<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14A-12
USP Real Estate Investment Trust
-----------------------------------------
(Name of Registrant as Specified in its Charter)
---------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies: SHARES
OF BENEFICIAL INTEREST
2) Aggregate number of securities to which transaction applies: 3,880,000
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction: $33,500,000
5) Total fee paid: $6,700
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-----------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
3) Filing Party:
-----------------------------------------------------
4) Date Filed:
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<PAGE>
USP REAL ESTATE INVESTMENT TRUST
4333 EDGEWOOD ROAD N.E.
CEDAR RAPIDS, IOWA 52499-5441
__________, 2000
To the Shareholders of USP Real Estate Investment Trust:
USP Real Estate Investment Trust (the "Trust") has entered into a Real
Estate Sale and Purchase Contract (the "Purchase Agreement") with AEGON USA
Realty Advisors, Inc. ("AEGON Advisors"), the Trust's advisor and a subsidiary
of the Trust's largest shareholder, to sell all of the real estate assets of the
Trust to AEGON Advisors for a total purchase price of $33,500,000 in cash (the
"Asset Sale"). Since the offer by AEGON Advisors to purchase the real estate
assets of the Trust is conditioned upon shareholder approval of the subsequent
liquidation of the Trust, holders of record of shares of beneficial interest of
the Trust are cordially invited to attend a special meeting of shareholders (the
"Special Meeting") at which shareholders of the Trust will be asked to consider
and approve the Asset Sale and the subsequent distribution of the proceeds of
the Asset Sale, plus any other cash held by the Trust less any cash retained to
satisfy creditors, to the shareholders (the "Liquidation"). The Liquidation of
the Trust's assets will result in the termination of the Trust.
The Board of Trustees has determined by a unanimous vote of a special
committee of disinterested Trustees established for the purpose of evaluating
this transaction (the "Special Committee"), and by a unanimous vote of all
Trustees, that the terms of the Asset Sale and the subsequent Liquidation are
fair to, and in the best interests of, our shareholders. In making this
decision, the Special Committee and the Board considered, among other things,
the written opinion, dated October 21, 1999, of Raymond James & Associates,
Inc., to the effect that, as of the date of the opinion and based upon and
subject to certain matters stated therein, the price received by the Trust in
connection with the Asset Sale is fair, from a financial point of view, to our
shareholders. The written opinion of Raymond James & Associates, Inc., dated
October 21, 1999, is attached as ANNEX C to the enclosed Proxy Statement and
should be read carefully and in its entirety. As a result of the foregoing, the
Special Committee and Board have approved the Asset Sale and Liquidation.
Additionally, holders of approximately 45% of the outstanding shares (including
AEGON USA, Inc.) have advised the Trust that they approve of the Asset Sale and
Liquidation and intend to vote in favor of the proposal at the Special Meeting.
We urge you to study the Proxy Statement carefully so as to make your own
assessment of the advisability of the proposed Asset Sale and Liquidation.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
By the terms of the Purchase Agreement and the Trust's Declaration of
Trust, respectively, the Asset Sale and Liquidation cannot be completed unless
approved by the requisite vote of our shareholders. Therefore, we have convened
the Special Meeting for our shareholders to vote on the Asset Sale and
Liquidation. The Special Meeting will take place at the AEGON Financial Center,
4333 Edgewood Road N.E., Cedar Rapids, Iowa on ____________, 2000 at _____ a.m.
(local time). The Board recommends that you vote "for" the Asset Sale and
Liquidation at the Special Meeting.
Your vote is very important. Whether or not you plan to attend the
Special Meeting, please take the time to vote by completing and mailing the
enclosed proxy card to us.
Enclosed with this letter is a Notice of Special Meeting of
Shareholders, Proxy Statement and proxy card. If you have any questions
concerning these documents, please feel free to contact our Investor Relations
Department at (319) 398-8895. The Proxy Statement is provided by the Board of
Trustees in connection with the furnishing of proxies for use at the Special
Meeting and at any adjournments or postponements of the Special Meeting. The
Proxy Statement provides you with detailed information about the Asset Sale and
Liquidation. You may obtain additional information about the Trust and AEGON
Advisors from documents filed with the United States Securities and Exchange
Commission.
Sincerely,
Patrick E. Falconio
CHAIRMAN OF THE BOARD OF TRUSTEES AND
CHIEF EXECUTIVE OFFICER
<PAGE>
USP REAL ESTATE INVESTMENT TRUST
4333 EDGEWOOD ROAD N.E.
CEDAR RAPIDS, IOWA 52499-5441
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ____________, ______________, 2000
To the Shareholders of USP Real Estate Investment Trust:
A Special Meeting of the shareholders of USP Real Estate Investment
Trust (the "Trust") will be held at the AEGON Financial Center, 4333 Edgewood
Road N.E., Cedar Rapids, Iowa on __________, __________, 2000 at _____ a.m.
(local time) and at any adjournment thereof for the following purposes:
1. To consider and vote upon a proposal to: (i) approve a Real
Estate Sale and Purchase Contract, dated January 20, 2000 (the
"Purchase Agreement"), between the Trust and AEGON USA Realty
Advisors, Inc. ("AEGON Advisors"), pursuant to which the Trust
has agreed to sell and transfer, and AEGON Advisors has agreed
to purchase, all of the Trust's real estate assets, and (ii)
approve the subsequent and immediate liquidation and
termination of the Trust (the "Asset Sale and Liquidation");
2. To transact such other business as may properly come before
the Special Meeting and any adjournments thereof.
Only shareholders of record at the close of business on _________, 2000
are entitled to notice of and to vote at the Special Meeting or at any
adjournment or postponement thereof.
Your attention is directed to the attached Proxy Statement for more
complete information regarding the Asset Sale and Liquidation. There is also
enclosed a form of proxy. The Board of Trustees of the Trust extends a cordial
invitation to all shareholders to be present at and participate in the Special
Meeting. Whether or not you plan to attend the Special Meeting, please specify
your vote on the enclosed proxy card and sign, date and return it as promptly as
possible. No postage is required if the proxy card is mailed from within the
continental United States.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ASSET
SALE AND LIQUIDATION OF THE TRUST.
FOR THE BOARD OF TRUSTEES
Maureen DeWald
Vice President and Secretary
Cedar Rapids, Iowa
_________, 2000
PLEASE DO NOT SEND YOUR SHARE CERTIFICATES AT THIS TIME. IF THE ASSET SALE IS
COMPLETED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR
SHARE CERTIFICATES.
<PAGE>
USP REAL ESTATE INVESTMENT TRUST
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, ____________, 2000
QUESTIONS AND ANSWERS ABOUT THE ASSET SALE AND LIQUIDATION
Q: WHAT IS THE ASSET SALE AND LIQUIDATION?
A: On January 20, 2000, the Trust entered into a Real Estate Sale and
Purchase Contract with AEGON USA Realty Advisors, Inc. ("AEGON Advisors")
whereby AEGON Advisors will purchase all of the real estate assets of the Trust
for $33,500,000. Following the Asset Sale, the Trust will distribute the
proceeds of the Asset Sale, plus any other cash held by the Trust, less any cash
retained to satisfy creditors, to the Trust's shareholders and terminate the
Trust. The Asset Sale and Liquidation is expected to result in a liquidating
distribution to shareholders in excess of $6.00 per share.
Q: WHEN AND WHERE WILL THE SPECIAL MEETING TAKE PLACE?
A: The Special Meeting is scheduled to take place at ______ a.m. local
time on ______________, 2000 at AEGON Financial Center, 4333 Edgewood Road,
N.E., Cedar Rapids, Iowa.
Q: CAN I ATTEND THE SPECIAL MEETING?
A: Holders of record of shares of beneficial ownership are entitled to
attend and vote at the Special Meeting either in person or by proxy.
Q: WHAT DO SHAREHOLDERS NEED TO DO NOW?
A: Whether or not you intend to attend the Special Meeting in person, you
should carefully review this Proxy Statement, indicate on the proxy card how you
wish to vote and sign and return the card in the enclosed return envelope as
soon as possible so that, if you do not attend personally, you will be
represented by proxy at the Special Meeting.
Approval of the proposal requires the affirmative vote of the holders
of two-thirds of the voting power of all outstanding shares.
Q: WHAT DO SHAREHOLDERS WHO HAVE SENT IN A PROXY CARD DO IF THEY WANT TO
CHANGE THEIR VOTE?
A: Just mail a later-dated, signed proxy card or other instrument revoking
your proxy so that it is received by the time of the Special Meeting at the
executive offices of the Trust. Shareholders may also change their vote by
attending the Special Meeting and voting in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares of beneficial interest only if you
provide instructions on how to vote. You should instruct your broker how to vote
your shares by following the directions your broker provides to you. If you do
not provide instructions to your broker, your shares will not be voted and they
will have the same effect as votes against the proposal to approve the Asset
Sale and Liquidation.
Q: SHOULD I SEND IN MY SHARE CERTIFICATES NOW?
A: No. If the Asset Sale is approved, you will receive written
instructions for surrendering your share certificates in connection with the
Liquidation.
Q: WHEN IS THE ASSET SALE EXPECTED TO BE CONSUMMATED?
A: We intend to consummate the Asset Sale as quickly as possible following
shareholder approval, and hope to do so by March 30, 2000; it is possible,
however, that the Asset Sale will not be completed until a later date. An
initial distribution of a majority of the proceeds from the Asset Sale is
expected to occur shortly after completion of the Asset Sale.
Q: WHAT ARE THE U.S. FEDERAL TAX CONSEQUENCES OF THE ASSET SALE AND
LIQUIDATION TO ME?
A: Your receipt of your proportionate share of the funds distributed in
the Liquidation, less your cost basis in your shares, will be taxable as
capital gains (or loss), assuming that you held your shares as a capital
asset. The gain (or loss) will be taxable as long-term capital gain (or
loss) if you have held your shares more than one year.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: For additional information about the Asset Sale and Liquidation,
including information about how to complete and return your proxy card, please
contact the Trust's Investor Relations Department at (319) 398-8895.
<PAGE>
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
THIS PROXY STATEMENT, THE SCHEDULE 13E-3 TRANSACTION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND OTHER STATEMENTS MADE FROM TIME
TO TIME BY THE TRUST, AEGON ADVISORS OR THEIR REPRESENTATIVES CONTAIN
FORWARD-LOOKING STATEMENTS. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE TRUST, AEGON ADVISORS AND MEMBERS
OF THEIR RESPECTIVE MANAGEMENT TEAMS, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT OF THE TRUST AND AEGON ADVISORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS DETAILED
IN THIS PROXY STATEMENT AND THE SCHEDULE 13E-3 TRANSACTION STATEMENT, AND THOSE
FACTORS SET FORTH FROM TIME TO TIME IN REPORTS OF THE TRUST FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE PROTECTION FROM LIABILITY OF THE SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS CONTAINED IN THE PRIVATE SECURITIES REFORM
ACT OF 1995 IS NOT APPLICABLE TO THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT OR THE SCHEDULE 13E-3 TRANSACTION STATEMENT OR IN STATEMENTS
INCORPORATED BY REFERENCE IN EITHER DOCUMENT.
This Proxy Statement is first being sent to shareholders on or about
__________, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
THE SPECIAL MEETING...............................................................................................1
Proposal to be Considered at the Special Meeting.........................................................1
Record Date; Shareholder Approval........................................................................1
Proxies ................................................................................................2
THE TRUST.........................................................................................................2
General ................................................................................................2
Administrative, Advisory and Acquisition Services........................................................2
Management Services......................................................................................3
The Properties...........................................................................................3
SELECTED FINANCIAL DATA...........................................................................................4
PRO FORMA FINANCIAL INFORMATION...................................................................................5
MARKET PRICE INFORMATION..........................................................................................9
SPECIAL FACTORS..................................................................................................10
Background of the Asset Sale............................................................................10
Purpose and Structure of the Asset Sale and Liquidation.................................................12
The Trust's Reasons for the Asset Sale..................................................................12
Opinion of Financial Advisor............................................................................13
Perspective of AEGON Advisors and its Affiliates on the Fairness of the Asset Sale......................19
Unsolicited Offers from Third Parties...................................................................19
Interests of Certain Persons in the Asset Sale and Liquidation..........................................20
SUMMARY OF MATERIAL FEATURES OF THE ASSET SALE...................................................................21
The Purchase Agreement..................................................................................21
Anticipated Accounting Treatment........................................................................25
Financing of the Asset Sale; Source of Funds............................................................25
Certain Federal Income Tax Consequences.................................................................25
Absence of Appraisal Rights.............................................................................26
Regulatory Approvals....................................................................................26
LIQUIDATION......................................................................................................26
General ...............................................................................................26
Liquidation Procedure...................................................................................27
Liquidating Distributions...............................................................................28
Contingency Reserve; Liquidating Trust..................................................................28
Final Record Date.......................................................................................29
Listing and Trading of the Shares and Interests in the Liquidating Trust................................29
MANAGEMENT OF THE TRUST AND AEGON ADVISORS.......................................................................29
Management of the Trust.................................................................................29
Management of AEGON Advisors............................................................................30
PRINCIPAL SHAREHOLDERS...........................................................................................31
OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS.....................................................................32
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COST AND METHOD OF PROXY SOLICITATION............................................................................32
EXPENSES OF THE TRANSACTION......................................................................................33
OTHER BUSINESS...................................................................................................33
SHAREHOLDER PROPOSALS............................................................................................33
WHERE YOU CAN FIND MORE INFORMATION..............................................................................33
</TABLE>
-ii-
<PAGE>
THE SPECIAL MEETING
This Proxy Statement is being furnished to the holders of the shares of
beneficial interest of USP Real Estate Investment Trust, an Iowa common law
business trust (the "Trust"), in connection with the solicitation by the Board
of Trustees of the Trust of proxies to be voted at the Special Meeting of
Shareholders of the Trust to be held at the AEGON Financial Center, 4333
Edgewood Road N.E., Cedar Rapids, Iowa, on __________, __________, 2000 at _____
a.m. local time, and any adjournments or postponements thereof (the "Special
Meeting"). Shares represented by properly executed proxies timely received by
the Trust will be voted at the Special Meeting or any adjournment or
postponement thereof in accordance with the terms of such proxies, unless such
proxies are revoked. See "--Proxies" below.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Trust will consider and
vote upon a proposal to approve and adopt a Real Estate Sale and Purchase
Contract, dated January 20, 2000 (the "Purchase Agreement"), by and between the
Trust and AEGON USA Realty Advisors, Inc., an Iowa corporation and a subsidiary
of the Trust's largest shareholder ("AEGON Advisors"), pursuant to which the
Trust has agreed to sell and transfer, and AEGON Advisors has agreed to purchase
and assume, all of the Trust's real estate assets and certain of the Trust's
liabilities (the "Asset Sale"). If the Asset Sale is consummated, the Trust will
receive $33,500,000 in cash, subject to certain adjustments as described herein.
AEGON Advisors will assume certain liabilities including, subject to lender
consent, the lien of the first mortgage and related security instruments
encumbering the Yamaha Warehouse located in Cudahy, Wisconsin, which would be
offset against the purchase price. The Yamaha Warehouse debt is expected to
total approximately $1.4 million. Since the Asset Sale is contingent upon the
subsequent liquidating distribution of substantially all of the remaining assets
of the Trust to the shareholders, the proposal presented to the shareholders
includes a proposal to liquidate the Trust immediately following the
consummation of the Asset Sale, and to authorize and direct the officers of the
Trust to commence the immediate liquidation of the Trust, including the payment
of creditors and the distribution of the remaining assets to the shareholders of
the Trust and, upon completion thereof, the filing of a notice of termination of
the Trust in the Office of the Recorder of Linn County, Iowa (the
"Liquidation"). The Asset Sale and Liquidation is expected to result in a
liquidating distribution to shareholders in excess of $6.00 per share. See
"SUMMARY OF MATERIAL FEATURES OF THE ASSET SALE" and "LIQUIDATION."
RECORD DATE; SHAREHOLDER APPROVAL
Only holders of record of the shares of beneficial interest at the
close of business on __________, 2000 are entitled to notice of and to vote at
the Special Meeting. Each share is entitled to one vote. One third of the voting
power of the shares entitled to vote, represented in person or by proxy, will be
required to constitute a quorum for the Special Meeting. Although shareholder
approval of a sale of the Trust's real estate assets is not required under the
Trust's Declaration of Trust, approval of the termination of the Trust as part
of the Liquidation requires the affirmative vote of the holders of two-thirds of
the voting power of all outstanding shares, and shareholders are being asked to
approve the Asset Sale as part of the Liquidation and as a closing condition of
the Purchase Agreement. Abstentions are counted for the purpose of establishing
a quorum and will have the same effect as a vote against the Asset Sale and the
Liquidation.
As of the date of this Proxy Statement, the Trust had 3,880,000 shares
of beneficial interest issued and outstanding held by approximately 1,850
holders of record. The officers and trustees of the Trust, representing 17,618
shares, or 0.45% of the outstanding shares entitled to vote (excluding shares
held by principal shareholders which may be deemed to be beneficially owned by
certain trustees), have agreed to vote "for" the Asset Sale and Liquidation. The
Trust also believes that the holders of an additional 45.06% of the shares
(including AEGON USA, Inc.) intend to vote in favor of the Asset Sale and
Liquidation. See "PRINCIPAL SHAREHOLDERS" AND "OWNERSHIP OF SHARES BY TRUSTEES
AND OFFICERS."
1
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PROXIES
Any shareholder entitled to vote at the Special Meeting may vote either
in person or by duly authorized proxy. All shares represented by properly
executed proxies received prior to or at the Special Meeting and not revoked
will be voted in accordance with the instructions indicated in such proxies. IF
NO INSTRUCTIONS ARE INDICATED, SIGNED PROXIES WILL BE VOTED "FOR" THE ASSET SALE
AND LIQUIDATION.
A shareholder may revoke his or her proxy at any time prior to its use
by delivering to the President of the Trust at the Trust's executive offices a
signed notice of revocation or a later dated and signed proxy or by attending
the Special Meeting and voting in person. Attendance at the Special Meeting will
not in itself constitute the revocation of a proxy.
THE TRUST
GENERAL
USP Real Estate Investment Trust is an equity-oriented real estate
investment trust organized under the laws of the State of Iowa pursuant to a
Declaration of Trust as amended and restated through April 23, 1984. The Trust
was formed on March 10, 1970 to provide its shareholders with an opportunity to
participate in the benefits of real estate investment and at the same time enjoy
the liquidity and marketability resulting from the ownership of securities which
are publicly traded. The Trust has elected to qualify as a real estate
investment trust (a "REIT") under the Internal Revenue Code. As a result of this
election, the Trust is not taxed on the portion of its income which is
distributed to shareholders, provided it distributes at least 95% of its taxable
income, has at least 75% of its assets in real estate investments and meets
certain other requirements for qualification as a REIT.
The Trust has no employees and has contracted with AEGON Advisors, a
subsidiary of AEGON USA, Inc., the Trust's largest shareholder ("AEGON USA"), to
provide administrative, advisory, acquisition, divestiture and property
management services. A summary description of the relationships between AEGON
USA and its various subsidiaries and of such subsidiaries' agreements with the
Trust follows. The description of the agreements which follows is qualified in
its entirety by reference to the terms and provisions of such agreements.
ADMINISTRATIVE, ADVISORY AND ACQUISITION SERVICES
AEGON USA Realty Advisors, Inc. is a wholly owned subsidiary of AEGON
USA. AEGON Advisors provides administrative, advisory, acquisition and
divestiture services to the Trust pursuant to an Administrative Agreement dated
January 1, 1984. The term of the Administrative Agreement is for one (1) year
and is automatically renewable each year for an additional year subject to the
right of either party to cancel the Administrative Agreement upon 90 days'
written notice. The performance of AEGON Advisors' duties and obligations under
the Administrative Agreement has been guaranteed by AEGON USA.
Under the Administrative Agreement, AEGON Advisors (a) provides
clerical, administrative and data processing services, office space, equipment
and other general office services necessary for the Trust's day-to-day
operations, (b) provides legal, tax and accounting services to maintain all
necessary books and records of the Trust and to ensure Trust compliance with all
applicable federal, state and local laws, regulatory reporting requirements and
tax codes, (c) arranges financing for the Trust, including but not limited to
mortgage financing for property acquisition, (d) obtains property management
services for the Trust's properties and supervises the activities of persons
performing such services, (e) provides monthly reports summarizing the results
of operations and financial conditions of the Trust, (f) prepares and files all
reports to shareholders and regulatory authorities on behalf of the Trust, (g)
prepares and files all tax returns of the Trust and (h) provides the Trust with
property acquisition and divestiture services.
AEGON Advisors receives fees for its administrative and advisory
services. In addition, AEGON Advisors is paid a separately negotiated fee of not
less than 2% nor more than 4% of the cost of each property acquired by the Trust
as compensation for acquisition services furnished by it to the Trust.
Administrative fees paid to AEGON
2
<PAGE>
Advisors were $204,587 for 1998, $173,831 for 1999, and $_________ for 2000
through the date of this Proxy Statement. No acquisition fees were paid in
1998 or through the date of this Proxy Statement.
MANAGEMENT SERVICES
AEGON Advisors provides management services to the Trust pursuant to
a Management Agreement dated July 1, 1981. The term of the Management
Agreement is for one year and is automatically renewable each year for an
additional year subject to the right of either party to cancel the Management
Agreement upon 30 days' written notice. Under the Management Agreement, AEGON
Advisors is obligated to (a) procure tenants and execute leases with respect
to Trust properties which are not leased under net lease arrangements (the
"Managed Properties"), (b) maintain and repair (at the Trust's expense) the
Managed Properties, (c) maintain complete and accurate books and records of
the operations of the Managed Properties, (d) maintain the Managed Properties
in accordance with applicable government rules and regulations, licensing
requirements and building codes, (e) collect all rents and (f) carry (at the
Trust's expense) general liability, accident, fire and other property damage
insurance. For these services, AEGON Advisors receives 5% of the gross income
derived from the operation of the Managed Properties. Management fees paid to
AEGON Advisors were $241,877 for 1998, $203,500 for 1999, and $_________ for
2000 through the date of this Proxy Statement. These services were previously
provided by AEGON USA Realty Management, Inc., a wholly owned subsidiary of
AEGON Advisors, which was merged into AEGON Advisors in December 1998.
A more detailed description of the Trust's business and of certain
agreements and business relationships involving the Trust and AEGON Advisors are
contained in the Trust's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, which is attached hereto as ANNEX A and incorporated herein
by reference. Updated financial information concerning the Trust is contained in
the Trust's Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, a copy of which is attached as ANNEX B and incorporated herein by
reference.
THE PROPERTIES
The Trust has direct ownership of the following six commercial real
estate properties (the "Properties"), all of which AEGON Advisors proposes to
purchase from the Trust: (i) Kingsley Square Shopping Center located in Orange
Park, Florida; (ii) First Tuesday Mall located in Carrollton, Georgia; (iii)
Mendenhall Commons Shopping Center located in Memphis, Tennessee; (iv) North
Park Plaza Shopping Center located in Phoenix, Arizona; (v) Presidential Drive
Office Building located in Atlanta, Georgia; and (vi) Yamaha Warehouse located
in Cudahy, Wisconsin. Properties owned by the Trust are leased to tenants either
on a managed basis or under net lease arrangements. As the owner of managed
property the Trust receives gross rentals and incurs operating expenses, such as
property taxes, insurance, repairs, maintenance and common area utilities. Under
net lease arrangements, the tenant, rather than the Trust, pays all operating
expenses related to the leased premises. As of the date of this Proxy Statement,
five commercial properties were being leased on a managed basis and one property
was leased on a net lease basis. The five managed commercial properties consist
of four shopping centers and one business park. Managed commercial properties
comprised 94% of the Trust's investment portfolio in 1998, compared to 95% in
1997 and 1996. Managed commercial properties provided 91% of the Trust's annual
revenue in 1998, compared to 89% in 1997 and 88% in 1996. A more detailed
description of the Trust's Properties is contained in the Trust's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, which is attached
hereto as ANNEX A and incorporated herein by reference.
3
<PAGE>
SELECTED FINANCIAL DATA
We are providing the following financial information concerning the
Trust to aid you in your analysis of the financial aspects of the Asset Sale and
Liquidation. The selected consolidated financial data set forth below have been
derived from the Trust's consolidated financial statements for the periods
indicated. Our audited consolidated financial statements are prepared in
accordance with generally accepted accounting principles. The information
provided below is only a summary and should be read in conjunction with our
historical consolidated financial statements (and related notes) contained in
our annual reports and other information that we have filed with the Securities
and Exchange Commission (the "Commission"). See "WHERE YOU CAN FIND MORE
INFORMATION." The selected consolidated financial data of the Trust provided for
the nine months ended September 30, 1998 and 1999 are unaudited; however, in the
opinion of the Trust's management, the selected consolidated financial data
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the selected financial data for such periods. The
results of operations for the nine months ended September 30, 1998 and 1999 may
not be indicative of the results of operations for the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ---------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 6,179,495 $ 5,618,014 $ 5,217,313 $ 5,012,087 $ 5,331,955 $ 4,120,105 $ 3,470,229
Earnings from
Operations $ 934,605 1,100,149 946,230 637,129 943,975 733,396 904,117
Net Gain on Sale or
Disposition of
Property $ 788,588 -- -- 259,157 528,282 -- --
Net Earnings $ 1,723,193 1,100,149 946,230 896,286 1,472,257 733,396 904,117
Distributions to
Shareholders $ 1,008,800 1,202,800 1,241,600 1,241,600 1,241,600 931,200 931,200
Per share*
Earnings from
Operations $ .24 .28 .24 .16 .24 .19 .23
Basic and Diluted
Net Earnings $ .44 .28 .24 .23 .38 .19 .23
Distributions to
Shareholders $ .26 .31 .32 .32 .32 .24 .24
Real Estate and
Mortgage Loans
Receivable $31,237,604 30,434,137 29,627,786 28,571,464 23,816,859 27,975,398 23,431,730
Total Assets $34,333,593 32,853,270 32,207,728 31,104,418 27,932,493 30,577,328 26,597,530
Mortgage Loans
Payable $16,853,303 15,271,385 14,819,479 14,140,584 10,897,933 13,813,825 9,449,202
Total Liabilities $17,720,310 16,342,638 15,992,466 15,234,470 11,831,888 14,905,184 10,524,008
Shareholders' Equity $16,613,283 16,510,632 16,215,262 15,869,948 16,100,605 15,672,144 16,073,522
Book value per
share $ 4.28 4.26 4.18 4.09 4.15 4.04 4.14
Ratio of Earnings
to Fixed Charges 1.88 to 1 1.70 to 1 1.63 to 1 1.62 to 1 2.07 to 1 1.71 to 1 2.41 to 1
</TABLE>
*Per share amounts for Earnings from Operations and Basic and Diluted Net
Earnings are based on the weighted average number of shares outstanding for each
period. Per share amounts for Distributions to Shareholders are based on the
actual number of shares outstanding on the respective record dates.
4
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma consolidated balance sheets as of September 30,
1999 and December 31, 1998, and the pro forma consolidated statements of
operations for the nine months ended September 30, 1999 and the year ended
December 31, 1998, give effect to the sale of the Properties. The adjustments
related to the pro forma consolidated balance sheets assume the transaction was
consummated at September 30, 1999 and December 31, 1998, respectively, while the
adjustments to the pro forma condensed consolidated statement of operations
assume the transaction was consummated at the beginning of each period
presented. These pro forma financial statements are not necessarily indicative
of the results that actually would have occurred if the Asset Sale had been in
effect as of and for the periods presented or the results that may be achieved
in the future.
USP REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
FINANCIAL PRO FORMA FINANCIAL
STATEMENTS ADJUSTMENTS STATEMENTS
----------------- ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Real estate $ 34,617,710 (34,617,710) --
Less accumulated depreciation (11,185,980) 11,185,980 --
----------------- ------------------ ------------------
23,431,730 (23,431,730) --
Cash and cash equivalents 2,616,567 22,535,560 25,152,127
Rents and other receivables 334,568 (334,568) --
Prepaid and deferred expenses 214,665 (214,665) --
----------------- ------------------ ------------------
$ 26,597,530 (1,445,403) 25,152,127
================= ================== ==================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities
Mortgage loans payable $ 9,449,202 (9,449,202) --
Accounts payable and accrued expenses 630,955 (630,955) --
Due to affiliates 41,542 (41,542) --
Distribution declared 310,400 (310,400) --
Tenant deposits 82,717 (82,717) --
Other 9,192 (9,192) --
----------------- ------------------ ------------------
$ 10,524,008 (10,524,008) --
----------------- ------------------ ------------------
Shareholders' Equity
Shares of beneficial interest,
$1 par value, 20,000,000
shares authorized, 3,880,000
shares issued and outstanding $ 3,880,000 -- 3,880,000
Additional paid-in capital 11,989,948 -- 11,989,948
Undistributed net earnings 203,574 9,078,605 9,282,179
----------------- ------------------ ------------------
$ 16,073,522 9,078,605 25,152,127
----------------- ------------------ ------------------
$ 26,597,530 (1,445,403) 25,152,127
================= ================== ==================
Book value per share $ 4.14 $ 2.34 $ 6.48
================= ================== ==================
</TABLE>
NOTE: The pro forma adjustments represent amounts attributed to the Properties
and all related costs of the proposed Asset Sale and subsequent Liquidation.
5
<PAGE>
USP REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
FINANCIAL PRO FORMA FINANCIAL
STATEMENTS ADJUSTMENTS STATEMENTS
----------------- ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Real estate $ 34,508,522 (34,508,522) --
Less accumulated depreciation (10,691,663) 10,691,663 --
----------------- ------------------ ------------------
23,816,859 (23,816,859) --
Cash and cash equivalents 3,423,296 21,309,797 24,733,093
Rents and other receivables 397,822 (397,822) --
Prepaid and deferred expenses 275,653 (275,653) --
Taxes held in escrow 18,863 (18,863) --
----------------- ------------------ ------------------
$ 27,932,493 (2,025,609) 24,733,093
================= ================== ==================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities
Mortgage loans payable $ 10,897,933 (10,897,933) --
Accounts payable and accrued expenses 418,204 (418,204) --
Due to affiliates 115,722 (115,722) --
Distribution declared 310,400 (310,400) --
Tenant deposits 78,701 (78,701) --
Other 10,928 (10,928) --
----------------- ------------------ ------------------
$ 11,831,888 (11,831,888) --
----------------- ------------------ ------------------
Shareholders' Equity
Shares of beneficial interest,
$1 par value, 20,000,000
shares authorized, 3,880,000
shares issued and outstanding $ 3,880,000 -- 3,880,000
Additional paid-in capital 11,989,948 -- 11,989,948
Undistributed net earnings 230,657 8,632,488 8,863,145
----------------- ------------------ ------------------
$ 16,100,605 8,632,488 24,733,093
----------------- ------------------ ------------------
$ 27,932,493 $ (3,199,400) $ 24,733,093
================= ================== ==================
Book value per share $ 4.15 $ 2.22 $ 6.37
================= ================== ==================
</TABLE>
NOTE: The pro forma adjustments represent amounts attributed to the Properties
and all related costs of the proposed Asset Sale and subsequent Liquidation.
6
<PAGE>
USP REAL ESTATE INVESTMENT TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
FINANCIAL PRO FORMA FINANCIAL
STATEMENTS ADJUSTMENTS STATEMENTS
----------------- ------------------ ------------------
<S> <C> <C> <C>
REVENUE
Rents $ 3,368,670 (3,368,670) --
Interest 101,559 (101,559) --
----------------- ------------------ ------------------
3,470,229 (3,470,229) --
----------------- ------------------ ------------------
EXPENSES
Property expenses:
Real estate taxes 353,531 (353,531) --
Repairs and maintenance 368,273 (368,273) --
Utilities 87,441 (87,441) --
Management fee 154,517 (154,517) --
Insurance 24,789 (24,789) --
Other 94,600 (94,600) --
----------------- ------------------ ------------------
Property expenses, excluding depreciation 1,083,151 (1,083,151) --
Depreciation 494,317 (494,317) --
----------------- ------------------ ------------------
Total property expenses 1,577,468 (1,577,468) --
Interest 640,126 (640,126) --
Administrative fee 162,729 (162,729) --
Other administrative 185,789 (185,789) --
----------------- ------------------ ------------------
2,566,112 (2,566,112) --
----------------- ------------------ ------------------
Earnings from operations 904,117 (904,117) --
Net gain on sale of property -- 8,908,141 8,908,141
----------------- ------------------ ------------------
Net earnings $ 904,117 8,004,024 8,908,141
================= ================== ==================
Basic and diluted net earnings per share $ .23 2.07 2.30
================= ================== ==================
Average number of shares outstanding 3,880,000 3,880,000 3,880,000
Ratio of earnings to fixed charges 2.41 to 1 13.50 to 1 N/A
</TABLE>
NOTE: The pro forma adjustments represent activity of the Trust for the first
nine months of 1999, including an assumed sale of the Properties, the gain from
which is net of all related costs for the proposed Asset Sale and subsequent
Liquidation.
7
<PAGE>
USP REAL ESTATE INVESTMENT TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
FINANCIAL PRO FORMA FINANCIAL
STATEMENTS ADJUSTMENTS STATEMENTS
----------------- ------------------ ------------------
<S> <C> <C> <C>
REVENUE
Rents $ 5,218,707 (5,218,707) --
Interest 113,248 (113,248) --
----------------- ------------------ ------------------
5,331,955 (5,331,955) --
----------------- ------------------ ------------------
EXPENSES
Property expenses:
Real estate taxes 561,818 (561,818) --
Repairs and maintenance 446,787 (446,787) --
Utilities 113,939 (113,939) --
Management Fee 241,877 (241,877) --
Insurance 50,299 (50,299) --
Other 219,517 (219,517) --
----------------- ------------------ ------------------
Property expenses, excluding depreciation 1,634,237 (1,634,237) --
Depreciation 831,332 (831,332) --
----------------- ------------------ ------------------
Total property expenses 2,465,569 (2,465,569) --
Interest 1,375,031 (1,375,031) --
Administrative fee 204,587 (204,587) --
Other administrative 342,793 (342,793) --
----------------- ------------------ ------------------
4,387,980 (4,387,980) --
----------------- ------------------ ------------------
Earnings from operations 943,975 (943,975) --
Net gain on sale of property 528,282 8,281,091 8,809,373
----------------- ------------------ ------------------
Net earnings $ 1,472,257 7,337,116 8,809,373
================= ================== ==================
Basic and diluted net earnings per share $ .38 1.89 2.27
================= ================== ==================
Average number of shares outstanding 3,880,000 3,880,000 3,880,000
Ratio of Earnings to Fixed Charges 2.07 to 1 6.34 to 1 N/A
</TABLE>
NOTE: The pro forma adjustments represent activity of the Trust for the year
1998, including an assumed sale of the Properties, the gain from which is net of
all related costs for the proposed Asset Sale and subsequent Liquidation.
8
<PAGE>
MARKET PRICE INFORMATION
The common shares of beneficial interest for the Trust are quoted on
the Nasdaq SmallCap Market under the symbol "USPTS." The following table sets
forth the high and low sales prices per share of the shares as quoted on the
Nasdaq SmallCap Market for the periods indicated.
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST
----------------------------
HIGH LOW
------------- ------------
<S> <C> <C>
1998
Quarter ended March 31, 1998 $4.75 $4.125
Quarter ended June 30, 1998 5.00 4.313
Quarter ended September 30, 1998 7.50 3.875
Quarter ended December 31, 1998 6.25 3.75
1999
Quarter ended March 31, 1999 $4.25 $3.75
Quarter ended June 30, 1999 5.00 3.875
Quarter ended September 30, 1999 5.813 4.00
Quarter ended December 31, 1999 5.813 5.469
2000
Quarter ended March 31, 2000 (through ________, 2000) $_____ $_____
</TABLE>
On August 16, 1999, the trading day on which the Trust announced it had
executed a letter of intent to sell all of its assets to AEGON Advisors, the
closing price of the shares was $4.25 per share as quoted on the Nasdaq SmallCap
Market. On January __, 2000, the last trading day before public announcement of
the execution of the Purchase Agreement, the closing price of the shares was
$_____ per share as quoted on the Nasdaq SmallCap Market. On _____________,
2000, the most recent practicable date prior to printing this Proxy Statement,
the closing price of the shares was $____ per share, as quoted on the Nasdaq
SmallCap Market. The Trust had 3,880,000 shares issued and outstanding held by
approximately 1,850 shareholders of record as of __, 2000.
The Trust is required to distribute at least 95% of its taxable income
to continue its qualification as a REIT. The Trust has paid quarterly dividends
totaling $.32 per share in each of the last three completed fiscal years. During
1999, the Trust made distributions of $.08 per share on February 16 to
shareholders of record as of February 4, on May 24 to shareholders of record as
of May 13, on August 16 to shareholders of record as of August 6, and on
November 29 to shareholders of record as of November 16. If the shareholders
approve the Asset Sale and Liquidation, the Trust expects to discontinue
quarterly distributions and will, instead, pay one or more liquidating
distributions as soon after the Asset Sale as is practical. The Trust's dividend
reinvestment plan will also be terminated.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE
SHARES.
9
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE ASSET SALE
The Trust's primary investment objective has been to invest in real
estate which will provide the best available cash flow and offer prospects for
long-term appreciation in value. The principal source of funds for investment by
the Trust was $25 million in proceeds from its initial public offering of
shares. The Trust ceased the issuance of shares from this offering in 1978. The
Trust completed a secondary offering of its shares in 1988, raising nearly $10
million. Since substantially all of the Trust's net income must be distributed
to shareholders in order to qualify as a REIT, the Trust has relied primarily on
cash generated from operations and property sales in excess of shareholder
distributions, along with borrowings secured by mortgages on specific
properties, to finance real estate investments. Outstanding indebtedness of the
Trust may not, according to its Declaration of Trust, exceed four hundred
percent of the Trust's net assets (shareholders' equity plus accumulated
depreciation). The Trust may finance future real estate investments through
additional borrowings secured by mortgages on the Trust's real estate
properties. The Trust currently has no commitments or arrangements for any such
financing and there can be no assurance that suitable financing will be
available on terms satisfactory to the Trust in the future.
On February 1, 1995, the Trust announced that it had begun exploring
strategic alternatives for maximizing shareholder value. The decision
reflected the opinion of the Board of Trustees that market prices for the
Trust's shares had not adequately reflected the value of the Trust. On April
9, 1997, Raymond James & Associates, Inc. ("Raymond James") was engaged as
financial advisor to the Trust to assist the Trust with ongoing efforts to
find an appropriate transaction. The Trust, with the assistance of Raymond
James, has explored various alternatives and conducted discussions with a
number of prospective buyers without reaching agreement on the terms and
conditions of a specific transaction.
On January 28, 1999, the Trust became aware of an unsolicited offer
from a company identified as Sutter Opportunity Fund, LLC to purchase for cash
up to 175,000 shares of the Trust (approximately 4.5% of the total outstanding)
for $3.25 per share less any distributions paid after November 15, 1998. The
Trust encouraged shareholders to reject the offer based on a comparison of the
offer price and recent trading prices on the Nasdaq SmallCap Market. The price
being offered was approximately 15-30% less than the market value of the shares.
On March 8, 1999, the Trust received a proposal from AEGON Advisors for
the purchase of the Trust's real estate assets for a total purchase price of
$33,500,000, free and clear of mortgages and other encumbrances. Due to the
relationship between the Trust, AEGON Advisors and the officers of the Trust,
the Board determined that it was appropriate to first seek the advice of legal
counsel before responding to the proposal. See "--Interests of Certain Persons
in the Asset Sale and Liquidation."
At a meeting of the Board of Trustees on April 8, 1999, the Board
reviewed the proposal for the purchase of the assets by AEGON Advisors and
discussed the terms of the offer, as well as the need for an opinion of an
investment bank regarding the fairness of the transaction to the Trust's
shareholders. The Board also discussed other potential transactions, previously
presented to the Board, involving a sale of the Trust, in light of the offer
from AEGON Advisors. Following a discussion of the potential conflicts of
interest faced by members of the Board and officers of the Trust arising from
past or present affiliations with AEGON Advisors, the Board established a
special committee of the Board of Trustees unaffiliated with AEGON Advisors or
any of its affiliates (the "Special Committee") consisting of Richard Osborne
and Samuel Kaplan to evaluate the AEGON Advisors proposal and to negotiate the
terms of and enter into definitive agreements with respect to the AEGON Advisors
proposal. The Special Committee was authorized to engage such legal, financial
and other advisors to advise the Special Committee as they deemed necessary. The
Board further determined that the approval by the Board of Trustees of any
transaction resulting from the offer by AEGON Advisors would be specifically
conditioned upon the prior approval of such transaction by the Special
Committee. The officers of the Trust were directed to cooperate with the Special
Committee and its advisors.
On April 30, 1999, the members of the Special Committee met with
representatives of AEGON Advisors to discuss the proposal for the purchase of
the assets. During the month of May 1999, the members of the Special
10
<PAGE>
Committee and the representatives of AEGON Advisors engaged in further
discussions and correspondence concerning the terms of the proposal.
On May 28, 1999, the Special Committee received a revised proposal
letter from AEGON Advisors. The revised proposal contemplated a purchase of the
Trust's real estate assets for a total purchase price of $33,500,000 free and
clear of all mortgages and other encumbrances except for the existing
indebtedness on the Yamaha Warehouse. The revised proposal also provided that
all transaction costs would be borne by the Trust except for the cost of title
insurance, surveys and environmental reports, which would be borne by AEGON
Advisors. The revised offer was contingent upon the liquidation of the Trust and
receipt by AEGON Advisors of its proportionate share of the liquidating
distributions.
On June 7, 1999, Mr. Kaplan of the Special Committee circulated the
revised proposal letter to the Board and suggested that a Board meeting be
called to discuss the revised proposal.
At a meeting of the Board of Trustees on June 21, 1999, the Special
Committee gave a report to the Board on its negotiations with AEGON Advisors
concerning the proposal to purchase the assets of the Trust. After reviewing the
revised proposal for the Board, the Special Committee recommended to the Board
that it authorize the execution of the letter of intent with AEGON Advisors. The
Board then discussed the revised proposal and draft letter of intent in detail,
as well as the need for a fairness opinion with respect to the sale and the
terms of its arrangements with Raymond James. At the conclusion of the meeting,
the Board adopted resolutions authorizing execution of the letter of intent with
AEGON Advisors and commencement of negotiation of the definitive agreements by
the Special Committee and counsel for the Trust. Completion of the transaction
was made subject to successful negotiation of the definitive agreements by the
Special Committee, receipt of shareholder approval of the transaction and
satisfactory arrangements for receipt of a fairness opinion from Raymond James.
On June 22, 1999, AEGON Advisors provided a draft purchase agreement to
the Trust and its legal counsel.
During July 1999, legal counsel for the Trust, in consultation with the
Special Committee, engaged in negotiations with representatives of Raymond James
concerning the terms of Raymond James' engagement as financial adviser to the
Trust and for the delivery to the Board of a fairness opinion regarding the
Asset Sale. At a meeting of the Board of Trustees on July 27, 1999, Mr. Kaplan
of the Special Committee gave a report to the Board on the results of these
negotiations with Raymond James. After discussion of the Raymond James
engagement letter and the need for a fairness opinion in connection with the
Asset Sale, the Board approved an amendment to the Trust's engagement letter
with Raymond James under which the Trust agreed to pay Raymond James a fee of
$100,000 for the fairness opinion upon delivery of the opinion, and a
transaction fee of $150,000 upon the closing of the Asset Sale.
On Friday, August 13, 1999 the Trust executed the letter of intent with
AEGON Advisors. On Monday, August 16, 1999, the Trust issued a press release
announcing that it had executed a letter of intent to sell all of its assets to
AEGON Advisors, subject to negotiation of a definitive agreement and shareholder
approval. Commencing thereafter, representatives of AEGON Advisors and the
Special Committee, and their respective advisors and legal counsel, proceeded to
negotiate the terms of a definitive real estate sale and purchase agreement.
On October 21, 1999, the Special Committee and the Board of Trustees
each held a special meeting and considered the proposed Purchase Agreement and
the transactions contemplated thereby. Members of the Special Committee and its
legal counsel each made presentations to the Board concerning the terms of the
proposed transaction. Raymond James reviewed with the Special Committee and the
Board of Trustees the financial analyses performed by Raymond James in
connection with its evaluation of the purchase price and related terms. Raymond
James also rendered to the Special Committee and to the Board an oral opinion
(which opinion was subsequently confirmed by delivery of a written opinion dated
October 21, 1999) to the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the price received by the
Trust in connection with the Asset Sale was fair, from a financial point of
view, to the Trust's shareholders. A resolution to approve and authorize the
Purchase Agreement and the Asset Sale and to recommend Liquidation to the
Trust's shareholders upon completion of the Asset Sale was adopted both by a
unanimous vote of the Special Committee and by a unanimous vote of all Trustees.
11
<PAGE>
Commencing thereafter, legal counsel for the Trust, in consultation
with representatives of the Trust and AEGON Advisors, proceeded to prepare a
proxy statement and other documentation for the Asset Sale and Liquidation. On
January 20, 2000, the Trust and AEGON Advisors executed the Purchase Agreement
and issued a joint press release announcing the execution of the Purchase
Agreement.
PURPOSE AND STRUCTURE OF THE ASSET SALE AND LIQUIDATION
The purpose of the Asset Sale and Liquidation is to enable AEGON
Advisors to acquire all of the real estate assets of the Trust including the
Properties which AEGON Advisors already manages on a day-to-day basis and
consolidate those Properties with and into its existing real estate portfolio,
thereby eliminating a level of administration, regulatory reporting obligations
and management peripheral to the core business of AEGON Advisors and providing
the shareholders of the Trust the opportunity to liquidate the Trust and realize
a premium over market prices for the Trust's shares in effect immediately prior
to the announcement of the Asset Sale.
The acquisition by AEGON Advisors of all of the real estate assets of
the Trust was structured as an asset sale rather than a stock sale or merger in
order to accommodate the desire of AEGON Advisors to ensure its acquisition of
the real estate assets without unnecessary risk or the burden of maintaining
another subsidiary. The Properties can easily be mixed into the AEGON real
estate portfolio. Ownership of the Trust as a subsidiary of AEGON Advisors would
not afford AEGON Advisors or AEGON USA with continued tax benefits of REIT
status currently provided to the Trust. A merger of the Trust with another
entity could involve complicated legal issues with limited guidance provided by
Iowa common law. The Trust wished to have its shareholders presented with a
simple transaction followed by liquidation as provided by the Trust's
Declaration of Trust.
THE TRUST'S REASONS FOR THE ASSET SALE
The Board of Trustees has determined, both by a unanimous vote of the
Special Committee and by a unanimous vote of all Trustees, that the Purchase
Agreement and the Asset Sale are fair to and in the best interests of the Trust
and its shareholders, and has by such votes approved the Purchase Agreement, the
Asset Sale and the Liquidation. Accordingly, the Board of Trustees recommends
that shareholders vote "FOR" the Asset Sale and Liquidation.
In reaching its determination, the Board of Trustees considered a
number of factors, including, without limitation, the following:
1. the effectiveness of the Asset Sale in implementing the
Trust's strategy of maximizing shareholder value through
strategic alternatives, as first announced by the Trust in
February 1995;
2. the present and anticipated environment of the REIT industry,
including the ability of the Trust to compete effectively as
an independent entity and the challenges faced by the Trust
since 1995 in locating a strategic partner;
3. the historical market prices and trading information with
respect to the Trust's shares, and the fact that the expected
liquidating distributions to shareholders in excess of $6.00
per share represent a premium at least 40% over the closing
market price for the Trust's shares on the day of the
announcement of the signing a letter of intent to sell the
Properties to AEGON Advisors, which led the Trustees to
conclude that the Asset Sale and Liquidation would provide an
opportunity for shareholders to receive a significant premium
to current and recent trading prices for the Trust's shares;
4. the expectations of management with respect to the Trust's
future growth opportunities through future real estate
investments, as affected by the specific requirements of
distributing substantially all of the Trust's net income and
limitations on outstanding indebtedness as a percentage of net
assets in order to qualify as a REIT;
12
<PAGE>
5. the terms and conditions of the Purchase Agreement, including
the amount and form of the consideration to be received by the
Trust and the conditions to the closing of the transaction,
which led the Trustees to conclude that there was a high
probability that the Asset Sale would be consummated; and
6. the financial presentation of Raymond James (which was engaged
by the Trust in 1997 to assist with the Trust's ongoing
efforts to find a suitable transaction) to the Board of
Trustees and the Special Committee, including Raymond James'
written opinion dated October 21, 1999, to the effect that, as
of the date of such opinion and based upon and subject to
certain matters stated therein, the price received by the
Trust in connection with the Asset Sale is fair, from a
financial point of view, to the Trust's shareholders.
The foregoing discussion of the information and factors considered by
the Special Committee and the Board of Trustees is not meant to be exhaustive
but includes the material factors considered by the Special Committee and the
Board of Trustees. Neither the Special Committee nor the Board of Trustees
quantified or attached any particular weight to the various factors that they
considered in reaching their determination that the Purchase Agreement and the
Asset Sale are fair to and in the best interests of the Trust and its
shareholders. In considering the recommendation of the Board of Trustees with
respect to the Asset Sale and Liquidation, shareholders should be aware that the
interests of certain trustees, officers and shareholders with respect to the
Asset Sale and Liquidation are or may be different from and in addition to the
interests of the Trust and its shareholders generally. The Special Committee and
the Board of Trustees were aware of these interests, and took these interests
into account in approving the Purchase Agreement and the transactions
contemplated thereby. See "--Interests of Certain Persons in the Asset Sale and
Liquidation." However, by establishing the Special Committee of trustees
unaffiliated with either AEGON Advisors or its affiliates, with full power to
appoint its own advisors and counsel, the Board of Trustees believes that the
Asset Sale was negotiated on an arm's-length basis and that the Asset Sale and
Liquidation are procedurally fair to the unaffiliated shareholders of the Trust.
ACCORDINGLY, THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE ASSET SALE AND LIQUIDATION.
OPINION OF FINANCIAL ADVISOR
In April, 1997, Raymond James & Associates, Inc. was retained by the
Trust to act as financial advisor in connection with potential business
combinations. Raymond James was selected by the Trust based on its
qualifications and expertise in the industry. At the October 21, 1999 meeting of
the Board, Raymond James rendered its oral opinion, subsequently confirmed in
writing, that, as of October 21, 1999 and based upon and subject to the various
considerations set forth in its opinion, the price received by the Trust in
connection with the Asset Sale is fair from a financial point of view to the
Trust's shareholders.
THE FULL TEXT OF THE RAYMOND JAMES WRITTEN OPINION DATED OCTOBER 21,
1999, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, MATTERS CONSIDERED AND THE LIMITATIONS ON THE SCOPE OF THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION
CAREFULLY AND IN ITS ENTIRETY. RAYMOND JAMES' OPINION IS DIRECTED TO THE SPECIAL
COMMITTEE AND THE BOARD OF TRUSTEES AND ADDRESSES ONLY THE FAIRNESS OF THE PRICE
RECEIVED BY THE TRUST IN CONNECTION WITH THE ASSET SALE FROM A FINANCIAL POINT
OF VIEW TO THE SHAREHOLDERS AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE ASSET
SALE NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW TO
VOTE AT THE MEETING. THE SUMMARY OF THE OPINION OF RAYMOND JAMES SET FORTH IN
THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In connection with rendering its opinion, Raymond James, among other
things:
13
<PAGE>
- reviewed certain publicly available financial statements and
other information of the Trust;
- reviewed certain internal financial statements and other
financial and operating data concerning the real estate assets
and the Trust prepared by the management of the Trust;
- reviewed certain financial projections prepared by management
of the Trust;
- discussed the past and current operations and financial
condition and the prospects of the real estate assets and the
Trust with officers of the Trust;
- reviewed the reported prices and trading activity for the
Trust's common shares;
- compared the financial performance of the Trust and the prices
and trading activity of the common shares with that of certain
other comparable publicly-traded companies and their
securities;
- reviewed the financial terms, to the extent publicly
available, of certain comparable transactions;
- reviewed the draft Purchase Agreement dated as of October 14,
1999 and certain related documents; and
- reviewed offers made for the real estate assets and or the
Trust itself since April 1997.
In rendering its opinion, Raymond James assumed and relied upon,
without independent verification, the accuracy and completeness of the
information reviewed by Raymond James for the purposes of its opinion. With
respect to the financial projections provided by the Trust, Raymond James
assumed in its opinion that such projections had been reasonably prepared on a
basis reflecting the best available estimates and judgments of the management of
the Trust as to the future financial performance of the Trust. The opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to Raymond James as of, October 21, 1999.
The following is a summary of the material financial and comparative
analyses performed by Raymond James in connection with providing the opinion to
the Board of Trustees on October 21, 1999. Certain of these summaries of
financial analyses include information presented in tabular format. In order to
understand fully the financial analyses used by Raymond James, the tables must
be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
USP REAL ESTATE INVESTMENT TRUST
TRADING ACTIVITY AND PREMIUM ANALYSIS
ESTIMATED ASSET VALUE. Raymond James estimated the value of the Trust's
real estate assets based on a property-by-property analysis. In estimating the
value of each property, Raymond James applied a range of capitalization rates to
1) projected net operating income for the 12 months ended December 31, 1999; 2)
net operating income based on the current leases in place; and 3) net operating
income for the 12 months ended September 30, 1999. The gross value of the real
estate assets based on this analysis ranged from $28,976,000 to $32,752,000 as
compared to an offer price in the Purchase Agreement of $33,500,000.
DISCOUNTED CASH FLOW. Raymond James performed a discounted cash flow
analysis of each of the real estate assets based on projections provided by the
Trust. Raymond James discounted all available free cash flow before interest and
dividends from each of the real estate assets for the years 2000 through 2002,
using discount rates ranging from 11.0 % to 13.0% and a terminal value for each
asset calculated by applying a capitalization rate to each of the properties
projected net operating income in 2003. The combined gross value of the real
estate assets based on this analysis ranged from $29,142,000 to $30,629,000 as
compared to an offer price in the Purchase Agreement of $33,500,000.
ANALYSES OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. Raymond
James reviewed the trading statistics of selected comparable publicly traded
retail property REITs, selected on the basis of their size, portfolio
characteristics and geographic concentration. The comparable companies selected
included:
- Kimco Realty Corporation
- New Plan Excel Realty Trust
- Weingarten Realty Investors
- Developers Diversified Realty Corporation
- Federal Realty Investment Trust
- JDN Realty Corporation
- Regency Realty Corporation
- Bradley Real Estate, Inc.
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<PAGE>
- Pan Pacific Retail Properties, Inc.
- Burnham Pacific Properties, Inc.
- IRT Property Company
- Center Trust Retail Properties, Inc.
- Konover Property Trust, Inc.
- Western Investment Real Estate Trust
- First Washington Realty Trust, Inc.
- Saul Centers, Inc.
- Mid-Atlantic Realty Trust
- Kranzco Realty Trust
- Acadia Realty Trust
- Price Enterprises, Inc.
- Philips International Realty Corporation
- Ramco-Gershenson Properties Trust
- Equity One, Inc.
- Malan Realty Investors, Inc.
- Agree Realty Corporation
- Aegis Realty Incorporated
- United Investors Realty Trust
- Urstadt Biddle Properties, Inc.
Based on consensus security analyst estimates for 1999, as reported by
First Call, an industry service provider of earnings estimates based on an
average of earnings estimates published by various investment banking firms, and
October 19, 1999 closing share prices, the trading multiples of 1999 projected
FFO per share of the comparable companies ranged from 4.2x to 9.7x, with an
average of 8.3x for companies with a market cap over $500 million, 7.1x for
comparable companies with a market cap between $100 million and $500 million,
and 7.3x for comparable companies with a market cap less than $100 million. With
a market cap of $25 million and based on the net price per share estimated by
the Trust resulting from the Asset Sale and Liquidation, the Trust would have a
trading multiple of 1999 projected FFO per share of 12.0x.
Based on the October 19, 1999 closing share prices of the comparable
companies, their dividend yields ranged from 6.9% to 14.9%, with an average of
8.8% for comparable companies with a market cap over $500 million, 10.6% for
comparable companies with a market cap between $100 million and $500 million,
and 11.1% for comparable companies with a market cap less than $100 million, as
compared to a dividend yield of 5.0% for the Trust , based on the Trust's
current annual dividend rate of $0.32 per share divided by the net price per
share estimated by the Trust resulting from the Asset Sale and Liquidation.
None of the comparable companies is identical to the Trust. In
evaluating the comparable companies, Raymond James made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Trust, such as the impact of competition on the Trust and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of the Trust or the industry or
in the financial markets in general.
ANALYSES OF SELECTED COMPARABLE TRANSACTIONS. Raymond James compared
the price to be received by the Trust in connection with the Asset Sale with
selected other comparable transactions. Raymond James analyzed two groups of
selected transactions: transactions in which a public REIT was acquired
(including certain public REIT transactions that have been announced, but not
yet closed) and transactions in which a REIT focused on the retail property
sector was acquired.
PUBLIC REIT TRANSACTIONS
(CLOSED)
<TABLE>
<CAPTION>
DATE EFFECTIVE TARGET ACQUIROR
- ------------------------- ------------------------------------------ ------------------------------------
<S> <C> <C>
2/25/98 Value Property Trust Wellsford Real Properties
3/30/98 ASR Investments Corporation United Dominion Realty Trust
4/8/98 Oasis Residential Camden Property Trust
5/8/98 Ambassador Apartments AIMCO
6/2/98 Meridian Point Realty Trust EastGroup Properties
6/3/98 Avalon Properties Inc. Bay Apartment Communities
6/15/98 Horizon Group Prime Retail
6/19/98 Price REIT Inc. Kimco Realty Corp.
15
<PAGE>
PUBLIC REIT TRANSACTIONS
(CLOSED)
<CAPTION>
DATE EFFECTIVE TARGET ACQUIROR
- ------------------------- ------------------------------------------ ------------------------------------
<S> <C> <C>
6/30/98 Security Capital Atlantic Security Capital Pacific Trust
8/3/98 American General Hospitality CapStar Hotel Company
8/6/98 Mid America Realty Investment Bradley Real Estate, Inc.
9/25/98 New Plan Realty Trust Excel Realty Trust
9/30/98 FAC Realty Trust Prometheus Southeast Retail
10/15/98 Capstone Capital Corp. HealthCare Realty Trust
10/20/98 Merry Land & Investment Co. Equity Residential Properties Trust
11/25/98 National Income Realty Trust Tarragon Realty Investors
2/5/99 Storage Trust Realty Public Storage Inc.
3/30/99 Meridian Industrial Trust Prologis Trust
5/24/99 Tower Realty Trust Reckson
6/8/99 Irvine Apartment Communities Irvine Company
7/2/99 Weeks Corp. Duke Realty Investments
10/1/99 Lexford Residential Trust Equity Residential Properties Trust
</TABLE>
Based on the closing prices for the trading day prior to the public
announcement of each of the public REIT transactions, the average premium paid
by the surviving company for the company being acquired was 12.2% and ranged
from (12.6)% to 56.6% for the selected transactions. On the same computation
basis, the premium to be paid by AEGON Advisors pursuant to the Asset Sale is
51.7%, based on the Trust's estimate of its net asset value following the Asset
Sale. Based on the closing prices for the trading day four weeks prior to the
public announcement of each of the public REIT transactions, the average premium
paid by the surviving company for the company being acquired was 15.2% and
ranged from (12.9%) to 88.9% for the selected transactions. On the same
computation basis, the premium to be paid by AEGON Advisors pursuant to the
Asset Sale is 56.3%, based on the Trust's estimate of its net asset value
following the Asset Sale.
PUBLIC REIT TRANSACTIONS
(ANNOUNCED)
<TABLE>
<CAPTION>
DATE ANNOUNCED TARGET ACQUIROR
- ------------------------- ------------------------------------------ ------------------------------------
<S> <C> <C>
3/4/99 Berkshire Realty Aptco LLC
4/5/99 Sunstone Hotel Investors Investor Group
6/16/99 TriNet Corporate Realty Trust Starwood Financial Trust
8/31/99 Commercial Assets Inc. Asset Investors Corporation
9/24/99 Walden Residential Properties Olympus Real Estate Corporation
</TABLE>
Based on the closing prices for the trading day prior to the public
announcement of each of the public REIT transactions which have been announced
but not yet closed, the average premium to be paid by the surviving company for
the company being acquired is 38.1% (18.7% excluding the TriNet Corporate Realty
transaction) and ranges from 0.0% to 115.8% for the selected transactions (a
maximum premium of 41.5% excluding the TriNet Corporate Realty transaction). On
the same computation basis, the premium to be paid by AEGON Advisors pursuant to
the Asset Sale is 51.7%, based on the Trust's estimate of its net asset value
following the Asset Sale. Based on the closing prices for the trading day four
weeks prior to the public announcement of each of the public REIT transactions
which have been announced but not yet closed, the average premium to be paid by
the surviving company for the company being acquired
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<PAGE>
is 43.6% (20.7% excluding the TriNet Corporate Realty transaction) and ranges
from 2.3% to 135.3% for the selected transactions (a maximum premium of 40.3%
excluding the TriNet Corporate Realty transaction). On the same computation
basis, the premium to be paid by AEGON Advisors pursuant to the Asset Sale is
56.3%, based on the Trust's estimate of its net asset value following the Asset
Sale.
PUBLIC RETAIL PROPERTY REIT TRANSACTIONS
(CLOSED)
<TABLE>
<CAPTION>
DATE EFFECTIVE TARGET ACQUIROR
- ------------------------- ------------------------------------------ ------------------------------------
<S> <C> <C>
6/15/98 Horizon Group Prime Retail
6/19/98 Price REIT Inc. Kimco Realty Corp.
8/6/98 Mid America Realty Investments Bradley Real Estate, Inc.
9/25/98 New Plan Realty Trust Excel Realty Trust
9/30/98 FAC Realty Trust Prometheus Southeast Retail
</TABLE>
Based on the closing prices for the trading day prior to the public
announcement of each of these transactions, the average premium paid by the
surviving company for the company being acquired in the public retail sector
REIT transactions was 8.3% and ranged from 2.7% to 13.5% for the selected
transactions. On the same computation basis, the premium to be paid by AEGON
Advisors pursuant to the Asset Sale is 51.7%, based on the Trust's estimate of
its net asset value following the Asset Sale. Based on the closing prices for
the trading day four weeks prior to the public announcement of each of the
public retail property REIT transactions, the average premium paid by the
surviving company for the company being acquired was 11.4% and ranged from
(7.9%) to 30.0% for the selected transactions. On the same computation basis,
the premium to be paid by AEGON Advisors pursuant to the Asset Sale is 56.3%,
based on the Trust's estimate of its net asset value following the Asset Sale.
The FFO multiples for the acquired retail focused companies, calculated based on
the price per share offered divided by the FFO per share based on the most
recently reported trailing 12 month period, ranged from 7.7x to 15.5x with an
average of 10.7x. The FFO multiple for the Trust is 14.5x based on the net price
per share estimated by the Trust from the Asset Sale and Liquidation divided by
FFO of $0.44 for the 12 month period ended September 30, 1999.
No transaction utilized in a comparable transaction analysis is
identical to the Asset Sale and, accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
financial and operating characteristics of the Trust and other factors that
would affect the acquisition value of companies to which it is being compared.
In evaluating the selected comparable transactions, Raymond James made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Trust, such as the impact of competition on the Trust and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of the Trust or the industry or
in the financial markets in general.
STOCK TRADING HISTORY. Raymond James reviewed the daily closing prices
of the Trust's common shares from January 1, 1990 through October 19, 1999.
Raymond James also reviewed the premium obtained by computing the percentage
excess of the anticipated liquidating distributions to shareholders over the
high, low and average closing price of the common shares for the following
periods ended August 16, 1999, the date of the announcement of the signed letter
of intent with AEGON Advisors.
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<PAGE>
Estimated Distribution Amount Based on the Offer Price $6.45
RECENT USP PRICE PER SHARE
- ---------------------------------------------------
Price at Announcement (8/16/99)*................... 4.25
<TABLE>
<CAPTION>
High Low Average
------------- ------------ -----------
<S> <C> <C> <C>
One Month Prior.................................... $ 4.25 $ 4.00 $ 4.04
Three Months Prior................................. $ 5.00 $ 4.00 $ 4.33
Six Months Prior................................... $ 5.00 $ 3.75 $ 4.18
One Year Prior..................................... $ 6.38 $ 3.75 $ 4.59
Three Years Prior.................................. $ 6.38 $ 3.56 $ 4.41
OFFER PREMIUM
- ---------------------------------------------------
Price at Announcement (8/16/99)*................... 51.7%
<CAPTION>
High Low Average
------------- ------------ -----------
<S> <C> <C> <C>
One Month Prior.................................... 51.7% 61.2% 59.5%
Three Months Prior................................. 29.0% 61.2% 48.9%
Six Months Prior................................... 29.0% 71.9% 54.2%
One Year Prior..................................... 1.1% 71.9% 40.6%
Three Years Prior.................................. 1.1% 81.0% 46.1%
</TABLE>
*THE TRANSACTION WAS ANNOUNCED AFTER THE MARKET CLOSED ON 8/16/99.
The summary set forth above does not purport to be a complete
description of the analyses performed by Raymond James. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to a
partial analysis or summary description. Raymond James believes that its
analyses must be taken as a whole and that selecting portions of its analyses,
without considering all analyses, would create an incomplete view of the process
underlying the opinion. In addition, certain analyses or valuations may be more
or less relevant than other analyses or valuations, and may have assumptions
which are more or less probable than other assumptions, so that the ranges of
valuations resulting from a particular analysis described above should not be
taken to be Raymond James' view of the value of the real estate assets or the
common shares. In light of the number and variety of analyses, valuations and
assumptions considered, Raymond James did not assign relative weights to these
analyses, valuations and assumptions considered.
In performing its analyses, Raymond James assumed economic, market and
other conditions as in effect on, and the information made available to it as
of, October 21, 1999. The analyses performed by Raymond James are not
necessarily indicative of actual value, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely as
part of Raymond James' analysis of whether the price to be received pursuant to
the Purchase Agreement is fair from a financial point of view to the Trust, and
were conducted in connection with the delivery of the opinion by Raymond James
to the Board of Trustees. The analyses do not purport to be appraisals or to
reflect the prices at which the real estate assets or the Trust might actually
be sold. The Raymond James analyses described above should not be viewed as
determinative of the opinion of the Board of Trustees or the management of the
Trust with respect to the value of the Trust.
The opinion speaks as of October 21, 1999 and Raymond James is not
required to and does not intend to update the opinion. Among other things,
changes in industry performance, general business, economic, market and
financial conditions, as well as changes in the Trust's business or its
properties, may affect a future determination of fairness. In
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<PAGE>
addition, in the event of a material amendment to the Purchase Agreement, the
Board of Trustees may request Raymond James to update the opinion, if it deems
appropriate.
Raymond James is a full service broker-dealer engaged in most aspects
of securities distribution and investment banking. Raymond James is the largest
brokerage and investment firm headquartered in the State of Florida. It is a
member of the New York Stock Exchange, American Stock Exchange, Philadelphia
Stock Exchange, Boston Stock Exchange, Chicago Board Options Exchange, New York
Futures Exchange, Pacific Stock Exchange and Chicago Stock Exchange. It is also
a member of the Securities Industry Association, the National Association of
Securities Dealers (NASD), and the Securities Investors Protection Corporation
(SIPC). In the ordinary course of its trading, brokerage and financing
activities, Raymond James and its affiliates may, at any time, have a long or
short position in, and buy and sell the equity securities of, the Trust for its
account or the accounts of its customers.
The type and amount of consideration payable in connection with the
Asset Sale and Purchase Agreement was determined through negotiation between the
Special Committee and AEGON Advisors. Although Raymond James provided financial
advice to the Special Committee during the course of negotiations, the decision
to enter into the Asset Sale and Purchase Agreement was solely that of the Board
of Trustees and the Special Committee. Raymond James' advice, opinion and
financial analyses were only one of the many factors considered by the Board of
Trustees and the Special Committee in their evaluation of the proposed Asset
Sale and Purchase Agreement and should not be viewed as determinative of the
views of the Board of Trustees or the Special Committee with respect to the
consideration to be received by the Trust in connection with the Asset Sale and
Purchase Agreement.
Pursuant to an engagement letter dated April 9, 1997, as amended on
August 9, 1999, the Trust paid a $50,000 engagement fee, and has agreed to pay
Raymond James (i) a $100,000 fee for its fairness opinion in connection with the
delivery of such opinion and (ii) a cash transaction fee of $150,000 upon the
closing of the Asset Sale. The Trust has also agreed to reimburse Raymond James
for all expenses incurred in connection with the services provided by Raymond
James. As of the date of this Proxy Statement, the Trust has paid Raymond James
approximately $21,000 for expenses incurred on behalf of the Trust.
PERSPECTIVE OF AEGON ADVISORS AND ITS AFFILIATES ON THE FAIRNESS OF THE ASSET
SALE
As discussed under "Special Factors--Background of the Asset Sale," the
determination of the purchase price for the Asset Sale resulted from extensive
arm's-length negotiation between the representatives of the Trust and AEGON
Advisors. At the conclusion of the negotiation process, AEGON Advisors offered
to acquire the real estate assets of the Trust for a price of $33,500,000.
AEGON Advisors and its affiliates believe that the Asset Sale is
fair to the shareholders of the Trust, including the unaffiliated
shareholders of the Trust. Neither AEGON Advisors nor any of its affiliates
undertook any formal or informal evaluation of its own as to the fairness of
the Asset Sale to the shareholders of the Trust. Rather, AEGON Advisors and
its affiliates base their belief solely on (i) the factors cited by the Board
of Trustees of the Trust and its determination that the Asset Sale is fair
to, and in the best interest of, the shareholders of the Trust (see "Special
Factors--Reasons for the Asset Sale"), (ii) the fact that the expected
liquidating distributions to shareholders in excess of $6.00 per share
represents a premium at least 40% over the closing price for the Trust's
shares on the day of the announcement of the execution of the letter of
intent with AEGON Advisors, and (iii) the fact that the terms of the Asset
Sale and the Purchase Agreement were negotiated on an arm's-length basis. In
concluding that the terms of the Asset Sale are fair to the unaffiliated
shareholders of the Trust, neither AEGON Advisors nor its affiliates attach
specific weight to any factors in reaching its belief as to fairness.
UNSOLICITED OFFERS FROM THIRD PARTIES
As of the date of this Proxy Statement, the Trust has not received any
unsolicited offers from third parties for a merger or other business combination
involving the Trust or any unsolicited proposal or offer to acquire in any
manner a substantial equity interest in, a substantial portion of the voting
securities of, or a substantial portion of the assets of the Trust, other than
the transaction contemplated by the Purchase Agreement, since announcing the
signing of the letter
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<PAGE>
of intent by the Trust and AEGON Advisors to commence negotiations of the Asset
Sale and Liquidation on August 16, 1999.
INTERESTS OF CERTAIN PERSONS IN THE ASSET SALE AND LIQUIDATION
In considering the recommendation of the Special Committee and the
Board, shareholders of the Trust should be aware that certain officers, trustees
and shareholders of the Trust may have interests in the Asset Sale and
Liquidation that may be different or in addition to the interests of
shareholders of the Trust generally. The Special Committee and the Board were
aware of these interests and considered them, among other factors, in approving
the Asset Sale and Liquidation. The interests are summarized below.
INTERESTS OF OFFICERS
The following four persons currently serve as executive officers of the
Trust: David L. Blankenship, Maureen DeWald, Alan F. Fletcher, and Roger L.
Schulz (the "Officers"). Mr. Blankenship has served as President of the Trust
since 1985. He has been employed by AEGON USA since 1977 in various
administrative and management positions related to real estate investment
activities and is Chairman of the Board and President of AEGON Advisors. Ms.
DeWald has served as Vice President of the Trust since 1986 and Secretary since
1985. She has been employed by AEGON USA since 1983 as an attorney for real
estate investment activities and is Senior Vice President, Secretary and General
Counsel of AEGON Advisors. Mr. Fletcher has served as Treasurer of the Trust
since 1986, as Vice President since 1985, as Assistant Secretary since 1982 and
as principal financial officer since 1981. He has been employed by AEGON USA
since 1981 in various financial and administrative positions related to
investment activities and is Senior Vice President and Chief Financial Officer
of AEGON Advisors. Mr. Schulz has served as Controller and Assistant Secretary
of the Trust since 1995. He has been employed by AEGON USA since 1985 in various
accounting and financial reporting positions related to real estate investment
activities and is Manager--Financial Reporting for AEGON Advisors.
The Officers receive no cash or deferred compensation in their
capacities as such from the Trust. The Officers are currently employed by AEGON
USA, and will remain employees of AEGON USA following the closing of the Asset
Sale and Liquidation. In order to avoid any real or apparent conflict of
interest among the Officers during the negotiation of the Purchase Agreement,
the Board established the Special Committee to negotiate, review the fairness
of, and approve the Purchase Agreement and the Asset Sale. The Officers were
directed by the Board to cooperate with the Special Committee and its advisors.
The Officers beneficially own 4,118 shares (excluding the shares owned by AEGON
USA), and will thus be entitled to receive 0.1% of the assets distributed in the
Liquidation. However, the shares beneficially owned by the Officers will be
treated the same as shares held by all other shareholders. See "OWNERSHIP OF
SHARES BY TRUSTEES AND OFFICERS."
INTERESTS OF TRUSTEES
The following four persons currently serve on the Board of Trustees:
Patrick E. Falconio, Edwin L. Ingraham, Samuel L. Kaplan and Richard M. Osborne.
Mr. Falconio has served as a Trustee and Chairman of the Board since 1988, and
retired on February 1, 1999 as Executive Vice President and Chief Investment
Officer of AEGON USA. He was also a director of AEGON Advisors and various other
subsidiaries of AEGON USA until his retirement. Mr. Ingraham has served as a
Trustee since 1984, and retired in 1988 as Executive Vice President, Treasurer
and Chief Investment Officer of AEGON USA. In order to avoid any real or
apparent conflict of interest among the Trustees approving the Asset Sale and
Liquidation, the Board established the Special Committee of trustees not
affiliated with AEGON Advisors or AEGON USA to negotiate, review the fairness
of, and approve, the Purchase Agreement and the Asset Sale. The Trustees
beneficially own 564,581 shares, and will thus be entitled to receive 14.55% of
the assets distributed in the Liquidation. However, the shares beneficially
owned by the Trustees will be treated the same as shares held by all other
shareholders. See "OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS." The Trust's
Declaration of Trust provides that the Trust shall indemnify each of its
Trustees, officers, employees and agents against all liabilities and expenses
reasonably incurred in connection with the defense or disposition of any action,
suit or other proceeding in which they may be involved or with which they may be
threatened, while acting as a Trustee or as an
20
<PAGE>
officer, employee or agent of the Trust or thereafter, by reason of being or
having been a Trustee, officer, employee or agent of the Trust, except with
respect to any matter as to which they shall have been found to have acted in
bad faith or with willful misconduct or reckless disregard of their duties or
gross negligence or not to have acted in good faith in the reasonable belief
that their action was in the best interests of the Trust. In connection
therewith, the Trust maintains an insurance policy to cover liability of the
Trustees, which the Trust expects to continue through tail coverage after the
Asset Sale and Liquidation.
INTERESTS OF AEGON USA
AEGON USA is the largest shareholder of the Trust, beneficially owning
approximately 30.86% of the Trust's outstanding shares. In addition to its
equity interest in the Trust, AEGON USA has provided debt financing for certain
of the Properties. On March 1, 1999, the mortgage loans on Mendenhall Commons
and North Park Plaza matured, requiring principal repayment. On March 15, 1999,
the Trust refinanced these mortgage loans with Monumental Life Insurance
Company, a wholly-owned subsidiary of AEGON USA. The new loans are for a period
of one year, carry an initial interest rate of 7%, and may be prepaid at any
time without penalty. If the Asset Sale is consummated, these loans will be
repaid by the Trust from the proceeds of the Asset Sale as part of the
Liquidation, prior to any liquidating distributions to shareholders.
SUMMARY OF MATERIAL FEATURES OF THE ASSET SALE
THE PURCHASE AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN ASPECTS OF THE PURCHASE
AGREEMENT. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY THE PURCHASE AGREEMENT, WHICH IS ATTACHED TO THIS PROXY STATEMENT AS
ANNEX D. WE HAVE NOT FILED WITH THE COMMISSION ALL EXHIBITS OR OTHER AGREEMENTS
REFERRED TO IN THE PURCHASE AGREEMENT. CAPITALIZED TERMS USED HEREIN AND NOT
OTHERWISE DEFINED HEREIN HAVE THE MEANINGS ASCRIBED TO SUCH TERMS IN THE
PURCHASE AGREEMENT.
GENERAL
On January 20, 2000, the Trust and AEGON Advisors entered into the
Purchase Agreement pursuant to which the Trust has agreed to sell and transfer,
and AEGON Advisors has agreed to purchase and assume, subject to the terms and
conditions of the Purchase Agreement, including approval of the Trust's
shareholders, all of the Trust's real estate assets and certain liabilities for
$33,500,000. The Trust's real estate assets include the Properties and all
Improvements, Personal Property, Tenant Leases, Operating Agreements,
Warranties, Plans and Specifications, Licenses related thereto, as well as all
rents, issues, royalties and profits of the Properties, whether coming due
before or after the closing date of the Asset Sale. The Properties are being
sold in fee simple title, subject to certain Permitted Exceptions. The
properties will be transferred free and clear of mortgages and related liens,
with the possible exception of the Yamaha Warehouse, as described below. Both
Mendenhall Commons and North Park Plaza are subject to mortgage loans with
Monumental Life Insurance Company, a wholly owned subsidiary of AEGON USA, which
will be repaid by the Trust from the proceeds of the Asset Sale as part of the
Liquidation. The Trust estimates that the known liabilities not assumed by AEGON
Advisors will total approximately $9,000,000.
If AEGON Advisors assumes, subject to lender consent, the existing lien
of the first mortgage and related security instruments encumbering the Trust's
Yamaha Warehouse property (the "Yamaha Debt"), thereby avoiding a substantial
prepayment fee of approximately $60,000, the Trust will pay the Yamaha Lender an
assumption fee of 1% of the outstanding principal owing under the Yamaha Debt,
and the purchase price will be reduced by the outstanding principal and unpaid
interest owing under the Yamaha Debt as of the Closing Date. The Yamaha Debt is
expected to total approximately $1.4 million at the time of closing. If the
Yamaha Lender refuses to consent to the sale, the purchase price will not be
reduced, but the Trust will pay off the Yamaha mortgage at the closing of the
Asset Sale, pay the prepayment fee and deliver the Yamaha Warehouse property
free and clear of the mortgage and related liens. AEGON Advisors is obligated
under the Purchase Agreement to use reasonable efforts to obtain the Yamaha
Lender's consent
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<PAGE>
to AEGON Advisors' assumption of the Yamaha Debt, and the Trust intends to use
its best efforts to ensure that such consent is obtained.
Subject to the conditions contained in the Purchase Agreement, the
closing of the Asset Sale will take place at or be closed in escrow through the
offices of American Title Company promptly following the Special Meeting, or at
such other place or on such other date as may be mutually agreeable to the
parties, but in no event later than June 30, 2000. There can be no assurance
that all conditions of the Asset Sale will be satisfied.
REPRESENTATIONS AND WARRANTIES
The Purchase Agreement contains customary representations and
warranties of the Trust relating to, among other things: (i) the Trust's status
as a domestic entity under the Internal Revenue Code; (ii) due authorization and
approval of the Purchase Agreement and each instrument or document required to
be executed and delivered by the Trust pursuant to the Purchase Agreement and
the consummation of the transactions contemplated thereby; (iii) the absence of
any governmental or regulatory authorization, consent or approval required to
consummate the Asset Sale; and (iv) the absence of any contract or agreement in
conflict with the terms and conditions of the Purchase Agreement.
The Purchase Agreement also contains customary representations and
warranties of AEGON Advisors relating to, among other things: (i) due
authorization and approval of the Purchase Agreement and the consummation of the
transactions contemplated thereby; (ii) the absence of governmental or other
regulations that would restrict AEGON Advisors' proposed purchase of the
Properties; and (iii) the absence of any conflict between the proposed Asset
Sale and AEGON Advisors' Articles of Incorporation or By-Laws.
The parties also jointly made certain statements concerning the
condition of the Properties, limited to their actual knowledge, regarding, among
other things: (i) the absence, except as disclosed, of tenants in material
default under their leases; (ii) the absence of liens and encumbrances affecting
the Properties, other than Permitted Title Exceptions; (iii) material compliance
of the Properties with all applicable laws, codes and ordinances including those
regulating zoning, building, health, fire or other safety and environmental
conditions; (iv) the status of insurance against fire and other hazards; (v) the
absence of plans for condemnation, or street or other improvements which may
result in special assessments against the Properties; (vi) the absence of
claims, suits or proceedings pending or threatened against or affecting the
Properties; and (vii) the absence of any damage to the Properties which has not
been repaired. The parties further stated in the Purchase Agreement that neither
the execution and delivery of the Purchase Agreement, nor the consummation of
the contemplated transactions or compliance with the terms and provisions of the
Purchase Agreement, will violate any provision of law to which the Trust is
subject, or will conflict or result in any breach or default of, or result in
any lien or encumbrance upon the Properties pursuant to, any indenture,
mortgage, deed of trust, lease or other instrument to which the Trust is a party
or by which the Trust or any of the Properties is bound. AEGON Advisors has
acknowledged that it is purchasing the Properties on an AS-IS condition, based
upon its own inspections of the Properties and without the benefit of any
representation, warranty or disclosure from the Trust.
OPERATIONS OF THE TRUST PRIOR TO THE CLOSING
While the Closing is pending, the Trust has agreed to operate the
Properties in the ordinary course of business, by, among other things, complying
with the terms of all leases, mortgages, or other contractual obligations, and
performing regular, scheduled, or necessary maintenance and repair of the
Properties and related fixtures, furniture and equipment. The Trust has agreed
not to enter into any agreements or contracts affecting the Properties which
will survive the closing, or any new lease or modifications or terminations of
existing leases, without the consent of AEGON Advisors. Any contracts for tenant
improvements for certain Permitted Lease Transactions which are not completed
prior to Closing will be assigned to and assumed by AEGON Advisors. The Trust
will pay for the tenant improvement costs or allowances and leasing commissions
in approved or Permitted Lease Transactions to the extent necessary to maintain
gross rent levels, upon which AEGON advisors had based its purchase price.
AEGON Advisors is the asset manager for the Properties pursuant to a
Management Agreement dated July 1, 1981 and an Administrative Agreement dated
January 1, 1984 (together, the "Advisory Agreements"). See "THE
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TRUST--Administrative, Advisory and Acquisition Services" and "--Management
Services." AEGON Advisors has agreed to continue to manage the Properties in the
best interests of the Trust pursuant to the Advisory Agreements in the same
manner as before the Purchase Agreement. All actions taken by the Trust in
regard to the Properties at the recommendation of AEGON Advisors as advisor will
be considered consented to by AEGON Advisors for purposes of the Purchase
Agreement. The Trust has directed AEGON Advisors to conduct operations at the
Properties in accordance with any applicable terms and conditions of the
Purchase Agreement. The Trust has also agreed that AEGON Advisors will have
access to the Properties to perform its due diligence and inspections allowed by
the Purchase Agreement in addition to its normal access to the Properties in its
capacity as advisor to the Trust. AEGON Advisors has agreed to indemnify the
Trust for any loss, cost, damage or liability caused by AEGON Advisors' conduct
of its due diligence review of the Properties.
The Trust has further agreed to call the Special Meeting to obtain the
approval of the shareholders for this transaction, which shall include the
approval of the shareholders in accordance with the Declaration of Trust that
the Trust be liquidated and the proceeds of the Asset Sale, together with other
liquid assets of the Trust, less costs and reserves, be promptly distributed to
the shareholders. The Trust agreed to recommend the Asset Sale, subject to
receipt of a favorable fairness opinion from Raymond James.
CLOSING CONDITIONS
The Asset Sale will be consummated only if the Purchase Agreement and
the required Liquidation are approved and adopted by the affirmative vote of the
holders of two-thirds of the voting power of all outstanding shares the Trust,
and the Trust receives a favorable fairness opinion from Raymond James. The
Trust believes that the holders of approximately 45% of the outstanding shares
(including AEGON USA) intend to vote in favor of the Asset Sale and Liquidation.
On October 21, 1999, the Board of Trustees received the written opinion of
Raymond James that the Asset Sale is fair, from a financial point of view, to
the Trust's shareholders.
The closing of the Asset Sale also is subject to the satisfaction of
certain other conditions specified in the Purchase Agreement, unless such
conditions are waived. AEGON Advisors' obligation to buy the Properties is
subject to, among other things: (i) AEGON Advisors obtaining a preliminary title
report and a commitment for an owner's policy of title insurance satisfactory to
AEGON Advisors from the Title Company with respect to each of the Properties;
(ii) AEGON Advisors obtaining certified surveys of the Properties which reveal
no new exceptions unacceptable to AEGON Advisors; (iii) AEGON Advisors obtaining
an environmental report or report update concerning the Properties which does
not show or indicate any asbestos in the Improvements or any contamination of
the Properties above any level requiring a mediation or clean-up by any
applicable federal, state or local law, code or ordinance except as otherwise
agreed to by AEGON Advisors; and (iv) the continued accuracy of the Trust's
representations in the Purchase Agreement without any change in the rent rolls
or the status of defaults of tenants which would be detrimental to the value of
any Property.
CLOSING PRORATIONS
AEGON Advisors will obtain its own insurance coverage for the
Properties at Closing. Rents and reimbursements due after Closing will be
prorated at Closing based upon estimates of such amounts. Property expenses,
collected rents, and ad valorem taxes on the Properties for the current year
will be prorated at the Closing, effective as of the Closing Date, utilizing the
latest available computations of such items. Except as otherwise agreed by the
parties, the Trust will be responsible for all property expenses incurred,
undertaken, or contracted for prior to Closing, and has agreed to indemnify and
hold AEGON Advisors harmless from any claim, cost, or cause of action arising
from any such expenses and liabilities. Charges under the continuing Operating
Agreements assumed by AEGON Advisors will be prorated between the parties at
Closing. Tenant security deposits in the possession of the Trust and prepaid
rents will be credited to AEGON Advisors. In addition to the Purchase Price,
AEGON Advisors will pay the Trust its pro rata share of all tenant delinquent
rental accounts at face value, but will only pay for accounts whose total
delinquency is less than ninety (90) days past due, and specifically shall not
pay for the accounts of any tenants in bankruptcy or state insolvency
proceedings or any accounts whose total delinquency is more than thirty (30)
days past due if the tenant in question has vacated the property. All other
rental accounts will be transferred to AEGON Advisors at Closing without
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additional charge. The Trust will cause all utility meters to be read on the
Closing Date and AEGON Advisors shall be responsible for having utilities
connected on such date in its own name.
RISK OF LOSS
Until Closing, all risk of loss of the Properties is on the Trust and
if, prior to Closing, the Properties, or any part thereof, become damaged by
fire or other casualty or become the object of any condemnation proceedings,
AEGON Advisors may, as its sole and exclusive remedy, elect to either (i)
terminate the Purchase Agreement, or (ii) proceed with the Closing and receive
an assignment in form acceptable to AEGON Advisors of all insurance proceeds or
awards for such taking, free and clear of all liens, claims and encumbrances,
and in the case of casualty, together with a cash payment by the Trust to AEGON
Advisors in the amount of the lesser of (a) any deductible under the Trust's
insurance, or (b) the cost of the repair of the damage. If the estimated cost of
repair is less than $1,000,000, AEGON Advisors has agreed to proceed to Closing.
REMEDIES
The Trust's sole remedy in the case of a default in AEGON Advisors'
performance under the Purchase Agreement is the receipt of the $200,000 in
earnest money paid into escrow by AEGON Advisors and termination of the Purchase
Agreement. Upon a default by the Trust under the Purchase Agreement, AEGON
Advisors may, as its sole and exclusive remedies, elect to: (i) terminate the
Purchase Agreement and reclaim the earnest money; (ii) seek specific performance
of the Purchase Agreement; or (iii) sue the Trust for damages not to exceed the
earnest money.
Except for failure to close on the specified Closing Date, in which
case no notice or cure period is required, prior to a declaration of default,
the parties have agreed to give written notice to each other specifying the
default. The defaulting party will have five business days from receipt of such
notice to cure the default. If the cure period extends beyond the scheduled date
of Closing, the Closing Date will be postponed to the last day of the cure
period. In the event either party to the Purchase Agreement employs an attorney
and commences legal action because of the other party's default, then the
non-prevailing party will pay to the prevailing party reasonable attorney's fees
incurred in the enforcement of the Purchase Agreement.
INDEMNIFICATION
The parties have agreed to indemnify and hold harmless each other with
respect to any loss arising from the inaccuracy of such party's representations
and warranties. AEGON Advisors has also agreed to indemnify and hold harmless
the Trust for any loss incurred by the Trust caused by AEGON Advisors' conduct
of its due diligence.
TERMINATION
The Purchase Agreement is subject to termination under several
circumstances, including failure to obtain the requisite shareholder approval.
It shall terminate automatically if any of the closing conditions are not
satisfied, if AEGON Advisors defaults in its performance of the Purchase
Agreement, if the Trust defaults in its performance of the Purchase Agreement,
or the Property becomes damaged by fire or other casualty or becomes the object
of any condemnation proceedings before the Closing. See " -- Remedies" above for
a summary of the effect of termination of the Purchase Agreement prior to
Closing. No other fees are due upon termination of the Purchase Agreement.
AMENDMENT AND WAIVER
The Purchase Agreement may be amended, superseded, extended or modified
only in a written document executed by both AEGON Advisors and the Trust. If the
conditions to closing regarding the status of the Properties are not timely
satisfied, AEGON Advisors may elect to (i) waive such conditions and close, (ii)
terminate the Purchase Agreement, or (iii) reject the affected Property or
Properties by notice to the Trust, in which event the rejected Properties
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will be deleted from the Purchase Agreement and the purchase price will be
reduced by the amount allocated to the deleted Properties.
FEES AND EXPENSES
The Trust will bear all costs and related expenses incurred in
connection with the Asset Sale and Liquidation, including applicable transfer
taxes, with the exception of expenses related to the cost of title policies,
surveys and environmental reports and one-half of the Title Company escrow fees,
if any, which AEGON Advisors will bear. No fees or commissions will be paid to
any brokers, finders or other persons in connection with the Asset Sale and
Liquidation except for the fees due Raymond James, whose fees shall be borne by
the Trust. See "SPECIAL FACTORS--Opinion of Financial Advisor."
ANTICIPATED ACCOUNTING TREATMENT
The Asset Sale will be accounted for as a sale by the Trust, and as a
purchase by AEGON Advisors.
FINANCING OF THE ASSET SALE; SOURCE OF FUNDS
AEGON Advisors has represented in the Purchase Agreement that it,
together with its affiliates, has sufficient capital resources necessary to
perform its obligations under the Purchase Agreement. AEGON Advisors intends to
finance the Asset Sale with working capital funds.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income
tax consequences to the Trust and its shareholders relevant to the Asset Sale
and Liquidation, but is not intended to be a complete analysis of all the
potential tax effects. The discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings, and judicial decisions now in effect, all of which are subject
to change at anytime. Any such changes may be applied retroactively. The
following discussion has no binding effect on the IRS or the courts and assumes
that the Trust will liquidate substantially in accordance with the process
described below under "LIQUIDATION." It is also assumed that all liquidating
distributions to shareholders or to the liquidating trust will occur during the
same taxable year as the Asset Sale occurs. No assurances can be given that the
tax treatment described herein will remain unchanged at the time of the
distributions.
CONSEQUENCES TO THE TRUST
Upon the Asset Sale, the Trust will generally recognize capital gain to
the extent the amount it realizes upon the sale of each real estate asset
exceeds its adjusted basis in that asset for federal income tax purposes at the
time of the sale. The Trust should not be subject to tax on the net capital gain
that it recognizes as a result of the Asset Sale if before the end of the
taxable year during which the Asset Sale occurs it makes liquidating
distributions to shareholders or to the liquidating trust in an amount at least
equal to its earnings and profits (as calculated for federal income tax
purposes) for that taxable year. Until the Liquidation is completed and the
Trust ceases to exist, the Trust will continue to be subject to tax on its
taxable income.
CONSEQUENCES TO SHAREHOLDERS
The Asset Sale will not in itself result in federal income tax
consequences to the holders of the shares. Upon receipt of the liquidating
distributions, shareholders will recognize gain or loss equal to the difference
between (i) the amount of cash distributed to them in the Liquidation, and (ii)
their tax basis for their shares. Gain or loss recognized by a shareholder will
be capital gain or loss provided the shares are held as capital assets. If the
shares are held as capital assets and the shareholder has held the shares for
more than one year, the gain will be long-term capital gain. Long-term capital
gains of individuals, estates, and trusts are currently taxed at a maximum rate
of 20%. Long-term capital gains of corporations are taxed at the same rates as
ordinary income (at rates up to 35%). To determine the
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deductibility of capital losses, all capital gains and losses incurred in the
year must be totaled. Any capital losses are deductible only to the extent of
any capital gains plus, in the case of non-corporate shareholders, ordinary
income of up to $3,000.00 per year. Corporate shareholders can use capital
losses for a tax year only to offset capital gains in that year. Individuals and
other non-corporate shareholders may carry over a net capital loss for an
unlimited time until the loss is exhausted. Corporate shareholders may carry
back a capital loss to each of the three tax years preceding the loss year to
offset capital gain. Any excess may be carried forward for five years following
the loss year. After the close of its taxable year, the Trust will provide
shareholders and the IRS with a statement of the amount of cash distributed to
each of the shareholders during that year.
THE LIQUIDATING TRUST
If a liquidating trust is used, shareholders will be treated for tax
purposes at the time of transfer as having received their pro rata share of
property transferred to the liquidating trust, reduced by the amount of known
liabilities assumed by the liquidating trust or to which the property
transferred is subject. The liquidating trust itself should not be subject to
tax. After formation of the liquidating trust, the shareholders must take into
account for federal income tax purposes each year their allocable portion of any
income, expense, gain or loss recognized by the liquidating trust. As a result
of the transfer of property to the liquidating trust and the possible receipt of
income by the liquidating trust, shareholders should be aware that they may be
subject to tax, whether or not they have received any actual distributions from
the liquidating trust with which to pay the tax. The final distributions from
the liquidating trust to shareholders will not have any further federal income
tax consequences to shareholders.
STATE AND LOCAL INCOME TAX CONSEQUENCES
Shareholders may also be subject to liability for state and local taxes
with respect to the receipt of liquidating distributions for their shares, as
well as their interests in the liquidating trust.
THE TRUST RECOMMENDS THAT EACH SHAREHOLDER CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES OF THE
PROPOSED ASSET SALE AND LIQUIDATION.
ABSENCE OF APPRAISAL RIGHTS
Under the Declaration of Trust, which is governed by Iowa common law,
if the shareholders approve the Asset Sale and Liquidation, the Asset Sale and
Liquidation will not give rise to any rights of shareholders of the Trust to
seek a court appraisal of their shares, or any similar dissenters' rights.
REGULATORY APPROVALS
The Trust believes that no regulatory approvals are or will be required
in connection with the Asset Sale and Liquidation. At the completion of the
Liquidation, the Trust will file notice with the County Recorder of Linn County,
Iowa, thereby terminating the Trust.
LIQUIDATION
GENERAL
If the shareholders approve the Purchase Agreement and the Asset Sale
is consummated, the assets of the Trust will consist of $33,500,000 in cash
proceeds from the Asset Sale, less approximately $1.4 million for repayment or
assumption of the Yamaha Debt and less such amount of proceeds necessary pay
certain liabilities not assumed in the Asset Sale, including the outstanding
mortgage loans on Mendenhall Commons and North Park Plaza. The Trust's other
assets will consist of cash and cash equivalents. The Trust currently estimates
that liabilities not assumed will total approximately $9,000,000. See "SELECTED
FINANCIAL DATA." Accordingly, the Trust estimates that there will be
approximately $24,500,000 (less the costs of operation and professional fees
during liquidation, and less any
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unforseen liabilities asserted during liquidation) available for distribution to
shareholders in liquidation on a pro rata basis. See "PRO FORMA FINANCIAL
INFORMATION." As of the date of this Proxy Statement, the Trust had 3,880,000
shares issued and outstanding. The Asset Sale and Liquidation is expected to
result in total liquidating distributions to shareholders in excess of $6.00 per
share. No assurances can be given, however, that, as a consequence of the
Liquidation, holders of the Trust's shares will receive aggregate cash
distributions per share which exceed the prices at which the Trust's shares have
generally been traded.
Assuming the Closing of the Asset Sale occurs on or before March 30,
2000, the Board of Trustees presently intends to pay an initial cash
distribution of at least $6.00 per share to shareholders on or before April
17, 2000 (the "Initial Distribution") provided that the Board believes at
that time that the Contingency Reserve hereinafter defined is adequate to
provide for the Trust's obligations, liabilities (actual and contingent) and
expenses. Depending on their tax basis for their shares, shareholders may be
required to recognize gain for tax purposes upon receipt of distributions in
liquidation and upon the transfer of any undistributed assets to a
liquidating trust. See "-- Liquidating Distributions," "SUMMARY OF MATERIAL
FEATURES OF THE ASSET SALE--Certain Federal Income Tax Consequences" and "PRO
FORMA FINANCIAL INFORMATION."
LIQUIDATION PROCEDURE
In the event that the Asset Sale is consummated, the officers of the
Trust will be directed to commence the immediate liquidation of the Trust. The
Trust will cease to carry on its business, except to the extent necessary for
the winding up of the Trust. The Advisory Agreements will be amended, providing
for a reasonable and customary fee to AEGON Advisors for its continued services
until the liquidation proceedings are completed or until a liquidating trust is
established. The legal existence of the Trust will continue to the extent
necessary to wind up the affairs of the Trust until the liquidation proceedings
are completed and a notice is filed with the County Recorder of Linn County,
Iowa.
The officers will proceed as soon as possible to collect or make
provision for the collection of all known debts due or owing to the Trust, pay
or make provision for the payment of all known debts, obligations, and
liabilities of the Trust according to their priorities, and will give notice to
each creditor of and claimant against the Trust. A notice of the pending
Liquidation will be published in a newspaper. All claims must be received within
120 days of publishing or giving written notice, as applicable. The Trust may
accept or reject the claim by giving written notice to the person submitting it.
The officers will be authorized to sell, transfer or otherwise dispose of all
remaining property and assets of the Trust, and all tangible or intangible
property, including money, remaining after the discharge of, or after making
adequate provision for the discharge of, the debts, obligations and liabilities
of the Trust will be distributed on a pro rata basis to the shareholders of
record on the Final Record Date selected by the Board for the distributions. No
further shareholder votes will be solicited with respect to approval of the
specific terms of any asset sales approved by the Board of Trustees. The Trust
will indemnify its officers, trustees, employees, agents, and representatives
for actions taken in connection with the Asset Sale and the winding up of the
affairs of the Trust. The Trust's obligations to indemnify such persons may also
be satisfied out of assets of any liquidating trust established hereunder.
The Board of Trustees has determined to establish a Contingency Reserve
of approximately $400,000 which it believes will be sufficient to satisfy the
liabilities, expenses, and obligations of the Trust not otherwise paid, provided
for or discharged at or immediately after the Closing. The net balance, if any,
of the Contingency Reserve remaining (including interest earned on cash in the
Contingency Reserve) after payment, provision or discharge of all liabilities,
expenses and obligations, also will be distributed to the Trust's shareholders
pro rata or to the liquidating trust. Although the Trust presently intends to
pay the initial distribution on or before April 17, 2000 (assuming the closing
of the Asset Sale occurs on or before March 30, 2000), no assurances can be
given that available cash at that time together with the Contingency Reserve
will be adequate in the Board's judgment to provide for the Trust's obligations,
liabilities, expenses and claims as well as to fund the distribution. See
"--Liquidating Distributions," "--Contingency Reserve; Liquidating Trust" and
"PRO FORMA FINANCIAL INFORMATION."
Assuming the Closing of the Asset Sale occurs on or before March 30,
2000 and the Initial Distribution occurs on or before April 17, 2000, the Trust
expects to transfer any remaining assets (including any Contingency Reserve) to
a liquidating trust. In the event a liquidating trust is established, the Trust
would distribute pro rata to the
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shareholders beneficial interests in the liquidating trust ("Interests"). It is
anticipated that the Interests will not be freely tradeable; hence, although the
recipients of the Interests in the liquidating trust will be treated for tax
purposes as having received their pro rata share of property transferred to the
liquidating trust and will thereafter take into account for tax purposes their
allocable portion of any income, expense, gain or loss realized by the
liquidating trust, the recipients of the Interests will not realize the value of
the Interests unless and until the liquidating trust distributes cash or other
assets to them.
Assuming the expiration of all time periods relating to payment of
claims described above and assuming there are no pending legal, administrative
or arbitration proceedings by or against the Trust, a notice will be filed with
the County Recorder of Linn County, Iowa. When the notice of liquidation has
been filed, the Trust will be terminated.
LIQUIDATING DISTRIBUTIONS
The Board has not established a firm timetable for distributions to
shareholders. If the closing of the Asset Sale takes place, the Board will,
subject to the requirements for maintaining adequate reserves to pay all of
the Trust's liabilities and obligations, make such distributions as promptly
as practicable consistent with maximizing shareholder value. Assuming the
Asset Sale closing occurs on or before March 30, 2000, the Board of Trustees
presently intends to pay an initial cash distribution of at least $6.00 per
share to shareholders on or before April 17, 2000, provided that at that time
the Board is of the opinion that the Contingency Reserve is adequate to
provide for the Trust's obligations, liabilities (actual and contingent) and
expenses. The Board is, however, currently unable to predict with certainty
the precise amount of any distributions of cash resulting from the
Liquidation. The actual amount and timing of, and Final Record Date for, all
distributions will be determined by the Board of Trustees, in its sole
discretion, and will depend upon the amounts deemed necessary by the Board to
pay or provide for all of the Trust's liabilities and obligations. The Trust
does not plan to satisfy all of its liabilities and obligations prior to
making an initial distribution to its shareholders, but instead will reserve
assets deemed by management to be adequate to provide for satisfying such
liabilities and obligations. However, the ultimate amount of liabilities
cannot be determined with certainty, which makes it impracticable to predict
the aggregate net amount ultimately distributable to shareholders. Claims,
liabilities and expenses from operations will continue to accrue following
approval of the Asset Sale and Liquidation and closing of the Asset Sale, and
the Trust anticipates that expenses for professional fees and other expenses
of liquidation will be significant. These expenses will reduce the amount of
assets available for ultimate distribution to shareholders. While the Trust
does not believe that a precise estimate of those expenses can presently be
made, the Board believes that available cash, interest income and the amounts
which will be received upon the closing of the Asset Sale will be adequate to
provide for the Trust's obligations, liabilities, expenses and claims
(including contingent liabilities) and to make cash distributions to
shareholders. However, no assurance can be given as to the foregoing. See
"PRO FORMA FINANCIAL INFORMATION."
CONTINGENCY RESERVE; LIQUIDATING TRUST
The Board of Trustees has determined to establish a Contingency Reserve
of approximately $400,000 which it currently believes will be sufficient to
operate the Trust until termination, and which it believes it will be sufficient
to satisfy the liabilities, expenses and obligations of the Trust not otherwise
paid, provided for or discharged at or immediately after the closing of the
Asset Sale.
The actual size of the Contingency Reserve is based upon estimates and
opinions of management derived from consultations with outside experts and
review of the Trust's estimated operating expenses and liabilities (actual and
contingent) and obligations. There can be no assurance that the Contingency
Reserve will be sufficient. The Trust may from time to time distribute to its
shareholders any portions of the Contingency Reserve which the Board deems no
longer required. After the liabilities, expenses and obligations for which the
Contingency Reserve has been established are believed by the Board to have been
satisfied in full, the Trust will distribute to its shareholders any remaining
portions of the Contingency Reserve.
Assuming the Closing of the Asset Sale occurs on or before March 30,
2000, and the Initial Distribution occurs on or before April 17, 2000, the Trust
expects to transfer the remaining assets (including the Contingency Reserve) to
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a liquidating trust. The sole purpose of the trust will be to liquidate on terms
satisfactory to the liquidating trustees and, after paying any remaining
liabilities of the Trust, distribute the proceeds of the assets formerly owned
by the Trust to the Trust's shareholders. The liquidating trust will be
obligated to pay any expenses and liabilities of the Trust which remain
unsatisfied. If the Contingency Reserve transferred to the liquidating trust is
exhausted, such expenses and liabilities will be satisfied out of the
liquidating trust's other unsold assets, if any.
The Board of Trustees will appoint one or more individuals or corporate
persons to act as trustee or trustees on such terms and conditions as the Board
of Trustees determines.
In the event the Trust fails to create an adequate Contingency Reserve
for payment of its expenses and liabilities, or should the Contingency Reserve
and the assets held by the liquidating trust be exceeded by the amount
ultimately found payable in respect of expenses and liabilities, each
shareholder could be held liable for the payment to creditors of his or her pro
rata share of the excess, limited to the amounts theretofore received by the
shareholder by way of distributions from the Trust or the liquidating trust.
If a court determines at any time that the Trust has failed to make
adequate provision for its expenses and liabilities or if the amount ultimately
required to be paid in respect of such liabilities exceeds the amount available
from the Contingency Reserve and the assets of the liquidating trust, a creditor
of the Trust could seek an injunction against the making of distributions to
shareholders on the ground that the amounts to be distributed are needed to
provide for the payment of the Trust's expenses and liabilities. Any such action
could delay or substantially diminish the cash distributions to be made to
shareholders.
FINAL RECORD DATE
The share transfer books of the Trust will be closed on the close of
business on the record date fixed by the Board of Trustees for the initial
liquidating distribution following the consummation of the Asset Sale, and
thereafter no further transfers will be recorded on the Trust's books, and no
further share certificates will be issued, other than replacement certificates.
It is anticipated that no further trading of the Trust's shares will occur after
that date (the "Final Record Date"). See "--Listing and Trading of the Shares
and Interests in the Liquidating Trust" below. When making the initial
liquidating distribution on or after the Final Record Date, the Trust will
require shareholders to surrender certificates representing their shares in
order to receive the distribution. Shareholders should not forward their share
certificates before receiving instructions to do so. All distributions otherwise
payable by the Trust or the liquidating trust, if any, to shareholders who have
not surrendered their share certificates may be held in trust for those
shareholders, without interest, until the surrender of their certificates
(subject to the requirements of state "escheat" laws requiring transfer of
unclaimed property to the states).
LISTING AND TRADING OF THE SHARES AND INTERESTS IN THE LIQUIDATING TRUST
Prior to the Final Record Date, the shares of beneficial interest will
continue to be transferable and the Trust's shareholders will continue to have
such rights as applicable laws confer upon shareholders. The Trust currently
intends to close its books on the Final Record Date and at that time cease
recording share transfers and issuing share certificates (other than replacement
certificates). Accordingly, it is expected that trading in the shares will cease
on that date.
MANAGEMENT OF THE TRUST AND AEGON ADVISORS
MANAGEMENT OF THE TRUST
Information concerning the management of the Trust, the names,
principal occupations and employment history of the trustees and officers of the
Trust, is provided in the Trust's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 that is incorporated by reference in this Proxy
Statement and attached hereto as ANNEX A. See "WHERE YOU CAN FIND MORE
INFORMATION." All of the trustees and officers of the Trust are citizens of the
United States. The business address of each trustee and officer of the Trust is
listed in footnote (1) to the table under "OWNERSHIP OF SHARES BY TRUSTEES AND
OFFICERS."
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MANAGEMENT OF AEGON ADVISORS
AEGON Advisors is a wholly owned subsidiary of AEGON USA, an Iowa
corporation which is an indirect, wholly-owned subsidiary of AEGON N.V., a
holding company organized under the laws of the Netherlands which is controlled
by Vereniging AEGON, an association organized under the laws of the Netherlands.
AEGON USA's business address is 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499. AEGON N.V.'s business address is also 4333 Edgewood Road, N.E. Cedar
Rapids, Iowa 52499, in care of AEGON USA.
AEGON ADVISORS. The names, positions and five years of employment
history of the directors of AEGON Advisors are listed below. Unless otherwise
specified below, the directors are United States citizens, have held the
positions listed below since at least five years prior to the date of this Proxy
Statement, and their business addresses are 4333 Edgewood Road, N.E., Cedar
Rapids, Iowa 52499.
David L. Blankenship is Chairman of the Board and President of AEGON
Advisors. Douglas C. Kolsrud has been Executive Vice President, Asset Allocation
and Risk Management, of AEGON USA since 1998 and, prior to that, was Corporate
Actuary of AEGON USA. Brenda K. Clancy has been Senior Vice President &
Treasurer, Information and Finance of AEGON USA since 1997 and, prior to that,
was Corporate Controller of AEGON USA.
AEGON USA. The names, positions and five years of employment history of
the directors of AEGON USA are listed below. Unless otherwise specified below,
the directors are United States citizens, have held the positions listed below
since at least five years prior to the date of this Proxy Statement, and their
business addresses are 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.
Frank C. Herringer is Chairman of the Board of AEGON USA, and Chairman
of the Board, President and Chief Executive Officer of Transamerica Corporation.
Irving W. Bailey, II, is Vice Chairman of the Board of AEGON USA, President of
Bailey Capital Corporation and former Chairman and Chief Executive Officer of
Providian Corporation. Donald J. Shepard is President and Chief Executive
Officer of AEGON USA. Leslie B. Disharoon is Chairman of Caves Valley Club and
retired as Chairman of the Board and President of Monumental Corporation. Edward
K. Dunn, Jr., has been Chairman of the Board of Mercantile Mortgage Corporation
since 1997 and, prior to that, was President of Mercantile-Safe Deposit & Trust
Company. William H. Foster, a British citizen, retired in 1996 and is a former
member of the Executive Board of AEGON N.V. Edward C. Meyer is Chairman of
Mitretek Systems and former Chairman of GRC International. Kornelis J. Storm, a
Dutch citizen, is Chairman of the Executive Board of AEGON N.V. E. Kirby Warren
is Professor of Management at Columbia University.
AEGON N.V. The names, positions and five years of employment history
of the directors of AEGON N.V. are listed below. Unless otherwise specified
below, the directors are Dutch citizens, have held the positions listed below
since at least five years prior to the date of this Proxy Statement, and their
business addresses are 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.
Kornelis J. Storm is Chairman of the Executive Board of AEGON N.V.
Paulus van de Geijn is Chairman of the Management Board of AEGON Nederland N.V.
Frank C. Herringer, a United States citizen, has been Chairman of the Board of
AEGON USA since July 1999 and is Chairman, President and Chief Executive Officer
of Transamerica Corporation. Donald J. Shepard, a United States citizen, is
President and Chief Executive Officer of AEGON USA. Hendrik B. van Wijk is
responsible for Group staff functions as Finance, Treasury, Actuary, Legal and
Fiscal department of AEGON N.V.
VERENIGING AEGON. The names, positions and five years of employment
history of the directors of Vereniging AEGON are listed below. Unless otherwise
specified below, the directors are Dutch citizens, have held the positions
listed below since at least five years prior to the date of this Proxy
Statement, and their business addresses are 4333 Edgewood Road, N.E., Cedar
Rapids, Iowa 52499.
Paul P. Kohnstamm is Chairman of the Executive Committee of Vereniging
AEGON, Director of Kohnstamm Real Estate Advisors, Professor in Real Estate
Economy at the University of Amsterdam and a former member of the
30
<PAGE>
Executive Board of Wilma Real Estate Company. Johannes L. Bouma is Vice Chairman
of the Executive Committee of Vereniging AEGON and a Professor in Business
Economics at the State University of Groningen, The Netherlands. Petrus J.
Idenburg is Professor in Strategic Aspects of Technology and Management at the
Technological University of Delft. Jan M. Boll is a Member of the State Council
of The Netherlands. Hendrikus de Ruiter is retired and a former Managing
Director of N.V. Koninklijke Nederlandsche Petroleum Mij. and Group Managing
Director. Gerard van Schaik is retired and former Chairman of the Executive
Board of Heineken N.V. Kornelis J. Storm is Chairman of the Executive Board of
AEGON N.V. Hendrik B. van Wijk is a Member of the Executive Board of AEGON N.V.
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to each person
and group (as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934) known by the Trust to be the beneficial owner of more than five
percent of the outstanding shares as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------- ----------------------- --------
<S> <C> <C>
AEGON USA, Inc. (1) 1,197,260 30.86%
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Turkey Vulture Fund XIII, Ltd. (2) 551,081 14.20%
c/o Kohrman Jackson & Krantz P.L.L.
1375 East 9th Street
Cleveland, Ohio 44114
</TABLE>
- ----------------------
(1) AEGON USA, Inc., an Iowa corporation, is an indirect, wholly-owned
subsidiary of AEGON N.V., a holding company organized under the laws of
the Netherlands which is controlled by Vereniging AEGON, an association
organized under the laws of the Netherlands. AEGON USA has sole voting
and investment powers with respect to the number of shares set forth
next to its name.
(2) Turkey Vulture Fund XIII, Ltd. (the "Fund") is an Ohio limited
liability company, of which Richard M. Osborne is the sole manager. As
sole manager of the Fund, with sole power to vote, or to direct the
voting of, and the sole power to dispose or to direct the disposition
of, any shares owned by the Fund, Mr. Osborne may be deemed to
beneficially own all of the shares of beneficial interest of the Trust
owned by the Fund.
31
<PAGE>
OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS
The following table sets forth the number of shares beneficially owned
as of December 31, 1999 by each Trustee and officer and by all trustees and
officers as a group (8 persons). Except as otherwise indicated by footnote, the
individuals have direct ownership of, and sole voting and investment power with
respect to, any shares beneficially owned by them. Under rules adopted by the
Commission, transactions in shares are reportable by trustees and officers on
specified forms, and the Trust is required to disclose any known delinquent
filings. The Trust is not aware of any delinquent filings by its current
trustees and officers.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER(1) OF BENEFICIAL OWNERSHIP OF CLASS
------------------- ----------------------- --------
<S> <C> <C>
Patrick E. Falconio(2) 2,000 *
Edwin L. Ingraham 1,500 *
Samuel L. Kaplan(3) 10,000 *
Richard M. Osborne(4) 551,081 14.20%
David L. Blankenship(5) 1,199,078 30.90%
Maureen DeWald 0 *
Alan F. Fletcher(6) 2,200 *
Roger L. Schulz 100 *
Trustees and officers as a group 1,765,959 45.51%
</TABLE>
- ----------------------
(1) The address of Messrs. Falconio, Blankenship, Fletcher, Schulz and Ms.
DeWald is 4333 Edgewood Road, N.E. Cedar Rapids, Iowa 52499. The
address of Mr. Ingraham is 2063 Woodstone Court, Victoria, Minnesota
55386. The address of Mr. Kaplan is 5500 Norwest Center, 90 South
Seventh Street, Minneapolis, Minnesota 55402. The address of Mr.
Osborne is c/o Kohrman Jackson & Krantz P.L., 1375 East 9th Street,
Cleveland, Ohio 44114.
(2) Mr. Falconio may be deemed to be the beneficial owner of 2,000 shares
owned by his wife.
(3) Mr. Kaplan is the direct owner of 8,500 shares and may be deemed to be
the beneficial owner of 1,500 shares held in a profit sharing trust for
his account.
(4) Mr. Osborne may be deemed to be the beneficial owner of 551,081 shares
beneficially owned by Turkey Vulture Fund, XIII, Ltd., an Ohio limited
liability company, of which Mr. Osborne is the sole manager.
(5) Mr. Blankenship may be deemed to be the beneficial owner of 1,197,260
shares beneficially owned by AEGON USA with respect to which he shares
voting and investment powers (see "PRINCIPAL SHAREHOLDERS"). Mr.
Blankenship disclaims beneficial ownership of such shares. He may also
be deemed to be the beneficial owner of 1,818 shares held in custodial
accounts for his children.
(6) Mr. Fletcher is the direct owner of 600 shares and is the beneficial
owner of 1,600 shares held in an individual retirement account.
* Such holdings represent less than one percent of the outstanding shares.
COST AND METHOD OF PROXY SOLICITATION
The cost of preparing, assembling and mailing the proxy materials and
of soliciting proxies by the Board of Trustees will be borne by the Trust. In
addition to the use of mails, proxies may be solicited on behalf of the Board by
personal interview, telephone and telegram by certain trustees or employees of
AEGON Advisors who will not be separately compensated for such services. The
Trust does not presently intend to use specially engaged employees or paid
solicitors for the solicitation of proxies, but has retained Boston EquiServe,
L.P., a subsidiary of State Street Bank and Trust Company, for proxy tabulation.
The Trust has made arrangements with brokerage houses and nominees to send proxy
materials to their principals and the Trust will reimburse them for their
reasonable out-of-pocket expenses incurred in doing so.
32
<PAGE>
EXPENSES OF THE TRANSACTION
The aggregate fees and expenses paid and estimated to be paid by the
Trust in connection with the Asset Sale and Liquidation are as follows:
<TABLE>
<S> <C>
Investment Banking Fee ...................... $250,000(1)
Legal and Accounting ........................ 175,000
Printing and Distribution ................... 65,000
Real Estate Closing Costs ................... 125,000
Insurance Expenses .......................... 75,000
SEC and Regulatory Filings .................. 6,700
Miscellaneous Liquidation Expenses .......... 28,300
--------
Total ....................................... $725,000
========
</TABLE>
- ---------------
(1) In addition to this fee, Raymond James is entitled to reimbursement of
out-of-pocket expenses incurred in connection with its engagement
(including fees and expenses of counsel).
OTHER BUSINESS
The Board is not aware of any other business that will come before the
Special Meeting. If any other business should come before the Special Meeting,
the persons named in the enclosed proxy will vote on it according to their best
judgment.
SHAREHOLDER PROPOSALS
The Trust anticipates approval and consummation of the Asset Sale
and Liquidation and therefore does not currently intend to hold a 2000 Annual
Meeting. If the Asset Sale and Liquidation are not approved and consummated,
however, shareholder proposals intended to be presented at the 2000 Annual
Meeting will be included in the Trust's proxy statement and form of proxy for
the 2000 Annual Meeting only if they were received no later than November 24,
1999. Shareholder proposals not presented in a timely manner for inclusion in
the Trust's proxy statement will be subject to the exercise of discretionary
authority granted in proxies executed in connection with the 2000 Annual
Meeting against such proposals unless such proposals are presented no later
than February 6, 2000.
WHERE YOU CAN FIND MORE INFORMATION
The Trust files annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K and other information with the Commission.
You may read and copy any reports, statements or other information that the
Trust files at the Commission's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. Such
filings are also available to the public from commercial document retrieval
services. Copies of such material also can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, Washington,
D.C. 20549. In addition, the Trust is required to file electronic versions of
such material with the Commission through the Commission's Electronic Data and
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Trust's shares are quoted on the Nasdaq
SmallCap Market under the symbol "USPTS." The Commission allows us to
"incorporate by reference" information into this Proxy Statement. This means
that in lieu of providing certain information in this Proxy Statement, we have
instead referred you to another document previously filed with the Commission
containing such information. This Proxy Statement refers you in particular to
the documents set forth below that we have previously filed with the Commission.
These documents contain important information about the Trust.
33
<PAGE>
Annual Report on Form 10-K for the year ended December 31, 1998
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
Current Report on Form 8-K filed on January 6, 1999
Current Report on Form 8-K filed on February 5, 1999
Current Report on Form 8-K filed on August 17, 1999
We are also incorporating by reference additional documents that we may
file with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act between the date of this Proxy Statement and the date of the
Special Meeting.
The information incorporated by reference is deemed to be part of this
Proxy Statement. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this Proxy Statement will be deemed modified,
superseded or replaced for purposes of this Proxy Statement to the extent that a
statement contained herein or in any subsequently filed document that also is or
is deemed to be incorporated by reference herein modifies, supersedes or
replaces such statement. Any statement so modified, superseded or replaced will
not be deemed, except as so modified, superseded or replaced, to constitute
apart of this Proxy Statement.
The Trust has supplied all information contained or incorporated by
reference in this Proxy Statement relating to the Trust. Documents that we refer
to above are available from us without charge, excluding all exhibits unless we
have specifically made reference to an exhibit in this Proxy Statement.
Shareholders may obtain such documents by requesting them in writing or by
telephone at the following addresses:
USP Real Estate Investment Trust
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499-5441
Attention: Investor Relations
If you would like to request documents from us, please do so by
___________ __, 2000 to receive them before the Special Meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE MATTERS BROUGHT BEFORE THE
SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY
STATEMENT IS DATED ___________ __, 2000. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THE PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN SUCH DATE, AND NEITHER THE MAILING OF THE PROXY STATEMENT TO THE
SHAREHOLDERS NOR THE CONSUMMATION OF THE ASSET SALE SHALL CREATE ANY IMPLICATION
TO THE CONTRARY.
FOR THE BOARD OF TRUSTEES
Patrick E. Falconio
Chairman of the Board
Cedar Rapids, Iowa
_____________, 2000
34
<PAGE>
ANNEX A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission file number 0-7589
USP REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Iowa 42-6149662
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4333 Edgewood Road N.E., Cedar Rapids, IA 52499
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 398-8975
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, $1 Par Value
(Title of Class)
Indicate by check-mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting shares of the registrant held by
non-affiliates at March 5, 1999 was $8,321,765.
The number of shares of beneficial interest of the registrant outstanding at
March 5, 1999 was 3,880,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I.
ITEM I. BUSINESS
The Trust
USP Real Estate Investment Trust is an equity-oriented real estate investment
trust organized under the laws of the State of Iowa pursuant to a Declaration of
Trust as amended and restated through April 23, 1984. The Trust was formed on
March 10, 1970 to provide its shareholders with an opportunity to participate in
the benefits of real estate investment and at the same time enjoy the liquidity
and marketability resulting from the ownership of securities which are
publicly-traded.
USP has elected to qualify as a real estate investment trust ("REIT") under the
Internal Revenue Code. As a result of this election, the Trust is not taxed on
the portion of its income which is distributed to shareholders, provided it
distributes at least 95% of its taxable income, has at least 75% of its assets
in real estate investments and meets certain other requirements for
qualification as a real estate investment trust.
The Trust has no employees as all services necessary to conduct the day-to-day
operations are performed by AEGON USA Realty Advisors, Inc. ("AEGON Realty
Advisors") and its affiliates. (See Note 6 to the Financial Statements.)
Investment Policy
The Trust's primary investment objective is to invest in real estate which will
provide the best available cash flow and offer prospects for long-term
appreciation in value. The Trust selectively sells property when it is
determined that a sales transaction will economically benefit the Trust through
the realization of capital gains. The Trust does not acquire property with a
view to realizing appreciation from short-term sales.
The Trust has sought to achieve its investment objectives by investing
principally in the direct ownership of real estate. Short-term cash investments
are made in high-quality commercial paper, money market funds and certificates
of deposit.
Source of Funds and Financing
The principal source of funds for investment by USP was $25 million in proceeds
from its initial public offering of shares. The Trust ceased the issuance of
shares from this offering in 1978. The Trust completed a secondary offering of
its shares in 1988, raising nearly $10 million. Since substantially all of the
Trust's net income must be distributed to shareholders in order to qualify as a
real estate investment trust, USP has relied primarily on cash generated from
operations and property sales in excess of shareholder distributions, along with
borrowings secured by mortgages on specific properties, to finance real estate
investments. Outstanding indebtedness of USP may not, according to the
Declaration of Trust, exceed four hundred percent of the Trust's net assets
(shareholders' equity plus accumulated depreciation). The aggregate principal
amount of mortgage indebtedness and net assets of the Trust as of December 31,
1998 were $10,897,933 and $26,792,268, respectively.
The Trust may finance future real estate investments through additional
borrowings secured by mortgages on the Trust's real estate properties. USP
currently has no commitments or arrangements for any such financing and there
can be no assurance that suitable financing will be available on terms
satisfactory to the Trust in the future.
2
<PAGE>
Competition
USP's portfolio competes with other similar properties in its respective
markets, some of which are newer than the USP properties. A strengthening U.S.
economy, a low level of commercial real estate construction, and strong leasing
efforts were factors resulting in a strong occupancy of Trust properties during
the last three years. Overall leased occupancy for the entire portfolio was 96%
at December 31, 1998, compared to 87% at December 31, 1997 and 88% at December
31, 1996.
ITEM 2. PROPERTIES
Real Estate Investments
The Trust has direct ownership of six commercial real estate properties. These
real estate investments are diversified geographically with 69% of the portfolio
located in the Southeast, 25% in the Southwest and 6% in the Great Lakes Region
based on the cost of the properties.
Properties owned by the Trust are leased to tenants either on a managed basis or
under net lease arrangements. As the owner of managed property the Trust
receives gross rentals and incurs operating expenses, such as property taxes,
insurance, repairs, maintenance and common area utilities. Under net lease
arrangements, the tenant, rather than the Trust, pays all operating expenses
related to the leased premises. At December 31, 1998, five commercial properties
were being leased on a managed basis and one property was leased on a net lease
basis.
The five managed commercial properties consisted of four shopping centers and
one business park. Managed commercial properties comprised 94% of the Trust's
investment portfolio in 1998, compared to 95% in 1997 and 1996. Managed
commercial properties provided 91% of USP's annual revenue in 1998, compared to
89% in 1997 and 88% in 1996. All managed properties have at least one tenant
representing 22% or more of the revenue from that property. The Kroger Company
at Mendenhall Commons in Memphis, Tennessee and Safeway at North Park Plaza in
Phoenix, Arizona each represent approximately 12% of the total revenue of the
Trust under leases expiring in 2012 and 2018, respectively.
The net leased property is an office/warehouse which represented approximately
6% of the Trust's investment portfolio in 1998, compared to 5% in 1997 and 1996,
and generated 7% of the Trust's annual revenue in 1998, 1997, and in 1996. Trust
properties and operations are summarized in the table on the next page.
The Trust's real estate investments are not expected to be substantially
affected by current federal, state or local laws and regulations establishing
ecological or environmental restrictions on the development and operations of
such property. However, the enactment of new provisions or laws may reduce the
Trust's ability to fulfill its investment objectives.
3
<PAGE>
The Trust's properties and operations are summarized in the table below.
<TABLE>
<CAPTION>
REAL ESTATE COST
AT DECEMBER 31, 1998 1998 REVENUE LARGEST TENANT
-------------------- --------------- ----------------------------------------------------------
PERCENT PERCENT
OF OF
NAME OF LEASE PROPERTY TRUST
AMOUNT PERCENT AMOUNT PERCENT TENANT EXPIRATION REVENUE REVENUE REVENUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED
Kingsley Square
Orange Park, Florida $ 5,743,758 17% $775,274 15% OfficeMax 2012 $246,584 32% 5%
First Tuesday Mall
Carrollton, Georgia 7,168,583 21 820,553 16 Winn Dixie 2004 188,152 23 3
Mendenhall Commons
Memphis, Tennessee 8,795,032 25 976,643 18 Kroger 2012 644,083 66 12
North Park Plaza
Phoenix, Arizona 8,680,330 25 1,135,596 21 Safeway 2018 625,034 55 12
Presidential Drive
Atlanta, Georgia 1,922,882 6 327,317 6 H. S. Photo 2000 74,849 23 1
---------- ----- ---------- ----- --- ---------- -----
32,310,585 94 4,035,383 76 1,778,702 33
NET LEASED
Yamaha Warehouse
Cudahy, Wisconsin 2,197,937 6 371,100 7 Yamaha Motor Corp. 2000 371,100 100 7
Properties sold --- --- 802,144 15
Trust operations --- --- 123,328 2
---------- ----- ----------- ----
$34,508,522 100% $5,331,955 100% $2,149,802 40%
========== ==== ========= ===== ========= ===
</TABLE>
Recent Transactions
In December 1998, the Trust sold Geneva Square in Lake Geneva, Wisconsin for
cash of $4,500,000. The Trust paid selling expenses of $20,165 and retired
mortgage indebtedness on the property of $2,803,790. Gain on the sale was
$528,282. Earlier in the year, the Trust received $248,000 from P.W.
Enterprises, a tenant at Geneva Square, in final settlement of a bankruptcy
claim filed in 1996.
During 1998, the Safeway lease at North Park Plaza in Phoenix, Arizona was
extended to 2018 and modified to include an additional 18,000 square feet
vacated in 1996 by Staples, Inc. Safeway is in the process of expanding into the
former Staples space and is also remodeling their existing space. Safeway is
responsible for the entire cost of the remodeling project.
At First Tuesday Mall in Carrollton, Georgia, the Trust had a lease with Belk
Rhodes for 49,836 square feet. Belk Rhodes vacated this space in 1997 but
continued to pay base rent. On July 30, 1998, this space was occupied by
Martin's Family Clothing, pursuant to a ten year lease.
At Kingsley Square in Orange Park, Florida, the Trust has a lease with Publix
Super Markets for 34,400 square feet. In 1997 the Trust received written notice
from Publix that they planned to close their store and move to a new location.
It is anticipated that Publix will vacate their space at the end of March 1999.
The Trust anticipates receiving rent from Publix for the remainder of the lease
term, which expires in February 2000. The Trust is attempting to secure a new
tenant for this space.
The Yamaha Warehouse facility in Cudahy, Wisconsin has a lease with Yamaha Motor
Corporation, its sole tenant. In March 1998, Yamaha exercised both of their
remaining one-year options in order to renew their lease for two more years. The
lease expires in June 2000. The Trust will be seeking a new lease with Yamaha or
some other prospective tenant.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential Drive
Business Park. The prepayment amount, including a 1% prepayment fee of $7,065 to
the lender, was $713,548. On February 5, 1999, the Trust prepaid the mortgage
loan on First Tuesday Mall. The prepayment amount, including a 1% prepayment fee
of $4,636 to the lender, was $468,281.
4
<PAGE>
On March 1, 1999, the mortgage loans payable on Mendenhall Commons and North
Park Plaza matured, with remaining principal balances of $3,930,120 and
$3,944,537, respectively. The Trust refinanced these properties with Monumental
Life Insurance Company, an affiliate of AEGON Realty Advisors. The loan amount
for Mendenhall is $3,925,000 with monthly debt service of $30,430. The loan
amount for North Park is $3,940,000 with monthly debt service of $30,547. Debt
service on both loans include principal amortization over twenty years and
interest at an initial rate of 7%, which will be adjusted quarterly based on
three month LIBOR plus 2%. The loans mature in one year and may be prepaid at
any time without penalty.
The operating results and financial condition of the Trust greatly depend upon
all tenants continuing to pay rent, and the Trust's ability to renew expiring
tenant leases and obtain new leases at competitive rental rates.
As previously reported, the Board of Trustees has been exploring various
strategic alternatives with the intent to maximize shareholder value. Raymond
James & Associates, Inc. has been engaged as financial advisor to assist the
Trust with these ongoing efforts. While a number of possibilities are being
considered, there is no assurance any transaction will be consummated.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
The Trust is not a party to any pending legal proceedings which, in the opinion
of management, are material to the Trust's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Distribution Information
The Trust is required to distribute at least 95% of its taxable income to
continue its qualification as a real estate investment trust. Although the Trust
expects to continue making distributions to shareholders, there is no assurance
of future distributions, since they are dependent upon earnings, cash flow, the
financial condition of the Trust and other factors.
5
<PAGE>
Identification of Market and Price Range
At March 5, 1999, the Trust had 3,880,000 shares of beneficial interest issued
and outstanding to 1,918 shareholders of record. The Trust's shares of
beneficial interest are traded over-the-counter on the Nasdaq SmallCap Market
under the symbol USPTS. At March 5, 1999, the Trust's per share high and low
sales prices were $3.9375 and $3.875, respectively, as obtained from
Wedbush/Morgan Securities, Inc., Newport Beach, California, Stifel Nicolaus,
St. Louis, Missouri, and Herzog, Heine, Geduld, Inc., New York, New York, the
principal market makers for shares of the Trust. These prices reflect quotations
between dealers without adjustment for retail mark-up, mark-down or commission
and do not necessarily represent actual transactions.
Market Price Range
<TABLE>
<CAPTION>
OVER-THE-COUNTER SALES PRICES
QUARTER ENDED HIGH LOW CLOSE
- -----------------------------------------------------------------
1998
<S> <C> <C> <C>
March 31 4 3/4 4 1/8 4 1/2
June 30 5 4 5/16 4 5/8
September 30 7 1/2 3 7/8 5 5/8
December 31 6 1/4 3 3/4 3 7/8
1997
March 31 4 11/16 4 1/8 4 1/2
June 30 4 7/8 3 7/8 4 3/4
September 30 5 4 1/4 4 5/8
December 31 5 3/8 4 4 1/8
</TABLE>
Income Tax Information
The percentages indicated below, multiplied by the amount of distributions
received or reinvested during the year, result in the amount to be reported for
income tax purposes. A Form 1099 is mailed to shareholders at the end of each
year reflecting the distributions paid by the Trust in that year.
Dividend Character
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Ordinary
Income 76.21% 50.75% 86.10%
Capital
Gains 23.79% --- ---
Return of
Capital --- 49.25% 13.90%
- --------------------------------------------------------------------------------
Total 100.00% 100.00% 100.00%
Distributions paid,
per share $.32 $.32 $.32
</TABLE>
6
<PAGE>
Advisor
AEGON USA Realty Advisors, Inc.
Cedar Rapids, Iowa
Stock Transfer and Dividend Reinvestment Agent
USP Real Estate Investment Trust
c/o Boston EquiServe, L.P.
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
10-K Information
The 1998 Form 10-K filed with the Securities and Exchange Commission (exclusive
of certain exhibits) is available without charge upon written request to Roger
L. Schulz, Controller, USP Real Estate Investment Trust, 4333 Edgewood Road
N.E., Cedar Rapids, Iowa 52499-5441.
7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 5,331,955 5,012,087 5,217,313 5,618,014 6,179,495
- --------------------------------------------------------------------------------------------------------------------------------
Earnings from Operations $ 943,975 637,129 946,230 1,100,149 934,605
Net Gain on Sale or Disposition of Property $ 528,282 259,157 --- --- 788,588
------------------------------------------------------------------------------
Net Earnings $ 1,472,257 896,286 946,230 1,100,149 1,723,193
- --------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders $ 1,241,600 1,241,600 1,241,600 1,202,800 1,008,800
- --------------------------------------------------------------------------------------------------------------------------------
Per Share*
Earnings from Operations $ .24 .16 .24 .28 .24
Basic and Diluted Net Earnings $ .38 .23 .24 .28 .44
Distributions to Shareholders $ .32 .32 .32 .31 .26
- --------------------------------------------------------------------------------------------------------------------------------
Real Estate and Mortgage
Loans Receivable $ 23,816,859 28,571,464 29,627,786 30,434,137 31,237,604
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 27,932,493 31,104,418 32,207,728 32,853,270 34,333,593
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage Loans Payable $ 10,897,933 14,140,584 14,819,479 15,271,385 16,853,303
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 11,831,888 15,234,470 15,992,466 16,342,638 17,720,310
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity $ 16,100,605 15,869,948 16,215,262 16,510,632 16,613,283
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Per share amounts for Earnings from Operations and Basic and Diluted Net
Earnings are based on the weighted average number of shares outstanding for each
period. Per share amounts for Distributions to Shareholders are based on the
actual number of shares outstanding on the respective record dates.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion that follows should be read in the general context of the
discussion in "Item 1. Business" and "Item 2. Properties."
Results of Operations
The Trust owns shopping centers, an office park and an office warehouse facility
in six U.S. cities. The Trust's properties continue to compete with centers and
office buildings of similar size, tenant mix and location. As of December 31,
1998, the combined leased occupancy of the Trust's six properties was 96%.
Operating results in the forthcoming year will be influenced by the ability of
current tenants to continue paying rent, and the Trust's ability to renew
expiring tenant leases and obtain new leases at competitive rental rates.
8
<PAGE>
The Trust sold Geneva Square in Lake Geneva, Wisconsin on December 22, 1998 for
$4,500,000, recognizing a gain on the sale of $528,282. One of the anchor
tenants at Geneva Square filed for bankruptcy and closed its 63,146 square foot
store in 1996, representing 44% of the square feet at Geneva Square. Due to the
size of this vacant space in relation to the demographics of the Lake Geneva
real estate market, the Trust was unable to locate a suitable replacement
tenant. This vacant space had a negative impact on the Trust's cash flow, and
along with the prospect of a competing center to be built nearby, led the Trust
to market the property for sale. The Trust was successful in selling the
property in a short period of time.
1998 COMPARED TO 1997
The Trust's net earnings for the year ended December 31, 1998 were $1,472,257
($.38 per share) compared to $896,286 ($.23 per share) for the year ended
December 31, 1997. The net earnings for 1998 include a net gain on sale of
$528,282 ($.14 per share) from the sale of Geneva Square Shopping Center in
December 1998. The net earnings for 1997 include a net gain of $259,157 ($.07
per share) realized from a previously deferred installment sale. (All per share
amounts are on a basic and diluted basis.) The increase in net earnings is
primarily due to the gain from the sale of Geneva Square and rent settlements
collected in 1998 from two previous tenants at Geneva Square.
Rental income was $5,218,707 in 1998 compared to $4,802,974 in 1997. This
increase of $415,733 was primarily due to the receipt of settlements in the
amount of $333,000 from two previous tenants at Geneva Square. Rental income
increased by $175,415 at Kingsley Square in Orange Park, Florida due to
OfficeMax, which began paying rent in May 1997. Rents at North Park Plaza
Shopping Center in Phoenix, Arizona increased by $86,519 but was offset by a
$78,228 decrease at First Tuesday Mall in Carrollton, Georgia.
Interest income was $113,248 in 1998 compared to $209,113 in 1997, a decrease of
46% due a lower balance of funds available for investment.
Property expenses before depreciation were $1,634,237 in 1998 compared to
$1,705,298 in 1997, representing 31% of rental income for 1998 and 36% of rental
income for 1997. Real estate taxes decreased by 8% as all properties experienced
a reduction in property taxes. Repairs and maintenance expenses decreased by
$102,978 or 19% due to tenant improvements made in 1997. Other property expenses
increased by $66,132 or 43% primarily due to an increase in lease commissions,
particularly at First Tuesday where unamortized lease commissions pertaining to
Luria's, a former tenant, were written off in 1998.
Interest expense declined by $68,306 from 1997 to 1998 due to the normal
amortization of mortgage loans payable and due to the underlying mortgage loan
on College Square, which was assigned in December 1997. Other administrative
expenses increased by $128,517 in 1998 primarily due to legal fees in connection
with the Trust's efforts to maximize shareholder value. As previously reported,
the Board of Trustees has been exploring various strategic alternatives with the
intent to maximize shareholder value. Raymond James & Associates, Inc. has been
engaged as financial advisor to assist the Trust with these ongoing efforts.
1997 COMPARED TO 1996
The Trust's net earnings for the year ended December 31, 1997 were $896,286
($.23 per share) compared to $946,230 ($.24 per share) for the year ended
December 31, 1996. The net earnings for 1997 include a realized gain on sale of
$259,157 ($.07 per share), previously deferred from the installment sale of
College Square Shopping Center in 1990. (All per share amounts are on a basic
and diluted basis.) The decrease in net earnings from 1996 to 1997 was primarily
due to lower revenue and an increase in repairs and maintenance expenses.
Rental income was $4,802,974 in 1997 compared to $4,965,259 in 1996. This
decline of $162,285 was primarily due to several tenants who experienced
financial difficulties and vacated their space. Rental income declined by
$171,000 at Geneva Square in Lake Geneva, Wisconsin and by $103,000 at Kingsley
Square in Orange Park, Florida. Rents at Geneva Square decreased primarily due
to P.W. Enterprises filing a Chapter 11 reorganization plan and vacating their
space in January 1996 and MMM Foods discontinuing their land lease rental
payment in October 1996. Rents decreased at Kingsley Square primarily due to
Luria's discontinuing their rent payments at the
9
<PAGE>
end of August 1996. The Trust has leased the space formerly occupied by Luria's
to OfficeMax, which began paying rent in May 1997. The reduction in rental
income from the above properties was partially offset by an increase in rents at
Mendenhall Commons Shopping Center in Memphis, Tennessee and Presidential Drive
Business Park in Atlanta, Georgia due to an increase in expense recoveries
(additional rents) and fewer rent write-offs.
Interest income was $209,113 in 1997 compared to $252,054 in 1996, a decrease of
17%, due to a lower balance of funds available for investment.
Property expenses before depreciation were $1,705,298 in 1997 compared to
$1,609,749 in 1996, representing 36% of rental income for 1997 and 32% of rental
income for 1996. Repairs and maintenance increased by $171,000 or 45% due to
tenant remodeling expenses along with parking lot, sidewalk, and roof repairs.
The increase in repairs and maintenance was partially offset by a decrease in
other property expenses which declined from $236,000 in 1996 to $153,000 in
1997. The decline in other property expenses in 1997 is primarily due to
substantial legal fees incurred in 1996 related to the bankruptcy of P.W.
Enterprises, litigation with former tenants, property appraisals and various
consulting expenses.
Interest expense declined by $48,000 from 1996 to 1997 due to the normal
amortization of mortgage loans payable. Other administrative expenses increased
by $58,000 due to the engagement of Raymond James and Associates as financial
advisor to assist the Trust with its ongoing efforts to maximize shareholder
value, and legal expenses in relation to these efforts.
In December 1990, the Trust sold Hickory Hills Shopping Center in Hillsville,
Virginia and College Square Shopping Center in Jefferson City, Tennessee. The
Trust provided mortgage loan financing for these sales in the amount of $525,000
for Hickory Hills and $1,125,000 for College Square. The loans matured on
December 20, 1997 and had yielded 9.5% to the Trust. Upon collection of the
remaining principal balance of these loans in December 1997, the Trust assigned
the underlying mortgage loan payable on College Square (which matures in
December 1999) to the mortgagee. As a result of the assignment, the payoff on
the College Square mortgage loan receivable was reduced by the outstanding
mortgage balance on the underlying College Square mortgage loan payable.
Cash Flow and Funds from Operations
The Trust has for several years used "funds from operations" as a measurement of
operating performance. Funds from operations is defined by the Trust as earnings
from operations plus depreciation expense. Funds from operations does not
represent operating income or cash flows from operations as defined by generally
accepted accounting principles, and should not be construed as an alternative to
operating income as an indicator of operating performance or to cash flows as a
measure of liquidity. Management generally considers funds from operations to be
a useful financial performance measure which, together with earnings, cash flows
and other information, may be used by investors to evaluate the Trust. Funds
from operations as presented by the Trust may not be comparable to similarly
titled measures reported by other companies. The Trust's funds from operations
for the three years ended December 31, 1998 and other property information are
presented on the next page.
10
<PAGE>
<TABLE>
<CAPTION>
SQ. FT.
SIZE LEASE EXPIRING FUNDS FROM OPERATIONS*
NAME AND LOCATION (SQ. FT.) EXPIRATION IN 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGED
Kingsley Square, Orange Park, Florida 115,025 1999-2012 5,225 $ 456,334 211,012 395,361
First Tuesday Mall, Carrollton, Georgia 180,371 1999-2008 12,025 443,774 594,006 553,802
Mendenhall Commons, Memphis, Tennessee 80,184 1999-2012 2,900 256,895 320,796 320,673
North Park Plaza, Phoenix, Arizona 100,748 1999-2018 6,297 337,055 273,077 224,402
Presidential Drive Business Park, Atlanta, Georgia 62,445 1999-2003 14,545 153,081 124,227 125,145
------- ------ --------- --------- ---------
538,773 40,992 1,647,139 1,523,118 1,619,383
NET LEASED
Yamaha Warehouse, Cudahy, Wisconsin 140,040 2000 --- 217,383 208,134 206,014
------- ---------- ---------
Total 678,813 40,992 1,864,522 1,731,252 1,825,397
======= ======
Properties sold 334,837 (58,464) 75,381
Non-property Trust operations, net (424,052) (229,326) (143,650)
--------- --------- ---------
Funds from operations $ 1,775,307 1,443,462 1,757,128
========= ========= =========
</TABLE>
*Earnings from operations plus depreciation
Liquidity and Capital Resources
The Trust's capital resources consist of its current equity in real estate
investments. The Trust maintains its properties in good condition and provides
adequate insurance coverage. Liquidity is represented by cash and cash
equivalents ($3,423,296 at December 31, 1998) and the continued operation of the
Trust's real estate portfolio. This liquidity is considered sufficient to meet
current obligations, which include capital expenditures. During 1998, the Trust
received net proceeds of $1,618,678 from the sale of Geneva Square.
Net cash provided by operating activities, as shown in the Statements of Cash
Flows, was $1,820,940 for the year ended December 31, 1998. Major applications
of cash in 1998 included $1,241,600 for distributions to shareholders and
$3,242,651 in principal payments and repayments on mortgage loans payable. The
Trust's debt service commitments for mortgage loans payable are described in
Note 7 to the Financial Statements.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential Drive
Business Park. The prepayment amount, including a 1% prepayment fee of $7,065 to
the lender, was $713,548. On February 5, 1999, the Trust prepaid the mortgage
loan on First Tuesday Mall. The prepayment amount, including a 1% prepayment fee
of $4,636 to the lender, was $468,281.
The Board of Trustees continues to monitor occupancies, leasing activity,
overall Trust operations, liquidity, and financial condition in determining
quarterly distributions to shareholders.
Inflation
Low to moderate levels of inflation during the past few years have favorably
impacted the Company's operation by stabilizing operating expenses. At the same
time, low inflation has the indirect effect of reducing the Company's ability to
increase tenant rents. The Trust's properties have tenants whose leases include
expense reimbursements and other provisions to minimize the effect of inflation.
These factors, in the long run, are expected to result in more attractive
returns from the Trust's real estate portfolio as compared to short-term
investment vehicles.
11
<PAGE>
Year 2000 Issue
Management of the Trust is well aware of the issues and concerns surrounding the
potential problems associated with computer systems that may not be able to
distinguish the year 2000 from the year 1900, typically referred to as "the year
2000 issue." The Trust does not own or use any information technology directly,
because all services necessary to conduct the day-to-day operations of the Trust
are performed by AEGON USA Realty Advisors, Inc. and its affiliates (the
Advisor). Nevertheless, the Trust could be adversely affected if computer
systems, as well as certain embedded technology, used by the Advisor, tenants,
vendors, financial institutions and other third parties do not properly process
and calculate date-related information and data from and after January 1, 2000.
The most significant risks associated with year 2000 issues that could
negatively impact the Trust include failure of tenants to pay rent, failure by
the Trust to pay its own obligations, failure of various building systems at the
Trust's real estate properties, failure of any and all third parties to provide
services and failure of any and all information, accounting and recordkeeping
systems or processes. The reasons for such failures could range from a simple
inability to process electronic information in a timely manner to a total
business failure somehow related to, or the result of, the year 2000 issue.
The Advisor has developed plans to modify, upgrade and/or replace portions of
its information technology to ensure that its computer systems will function
properly in the year 2000 and thereafter, and is in process of obtaining
reasonable assurances that comparable steps are being taken by the Trust's'
other major service providers. As of December 31, 1998, substantially all of the
Advisor's mission critical systems were year 2000 compliant. The Advisor will
continue conducting revalidation testing of its systems throughout 1999,
including the development, review, and revision of business resumption and
continuity plans.
The Trust is not expected to incur any direct costs associated with year 2000
issues. Based on these efforts to date, management of the Trust is not aware of
any consequence of the year 2000 issue that it believes would have a material
effect on the Trust's business, results of operations or financial condition.
There can be no assurance, however, that these efforts will be sufficient to
avoid any adverse impact to the Trust.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate
Land $ 9,189,243 9,666,409
Buildings and improvements 25,319,279 31,027,807
- --------------------------------------------------------------------------------------------------------------------------
34,508,522 40,694,216
Less accumulated depreciation (10,691,663) (12,122,752)
- --------------------------------------------------------------------------------------------------------------------------
23,816,859 28,571,464
Cash and cash equivalents 3,423,296 1,606,427
Rents and other receivables 397,822 421,637
Prepaid and deferred expenses 275,653 351,874
Taxes held in escrow 18,863 153,016
- --------------------------------------------------------------------------------------------------------------------------
$ 27,932,493 31,104,418
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans payable $ 10,897,933 14,140,584
Accounts payable and accrued expenses 418,204 560,917
Due to affiliates 115,722 97,473
Distribution declared 310,400 310,400
Tenant deposits 78,701 80,818
Other 10,928 44,278
- --------------------------------------------------------------------------------------------------------------------------
11,831,888 15,234,470
- --------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Shares of beneficial interest, $1 par value,
20,000,000 shares authorized, 3,880,000
shares issued and outstanding 3,880,000 3,880,000
Additional paid-in capital, net of cumulative
distributions in excess of earnings
of $16,411,501 in 1998 and 1997 11,989,948 11,989,948
Undistributed net earnings 230,657 ---
- --------------------------------------------------------------------------------------------------------------------------
16,100,605 15,869,948
- --------------------------------------------------------------------------------------------------------------------------
$ 27,932,493 31,104,418
==========================================================================================================================
</TABLE>
See the accompanying notes to financial statements.
13
<PAGE>
Statements of Earnings
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Rents $ 5,218,707 4,802,974 4,965,259
Interest 113,248 209,113 252,054
- ------------------------------------------------------------------------------------------------------------------------
5,331,955 5,012,087 5,217,313
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property expenses:
Real estate taxes 561,818 610,322 595,318
Repairs and maintenance 446,787 549,765 378,432
Utilities 113,939 122,754 123,585
Management fee 241,877 221,935 230,045
Insurance 50,299 47,137 46,411
Other 219,517 153,385 235,958
- ------------------------------------------------------------------------------------------------------------------------
Property expenses, excluding depreciation 1,634,237 1,705,298 1,609,749
Depreciation 831,332 806,333 810,898
- ------------------------------------------------------------------------------------------------------------------------
Total property expenses 2,465,569 2,511,631 2,420,647
Interest 1,375,031 1,443,337 1,491,534
Administrative fee 204,587 205,714 202,378
Other administrative 342,793 214,276 156,524
- ------------------------------------------------------------------------------------------------------------------------
4,387,980 4,374,958 4,271,083
- ------------------------------------------------------------------------------------------------------------------------
Earnings from operations 943,975 637,129 946,230
Net gain on sale of property 528,282 259,157 ---
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,472,257 896,286 946,230
========================================================================================================================
Basic and diluted net earnings per share $ .38 .23 .24
========================================================================================================================
Distributions to shareholders $ 1,241,600 1,241,600 1,241,600
========================================================================================================================
Distributions to shareholders per share $ .32 .32 .32
========================================================================================================================
</TABLE>
See the accompanying notes to financial statements.
14
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Rents collected $ 5,219,180 4,825,238 5,167,812
Interest received 113,248 216,650 250,878
Payments for operating expenses (2,139,822) (2,283,645) (1,889,840)
Interest paid (1,371,666) (1,439,972) (1,484,924)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,820,940 1,318,271 2,043,926
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from property sales, net of closing costs 4,479,835 --- ---
Capital expenditures (28,280) (1,010,937) (31,713)
Principal collections on mortgage loans receivable --- 28,094 27,166
Principal repayment on mortgage loans receivable --- 1,298,008 ---
Other, net 28,625 (34,135) 17,144
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 4,480,180 281,030 12,597
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal portion of scheduled mortgage loan payments (438,861) (484,914) (451,906)
Principal prepayment on mortgage loans payable (2,803,790) --- ---
Distributions paid to shareholders (1,241,600) (1,241,600) (1,241,600)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (4,484,251) (1,726,514) (1,693,506)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,816,869 (127,213) 363,017
Cash and cash equivalents at beginning of year 1,606,427 1,733,640 1,370,623
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,423,296 1,606,427 1,733,640
==========================================================================================================================
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 1,472,257 896,286 946,230
Gain on sale of property (528,282) (259,157) ---
- --------------------------------------------------------------------------------------------------------------------------
Earnings from operations 943,975 637,129 946,230
Add (deduct) reconciling adjustments:
Depreciation 831,332 806,333 810,898
Amortization 3,365 3,365 6,610
Decrease in rents and other receivables 33,823 26,608 171,497
Decrease (increase) in prepaid and deferred expenses 32,106 (80,011) 17,046
Decrease (increase) in taxes held in escrow 134,153 (6,145) (4,093)
Increase (decrease) in accounts payable and accrued expenses (142,713) (123,228) 57,690
Increase in due to affiliates 18,249 51,027 8,168
Increase (decrease) in advance rents (33,350) 3,193 29,880
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,820,940 1,318,271 2,043,926
==========================================================================================================================
</TABLE>
See the accompanying notes to financial statements.
15
<PAGE>
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------------------
Shares of Additional Undistributed Total
Beneficial Paid-In Net Shareholders'
Interest Capital Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 3,880,000 12,018,890 611,742 16,510,632
Net earnings --- --- 946,230 946,230
Distributions to shareholders --- --- (1,241,600) (1,241,600)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 3,880,000 12,018,890 316,372 16,215,262
Net earnings --- --- 896,286 896,286
Distributions to shareholders --- (28,942) (1,212,658) (1,241,600)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 3,880,000 11,989,948 --- 15,869,948
Net earnings --- --- 1,472,257 1,472,257
Distribution to Shareholders --- --- (1,241,600) (1,241,600)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 3,880,000 11,989,948 230,657 16,100,605
==========================================================================================================================
</TABLE>
See the accompanying notes to financial statements.
16
<PAGE>
Notes to Financial Statements
1. Accounting Policies
The Trust is predominantly in the business of investing in real estate.
Investments in real estate are stated at cost. The Trust provides an allowance
for valuation of real estate when it is determined that the values have
permanently declined below recorded book value.
The Trust records impairment losses when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by the real estate are
less than their carrying amount. If real estate is considered to be impaired,
it's carrying amount is written down to fair value and recognized as a net loss
on property in the statement of earnings.
Expenditures for repairs and maintenance which do not add to the value or extend
the useful life of property are expensed when incurred. Additions to existing
properties, including replacements, improvements and expenditures which do add
to the value or extend the useful life of property, are capitalized.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets.
The Trust follows the operating method of accounting for leases, whereby
scheduled rental income is recognized on a straight-line basis over the lease
term. Contingent rental income is recognized in the period in which it arises.
Interest on mortgage loans receivable and amortization of discounts are
recognized as income over the period the respective loans are outstanding. The
Trust provides for possible losses on mortgage loans, rents and other
receivables when it is determined that collection of such receivables is
doubtful. Rents and other receivables are stated net of an allowance for
uncollectible accounts of $224,938 in 1998 and $321,764 in 1997. Cash
equivalents include investments with original maturities of three months or
less.
Gains on real estate sales are recognized for financial accounting purposes in
accordance with Statement of Financial Accounting Standard No. 66, ACCOUNTING
FOR SALES OF REAL ESTATE. Deferred gains are recognized as income using the
installment method.
Since the Trust has no potentially dilutive securities outstanding, basic and
diluted net earnings per share in accordance with Statement of Financial
Accounting Standard No. 128, EARNINGS PER SHARE, are the same.
During 1997, the Financial Accounting Standards Board issued Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. Statement
No. 131 establishes standards for reporting information about operating
segments, products and markets. Generally, Statement No. 131 requires financial
information to be reported on the basis on which it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Statement, which was required to be adopted by the Trust during
1998, had no impact on the financial statements as the Trust has only one
operating segment, which involves the direct ownership of commercial real estate
properties substantially on a managed basis.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
The actual results of the Trust could differ as a result of those estimates.
17
<PAGE>
2. Fair Values of Financial Instruments
Statement of Financial Accounting Standard No. 107, DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information about
financial instruments.
The following methods and assumptions were used by the Trust in estimating its
fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and cash equivalents
approximates their fair values.
MORTGAGE LOANS PAYABLE: The fair values of mortgage loans payable are estimated
utilizing discounted cash flow analysis, using interest rates reflective of
current market conditions and the risk characteristics of the loans.
The following sets forth a comparison of the fair values and carrying values of
the Trust's financial instruments subject to the provisions of Statement of
Financial Accounting Standard No. 107:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ----------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents 3,423,296 3,423,296 1,606,427 1,606,427
Liabilities
Mortgage loan payable 10,897,933 11,265,751 14,140,584 14,885,253
</TABLE>
3. Real Estate
Investments in real estate consist entirely of managed and net leased commercial
property. Information regarding the Trust's investment in each property is
presented in the Schedule of Real Estate and Accumulated Depreciation below.
Schedule of Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
INITIAL COST TO GROSS AMOUNT AT WHICH CARRIED
TRUST DECEMBER 31, 1998
-------------------- -------------------------------
SUBSEQUENT
PROPERTY AMOUNT OF BUILDINGS & COST BUILDINGS & ACCUMULATED DATE DATE
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION BUILT ACQUIRED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED
Kingsley Square $ 429,527 450,000 3,311,660 1,982,098 450,000 5,293,758 5,743,758 2,607,761 1975-76 7/79
Orange Park, FL
First Tuesday Mall 469,618 595,000 4,347,697 2,225,886 600,392 6,568,191 7,168,583 3,677,400 1975-78 7/79
Carrollton, GA
Mendenhall Commons 3,935,041 3,134,692 5,597,340 63,000 3,134,692 5,660,340 8,795,032 1,385,212 1987 2/89
Memphis, TN
North Park Plaza 3,949,314 4,635,147 4,018,353 26,830 4,633,382 4,046,948 8,680,330 986,189 1963 2/89
Phoenix, AZ
Presidential Drive 709,391 344,583 1,424,300 154,000 344,58 1,578,300 1,922,882 631,136 1980 12/84
Atlanta, GA --------- --------- ---------- --------- --------- ---------- ---------- ---------
9,492,891 9,159,421 18,699,350 4,451,814 9,163,048 23,147,537 32,310,585 9,287,698
NET LEASED
Yamaha Warehouse 1,405,042 26,195 755,756 1,415,986 26,195 2,171,742 2,197,937 1,403,965 1971 2/72
Cudahy, WI ----------- --------- ---------- --------- --------- ---------- ---------- ----------
Total $10,897,933 9,185,616 19,455,106 5,867,800 9,189,243 25,319,279 34,508,522 10,691,663
=========== ========= ========== ========= ========= ========== ========== ==========
<CAPTION>
LIFE ON
WHICH
DEPRECIATION
IS
PROPERTY COMPUTED
DESCRIPTION (IN YEARS)
- --------------------------------
<S> <C>
MANAGED
Kingsley Square 10-40
Orange Park, FL
First Tuesday Mall 10-40
Carrollton, GA
Mendenhall Commons 10-40
Memphis, TN
North Park Plaza 10-40
Phoenix, AZ
Presidential Drive 10-35
Atlanta, GA
NET LEASED
Yamaha Warehouse 15-40
Cudahy, WI
Total
</TABLE>
The above properties are all shopping centers except for Presidential Drive
which is a business park and Yamaha Warehouse which is an office/warehouse.
18
<PAGE>
The activity in real estate and related depreciation for the three years ended
December 31, 1998 is summarized in the table below.
<TABLE>
<CAPTION>
REAL ESTATE YEARS ENDED DECEMBER 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COST
Beginning of year $ 40,694,216 39,683,279 39,651,566
Additions during year
Improvements 28,280 1,010,937 31,713
Deductions during year
Property sales (6,213,974) --- ---
- ------------------------------------------------------------------------------------------------------------
End of year $ 34,508,522* 40,694,216 39,683,279
- ------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION
Beginning of year $ 12,122,752 11,316,419 10,505,521
Additions during year
Depreciation expense 831,332 806,333 810,898
Deductions during year
Property sales (2,262,421) --- ---
- ------------------------------------------------------------------------------------------------------------
End of year $ 10,691,663 12,122,752 11,316,419
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*The aggregate cost for federal income tax purposes is $34,642,232.
Wholly owned managed properties with an aggregate cost of $32,310,585 are leased
to tenants pursuant to lease agreements under which the Trust incurs normal real
estate operating expenses associated with ownership. Yamaha Warehouse, a
wholly-owned property with an aggregate cost of $2,197,937 is leased under a net
lease agreement which requires the lessee to pay cash rental, property taxes and
other expenses incurred in connection with the operation of the property.
In 1998, the Trust incurred capital expenditures of $28,280 for parking lot
improvements at First Tuesday Mall. In 1997, the Trust incurred capital
expenditures of $1,010,937. The improvements consisted of $833,526 for tenant
build-outs (including $770,526 for OfficeMax at Kingsley Square) and $177,411
for parking lot and sidewalk improvements at First Tuesday Mall and at
Presidential Drive Business Park.
On December 22, 1998, the Trust sold Geneva Square, a 143,676 square foot
shopping center located in Lake Geneva, Wisconsin. The sale price was $4,500,000
from which the Trust paid selling expenses of $20,165 and retired mortgage
indebtedness on the property of $2,803,790. Gain on the sale was $528,282.
19
<PAGE>
4. Mortgage Loans Receivable
Mortgage loans receivable consist of notes received from financing property
sales and are secured by the properties sold, subject to any underlying mortgage
loans payable. The Trust received mortgage loans receivable of $1,650,000 as
part of the consideration for the sales of Hickory Hills and College Square in
1990 and retained a mortgage payable on the property. Accordingly, the gain on
this sale was deferred. The mortgage loans receivable matured on December 20,
1997 and had yielded 9.5% to the Trust. Upon maturity of these mortgage loans
receivable, the Trust assigned the underlying mortgage loan payable on College
Square to the mortgagee. As a result of the assignment, the proceeds from the
College Square mortgage loan receivable were reduced by the outstanding mortgage
loan payable of $193,981.
The activity in mortgage loans receivable for the two years ended December 31,
1997 (there was no activity in 1998) is summarized in the table below.
MORTGAGE LOANS RECEIVABLE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------
PRINCIPAL
<S> <C> <C>
Beginning of year $ 1,520,083 1,547,249
Deductions during year
Principal collections (28,094) (27,166)
Principal repayment (1,491,989) ---
- -------------------------------------------------------------------------------
Balance at end of year --- 1,520,083
Deferred gain --- (259,157)
- -------------------------------------------------------------------------------
Balance, net of deferred gain $ --- 1,260,926
- -------------------------------------------------------------------------------
</TABLE>
5. Cash and Cash Equivalents
At December 31, 1998, cash and cash equivalents consisted of cash of $548 and a
money market fund of $3,422,748. At December 31, 1997, cash and cash equivalents
consisted of cash of $927 and a money market fund of $1,605,500.
20
<PAGE>
6. Transactions With Affiliates
The Trust has contracted with AEGON USA Realty Advisors, Inc. ("AEGON Realty
Advisors") to provide administrative services for a base fee of 5/8% of the
average gross real estate investment plus 1/4% of the monthly balance of
mortgage loans receivable and an incentive fee of 20% of annual adjusted cash
flow from operations in excess of $.72 per share. If the annual adjusted cash
flow from operations is less than $.72 per share, then the payment of so much of
the base fee is to be deferred so that revised cash flow from operations will be
equal to $.72 per share; provided, however, in no event shall the amount
deferred exceed 20% of the previously determined base fee. Any deferred fees may
be paid in subsequent years (subject to certain limits). Annual adjusted cash
flow from operations, as defined for purposes of the incentive fee, includes the
net realized gain (or loss) from the disposition of property, adjusted to
exclude accumulated depreciation (otherwise stated as gain in excess of cost
without reduction for allowable depreciation). The administrative fee is limited
to 1 1/2% of average quarterly net invested assets. The administrative agreement
is for a one-year term, automatically renewed annually and cancelable by either
party upon 90 days written notice. Amounts paid to AEGON Realty Advisors for
administrative services were: $204,587 for 1998, $205,714 for 1997, and $202,378
for 1996. No incentive fees were paid in 1998, 1997 or 1996.
AEGON Realty Advisors also provides real estate acquisition and disposition
services for the Trust. A negotiated fee of 2% to 4% of the cost is charged for
properties acquired. No separate fee is charged for property dispositions. There
were no acquisition fees paid in 1998, 1997 or 1996.
AEGON USA Realty Management, Inc. ("AEGON Realty Management"), a wholly-owned
subsidiary of AEGON Realty Advisors, provided property management services to
the Trust for a fee of 5% of the gross income of each managed property. The
property management agreement is for a one-year term, automatically renewed
annually and cancelable upon a 30-day written notice from either party. Amounts
paid to AEGON Realty Management for property management services were $241,877
for 1998, $221,935 for 1997, and $230,045 for 1996. On December 31, 1998, AEGON
Realty Management was merged with and into AEGON Realty Advisors and the
property management agreement was assumed by AEGON Realty Advisors.
AEGON Realty Advisors previously provided dividend disbursement, stock
certificate preparation, recordkeeping and other shareholder services to the
Company for a quarterly fee of $1.25 per shareholder account, $.75 per
shareholder account for distributions processed, $.50 per shareholder account
for proxy tabulation, and such other compensation for services performed as from
time to time agreed to by the parties. The Trust paid AEGON Realty Advisors
$21,376, $21,658, and $21,904 in shareholder service fees for 1998, 1997, and
1996, respectively. AEGON Realty Advisors had subcontracted with Boston
EquiServe, L.P., a subsidiary of State Street Bank and Trust Company, for
delivery of these services. Effective January 1, 1999, the Trust contracted
directly with Boston EquiServe, L.P. and terminated the agreement with AEGON
Realty Advisors.
On December 31, 1993, the mortgage loan on the Trust's Presidential Drive
property was acquired from the lender by AUSA Life Insurance Company, Inc., an
affiliate of AEGON Realty Advisors, as part of a large transaction involving the
transfer of loans and securities. Interest paid on the mortgage was $74,575 in
1998, $77,779 in 1997, and $80,674 in 1996. In addition, the mortgage on Geneva
Square was with PFL Life Insurance Company ("PFL"), an affiliate of AEGON Realty
Advisors. Interest paid on the mortgage was $228,562 in 1998, $235,842 in 1997,
and $236,477 in 1996. Geneva Square was sold in December 1998.
On March 1, 1999, the mortgage loans on Mendenhall Commons and North Park Plaza
matured. The Trust obtained financing from Monumental Life Insurance Company
("Monumental"), an affiliate of AEGON Realty Advisors, for these properties.
(See Note 7.)
AEGON Realty Advisors is an indirect wholly-owned subsidiary of AEGON USA, Inc.
which, through other wholly-owned subsidiaries, beneficially owns approximately
31% of the outstanding shares of the Trust at December 31, 1998.
21
<PAGE>
7. Mortgage Loans Payable
Mortgage loan obligations, secured by the real estate owned, carry annual
interest rates ranging from 9.25% to 10.5%.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential
Drive Business Park. The prepayment amount, including a 1% prepayment fee to
the lender, was $713,548. The annual debt service on this mortgage was
$107,604, including interest at 10.25%. On February 5, 1999, the Trust
prepaid the mortgage loan on First Tuesday Mall. The prepayment amount,
including a 1% prepayment fee to the lender, was $468,281. The annual debt
service on this mortgage was $115,128, including interest at 9.25%. These
prepayment fees will be recorded in 1999's results of operations.
On March 1, 1999, the mortgage loans on Mendenhall Commons and North Park Plaza
matured, requiring principal repayments of $3,930,120 and $3,944,537,
respectively. On March 15, 1999, the Trust refinanced these mortgage loans with
Monumental. The loan amount for Mendenhall is $3,925,000 with monthly debt
service of $30,430. The loan amount for North Park is $3,940,000 with monthly
debt service of $30,547. Debt service on both loans include principal
amortization over twenty years and interest at an initial rate of 7%, which will
be adjusted quarterly based on three month LIBOR plus 2%. The loans mature in
one year and may be prepaid at any time without penalty. Information regarding
each mortgage is presented in the Schedule of Mortgage Loans on Real Estate
below.
Schedule of Mortgage Loans on Real Estate
<TABLE>
<CAPTION>
PERIODIC PAYMENT TERMS
----------------------------------------
CARRYING
FACE AMOUNT OF
ANNUAL BALLOON AMOUNT MORTGAGE
STATED FINAL PRINCIPAL PAYMENT PREPAYMENT OF MORTGAGE AT DEC.
PROPERTY DATE OF INTEREST MATURITY AND AT PENALTY AT 31,
DESCRIPTION NOTE RATE DATE INTEREST MATURITY PROVISIONS* ACQUISITION 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED
Kingsley Square 2/77 10% 2/02 $ 76,370 $ --- Feb. 98 to Feb. 99 $ 700,000 $ 198,728
Orange Park, FL penalty is 5.5%,
(two loans) declining .5% per
year to 4%
thereafter
8/75 10% 8/00 163,650 --- 5.0% 1,500,000 230,799
First Tuesday 4/79 9.25% 4/04 115,128 --- 1.0% 1,120,000 469,618 ***
Carrollton, GA
Mendenhall Commons
Memphis, TN 2/89 10.25% 3/99 462,396 3,930,120 1.0% 4,300,000 3,935,041 ****
North Park Plaza
Phoenix, AZ 2/89 10.5% 3/99 472,008 3,944,537 1.0% 4,300,000 3,949,314 ****
Presidential Drive
Atlanta, GA 2/80 10.25% 2/10 107,604 --- 1.0% 968,935 709,391 **
--------------------- -------------------------
1,397,156 7,874,657 12,888,935 9,492,891
NET LEASED
Yamaha Warehouse
Cudahy, WI 12/90 10.125% 1/01 159,627 1,366,721 Excess of loan 1,500,000 1,405,042
rate over U.S.
Treasury Bill rate
---------------------- -------------------------
$1,556,783 $9,241,378 $14,388,935 $10,897,933
====================== =========================
</TABLE>
* Percentages are of the principal amount at time of prepayment.
** The loan was prepaid on February 1, 1999.
*** The loan was prepaid on February 5, 1999.
**** The loan was refinanced on March 15, 1999.
22
<PAGE>
The activity in mortgage loans payable for the three years ended December 31,
1998 is summarized in the table below.
Mortgage Loans Payable
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRINCIPAL
Beginning of year $14,140,584 14,819,479 15,271,385
Deductions during year
Principal payments (438,861) (484,914) (451,906)
Prepayments and maturities (2,803,790) (193,981) ---
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $10,897,933 14,140,584 14,819,479
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Scheduled monthly payments will substantially amortize the principal balances of
the mortgage loans over their respective terms with the exception of balloon
payments at maturity. Amortized payments on the outstanding balances due in the
next five years, including balloon repayments at maturity, prior to the 1999
transactions discussed above, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED PAYMENTS
YEAR PAYMENTS AT MATURITY
- -----------------------------------------------------
<S> <C> <C>
1999 $345,637 $7,874,657
2000 291,617 ---
2001 207,007 1,366,721
2002 150,324 ---
2003 163,148 ---
</TABLE>
23
<PAGE>
8. Leased Assets
The Trust is lessor of various properties as described in Note 3. Certain
properties are leased to tenants under long-term, non-cancelable operating lease
agreements. Future minimum lease rentals to be received under the terms of these
lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- -----------------------------------------
<S> <C>
1999 $3,570,408
2000 3,027,040
2001 2,509,523
2002 2,137,304
2003 1,998,654
2004-2018 13,990,315
</TABLE>
Contingent rentals included in income received in connection with operating
leases were $136,446, $134,343, and $101,446 for the years ended December 31,
1998, 1997 and 1996, respectively. Such rentals are based principally on tenant
sales in excess of stipulated minimums. In 1998 and 1997 the Trust derived 10%
or more of its revenue from the Kroger Company at Mendenhall Commons and from
Safeway at North Park Plaza. The revenue from these tenants was $644,083 and
$625,034 in 1998, and $587,097 and $581,028 in 1997, respectively. In 1996 the
Trust derived 10% or more of its revenue from the Kroger Company. The revenue
from this tenant for 1996 was $646,844.
In August 1994, Publix Supermarkets exercised an option to extend their lease
for 34,400 square feet at Kingsley Square. The lease extension, effective
February 11, 1995, has a term of five years and requires the Trust to contribute
up to $250,000 toward remodeling costs at the Publix store. Since Publix has not
yet remodeled their store and because they have given written notice of their
intent to close the store in 1999, it is unlikely this amount will be paid.
Accordingly, this amount has not been recorded in the financial statements.
9. Federal Income Taxes
The Trust conducts its operations so as to qualify as a real estate investment
trust under the Internal Revenue Code which requires, among other things, that
at least 95% of the Trust's taxable income be distributed to shareholders. The
Trust has historically distributed all of its taxable income. Distributions made
in 1998, plus a portion of the Trust's first distribution in 1999, were used to
meet the Internal Revenue Code distribution requirements for 1998. Accordingly,
no provision has been made for federal income taxes since the Trust did not have
taxable income after the deductions allowed for distributions to shareholders.
Certain property acquisitions have resulted in the basis of those properties
being determined differently for financial accounting purposes than for income
tax purposes. The differing methods of determination of basis in these
transactions has resulted in the tax basis of certain properties being higher or
lower than the financial basis. At December 31, 1998 the tax basis of real
estate was $133,710 in excess of the financial basis.
24
<PAGE>
10. Legal Proceedings
The Trust is not a party to any pending legal proceedings which, in the opinion
of management, are material to the Trust's financial position.
11. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------- YEAR ENDED
YEAR 3/31 6/30 9/30 12/31 12/31
- -----------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C>
REVENUE $ 1,622,786(1) 1,266,703 1,230,616 1,211,850 5,331,955
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS $ 512,257 108,264 112,875 210,579 943,975
NET GAIN ON SALE OF PROPERTY --- --- --- 528,282 528,282
----------------------------------------------------------------------------------------
NET EARNINGS $ 512,257(1) 108,264 112,875 738,861 1,472,257
- -----------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET
EARNINGS PER SHARE $ .13 .03 .03 .19 .38
- -----------------------------------------------------------------------------------------------------------------------------
1997
Revenue $ 1,277,422 1,236,318 1,250,455 1,247,892 5,012,087
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from operations $ 163,220 166,302 66,105 241,502 637,129
Net gain on sale of property --- --- --- 259,157 259,157
----------------------------------------------------------------------------------------
Net earnings $ 163,220 166,302 66,105 500,659 896,286
- -----------------------------------------------------------------------------------------------------------------------------
Basic and diluted net
earnings per share $ .04 .04 .02 .13 .23
- -----------------------------------------------------------------------------------------------------------------------------
1996
Revenue $ 1,371,756 1,312,030 1,370,969 1,162,558 5,217,313
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from operations $ 294,639 217,624 206,052 227,915 946,230
----------------------------------------------------------------------------------------
Net earnings $ 294,639 217,624 206,052 227,915 946,230
- -----------------------------------------------------------------------------------------------------------------------------
Basic and diluted net
earnings per share $ .08 .06 .05 .06 .24
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Revenues and net income for the first quarter of 1998 included a final
settlement of $248,000 for a claim as an unsecured creditor under a Chapter 11
reorganization plan and an $85,000 settlement for the termination of a lease by
a tenant in 1997.
25
<PAGE>
Report of Independent Auditors
The Board of Trustees and Shareholders
USP Real Estate Investment Trust
We have audited the accompanying balance sheets of USP Real Estate Investment
Trust as of December 31, 1998 and 1997, and the related statements of earnings,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Trust'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USP Real Estate Investment
Trust at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
February 23, 1999
26
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information About Directors (referred to herein as "Trustees")
Certain information about the nominees for Trustee appears below. (See "Item 13.
Certain Relationships and Related Transactions" for a description of the Trust's
relationship with AEGON USA Realty Advisors, Inc. and other subsidiaries of
AEGON USA, Inc.) On January 22, 1999, at a meeting of the USP Board of Trustees,
Richard M. Osborne was elected to serve as a Trustee. Gary A. Downing, a Trustee
and member of the Audit Committee, has decided not to stand for re-election at
the Annual Meeting.
PATRICK E. FALCONIO, age 57, has served as a Trustee and Chairman of the Board
since 1988. He retired on February 1, 1999 as an Executive Vice President of
AEGON USA, Inc. (insurance and financial services), Cedar Rapids, Iowa, where he
had been employed since 1987. He was also a Director of AEGON USA Realty
Advisors, Inc. and various other subsidiaries of AEGON USA, Inc. until his
retirement.
EDWIN L. INGRAHAM, age 72, has served as a Trustee of the Trust since 1984, and
as Vice Chairman of the Board of Trustees since 1990. He retired in 1988 as
Executive Vice President, Treasurer and Chief Investment Officer of AEGON USA,
Inc., where he had been employed since 1982. Mr. Ingraham is a member of the
Audit Committee.
SAMUEL L. KAPLAN, age 62, has served as a Trustee of the Trust since 1983. He
has been engaged in the practice of law in Minneapolis, Minnesota as a member of
the firm of Kaplan, Strangis and Kaplan, P.A. since 1978. Mr. Kaplan is a member
of the Audit Committee.
RICHARD M. OSBORNE, age 53, has served as a Trustee of the Trust since January
1999. He is President and Chief Executive Officer of OsAir, Inc., a company he
founded in 1963. OsAir, Inc. is a manufacturer of industrial gases for pipeline
delivery and a real property developer. Mr. Osborne is the sole Manager of
Turkey Vulture Fund XIII, Ltd. which acquires, holds, sells or otherwise invests
in all types of securities and other instruments. Mr. Osborne is a Director and
Chairman of the Board of Meridian Point Realty Trust '83, a publicly-held real
estate investment trust, a Director of Central Reserve Life Corporation, a
publicly-held insurance holding company, a Director and Chairman of the Board of
Pacific Gateway Properties, Inc., a publicly-held real estate company and a
Director and Vice Chairman of the Board of GLB Bancorp, Inc., a bank holding
company.
Information About Executive Officers
Certain information about the executive officers of the Trust who are not also
nominees appears below. The term of office of each executive officer will expire
at the Annual Meeting of the Board of Trustees, which will follow the Annual
Meeting of Shareholders. (See "Item 13. Certain Relationships and Related
Transactions" for a description of the Trust's relationship with AEGON USA
Realty Advisors, Inc. and other subsidiaries of AEGON USA, Inc.)
DAVID L. BLANKENSHIP, age 48, has served as President of the Trust since 1985.
He has been employed by AEGON USA, Inc. since 1977 in various administrative and
management positions related to real estate investment activities and is
Chairman of the Board and President of AEGON USA Realty Advisors, Inc.
MAUREEN DEWALD, age 48, has served as Vice President of the Trust since 1986 and
Secretary since 1985. She has been employed by AEGON USA, Inc. since 1983 as an
attorney for real estate investment activities and is Senior Vice President,
Secretary and General Counsel of AEGON USA Realty Advisors, Inc.
27
<PAGE>
ALAN F. FLETCHER, age 49, has served as Treasurer of the Trust since 1986, as
Vice President since 1985, as Assistant Secretary since 1982 and as principal
financial officer since 1981. He has been employed by AEGON USA, Inc. since 1981
in various financial and administrative positions related to investment
activities and is Senior Vice President and Chief Financial Officer of AEGON USA
Realty Advisors, Inc.
ROGER L. SCHULZ, age 37, has served as Controller and Assistant Secretary of the
Trust since 1995. He has been employed by AEGON USA, Inc. since 1985 in various
accounting and financial reporting positions related to real estate investment
activities and is Manager - Financial Reporting for AEGON USA Realty Advisors,
Inc.
ITEM 11. EXECUTIVE COMPENSATION
During 1998, each Trustee, with the exception of Mr. Falconio, received an
annual fee of $6,000 plus $750 for each regular or special meeting attended, as
well as $400 per day for inspecting properties owned by the Trust and $400 for
attendance at each committee meeting as a member, unless held in conjunction
with a meeting of the Board of Trustees. Mr. Falconio has waived all fees for
his services as a Trustee so long as he continues to be affiliated as an officer
or director of AEGON USA, Inc. (see "Item 10. Directors and Executive Officers
of the Registrant"). Total fees paid to all Trustees as a group were $27,000 for
1998.
The executive officers of the Trust receive no cash or deferred compensation in
their capacities as such.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to each person and group
(as that term is used in Section 13(d)(3) of the Securities Exchange Act of
1934) known by the Trust to be the beneficial owner of more than five percent
(5%) of the outstanding shares of the Trust as of March 5, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C>
AEGON USA, Inc. (1) 1,197,260 30.86%
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Turkey Vulture Fund XIII, Ltd. (2) 551,081 14.20%
c/o Kohrman Jackson & Krantz P.L.L.
1375 East 9th Street
Cleveland, Ohio 44114
</TABLE>
(1) AEGON USA, Inc. is an indirect, wholly-owned subsidiary of AEGON N.V., a
holding company organized under the laws of The Netherlands which is controlled
by Vereninging AEGON, an association organized under the laws of The
Netherlands. AEGON USA, Inc. has sole voting and investment powers with respect
to the above Shares.
(2) Turkey Vulture Fund XIII, Ltd. (the "Fund") is an Ohio limited liability
company, of which Richard M. Osborne is the sole Manager. As sole Manager of the
Fund, Mr. Osborne may be deemed to beneficially own all of the Shares of
beneficial interest of USP owned by the Fund. Mr. Osborne also has sole power to
vote, or to direct the voting of, and the sole power to dispose or to direct the
disposition of, any Shares owned by the Fund.
Security Ownership of Management
28
<PAGE>
The following table sets forth the number of Shares of the Trust beneficially
owned as of March 5, 1999 by each Trustee, nominee, and officer and by all
Trustees, nominees and officers as a group (9 persons). Except as otherwise
indicated by footnote, the individuals have direct ownership of, and sole voting
and investment power with respect to, any Shares beneficially owned by them.
Under rules adopted by the Securities and Exchange Commission, transactions in
Shares of the Trust are reportable by Trustees and officers on specified forms,
and the Trust is required to disclose any known delinquent filings. A report on
Form 5 was filed late for Mr. Downing, reporting 36 Shares acquired through the
Trust's distribution reinvestment plan.
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C>
Gary A. Downing(1) 577 *
Patrick E. Falconio(2) 2,000 *
Edwin L. Ingraham 1,500 *
Samuel L. Kaplan(3) 10,000 *
Richard M. Osborne(4) 551,081 14.20%
David L. Blankenship(5) 1,199,078 30.90%
Maureen DeWald 0 *
Alan F. Fletcher(6) 2,200 *
Roger L. Schulz 100 *
Trustees, nominees and officers as a group 1,766,536 45.53%
</TABLE>
(1) Mr. Downing is the beneficial owner of 577 Shares held in an individual
retirement account.
(2) Mr. Falconio may be deemed to be the beneficial owner of 2,000 Shares
owned by his wife.
(3) Mr. Kaplan is the direct owner of 8,500 Shares and may be deemed to be
the beneficial owner of 1,500 Shares held in a profit sharing trust for
his account.
(4) Mr. Osborne may be deemed to be the beneficial owner of 551,081 Shares
beneficially owned by Turkey Vulture Fund, XIII, Ltd., an Ohio limited
liability company, of which Mr. Osborne is the sole Manager.
(5) Mr. Blankenship may be deemed to be the beneficial owner of 1,197,260
Shares beneficially owned by AEGON USA, Inc. with respect to which he
shares voting and investment powers (see "Principal Shareholders" and
"Information About Executive Officers"). Mr. Blankenship disclaims
beneficial ownership of such Shares. He may also be deemed to be the
beneficial owner of 1,818 Shares held in custodial accounts for his
children.
(6) Mr. Fletcher is the direct owner of 600 Shares and is the beneficial
owner of 1,600 Shares held in an individual retirement account.
*Such holdings represent less than one percent of the outstanding Shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Trust has no employees and has contracted with various subsidiaries of AEGON
USA, Inc. (see "Principal Shareholders") to provide administrative, advisory,
acquisition, divestiture, property management and shareholder services. A
description of the relationships between AEGON USA, Inc. and its various
subsidiaries and of such subsidiaries' agreements with the Trust follows. The
description of the agreements which follows is qualified in its entirety by
reference to the terms and provisions of such agreements. (See "Item 12.
Security Ownership of Certain Beneficial Owners and Management" for a
description of the relationship between AEGON USA, Inc. and AEGON N.V.)
29
<PAGE>
Administrative, Advisory and Acquisition Services
AEGON USA Realty Advisors, Inc. ("AEGON Advisors"), is a wholly-owned subsidiary
of AEGON USA, Inc. AEGON Advisors provides administrative, advisory, acquisition
and divestiture services to the Trust pursuant to an Administrative Agreement.
The term of the Administrative Agreement is for one (1) year and is
automatically renewable each year for an additional year subject to the right of
either party to cancel the Agreement upon 90 days written notice. The
performance of AEGON Advisors' duties and obligations under the Administrative
Agreement has been guaranteed by AEGON USA, Inc.
Under the Administrative Agreement, AEGON Advisors (a) provides clerical,
administrative and data processing services, office space, equipment and other
general office services necessary for the Trust's day-to-day operations, (b)
provides legal, tax and accounting services to maintain all necessary books and
records of the Trust and to ensure Trust compliance with all applicable federal,
state and local laws, regulatory reporting requirements and tax codes, (c)
arranges financing for the Trust, including but not limited to mortgage
financing for property acquisition, (d) obtains property management services for
the Trust's properties and supervises the activities of persons performing such
services, (e) provides monthly reports summarizing the results of operations and
financial conditions of the Trust, (f) prepares and files all reports to
shareholders and regulatory authorities on behalf of the Trust, (h) prepares and
files all tax returns of the Trust and (i) provides the Trust with property
acquisition and divestiture services.
AEGON Advisors receives fees for its administrative and advisory services as
follows: (a) a base fee, payable monthly, equal to 5/8% per annum of the average
monthly gross real estate investments of the Trust plus 1/4% per annum of the
monthly outstanding principal balance of mortgage loans receivable; and (b) an
incentive fee, payable annually, equal to 20% of the annual adjusted cash flow
from operations in excess of $.72 per share. If the annual adjusted cash flow
from operations is less than $.72 per share, then the payment of so much of the
base fee is to be deferred so that revised cash flow from operations will be
equal to $.72 per share; provided, however, in no event shall the amount
deferred exceed 20% of the previously determined base fee. Any deferred fees may
be paid in a subsequent year, up to a maximum of 30% of that year's revised cash
flow from operations in excess of $.72 per share. Annual adjusted cash flow from
operations, as defined for purposes of the incentive fee, includes the net
realized gain (or loss) from the disposition of property, adjusted to exclude
accumulated depreciation (otherwise stated as gain in excess of cost without
reduction for allowable depreciation). Notwithstanding the foregoing, the
combined base and incentive fees cannot exceed the amount permitted by the
limitation on operating expenses as provided in the Trust's Declaration of
Trust, which limitation is essentially 1 1/2% of the Trust's average quarterly
invested assets, net of depreciation. In addition, AEGON Advisors is to be paid
a separately negotiated fee of not less than 2% nor more than 4% of the cost of
each property acquired by the Trust as compensation for acquisition services
furnished by it to the Trust. Administrative fees paid to AEGON Advisors for
1998 were $204,587. No acquisition fees were paid in 1998.
Management Services
AEGON Advisors provides management services to the Trust pursuant to a Property
Management Agreement. The term of the Agreement is for one (1) year and is
automatically renewable each year for an additional year subject to the right of
either party to cancel the Agreement upon 30 days written notice. Under the
Management Agreement, AEGON Advisors is obligated to (a) procure tenants and
execute leases with respect to Trust properties which are not leased under net
lease arrangements (the "Managed Properties"), (b) maintain and repair (at the
Trust's expense) the Managed Properties, (c) maintain complete and accurate
books and records of the operations of the Managed Properties, (d) maintain the
Managed Properties in accordance with applicable government rules and
regulations, licensing requirements and building codes, (e) collect all rents
and (f) carry (at the Trust's expense) general liability, accident, fire and
other property damage insurance. For these services, AEGON Advisors receives 5%
of the gross income derived from the operation of the Managed Properties.
Management fees paid to AEGON Advisors for 1998 were $241,877. These services
were previously provided by AEGON USA Realty Management, Inc., a wholly-owned
subsidiary of AEGON Advisors, which was merged into AEGON Advisors in December
1998.
30
<PAGE>
Shareholder Services
AEGON Advisors provides shareholder services to the Trust pursuant to a
Shareholder Services Agreement (the "Agreement"). Under the Agreement, AEGON
Advisors is obligated to provide dividend disbursement, stock certificate
preparation, recordkeeping and other shareholder services for which AEGON
Advisors receives the following fees: a quarterly fee of $1.25 per shareholder
account based on the number of shareholder accounts (minimum $1,000 per
quarter), a fee of $.75 per shareholder account for each dividend processed, a
fee of $.50 per shareholder account for proxy tabulation, and such other
compensation as from time to time agreed upon by the Trust and AEGON Advisors.
Shareholder service fees paid to AEGON Advisors for 1998 were $21,376. AEGON
Advisors has subcontracted for stock transfer and dividend disbursement services
with Boston EquiServe, L.P., a subsidiary of State Street Bank and Trust
Company. Effective January 1, 1999, the Trust contracted directly with Boston
EquiServe, L.P. and terminated the agreement with AEGON Advisors.
Other
On December 31, 1993, the mortgage loan on the Trust's Presidential Drive
property was acquired from the lender by AUSA Life Insurance Company, Inc., a
wholly-owned subsidiary of AEGON USA, Inc., as part of a large transaction
involving the transfer of loans and securities. The terms of the mortgage loan
remained the same. On February 1, 1999, the Trust prepaid the mortgage loan on
Presidential Drive Business Park. The prepayment amount, including a 1%
prepayment fee of $7,065 to the lender, was $713,548. In February 1994, the
Trust refinanced the existing mortgage loan on its Geneva Square property with a
new mortgage loan from PFL Life Insurance Company ("PFL"), a wholly-owned
subsidiary of AEGON USA, Inc. This $3,000,000 loan was obtained by the Trust on
commercially competitive terms at a fixed interest rate of 8% and a 1%
origination fee ($30,000) was paid to PFL in connection with the loan. The loan
matured on March 1, 1996, and the Trust exercised an option to extend the loan
for eight years at 8.30% based on commercially competitive terms offered for
comparable loans by PFL. On December 22, 1998, the Trust sold Geneva Square and
the mortgage balance of $2,803,790 was repaid. On March 1, 1999, the mortgage
loans on Mendenhall Commons and North Park Plaza matured, requiring principal
repayment. On March 15, 1999, the Trust refinanced these mortgage loans with
Monumental Life Insurance Company, a wholly-owned subsidiary of AEGON USA, Inc.
The new loans are for a period of one year, carry an initial interest rate of
7%, and may be prepaid at any time without penalty. The maximum principal amount
of the Presidential Drive and Geneva Square mortgage indebtedness outstanding
during 1998 was $3,570,474. The Trust paid $57,293 in principal and $303,137 in
interest on such mortgage indebtedness for 1998.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents
The following financial statements are included in Item 8:
1. Financial Statements.
Balance Sheets, December 31, 1998 and 1997.
Statements of Earnings, Years Ended December 31, 1998, 1997, and 1996.
Statements of Cash Flows, Years Ended December 31, 1998, 1997, and 1996.
Statements of Shareholders' Equity, Years Ended December 31, 1998, 1997, and
1996.
Notes to Financial Statements.
Report of Independent Auditors.
2. Financial Statement Schedules.
Financial Statement Schedules. (Included in Notes to Financial Statements)
(III) Schedule of Real Estate and Accumulated Depreciation. Note 3
(IV) Schedule of Mortgage Loans on Real Estate. Note 7
All other schedules have been omitted because they are not required, or because
the required information, where material, is included in the financial
statements or accompanying notes.
32
<PAGE>
PART IV (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
(a) List of Documents (continued)
3. Exhibits.
(3) Second Amended and Restated Declaration of Trust
currently in effect, dated October 5, 1972, as amended
December 18, 1972, March 3, 1975 and April 23, 1984,
incorporated herein by reference to Item 14(a)3, Exhibit
(3) of Form 10-K for the year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19, 1997.
(4) Articles II and III of the Second Amended and Restated
Declaration of Trust currently in effect, dated October
5, 1972, as amended December 18, 1972, March 3, 1975 and
April 23, 1984, incorporated herein by reference to Item
14(a)3, Exhibit (3) of Form 10-K for the year ended
December 31, 1984.
(10) Administrative Agreement currently in effect, dated
January 1, 1984, incorporated herein by reference to Item
5, Exhibit (28) of Form 8-K dated January 1, 1984.
(10.1) Property Management Agreement currently in effect, dated
July 1, 1981, as amended November 4, 1982, incorporated
herein by reference to Item 14(a)3, Exhibit (10) of Form
10-K for the year ended December 31, 1982.
(10.2) Shareholder Services Agreement, currently in effect,
dated January 1, 1991, as amended January 1, 1992 and
assigned January 28, 1992, incorporated herein by
reference to Item 14(a)3, Exhibit (10.2) of Form 10-K for
the year ended December 31, 1991.
(b) No reports on Form 8-K were filed during the fourth quarter of
1998.
(c) The required exhibits applicable to this section are listed in
Item 14(a)3.
(d) There are no required financial statement schedules applicable to
this section.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
USP REAL ESTATE INVESTMENT TRUST
/s/ Patrick E. Falconio /s/ Alan F. Fletcher
- ------------------------------------- -----------------------------
Patrick E. Falconio Alan F. Fletcher
Chairman of the Board Vice President and Treasurer
(principal executive (principal financial officer)
officer)
/s/ Roger L. Schulz
-----------------------------
Roger L. Schulz
Controller
(principal accounting officer)
March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
/s/ Gary A. Downing /s/ Samuel L. Kaplan
- ------------------------------------- -----------------------------
Gary A. Downing Samuel L. Kaplan
Trustee Trustee
/s/ Patrick E. Falconio /s/ Richard M. Osborne
- ------------------------------------- -----------------------------
Patrick E. Falconio Richard M. Osborne
Trustee Trustee
/s/ Edwin L. Ingraham
- -------------------------------------
Edwin L. Ingraham
Trustee
March 26, 1999
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Item Title or Description
-------- --------------------
<S> <C>
(3) Second Amended and Restated Declaration of Trust
currently in effect, dated October 5, 1972, as
amended December 18, 1972, March 3, 1975 and
April 23, 1984, incorporated herein by reference
to Item 14(a)3, Exhibit (3) of Form 10-K for the
year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19,
1997.
(4) Articles II and III of the Second Amended and
Restated Declaration of Trust currently in effect,
dated October 5, 1972, as amended December 18,
1972, March 3, 1975 and April 23, 1984,
incorporated herein by reference to Item 14(a)3,
Exhibit (3) of Form 10-K for the year ended
December 31, 1984.
(10) Administrative Agreement currently in effect,
dated January 1, 1984, incorporated herein by
reference to Item 5, Exhibit (28) of Form 8-K
dated January 1, 1984.
(10.1) Property Management Agreement currently in effect,
dated July 1, 1981, as amended November 4, 1982,
incorporated herein by reference to Item 14(a)3,
Exhibit (10) of Form 10-K for the year ended
December 31, 1982.
(10.2) Shareholder Services Agreement dated January 1,
1991, as amended January 1, 1992 and assigned
January 28, 1992, incorporated herein by reference
to Item 14(a)3, Exhibit (10.2) of Form 10-K for
the year ended December 31, 1991.
</TABLE>
All Exhibit Items are omitted from this report, but a copy will be furnished
upon payment of $33.00, representing a charge of fifty cents ($.50) per page,
accompanying a written request to Roger L. Schulz, Controller, USP Real Estate
Investment Trust, 4333 Edgewood Road N.E., Cedar Rapids, IA 52499.
35
<PAGE>
ANNEX B
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1999 Commission file number 0-7589
USP REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Iowa 42-6149662
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4333 Edgewood Road N.E., Cedar Rapids, IA 52499
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 398-8975
N/A
(Former name, address and fiscal year, if changed since last report)
Indicate by check-mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of beneficial interest of the registrant outstanding at
November 15, 1999 was 3,880,000.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
USP REAL ESTATE INVESTMENT TRUST
Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
-------------------------------- ---------------
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Real estate
Land, buildings and improvements at cost $ 34,617,710 40,722,496 34,508,522
Less accumulated depreciation (11,185,980) (12,747,098) (10,691,663)
-------------- -------------- ---------------
23,431,730 27,975,398 23,816,859
Cash and cash equivalents 2,616,567 1,809,854 3,423,296
Rents and other receivables 334,568 354,272 397,822
Prepaid and deferred expenses 214,665 278,337 275,653
Taxes held in escrow - 159,467 18,863
-------------- -------------- ---------------
$ 26,597,530 30,577,328 27,932,493
============== ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans payable $ 9,449,202 13,813,825 10,897,933
Accounts payable and accrued expenses 630,955 619,498 418,204
Due to affiliates 41,542 48,442 115,722
Distribution declared 310,400 310,400 310,400
Tenant deposits 82,717 80,095 78,701
Other 9,192 32,924 10,928
-------------- -------------- ---------------
10,524,008 14,905,184 11,831,888
-------------- -------------- ---------------
Shareholders' Equity
Shares of beneficial interest,
$1 par value, 20,000,000
shares authorized, 3,880,000
shares issued and outstanding 3,880,000 3,880,000 3,880,000
Additional paid-in capital 11,989,948 11,792,144 11,989,948
Undistributed net earnings 203,574 - 230,657
-------------- -------------- ---------------
16,073,522 15,672,144 16,100,605
-------------- -------------- ---------------
$ 26,597,530 30,577,328 27,932,493
============== ============== ===============
</TABLE>
2
<PAGE>
USP REAL ESTATE INVESTMENT TRUST
Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Rents $ 1,053,922 1,201,595 3,368,670 4,034,705
Interest 35,562 29,021 101,559 85,400
------------ ------------ ------------ -----------
1,089,484 1,230,616 3,470,229 4,120,105
------------ ------------ ------------ -----------
EXPENSES
Property expenses:
Real estate taxes 118,366 152,955 353,531 458,865
Repairs and maintenance 118,682 132,259 368,273 317,128
Utilities 29,789 33,309 87,441 82,611
Management fee 37,356 55,442 154,517 187,316
Insurance 8,881 10,757 24,789 33,554
Other 39,194 37,107 94,600 151,102
------------ ------------ ------------ -----------
Property expenses, excluding depreciation 352,268 421,829 1,083,151 1,230,576
Depreciation 162,645 206,985 494,317 624,346
------------ ------------ ------------ -----------
Total property expenses 514,913 628,814 1,577,468 1,854,922
Interest 186,731 343,753 640,126 1,039,252
Administrative fee 54,243 63,909 162,729 191,727
Other administrative 74,915 81,265 185,789 300,808
------------ ------------ ------------ -----------
830,802 1,117,741 2,566,112 3,386,709
------------ ------------ ------------ -----------
Net earnings $ 258,682 112,875 904,117 733,396
============ ============ ============ ===========
Basic and diluted net earnings per share $ .07 .03 .23 .19
============ ============ ============ ===========
Distributions to shareholders $ 310,400 310,400 931,200 931,200
============ ============ ============ ===========
Distributions to shareholders per share $ .08 .08 .24 .24
============ ============ ============ ===========
</TABLE>
3
<PAGE>
USP REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Rents collected $ 3,421,113 4,090,636
Interest received 101,559 85,400
Payments for operating expenses (1,226,618) (1,662,072)
Interest paid (637,602) (1,036,728)
------------- -------------
Net cash provided by operating activities 1,658,452 1,477,236
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (109,188) (28,280)
Other, net 23,938 12,430
------------- -------------
Net cash used by investing activities (85,250) (15,850)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal portion of scheduled
mortgage loan payments (278,604) (326,759)
Principal repayment of mortgage loans (1,170,127) -
Distributions paid to shareholders (931,200) (931,200)
------------- -------------
Net cash used by financing activities (2,379,931) (1,257,959)
------------- -------------
Net increase (decrease) in cash and cash equivalents (806,729) 203,427
Cash and cash equivalents at beginning of period 3,423,296 1,606,427
------------- -------------
Cash and cash equivalents at end of period $ 2,616,567 1,809,854
============= =============
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 904,117 733,396
Add (deduct) reconciling adjustments:
Depreciation 494,317 624,346
Amortization 2,524 2,524
Decrease in rents and other receivables 54,179 67,285
Decrease in prepaid and deferred expenses 47,617 57,940
Decrease (increase) in taxes held in escrow 18,863 (6,451)
Increase in accounts payable
and accrued expenses 212,751 58,581
Decrease in due to affiliates (74,180) (49,031)
Decrease in advance rents (1,736) (11,354)
------------- -------------
Net cash provided by operating activities $ 1,658,452 1,477,236
============= =============
</TABLE>
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1: The unaudited interim financial statements are prepared in accordance
with generally accepted accounting principles and include all adjustments of a
normal recurring nature necessary for a fair presentation of the financial
position and quarterly results. Interim reports should be read in conjunction
with the audited financial statements and related notes included in the 1998
Annual Report.
<TABLE>
<CAPTION>
<S> <C>
NOTE 2: Shareholders' equity, December 31, 1998 $ 16,100,605
Net earnings 904,117
Distributions to shareholders (931,200)
--------------
Shareholders' equity, September 30, 1999 $ 16,073,522
==============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
USP Real Estate Investment Trust's net earnings for the three and nine months
ended September 30, 1999 were $258,682 ($.07 per share) and $904,117 ($.23 per
share), respectively, compared to $112,875 ($.03 per share) and $733,396 ($.19
per share) for the same periods in 1998. (All per share amounts are on a basic
and diluted basis.) While net earnings and funds from operations increased from
1998 to 1999, both revenues and expenses were lower in 1999 primarily due to the
December, 1998 sale of Geneva Square Shopping Center in Lake Geneva, Wisconsin.
The Trust's rental income this year is $666,035 lower than the first nine months
of 1998, entirely attributable to the sale of Geneva Square. Rental income for
properties owned in both years actually increased by $56,074 due to a lease
termination fee and an increase in expense recoveries (additional rents). At
September 30, 1999, overall leased occupancy of the portfolio was 95%. Total
property expenses, excluding depreciation, decreased by $147,425 from 1998 to
1999. As a percentage of rental income, such expenses increased from 30% in 1998
to 32% in 1999, primarily because rents declined more than expenses.
Real estate taxes decreased by $105,334 from 1998 primarily due to the sale of
Geneva Square. Repairs and maintenance increased by $51,145 from 1998 primarily
due to an increase in tenant remodeling expenses and parking lot repairs in
1999. Utilities increased by $4,830 from 1998 primarily due to an increase in
water usage at Presidential Drive Business Park in Atlanta, Georgia. These
charges are paid by the Trust and billed back to tenants as additional rent.
Management fees decreased by $32,799 from 1998 due to lower revenue in 1999 as a
result of the sale of Geneva Square. Other property expenses were $56,502 lower
than 1998, due to reduced lease commissions, insurance claims, and advertising
and promotional expenses.
In 1999, depreciation expense and the administrative fee each decreased from
1998 due to the sale of Geneva Square. Interest expense decreased by $399,126
due to the sale of Geneva Square and due to the Trust prepaying the mortgage
loans in February 1999 on Presidential Drive Business Park in Atlanta, Georgia
and First Tuesday Mall in Carrollton, Georgia. Other administrative expenses
decreased by $115,019 during the first nine months of 1999 compared to the same
period last year. This decrease is due to lower legal expenses, incurred
primarily in connection with the Trust's efforts to maximize shareholder value.
Capital resources of the Trust consist of equity in real estate investments.
Properties are maintained in good condition and adequate insurance coverage is
provided. Liquidity is represented by cash and cash equivalents ($2,616,567 at
September 30, 1999) as well as cash flow from the continued operation of the
Trust's real estate portfolio, which is considered sufficient to meet current
obligations.
5
<PAGE>
As reported in a news release dated August 16, 1999, the Trust announced that it
had executed a letter of intent to sell all of its assets to AEGON USA Realty
Advisors, the Trust's advisor. The sale of assets is subject to negotiation of a
definitive agreement and shareholder approval, and is expected to result in a
liquidating distribution to USP shareholders in excess of $6.00 per share after
all transaction costs have been paid. Shareholders will receive a proxy
statement containing additional information regarding the transaction. While no
assurance can be given that the sale will be consummated, completion of the
transaction is planned for early 2000.
The Board of Trustees declared a third quarter distribution of $.08 per share,
payable November 29, 1999 to shareholders of record November 16, 1999. Future
distributions to shareholders will continue to be dependent upon earnings, cash
flow, financial condition, and the status of the proposed sale and liquidation.
YEAR 2000 ISSUE
Management of the Trust is well aware of the issues and concerns surrounding the
potential problems associated with computer systems that may not be able to
distinguish the year 2000 from the year 1900, typically referred to as "the year
2000 issue." The Trust does not own or use any information technology directly,
because all services necessary to conduct the day-to-day operations of the Trust
are performed by AEGON USA Realty Advisors, Inc. and its affiliates (the
Advisor). Nevertheless, the Trust could be adversely affected if computer
systems, as well as certain embedded technology, used by the Advisor, tenants,
vendors, financial institutions and other third parties do not properly process
and calculate date-related information and data from and after January 1, 2000.
The most significant risks associated with year 2000 issues that could
negatively impact the Trust include failure of tenants to pay rent, failure by
the Trust to pay its own obligations, failure of various building systems at the
Trust's real estate properties, failure of any and all third parties to provide
services and failure of any and all information, accounting and recordkeeping
systems or processes. The reasons for such failures could range from a simple
inability to process electronic information in a timely manner to a total
business failure somehow related to, or the result of, the year 2000 issue.
The Advisor has developed plans to modify, upgrade and/or replace portions of
its information technology to ensure that its computer systems will function
properly in the year 2000 and thereafter, and is in process of obtaining
reasonable assurances that comparable steps are being taken by the Trust's'
other major service providers. As of December 31, 1998, substantially all of the
Advisor's mission critical systems were year 2000 compliant. The Advisor will
continue conducting revalidation testing of its systems throughout 1999,
including the development, review, and revision of business resumption and
continuity plans.
The Trust is not expected to incur any direct costs associated with year 2000
issues. Based on these efforts to date, management of the Trust is not aware of
any consequence of the year 2000 issue that it believes would have a material
effect on the Trust's business, results of operations or financial condition.
There can be no assurance, however, that these efforts will be sufficient to
avoid any adverse impact to the Trust.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K.
The Trust reported on a Form 8-K, dated August 17, 1999, that it had
executed a letter of intent to sell all of its assets to AEGON USA
Realty Advisors, the Trust's advisor.
6
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
USP REAL ESTATE INVESTMENT TRUST
/s/ Alan F. Fletcher
----------------------------------------
Alan F. Fletcher
Vice President and Treasurer
(principal financial officer)
/s/ Roger L. Schulz
-----------------------------------------
Roger L. Schulz
Controller
(principal accounting officer)
Dated: November 15, 1999
7
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ANNEX C
October 21, 1999
The Board of Trustees
The Special Committee of the Board of Trustees
USP Real Estate Investment Trust
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of USP Real Estate Investment Trust (the "Trust") of
the price to be received by the Trust in connection with the sale of all the
real estate assets (the "Assets") of the Trust to AEGON USA Realty Advisors,
Inc. ("AEGON Advisors") (the "Asset Sale") pursuant and subject to the Real
Estate Sale and Purchase Contract between the Trust and AEGON Advisors
substantially in the form of the draft dated as of October 14, 1999 (the
"Purchase Agreement"). The consideration to be offered by AEGON Advisors in the
Asset Sale will be $33,500,000 in cash subject to certain adjustments.
In connection with our review of the proposed Asset Sale and the preparation of
our opinion herein, we have, among other things:
1. reviewed certain publicly available financial statements and other
information of the Trust;
2. reviewed certain internal financial statements and other financial and
operating data concerning the Assets and the Trust prepared by the
management of the Trust;
3. reviewed certain financial projections prepared by the Trust;
4. discussed the past and current operations and financial condition and
the prospects of the Assets and the Trust with officers of the Trust;
5. reviewed the reported prices and trading activity for the Trust's
shares;
6. compared the financial performance of the prices and trading activity
of the Trust's shares with that of certain other comparable
publicly-traded companies and their securities; and
7. reviewed offers made for the Assets and/or the Trust itself since
April, 1997.
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Board of Trustees
USP Real Estate Investment Trust
October 21, 1999
Page 2
We have assumed and relied upon the accuracy and completeness of all information
supplied or otherwise made available to us by the Trust and have not attempted
to verify independently any of such information. We have not made or obtained an
independent appraisal of the assets or liabilities (contingent or otherwise) of
the Trust. With respect to financial forecasts and other information and data
provided to or otherwise reviewed by or discussed with us, we have assumed that
such forecasts and other information and data have been reasonably prepared in
good faith on bases reflecting the best currently available estimates and
judgments of the Trust's management, and we have relied upon the Trust to advise
us promptly if any information previously provided became inaccurate or was
required to be updated during the period of our review.
Our opinion is based upon market, economic, financial and other circumstances
and conditions existing and disclosed to us as of the date hereof and any
material change in such circumstances and conditions would require a
reevaluation of this opinion, which we are under no obligation to undertake.
We express no opinion as to the underlying business decision to effect the Asset
Sale, or the structure or tax consequences of the Purchase Agreement. We did not
structure the Asset Sale or negotiate the final terms of the Purchase Agreement.
Our opinion is limited to the fairness, from a financial point of view, of the
gross sales price of $33,500,000 to be received by the Trust in connection with
the Asset Sale. We express no opinion with respect to any other reasons, legal,
business, or otherwise, that may support the decision of the Special Committee
or Board of Trustees to approve or consummate the Asset Sale.
In conducting our investigation and analyses and in arriving at our opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed relevant,
including the review of (i) historical and projected operating earnings of the
Assets; (ii) the current and projected financial position and results of
operations of the Trust; (iii) the historical market prices and trading activity
of the shares of the Trust; (iv) information concerning selected business
combinations which we deemed comparable in whole or in part; and (v) other
proposals made to the Trust since April, 1997.
In arriving at this opinion, Raymond James did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Raymond James believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all
analyses, would create an incomplete view of the process underlying this
opinion.
Raymond James & Associates, Inc. ("Raymond James") is actively engaged in the
investment banking business and regularly undertakes the valuation of investment
securities in connection with public offerings, private placements, business
combinations and similar transactions.
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Board of Trustees
USP Real Estate Investment Trust
October 21, 1999
Page 3
Raymond James has been engaged to render financial advisory services to the
Trust in connection with the proposed Asset Sale and will receive a fee for such
services, which fee is contingent upon consummation of the Asset Sale. Raymond
James will also receive a fee in connection with the delivery of this opinion.
In addition, the Trust has agreed to indemnify us against certain liabilities
arising out of our engagement.
In the ordinary course of our business, Raymond James may trade in the
securities of the Trust for our own account or for the accounts of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
It is understood that this letter is for the information of the Special
Committee and the Board of Trustees of the Trust in evaluating the proposed
Asset Sale and does not constitute a recommendation to any shareholder of the
Trust regarding how said shareholder should vote on the proposed Asset Sale.
This opinion is not to be quoted or referred to, in whole or in part, without
our prior written consent, which will not be unreasonably withheld; provided
that, this opinion letter may be included in its entirety in the Proxy Statement
of the Trust relating to the proposed Asset Sale.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the price received by the Trust in connection with the Asset Sale is
fair, from a financial point of view, to the holders of the Trust's outstanding
shares.
Very truly yours,
/s/ RAYMOND JAMES & ASSOCIATES, INC.
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ANNEX D
REAL ESTATE SALE AND PURCHASE CONTRACT
THIS CONTRACT ("Contract") is made and entered into as of the 20th day
of January, 2000 (hereinafter referred to as the date hereof), by and between
USP Real Estate Investment Trust, an Iowa common law business trust (hereinafter
referred to as "Seller"), and AEGON USA Realty Advisors, Inc., an Iowa
corporation (hereinafter referred to as "Purchaser").
The parties hereto agree as follows:
l. AGREEMENT TO PURCHASE AND SELL.
A. Seller agrees to sell to Purchaser and Purchaser agrees to purchase
from Seller, subject to the terms and conditions of this Contract, the six
properties (the "Properties") described as follows:
(i) Kingsley Square Shopping Center located in Orange Park,
Florida, and legally described on Exhibit "A-1" attached hereto;
(ii) First Tuesday Mall located in Carrollton, Georgia, and
legally described on Exhibit "A-2" attached hereto;
(iii) Mendenhall Commons Shopping Center located in Memphis,
Tennessee, and legally described on Exhibit "A-3" attached hereto;
(iv) North Park Plaza Shopping Center located in Phoenix,
Arizona, and legally described on Exhibit "A-4" attached hereto;
(v) Presidential Drive Office Building located in Atlanta,
Georgia, and legally described on Exhibit "A-5" attached hereto;
(vi) Yamaha Warehouse located in Cudahy, Wisconsin, and
legally described on Exhibit "A-6" attached hereto.
The Properties are being sold together with:
(vii) All buildings, improvements, structures and fixtures,
placed, constructed, installed, or located on the Properties, together with the
parking facilities related thereto, and all other improvements situated on, over
and under the lands legally described above (the "Improvements");
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(viii) All of the furniture, furnishings, fixtures, fittings,
appliances, apparatus, equipment, tools, supplies and machinery, if any, owned
by Seller and located on the Properties (the "Personal Property");
(ix) Seller's interest as landlord under all leases of space
of and within any part of the Properties, including, without limitation, any
renewals thereof and any options to renew the same, together with any and all
third party guarantees of the obligations of tenants under such leases
(hereinafter referred to as the "Tenant Leases:");
(x) All contract agreements, if any, affecting the operation
of the Improvements as fully developed commercial properties, including without
limitation, all service contracts, maintenance agreements, equipment leases,
advertising contracts, and the like, to the extent assignable, (hereinafter
together referred to as the "Operating Agreements");
(xi) To the extent assignable, all guarantees and warranties
given, made, or issued by any contractors, subcontractors, servicers, suppliers,
manufacturers, installers, and the like, relating to or with respect to the
construction, repair, or maintenance of the Improvements or Personal Property
and the workmanship, materials, components, appliances, and equipment forming a
part of or installed on or included within or upon the Improvements (hereinafter
referred to as the "Warranties");
(xii) All development, construction, and engineering plans,
specifications, drawings, survey materials or other written materials or matters
in the possession of Seller which pertain to the planning, development,
construction, maintenance and repair of the Improvements, including, without
limitation all "working" drawings and all "as-built" drawings and surveys,
compliance reports, engineering reports, soil, geological, and environmental
reports (hereinafter referred to as the "Plans and Specifications");
(xiii) All licenses, permits, authorizations, and certificates
of occupancy affecting the Improvements as fully operational commercial rental
properties (hereinafter referred to as the "Licenses"), including without
limitation the right to use the names of the Properties set forth above, to the
extent Seller has any ownership or proprietary rights to use such names; and
(xiv) All rents, issues, royalties, and profits of the
Properties, whether coming due before or
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after the Closing Date, including all refunds or rebates of any nature
concerning the Property which are made on or after the Closing Date and
including all rights to insurance proceeds or other recoveries for damage to the
Properties (or any part thereof) which is not repaired by the date of Closing.
The Properties, together with all other rights and properties set forth
in (i) through (xiv) above are collectively sometimes referred to herein as the
"Property".
2. PURCHASE PRICE AND METHOD OF PAYMENT.
A. The total purchase price for the Property to be paid by Purchaser is
Thirty-Three Million Five Hundred Thousand Dollars ($33,500,000.00), payable in
cash by Purchaser at Closing. The purchase price will be reduced in accordance
with paragraph 10C hereof if the mortgage on the Yamaha Warehouse is assumed by
Purchaser. The allocation of purchase price between the Properties for purposes
of title insurance coverage and transfer tax or other legally required
declarations shall be as set forth on Exhibit "B".
B. Within three (3) business days after the date hereof, Purchaser
shall deliver to American Title Company, 3131 Turtle Creek Blvd., Suite 101,
Dallas, TX 75219 Attention: Bo Feagin (hereinafter referred to as the "Title
Company") earnest money (the "Deposit") in the amount of Two Hundred Thousand
Dollars ($200,000.00). The Deposit shall be placed by the Title Company in an
interest bearing account with all interest earned thereon to be for the benefit
of the Purchaser. The Deposit shall be held during the pendency of this Contract
and disbursed in accordance with the terms hereof. In the event the transactions
covered hereby shall close, at Closing the Deposit shall be credited towards the
Purchase Price.
3. PERMITTED TITLE EXCEPTIONS.
The Properties are being sold in fee simple title, subject to the
following exceptions:
A. Zoning and building laws or ordinances;
B. The liens of real estate taxes which are not yet due and payable;
C. Those matters set forth on the Seller's title polices concerning the
Properties which are identified on Exhibit "C" attached hereto, except for liens
or encumbrances (subject to subparagraph F below) and expired Tenant Leases or
other expired exceptions, which shall be discharged by Seller at or prior to
Closing;
D. Rights of tenants in possession;
E. Those matters set forth on the existing surveys of the Properties
identified on Exhibit "D" attached hereto; and
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F. Subject to paragraph 10C, the lien of the first mortgage and related
security instruments encumbering the Yamaha Warehouse in the current principal
amount of approximately One Million Three Hundred Ninety-Six Thousand One
Hundred Seventy-Three Dollars ($1,396,173.00) held by Wisconsin National Life
Insurance Company (hereinafter referred to as the "Yamaha Lender").
G. Such other easements or reservations of title as shall be approved
by Purchaser after Purchaser's examination of the title binders and updated
surveys for the Property as hereinafter required.
(A through G above are hereinafter collectively referred to as
"Permitted Exceptions").
4. CLOSING.
Consummation of the transactions contemplated by this Contract (the
"Closing") will be held at or closed in escrow through the offices of the Title
Company on a day and at a time mutually agreeable to the parties, after all
conditions precedent have been satisfied, but in any case on or before June 30,
2000. In the absence of a different specified date in accordance with this
paragraph, the Closing shall take place at 9:00 A.M., March 30, 2000
(hereinafter referred to as the "Closing Date").
5. PURCHASER'S CONDITIONS PRECEDENT.
Purchaser's obligations to purchase the Property hereunder are
contingent upon satisfaction of the following conditions precedent ("Purchaser's
Conditions Precedent") within forty-five (45) days of the date hereof (the
"Purchaser's Condition Period"):
A. Unless this Condition is waived by Purchaser within the Purchaser's
Condition Period, Purchaser agrees to obtain a preliminary title report and
commitment to insure title covering each Property issued by the Title Company.
It is a condition precedent to Purchaser's obligations to purchase the Property
that the Title Company agree to issue an owner's policy of title insurance to
Purchaser for each Property in an amount equal to the purchase price set forth
on Exhibit "B" and in ALTA Extended Owner's Form B-1970 or the equivalent
thereof as used in the applicable state. The Title Company shall agree to delete
from the final policies any exceptions for mechanic's or materialman's liens,
and for discrepancies, conflicts in boundary lines, lack of access, shortages in
area, encroachments, or other facts a current survey or inspection of the
Property would disclose. Seller agrees to execute those affidavits and/or
furnish other documentation reasonably requested by the Title Company to make
such deletions and to reflect the current status of rights pursuant to Tenant
Leases as of the Closing Date. Purchaser shall
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have until expiration of its Conditions Period to examine the title to the
Properties and to notify Seller in writing of any defects in or encumbrances
upon Seller's title to the Properties (other than the Permitted Exceptions) that
are unacceptable to Purchaser. Any objection not timely made by Purchaser shall
be deemed to be waived, and all such matters shown as exceptions to title in the
commitments (but not including items shown in requirements sections) shall be
Permitted Exceptions.
Seller shall have until Closing to cure all such defects. If any
defects (other than Permitted Title Exceptions) are not cured or otherwise
removed in a manner reasonably satisfactory to Purchaser by the scheduled date
of Closing, Purchaser shall have the remedies set forth in subparagraph F below.
B. Unless this Condition is waived by Purchaser within the Purchaser's
Condition Period, Purchaser agrees to obtain certified surveys of the Properties
certified by the surveyor to Purchaser and to the Title Company. It is a
Condition Precedent to Purchaser's obligations hereunder that the surveys reveal
no new exceptions to title that are unacceptable to Purchaser. Any such matters
shall be reported to Seller and dealt with in accordance with the procedure for
other title exceptions as set forth in subparagraph 5A above.
C. Purchaser acknowledges receipt of the environmental reports on the
Properties identified in Exhibit "E" attached hereto and agrees to accept the
Properties in the environmental condition as reflected therein, provided,
however, any new or additional information concerning the environmental
condition of any Property shall be subject to Purchaser's approval, in
Purchaser's sole discretion and except that, prior to Closing, Purchaser shall
receive evidence of proper closure or removal of underground tanks as noted in
the report concerning Northpark Shopping Center.
D. The Mutual Representations as set forth herein in paragraph 7 hereof
and Seller's representations as set forth in paragraph 8 hereof shall be true
and correct as of the Closing Date without any change in the rent rolls or the
status of defaults of tenants which would be detrimental to the value of any
Property. Each party agrees to promptly notify the other of any matter coming to
the knowledge of such party which would render any of the Mutual Representations
or Seller's Representations untrue in any material respect. Seller agrees to use
reasonable efforts to correct any such matter prior to Closing, but shall not be
obligated to expend any money or to incur any liability to effect any such cure.
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E. The parties acknowledge that Purchaser is the asset manager for the
Properties pursuant to a Management Agreement dated July 1, 1981 and an
Administrative Agreement dated January 1, 1984 (together the "Advisory
Agreements"). Purchaser shall continue to manage the Property in the best
interests of the Seller pursuant to the Advisory Agreements in the same manner
as prior to this Contract. All actions taken by Seller in regard to the Property
at the recommendation of Purchaser as Advisor shall be considered consented to
by Purchaser pursuant to this Contract. Seller hereby directs Purchaser to
conduct operations at the Properties in accordance with any applicable terms and
conditions of this Contract. Seller agrees that Purchaser shall have access to
the Property pending Closing to perform its due diligence and inspections
allowed by this Contract in addition to Purchaser's access to the Property in
its capacity as Advisor. Purchaser agrees to indemnify and hold Seller harmless
from any loss, cost, damage, or liability caused by Purchaser's conduct of the
due diligence set forth herein. This indemnity shall survive the Closing or
earlier termination of this Contract.
F. If the Purchaser's Conditions Precedent set forth in this paragraph
5 are not timely satisfied, then Purchaser may elect to (i) waive such
condition(s) and close, by giving written notice to Seller such that Seller
receives the notice no later than sixty (60) days after the date hereof in the
event of a failure of conditions to be satisfied within Purchaser's Condition
Period, or no later than the date scheduled for Closing in the event of a
failure of the conditions to be met prior to Closing (hereinafter referred to in
this paragraph as "Timely Notice"), or (ii) terminate this Contract by Timely
Notice to Seller. Upon a termination of this Contract in accordance herewith,
Purchaser's Deposit shall be promptly refunded and neither party shall have any
further rights or obligations hereunder. In the absence of any written notice
from Purchaser, Purchaser shall be deemed to have elected to terminate this
Contract.
6. ADDITIONAL CONDITIONS PRECEDENT.
The parties obligations to purchase and sell the Property hereunder are
conditioned upon the following:
A. Seller obtaining a favorable vote for this transaction from its
holders of beneficial interest in accordance with Seller's Declaration of Trust.
Seller agrees to hold a special meeting for such purpose on or before June 15,
2000 and to comply with its Declaration of Trust and all applicable laws, codes,
ordinances, and regulations in the holding of such meeting and vote.
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B. Seller agrees to recommend the sale contemplated by this Contract
for shareholder approval at or prior to the special meeting held for such
purpose. It is a condition precedent to Purchaser's obligations hereunder that
the shareholder approval of this transaction contain a further mandatory
provision satisfactory to Purchaser that the Trust be liquidated and that the
proceeds of this sale, together with other liquid assets of the Trust, less
costs and reserves, be promptly distributed to the holders of beneficial
interests of Seller.
C. Seller's obligations hereunder are subject to the Purchaser's
representations as set forth in paragraph 9 hereof being true and correct on the
Closing Date. Each party agrees to notify the other of any matter which would
render any of Purchaser's representations and warranties untrue in any material
respect. Purchaser agrees to utilize its best efforts to cure such matters, but
shall not be obligated to expend any money or incur any liability to effect such
cure.
E. If any of the Additional Conditions Precedent are not timely
satisfied, unless the parties mutually agree to extend the time for satisfaction
of the conditions, this Contract shall be terminated, the Purchaser's Deposit
shall be promptly returned, and neither party shall have any further rights or
obligations hereunder.
7. MUTUAL REPRESENTATIONS.
The parties, to their actual knowledge, each make to the other the
following statements concerning the condition of the Property (hereinafter
referred to as the "Mutual Representations"):
A. Attached hereto as Exhibits "F-1" through "F-6" are true and
complete rent rolls of the Properties as of the date set forth thereon, and
except as set forth on Exhibits "F-1" through "F-6", no tenant is in material
default under its lease, nor has Seller received any notice that it is in
default as landlord thereunder.
B. All of the Property is, or on the Closing Date will be, owned by
Seller free and clear of liens and encumbrances, other than the Permitted Title
Exceptions.
C. Each of the Properties is in material compliance with all applicable
laws, codes, and ordinances including those regulating zoning, building, health,
fire, or other safety and environmental condition.
D. The Properties are insured against fire and other hazards as
described in Exhibit "G" attached hereto.
E. There are no plans for condemnation of all or any part of the
Properties.
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F. There are no planned street or other improvements which may result
in special assessments against the Properties or any part thereof, or which may
alter or disrupt ingress and egress from the Properties.
G. There are no claims, actions, suits, or proceedings pending,
threatened against, or affecting the Property.
H. There are, and on the date of Closing there will be no damage to the
Property which has not been repaired. Subject to the provisions of paragraph 15,
all damage occurring to the Property prior to Closing shall be repaired by
Seller at Seller's expense. All mechanical equipment for which Seller is
responsible pursuant to the terms of Tenant Leases, including, but not limited
to the plumbing, air conditioning and heating and electrical systems will be in
good and serviceable operating condition.
I. At the time of Closing, any work required to be performed by the
Seller under the terms of the Tenant Leases or the Operating Agreements or other
agreements in connection with the Property will have been completed in
accordance with the plans and specifications therefor, if any, and fully paid
for by Seller, except for tenant finish work incident to new leases entered into
between the date hereof and Closing, which shall be governed by the provisions
of paragraph 10.
J. Neither the execution and delivery of this Contract or the other
documents called for hereunder, nor the consummation of any of the transactions
herein or therein contemplated, nor compliance with the terms and provisions
hereof, or with the terms and provisions thereof, will contravene any provision
of law, statute, rule, or regulation to which Seller is subject, or will
conflict to be inconsistent with, or result in any breach of any of the terms,
conditions, covenants, or provisions of, or constitute a default under or result
in the creation or imposition of any lien, security interest, charge, or
encumbrance upon the Property pursuant to the terms of any indenture, mortgage,
deed of trust, lease, or other instrument to which Seller is a party, or by
which Seller or any Property may be bound. Except as set forth in Exhibit "L",
no person or entity has any right to acquire the Property or any interest or
part thereof.
K. There are no Operating Agreements that are either not assignable or
non-cancelable on thirty (30) days prior notice.
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L. Except for the Permitted Exceptions and except as otherwise
disclosed herein and in Exhibits "C" and "D" attached hereto, there are no
material liens or encumbrances against the Properties or other exceptions to fee
simple title which would materially adversely affect the value of the
Properties.
M. For purposes of this Contract, the actual knowledge of Seller shall
mean the actual knowledge of the Trustees, and the actual knowledge of Purchaser
shall mean the actual knowledge of David Blankenship, Alan Fletcher, Roger
Schulz, Dennis Roland, and Maureen DeWald.
8. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller represents and warrants the following:
A. Seller is not a foreign person, foreign corporation, foreign
partnership, foreign trust, or foreign estate as defined in the Internal Revenue
Code and Regulations.
B. The execution and delivery of this Contract and each instrument or
document required to be executed and delivered by Seller pursuant hereto and the
consummation of the transactions contemplated hereby, upon execution, delivery,
and consummation thereof, will be duly authorized and approved by all requisite
Trust actions and no other authorization or approval, whether of governmental
bodies or otherwise, will be necessary in order to enable Seller to enter into
or to perform this Contract, subject to the Conditions Precedent. Seller is not
a party to any contract or agreement, other than through Purchaser as Advisor,
which would violate the representations contained in subparagraph J above.
9. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser represents and warrants that it has taken all necessary
action to authorize the execution and delivery of this Contract and to
consummate the purchase of the Property as herein contemplated. The officer
executing this Contract on behalf of Purchaser has been duly authorized to do so
pursuant to proper action by Purchaser's Board of Directors. Purchaser is not
subject to any governmental or other regulations that would restrict this
purchase, nor is this purchase in contravention of any term or provision of
Purchaser's Articles of Incorporation or By-Laws.
10. COVENANTS AND AGREEMENTS.
Between the date hereof and the Closing:
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A. Seller shall not enter into any agreements or contracts affecting
the Properties which survive Closing, nor shall Seller enter into any new lease
or modify or terminate any existing Tenant Lease without the prior written
consent of Purchaser, which consent shall not be unreasonably withheld or
delayed. Notwithstanding the foregoing, Seller may enter the pending lease
transactions described on Exhibit "H" ("Permitted Lease Transactions"). The
parties agree to pursue, approve, and enter new leases in the ordinary course of
business. The parties shall pay for the tenant improvement costs or allowances
and leasing commissions in Permitted or hereafter approved Lease Transactions
entered between the date hereof and Closing in accordance with Exhibit "H".
Nothing in this Contract shall be deemed to require Seller to enter into any new
lease, lease modification, or operating agreement. Any contracts for tenant
improvements for the Permitted Lease Transactions which are not completed prior
to Closing shall be assigned to and assumed by Purchaser as an Operating
Contract pursuant to paragraph 11A(2) hereof, subject to any appropriate
prorations for the costs thereof in accordance with this paragraph.
B. Seller shall operate the Property in the ordinary course of
business, including without limitation, compliance with the terms of all leases,
mortgages, or other contractual obligations relating to the Property and doing
regular, scheduled, or necessary maintenance and repair of the Properties, and
of the fixtures, furniture, and equipment, so that the Property will be in the
condition required herein on the Closing Date. Discretionary repairs and
maintenance shall be performed in accordance with the budget for such matters as
approved by the Seller.
C. The Purchaser shall use reasonable efforts to obtain the Yamaha
Lender's consent to the Purchaser's purchase of Yamaha Warehouse subject to its
mortgage. If such consent is obtained, the purchase price shall be reduced by
the principal balance of the mortgage at Closing and accrued interest on the
mortgage debt will be pro rated between the parties with Purchaser responsible
for interest on and after the date of Closing. Seller agrees to pay the
assumption fee to the Yamaha Lender in the amount of one percent (1%) of the
principal balance of the loan. If the Yamaha Lender refuses to consent to the
sale, then the purchase price will not be reduced, Seller will pay off the
Yamaha mortgage at Closing and deliver the Property free and clear of the
mortgage and related liens.
11. ITEMS TO BE DELIVERED AT THE CLOSING.
A. At Closing, Seller shall cause to be delivered the following:
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(1) A Special Warranty Deed for each Property in the form
attached hereto as Exhibit "I" (modified as necessary to comply with state,
local law, or recording requirements), conveying to Purchaser fee simple title
to the Properties, subject only to the Permitted Exceptions.
(2) A blanket conveyance, bill of sale and assignment for each
Property (the "Bill of Sale"), conveying and assigning title with covenants of
general warranty to Purchaser, free and clear of all liens and encumbrances,
(other than the Permitted Exceptions); the Personal Property and the Tenant
Leases, the Operating Agreements, the Warranties, and the Licenses, such
instrument to be in form attached hereto as Exhibit "J".
(3) A rent roll (the "Rent Roll") for each Property, certified
by Seller and Purchaser to be true, complete and correct as of the Closing Date
and reflecting the status of tenant delinquencies, if any, existing as of the
Closing Date.
(4) All keys in Seller's possession or control to all locks on
the Property.
(5) To the extent they are in Seller's possession, the
executed originals of all Tenant Leases, together with copies of all
correspondence relating to the Leases and such accounting information relating
to the Leases as Purchaser may reasonably require.
(6) A certificate in the form attached hereto as Exhibit "K",
certifying that Seller is a non-foreign entity.
(7) Possession of the Property subject to the Permitted
Exceptions.
(8) Notices to Tenants of sale, in a form acceptable to
Purchaser and Seller.
(9) To the extent they are in Seller's possession, all
original Operating Agreements, Warranties, and Plans and Specifications.
(10) Proper documentation showing the good standing or other
authorization of Seller and the authorization of all persons executing documents
on behalf of Seller. Seller shall also execute and/or deliver all documents
required by the Title Company to issue the title policies in the form required
by this Contract, provided that disclosures, if any, required to be certified by
the Trust shall be either (i) certified to the knowledge of the Trustees, or
(ii) Purchaser as Advisor shall give the same certifications to Seller, which
certifications may be limited to the officers of USP.
B. Action at the Closing by Purchaser.
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On the date of Closing, Purchaser shall deliver the purchase
price to Seller by wire transfer in the amount required by paragraph 2 hereof,
subject to prorations and credits as contemplated herein. Purchaser shall
execute and deliver to Seller at Closing the Bills of Sale evidencing
Purchaser's assumption of the Tenant Leases and Operating Agreements. The
parties shall execute "Notices to Tenants" advising tenants of the sale and
Purchaser agrees to deliver, or cause to be delivered, such notices to each
tenant after Closing.
12. CLOSING PRORATIONS.
Purchaser shall obtain its own insurance coverage for the Property at
Closing. Property expenses, including charges under the continuing Operating
Agreements assumed by Purchaser, collected rents, and ad valorem taxes on the
Property shall be prorated at the Closing, effective as of the Closing date,
using the latest available computations of such items. Utilities shall be
prorated between the parties at Closing. Purchaser shall have all utilities in
Seller's name transferred to Purchaser's name promptly following the Closing.
All expenses which are prorated at Closing (exclusive of any unknown claims
related thereto, which shall remain the responsibility of Seller) shall be
deemed a final proration and Purchaser shall be responsible for payment of such
items when due. Except as prorated between the parties at Closing or as
otherwise agreed by the parties in accordance with this paragraph and paragraph
10A, Seller shall be responsible for all property expenses incurred, undertaken,
or contracted for prior to Closing, and agrees to indemnify and hold Purchaser
harmless from any claim, cost, or cause of action arising from any such expenses
and liabilities, including court costs and attorney's fees in the defense
thereof or in the enforcement of this indemnity. Tenant security deposits in the
possession of Seller and prepaid rents shall be credited to Purchaser. Included
in this sale are all delinquent rental accounts and all rents, issues, and
profits of the Properties due or which may become due after Closing relating to
periods occurring prior to Closing. In addition to the purchase price, Purchaser
shall pay Seller for Seller's prorata share of delinquent tenant rental
accounts, exclusive of late charges and/or interest, at face value, but
specifically excluding payment for delinquent accounts of tenants in Material
Default (hereinafter defined), as of the Closing Date. Purchaser shall also pay
Seller at Closing for Seller's prorata share of tenant reimbursements for CAM
and real estate taxes due after Closing based upon the most recent estimate of
such amounts as used in Seller's ledgers to accrue for such items, specifically
excluding any payment for reimbursables of tenants in Material Default as of the
Closing Date. As used in this paragraph, Material Default shall mean any tenant
(i) whose rental account is more than ninety (90) days delinquent, (ii) who is
in bankruptcy or
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insolvency proceedings, (iii) has vacated the Property and is delinquent in
payment of rent for more than thirty (30) days, or (iv) has indicated in writing
its inability or refusal to pay its account. Subject only to the payments and
prorations set forth in this paragraph, all rent issues and profits of the
Properties of every nature due or paid after Closing shall be the property of
Purchaser.
13. CLOSING COSTS.
Purchaser shall pay the cost of the title policies, surveys, and
environmental reports. Seller shall pay for the applicable transfer taxes. The
parties shall each pay one-half of the Title Company escrow fees, if any. Each
party shall bear its own attorney's fees.
14. REMEDIES UPON DEFAULT.
IF PURCHASER SHALL DEFAULT IN ITS PERFORMANCE OF THIS CONTRACT,
PURCHASER AND SELLER AGREE IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT TO
FIX THE DAMAGES WHICH SELLER MAY SUFFER. THEREFORE, PURCHASER AND SELLER HEREBY
AGREE A REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT SELLER WOULD SUFFER IN
THE EVENT PURCHASER DEFAULTS AND FAILS TO COMPLETE THE PURCHASE OF THE
PROPERTIES ARE AND SHALL BE, AS SELLER'S SOLE AND EXCLUSIVE REMEDY (WHETHER AT
LAW OR IN EQUITY), AN AMOUNT EQUAL TO THE EARNEST MONEY. SAID AMOUNT SHALL BE
THE FULL, AGREED AND LIQUIDATED DAMAGES FOR THE BREACH OF THIS CONTRACT BY
PURCHASER, ALL OTHER CLAIMS TO DAMAGES OR REMEDIES BEING HEREIN EXPRESSLY WAIVED
BY SELLER. THE PAYMENT OF SUCH AMOUNT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A
FORFEITURE OR PENALTY, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO
SELLER. UPON SUCH DEFAULT BY PURCHASER, THIS AGREEMENT SHALL BE TERMINATED AND
NEITHER PARTY SHALL HAVE ANY FURTHER RIGHTS OR OBLIGATIONS HEREUNDER, EACH TO
THE OTHER EXCEPT FOR THE RIGHT OF SELLER TO RECEIVE SUCH LIQUIDATED DAMAGES FROM
THE TITLE COMPANY.
If Seller shall default in its performance of this Contract, the
Purchaser may, as its sole and exclusive remedies elect to either (i) terminate
this Contract and receive a refund of the Deposit, or (ii) sue Seller for
damages, which damages the parties agree shall be limited to an amount not to
exceed the Deposit.
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Except for failure to close on the specified Closing Date, for which
default no notice or cure period is required, prior to a declaration of default,
the declaring party shall give the defaulting party written notice specifying
the default. The defaulting party shall have five (5) business days from receipt
of such notice to cure the default. If the cure period extends beyond the
scheduled date of Closing, the Closing Date shall be postponed to the last day
of the cure period.
In the event either party hereto employs an attorney and commences
legal action because of the other party's default, then the non-prevailing party
shall pay to the prevailing party reasonable attorney's fees incurred in the
enforcement of this Contract.
15. RISK OF LOSS.
Until Closing, all risk of loss of the Property is on the Seller and
if, prior to Closing, the Property, or any part thereof, shall become damaged by
fire or other casualty or become the object of any condemnation proceedings,
Purchaser may, as its sole and exclusive remedy, elect to either (i) terminate
this Contract, or (ii) proceed with the Closing and receive an assignment in
form acceptable to Purchaser of all insurance proceeds or awards for such
taking, free and clear of all liens, claims and encumbrances, and in the case of
casualty, together with a cash payment by Seller to Purchaser in the amount of
the lesser of (a) any deductible under Seller's insurance, or (b) the cost of
the repair of the damage. If the estimated cost of repair is less than One
Million Dollars ($1,000,000.00), Purchaser agrees to proceed to Closing in
accordance with (ii) above. Any election allowed hereunder shall be made in
writing no later than the earlier of (i) the scheduled date of Closing, or (ii)
ten (10) days after a party's receipt of notice of such damage or proceeding.
16. NOTICES.
All notices and demands herein required shall be in writing. Whenever
any notice, demand or request is required or permitted hereunder, such notice,
demand or request shall be hand-delivered personally or by express mail, courier
service (both with delivery receipt), or electronically verifiable facsimile
transmission or sent by United States Mail (registered or certified) postage
prepaid, to the addresses set forth below.
As to Seller: Patrick E. Falconio, Chairman of the Board of Trustees
USP Real Estate Investment Trust
111 Cottage Grove SE, #501
Cedar Rapids, IA 52403
Fax: 319/298-1910
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With a copy to: Timothy Hearn
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
Fax Number: (612) 340-2868
As to Purchaser: AEGON USA Realty Advisors, Inc.
4333 Edgewood Road N.E.
Cedar Rapids, IA 52499
Attention: Maureen DeWald
Fax Number (319) 369-2188
Any notice, demand or request which shall be given in the manner
aforesaid shall be deemed sufficiently given for all purposes hereunder (1) at
the time such notices, demands or requests are hand-delivered (which shall be
deemed to include delivery by express mail or courier service or transmission by
telefax facsimile) or (2) the day such notices, demands or requests are posted,
postage prepaid, in the United States Mail in accordance with the preceding
portion of this paragraph, provided however, time for response to any such
notice shall commence upon receipt at the address specified. Notice by telefax
transmission shall be given on a non-banking holiday weekday between the hours
of 9:00 a.m. to 5:00 p.m. (at the destination) or shall be deemed received on
the next such day and time.
17. TIME OF ESSENCE.
Time is of the essence of this Contract.
18. REAL ESTATE BROKERS.
Purchaser and Seller covenant and represent to each other that, there
is no party entitled to a real estate commission, finder's fee, cooperation fee,
or brokerage-type fee or similar compensation in connection with this Contract
and the transactions contemplated herein, except for a fee due Raymond James &
Associates, Inc. for rendering the fairness opinion requested by Seller herein,
and whose fee shall be paid by Seller pursuant to a separate agreement. Each
party agrees to hold the other harmless from and against any claim for a
commission or fee from any other broker or agent claiming by or through the
indemnifying party. Seller warrants that Raymond James & Associates, Inc. has
waived any right to claim a commission or transaction fee on this sale.
19. ENTIRE AGREEMENT.
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This Contract contains all of the agreements, representations and
warranties of the parties hereto and supersedes all other discussions,
understandings or agreements in respect to the subject matter hereof. All prior
discussions, understandings and agreements are merged into this Contract, which
alone fully and completely expresses the agreements and understandings of the
parties hereto. This Contract may be amended, superseded, extended or modified
only by an instrument in writing referring hereto signed by both parties.
20. EXHIBITS A PART OF THIS CONTRACT.
All Exhibits referred to in this Contract and attached hereto are
incorporated into this Contract by reference and are hereby made a part hereof.
21. NO BENEFIT TO OTHER PARTIES.
Except as otherwise provided herein, none of the provisions hereof
shall inure to the benefit of any party other than the parties hereto and their
respective successors and permitted assigns, or be deemed to create any rights,
benefits or privileges in favor of any other party except the parties hereto.
22. NO AGENCY, PARTNERSHIP OR JOINT VENTURE.
Nothing herein shall be construed to establish an agency relationship,
a partnership or a joint venture between Seller and Purchaser for any purpose.
23. CAPTIONS.
The captions and headings contained in this Contract are for reference
purposes only and shall not in any way affect the meaning or interpretation
hereof.
24. GOVERNING LAW.
This Contract shall be governed, construed and enforced in accordance
with the laws of the State of Iowa.
25. NO WAIVER.
The waiver by one party of the performance of any covenant or condition
herein shall not invalidate this Contract, nor shall it be considered to be a
waiver by such party of any other covenant or condition herein. The waiver by
either or both parties of the time for performing any act shall not constitute a
waiver of the time for performing any other act or an identical act required to
be performed at a later time. Except as otherwise specifically restricted
herein, the exercise of any remedy provided by law and the provisions of this
Contract shall not exclude other available remedies.
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26. AS-IS CONDITION.
Purchaser acknowledges that it is purchasing the Property on an AS-IS
condition, based upon its own inspections thereof and without benefit of any
representation, warranty or disclosure from Seller, either express or implied or
in the nature of fitness for any particular purpose, except as specifically set
forth herein. Seller agrees to maintain the Properties in their current physical
condition to the Closing Date, normal wear and tear excepted.
27. SURVIVAL OF REPRESENTATIONS.
The representations and warranties made by Seller in paragraph 8 of
this Contract and by Purchaser in paragraph 9 (the parties "Separate
Representations and Warranties") shall survive the Closing and delivery of deeds
and other conveyance documents. Each party agrees to indemnify and hold the
other harmless from and against any loss, cost, liability, claim, or cause of
action arising from the inaccuracy of such parties Separate Representations and
Warranties, including court costs and attorney's fees incurred by such
indemnified party in the defense of any such claim and in the enforcement of
this indemnity. All indemnities contained in this Contract shall survive the
Closing. The Mutual Representations in paragraph 7 are given for the sole
purpose of establishing the Purchaser's Conditions Precedent to Closing
contained in paragraph 5D and shall not survive the Closing; the sole remedy for
breach of the Mutual Representations being as set forth in paragraph 5F.
Provided, however, notwithstanding the provisions of the prior sentence to the
contrary, the breach of any of the Mutual Representations by Purchaser that
results in a claim against Seller by Purchaser under or pursuant to any
representations or warranties of Seller contained in the conveyance documents
delivered by Seller at Closing, shall survive for the sole benefit of Seller and
for the sole use as a defense against any such claim by Purchaser and/or its
successors or assigns in interest to the Properties.
28. ACCESS TO FILES.
For a period of three (3) years after Closing, Purchaser agrees to
grant to Seller, its successors or assigns, access to Tenant Lease and Property
files delivered to Purchaser at Closing, subject to reasonable advance written
notice.
29. PACKAGE SALE.
The purchase price provided herein is based upon a group sale of the
Properties, and except as provided in paragraph 5F, no Property or Properties
may be purchased or sold individually hereunder without the prior written
consent of Purchaser and Seller, which consent may be withheld in the sole
discretion of either party.
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<PAGE>
30. ASSIGNMENT.
Purchaser shall have the right to assign this Contract, in whole or in
part, to one or more affiliated entities, provided written notice shall be given
to Seller of such assignment no later than ten (10) days prior to Closing. Any
such assignment shall not terminate any liability hereunder unless so released
in writing by Seller.
31. BUSINESS DAYS.
In the event that any time period under this Contract expires on a day
that is not a business day, such time period shall be deemed extended to the
first business day following such date. "Business day" as used herein shall mean
any day other than Saturday, Sunday or a legal holiday on which business is
transacted by federally insured national banking institutions in Cedar Rapids,
Iowa.
32. COUNTERPARTS.
This Contract may be signed in counterparts, each of which is deemed an
original. This Contract shall be null and void unless it shall be executed by
Purchaser and one copy returned to Seller on or before January 20, 2000.
WHEREFORE, the parties have hereunto affixed their hands and seals as of the
date set hereof.
SELLER: PURCHASER:
USP Real Estate Investment Trust AEGON USA Realty Advisors, Inc.
By: /s/ Patrick E. Falconio By: /s/ David L. Blankenship
--------------------------------- -------------------------------
Patrick E. Falconio, Trustee David L. Blankenship, President
Chairman of the Board of Trustees
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PROXY
USP REAL ESTATE INVESTMENT TRUST
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Maureen DeWald and Alan F. Fletcher, or either
of them, with full power of substitution, proxies to represent the undersigned
at the Special Meeting of Shareholders of USP REAL ESTATE INVESTMENT TRUST to be
held at the AEGON Financial Center, 4333 Edgewood Road N.E., Cedar Rapids, Iowa,
on ________, _______ ___, 2000, and at any adjournment thereof, with all power
which the undersigned would possess if personally present, and to vote all
shares which the undersigned may be entitled to vote, as designated hereon. This
proxy, when properly executed, will be voted in the manner directed herein by
the undersigned. If no direction is made, this proxy will be voted FOR the
proposal described hereon.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
Please sign exactly as your name(s) appear(s) on the books of the Trust. Joint
owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If a corporation, this signature should be that of an
authorized officer who should state his or her title.
HAS YOUR ADDRESS CHANGED?
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PLEASE MARK VOTE
X AS IN THIS EXAMPLE
USP REAL ESTATE INVESTMENT TRUST
1. Approval of a Real Estate Sale and
Purchase Contract, dated January
20, 2000, between the Trust and
AEGON USA Realty Advisors, Inc.,
and the subsequent and immediate
liquidation and termination of the
Trust (the "Asset Sale and
Liquidation").
FOR ____ AGAINST ____ ABSTAIN ____
CONTROL NUMBER:
RECORD DATE SHARES:
In their discretion, the Proxies are
authorized to vote upon such other business
as may properly come before the meeting.
Mark box at right if an address change has
been noted on the reverse side of this card.
Please be sure to sign and date this Proxy. Date:
- --------------------- ------------------
Shareholder sign here Co-owner sign here
DETACH CARD
USP REAL ESTATE INVESTMENT TRUST
Dear Shareholder:
Please note the important information enclosed with this Proxy Ballot.
The proposed Asset Sale and Liquidation requires your immediate
attention, and is discussed in detail in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your
right to vote your shares.
Please mark the box on this proxy card to indicate how your shares will
be voted. Then sign the card, detach it and return your proxy vote in
the enclosed postage paid envelope.
Your vote must be received prior to the Special Meeting of
Shareholders, __________ 2000.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
USP Real Estate Investment Trust
