<PAGE> 1
As filed with the Securities and Exchange Commission on December 9, 1998
REGISTRATION NO. 333-67929
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Pre Effective Amendment
No. 1 to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LNR PROPERTY CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0777234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 NORTHWEST 107TH AVENUE
MIAMI, FLORIDA 33172
(305) 485-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN J. SAIONTZ
CHIEF EXECUTIVE OFFICER
LNR PROPERTY CORPORATION
760 NORTHWEST 107TH AVENUE
MIAMI, FLORIDA 33172
(305) 485-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
DAVID W. BERNSTEIN, ESQ.
ROGERS & WELLS LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 878-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: | |
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
AMENDED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER , 1998)
$100,000,000
[LNR PROPERTY LOGO]
% SENIOR SUBORDINATED NOTES DUE 2008
-------------------------
We are offering $100,000,000 aggregate principal amount of our %
Senior Subordinated Notes due 2008. The Notes include the terms set forth below.
This prospectus supplement and the related prospectus include additional
information on the terms of the Notes, including optional redemption prices and
covenants.
The Notes will mature on , 2008. We will pay interest on
the Notes on each and , beginning on
, 1999.
We may redeem all or some of the Notes beginning on ,
2003. We may also redeem up to 35% of the principal amount of the Notes sooner
than that with the proceeds from public equity offerings.
We will use the net proceeds of this offering to repay a portion of our
existing debt.
The Notes are our senior subordinated obligations, subordinated to our
senior indebtedness. The Notes have the same payment priority as our 9 3/8%
Senior Subordinated Notes due 2008.
The Notes will not be listed on any securities exchange or included in
any quotation system.
The Notes will be offered on a firm commitment basis if and when an
underwriting agreement is executed by the underwriter at the time of pricing of
the offering.
-------------------------
SEE "RISK FACTORS," WHICH BEGINS ON PAGE S-16, FOR A DISCUSSION OF SOME
PARTICULARLY IMPORTANT ITEMS WHICH YOU SHOULD CONSIDER.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----------
<S> <C> <C>
Public Offering Price...................................... % $
Underwriting Discounts and Commissions..................... % $
Proceeds to Us (before expenses)........................... % $
</TABLE>
-------------------------
We expect that delivery of the Notes will be made on or about December
, 1998 through the book entry facilities of The Depository Trust Company.
BT ALEX. BROWN
The date of this prospectus supplement is December , 1998.
<PAGE> 3
FORWARD-LOOKING INFORMATION
We make forward-looking statements about our business in this prospectus
supplement and in our filings with the Securities and Exchange Commission.
Although we believe the expectations reflected in our forward-looking statements
are reasonable, it is possible they will prove not to have been correct,
particularly given the cyclical nature of the commercial real estate market.
Among the factors which create uncertainties about our future performance are
(1) changes in interest rates, (2) changes in demand for commercial real estate
nationally, in areas in which we own properties, or in areas in which properties
securing mortgages we own are located, (3) international, national or regional
business conditions which affect the ability of mortgage obligors to pay
principal or interest when it is due, (4) the cyclical nature of the commercial
real estate business and (5) changes in markets for various types of real estate
based securities.
S-2
<PAGE> 4
PROSPECTUS SUPPLEMENT SUMMARY
The following is a summary of some of the information in this prospectus
supplement. It may not include all the information that is important to you. We
urge you to read the entire document and our prospectus, dated December ,
1998.
Lennar Corporation formed our company in June 1997 to separate Lennar's
real estate investment and management businesses from its homebuilding business.
In October 1997, Lennar distributed our stock to Lennar's stockholders in a
tax-free spin-off. Activities that Lennar conducted, as our predecessor, of the
type that we currently conduct are treated in this prospectus supplement as our
own historical activities.
LNR PROPERTY CORPORATION
We are a real estate investment and management company. We invest in
commercial real estate. We also structure and make real estate related
investments and, through our expertise in developing and managing properties,
seek to enhance the value of those investments. We have been engaged in the
development, ownership and management of commercial and multi-family residential
properties since 1969. Our Chairman, Chief Executive Officer and President have
worked together in our company for more than a decade. During our last five
fiscal years, our revenues and EBITDA increased at compound annual growth rates
of 27.7% and 30.4%, respectively. Revenues and EBITDA during the first nine
months of our current fiscal year were $175.9 million and $122.3 million,
respectively.
Our real estate investment activities primarily consist of
- developing and managing commercial and multi-family residential
properties,
- acquiring, managing and repositioning commercial and multi-family
residential real estate loans and properties,
- acquiring (often in partnership with financial institutions and real
estate funds) and managing portfolios of real estate assets,
- investing in unrated and non-investment grade rated commercial mortgage-
backed securities, known as CMBS, as to which we have the right to be
special servicer (i.e., to oversee workouts of underperforming and
nonperforming loans) and
- making high yielding real estate related loans and equity investments.
We adjust our investment focus from time to time to adapt to changes in
markets and phases of the real estate cycle.
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<PAGE> 5
At August 31, 1998, our assets consisted of:
<TABLE>
<CAPTION>
TYPE OF ASSET BOOK VALUE DESCRIPTION/COMMENT
------------- ---------- -------------------
(IN MILLIONS)
<S> <C> <C>
Commercial properties.... $ 785.2 Multi-family apartment buildings,
office and industrial buildings,
retail centers, hotels and land.
Real estate loans........ 200.0 Primarily mortgage loans. Also
includes loans to developers and
builders, sometimes with profit
participation.
Partnerships............. 196.3 Primarily 15 partnerships which
acquired portfolios of loans and/or
properties, including three
partnerships investing in Japanese
loan portfolios; and 10 partnership
interests from the Affordable Housing
Group acquisition. Also includes
Lennar Land Partners, a land
partnership with Lennar.
CMBS..................... 402.7 Unrated or non-investment grade rated
tranches of CMBS pools acquired at
significant discounts from face value,
as to which we have the right to be
special servicer and can seek to
increase collections of underlying
loans.
Cash and other assets.... 224.4 Cash at August 31, 1998 consisted of
-------- $57.7 million of unrestricted cash and
$78.0 million of restricted cash, of
which $45.1 million was collateral for
a letter of credit and $18.4 million
was related to the acquisition of the
Affordable Housing Group. Other assets
primarily include tax receivables and
accounts receivable.
Total.......... $1,808.6
========
</TABLE>
S-4
<PAGE> 6
COMPETITIVE STRENGTHS
We believe the following competitive strengths contribute to our ability to
grow and operate profitably:
REAL ESTATE DEVELOPMENT, MANAGEMENT AND WORKOUT EXPERIENCE
We have developed, redeveloped, repositioned, owned and managed over 560
commercial and multi-family residential properties since 1969. They have
included multi-family apartment buildings, office buildings, retail space,
hotels, industrial space and land. We also have, over the past seven years, been
responsible for workouts with regard to more than 7,800 real estate loans. Fitch
IBCA, Inc., which rates CMBS special servicers on the basis of management team,
organizational structure, operating history, workout and asset disposition
experience and strategies, information systems, investor reporting capabilities
and financial resources, has given us its highest rating. Based on industry
sources, the CMBS as to which we had the right to assume the special servicing
represented 17.6% and 12.8% of all the CMBS issued in 1996 and 1997. The
experience we have gained in developing, owning and managing properties helps us
to evaluate potential real estate investments (including asset by asset
evaluations of properties underlying CMBS) and maximize proceeds from
underperforming or nonperforming assets in which we acquire interests or which
underly CMBS in which we invest. We believe our combination of real estate and
financial experience gives us an advantage over competing investors who have
financial, but not operating, experience.
DISCIPLINED INVESTMENT APPROACH
We perform extensive due diligence before making investments in order to
evaluate investment risks and opportunities and see whether we will be able to
use our skills to enhance the value of the investments. For example, before
bidding for a CMBS investment, we perform a property-by-property evaluation of
the assets underlying the CMBS, including site visits, analyses of rent rolls,
vacancy rates and tenant strength, and analyses of the real estate markets in
which the properties are located. Our formalized pre-investment procedures allow
our senior management to exercise significant control and discipline over all
our investment decisions.
EXPERIENCED MANAGEMENT TEAM
The ten members of our senior management have an average of 17 years of
real estate industry experience. Steven J. Saiontz, our Chief Executive Officer,
and Jeffrey P. Krasnoff, our President, have 15 and 21 years of real estate
industry experience, respectively, and have been with us for 15 years and 12
years, respectively. In addition, Stuart A. Miller, our Chairman of the Board,
who devotes approximately 25% of his working time to our company, is the chief
executive officer of Lennar, a major homebuilder, and has more than 15 years of
real estate industry experience. We use incentive based compensation to retain
key members of management, including, in many instances, payment of bonuses over
multi-year periods, and vesting of stock options over periods as long as nine
years.
SIGNIFICANT EQUITY OWNERSHIP BY LEONARD MILLER
Leonard Miller, one of the founders of Lennar and a Director of our
company, owns, through family partnerships, almost 9.9 million shares of our
Class B
S-5
<PAGE> 7
Common Stock. He is the father of Stuart A. Miller, our Chairman, and the
father-in-law of Steven J. Saiontz, our Chief Executive Officer.
EXTENSIVE ASSET MONITORING
We have developed an extensive asset monitoring program that includes
weekly and monthly reports and meetings at which actual results are compared
against budgets on an asset-by-asset basis. This, combined with comprehensive
systems, procedures and controls, allows our management to monitor asset
performance closely.
SIGNIFICANT STRATEGIC RELATIONSHIPS
Through partnerships and otherwise, we have developed strategic
relationships with affiliates of many of the leading investment banking firms
and real estate funds, including Banc One/Orix, Blackrock Group, BT Alex. Brown
Incorporated, Credit Suisse First Boston Corporation, Deutsche Bank Securities,
First Chicago Capital Corp., Lehman Brothers Inc., Morgan Stanley Dean Witter
and Westbrook Partners. These organizations have sought to avail themselves of
our ability to evaluate real estate assets rapidly and effectively and to apply
our asset management skills to enhance the value of assets once they have been
acquired (including overseeing workouts of underperforming and nonperforming
assets). The relationships we have developed have, among other things, brought
us investment opportunities to which we might not otherwise have had access.
DIVERSE SOURCES OF RECURRING INCOME
We have significant net rental income, interest income and income from fees
earned as special servicer with regard to CMBS and for managing partnerships in
which we participate. During 1997 and the nine months ended August 31, 1998, our
net revenues from these sources totaled $75.4 million and $80.2 million,
respectively. In addition, through our 50% ownership of Lennar Land Partners, we
generate earnings from sales of Lennar Land Partners' properties, including
sales of properties to Lennar for use in Lennar's homebuilding activities.
TAX CREDITS
In 1998 we purchased interests (primarily controlling interests) in a group
of 42 entities known as the Affordable Housing Group, or AHG. AHG owns
approximately 6,100 multi-family and senior housing rental apartments, many of
which qualify for low-income housing tax credits under Federal tax laws. These
tax credits can be used to increase our after-tax income or may be sold to
others. Since the AHG acquisition, we have acquired interests in or committed to
develop additional rental apartment properties which will qualify for additional
low-income housing tax credits.
NOT A REIT
In order not to be subject to federal income taxation, a real estate
investment trust is limited in what it can do and the types of income it can
receive, it must hold assets for minimum periods and it must distribute each
year almost all its earnings. In contrast, we can actively manage properties,
earn fee income and other types of nonpassive income, dispose of assets without
meeting holding period requirements, and retain and reinvest our after-tax
earnings.
S-6
<PAGE> 8
BUSINESS STRATEGY
Our business strategy consists of four key elements:
USING REAL ESTATE EXPERTISE TO ENHANCE REAL ESTATE INVESTMENTS
We focus on investments which we believe can benefit from our expertise in
real estate development and management, including our expertise regarding
workouts of troubled real estate assets. We use this expertise to evaluate the
risks and potential rewards from particular real estate related investments and
to enhance the value of our investments by overseeing management of underlying
properties. For example, we have only invested in CMBS when we have had the
right to be special servicer (i.e., to oversee workouts), which enables us to
attempt to increase proceeds from underperforming or nonperforming assets. We
believe our experience in enhancing assets distinguishes us from many other
investors in real estate related financial products.
IDENTIFYING OPPORTUNITIES ATTUNED TO VARIOUS PHASES OF THE REAL ESTATE CYCLE
During each phase of the real estate cycle, we try to identify investments
which will benefit from being made at that point in the cycle. In the weak real
estate market of the early 1990's, we acquired portfolios of underperforming or
nonperforming real estate loans and subordinate classes of CMBS at substantial
discounts from their face value. During the second half of 1997 and the first
half of 1998, when real estate markets were relatively strong, we made fewer
investments in CMBS because we believed that the pricing of newly issued CMBS
had become unattractive. During this period, we emphasized investments in real
estate development, redevelopment and repositioning opportunities. We also
purchased CMBS in the secondary market and increased our investments in some of
the CMBS transactions which we already owned. In addition, we sold commercial
properties in our portfolio at prices we believed to be attractive.
During 1998 we entered the business of owning, developing and syndicating
multi-family and senior housing properties which qualify for low-income housing
tax credits, by acquiring interests in the AHG entities. Also, during 1998 we
invested in portfolios of distressed Japanese real estate loans.
Beginning in late summer 1998, there was an abrupt downturn in the market
for high-yielding debt securities in general, and in the markets for commercial
mortgage loans and CMBS in particular. This caused a substantial increase in the
yields available for purchasers of these types of instruments. In response, we
resumed our interest in purchasing mortgage loans and subordinated CMBS, and we
expect to complete some purchases shortly.
USING STRATEGIC RELATIONSHIPS
We build and maintain strategic relationships with leading investment
banking firms and real estate funds which can introduce us to real estate
related investment opportunities. Also, by investing in partnership with these
firms and funds, we can limit the amount we are required to spend to acquire
interests in large real estate asset portfolios or other large real estate
related investments.
S-7
<PAGE> 9
DIVERSIFYING OUR REAL ESTATE ASSET INVESTMENTS
Our real estate investments are diversified both in the forms of the
investments and in the types of properties to which they relate. Further, our
investments relate to properties located throughout the United States and
elsewhere, and therefore are to an extent protected against factors which affect
only particular geographic areas.
RECENT DEVELOPMENTS
Beginning in late summer 1998, there was a sharp decline in the market
prices of real estate related securities. This caused a number of firms to
record significant losses, and led at least one major CMBS investor to file
under Chapter 11 of the Bankruptcy Code. We were not materially affected by the
decline in prices of real estate related securities because:
- We usually acquire real estate related securities for their long-term
yields and to benefit from increases in the values of the underlying
assets (both of which have remained strong), not as short-term
investments. Therefore, temporary fluctuations in market prices of
securities do not affect our net income while we hold the securities.
- We typically purchase our real estate related securities at substantial
discounts from their face amounts. We believe both the high yields they
are currently generating as a percentage of their book values and the
strong performance of the underlying collateral make it likely that we
will collect more than the purchase prices we paid.
- We do not originate mortgages for securitization, and therefore were not
required to sell them at a loss when the securitization market weakened.
- We had not recognized "gain on sale" non-cash income from retained
residuals of securitized asset pools.
In addition, we are continuing our efforts to (1) replace much of our
short-term credit with long-term debt or medium-term credit lines in order to
better match the maturities of our assets with our liabilities and (2) diversify
our sources of financing in order to ensure the availability of necessary
funding. The offering of the Notes is a step in our doing so.
See "Risk Factors -- Decline in Value of Real Estate Related Securities"
and "-- Lender Reluctance to Make Loans to Real Estate Related Companies."
-------------------------
Our principal executive office is located at 760 N.W. 107th Avenue, Miami,
Florida 33172, and our telephone number is (305) 485-2000.
S-8
<PAGE> 10
THE OFFERING
The summary below describes the principal terms of the Notes. Certain of
the terms and conditions described below are subject to important limitations
and exceptions. The "Description of the Notes" section of this prospectus
supplement contains a more detailed description of the terms and conditions of
the Notes.
Issuer.......................... LNR Property Corporation
Securities Offered.............. $100,000,000 principal amount of %
Senior Subordinated Notes due 2008.
Maturity........................ , 2008.
Interest Rate................... % per year (calculated using a 360-day
year).
Interest Payment Dates.......... Each and ,
beginning on , 1999. Interest
will accrue from the issue date of the
Notes.
Ranking......................... The Notes will be our unsecured senior
subordinated obligations and will rank
junior to our existing and future Senior
Indebtedness. The Notes have the same
priority as our 9 3/8% Senior Subordinated
Notes due 2008. As of August 31, 1998,
giving pro forma effect to the issuance of
the Notes and the assumed use of the net
proceeds from the issuance to repay Senior
Indebtedness, we would have had $562
million of Senior Indebtedness outstanding,
including debt we had guaranteed. The Notes
are also in effect subordinate to our
subsidiaries' obligations to pay their
debts. As of August 31, 1998, giving pro
forma effect to the issuance of the Notes
and the assumed use of the net proceeds
from the issuance to repay Senior
Indebtedness, our subsidiaries would have
had an additional $393 million of debt
which we had not guaranteed.
Optional Redemption............. We cannot redeem the Notes until
, 2003. Thereafter, we may
redeem some or all of the Notes at the
redemption prices set forth in this
prospectus supplement, plus accrued
interest.
Optional Redemption after Public
Equity Offerings................ At any time (which may be more than once)
before , 2001, we can choose
to buy back up to 35% of the outstanding
Notes
S-9
<PAGE> 11
with money that we raise in one or more public equity offerings, as long as:
- we pay % of the face amount of the
Notes, plus accrued interest;
- we buy the Notes back within 60 days of
completing the public equity offering;
and
- at least 65% of the aggregate principal
amount of the originally issued Notes
remain outstanding.
Change of Control Offer......... If a change in control of our company
occurs, we must give holders of the Notes
the opportunity to sell us their Notes at
101% of their face amount, plus accrued
interest.
We might not be able to pay you the
required price for Notes you present to us
at the time of a change of control,
because:
- we might not have enough funds at that
time; or
- the terms of our senior debt may prevent
us from buying the Notes presented.
Certain Indenture Provisions.... The Indenture governing the Notes will
contain covenants limiting our and our
subsidiaries' ability to:
- incur indebtedness;
- issue preferred stock of subsidiaries;
- pay dividends or make other
distributions;
- repurchase equity interests or
subordinated indebtedness;
- make certain other restricted payments;
- incur indebtedness that is subordinate in
right of payment to any Senior
Indebtedness but senior in right of
payment to the Notes;
- merge or consolidate with another person;
or
- sell, lease or otherwise dispose of all
or substantially all of our assets.
These covenants are subject to a number of
important limitations and exceptions. See
"Description of the Notes -- Certain
Covenants."
Depositary Arrangements......... The Notes will be represented by one or
more global securities, without coupons,
which will
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<PAGE> 12
be deposited with a custodian for The Depository Trust Company. DTC will keep
records for the owners of beneficial interests in the global securities. The
only way to transfer those beneficial interests will be to have DTC record the
transfers. Except under very limited circumstances, we will not issue
certificates evidencing the Notes to anyone other than DTC. See "Description of
the Notes -- Global Securities" and "-- Book-Entry System."
Use of Proceeds................. We will use the net proceeds from the sale
of the Notes to repay a portion of our
existing debt. See "Use of Proceeds."
Risk Factors.................... Investing in the Notes involves substantial
risks. See "Risk Factors" for a description
of certain of the risks you should consider
before investing in the Notes.
S-11
<PAGE> 13
SUMMARY FINANCIAL DATA
The following tables present summary consolidated financial data about us.
You should read this information together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements (including the notes to them) which appear later or are
incorporated by reference in this prospectus supplement.
The pro forma information included in the following tables reflects (1) the
spin-off of our company from Lennar Corporation, which was effective October 31,
1997, and (2) our acquisition of interests in the 42 Affordable Housing Group
companies, as though they had both taken place on December 1, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 31, FOR THE YEARS ENDED NOVEMBER 30,
---------------------------- --------------------------------------------------------
PRO PRO
FORMA ACTUAL FORMA ACTUAL
-------- ----------------- ------- ----------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994 1993
-------- ------- ------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues
Rental income............... $ 57,851 49,887 43,578 69,943 56,334 59,215 51,664 45,978 39,381
Equity in earnings of
partnerships.............. 39,562 40,640 26,452 42,085 30,149 51,862 31,203 20,710 7,046
Interest income............. 55,137 54,830 30,899 41,898 41,446 28,726 20,475 11,640 8,694
Gains on sales of:
Real estate............... 21,439 21,439 13,874 18,076 18,076 3,669 15,776 9,085 --
Investment securities..... 1,386 1,386 5,359 5,359 5,359 1,735 513 -- --
Management fees............. 6,898 6,898 10,170 13,385 13,385 18,229 10,274 12,390 6,565
Other, net.................. 1,108 822 2,207 4,352 2,734 -- 2,910 2,016 1,387
-------- ------- ------- ------- ------- ------- ------- ------- ------
Total revenues.............. 183,381 175,902 132,539 195,098 167,483 163,436 132,815 101,819 63,073
-------- ------- ------- ------- ------- ------- ------- ------- ------
Costs and expenses
Cost of rental operations... 35,923 31,439 28,159 43,464 35,767 38,126 30,890 23,884 18,866
General and
administrative............ 22,476 20,578 16,897 26,480 26,584 20,756 15,155 14,436 7,806
Depreciation................ 11,610 8,412 4,322 11,417 6,060 5,916 5,671 4,618 4,002
Minority interests.......... 899 1,567 156 (985) -- -- -- -- --
Other, net.................. -- -- -- -- -- 658 -- -- --
-------- ------- ------- ------- ------- ------- ------- ------- ------
Total costs and expenses.... 70,908 61,996 49,534 80,376 68,411 65,456 51,716 42,938 30,674
-------- ------- ------- ------- ------- ------- ------- ------- ------
Operating earnings............ 112,473 113,906 83,005 114,722 99,072 97,980 81,099 58,881 32,399
Interest expense.............. 39,902 34,260 20,722 34,721 26,584 20,513 14,692 5,688 3,378
-------- ------- ------- ------- ------- ------- ------- ------- ------
Earnings before income
taxes....................... 72,571 79,646 62,283 80,001 72,488 77,467 66,407 53,193 29,021
Income taxes.................. 17,341 26,974 24,290 19,188 28,270 30,212 25,899 20,695 10,447
-------- ------- ------- ------- ------- ------- ------- ------- ------
Net earnings.................. $ 55,230 52,672 37,993 60,813 44,218 47,255 40,508 32,498 18,574
======== ======= ======= ======= ======= ======= ======= ======= ======
Net earnings per share(1)
Basic......................... $ 1.53 1.46 1.05 1.68 1.22
======== ======= ======= ======= =======
Diluted....................... $ 1.51 1.44 1.05 1.68 1.22
======== ======= ======= ======= =======
</TABLE>
- -------------------------
(1) Our company was formed in June 1997 and had no outstanding stock before
then; therefore, net earnings per share have not been calculated for
the fiscal years ended November 30, 1996, 1995, 1994 and 1993.
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<PAGE> 14
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE
MONTHS ENDED AUGUST 31, AS OF AND FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------- -----------------------------------------------------------
PRO PRO
FORMA ACTUAL FORMA ACTUAL
---------- ------------------- ------- -------------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994 1993
---------- --------- ------- ------- --------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA(1).............. $ 124,083(2) 122,318 87,327 126,139(2) 105,132 103,896 86,770 63,499 36,401
Adjusted Consolidated
EBITDA(3)............ 136,099 126,881 87,327 138,151 105,132 103,896 86,770 63,499 36,401
Depreciation........... 11,610 8,412 4,322 11,417 6,060 5,916 5,671 4,618 4,002
Ratio of earnings to
fixed charges(4)..... 2.5x 3.0x 3.9x 4.6x 3.6x 4.8x 5.5x 10.4x 9.6x
Ratio of EBITDA to
average assets(5).... 8.8% 8.6% 11.6% 12.5% 11.8% 14.8% 14.5% 14.8% 14.1%
FINANCIAL POSITION
Total assets........... (6) 1,808,620 750,661 (6) 1,023,337 752,968 652,400 547,722 310,355
Total mortgage notes
and other debts
payable.............. (6) 1,080,491 367,667 (6) 391,171 354,406 252,256 119,935 34,163
Total stockholders'
equity(7)............ (6) 614,163 -- (6) 569,088 -- -- -- --
Total Parent Company
investment........... (6) -- 341,907 (6) -- 367,048 370,903 396,403 266,965
CERTAIN DATA ADJUSTED
FOR OFFERINGS
Interest expense(8).... $ 54,374 -- -- 44,363 -- -- -- -- --
Total mortgage notes
and other debts
payable.............. 1,083,491 -- -- 529,646 -- -- -- -- --
Ratio of EBITDA to
interest expense..... 2.3x -- -- 2.8x -- -- -- -- --
Ratio of total mortgage
notes and other debts
payable to total
stockholders'
equity(9)............ 1.8x -- -- 0.9x -- -- -- -- --
</TABLE>
- -------------------------
(1) We use EBITDA (earnings before interest, taxes, depreciation and
amortization) in analyzing our operating performance, leverage and
liquidity. However, it is not a measure of financial performance under
generally accepted accounting principles and should not be considered
an alternative to net earnings, an indicator of our operating
performance or an alternative to cash flow as a measure of liquidity.
(2) Pro forma EBITDA information does not reflect the tax benefits to us
resulting from the AHG transaction. Our income taxes would have
decreased by $16.7 million and $16.8 million for the nine months ended
August 31, 1998 and the year ended November 30, 1997, respectively, if
we had owned the acquired AHG interests throughout those periods.
(3) Adjusted Consolidated EBITDA is calculated in accordance with the
definition of that term in the Indenture. See "Description of the
Notes."
(4) We guarantee outstanding debt of Lennar Land Partners. See "Description
of Certain Indebtedness -- Guarantees of Partnership Debt." The fixed
charges associated with that debt are not included in the computation
of these ratios.
S-13
<PAGE> 15
(5) Ratio of EBITDA to average assets is calculated by dividing EBITDA by
the average of total assets at the beginning and end of each period
presented. Pro forma average assets as of August 31, 1998 and as of
November 30, 1997 is prepared under the assumption that all 42 AHG
properties had been acquired by those dates.
(6) Pro forma information is not provided.
(7) In connection with the spin-off, the assets and liabilities of Lennar
and its subsidiaries were divided between us and Lennar and its
homebuilding subsidiaries so that Lennar and its homebuilding
subsidiaries would have a net worth of $200 million (with specified
adjustments) and the remaining net worth was transferred to us. See
Parent Company investment and stockholders' equity on our consolidated
financial statements and the notes to them, which appear later or are
incorporated by reference in this prospectus supplement.
(8) Information for the nine months ended August 31, 1998 gives effect to
the assumed repayment of $97 million and $194 million of short-term
debt, which had approximate weighted average interest rates of 6.84%
and 6.73%, respectively, using the net proceeds from the issuance of
the Notes, assuming the Notes bore interest at 10.5%, and the issuance
in March 1998 of our 9 3/8% Senior Subordinated Notes due 2008, which
had an effective interest rate of 9.445%. Information for the year
ended November 30, 1997 gives effect to the assumed repayment of $97
million and $194 million of short-term debt, which had approximate
weighted average interest rates of 6.81% and 6.70%, respectively, using
the net proceeds from the issuance of the Notes, assuming the Notes
bore interest at 10.5%, and the issuance of our 9 3/8% Senior
Subordinated Notes due 2008, which had an effective interest rate of
9.445%.
(9) Total mortgage notes and other debts payable excludes $118 million and
$119 million of outstanding unconsolidated partnership debt guaranteed
by us at August 31, 1998 and November 30, 1997, respectively. The ratio
of total mortgage notes and other debts payable plus outstanding
unconsolidated partnership debt guaranteed by us to our stockholders'
equity, as adjusted for the offering of the Notes and our 9 3/8% Senior
Subordinated Notes due 2008, would have been 1.96x at August 31, 1998
and 1.13x at November 30, 1997.
S-14
<PAGE> 16
The following is a summary by business lines of our actual results of
operations for the nine months ended August 31, 1998 and 1997 and the years
ended November 30, 1997, 1996, 1995, 1994 and 1993 and pro forma results for the
year ended November 30, 1997, after allocating among the core business lines
certain non-corporate general and administrative expenses. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included or incorporated by
reference in this prospectus supplement.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS FOR THE YEARS ENDED NOVEMBER 30,
ENDED AUGUST 31, --------------------------------------------------------
------------------ PRO
ACTUAL FORMA ACTUAL
------------------ ------- ----------------------------------------------
1998 1997 1997 1997 1996 1995 1994 1993
-------- ------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS BY BUSINESS LINE
Revenues
Real estate operations............ $ 71,326 57,452 88,019 74,410 62,884 67,440 55,063 39,381
CMBS and loans.................... 60,558 39,439 51,519 51,067 33,207 23,202 12,766 8,694
Partnerships and joint ventures... 43,196 33,441 51,208 39,272 67,345 39,263 31,974 13,611
Corporate and other............... 822 2,207 4,352 2,734 -- 2,910 2,016 1,387
-------- ------- ------- ------- ------- ------- ------- ------
Total revenues..................... 175,902 132,539 195,098 167,483 163,436 132,815 101,819 63,073
-------- ------- ------- ------- ------- ------- ------- ------
Operating expenses
Real estate operations............ 45,278 35,011 59,033 44,663 46,683 38,296 33,243 25,197
CMBS and loans.................... 4,645 2,791 2,547 2,547 1,813 604 555 139
Partnerships and joint ventures... 3,525 3,933 3,307 3,104 6,113 5,339 4,453 1,670
Corporate and other............... 8,548 7,799 15,489 18,097 10,847 7,477 4,687 3,668
-------- ------- ------- ------- ------- ------- ------- ------
Total operating expenses........... 61,996 49,534 80,376 68,411 65,456 51,716 42,938 30,674
-------- ------- ------- ------- ------- ------- ------- ------
Operating earnings
Real estate operations............ 26,048 22,441 28,986 29,747 16,201 29,144 21,820 14,184
CMBS and loans.................... 55,913 36,648 48,972 48,520 31,394 22,598 12,211 8,555
Partnerships and joint ventures... 39,671 29,508 47,901 36,168 61,232 33,924 27,521 11,941
Corporate and other............... (7,726) (5,592) (11,137) (15,363) (10,847) (4,567) (2,671) (2,281)
-------- ------- ------- ------- ------- ------- ------- ------
Total operating earnings........... 113,906 83,005 114,722 99,072 97,980 81,099 58,881 32,399
Interest expense................... 34,260 20,722 34,721 26,584 20,513 14,692 5,688 3,378
Income tax expense................. 26,974 24,290 19,188 28,270 30,212 25,899 20,695 10,447
-------- ------- ------- ------- ------- ------- ------- ------
Net earnings....................... $ 52,672 37,993 60,813 44,218 47,255 40,508 32,498 18,574
======== ======= ======= ======= ======= ======= ======= ======
</TABLE>
S-15
<PAGE> 17
RISK FACTORS
You should in particular consider the following factors before investing in
the Notes.
CYCLICAL NATURE OF THE REAL ESTATE BUSINESS
Most aspects of the United States real estate markets are cyclical. To some
extent, the cycles for different types of real estate assets (such as single
family homes and office buildings) are different. However, all aspects of the
real estate markets are affected by interest rates, with the value of various
types of real estate tending to decline relative to non-real estate assets when
interest rates rise. All aspects of the United States real estate markets also
may be affected by changes in the economy in general. Because a significant
portion of our business involves acquiring mortgages, properties and real estate
related securities at discounted prices, periods of low real estate values have
in the past provided investment opportunities for us. However, although future
periods of poor real estate markets may provide additional acquisition
opportunities for us, they also may seriously impair the value of the assets we
already hold and our ability to dispose of assets at prices which are acceptable
to us.
In accordance with our strategy of trying to enhance the value of assets we
acquire and to sell those assets at a profit, when real estate markets are
strong we tend to accelerate the rate at which we sell them. Conversely, when
real estate markets are strong, there may be fewer opportunities for us to
acquire assets at prices which are likely to generate the combination of yield
and appreciation in value which we seek. While we believe there are attractive
investment opportunities even when real estate markets are strong (for example,
during 1997 and year to date 1998, we made several investments in development or
redevelopment projects, which should benefit from a strong real estate market,
and we began to seek investment opportunities outside the United States), our
rate of asset acquisitions during periods of strong real estate markets may be
slower than during periods of weaker real estate markets.
DECLINE IN VALUE OF REAL ESTATE RELATED SECURITIES
In the late summer of 1998, there was a sharp decline in the market prices
of real estate related securities. This caused a number of firms to record
significant losses, and led at least one major CMBS investor to file under
Chapter 11 of the Bankruptcy Code. We were not materially affected by the
decline in prices of real estate related securities. See "Prospectus Supplement
Summary -- Recent Developments." Nonetheless, we are not immune to adverse
effects of fluctuating markets for real estate assets and real estate
securities, and we could be significantly affected by market declines in the
future.
SIGNIFICANT INDEBTEDNESS
At August 31, 1998, our total indebtedness was $1,080 million, representing
approximately 64% of our combined total debt and stockholders' equity. See
"Capitalization." This included approximately $209 million at August 31, 1998,
of AHG's pre-existing property-specific mortgage financing that is non-recourse
to us and indebtedness we incurred to finance the acquisition. We also are a
guarantor or similarly obligated with regard to up to $244 million of credit
facilities of
S-16
<PAGE> 18
unconsolidated partnerships, under which $118 million was outstanding as of
August 31, 1998. See "Description of Certain Indebtedness."
Our ability to make scheduled payments of principal or interest on, or to
refinance, our indebtedness depends on our future performance, which, to a
certain extent, is subject to general economic, financial, competitive and other
factors beyond our control. Based upon the current level of operations and
anticipated growth, we believe our available cash flow, together with other
sources of liquidity, will be adequate to meet our requirements for working
capital and capital expenditures and anticipated required payments of principal
and interest on our indebtedness, including the Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Financial Resources."
A significant portion of our existing indebtedness bears interest at
variable rates. However, most of our investments generate interest or rental
income at essentially fixed rates. Therefore, a material increase in the
interest rates on our indebtedness could substantially reduce our cash flow.
RANKING OF OUR OBLIGATIONS
Our obligations under the Notes will be unsecured and will be subordinate
to all of our existing and future Senior Indebtedness. At August 31, 1998,
giving pro forma effect to the issuance of the Notes and the assumed use of the
net proceeds from the issuance to repay Senior Indebtedness, we had $562 million
of Senior Indebtedness outstanding, including $291 million of our subsidiaries'
debt which we guaranteed. We may incur additional Senior Indebtedness, subject
to restrictions contained in the Indenture. In addition, we are a holding
company and our principal source of revenues is dividends or other payments from
our subsidiaries. A subsidiary cannot make distributions to us, as its
stockholder, unless it has paid or is able to pay everything it owes to its
creditors. This means that our obligations with regard to the Notes will in
effect be subordinated to the liabilities of our subsidiaries, even if we have
not guaranteed them. At August 31, 1998, giving pro forma effect to the issuance
of the Notes and the assumed use of the net proceeds from the issuance to repay
Senior Indebtedness, our subsidiaries' liabilities which we had not guaranteed
would have totalled $393 million. See "Description of the Notes."
MATURITY OF 9 3/8% SENIOR SUBORDINATED NOTES
In March 1998 we issued $200 million aggregate principal amount of 9 3/8%
Senior Subordinated Notes, which will mature approximately nine months before
the Notes. It is possible that we will pay the principal of the 9 3/8% Senior
Subordinated Notes in full, but will not have sufficient funds to pay the
principal of the Notes when they mature.
LENDER RELUCTANCE TO MAKE LOANS TO REAL ESTATE RELATED COMPANIES
As a result of the decline in the market prices of real estate related
securities in the late summer of 1998, many firms which had been making loans to
originators or purchasers of mortgage loans or real estate related securities
became less willing to make loans to firms of that type. We had $255 million
outstanding at August 31, 1998 under repurchase obligation credit lines which
matured in
S-17
<PAGE> 19
September and October 1998. Those lines were renewed, and now mature in April
and December 1999. See "Description of Certain Indebtedness." If the repurchase
obligation lines had not been renewed in September and October 1998, we might
have been required to sell assets before we would have liked to and at prices
which are less than what we believe to be the assets' true long-term value in
order to repay the lines. In order to reduce our exposure to situations of that
type, we are continuing our efforts to replace much of our short-term credit
with long-term debt or medium-term credit lines and to diversify our sources of
financing. The offering of the Notes is a step in our doing so. Nonetheless,
because we borrow significant sums in connection with our activities, we could
be adversely affected by reluctance of lenders to make loans to companies in
real estate related businesses. This reluctance could restrict the extent to
which we can acquire new real estate related assets. Further, a general lack of
mortgage financing in the economy could force owners of properties on which we
directly or indirectly hold mortgage loans who had expected to re-finance their
mortgage loans when they matured, to default on these mortgage loans. That could
make it more difficult for us to meet our obligations when they are due. Also,
lender unwillingness to make commercial mortgage loans could affect the ability
of buyers of our assets to complete acquisitions.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
Our historical financial information relates primarily to periods when the
companies which operate our business were subsidiaries of Lennar. Our operating
results during those periods were not necessarily the same as they would have
been if we had been a separate, stand-alone group.
LIMITED HISTORY AS A STAND-ALONE GROUP
Until November 1, 1997, we had never operated as a stand-alone publicly
owned group of companies. Therefore, our administrative costs after that date
have been higher than those reflected in our historical financial statements.
Also, until November 1, 1997, none of our senior executive officers had been
engaged in managing a public parent company (except that our Chairman of the
Board, who is not a full time employee, has for a number of years been a senior
executive officer of Lennar and has since April 1997 been the chief executive
officer of Lennar).
RISKS RELATED TO AHG ACQUISITION
Although we have substantial experience in developing multi-family
residential apartments, our senior management has little experience with
acquiring, owning and syndicating properties which qualify for low-income tax
credits under Section 42 of the Internal Revenue Code.
INVESTMENT IN JAPAN; POSSIBLE FUTURE INVESTMENTS IN FOREIGN MARKETS
We have formed several partnerships with large financial institutions to
acquire portfolios of distressed real estate loans in Japan, where the
commercial real estate market has declined substantially in recent years. As of
August 31, 1998, our investments in these assets amounted to approximately $20
million. We are considering making additional investments in Japanese real
estate and real estate related assets if attractive opportunities arise. We also
may seek investment opportunities elsewhere outside the United States.
S-18
<PAGE> 20
When we consider real estate related investments outside the United States,
we usually do so in conjunction with experts in real estate or real estate
finance where the real estate is located. Nonetheless, until recently, our
senior management had no experience in Japan or other markets outside the United
States and this lack of experience could adversely affect the senior managers'
ability to evaluate types of real estate investments which are available, trends
in real estate markets or overall economic trends in particular countries. Also,
real estate related transactions in a country normally are conducted in the
currency of that country. Investments denominated in currencies other than the
U.S. dollar may be adversely affected by a decline in the value of the
currencies in which the investments are denominated compared with the value of
the U.S. dollar, whether because of factors affecting the non-U.S. currencies or
because of a strengthening of the U.S. dollar against currencies generally. We
may try to hedge against currency risks by buying or selling currency contracts
or options. However, we have very little experience in hedging against currency
fluctuations.
INDEMNIFICATION OF LENNAR IN CASE THE SPIN-OFF WAS NOT TAX-FREE
A Separation and Distribution Agreement we entered into with Lennar at the
time of the spin-off provides that if it is ultimately determined that the
spin-off did not qualify as a tax free transaction, other than because of
actions taken by Lennar after completion of Lennar's merger with Pacific
Greystone Corporation (October 31, 1997), and as a result Lennar incurs any
liabilities for taxes, interest or penalties which it would not have incurred if
the spin-off had been tax free, we will pay Lennar an amount equal to the
liabilities incurred for taxes, interest and penalties as a result of the
spin-off and all related accounting, legal and professional fees, as well as any
costs, expenses or damages Lennar incurs as a result of stockholder litigation
or controversies because the spin-off was not tax free. The Internal Revenue
Service issued a ruling that the spin-off was tax free. We believe that, because
the Internal Revenue Service issued that ruling, it is very unlikely that the
Internal Revenue Service would assert that the spin-off was not tax free and
would be successful in that assertion. However, if it were determined that the
ruling was issued on the basis of an inaccurate statement of facts, or if events
occur which Lennar or its principal stockholder had stated to the Internal
Revenue Service would not occur, the Internal Revenue Service could ignore the
ruling and seek to demonstrate that the spin-off was not tax free. If it were
determined that the spin-off was not tax free, Lennar could be taxed on the
entire amount by which the fair value of our stock at the time of the spin-off
exceeded Lennar's basis in that stock. We might be required to reimburse Lennar
for the Federal tax on this amount (probably at a tax rate of 35%), plus
interest and any penalties Lennar is required to pay to the Internal Revenue
Service, as well as any state or other taxes resulting from the spin-off. This
could require us to dispose of substantial portions of our assets, and could
substantially impair our subsidiaries' ability to conduct their activities as we
currently expect the subsidiaries to conduct those activities.
WE WOULD BE ADVERSELY AFFECTED IF WE WERE SUBJECT TO THE INVESTMENT COMPANY ACT
We intend to conduct our business at all times so as not to become
regulated as an investment company under the Investment Company Act of 1940.
Accord-
S-19
<PAGE> 21
ingly, we do not expect to be subject to the restrictive provisions of the
Investment Company Act. The Investment Company Act applies to entities which
hold themselves out as being involved primarily in investing, reinvesting or
trading in securities or which own investment securities having a value
exceeding 40% of the value of the entities' total assets (other than government
securities or cash) on an unconsolidated basis. The Investment Company Act
exempts, among others, entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" ("Qualifying Interests"). Under the current interpretation of the
staff of the Securities and Exchange Commission, to qualify for this exemption,
the entity must maintain at least 55% of its assets in ownership of real estate
or mortgage loans. Unless CMBS held by an entity constitute 100% of the
interests in the mortgage pools to which they relate, the CMBS may be treated as
not constituting ownership of the mortgage loans to which the CMBS relate, and
therefore not being Qualifying Interests. Analyses of our assets at November 30,
1997 and August 31, 1998 indicated that (a) less than 40% of our assets, other
than Government securities or cash, on an unconsolidated basis, were investment
securities and (b) more than 55% of our assets were Qualifying Interests. If,
however, due to a change in our assets, or a change in the value of particular
assets, we were to become an investment company which is not exempt from the
Investment Company Act, either we would have to restructure our assets so we
would not be subject to the Investment Company Act, or we would have to change
materially the way we conduct our activities. Either of these changes could
require us to sell substantial portions of our assets at a time we might not
otherwise want to do so, and we could incur significant losses as a result.
Further, in order to avoid becoming subject to the requirements of the
Investment Company Act, we may be required at times to forego investments we
would like to make or otherwise to act in a manner other than that which our
management believes would maximize our earnings.
LIMITED COVENANTS
The covenants in the Indenture under which we will issue the Notes are
limited. They do not protect the holder against a material decline in our
financial condition. If we do not comply with our obligations under the
Indenture, there could be a default which would trigger a default under our
other debt instruments and cause an acceleration of the underlying debt. If that
underlying debt is Senior Indebtedness, the subordination provisions of the
Indenture would likely restrict payments to holders of the Notes.
REAL ESTATE INVESTMENT RISKS
There are risks involved in investing in real property and real estate
related assets. Factors which could affect us, either as an owner of real
property or as a holder of investments secured by real property (including
mortgage loans and CMBS) include:
- general economic conditions;
- local real estate conditions (including over-supply of, or a reduction in
demand for, space in areas where particular properties are located);
- costs of complying with government regulations;
S-20
<PAGE> 22
- inability to re-lease space when leases expire on terms as favorable as
those of the expired leases, or at all;
- illiquidity of real estate investments, which may affect our ability to
alter our portfolio in response to changes in economic or other
conditions;
- environmental liabilities or the existence of contamination which makes
it difficult to sell or lease particular properties;
- costs of complying with the Americans with Disabilities Act; and
- the possibility that costs of improving properties to bring them up to
market standards will be greater than anticipated, and therefore we will
have to increase our investment above what we had contemplated.
RISKS OF INVESTING IN SUBORDINATED CMBS
To date we have purchased only substantially subordinated classes of CMBS,
because they can be purchased at large discounts from their face amounts, and
therefore present a potential for significant profits if collections of the
underlying loans exceed those anticipated when we bought them. However, if
collections are lower than anticipated, the payments to the holders of the most
subordinated classes of CMBS, which are the classes in which we invest, will be
substantially reduced, and possibly eliminated.
ABSENCE OF EXISTING PUBLIC MARKET; MARKET PRICES
There is no public market for the Notes and it is possible that there never
will be an active trading market for the Notes. A number of factors may affect
the future trading price of Notes, including prevailing interest rates and the
market for similar securities, as well as our operating results and financial
condition. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
debt securities and could similarly affect the Notes.
CONTROLLING STOCKHOLDER
We have two classes of stock: common stock, which is entitled to one vote
per share, and Class B Common Stock, which is entitled to ten votes per share.
Leonard Miller owns, through family partnerships, approximately 92.0% of the
Class B Common Stock, which entitles him to cast approximately 74.8% of the
combined votes which can be cast by the holders of the common stock and the
Class B Common Stock. That gives Mr. Miller the power to elect all our directors
and to approve most matters which are presented to the stockholders, even if no
other stockholders vote in favor of them. Mr. Miller's ownership might
discourage someone from making a significant equity investment in us, even if we
needed the investment to meet our obligations (including those on the Notes) and
to operate our business.
S-21
<PAGE> 23
USE OF PROCEEDS
We expect the net proceeds from the issuance of the Notes to be
approximately $97.0 million. We intend to use the net proceeds to repay debt,
which may be either short-term debt or borrowings under our unsecured revolving
credit facility, or both. However, in the future, we are likely to incur
additional short-term debt and to re-borrow under our unsecured revolving credit
facility.
At October 31, 1998, our short-term debt had a weighted average interest
rate of 6.7%. We incurred this debt to finance the purchase of assets, including
CMBS and commercial properties. At October 31, 1998, the interest rate under our
unsecured revolving credit facility was 6.5%, and the maturity date is December
31, 2000 (which we have the option to extend for one year).
S-22
<PAGE> 24
CAPITALIZATION
Set forth below is our short-term debt and capitalization at August 31,
1998 and as adjusted to give effect to the issuance of the Notes. We have
assumed in the following table that all the net proceeds from the issuance of
the Notes will be used to repay short-term debt, although we may use at least
part of the proceeds to repay borrowings under our unsecured revolving credit
facility. See "Use of Proceeds." This table should be read in conjunction with
our consolidated financial statements and the notes thereto included elsewhere
in this prospectus supplement. See also "Description of Certain Indebtedness."
<TABLE>
<CAPTION>
AT AUGUST 31, 1998
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Short-term debt, including current portion of
long-term debt(1)................................. $ 567,271 470,271
Unsecured revolving credit facility................. 100,000 100,000
Other long-term debt(2)............................. 214,079 214,079
9 3/8% Senior Subordinated Notes due 2008 (net of
$859 discount).................................... 199,141 199,141
The Notes........................................... -- 100,000
---------- ---------
Total debt..................................... 1,080,491 1,083,491
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 150,000 shares
authorized, 25,046 shares issued and
outstanding....................................... 2,504 2,504
Class B common stock, $.10 par value, 40,000 shares
authorized, 10,755 shares issued and
outstanding....................................... 1,076 1,076
Additional paid-in capital.......................... 539,287 539,287
Retained earnings................................... 51,434 51,434
Unrealized gains on available-for-sale securities,
net............................................... 19,862 19,862
---------- ---------
Total stockholders' equity..................... 614,163 614,163
---------- ---------
Total debt and stockholders' equity............ $1,694,654 1,697,654
========== =========
</TABLE>
- -------------------------
(1) Short-term debt consists of $255.4 million of borrowings under
repurchase agreements secured by CMBS, $149.0 million of borrowings
under a mortgage warehouse facility (secured by mortgage loans), $79.2
million of borrowings under mortgage notes secured by operating
properties and land, and $50.0 million of borrowings under revolving
credit lines secured by CMBS and mortgage loans. Current portion of
long-term debt at August 31, 1998 was $33.7 million.
(2) Other long-term debt consists of secured mortgage notes on operating
properties and land.
S-23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following is a summary of our actual results of operations for the
three and nine month periods ended August 31, 1998 and 1997 and pro forma
results for the three and nine month periods ended August 31, 1997, after
allocating among the core business lines certain non-corporate general and
administrative expenses. The pro forma adjustments to the three and nine month
periods ended August 31, 1997 include (i) our 50% interest in Lennar Land
Partners ("LLP"), (ii) the addition of incremental administrative costs
associated with operating as a stand-alone public company, (iii) reductions in
interest expense due to the use of proceeds from funds advanced by Lennar
Corporation to repay debt, (iv) removal of costs associated with completing the
spin-off of our business to Lennar's stockholders and (v) the estimated income
tax effect of the pro forma adjustments at our effective tax rate of 39.0%.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
---------------------------- -----------------------------
ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL PRO FORMA
------- ------ --------- ------- ------- ---------
1998 1997 1997 1998 1997 1997
------- ------ --------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Real estate operations......... $29,401 21,073 21,073 71,326 57,452 57,452
CMBS and loans................. 22,152 11,595 11,595 60,558 39,439 39,439
Partnerships and joint
ventures.................... 17,467 9,878 12,833 43,196 33,441 39,847
Corporate and other............ 143 822 822 822 2,207 2,207
------- ------ ------ ------- ------- -------
Total revenues................... 69,163 43,368 46,323 175,902 132,539 138,945
------- ------ ------ ------- ------- -------
Operating expenses
Real estate operations......... 19,225 12,085 12,085 45,278 35,011 35,011
CMBS and loans................. 2,034 780 780 4,645 2,791 2,791
Partnerships and joint
ventures.................... 1,347 1,020 1,020 3,525 3,933 3,933
Corporate and other............ 2,739 2,794 3,521 8,548 7,799 7,727
------- ------ ------ ------- ------- -------
Total operating expenses......... 25,345 16,679 17,406 61,996 49,534 49,462
------- ------ ------ ------- ------- -------
Operating earnings
Real estate operations......... 10,176 8,988 8,988 26,048 22,441 22,441
CMBS and loans................. 20,118 10,815 10,815 55,913 36,648 36,648
Partnerships and joint
ventures.................... 16,120 8,858 11,813 39,671 29,508 35,914
Corporate and other............ (2,596) (1,972) (2,699) (7,726) (5,592) (5,520)
------- ------ ------ ------- ------- -------
Total operating earnings......... 43,818 26,689 28,917 113,906 83,005 89,483
Interest expense................. 17,277 7,521 6,996 34,260 20,722 19,147
Income tax expense............... 7,443 7,475 8,549 26,974 24,290 27,431
------- ------ ------ ------- ------- -------
Net earnings..................... $19,098 11,693 13,372 52,672 37,993 42,905
======= ====== ====== ======= ======= =======
</TABLE>
S-24
<PAGE> 26
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Net earnings were $19.1 million and $52.7 million, respectively, for the
three and nine month periods ended August 31, 1998 compared to $11.7 million and
$38.0 million, respectively, for the same periods in 1997. The increases
resulted primarily from greater interest income from investment securities,
greater earnings from our investments in LLP and greater gains on sales of real
estate. Additionally, as a result of tax credits from the Affordable Housing
Group acquisition, our effective tax rate was reduced to 28% and 34% for the
three and nine month periods ended August 31, 1998 compared to 39% for both
periods in 1997.
REAL ESTATE OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
----------------- ----------------
1998 1997 1998 1997
------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Rental income.......................... $20,023 13,600 49,887 43,578
Gains on sales of real estate.......... 9,378 7,473 21,439 13,874
------- ------ ------ ------
Total revenues....................... 29,401 21,073 71,326 57,452
------- ------ ------ ------
Cost of rental operations.............. 12,619 9,878 31,439 28,159
Other operating expenses............... 2,257 800 5,427 2,530
Depreciation........................... 4,349 1,407 8,412 4,322
------- ------ ------ ------
Total operating expenses............. 19,225 12,085 45,278 35,011
------- ------ ------ ------
Operating earnings................... $10,176 8,988 26,048 22,441
======= ====== ====== ======
</TABLE>
Total revenues from real estate operations include the rental income from
operating properties plus gains on sales of those properties. Total operating
expenses include the direct costs of operating those properties and the overhead
associated with managing them.
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Overall, operating earnings from real estate properties increased to $10.2
million and $26.0 million for the three and nine month periods ended August 31,
1998, respectively, from $9.0 million and $22.4 million, for the same periods in
1997. Earnings were higher primarily due to gains on sales of stabilized
operating properties and increases in net rental income.
The three and nine month periods ended August 31, 1998 include $2.0 million
and $2.7 million, respectively, of net rental income from operations on the 36
AHG property investments that closed on May 1, 1998 and the four additional
investments that closed during June. Pre-tax operating margins for properties
that qualify for Low-Income Housing Tax Credits are generally lower than for
market rate rentals. However, we receive our desired yield from these
investments after adding in the impact of lower income taxes as a result of
these credits and other related tax deductions.
S-25
<PAGE> 27
Although we sold real estate with carrying values of $16.3 million and
$37.0 million during the three month and nine month periods ended August 31,
1998, the total book value of operating properties and equipment and land held
for investment increased by $217 million and $473 million, respectively, during
these same three month and nine month periods primarily as a result of the AHG
acquisition and other asset purchases. The AHG acquisition increased operating
properties by approximately $15 million and $194 million, respectively, during
the three and nine month periods ended August 31, 1998. A majority of the other
asset purchases were of operating properties which are being developed or where
we believe we can improve net operating earnings and/or ultimate sales value,
although there can be no assurance that we will be successful. As of August 31,
1998, approximately 45% of our operating property portfolio, based on book
value, had not yet reached stabilized occupancy and the anticipated improvements
in our operating earnings will not be recognized until future periods.
Net rental income increased during the three month and nine month periods
of 1998 as compared to the same periods in 1997 as the net rental income
increases more than offset the net rental income from the properties sold. The
net rental income for the quarter doubled from last year's third quarter.
Depreciation expense increased to $4.3 million and $8.4 million for the three
and nine month periods ended August 31, 1998 from $1.4 million and $4.3 million
for the same periods in 1997. The increase was a direct result of the AHG
acquisition and other property acquisitions.
Other operating expenses, which represent an allocation of salary,
professional and other administrative expenses, increased to $2.3 million and
$5.4 million, respectively, for the three and nine month periods ended August
31, 1998 from $0.8 million and $2.5 million, for the same periods in 1997,
primarily due to increases in personnel and general overhead costs necessary to
analyze, acquire and manage new properties and the acquisition of AHG.
Note: Actual and pro forma results are identical for 1997.
CMBS AND LOANS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------- -------------------
1998 1997 1998 1997
------- --------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income -- CMBS.......... $14,691 6,574 39,475 21,873
Interest income -- loans......... 3,684 3,695 12,020 9,026
Interest income -- other......... 1,696 -- 3,335 --
Gains on sales of investment
securities..................... -- 350 1,386 5,359
Servicing fees................... 2,081 976 4,342 3,181
------- ------ ------ ------
Total revenues................. 22,152 11,595 60,558 39,439
Operating expenses............... 2,034 780 4,645 2,791
------- ------ ------ ------
Operating earnings............. $20,118 10,815 55,913 36,648
======= ====== ====== ======
</TABLE>
S-26
<PAGE> 28
Revenues from CMBS and loans include interest income, gains on sales of
these assets and fees from acting as special servicer for CMBS transactions.
Related operating expenses include the direct costs of investing in and
originating CMBS and loans, and servicing the CMBS portfolio.
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Overall, operating earnings from CMBS and loans increased to $20.1 million
and $55.9 million for the three month and nine month periods ended August 31,
1998, respectively, from $10.8 million and $36.6 million, for the same periods
in 1997. Earnings were higher largely due to the growth of our CMBS and loan
portfolios and the greater recognition of earnings due to actual CMBS
performance exceeding original expectations. Our CMBS portfolio grew to $403
million at August 31, 1998 from $305 million at November 30, 1997. During the
nine month period ended August 31, 1998, we purchased $177 million face amount
of securities for approximately $106 million.
In recording CMBS interest income, we follow generally accepted accounting
principles and record interest received plus the amortization of the difference
between the carrying value and the face amount of the securities to achieve a
level yield. To date, this has resulted in less recognition of interest income
than interest received. The excess interest received is applied to reduce our
investment. During the three and nine month periods ended August 31, 1998, this
excess of cash received over income recorded was $2.0 million and $8.8 million,
respectively. It was $5.1 million and $14.2 million, respectively, for the same
periods in 1997. Our initial and ongoing estimates of our returns on CMBS
investments are based on a number of assumptions that are subject to certain
business and economic conditions, the most significant of which is the timing
and magnitude of credit losses on the underlying mortgages.
Actual loss experience to date, particularly for older transactions (3 to 5
years in age) is significantly lower than originally underwritten by us.
Therefore, we believe changes to original estimated yields have, and should
continue to, result in improved earnings from these transactions. We believe
these improvements resulted from (i) our having conservatively underwritten
these transactions, (ii) our workout and real estate expertise and (iii) an
improving real estate economy. However, the positive experience on these older
transactions will not necessarily translate into yield improvements on newer
investments.
Interest income from mortgage loans remained constant over the prior year
quarter at $3.7 million during the three month period ended August 31, 1998.
During the third quarter of 1998, interest income on new investments was offset
by reduced interest earned on loans that paid off. Interest income increased to
$12.0 million for the nine months ended August 31, 1998 from $9.0 million for
the same period in the prior year. The year to date increase was primarily
attributable to new investments in mortgage loans. Investments in loans
increased to $200 million at August 31, 1998 from $87 million at November 30,
1997 primarily due to a $105 million participation in a $255 million first
mortgage loan collateralized by a hotel portfolio that was acquired late in the
quarter ended August 31, 1998. This loan was sold at par subsequent to quarter
end.
S-27
<PAGE> 29
Other interest income increased during the three and nine month periods
ended August 31, 1998, primarily due to investments made during the fourth
quarter of 1997. The first quarter of 1998 also included interest earned from
temporary investments made with cash received from Lennar in connection with the
spin-off.
Operating expenses increased to $2.0 million and $4.6 million during the
three and nine month periods ended August 31, 1998, respectively, from $0.8
million and $2.8 million for the same periods in 1997, primarily due to
increases in personnel and out-of-pocket expenses related to the growth of the
CMBS business.
Note: Actual and pro forma results are identical for 1997.
PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
--------------------------- ---------------------------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
--------------- --------- --------------- ---------
1998 1997 1997 1998 1997 1997
------- ----- --------- ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Equity in earnings from
partnerships
Portfolios............. $ 5,004 6,137 6,137 15,903 25,169 25,169
Lennar Land Partners... 8,529 -- 2,955 20,413 -- 6,406
Other.................. 3,138 524 524 4,324 1,283 1,283
Management fees.......... 796 3,217 3,217 2,556 6,989 6,989
------- ----- ------ ------ ------ ------
Total revenues......... 17,467 9,878 12,833 43,196 33,441 39,847
Operating expenses....... 1,347 1,020 1,020 3,525 3,933 3,933
------- ----- ------ ------ ------ ------
Operating earnings..... $16,120 8,858 11,813 39,671 29,508 35,914
======= ===== ====== ====== ====== ======
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Operating earnings from partnerships and joint ventures increased to $16.1
million and $39.7 million for the three and nine month periods ended August 31,
1998, respectively, from $8.9 million and $29.5 million, for the same periods in
1997. Although our investments in earnings of our older partnerships have
decreased, those related earnings have to some extent been replaced with our 50%
share of LLP's results, which amounted to $8.5 million and $20.4 million for the
three month and nine month periods ended August 31, 1998, respectively. We
expect LLP to continue to provide recurring earnings at least over the next
several years although the level of LLP's earnings will be dependent upon
general economic conditions and housing starts. Other partnership earnings were
higher during the third quarter ended August 31, 1998 compared with the same
period in 1997 due to the sale of assets in the underlying partnerships.
Partnership distributions received by us during the three month and nine
month periods ended August 31, 1998 were $37.7 million and $54.9 million,
S-28
<PAGE> 30
respectively, in comparison with $42.5 million and $71.6 million for the same
periods in 1997. For the three month and nine month periods ended August 31,
1998, respectively, distributions were $21.0 million and $14.3 million greater
than our actual equity in earnings of the partnerships of $16.7 million and
$40.6 million, respectively, primarily due to asset sales by the older
partnerships and a $13 million distribution from LLP.
Our overall investments in and advances to partnerships increased to $196
million at August 31, 1998 from $159 million at November 30, 1997. This was
primarily due to the portfolio investments in Japan and the AHG acquisition.
During the quarter, we completed our fifth portfolio purchase with partners of
non-performing commercial mortgage real estate loans in Japan, bringing our
total investment at August 31, 1998 to approximately $20 million.
Management fees decreased to $0.8 million and $2.6 million for the three
and nine month periods ended August 31, 1998, respectively, from $3.2 million
and $7.0 million, for the same periods in 1997, due to lower disposition fees as
there were fewer sales of partnership assets.
Pro forma operating earnings from partnerships and joint ventures for the
three and nine month periods ended August 31, 1997 were $11.8 million and $35.9
million, respectively, compared to $8.9 million and $29.5 million on an actual
basis. These differences were due to the inclusion of LLP's pro forma income for
the three and nine month periods ended August 31, 1997.
CORPORATE, OTHER, INTEREST, AND INCOME TAX EXPENSES
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THE THREE MONTHS
AND NINE MONTHS ENDED AUGUST 31, 1997
Corporate and other operating expenses increased to $2.6 million and $7.7
million for the three and nine month periods ended August 31, 1998,
respectively, from $2.0 million and $5.6 million for the same periods in 1997,
primarily due to higher incremental costs for operating as a stand-alone public
company and a lower level of other income (which is netted against corporate,
general and administrative expenses for business line reporting). Partially
offsetting these increases was the absence of a charge incurred in the first
quarter of 1997 for spin-off related expenses.
Pro forma corporate and other operating expenses for the three and nine
month periods ended August 31, 1997 were $2.7 million and $5.5 million,
respectively, compared to $2.0 million and $5.6 million on an actual basis.
These differences were due to the removal of spin-off related costs incurred in
1997, offset by incremental costs for operating as a stand-alone public company.
Interest expense increased to $17.3 million and $34.3 million for the three
and nine month periods ended August 31, 1998, respectively, from $7.5 million
and $20.7 million, for the same periods in 1997. This increase was directly
attributable to our mortgage notes and other debts payable increasing to $1,080
million at August 31, 1998 from $368 million at August 31, 1997, as described in
further detail below under "Liquidity and Financial Resources."
Pro forma interest expense for the three and nine month periods ended
August 31, 1997 was $7.0 million and $19.1 million, respectively, compared to
S-29
<PAGE> 31
$7.5 million and $20.7 million on an actual basis. This difference was due to
the pro forma use of proceeds from funds advanced by Lennar on October 31, 1997,
to repay debt as if such debt had been repaid on December 1, 1996.
Income tax expense decreased to $7.4 million for the three months ended
August 31, 1998 from $7.5 million for the same period in 1997; and increased to
$27.0 million for the nine months ended August 31, 1998 from $24.3 million for
the same period in 1997. However, as a result of the AHG tax credits, our
effective tax rate was reduced to 28% and 34% for the three and nine month
periods ended August 31, 1998 compared to 39% for both respective periods in
1997.
Pro forma income tax expense for the three and nine month periods ended
August 31, 1997 was $8.5 million and $27.4 million, respectively, compared to
$7.5 million and $24.3 million on an actual basis. The difference was due to the
estimated income tax effect of the pro forma adjustments at our effective tax
rate of 39.0%.
LIQUIDITY AND FINANCIAL RESOURCES
We received $1.0 million of cash from operating activities during the nine
months ended August 31, 1998 compared with $32.4 million of cash used for the
same period in 1997.
Increased cash flow from operating activities during 1998 is primarily due
to a decrease in restricted cash and an increase in accounts payable and accrued
liabilities.
Cash flows used in investing activities totaled $390.5 million during the
nine months ended August 31, 1998 compared with $105.1 million of cash flows
provided by investing activities for the same period in 1997. The increase in
cash flow used in investing activities during the nine months ended August 31,
1998 is primarily attributable to higher purchases of operating properties and
land held for investment, the AHG acquisition and significantly less proceeds
from sales of investment securities.
We received cash from financing activities of $413.2 million during the
nine months ended August 31, 1998 compared with $70.7 million of cash used for
the same period in 1997. The increase was primarily due to increased borrowings
under repurchase agreements, revolving credit lines and mortgage notes and other
debts payable, which were utilized to fund the purchase of new operating
properties, the construction or improvement costs to existing properties, the
purchase of land held for investment and the AHG acquisition.
During the third quarter, we entered into a $150 million warehouse credit
facility which is collateralized by mortgage loans. This line of credit bears
interest at LIBOR plus a margin. At August 31, 1998, approximately $149 million
was outstanding under this line.
Beginning in the late summer of 1998, the market prices of real estate
related securities began to decrease. We believe these decreases are for the
most part due to the reduction in the number of purchasers and the amount of
capital available in the market place to buy those securities as well as the
recent increase in the supply of those securities. These price decreases did not
directly affect our results from operations, because we hold our real estate
related securities primarily as long-term investments. We do not believe the
decline in market prices represents a
S-30
<PAGE> 32
permanent impairment of the value of the securities, particularly because there
does not appear to have been an impairment of the value of the real estate
assets underlying those securities.
We have financed some of our purchases of real estate related securities
under repurchase agreements. At August 31, 1998, we had two such repurchase
lines amounting to $310 million of which $255 million was outstanding. Those
agreements matured in September and October 1998, but were renewed through April
and December 1999, although we reduced the aggregate commitment under the lines
to $218 million. See "Description of Certain Indebtedness."
Our board of directors has approved a stock repurchase plan authorizing us
to buy back up to 2,000,000 shares of our own stock. As of the end of the third
quarter, we had purchased and retired 350,000 shares under this program at an
average price of approximately $16 per share.
YEAR 2000
We have segregated our systems into two basic types in terms of identifying
and assessing Year 2000 issues. These systems are the financial systems and the
non-financial systems. The financial systems comprise the general ledger and
related subsystems. Non-financial systems are primarily related to our business
activities as a lessor of commercial real estate and we are currently assessing
the cost to change these systems. The inability to correct any Year 2000
deficiencies in any non-financial systems would not seriously impair our ability
to conduct our business.
As part of the tax free spin-off from Lennar Corporation, we were required
to segregate our financial systems from Lennar. We have identified the software
and hardware to do this and have already put one system in place and are in the
process of installing all other financial systems, all of which are Year 2000
compliant. We currently anticipate that the implementation of the new financial
systems will be completed before mid-1999 and the total project costs will be
between $3 million and $4 million.
We are also in the process of assessing the Year 2000 readiness of our key
vendors, subcontractors and business partners to determine whether key processes
and business activities will be interrupted. We expect to complete this project
early in 1999. A failure of our vendors, subcontractors and business partners to
address adequately their Year 2000 readiness could affect our business. As part
of its contingency planning efforts, we are preparing to identify alternate
sources or strategies where necessary if we identify significant exposures.
S-31
<PAGE> 33
BUSINESS
REAL ESTATE INVESTMENTS AND RELATED ACTIVITIES
Commercial and Multi-Family Residential Rental Real Estate
In 1969 Lennar began engaging in the development, ownership and management
of commercial and residential multi-family rental real estate. Its initial
activities of this type included acquiring an apartment complex, and building
and operating small office buildings, local regional shopping centers and other
commercial and industrial facilities on properties being developed as part of
Lennar's homebuilding operations. Gradually, this was expanded to general
development, acquisition and active management of commercial and residential
multi-family rental real estate, as well as acquiring land for development and
sale or leasing for commercial uses. Among other things, these activities helped
offset the cyclical nature of Lennar's homebuilding business. We have developed
a staff of in-house real estate professionals to engage in those activities,
including on-site management, leasing and maintenance personnel, and accounting
and management personnel located at several offices. We also, in some instances,
have used outside management companies to perform day-to-day activities. In
those instances, our employees have closely supervised the operation of the
commercial properties and the activities of the outside management companies. At
August 31, 1998, our portfolio included 13 shopping centers with 1.1 million
square feet of rentable space, nine office buildings with 2.2 million square
feet of rentable space, two industrial properties, 9,866 apartment units, a
mobile home park and five hotels.
The shopping centers we own and operate include seven small regional
shopping centers (sometimes referred to as "strip centers") with between 12,000
square feet and 36,400 square feet of store space, as well as parking areas and
public areas, and six larger shopping centers, with 72,000 square feet to
462,000 square feet of store space. All the small regional centers are located
in Florida. Of the larger shopping centers, four are in Florida and two are in
Arizona.
Our nine office buildings range from one to 36 stories and have an
aggregate of 2.2 million square feet of rentable office space. Three of the
office buildings are in Florida, one is in Georgia, four are in California and
one is in Louisiana. Our industrial properties are located in Florida and
California and consist of 80,000 square feet and 382,000 square feet,
respectively, of usable floor space. Our 48 apartment properties range in size
from 40 to 712 units.
S-32
<PAGE> 34
The apartment properties are geographically located as follows:
<TABLE>
<CAPTION>
NUMBER OF
STATE PROPERTIES
- ----- ----------
<S> <C>
Washington.......................................... 12
Florida............................................. 6
Oregon.............................................. 5
New Mexico.......................................... 3
Arizona............................................. 2
California.......................................... 2
Colorado............................................ 2
Illinois............................................ 2
Montana............................................. 2
Nevada.............................................. 2
Pennsylvania........................................ 2
Tennessee........................................... 2
Texas............................................... 2
Georgia............................................. 1
Idaho............................................... 1
Maryland............................................ 1
Virginia............................................ 1
--
48
==
</TABLE>
The five hotels owned by us have a total of 1,055 rooms. Two of the
properties are under development and the other three are managed by a national
chain under a management contract which can be terminated by either party on 10
days' notice.
In addition to our operating properties, we own commercially zoned land,
1.6 million square feet of which is leased under ground leases, and 1,145.5
acres of which is to be used for specific projects or sold.
We maintain a program of liability, property loss and damage and other
insurance which covers all our properties and which we believe is adequate to
protect us against all reasonably foreseeable material insurable risks.
S-33
<PAGE> 35
The net book value at August 31, 1998 and the annualized operating results
for the nine month period ended on that date with regard to various types of
properties owned by us, and related furniture, furnishings and equipment, were
as follows:
<TABLE>
<CAPTION>
ANNUALIZED ANNUALIZED
NET OPERATING NOI AS A % OF
NET BOOK OCCUPANCY INCOME NET BOOK
VALUE RATE (NOI) VALUE
-------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Stabilized operating
properties
Commercial................ $116,894 98% $16,370 14%
Multi-family.............. 26,880 92% 7,607 28%
AHG multi-family(1)....... 158,530 93% 8,878 6%
Hotel and other........... 45,400 73% 9,200 20%
Under development or
repositioning
Commercial................ 121,141 4,168
Multi-family.............. 137,362 3,214
Hotel..................... 11,300 --
-------- -------
Total operating
properties................ 617,507 49,437
Furniture, fixtures and
equipment................. 5,640 --
Land held for investment.... 162,008 --
-------- -------
Total operating properties
and equipment............. $785,155 $49,437
======== =======
</TABLE>
- -------------------------
(1) Annualized NOI and annualized NOI as a percentage of net book value excludes
the annualized effect of tax credits; if included, annualized NOI and
annualized NOI as a percentage of net book value would have been $20,173 and
13%, respectively.
Our financing strategy with regard to our real estate portfolio is normally
to obtain financing secured by specific assets when we acquire them. This type
of financing usually is short- or intermediate-term. However, we sometimes seek
more permanent financing in cases where the market for an asset makes long-term
debt an attractive option and the loan can be assumed or prepaid.
During 1998 we entered the business of owning, developing and syndicating
multi-family and senior housing properties by acquiring interests in AHG. AHG
owns approximately 6,100 residential rental apartments, many of which qualify
for low-income housing tax credits. Of the apartments, 49% are located in the
Northwestern United States, 17% are located in the Southwest, 15% are located in
the East, 13% are located in the Far West, and the remainder are located in the
Southeast and Midwest. Approximately 82% of the apartments were constructed by
AHG or under its supervision. AHG acquired the other apartments after they were
completed. At August 31, 1998, our balance sheet included AHG balances as
S-34
<PAGE> 36
follows: properties of approximately $194 million, investments in partnerships
of approximately $14 million and approximately $133 million of pre-existing
property-specific mortgage financing that is non-recourse to us. We paid $76
million as of August 31, 1998 to purchase the interests in AHG.
Since the AHG acquisition, we have committed to develop five additional
apartment properties which should qualify for low-income housing tax credits.
These new properties will contain approximately 850 rental apartments. We expect
to continue acquiring, developing, operating and syndicating residential
apartments which qualify for low-income tax credits.
Portfolios of Commercial Mortgage Loans and Owned Real Estate
In 1992, we began acquiring, directly and through partnerships, portfolios
of commercial mortgage loans and related pools of owned real estate assets in
the United States. Our first transaction of this type was a partnership with The
Morgan Stanley Real Estate Fund, which acquired from Resolution Trust
Corporation a portfolio of almost $1 billion face value of assets consisting of
more than 1,000 mortgage loans and 65 properties. Since 1992, we have formed 11
additional partnerships with several different investment banking firms and real
estate funds to purchase and handle workout activities regarding portfolios of
distressed commercial loans and related real estate. Our partners in these
additional partnerships included affiliates of Banc One/Orix, Blackrock Group,
BT Alex. Brown Incorporated, Credit Suisse First Boston Corporation, Deutsche
Bank Securities, First Chicago Capital Corp., Lehman Brothers Inc., Morgan
Stanley Dean Witter and Westbrook Partners. Involvement of these partners both
gave us access to investment opportunities we might not otherwise have had and
reduced the amount we had to invest to acquire interests in large portfolios.
In each of these partnerships, one of our subsidiaries acts as the managing
general partner and conducts the business of the partnership. The partnership
portfolio acquisitions in 1993 included a portfolio of real estate assets with a
face amount of more than $2 billion, in what we believe is one of the largest
real estate portfolio acquisitions ever to take place in the United States. We
earn management fees and asset disposition fees from the partnerships and have
carried interests in cash flow and sale proceeds once the partners have
recovered their capital and achieved specified returns. Our investments ranged
from 15% to 50% of the partnerships' capital and totaled $165 million, out of a
total of $684 million invested in the partnerships. By August 31, 1998, the
partnerships had distributed a total of $1.2 billion to the partners, of which
$356 million had been distributed to us. We also received management and asset
disposition fees totaling approximately $52.4 million. As the U.S. real estate
markets strengthened in 1996 and 1997, substantially fewer large real estate
portfolios become available at what we viewed as attractive prices. We have not
participated in a partnership which acquired a portfolio of underperforming real
estate assets in the United States since August 1996 (although we became part of
several partnerships to acquire portfolios of underperforming and nonperforming
commercial mortgage loans in Japan). However, we have continued to acquire
individual underperforming real estate assets. Currently, the partnerships we
formed are engaged primarily in enhancing and disposing of assets in the
portfolios they acquired, as well as collecting sums paid with regard to
portfolio assets. Since June 1992, we have also
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<PAGE> 37
acquired directly three portfolios of real estate assets with face amounts of
between $21 million and $75 million.
The portfolio loans consist primarily, but not entirely, of fixed rate
first mortgage loans secured by office and industrial buildings, shopping
centers and multi-family residential properties. They are not covered by credit
insurance.
Our principal activity with respect to distressed portfolios (whether owned
by partnerships or directly owned by us) is to manage the workout of
nonperforming loans, including negotiating new or modified financing terms and
foreclosing on defaulted loans. The assets generally are held only as long as is
required to enhance their value and prepare them for sale. Approximately 20% to
25% of each portfolio is turned over each year. We believe our workout and
property rehabilitation skills are the principal reasons financial institutions
have sought us as a partner in acquiring portfolios of distressed assets and
have given us management control of the partnerships.
Debt financing for partnerships' acquisitions of real estate related asset
portfolios has usually been on a non-recourse basis and with no guaranties by us
or any other of the partners. In some cases, the lender must be repaid in full
before a partnership can make cash distributions to us and our partners. Our
financing strategy with regard to real estate related asset portfolios in which
we invest directly is to seek financing which matches the underlying loans. This
type of financing usually gives lenders recourse to those of our subsidiaries
which acquire particular asset portfolios.
Investments in CMBS
As a further use of our loan and real estate workout capabilities, we
acquire unrated and non-investment grade rated subordinated CMBS and provide
"special servicing" for the mortgage pools to which they relate. Fitch IBCA,
Inc., which rates special servicers of CMBS on the basis of management team,
organizational structure, operating history, workout and asset disposition
experience and strategies, information systems, investor reporting capabilities
and financial resources, has given us Fitch's highest rating. At August 31,
1998, we were entitled to be the special servicer with regard to 42 securitized
commercial mortgage pools and owned unrated junior CMBS related to 38 of those
pools. Special servicing is the business of managing and working out the problem
assets in a pool of commercial mortgages or other assets. For example, when a
mortgage in a securitized pool goes into default, the special servicer
negotiates with the borrower on behalf of the pool to resolve the situation. We
use as special servicer essentially the same workout skills we apply with regard
to our distressed asset portfolios. Because the holders of the unrated CMBS
receive everything that is collected after the more senior levels of CMBS have
been paid in full, we and other holders of unrated CMBS are the principal
beneficiaries of increased collections. Therefore, ownership of the unrated CMBS
gives us an opportunity to profit from our special servicing in addition to
receiving fees for being special servicer. We have not purchased unrated CMBS
unless we have had the right to be the special servicer of the mortgage pools to
which they relate.
We also, in some instances, purchase non-investment grade rated
subordinated CMBS relating to commercial mortgage pools as to which we will act
as special servicer. We expect to receive a yield on these securities based on
the stated
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<PAGE> 38
interest and amortization of our purchase discount. However, if, as senior CMBS
issued with regard to a pool begin to be paid down, and the performance of the
pool exceeds initial expectations, then the ratings of the subordinated CMBS are
sometimes upgraded by the rating agencies. This increases their market values
and gives us an opportunity to achieve gains on sale of the securities, as well
as receiving the stated interest while we hold them. Therefore, purchases of
non-investment grade rated subordinated securities, like purchases of unrated
junior securities, are a means for us to profit from our workout skills.
Particularly in periods of falling interest rates, there often are
prepayments of mortgages underlying CMBS. Because we usually purchase CMBS at
significant discounts from their face amounts, prepayments tend to increase our
yield as a percentage of our investment.
We are currently financing our purchases of CMBS through cash flow
generated from operations, repurchase obligations and borrowings under medium-
term and short-term revolving credit lines.
The following are the CMBS held by us at August 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE % OF AVERAGE AVERAGE
FACE INTEREST BOOK FACE CASH BOOK
AMOUNT RATE VALUE AMOUNT YIELD(1) YIELD(2)
-------- -------- -------- ------ -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
BB rated or
above.............. $121,317 8.38% $103,228 85.1% 9.9% 13.4%
B rated.............. 173,235 7.58% 126,109 72.8% 10.6% 13.1%
Unrated.............. 559,854 7.60% 136,667 24.4% 30.4% 23.6%
Unrealized gains on
securities and
other.............. -- -- 36,715 -- -- --
-------- --------
Total CMBS
portfolio....... $854,406 7.89% $402,719 47.1% 17.8% 17.1%
======== ========
</TABLE>
- -------------------------
(1) Cash yield is determined by annualizing the actual cash received during
the month ended August 31, 1998, and dividing the result by the book
value at August 31, 1998.
(2) Book yield is determined by annualizing the interest income for the
month ended August 31, 1998, and dividing the result by the book value
at August 31, 1998.
Commercial Real Estate Lending
We hold mortgage loans made with regard to commercial properties or
properties being developed as residential communities, and loans made to the
developers and builders themselves. At August 31, 1998, we held nine mortgage
loans with a total outstanding principal balance of $174.6 million and seven
loans to developers and builders with a total outstanding principal balance of
$35.3
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<PAGE> 39
million. The states in which the properties securing our mortgage loans were
located were as follows:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
STATE OF LOANS
- ----- ----------------
(IN THOUSANDS)
<S> <C>
Nevada............................................... $ 51,101
California........................................... 47,639
Texas................................................ 3,704
Florida.............................................. 2,487
Multiple States(1)................................... 105,000
--------
Total.............................................. $209,931
========
</TABLE>
- -------------------------
(1) This item was a loan participation which was repurchased from us during
the fourth quarter of 1998.
The mortgage loans are primarily first mortgage loans secured by office
buildings, shopping centers, hotels or land acquired for development. The
mortgage loans on residential communities are usually subordinate to
construction loans, and often provide us, in addition to interest income,
participation in profits after the developer or builders have achieved specified
financial targets. The types of loans held by us at August 31, 1998, were as
follows:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
TYPE OF LOAN OF LOANS
- ------------ ----------------
(IN THOUSANDS)
<S> <C>
Mortgage loans
Hotels............................................. $105,000(1)
Convention center.................................. 45,000
Office buildings................................... 17,295
Shopping center.................................... 3,704
Industrial park.................................... 1,707
Residential land................................... 1,302
Recreation facility................................ 290
Warehouse.......................................... 282
Developer and builder loans.......................... 35,351
--------
Total.............................................. $209,931
========
</TABLE>
- -------------------------
(1) This item was a loan participation which was repurchased from us during
the fourth quarter of 1998.
We identify opportunities to make commercial and residential development
loans through brokers and relationships with other real estate companies and
developers.
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<PAGE> 40
We evaluate possible loans with in-house personnel, who perform site visits
and do market, demographic and financial analyses with regard to the collateral
for the loans. We apply guidelines, which change from time to time depending on
the type of property and market conditions, relating to loan-to-value ratio,
debt coverage and other financial ratios. In most instances the guidelines we
have applied have been similar to those applied in evaluating commercial
mortgages for inclusion in mortgage securitizations (although we have not to
date securitized any of the commercial loans we originated for our own account).
Sometimes we have made subordinated loans to which we apply other guidelines,
but which bear interest at rates which are higher than those on senior
commercial mortgage loans, and some of which provide us participations in
profits from the underlying properties.
Lennar Land Partners
Before the spin-off, Lennar and we transferred to LLP, which is 50% owned
by us and 50% owned by Lennar, parcels of land or interests in land and other
assets which had a total book value on Lennar's books at October 31, 1997 of
approximately $372.4 million. This land was acquired by Lennar primarily to be
used for residential home development. The parcels of land or interests in land
contributed by us had been contributed to us by Lennar so we could contribute
them to LLP and receive a 50% interest in LLP. From November 1, 1997 through
August 31, 1998, LLP had land sale revenues of $135.4 million, of which $81.3
million was from sales to Lennar. During that period, LLP obtained control of
approximately 8,000 additional homesites, primarily through partnership
arrangements. At August 31, 1998, LLP's land consisted of approximately 26,175
potential home sites in 32 communities, of which 19 communities with 17,603
potential home sites are in Florida, two communities with 628 potential home
sites are in Arizona, five communities with 3,758 potential home sites are in
Texas and six communities with 4,186 potential home sites are in California.
Approximately 8% of the land was developed and ready to be built upon, 48% of
the land was in various stages of development and 44% of the land was totally
undeveloped.
When Lennar contributed that land to us and to LLP, Lennar retained options
to purchase up to approximately 22% of the contributed land at prices it
established. The remaining land is available for sale to independent
homebuilders or to Lennar at prices determined from time to time, which, as is
discussed below, we must approve.
LLP has an agreement with Lennar under which Lennar, for a fee, administers
all day-to-day activities of LLP, including overseeing planning and development
of properties and overseeing sales of land to Lennar and other builders.
LLP is governed by an Executive Committee consisting of representatives of
Lennar and of us, with Lennar's representatives and our representatives each
having in total one vote. This, in effect, gives each of Lennar and us a veto
with regard to matters presented to the Executive Committee. Our by-laws require
that all significant decisions relating to LLP be approved by a Board of
Directors committee consisting entirely of directors who have no relationship
with Lennar.
Lennar may, but will be under no obligation to, offer additional properties
to LLP. Lennar is free to acquire properties for itself without any
consideration of whether those properties might have been appropriate for LLP.
We can, in effect,
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<PAGE> 41
veto any proposals that LLP acquire properties proposed by Lennar. Arrangements
with regard to particular properties might include, (i) options to Lennar to
purchase all or portions of properties, (ii) rights of first refusal for Lennar
to acquire lots if other builders propose to acquire them, or (iii) buy/sell
arrangements under which, if Lennar wanted to purchase lots on which it did not
have an option, it would propose a purchase price and we would have the option
either to approve the sale to Lennar at that price or to purchase the lots for
that price (probably in order to resell them to someone who would be willing to
pay a higher price).
We might seek to acquire commercial portions of properties owned or
acquired by LLP or options relating to them. If we did, Lennar could, if it
wanted to do so, veto acquisitions by us.
LLP has a $125 million revolving line of credit, and a $100 million term
loan, each of which matures in 2001. If LLP defaults under those credit
facilities, the lenders have the right to require us, together with Lennar, to
purchase LLP's obligations to the lenders, or a portion of them. However, if the
default is failure to meet financial covenants, the lenders must give Lennar and
us the opportunity to cure the default. Many of LLP's assets are subject to
non-recourse mortgage loans. The revolving line of credit is available to
supplement financing which is available with regard to specific properties. As
of August 31, 1998, there was $8 million outstanding under the revolving line of
credit, and $79 million outstanding under the term loan.
COMPETITION
In virtually all aspects of our activities, we compete with a variety of
real estate development companies, real estate investment trusts, investment
firms, investment funds and others. The principal area of competition is for the
purchase of real estate assets and securities at prices which we believe will
enable us to achieve our desired returns. As the real estate markets improved
over most of the past two years, we encountered increased competition in several
of the markets in which we compete, including the purchase of certain types of
real estate and CMBS, as well as real estate lending. We believe that our access
to investment opportunities through our relationships and presence in markets
across the country, our ability quickly to underwrite and evaluate those
opportunities and our expertise in real estate workout and management helped us
to compete effectively in the purchase of those types of assets. In addition,
our experience in adding value to real estate and our top rating as a special
servicer to CMBS transactions often attracts other investors with attractive
investment opportunities but who do not have those skills.
Competitive conditions relating to shopping centers, office buildings,
industrial properties, residential apartment buildings and hotels owned or
operated by us vary depending on the locations of particular properties. Most
often these facilities compete for tenants or other users based on their
locations, the facilities provided and the pricing of the leases or room rates.
As general economic conditions improved in 1997 and 1998, occupancies generally
increased in many of our markets, which helped to reduce the amount of
competition in existing properties and has allowed for, in certain instances,
new development.
We are not a significant national competitor with regard to any of the
properties we own or any type of real estate securities, except that industry
sources
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<PAGE> 42
regarding issuances of CMBS indicate that the CMBS as to which we had the right
to assume the special servicing represented 17.6% and 12.8% of all the CMBS
issued in 1996 and 1997, respectively.
REGULATION
Commercial properties owned by us or partnerships in which we participate
must comply with a variety of state and local regulations relating to, among
other things, zoning, treatment of waste, construction materials which must be
used and some aspects of building design.
In our loan workout activities, we are required to comply with a number of
Federal and state laws designed to protect debtors against overbearing loan
collection techniques. However, in most instances, laws of this type apply to
consumer level loans (including home mortgages), but do not apply to commercial
loans.
Our hotels have to be licensed to conduct various aspects of their
businesses, including sales of alcoholic beverages.
EMPLOYEES
At August 31, 1998, we had 401 full time and 48 part time employees, of
whom 10 were senior management, 41 were corporate staff, 146 were hotel
personnel and 252 were engaged in asset acquisitions, loan workouts and
rehabilitation and disposition of properties.
None of our employees is represented by a union. We believe our
relationships with our employees are good.
LEGAL PROCEEDINGS
We are not subject to any legal proceedings other than suits relating to
properties we own which we view as an ordinary part of our business, and most of
which are covered by insurance. We believe these suits will not, in aggregate,
have a material adverse effect upon us.
PROPERTIES
We maintain our principal executive offices at 760 N.W. 107th Avenue,
Miami, Florida, in a building which we built and is owned by us. Those offices
consist of approximately 16,000 square feet. We have additional offices in
various office buildings owned by us and we lease offices in two other
facilities.
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<PAGE> 43
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table lists our directors, all of whom will serve until the
next annual meeting of stockholders, and our executive officers:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION
- ---- --- ------------------
<S> <C> <C>
Stuart A. Miller............... 41 Chairman of the Board; Director
Steven J. Saiontz.............. 40 Chief Executive Officer;
Director
Jeffrey P. Krasnoff............ 43 President; Director
Shelly Rubin................... 36 Financial Vice President
Michelle R. Simon.............. 34 Secretary and Corporate Counsel
Robert Cherry.................. 36 Vice President
Steven I. Engel................ 52 Vice President
Mark A. Griffith............... 42 Vice President
David G. Levin................. 43 Vice President
Ronald E. Schrager............. 36 Vice President
David O. Team.................. 38 Vice President
Margaret A. Jordan............. 47 Treasurer
John T. McMickle............... 41 Controller
Leonard Miller................. 66 Director
Sue M. Cobb.................... 61 Director
Carlos M. de la Cruz........... 57 Director
Brian L. Bilzin................ 53 Director
</TABLE>
Stuart A. Miller is our Chairman of the Board. Mr. Miller became our
Chairman of the Board when we were formed in June 1997. Mr. Miller has been the
President and Chief Executive Officer of Lennar since April 1997. For more than
five years prior to April 1997, Mr. Miller was a vice president of Lennar and
held various executive positions with Lennar subsidiaries, including being the
president of its principal homebuilding subsidiary from December 1991 to April
1997 and the president of its principal real estate investment and management
division (the predecessor to a substantial portion of our business) from April
1995 to April 1997.
Steven J. Saiontz is our Chief Executive Officer. Mr. Saiontz became our
Chief Executive Officer and a Director when we were formed in June 1997. For
more than five years prior to that, he was the president of Lennar Financial
Services, Inc., a wholly owned subsidiary of Lennar. Mr. Saiontz is currently a
Director of Lennar. He is the brother-in-law of Stuart A. Miller and the
son-in-law of Leonard Miller.
Jeffrey P. Krasnoff is our President. Mr. Krasnoff became our President
when we were formed in June 1997 and became a Director in December 1997. From
1987 until June 1997, he was a vice president of Lennar. From 1990 until he
became our President, Mr. Krasnoff was involved almost entirely in Lennar's real
estate investment and management division (the predecessor to a substantial
portion of our business).
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<PAGE> 44
Shelly Rubin is our Financial Vice President. She became our Financial Vice
President when we were formed in June 1997. From May 1994 until June 1997, she
was the principal financial officer of Lennar's real estate investment and
management division (the predecessor to a substantial portion of our business).
From 1991 until May 1994, Ms. Rubin was employed by Burger King Corporation as
the controller for its real estate division.
Michelle R. Simon is our Secretary and Corporate Counsel. She became our
Secretary and Corporate Counsel when we were formed in June 1997. From 1994
until June 1997, she was the counsel to Lennar's real estate investment division
(the predecessor to a substantial portion of our business). From 1992 to 1994,
Ms. Simon was an associate and then a vice president in the investment banking
division, special execution group, of Goldman, Sachs & Co.
Robert Cherry is a Vice President, responsible for sourcing and evaluating
new investment opportunities. From March 1995 until October 1997, Mr. Cherry had
similar responsibilities for Lennar's real estate investment and management
division (the predecessor to a substantial portion of our business). From March
1994 until February 1995, he was a vice president of G. Soros Realty
Advisors/Quantum North America Realty Fund. Prior to that he was a senior
analyst at Moody's Investor Service. Before joining Moody's, Mr. Cherry was an
associate at the law firm of Sullivan & Cromwell.
Steven I. Engel is a Vice President, directing the special servicing of our
CMBS portfolio. From 1992 until 1997, Mr. Engel had similar responsibilities for
Lennar's real estate investment and management division (the predecessor to a
substantial portion of our business). From 1987 to 1992, Mr. Engel owned and
managed his own single family construction company with projects in Broward,
Collier and Lee counties in Florida.
Mark A. Griffith is a Vice President, responsible for managing our Eastern
Regional Division. From February 1990 until October 1997, Mr. Griffith had
similar responsibilities for Lennar's real estate investment and management
division (the predecessor to a substantial portion of our business).
David G. Levin is a Vice President, responsible for managing Lennar Capital
Services, one of our subsidiaries. From February 1992 until early 1997, Mr.
Levin was responsible for managing the Miami Division of Lennar's real estate
investment and management division (the predecessor to a substantial portion of
our business), which was at that time primarily focused on partnerships with the
Morgan Stanley Real Estate Fund. Prior to that he had various positions with
commercial real estate firms including managing director of Bear Stearns Real
Estate Group.
Ronald E. Schrager is a Vice President, responsible for managing our Miami
Division, which is primarily focused on CMBS/special servicing. From September
1992 until early 1997, he held several positions in Lennar's real estate
investment and management division (the predecessor to a substantial portion of
our business), managing various areas. Prior to that he served as a vice
president of Chemical Bank's Real Estate Finance Group.
David O. Team is a Vice President, responsible for our Western Regional
Division. From April 1996 until October 1997, Mr. Team had similar
responsibilities for Lennar's real estate investment and management division
(the predecessor
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<PAGE> 45
to a substantial portion of our business). From 1994 to 1996, Mr. Team was the
owner and president of Windward Realty Group, a real estate development firm.
From 1992 to 1993, he was a senior vice president with American Real Estate
Group.
Margaret A. Jordan is our Treasurer. Ms. Jordan joined us in September
1997. From February 1993 to August 1997, Ms. Jordan worked as an independent
contractor and financial consultant to real estate businesses. From June 1987 to
January 1993, Ms. Jordan was employed by Atlantic Gulf Communities Corporation,
serving as assistant treasurer and then senior vice president and treasurer.
John T. McMickle is our Controller. Mr. McMickle joined us in July 1997.
From 1994 to June 1997, Mr. McMickle was responsible for financial reporting at
Ryder System. Prior to that he was employed as a senior manager by Price
Waterhouse LLP.
Leonard Miller is the Chairman of the Board of Lennar. He has been the
President or Chairman of the Board, or both, of Lennar since it was founded in
1969. From the time Lennar was founded until April 1997, Mr. Miller was the
chief executive officer of Lennar. Leonard Miller is the father of Stuart A.
Miller and the father-in-law of Steven J. Saiontz.
Sue M. Cobb is and for more than five years has been, Managing Director and
General Counsel of Cobb Partners, Inc. and affiliated companies, a privately
owned group of companies involved in investments, real estate and resort
development. She was the founding partner of the Public Finance Department in
the law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., with
whom she was associated from 1978 until early 1998. From 1993 to 1996, she was
also Vice President and General Counsel of Pan American World Airways, Inc. She
is currently a Director of Enterprise Florida Capital Development Corp., a
public/private development organization in the State of Florida; and a Director
of Kirkwood Associates, Inc., a closely held ski and summer resort company
headquartered in Kirkwood, California. From 1982 to 1988, she was a member of
the Board of Directors of the Federal Reserve Bank of Atlanta, Miami Branch, and
served three terms as Chairman of that Board.
Carlos M. de la Cruz is, and for more than five years has been, the
Chairman of the Board of Eagle Brands, Inc. (a beverage wholesaler), Coca-Cola
Puerto Rico Bottlers and the Miami Honda, Central Hyundai, Sunshine Ford and
Central Kia automobile dealerships.
Brian L. Bilzin is, and since February 1, 1998 has been, a partner in the
law firm of Bilzin Sumberg Dunn Price & Axelrod LLP. For more than five years
prior to February 1, 1998, Mr. Bilzin was a partner in Rubin Baum Levin Constant
Friedman & Bilzin, a law firm.
We have an Audit Committee, consisting entirely of directors who are not
employees, officers or former officers us or any of our subsidiaries or
divisions, are not relatives of any of our principal executive officers, and are
not individual members of organizations which act as advisors, consultants or
legal counsel to us which receive compensation on a continuing basis from us.
The functions of the Audit Committee will be to recommend to the full Board of
Directors the engagement of independent auditors, review the scope of non-audit
services performed for us or our subsidiaries by the independent auditors,
review the
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<PAGE> 46
independent auditors' recommendations for improvements of internal controls and
review the scope of work, findings and conclusions of our Internal Audit
Department. The members of this Committee are Ms. Sue M. Cobb and Mr. Carlos M.
de la Cruz.
Our By-Laws require that we have, until 2002, an Independent Directors
Committee consisting of three or more directors, none of whom is an officer or
employee of us or a subsidiary, and none of whom is a director, officer or
employee of Lennar Corporation or a subsidiary of Lennar Corporation. Our By-
Laws state that, unless the action has been approved by the Independent
Directors Committee, we may not, and our Board of Directors may not approve or
authorize us to, (i) instruct or permit the representatives of a subsidiary on
the Executive Committee of LLP to vote or consent with regard to any action
which requires the unanimous vote of that Executive Committee, (ii) enter into,
or permit any of its subsidiaries to enter into, any transaction with Lennar
Corporation or any of its subsidiaries, or (iii) agree to any amendment of, or
give any waiver or consent under, the Separation and Distribution Agreement. The
members of this Committee are Mr. Brian L. Bilzin, Ms. Sue M. Cobb and Mr.
Carlos M. de la Cruz.
We have (a) a Compensation Committee (whose members are Messrs. Leonard
Miller and Brian L. Bilzin), which determines the compensation of our chief
executive officer and other executive officers and reviews the compensation of
its other key employees, (b) a Stock Option Committee (whose members are Messrs.
Jeffrey P. Krasnoff, Stuart A. Miller and Leonard Miller), which grants, and
determines the terms of, options under our Employee Stock Option Plans, except
grants to our directors or officers and (c) a Directors and Officers Stock
Option Committee (whose members are Ms. Sue M. Cobb and Mr. Carlos M. de la
Cruz), which approves grants, and the terms of, options granted to our directors
or officers (in addition to approval by our Board of Directors of grants of
options to our directors and officers).
We use incentive compensation to encourage key employees to remain with us,
as well as to reward performance. Thus, in many instances 50% of bonuses to key
employees are paid when they are earned, with the remaining 50% payable over the
following five years, and most stock options are ten year options which become
exercisable in 10% increments on the first through ninth anniversaries of their
dates of grant.
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<PAGE> 47
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following table sets forth our mortgage notes and other debts payable
on a consolidated basis at August 31, 1998.
<TABLE>
<CAPTION>
AT AUGUST 31, 1998
------------------
(IN THOUSANDS)
<S> <C>
SECURED DEBT WITHOUT RECOURSE TO US:
Mortgage notes on operating properties and land with fixed
interest rates of 4.9% to 11%, due through April
2036................................................... $ 117,306
Mortgage notes on operating properties and land with a
floating interest rate (6.4% to 9.5% at August 31,
1998), due through 2027................................ 127,059
Mortgage warehouse facility with a floating interest rate
of 6.4% at August 31, 1998, secured by mortgage loans,
due June 1999.......................................... 148,950
----------
Total secured debt without recourse to us.............. 393,315
----------
SECURED DEBT WITH RECOURSE TO US:
Mortgage notes on operating properties and land with fixed
interest rates of 7.3% to 8.0%, due through 2004....... 26,748
Mortgage notes on operating properties and land with
floating interest rates (4.3% to 9.1% at August 31,
1998),
due through December 2010.............................. 55,889
Repurchase agreements with floating interest rates (6.4%
to 6.8% at August 31, 1998), secured by CMBS,
due through October 1998(1)............................ 255,398
Revolving credit lines with floating interest rates (6.5%
to 6.6% at August 31, 1998), secured by CMBS and loans,
due through August 1999................................ 50,000
----------
Total secured debt with recourse to us................. 388,035
----------
UNSECURED DEBT WITH RECOURSE TO US:
Revolving credit line with a floating interest rate of
6.7% at August 31, 1998, due December 2000............. 100,000
Senior Subordinated Debt with a fixed interest rate of
9.4% at August 31, 1998, due March 2008................ 199,141
----------
Total unsecured debt with recourse to us............... 299,141
----------
Total mortgage notes and other debts payable........... $1,080,491
==========
</TABLE>
- -------------------------
(1) The terms of these agreements were subsequently extended.
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<PAGE> 48
Information concerning our more significant debt instruments is as follows:
MORTGAGE AND/OR DEVELOPER NOTES ON OPERATING PROPERTIES
We, through subsidiaries, have 83 mortgage and/or developer notes on
operating properties, 33 of which have scheduled principal and interest
payments, and the remainder of which only have scheduled interest payments, with
the principal due at maturity.
REPURCHASE AGREEMENTS
We, through subsidiaries, have entered into two reverse repurchase
agreements through which we finance selected CMBS. At August 31, 1998, the
agreements had an aggregate commitment of $310 million under which $255 million
was outstanding. Since that date we have reduced the aggregate commitment to
$218 million. Interest is variable and is based on LIBOR plus specified
percentages. One agreement, which has a commitment of $58 million, expires in
April 1999. We have agreed to reduce gradually our borrowings under that
agreement. We have a commitment letter from the lender under the $160 million
facility to extend the maturity of that facility through December 1999. We have
also agreed to reduce gradually our borrowings under the $160 million facility.
We have guaranteed the obligations of our subsidiaries under both of these
agreements and the agreements are collateralized by the CMBS.
SECURED REVOLVING CREDIT LINES
We, through subsidiaries, have three secured revolving credit lines with an
aggregate commitment of $225 million under which $199 million was outstanding at
August 31, 1998. Interest is variable and is based on LIBOR plus specified
percentages. The lines are collateralized by CMBS and mortgage loans. The lines
mature during 1999 and are expected to be refinanced or extended on
substantially the same terms as the existing lines. The agreements also contain
certain financial tests and restrictive covenants, none of which are currently
expected to restrict our activities. We have guaranteed the obligations of our
subsidiaries under two of these agreements, representing $75 million of the $225
million.
UNSECURED REVOLVING CREDIT NOTES PAYABLE
On December 5, 1997, we entered into a $200 million unsecured revolving
credit agreement which expires on December 31, 2000, with the option of a one
year extension. Interest is calculated at LIBOR plus a margin, which varies
based on our leverage and debt ratings. At August 31, 1998, there was $100
million outstanding under the Revolving Credit Agreement. At August 31, 1998,
the interest rate was 6.7%. The agreement contains certain financial tests and
restrictive covenants, including maximum leverage ratio, minimum net worth,
minimum interest and fixed charge coverage ratios and limits on the incurrence
of unsecured senior debt and subordinated debt. In addition, we are required to
maintain a borrowing base. None of the covenants is currently expected to
restrict our activities.
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9 3/8% SENIOR SUBORDINATED NOTES
On March 19, 1998, we sold $200 million principal amount of 9 3/8% Senior
Subordinated Notes due 2008. The terms of the 9 3/8% Senior Subordinated Notes
are substantially the same as the terms of the Notes, except with regard to the
interest rate and payment dates, the redemption prices and the maturity date.
GUARANTEES OF PARTNERSHIP DEBT
As of August 31, 1998, we were a guarantor or similarly obligated with
regard to $204 million of credit facilities of LLP, under which $87 million was
outstanding. If LLP defaults under those credit facilities, the lenders have the
right to require us, together with Lennar, to purchase LLP's obligations to the
lenders, or a portion of them. However, if the default is failure to meet
financial covenants, the lenders must give us and Lennar the opportunity to cure
the default. See Business -- Real Estate Investments and Related
Activities -- Lennar Land Partners."
In addition, we were the guarantor of up to $40 million of additional
credit facilities of unconsolidated partnerships, under which $31 million was
outstanding at August 31, 1998.
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DESCRIPTION OF THE NOTES
We have summarized certain terms of the Notes and the Indenture in this
section. This summary is not complete. The following description of the
particular terms of the Notes supplements the description in the accompanying
prospectus of the general terms and provisions of our debt securities. To the
extent that the following description of Notes is inconsistent with that general
description in the prospectus, the following description replaces that in the
prospectus. We will issue the Notes under an Indenture dated as of December ,
1998, between us and The Bank of New York, as trustee (the "Trustee"), as
supplemented by a Supplemental Indenture to be dated as of December , 1998
(the "Indenture"). We have also filed the Indenture with the SEC. You should
read the Indenture for additional information before you purchase Notes. The
Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as
amended (the "TIA"). Capitalized terms used but not defined in this section have
the meanings specified in the Indenture. For purposes of this "Description of
Notes," "we," "our" or "us" refers to LNR Property Corporation and does not
include our subsidiaries except in references to financial data determined on a
consolidated basis.
GENERAL
The Notes will be our general unsecured obligations and will be
subordinated in right of payment to all existing and future Senior Indebtedness.
The Notes will rank equal in right of payment with any of our other senior
subordinated indebtedness and will rank senior in right of payment to any of our
other subordinated indebtedness. In addition, as obligations of a holding
company, the Notes will be effectively subordinated to all present and future
indebtedness of our Subsidiaries. See "Risk Factors -- Ranking of Our
Obligations."
PRINCIPAL, MATURITY AND INTEREST
The Notes offered are limited in aggregate principal amount to $100
million, and will mature on , 2008. Interest on the Notes will
accrue at the rate of % per annum and will be payable in arrears
on each and , commencing on , 1999.
We will pay interest to the persons in whose names the Notes are registered at
the close of business on the fifteenth day immediately preceding each interest
payment date. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the date of issuance. There is no sinking fund applicable to the
Notes.
REDEMPTION
Optional Redemption. The Notes will be redeemable at our option at any
time on or after , 2003 in whole or in part, upon not less than
30 nor more than 60 days' notice. If the Notes are redeemed during the
twelve-month period commencing on of any of the years indicated
below, the redemption price will equal the percentage of the amount of the
redeemed Notes
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opposite that year, plus accrued and unpaid interest thereon to the applicable
redemption date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... %
2004......................................................
2005......................................................
2006......................................................
2007 and thereafter....................................... 100.00
</TABLE>
Optional Redemption upon Public Equity Offerings. Notwithstanding the
foregoing, at any time on or prior to , 2001, we may redeem up to
35% of the aggregate principal amount of the Notes originally issued with net
cash proceeds of one or more Public Equity Offerings. The redemption price will
equal % of the aggregate principal amount to be redeemed, plus accrued and
unpaid interest, if any, to the redemption date. However, immediately following
such redemption, at least 65% of the aggregate principal amount of the Notes
originally issued must remain outstanding. The redemption must occur within 60
days of the date of the closing of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of our Qualified Capital Stock under an effective
registration statement filed with the SEC in accordance with the Securities Act
of 1933 (the "Securities Act").
SELECTION AND NOTICE OF REDEMPTION
If less than all of the Notes are to be redeemed at any time, the Trustee
will select the particular Notes or portions of Notes to be redeemed (1) in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, (2) if the Notes are not then listed,
on a pro rata basis, by lot or by such method as the Trustee deems fair and
appropriate. Notes of $1,000 or less will not be redeemed in part. If a partial
redemption is made with the proceeds of a Public Equity Offering, the Trustee
will select the particular Notes to be redeemed on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to DTC procedures), unless
such method is otherwise prohibited.
Notice of redemption must be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to that Note must state the portion of the
principal amount of that Note to be redeemed. A new Note in a principal amount
equal to the unredeemed portion will be issued in the name of the Holder upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption as long
as we have deposited with the paying agent funds in satisfaction of the
applicable redemption price.
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SUBORDINATION
The payment of all Obligations on the Notes will be subordinated in right
of payment to the prior payment in full in cash or cash equivalents of all
Obligations on Senior Indebtedness, whether outstanding on the Issue Date or
thereafter incurred, including without limitation our obligations under the
Credit Agreement. Upon any payment or distribution of our assets to creditors
upon any total or partial liquidation, dissolution, winding-up, reorganization,
assignment for the benefit of creditors or marshaling of our assets or in a
bankruptcy, reorganization, insolvency, receivership or other similar
proceeding, all Obligations upon all Senior Indebtedness shall first be paid in
full in cash or cash equivalents, or such payment duly provided for, before any
payment or distribution is made on account of any Obligations on the Notes, or
for the acquisition of any of the Notes for cash or property or otherwise. If
any payment default occurs and is continuing with respect to any Senior
Indebtedness, no payment of any kind or character shall be made by us or on our
behalf or any other Person on our or that Person's behalf with respect to any
Obligations on the Notes or to acquire any of the Notes for cash or property or
otherwise.
In addition, if (1) any other event of default occurs and is continuing
with respect to any Designated Senior Indebtedness permitting the holders of
such Designated Senior Indebtedness then outstanding to accelerate the maturity
thereof and (2) the Representative for that issue of Designated Senior
Indebtedness gives written notice of the event of default to the Trustee (a
"Default Notice"), then, unless and until all events of default with respect to
that issue of Designated Senior Indebtedness have been cured or waived or have
ceased to exist or the Trustee receives notice from the Representative for that
issue of Designated Senior Indebtedness terminating the Blockage Period (as
defined below), during the 180 days after the delivery of such Default Notice
(the "Blockage Period"), we and any of our Subsidiaries or any obligor under the
Notes will not:
- make any payment of any kind or character with respect to any Obligations
on the Notes; or
- acquire any of the Notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a
Blockage Period extend beyond 180 days from the date the payment on the Notes
was due and only one such Blockage Period may be commenced with respect to all
issues of Designated Senior Indebtedness within any 360 consecutive days. No
event of default which existed or was continuing on the commencement date of any
Blockage Period shall be the basis for commencement of a second Blockage Period
by the Representative of such Designated Senior Indebtedness, whether or not
within a period of 360 consecutive days, unless such event of default shall have
been cured or waived for a period of not less than 90 consecutive days. Any
subsequent action, or any breach of any financial covenants for a period
commencing after the commencement date of such Blockage Period that, in either
case, would give rise to an event of default pursuant to any provisions under
which an event of default previously existed or was continuing shall constitute
a new event of default for this purpose.
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As a result of this subordination, in the event of our insolvency, our
creditors who are not holders of Senior Indebtedness, including the holders of
the Notes, may recover less, ratably, than holders of Senior Indebtedness.
As of August 31, 1998, giving pro forma effect to the issuance of the Notes
and the assumed use of the net proceeds from the issuance to repay Senior
Indebtedness, the aggregate amount of Senior Indebtedness outstanding would have
been $562 million.
We are principally a holding company whose primary assets consist of shares
of Common Stock issued by our Subsidiaries. Accordingly, we will be dependent
upon the cash flows of, and receipt of dividends and advances from, or
repayments of advances by, our Subsidiaries in order to meet our debt
obligations, including our obligations under the Notes. The Notes will not be
guaranteed by our Subsidiaries and, consequently, our Subsidiaries are not
obligated or required to pay any amounts pursuant to the Notes or to make funds
available therefor in the form of dividends or advances. See "Risk
Factors -- Ranking of Our Obligations."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, you will have the right to
require that we offer to repurchase all or any part of your Notes (the "Change
of Control Offer"). The purchase price paid in such a repurchase will equal 101%
of the principal amount of those Notes, plus accrued and unpaid interest to the
date of repurchase.
Within 30 days following the date upon which a Change of Control occurs, we
will send by first class mail to each holder, with a copy to the Trustee, a
notice which will govern the terms of the Change of Control Offer. The notice
will state, among other things, the repurchase date, which may be no earlier
than 30 days and no later than 45 days from the mailing date of the notice,
other than as required by law (the "Change of Control Payment Date"). If you
elect to have a Note repurchased in a Change of Control Offer, you must
surrender the Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Note completed, to the paying agent before the close of
business on the third business day prior to the Change of Control Payment Date.
In connection with any Change of Control, we will within 30 days following
any Change of Control, (1) obtain the consents under the Credit Agreement and
all other Senior Indebtedness required to permit the repurchase of the Notes
pursuant to a Change of Control Offer or (2) repay in full all Indebtedness, and
terminate all commitments, under the Credit Agreement and all other Senior
Indebtedness the terms of which would prohibit the purchase of the Notes under a
Change of Control Offer.
If we are obligated to make a Change of Control Offer, there can be no
assurance that we will be able to obtain all required consents under Senior
Indebtedness or have available funds sufficient to repay Senior Indebtedness and
to pay the Change of Control purchase price for all the Notes tendered in the
Change of Control Offer. In the event we are required to purchase outstanding
Notes under a Change of Control Offer, we would need to seek third party
financing to the extent we do not have available funds to meet our purchase
obligations. However, there can be no assurance that we would be able to obtain
any such financing.
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Neither our Board of Directors nor the Trustee may waive the covenant
relating to our obligation to repurchase Notes upon a Change of Control. That
obligation, as well as restrictions in the Indenture on our and our
Subsidiaries' ability to incur additional Indebtedness, to grant liens on our
property and to make Restricted Payments may also make more difficult or
discourage a takeover of us, whether favored or opposed by the our management.
Consummation of any such transaction in certain circumstances may require
redemption or repurchase of the Notes, and there can be no assurance that we or
the acquiring party will have sufficient financial resources to effect such
redemption or repurchase. Such obligations and restrictions, and the
restrictions on transactions with Affiliates may, in certain circumstances, make
more difficult or discourage any leveraged buyout of us or any of our
Subsidiaries by our management. However, the Indenture may not afford the
holders of Notes protection in all circumstances from the adverse aspects of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
A Change of Control will be deemed to have occurred on, among other events,
the sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of our and our Subsidiaries' assets taken as a whole.
Although there is case law interpreting the phrase "substantially all," there is
no precise established definition of the phrase under applicable law.
Accordingly, your ability to require us to repurchase your Notes as a result of
a sale, lease, transfer, conveyance or other disposition of less than all of our
and our Subsidiaries' assets taken as a whole to another Person or group may be
uncertain.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of Notes
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the Indenture, we will comply with the applicable securities laws and
regulations and will not be deemed to have breached our obligations under the
"Change of Control" provisions of the Indenture by virtue thereof.
We will not be required to make a Change of Control Offer if a third party
makes the Change of Control Offer in compliance with the requirements of the
Indenture and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer in response to such Change of Control Offer.
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness. We will not, and will
not cause or permit any of our Subsidiaries to, directly or indirectly, create,
incur, assume, guarantee, acquire, become liable, contingently or otherwise,
with respect to, or otherwise become responsible for payment of (collectively,
"incur"), any Indebtedness (including, without limitation, Acquired
Indebtedness) other than Permitted Indebtedness.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing at the time of or as a consequence of the incurrence
of any such Indebtedness, we and our Subsidiaries may incur Indebtedness
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(including, without limitation, Acquired Indebtedness) if on the incurrence of
such Indebtedness, after giving effect to the incurrence thereof:
- our Consolidated Fixed Charge Coverage Ratio is greater than 1.5 to 1.0;
- the ratio of the aggregate amount of Recourse Indebtedness outstanding on
a consolidated basis to our Consolidated Net Worth is less than 5.0 to
1.0;
- the ratio of the aggregate amount of Senior Recourse Indebtedness
outstanding on a consolidated basis to the sum of (1) our Consolidated
Net Worth and (2) the aggregate amount of the Subordinated Indebtedness
outstanding on a consolidated basis is less than 3.5 to 1.0; and
- the ratio of the aggregate amount of Subordinated Indebtedness
outstanding on a consolidated basis to our Consolidated Net Worth is less
than 1.0 to 1.0.
No Indebtedness incurred pursuant to the preceding paragraph shall be
included in calculating any limitation set forth in the definition of Permitted
Indebtedness. Neither the accrual of interest nor the accretion of original
issue discount shall be deemed an incurrence of Indebtedness. Prior to any
incurrence of Indebtedness pursuant to the preceding paragraph (other than an
advance under a committed facility), we must deliver to the Trustee an officers'
certificate setting forth the calculations by which such incurrence was
determined to be permitted. If, during any month, we incur Indebtedness pursuant
to the preceding paragraph through advances under a committed facility, we must
deliver to the Trustee on the last day of such month an officers' certificate
setting forth the calculations by which each such incurrence was determined to
be permitted.
Limitation on Restricted Payments. We will not, and will not cause or
permit any of our Subsidiaries to, directly or indirectly, make a Restricted
Payment (as defined below), if at the time of such Restricted Payment or
immediately after giving effect thereto:
- a Default or an Event of Default shall have occurred and be continuing;
- we are not able to incur at least $1.00 of additional Indebtedness (other
than additional Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant above;
- the aggregate amount of all Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Base Date (the amount expended
for such purposes, if other than in cash, being the fair market value of
such property as determined reasonably and in good faith by our Board of
Directors) shall exceed the sum of:
(1) 50% of our cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss)
earned during the period beginning on the first day of the fiscal
quarter including the Base Date and ending on the last day of the
most recent fiscal quarter ending at least 30 days prior to the date
the Restricted Payment occurs (the "Reference Date") (treating such
period as a single accounting period); plus
(2) 100% of the aggregate net cash proceeds received by us from any
Person (other than our Subsidiaries) from the issuance and sale
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subsequent to the Base Date and on or prior to the Reference Date of
our Qualified Capital Stock, including treasury stock; plus
(3) without duplication of any amounts included in clause (2) above,
100% of the aggregate net cash proceeds of any equity contribution
received by us from a holder of our Capital Stock subsequent to the
Base Date and on or prior to the Reference Date (excluding, in the
case of clauses (2) and (3), any net cash proceeds from a Public
Equity Offering to the extent used to redeem the Notes); plus
(4) $75,000,000.
The following actions are "Restricted Payments":
- the declaration or payment of any dividend or any distribution (other
than dividends or distributions made to us or any of our Subsidiaries
and, if such Subsidiary is not a Wholly Owned Subsidiary, to such
Subsidiary's other stockholders or interest holders on a pro rata basis,
and other than any dividend or distribution payable solely in our
Qualified Capital Stock) on or in respect of shares of our Capital Stock
to holders of such Capital Stock;
- the purchase, redemption, acquisition or retirement for value of any of
our Capital Stock or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock (other than the
exchange of such Capital Stock or any warrants, rights or options to
acquire shares of any class of our Capital Stock for our Qualified
Capital Stock); or
- any principal payment on, purchase, defeasance, redemption, prepayment,
decrease, acquisition or retirement for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment,
any of our or our Subsidiaries' Indebtedness that is subordinate or
junior in right of payment to the Notes or any guarantee thereof.
Notwithstanding the foregoing, the provisions of the first paragraph of
this section will not prohibit:
(1) the payment of any dividend or the consummation of any irrevocable
redemption within 60 days after the date of declaration of such
dividend or the giving of such irrevocable redemption notice if the
dividend or redemption would have been permitted on the date of
declaration or giving of irrevocable redemption notice;
(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of our Capital Stock, either:
(i) solely in exchange for shares of our Qualified Capital Stock; or
(ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to any of our Subsidiaries) of
shares of our Qualified Capital Stock;
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(3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any of our Indebtedness that is
subordinate or junior in right of payment to the Notes either:
(i) solely in exchange for shares of our Qualified Capital Stock; or
(ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to any of our Subsidiaries)
of:
(A) shares of our Qualified Capital Stock; or
(B) Refinancing Indebtedness; and
(4) if no Default or Event of Default shall have occurred and be
continuing, the repurchase of shares of, or options to purchase shares
of, our Common Stock from our employees, former employees, directors or
former directors pursuant to the terms of agreements or plans approved
by our Board of Directors under which such individuals purchased or
sold, or were granted the option to purchase or sell shares of Common
Stock, provided, however, that the aggregate amount of such repurchases
or Restricted Payments shall not exceed $250,000 any calendar year.
In determining the aggregate amount of Restricted Payments made subsequent to
the Base Date, amounts expended pursuant to clauses (1), (2)(ii) and (3)(ii)(A)
shall be included in such calculation.
Not later than three business days before making any Restricted Payment, we
will deliver to the Trustee an officers' certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. We will not, and will not cause or permit any of our Subsidiaries
to, directly or indirectly, create or otherwise cause or permit to exist or
become effective any encumbrance or restriction on the ability of any of our
Subsidiaries to:
- pay dividends or make any other distributions on or in respect of its
Capital Stock;
- make loans or advances or pay any Indebtedness or other obligation owed
to us or any of our other Subsidiaries; or
- transfer any of its property or assets to us or any of our other
Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(1) applicable law;
(2) the Indenture with respect to the Notes;
(3) the Credit Agreement;
(4) nonassignment provisions of any contract or any lease governing a
leasehold interest of any of our Subsidiaries;
(5) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person or the properties or
assets of the Person so acquired;
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(6) agreements existing on the Base Date to the extent and in the manner
such agreements are in effect on the Base Date;
(7) restrictions on the transfer of assets subject to any Lien permitted
under the Indenture to secure Non-Recourse Indebtedness imposed by the
holder of such Lien;
(8) restrictions imposed by any agreement to sell assets permitted under
the Indenture to any Person pending the closing of such sale;
(9) any agreement or instrument governing Capital Stock of any Person that
is acquired; or
(10) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (2), (3), (5) or (6) above, provided, however,
that the provisions relating to such encumbrance or restriction
contained in any such Indebtedness incurred to Refinance the
Indebtedness are not less favorable to us in any material respect as
determined by our Board of Directors in their reasonable and good
faith judgment than the provisions relating to such encumbrance or
restriction contained in agreements referred to in such clause (2),
(3), (5) or (6), respectively.
Limitation on Preferred Stock of Subsidiaries. We will not permit any of
our Subsidiaries to issue any Preferred Stock (other than to us or to any of our
Wholly Owned Subsidiaries) or permit any Person (other than us or any of our
Wholly Owned Subsidiaries) to own any Preferred Stock of any of our
Subsidiaries.
Limitation on Liens and Guarantees. We will not, and will not cause or
permit any of our Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens securing our Indebtedness that is
expressly subordinate or junior in right of payment to the Notes or is equal in
right of payment to the Notes against or upon any of our or our Subsidiaries'
property or assets (whether owned on the Issue Date or acquired after the Issue
Date), or any proceeds therefrom, or assign or otherwise convey any right to
receive income or profits therefrom, or to grant any guarantees of such
Indebtedness, unless:
- in the case of Liens securing our Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens;
- in the case of guarantees of our Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are
subject to a guarantee from the same guarantor or guarantors that is
senior in priority to such guarantees; and
- in all other cases, the Notes are equally and ratably secured or
guaranteed as applicable.
For purposes of clarification, any Lien against property, assets, proceeds
or rights to receive income or profits securing Indebtedness which has been
guaranteed will be considered to be a Lien securing the Indebtedness and not a
Lien securing the guarantee.
Prohibition on Incurrence of Senior Subordinated Debt. We will not incur
or permit to exist Indebtedness that by its terms (or by the terms of any
agreement
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governing such Indebtedness) is senior in right of payment to the Notes and
expressly subordinate in right of payment to any of our other Indebtedness.
Merger, Consolidation and Sale of Assets. We will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of our assets (determined on a consolidated basis for us
and our Subsidiaries) unless:
- either:
(1) we are the surviving or continuing corporation; or
(2) the Person (if other than us) formed by such consolidation or into
which we are merged or which acquires our and our Subsidiaries'
properties and assets substantially as an entirety (the "Surviving
Entity") (i) is a corporation organized and validly existing under
the laws of the United States or any State thereof or the District
of Columbia and (ii) expressly assumes, by supplemental indenture,
the due and punctual payment of our payment obligations under the
Notes and the performance of all of our covenants under the Notes,
the Indenture and the Registration Rights Agreement;
- immediately after giving effect to such transaction and the assumption
contemplated by clause (2)(ii) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), we or
such Surviving Entity, as the case may be:
(1) shall have a Consolidated Net Worth equal to or greater than the our
Consolidated Net Worth immediately prior to such transaction; and
(2) shall be able to incur at least $1.00 of additional Indebtedness
(other than additional Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness" covenant;
- immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (2)(ii) above
(including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default
or Event of Default shall have occurred or be continuing; and
- we or the Surviving Entity, as the case may be, shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each
stating that such transaction and any required supplemental indenture
comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have
been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more of our
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
our properties and assets shall be deemed to be the transfer of all or
substantially all of our properties and assets.
If we are not the continuing corporation in any transaction in accordance
with the foregoing, the successor Person formed by such consolidation or into
which
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we are merged or to which such conveyance, lease or transfer is made shall (upon
the required assumption described above) succeed to, and be substituted for, and
may exercise every right and power we have under the Indenture and the Notes
with the same effect as if such surviving entity had been named as such.
Limitations on Transactions with Affiliates. We will not, and will not
cause or permit any of our Subsidiaries to, directly or indirectly, enter into
or permit to exist any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of its Affiliates
(each an "Affiliate Transaction"), other than:
- Permitted Affiliate Transactions (as defined below); and
- Affiliate Transactions on terms that are no less favorable to us or such
Subsidiary than those that might reasonably have been obtained or are
obtainable in a comparable transaction at such time on an arm's-length
basis from a Person that is not our or such Subsidiary's Affiliate.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $5.0 million must be
approved by our Board of Directors or such Subsidiary, as the case may be. The
Board's approval is to be evidenced by a Board Resolution stating that such
Board of Directors (including a majority of the directors who do not have any
interest in the Affiliate Transaction) has determined that such transaction
complies with the foregoing provisions. In addition, if we or any of our
Subsidiaries enters into an Affiliate Transaction (or a series of related
Affiliate Transactions related to a common plan) involving aggregate payments or
other property with a fair market value in excess of $7.5 million, we or such
Subsidiary, as the case may be, shall, prior to the consummation of that
transaction or transactions, obtain a favorable opinion as to the fairness of
such transaction or transactions to us or the relevant Subsidiary, as the case
may be, from a financial point of view, from an Independent Financial Advisor.
The following transactions are Permitted Affiliate Transactions:
- payment of reasonable fees and compensation to, and indemnity provided on
behalf of, our or any of our Subsidiaries' officers, directors,
employees, consultants or agents, as determined in good faith by our
Board of Directors or senior management;
- transactions between or among us and any of our Wholly Owned Subsidiaries
or between or among such Wholly Owned Subsidiaries provided such
transactions are not otherwise prohibited by the Indenture;
- any agreement as in effect as of the Base Date or any amendment thereto
or any transaction contemplated thereby (including pursuant to any
amendment thereto) or in any replacement agreement thereto so long as any
such amendment or replacement agreement is not more disadvantageous to
the Holders in any material respect than the original agreement as in
effect on the Base Date;
- Restricted Payments permitted by the Indenture; and
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- transactions between or among us or any of our Subsidiaries and the Land
Partnership, provided such transactions are permitted by and are effected
in accordance with the terms of the Partnership Agreement of the Land
Partnership and our By-laws, in each case, as in effect on the Base Date.
Conduct of Business. We will, and will cause our Subsidiaries to, engage
primarily in the businesses of acquiring, developing, selling, owning, managing,
operating, leasing, credit enhancing and insuring commercial and multi-family
residential real estate, real estate related lending, acquiring, owning,
servicing and collecting real estate related loans and other underperforming
debt securities, investing in real estate related securities and securities of
companies engaged primarily in real estate related activities, and other
activities related to or arising out of any of those activities.
Reports to Holders. We will deliver to the Trustee within 15 days after
the filing of the same with the SEC, copies of the quarterly and annual reports
and of the information, documents and other reports, if any, which we are
required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act. Notwithstanding that we may not be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, we will file with the Commission, to
the extent permitted, and provide the Trustee and the holders with such annual
reports and such information, documents and other reports specified in Sections
13 and 15(d) of the Exchange Act. We will also comply with the other provisions
of 314(a) of the TIA.
EVENTS OF DEFAULT
Each of the following are Events of Default under the Indenture:
(1) if we fail to pay interest on any Notes when it becomes due and payable
and the default continues for a period of 30 days, whether or not such
failure shall be due to the subordination provisions of the Indenture
or agreements with respect to any other Indebtedness or any other
reason;
(2) if we fail to pay the principal on any Notes, when it becomes due and
payable, at maturity, upon acceleration, upon redemption or otherwise
(including the failure to make a Change of Control Offer or make a
payment to purchase Notes tendered pursuant to a Change of Control
Offer), whether or not such failure shall be due to the subordination
provisions of the Indenture or agreements with respect to any other
Indebtedness or any other reason;
(3) if we fail to observe or perform any other covenant or agreement
contained in the Indenture which continues for a period of 30 days
after we received written notice specifying the default (and demanding
that such default be remedied) from the Trustee or the Holders of at
least 25% of the outstanding principal amount of the Notes (except in
the case of our default with respect to the "Merger, Consolidation and
Sale of Assets" covenant, which will constitute an Event of Default
with such notice requirement but without such passage of time
requirement);
(4) if we fail to pay at final maturity (giving effect to any applicable
grace periods and any extensions thereof) the principal amount of any
of our or our Subsidiaries' Recourse Indebtedness, or the acceleration
of the final
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stated maturity of any such Recourse Indebtedness if the aggregate
principal amount of such Indebtedness, together with the principal
amount of any other such Recourse Indebtedness in default for failure
to pay principal at final maturity or which has been accelerated,
aggregates $5.0 million or more at any time;
(5) one or more judgments in an aggregate amount in excess of $5.0 million
shall have been rendered against us or any of our Subsidiaries and
remain undischarged, unpaid or unstayed for a period of 60 days after
such judgment or judgments become final and nonappealable; and
(6) certain events of bankruptcy affecting us or any of our Subsidiaries.
The Events of Default described in clauses (4), (5) and (6) above with
respect to a Subsidiary shall not apply if that Person was not a Subsidiary at
the time such event or condition occurred unless, in the case of clause (4) or
(5) above, we or another of our Subsidiaries assumes or otherwise becomes liable
for the liability referred to therein or the liabilities generally of such
Person.
If an Event of Default (other than an Event of Default specified in clause
(6) above) shall occur and be continuing, the Trustee or the Holders of at least
25% in principal amount of outstanding Notes may declare the principal of and
accrued interest on all the Notes to be due and payable by written notice to us
and, if it is given by Holders, the Trustee specifying the respective Event of
Default and that it is a "notice of acceleration" (the "Acceleration Notice").
Upon delivery of an Acceleration Notice, the principal of and accrued interest
on all the Notes:
- shall become immediately due and payable; or
- if there are any amounts outstanding under the Credit Agreement, shall
become immediately due and payable upon the first to occur of an
acceleration under the Credit Agreement or five business days after
receipt by us and the Representative under the Credit Agreement of such
Acceleration Notice but only if such Event of Default is then continuing.
If an Event of Default specified in clause (6) above occurs and is
continuing with respect to us, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
At any time after a declaration of acceleration with respect to the Notes,
the Holders of a majority in aggregate principal amount of the Notes may rescind
and cancel such declaration and its consequences:
- if the rescission would not conflict with any judgment or decree;
- if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
such acceleration;
- if interest on overdue installments of interest (to the extent the
payment of such interest is lawful) and on overdue principal, which has
become due otherwise than by such declaration of acceleration, has been
paid;
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- if we have paid the Trustee its reasonable compensation and reimbursed
the Trustee for its expenses, disbursements and advances; and
- in the event of the cure or waiver of an Event of Default of the type
described in clause (4) of the description above of Events of Default,
the Trustee has received an officers' certificate and an opinion of
counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any rights
arising from a subsequent Default.
The Holders of a majority in aggregate principal amount of the Notes may
waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Notes.
The Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
We are required to provide an officers' certificate to the Trustee promptly
upon our obtaining knowledge of any Default or Event of Default that has
occurred and, if applicable, describe such Default or Event of Default and the
status thereof. In addition, we must provide an annual certification as to the
existence of Defaults and Events of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have our obligations
discharged with respect to the outstanding Notes ("Legal Defeasance"). Legal
Defeasance means that we will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Notes, except for:
- the rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest on the Notes when such payments are due;
- our obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, replacement of mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payments;
- the rights, powers, trust, duties and immunities of the Trustee and our
obligations in connection therewith; and
- the Legal Defeasance provisions of the Indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants that are described in the
Indenture, including the covenants relating to a Change of Control ("Covenant
Defeasance"). Following a Covenant Defeasance, any omission to comply with
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such obligations shall not constitute a Default or Event of Default. If a
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default.
In order to exercise Legal Defeasance or Covenant Defeasance:
- we must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in United States dollars, noncallable United States
government obligations, or a combination thereof, in such amounts as will
be sufficient without reinvestment, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal
of, premium, if any, and interest on the Notes on the stated dates for
payment thereof or on the applicable redemption date, as the case may be;
- in the case of Legal Defeasance, we must deliver to the Trustee an
opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that:
(1) we have received from, or there has been published by, the Internal
Revenue Service a ruling; or
(2) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that,
the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Legal Defeasance had not occurred;
- in the case of Covenant Defeasance, we must deliver to the Trustee an
opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
- no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (after giving effect to the deposit) or, in the
case of Legal Defeasance, insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit (other than a Default or Event of
Default resulting from the incurrence of Indebtedness all or a portion of
the proceeds of which will be used to defease the Notes concurrently with
such incurrence);
- such Legal Defeasance or Covenant Defeasance shall not result in a breach
or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which we or any of our
Subsidiaries is a party or by which we or any of our Subsidiaries is
bound;
- we must deliver to the Trustee an officers' certificate stating that the
deposit was not made by us with the intent of preferring the Holders over
any of our other creditors or with the intent of defeating, hindering,
delaying or defrauding any of our other creditors or others;
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- we must deliver to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance, as the case
may be, have been complied with;
- we must deliver to the Trustee an opinion of counsel to the effect that,
after the 91st day following the deposit, assuming that no bankruptcy
related default or Event of Default has occurred and is continuing on
such day:
(1) the trust funds will not be subject to any rights of holders of our
Indebtedness other than the Notes; and
(2) the deposit of trust funds will not be subject to avoidance under
any applicable preference or similar laws; and
- certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when:
- either:
(1) all the Notes theretofore authenticated and delivered have been
delivered to the Trustee for cancellation, except lost, stolen or
destroyed Notes which have been replaced or paid and Notes for whose
payment money has been deposited in trust or segregated and held in
trust by us and repaid to us or discharged from such trust; or
(2) all Notes not theretofore delivered to the Trustee for cancellation
have become due and payable and we have irrevocably deposited or
caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes
not theretofore delivered to the Trustee for cancellation, for
principal of, premium, if any, and interest on the Notes to the date
of deposit together with irrevocable instructions from us directing
the Trustee to apply such funds to the payment thereof;
- we have paid all other sums payable by us under the Indenture; and
- we have delivered to the Trustee an officers' certificate and an opinion
of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been
complied with.
MODIFICATION OF THE INDENTURE
From time to time, we and the Trustee, without the consent of the Holders,
may amend the Indenture with respect to the Notes for certain specified
purposes, including curing ambiguities, defects or inconsistencies, so long as
such change does not, in the opinion of the Trustee, adversely affect the rights
of any of the Holders in any material respect. In formulating its opinion on
such matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel.
Other modifications, waivers and amendments of the Indenture with respect to the
Notes may be made with the consent of the Holders of a majority in principal
amount of the then
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outstanding Notes. However, without the consent of each Holder affected thereby,
no amendment or waiver may:
- reduce the amount of Notes whose Holders must consent to an amendment;
- reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any Notes;
- reduce the principal of or change or have the effect of changing the
fixed maturity of any Notes, or change the date on which any Notes may be
subject to redemption or repurchase, or reduce the redemption or
repurchase price therefor;
- make any Notes payable in money other than that stated in the Notes;
- make any change in provisions of the Indenture protecting the right of
each Holder to receive payment of principal of and interest on such Note
on or after the due date thereof or to bring suit to enforce such
payment, or permitting Holders of a majority in principal amount of Notes
to waive Defaults or Events of Default;
- amend, change or modify in any material respect our obligation to make
and consummate a Change of Control Offer in the event of a Change of
Control or modify any of the provisions or definitions with respect
thereto; or
- modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Notes in a
manner which adversely affects the Holders.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
conflicts of law.
CONCERNING THE TRUSTEE
The Bank of New York, the Trustee under the Indenture, will be appointed by
us as the initial paying agent, registrar and custodian with regard to the
Notes. The Trustee is the lender to one of our subsidiaries under a $50 million
revolving credit facility. We also may maintain custodial and deposit accounts
and conduct other banking transactions with the Trustee or its affiliates in the
ordinary course of business. The Trustee and its affiliates may from time to
time in the future provide banking and other services to us in the ordinary
course of their business.
Except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the Indenture. During
the existence of an Event of Default, the Trustee will exercise such rights and
powers vested in it by the Indenture, and use the same degree of care and skill
in its exercise as a prudent man or woman would exercise or use under the
circumstances in the conduct of his or her own affairs.
If the Trustee becomes our creditor, the Indenture and the provisions of
the TIA limit the right of the Trustee to obtain payments of claims in certain
cases or to realize on certain property received in respect of any such claim as
security or otherwise. Subject to the TIA, the Trustee will be permitted to
engage in other
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transactions. However, if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
GLOBAL SECURITIES
The Notes will be issued in the form of one or more global securities
("Global Securities") that will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York (the "Depositary"). Interests in
the Global Securities will be issued only in denominations of $1,000 principal
amount or integral multiples of that amount. Unless and until it is exchanged in
whole or in part for Securities in definitive form, a Global Security may not be
transferred except as a whole to a nominee of the Depositary for such Global
Security, or by a nominee of the Depositary to the Depositary or another nominee
of the Depositary, or by the depositary or any such nominee to a successor
Depositary or a nominee of such successor Depositary.
BOOK-ENTRY SYSTEM
Initially, the Notes will be registered in the name of Cede & Co., the
nominee of the Depositary. Accordingly, beneficial interests in the Notes will
be shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants.
The Depositary has advised us and the Underwriters as follows: the
Depositary is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the United States Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. The Depositary holds Securities that its participants ("Direct
Participants") deposit with the Depositary. The Depositary also facilitates the
settlement among Direct Participants of securities transactions, such as
transfers and pledges, in deposited securities through electronic computerized
book-entry changes in such Direct Participants' accounts, eliminating the need
for physical movement of Securities certificates. Direct Participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations.
The Depositary is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the Depositary's
book-entry system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to the Depositary and its Direct and
Indirect Participants are on file with the SEC.
Payments on the Notes registered in the name of the Depositary's nominee
will be made in immediately available funds to the Depositary's nominee as the
registered owner of the Global Securities. We and the Trustee will treat the
Depositary's nominees as the owners of such Notes for all other purposes as
well. Therefore, neither we, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of any amount due on the Notes to
owners of
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beneficial interests in the Global Securities. It is the Depositary's current
practice, upon receipt of any payment, to credit Direct Participants' accounts
on the payment date according to their respective holdings of beneficial
interests in the Global Securities as shown on the Depositary's records unless
the Depositary has reason to believe that it will not receive payment. Payments
by Direct and Indirect Participants to owners of beneficial interests in the
Global Securities will be governed by standing instructions and customary
practices, as is the case with Securities held for the accounts of customers in
bearer form or registered in "street name." Such payments will be the
responsibility of such Direct and Indirect Participants and not of the
Depositary, the Trustee or us.
Notes represented by a Global Security will be exchangeable for Notes in
definitive form of like tenor in authorized denominations only if:
- the Depositary notifies us that it is unwilling or unable to continue as
Depositary;
- the Depositary ceases to be a clearing agency registered under applicable
law and a successor Depositary is not appointed by us within 90 days; or
- we, in our discretion, determine not to require all of the Notes to be
represented by a Global Security and notify the Trustee of our decision.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriter in immediately
available funds. So long as the Depositary continues to make its Same-Day Funds
Settlement System available to us, all payments on the Notes will be made by us
in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issues is
generally settled in clearing-house or next-day funds. In contrast, the Notes
will trade in the Depositary's Same-Day Funds Settlement System until maturity,
and secondary market trading in the Notes; therefore, the Depositary will
require that trades be settled in immediately available funds.
CERTAIN DEFINITIONS
The following are definitions of certain of the terms used in the
Indenture.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes our Subsidiary or at the
time it merges or consolidates with or into us or any of our Subsidiaries or
assumed by us or any of our Subsidiaries in connection with the acquisition of
assets from such Person.
"Adjusted Consolidated EBITDA" means, with respect to any Person for any
period, the sum of Consolidated EBITDA plus any non-refundable housing tax
credits used by such Person and its Consolidated Subsidiaries to reduce the
amount of income taxes that would have otherwise been payable by such Person and
its Consolidated Subsidiaries for such period.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the
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direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means:
- an Investment by us or any of our Subsidiaries in any other Person
pursuant to which such Person shall become our Subsidiary, or shall be
merged with or into us or any of our Subsidiaries; or
- the acquisition by us or any of our Subsidiaries of the assets of any
Person (other than our Subsidiary) which constitutes all or substantially
all of the assets of such Person or comprise any division or line of
business of such Person or any other properties or assets of such Person
other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by us or any of our
Subsidiaries (including any sale and leaseback transaction) to any Person other
than us or our Wholly Owned Subsidiaries of:
- any Capital Stock of any of our Subsidiaries; or
- any of our or our Subsidiaries' other property or assets other than in
the ordinary course of business.
"Base Date" means March 24, 1998, the date on which our 9 3/8% Senior
Subordinated Notes due 2008 were originally issued.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP. For purposes of this definition, the
amount of such obligations at any date shall be the capitalized amount of such
obligations at such date, determined in accordance with GAAP.
"Capital Stock" means:
- with respect to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however designated and
whether voting or nonvoting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person; and
- with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.
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"Change of Control" means the occurrence of one or more of the following
events:
- any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of our assets
or the assets of Leisure Colony to any Person or group of related Persons
for purposes of Section 13(d) of the Exchange Act (a "Group"), together
with any Affiliates thereof (whether or not otherwise in compliance with
the provisions of the Indenture), other than, in the case of Leisure
Colony, a transaction with us or any of our Wholly Owned Subsidiaries;
- the approval by the holders of our Capital Stock of any plan or proposal
for our liquidation or dissolution (whether or not otherwise in
compliance with the provisions of the Indenture);
- any Person or Group (other than Leonard Miller and any Permitted
Transferees of Leonard Miller) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than
50% of the aggregate ordinary voting power represented by our issued and
outstanding Capital Stock;
- Leisure Colony shall cease being our Wholly Owned Subsidiary; or
- a majority of the members of our Board of Directors are persons who were
not directors on the Issue Date and whose election was not approved by a
vote of at least a majority of the members of our Board of Directors in
office at the time of the election who either were members of such Board
of Directors on the Base Date or whose election as members of such Board
of Directors was previously approved by such a majority.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or non-voting) of such Person's common stock, whether
outstanding on the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person for any period, the
sum (without duplication) of:
(1) Consolidated Net Income, plus
(2) to the extent Consolidated Net Income has been reduced thereby,
(i) all income taxes of such Person and its Subsidiaries paid or accrued
in accordance with GAAP for such period (other than income taxes
attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions outside the
ordinary course of business),
(ii) Consolidated Interest Expense, and
(iii) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Subsidiaries in
accordance with GAAP.
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"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Adjusted Consolidated EBITDA of such Person during the four
full fiscal quarters (the "Four Quarter Period") ending on or prior to the date
of the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of
this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
- the incurrence or repayment of any Indebtedness of such Person or any of
its Subsidiaries (and the application of the proceeds thereof) giving
rise to the need to make such calculation and any incurrence or repayment
of other Indebtedness (and the application of the proceeds thereof),
other than the incurrence or repayment of Indebtedness in the ordinary
course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any
time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the
case may be (and the application of the proceeds thereof), occurred on
the first day of the Four Quarter Period; and
- any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a
result of such Person or one of its Subsidiaries (including any Person
who becomes a Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also
including any Consolidated EBITDA (including any pro forma expense and
cost reductions calculated on a basis consistent with Regulation S-X
under the Securities Act as in effect on the Base Date) (provided that
such Consolidated EBITDA shall be included only to the extent includible
pursuant to the definition of "Consolidated Net Income") attributable to
the assets which are the subject of the Asset Acquisition or Asset Sale
occurring during the Four Quarter Period or at any time subsequent to the
last day of the Four Quarter Period and on or prior to the Transaction
Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness)
occurred on the first day of the Four Quarter Period.
If such Person or any of its Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or any Subsidiary
of such Person had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the
Transaction Date;
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(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Four
Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined
on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations shall be deemed to
accrue at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense, plus
(2) the product of
(i) the amount of all dividend payments on any series of Preferred Stock
of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such
period times
(ii) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated federal,
state and local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP, including without limitation:
(i) any amortization of debt discount;
(ii) the net costs under Interest Swap Obligations;
(iii) all capitalized interest; and
(iv) the interest portion of any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by such Person and its
Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP, minus amortization or write off of deferred
financing costs.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate net income (or loss) of such Person and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP. However,
Consolidated Net Income shall not include:
(1) gains (and losses) on an after-tax effected basis from Asset Sales or
abandonments or reserves relating thereto;
(2) items classified as extraordinary or nonrecurring gains or losses on an
after tax-effected basis;
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(3) the net income or loss of any Person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a
Subsidiary of the referent Person or is merged or consolidated with the
referent Person or any Subsidiary of the referent Person;
(4) the net income (but not loss) of any Subsidiary of the referent Person
to the extent that the declaration of dividends or similar
distributions by that Subsidiary of that income is restricted, directly
or indirectly, by operation of the terms of its charter or constituent
documents or any agreement, instrument, judgment, law, order, statute,
rule, or governmental regulation or for any other reason whatsoever;
(5) the net income or loss of any other Person, other than a Consolidated
Subsidiary of the referent Person, except:
(i) to the extent (in the case of net income) of cash dividends or
distributions paid to the referent Person, or to a Wholly Owned
Subsidiary of the referent Person (other than a Subsidiary described
in clause (4) above), by such other Person; or
(ii) that the referent Person's share of any net income or loss of such
other Person under the equity method of accounting for Affiliates
shall not be excluded;
(6) any restoration to income of any contingency reserve of an
extraordinary, nonrecurring or unusual nature, except to the extent
that provision for such reserve was made out of Consolidated Net Income
accrued at any time following the Base Date;
(7) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether
or not such operations were classified as discontinued); and
(8) in the case of a successor to the referent Person by consolidation or
merger or as a transferee of the referent Person's assets, any earnings
of the successor prior to such consolidation, merger or transfer of
assets.
"Consolidated Net Worth" means, with respect to any Person, the
consolidated stockholders' equity of such Person as of the end of the last
completed fiscal quarter ending on or prior to the date of the transaction
giving rise to the need to calculate Consolidated Net Worth, determined on a
consolidated basis in accordance with GAAP, less (without duplication) amounts
attributable to Disqualified Capital Stock of such Person and interests in such
Person's Consolidated Subsidiaries not owned, directly or indirectly by such
Person.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization, and other non-cash charges of
such Person and its Subsidiaries reducing Consolidated Net Income of such Person
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges which require an accrual of or
a reserve for cash charges for any future period).
"Consolidated Subsidiary" means, with respect to any Person, a Subsidiary
of such Person, the financial statements of which are consolidated with the
financial statements of such Person in accordance with GAAP.
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"Credit Agreement" means the Revolving Credit Agreement dated as of
December 5, 1997 among us, certain of our Subsidiaries, the lenders party
thereto in their capacities as lenders thereunder and Bank of America National
Trust and Savings Association, as agent, together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreement may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time. The Credit Agreement includes any agreement extending the maturity of,
refinancing, replacing or otherwise restructuring (including increasing the
amount of available borrowings (provided, however, that such increase in
borrowings is permitted by the "Limitation on Incurrence of Additional
Indebtedness" covenant above other than as Permitted Indebtedness) or adding our
Subsidiaries as additional borrowers or guarantors thereunder) all or any
portion of the Indebtedness under such agreement or any successor or replacement
agreement whether by the same or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect us or
any of our Subsidiaries against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means:
- Indebtedness under or in respect of the Credit Agreement; and
- any other Indebtedness constituting Senior Indebtedness which, at the
time of determination, has an aggregate principal amount of at least
$25.0 million and is specifically designated in the instrument evidencing
such Senior Indebtedness as our "Designated Senior Indebtedness."
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (other than as a result
of a Change of Control) on or prior to the final maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Existing Indebtedness" means our and our Subsidiaries' Indebtedness (other
than Indebtedness under the Credit Agreement) in existence on the Base Date or
incurred subsequent to the Base Date and on or prior to the Issue Date in
accordance with the terms of our 9 3/8% Senior Subordinated Notes due 2008
(other than as "Permitted Indebtedness" thereunder), until such amounts are
repaid.
"Fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by our Board of Directors acting reasonably and in good
faith and shall be evidenced by a Board Resolution of our Board of Directors.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect on the Issue Date.
"Holder" means any holder of Notes.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business);
(5) all Obligations for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of Indebtedness
of any other Person that is referred to in clauses (1) through (5)
above and clause (8) below;
(7) all Obligations of any other Person of the kind referred to in clauses
(1) through (6) above and clause (8) below which are secured by any
lien on any property or asset of such Person, the amount of such
Obligation being deemed to be the lesser of the fair market value of
such property or asset or the amount of the Obligation so secured;
(8) all Obligations under currency agreements and interest swap agreements
of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference
and its maximum fixed repurchase price, but excluding accrued
dividends, if any.
For purposes hereof, the amount of any guarantee or other contingent
obligation in respect of Indebtedness of:
(i) any other Person (other than a Subsidiary of such Person) shall be
deemed to be equal to the maximum amount of such Indebtedness,
unless the liability is otherwise limited by the terms of such
guarantee or other contingent obligation regarding such
Indebtedness, in which case, the amount of such guarantee or other
obligation shall be deemed to equal the maximum amount of such
liability; and
(ii) any Subsidiary of such Person, at the option of such Person, shall
be deemed to be either the amount determined pursuant to clause (1)
or the actual outstanding amount of such Indebtedness.
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For purposes of this definition, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture. If
such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock.
"Independent Financial Advisor" means a firm which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in us or any of our Subsidiaries and which, in the
judgment of our Board of Directors, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on a stated notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by us and
our Subsidiaries on commercially reasonable terms in accordance with our or our
Subsidiaries' normal trade practices, as the case may be.
"Issue Date" means the date of original issuance of the Notes.
"Land Partnership" means Lennar Land Partners, a Delaware general
partnership.
"Leisure Colony" means Leisure Colony Management Corp. Co., a Florida
corporation, and its successors including any of our Subsidiaries to which all
or substantially all the assets of Leisure Colony Management Corp. Co. are sold,
leased or otherwise transferred.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Mortgage Subsidiary" means our Wholly Owned Subsidiary to be formed after
the Base Date solely for the purpose of engaging in the mortgage banking
business and incidental activities directly related thereto.
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"Non-Recourse Indebtedness" means any of our or any of our Subsidiaries'
Indebtedness that is:
- specifically advanced to finance the acquisition of investment assets and
secured only by the assets to which such Indebtedness relates without
recourse to us or any of our Subsidiaries;
- advanced to any of our Subsidiaries or group of our Subsidiaries formed
for the sole purpose of acquiring or holding investment assets against
which a loan is obtained that is made without recourse to, and with no
cross-collateralization against our or any of our other Subsidiaries'
assets and upon complete or partial liquidation of which the loan must be
correspondingly completely or partially repaid, as the case may be; or
- specifically advanced to finance the acquisition of real property and
secured by only the real property to which such Indebtedness relates
without recourse to us or any of our Subsidiaries.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the Notes in an aggregate principal amount not in
excess of $100 million;
(2) Indebtedness incurred pursuant to the Credit Agreement in an aggregate
outstanding principal amount at any time not to exceed $220 million;
(3) our Interest Swap Obligations covering our or any of our Subsidiaries'
Indebtedness; provided, however, that such Interest Swap Obligations
are entered into to protect us and our Subsidiaries from fluctuations
in interest rates on Indebtedness incurred in accordance with the
Indenture to the extent the notional principal amount of such Interest
Swap Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(4) Indebtedness under Currency Agreements; provided, however, that in the
case of Currency Agreements which relate to Indebtedness, such
Currency Agreements do not increase our or our Subsidiaries'
Indebtedness outstanding other than as a result of fluctuations in
foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(5) Indebtedness of a Subsidiary to us or to any of our Wholly Owned
Subsidiaries for so long as such Indebtedness is held by us or any of
our Wholly Owned Subsidiaries, in each case subject to no Liens held
by any Person other than us or any of our Wholly Owned Subsidiaries.
However, if on any date any Person other than us or any of our Wholly
Owned Subsidiaries acquires any such Indebtedness or obtains a Lien in
respect of such Indebtedness, such date shall be deemed the date of
incurrence of Indebtedness not constituting Permitted Indebtedness by
the issuer of such Indebtedness unless such Indebtedness is otherwise
permitted under the Indenture;
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(6) our Indebtedness to any of our Wholly Owned Subsidiaries for so long
as such Indebtedness is held by any of our Wholly Owned Subsidiaries,
in each case subject to no Lien; provided, however, that:
(i) any of our Indebtedness to any of our Wholly Owned Subsidiaries is
unsecured and subordinated, pursuant to a written agreement, to our
obligations under the Indenture and the Notes at least to the same
extent that the Notes are subordinated to Senior Indebtedness; and
(ii) if on any date any Person other than any of our Wholly Owned
Subsidiaries acquires any such Indebtedness or obtains a Lien in
respect of such Indebtedness, such date shall be deemed the date
of incurrence of Indebtedness not constituting our Permitted
Indebtedness unless such Indebtedness is otherwise permitted under
the Indenture;
(7) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within three business days of incurrence;
(8) our or any of our Subsidiaries' Indebtedness represented by letters of
credit for our account or such Subsidiaries, as the case may be, in
order to provide security for workers' compensation claims, payment
obligations in connection with self-insurance or similar requirements
in the ordinary course of business;
(9) Existing Indebtedness outstanding on the Base Date or incurred
subsequent to the Base Date and on or prior to the Issue Date in
accordance with the terms of our 9 3/8% Senior Subordinated Notes due
2008 (other than as "Permitted Indebtedness" thereunder);
(10) Non-Recourse Indebtedness of the Mortgage Subsidiary;
(11) Additional Indebtedness in an aggregate principal amount not to exceed
$50.0 million at any time outstanding; and
(12) Refinancing Indebtedness.
"Permitted Transferee" means, with respect to any Person:
- that Person's spouse;
- a parent or lineal descendant (including an adopted child) of a parent of
that Person, or the spouse of a lineal descendant of a parent of that
Person;
- a trustee, guardian or custodian for, or an executor, administrator or
other legal representative of the estate of, that Person, or a trustee,
guardian or custodian for a Permitted Transferee of that Person;
- the trustee of a trust (including a voting trust) for the benefit of that
Person; and
- a corporation, partnership or other entity of which that Person and
Permitted Transferees of that Person are the beneficial owners of a
majority in voting power of the equity.
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"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Recourse Indebtedness" means all of our and our Subsidiaries' Indebtedness
other than Non-Recourse Indebtedness.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by us or any of our
Subsidiaries of Indebtedness incurred in accordance with the "Limitation on
Incurrence of Additional Indebtedness" covenant (other than pursuant to clauses
(2), (3), (4), (5), (6), (7), (8), (10), (11) or (12) of the definition of
Permitted Indebtedness), in each case that does not:
- result in an increase in the aggregate principal amount of Indebtedness
of such Person as of the date of such proposed Refinancing (plus the
amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
fees and expenses incurred by us or such Subsidiary, as the case may be,
in connection with such Refinancing), except to the extent that any such
increase in Indebtedness is otherwise permitted by the Indenture; or
- create Indebtedness with:
(1) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced; or
(2) a final maturity earlier than the final maturity of the Indebtedness
being Refinanced.
However, if such Indebtedness being Refinanced is our Indebtedness, then
such Refinancing Indebtedness shall be solely our Indebtedness and (x) if such
Indebtedness being Refinanced is equal in right of payment with the Notes, then
such Refinancing Indebtedness shall be equal in right of payment with or
subordinate to the Notes or (y) if such Indebtedness being Refinanced is
subordinate or junior to the Notes, then such Refinancing Indebtedness shall be
subordinate to the Notes at least to the same extent and in the same manner as
the Indebtedness being Refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Indebtedness. However, if and
for so long as any Designated Senior Indebtedness lacks such a representative,
then the Representative for such Designated Senior Indebtedness shall at all
times
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constitute the holders of a majority in outstanding principal amount of such
Designated Senior Indebtedness in respect of any Designated Senior Indebtedness.
"Senior Indebtedness" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any of
our Indebtedness, whether outstanding on the Issue Date or thereafter created,
incurred or assumed, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the Notes. Without limiting the generality of the foregoing,
"Senior Indebtedness" shall also include the principal of, premium, if any,
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on, and all other amounts owing in respect of:
(1) all of our monetary obligations (including guarantees thereof) of every
nature under the Credit Agreement, including, without limitation,
obligations to pay principal and interest, reimbursement obligations
under letters of credit, fees, expenses and indemnities;
(2) all Interest Swap Obligations (including guarantees thereof); and
(3) all obligations (including guarantees) under Currency Agreements, in
each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include:
(1) any of our Indebtedness to any of our Subsidiaries or any of our
Affiliates or any of such Affiliate's Subsidiaries;
(2) Indebtedness to, or guaranteed on behalf of, our or any of our
Subsidiaries' shareholders, directors, officers or employees
(including, without limitation, amounts owed for compensation);
(3) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(4) Indebtedness represented by Disqualified Capital Stock;
(5) any liability for federal, state, local or other taxes we owe;
(6) that portion of any Indebtedness incurred in violation of the Indenture
provisions set forth under "Limitation on Incurrence of Additional
Indebtedness;"
(7) Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code is without
recourse to us; and
(8) any Indebtedness which is, by its express terms, subordinated in right
of payment to any of our other Indebtedness.
"Senior Recourse Indebtedness" means all Senior Indebtedness other than
Senior Indebtedness that is Non-Recourse Indebtedness plus Subsidiary
Unsubordinated Indebtedness of each of our Subsidiaries (but only to the extent
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not in excess of the book value of the assets of the issuer thereof) other than
Subsidiary Unsubordinated Indebtedness of such Subsidiary that is Non-Recourse
Indebtedness.
"Subordinated Indebtedness" means all of our and our Subsidiaries'
Indebtedness which expressly provides that such Indebtedness shall be
subordinated in right of payment to any other Indebtedness.
"Subsidiary" means, with respect to any Person:
- any corporation of which the outstanding Capital Stock having at least a
majority of the votes entitled to be cast in the election of directors
under ordinary circumstances shall at the time be owned, directly or
indirectly, by such Person;
- any other Person (other than a partnership) of which at least a majority
of the voting interest under ordinary circumstances is at the time,
directly or indirectly, owned by such Person; or
- any partnership the sole general partner or the managing general partner
of which is such Person or a Subsidiary of such Person or the only
general partners of which are such Person or one or more Subsidiaries of
such Person (or any combination thereof).
"Subsidiary Unsubordinated Indebtedness" means all Indebtedness of any of
our Subsidiaries other than Subordinated Indebtedness thereof.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of such Indebtedness
into
(2) the sum of the total of the products obtained by multiplying
(i) the amount of each then remaining installment, sinking fund, serial
maturity or other required payment of principal, including payment
at final maturity, in respect thereof, by
(ii) the number of years (calculated to the nearest one-twelfth) which
will elapse between such date and the making of such payment.
"Wholly Owned Subsidiary" means, with respect to any Person, any Subsidiary
of such Person:
- of which all the outstanding voting securities normally entitled to vote
in the election of directors are owned by such Person or any Wholly Owned
Subsidiary of such Person (other than directors qualifying shares or an
immaterial amount of shares required to be owned by other Persons
pursuant to applicable law); or
- all the outstanding partnership interests are owned by such Person or any
Wholly Owned Subsidiary of such Person.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement, BT Alex. Brown Incorporated (the "Underwriter") has agreed to
purchase from us $100 million in principal amount of Notes at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus supplement.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent.
We have been advised by the Underwriter that the Underwriter proposes to
offer the Notes to the public at the public offering price set forth on the
cover page of this prospectus supplement and to certain dealers at such price
less a concession not in excess of % of such offering price. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of % of the public offering price of the Notes to certain other dealers.
After commencement of the offering, the offering price and other selling terms
may be changed by the Underwriter.
The Notes are a new issue of securities with no established trading market.
The Notes will not be listed on any securities exchange. The Underwriter has
advised us that it intends to act as market maker for the Notes. However, the
Underwriter is not obligated to do so and may discontinue any market making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Notes.
We have agreed to indemnify the Underwriter and certain controlling persons
against certain liabilities, including liabilities under the Securities Act.
The Underwriter has advised us that, pursuant to Regulation M under the
Exchange Act, certain persons participating in the offering may engage in
transactions, including over-allotment, stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Notes at a level above that
which might otherwise prevail in the open market. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. A stabilizing bid is a bid for the purchase of Notes on behalf of the
Underwriter for the purchase of fixing or maintaining the price of the Notes. A
syndicate covering transaction is the bid for or the purchase of Notes on behalf
of the Underwriter to reduce a short position incurred by the Underwriter in
connection with the offering. A penalty bid is an arrangement permitting the
Underwriter to reclaim the selling concession otherwise accruing to a syndicate
member in connection with the offering if the Notes originally sold by such
syndicate member are purchased in a syndicate covering transaction and therefore
have not been effectively placed by such syndicate member. The Underwriter is
not obligated to engage in these activities and, if commenced, any of these
activities may be discontinued at any time.
The Underwriter has advised us that the Underwriter does not intend to
confirm sales to any account over which it exercises discretionary authority.
The Underwriter and its predecessors have from time to time provided, and
expect to continue to provide, financial and advisory services to Lennar and us
for
S-81
<PAGE> 83
customary fees. An affiliate of the Underwriter is an investor, together with
one of our subsidiaries, in a venture that was formed to make various
investments in Japan.
LEGAL MATTERS
Rogers & Wells LLP, New York, New York will pass upon the validity of the
Notes for us. Willkie Farr & Gallagher, New York, New York will pass upon
certain legal matters in connection with the Notes for the Underwriter.
EXPERTS
Our consolidated financial statements as of November 30, 1997 and 1996 and
for each of the three years in the period ended November 30, 1997 and related
financial statement schedules, and the consolidated financial statements of
Affordable Housing Group as of December 31, 1997 and for the year then ended,
included or incorporated by reference in this prospectus supplement and the
prospectus and registration statement of which it is part have been audited by
Deloitte & Touche LLP independent auditors, as stated in their reports appearing
herein and incorporated by reference in this prospectus supplement and the
prospectus and have been so included in reliance upon the reports of such firm
given their authority as experts in accounting and auditing.
INFORMATION WE FILE
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 under the Securities Act with respect to securities we may
issue, including the Notes. This prospectus supplement and the accompanying
prospectus, which constitute a part of the Registration Statement, do not
contain all the information set forth in the Registration Statement and the
exhibits and schedules to it. We file annual, quarterly and current reports,
proxy statements and other materials with the SEC. The public may read and copy
any materials we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
located at Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois
60661, and 7 World Trade Center, Suite 1300, New York, New York 10048. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements and other information
regarding issuers (including us) that file electronically with the SEC. The
address of that site is http://www.sec.gov. Reports, proxy statements and other
information we file also can be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
S-82
<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
LNR PROPERTY CORPORATION AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The following audited consolidated financial statements and unaudited
consolidated condensed financial statements of LNR Property Corporation and
subsidiaries are presented herein on the pages indicated below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets as of November 30, 1997 and
1996................................................... F-3
Consolidated Statements of Earnings for the Years Ended
November 30, 1997, 1996 and 1995....................... F-4
Consolidated Statements of Parent Company Investment and
Stockholders' Equity for the Years Ended November 30,
1997, 1996 and 1995.................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1997, 1996 and 1995....................... F-6
Notes to Consolidated Financial Statements for the Years
Ended November 30, 1997, 1996 and 1995................. F-7
Report of Independent Auditors............................ F-23
Schedule II -- Valuation and Qualifying Accounts.......... F-24
Schedule III -- Real Estate and Accumulated
Depreciation........................................... F-25
Schedule IV -- Mortgage Loans on Real Estate.............. F-26
UNAUDITED FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheet as of August 31,
1998................................................... F-27
Consolidated Condensed Statements of Earnings for the Nine
Month Periods Ended August 31, 1998 and 1997........... F-28
Consolidated Condensed Statements of Cash Flows for the
Nine Month Periods Ended August 31, 1998 and 1997...... F-29
Notes to Consolidated Condensed Financial Statements for
the Nine Month Periods Ended August 31, 1998........... F-30
</TABLE>
F-1
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of LNR Property Corporation:
We have audited the accompanying consolidated balance sheets of LNR
Property Corporation and subsidiaries (the "Company") as of November 30, 1997
and 1996 and the related consolidated statements of earnings, cash flows and
Parent Company investment and stockholders' equity for each of the three years
in the period ended November 30, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LNR Property
Corporation and subsidiaries at November 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended November 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, effective
December 1, 1994, the Company changed its method of accounting for its
investments in debt securities to conform with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Effective December 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
DELOITTE & TOUCHE LLP
Miami, Florida
February 3, 1998
(February 18, 1998, as to Note 16)
F-2
<PAGE> 86
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF NOVEMBER 30,
---------------------
1997 1996
---------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 34,059 2,295
Restricted cash............................................. 56,637 1,552
Investment securities....................................... 304,660 263,842
Mortgage loans, net......................................... 86,849 64,441
Operating properties and equipment, net..................... 228,598 203,266
Land held for investment.................................... 83,297 91,177
Investments in and advances to partnerships................. 159,359 110,180
Deferred income taxes....................................... 23,974 10,067
Other assets................................................ 45,904 6,148
---------- -------
Total assets...................................... $1,023,337 752,968
========== =======
LIABILITIES, PARENT COMPANY INVESTMENT AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable.......................................... $ 4,244 2,698
Accrued expenses and other liabilities.................... 36,708 27,931
Mortgage notes and other debts payable.................... 391,171 354,406
---------- -------
Total liabilities................................. 432,123 385,035
---------- -------
Minority interests.......................................... 22,126 885
---------- -------
Commitments and contingent liabilities (Note 13)
Parent Company investment................................... -- 367,048
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized,
25,144 shares issued and outstanding................... 2,515 --
Class B common stock, $.10 par value, 40,000 shares
authorized, 10,984 shares issued and outstanding....... 1,098 --
Additional paid-in capital................................ 544,548 --
Retained earnings......................................... 370 --
Unrealized gain on available-for-sale securities, net..... 20,557 --
---------- -------
Total Parent Company investment and stockholders'
equity.......................................... 569,088 367,048
---------- -------
Total liabilities, Parent Company investment and
stockholders' equity............................ $1,023,337 752,968
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 87
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Rental income............................................. $56,334 59,215 51,664
Equity in earnings of partnerships........................ 30,149 51,862 31,203
Interest income........................................... 41,446 28,726 20,475
Gains on sales of:
Real estate............................................ 18,076 3,669 15,776
Investment securities.................................. 5,359 1,735 513
Management fees........................................... 13,385 18,229 10,274
Other, net................................................ 2,734 -- 2,910
------- ------- -------
Total revenues.................................... 167,483 163,436 132,815
------- ------- -------
Costs and expenses
Cost of rental operations................................. 35,767 38,126 30,890
General and administrative................................ 26,584 20,756 15,155
Depreciation.............................................. 6,060 5,916 5,671
Other, net................................................ -- 658 --
------- ------- -------
Total costs and expenses.......................... 68,411 65,456 51,716
------- ------- -------
Operating earnings.......................................... 99,072 97,980 81,099
Interest expense............................................ 26,584 20,513 14,692
------- ------- -------
Earnings before income taxes................................ 72,488 77,467 66,407
Income taxes................................................ 28,270 30,212 25,899
------- ------- -------
Net earnings................................................ $44,218 47,255 40,508
======= ======= =======
Net earnings per share...................................... $ 1.21
=======
Weighted average common and common equivalent shares
outstanding............................................... 36,434
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 88
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARENT COMPANY INVESTMENT
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30
-------------------------------
1997 1996 1995
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Parent Company investment:
Beginning balance......................................... $ 367,048 370,903 396,403
Net earnings, December 1, 1996 through October 31, 1997... 43,848 47,255 40,508
Advances (to) from Parent Company......................... 145,617 (53,240) (71,778)
Change in unrealized gain on available-for-sale
securities, net........................................ 10,874 2,130 5,770
Spin-off of LNR from Parent Company....................... (567,387) -- --
--------- ------- -------
Balance at November 30............................ -- 367,048 370,903
--------- ------- -------
Common Stock:
Beginning balance......................................... -- -- --
Spin-off of LNR from Parent Company....................... 3,613 -- --
Conversion of common stock to Class B common stock........ (1,098) -- --
--------- ------- -------
Balance at November 30............................ 2,515 -- --
--------- ------- -------
Class B common stock:
Beginning balance......................................... -- -- --
Conversion of common stock to Class B common stock........ 1,098 -- --
--------- ------- -------
Balance at November 30............................ 1,098 -- --
--------- ------- -------
Additional paid-in capital:
Beginning balance......................................... -- -- --
Spin-off of LNR from Parent Company....................... 545,000 -- --
Cash dividends-common stock............................... (452) -- --
--------- ------- -------
Balance at November 30............................ 544,548 -- --
--------- ------- -------
Retained earnings:
Beginning balance......................................... -- -- --
Net earnings, November 1 through November 30, 1997........ 370 -- --
--------- ------- -------
Balance at November 30............................ 370 -- --
--------- ------- -------
Unrealized gain on available-for-sale securities, net:
Beginning balance......................................... -- -- --
Spin-off of LNR from Parent Company....................... 18,774 -- --
Change in unrealized gain on available-for-sale
securities, net, November 1 through November 30,
1997................................................... 1,783 -- --
--------- ------- -------
Balance at November 30............................ 20,557 -- --
--------- ------- -------
Total Parent Company investment and stockholders' equity.... $ 569,088 367,048 370,903
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 89
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 44,218 47,255 40,508
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation............................................ 6,060 5,916 5,671
Minority interest....................................... 238 -- --
Amortization of discount on mortgage loans and loan
costs................................................. (91) (6) (881)
Gains on sales of real estate........................... (18,076) (3,669) (15,776)
Equity in earnings of partnerships...................... (30,149) (51,862) (31,203)
Gain on sales of investment securities.................. (5,359) (1,735) (513)
Decrease in deferred income taxes....................... (21,999) (12,614) (14,742)
Changes in assets and liabilities:
Increase in restricted cash........................... (10,182) (155) (1,397)
Decrease (increase) in other assets................... (17,898) 8,129 (3,892)
Decrease (increase) in mortgage loans held for sale... (14,910) (9,776) 10,285
Increase in accounts payable and accrued
liabilities........................................ 11,886 6,694 8,910
-------- ------- -------
Net cash (used in) operating activities............ (56,262) (11,823) (3,030)
-------- ------- -------
Cash flows from investing activities:
Operating properties and equipment
Additions............................................... (79,830) (19,269) (9,511)
Sales................................................... 71,664 11,667 21,804
Land held for investment
Additions............................................... (21,435) (3,699) (5,911)
Sales................................................... 10,733 4,258 16,365
Investments in and advances to partnerships............... (5,342) (12,138) (70,442)
Distributions from partnerships........................... 79,693 95,361 93,899
Purchases of other investments............................ (21,857) -- --
Purchase of mortgage loans held for investment............ (349) (15,927) (39,730)
Proceeds from mortgage loans held for investment.......... 1,116 9,616 5,374
Purchase of investment securities......................... (96,386) (96,295) (57,450)
Proceeds from sales of investment securities and other.... 110,714 19,773 11,019
Interest received on CMBS in excess of income
recognized.............................................. 21,241 10,123 5,773
-------- ------- -------
Net cash provided by (used in) investing
activities....................................... 69,962 3,470 (28,810)
-------- ------- -------
Cash flows from financing activities:
Payment of dividends...................................... (452) -- --
Net borrowings under repurchase agreements and revolving
credit lines............................................ 240 76,424 109,482
Mortgage notes and other debts payable
Proceeds from borrowings................................ 35,377 1,255 --
Principal payments...................................... (17,101) (18,752) (1,323)
Payments (to) from Parent Company......................... -- (52,478) (73,708)
-------- ------- -------
Net cash provided by financing activities.......... 18,064 6,449 34,451
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 31,764 (1,904) 2,611
Cash and cash equivalents at beginning of year.............. 2,295 4,199 1,588
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 34,059 2,295 4,199
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized........ $ 25,341 20,428 14,489
Cash paid for taxes....................................... $ 3,660 -- --
Supplemental disclosures of non-cash investing and financing
activities:
Purchases of investment securities financed by sellers.... $ 50,280 25,619 24,162
Purchase of an operating property financed by a mortgage
note.................................................... $ -- 17,400 --
Contribution of loans held for investment to acquire an
investment in partnership............................... $ -- -- 27,651
Purchase of a mortgage loan financed by revolving credit
line.................................................... $ 33,092 -- --
Spin-off of LNR from Parent Company:
Increase in Parent Company investment due to transfer of
certain assets, liabilities and minority interests prior
to Spin-off............................................. $145,617 -- --
Increase in Parent Company investment due to change in
unrealized gain on available-for-sale securities, net... $ 10,874 -- --
Supplemental disclosure of non-cash transfers:
Transfer of mortgage loans to land held for investment.... $ -- 2,273 --
Transfer of operating properties to land held for
investment.............................................. $ 1,826 -- --
Transfer of other assets to accounts payable and accrued
expenses................................................ $ 1,563 -- --
Transfer of Parent Company investment to common stock..... $ 3,613 -- --
Transfer of Parent Company investment to additional
paid-in capital......................................... $545,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 90
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997, 1996 AND 1995
1. SUMMARY OF ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
LNR Property Corporation ("LNR") and subsidiaries (collectively, the
"Company"), a Delaware corporation, was formed in June 1997. The Company
operates a real estate investment and management business which engages
principally in (i) developing and managing commercial real estate, (ii)
acquiring, managing and repositioning commercial real estate loans and
properties, (iii) acquiring (often in partnership with financial institutions
and real estate funds) and managing portfolios of real estate assets, (iv)
investing in non-investment grade commercial mortgage backed securities ("CMBS")
as to which the Company has the right to be the special servicer (i.e., to
oversee workouts of underperforming loans) and (v) originating high yielding
real estate related loans.
Spin-off Transaction
Prior to October 31, 1997, Lennar Corporation (the "Parent Company" or
"Lennar") transferred its real estate investment and management business to the
Company. On October 31, 1997, Lennar effected a spin-off of the Company to
Lennar's stockholders (the "Spin-off") by distributing to them one share of LNR
stock for each share of Lennar stock they held.
The assets and liabilities of Lennar and its subsidiaries were divided
between the Company and Lennar and its homebuilding subsidiaries so that Lennar
and its homebuilding subsidiaries would have a net worth of $200 million (with
specified adjustments) and the remaining net worth was transferred to the
Company.
In connection with the Spin-off, Lennar and the Company agreed that at
least until December 2002, Lennar and its homebuilding subsidiaries would not
engage in the businesses in which the Company currently is engaged and the
Company would not engage in the businesses in which Lennar and its homebuilding
subsidiaries currently are engaged (except in limited areas in which the
activities of the two groups overlap).
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. The assets, liabilities and
results of operations of entities (both corporations and partnerships) in which
the Company has a controlling interest have been consolidated. The ownership
interests of noncontrolling owners in such entities are reflected as minority
interests. The Company's investments in partnerships (and similar entities) in
which less than a controlling interest is held are accounted for by the equity
method (when significant influence can be exerted by the Company), or the cost
method. All significant intercompany transactions and balances have been
eliminated.
For periods prior to the Spin-off, the financial statements of the Company
are presented as if the Company had been a separate combined group. Expenses
which related both to the businesses operated by the Company and the businesses
retained by Lennar have been allocated on a basis which the Company believes is
reasonable. However, the expenses allocated to the Company are not necessarily
the same as those the Company would have incurred if it had operated
independently, and in general, the results of operations, financial position and
cash flows reflected in the consolidated financial statements of the Company are
not necessarily the same as those which would have been realized if the Company
had been operated independently of Lennar during the periods to which those
financial statements relate.
The Company began accumulating retained earnings immediately following the
Spin-off on October 31, 1997.
F-7
<PAGE> 91
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Earnings Per Share
The Company was formed in June 1997 and had no outstanding stock prior to
formation; therefore, net earnings per share have not been calculated for the
fiscal years ended November 30, 1996 and 1995 in the attached consolidated
financial statements. Earnings per share for 1997 are computed as though the
shares issued in the Spin-off had been outstanding throughout the year.
Net earnings per share is computed by dividing net earnings by the weighted
average number of the total common shares and Class B common shares and common
stock equivalents outstanding during the period. The dilutive effect of all
outstanding stock options is considered common stock equivalents and is
calculated using the treasury stock method.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Due to the
short maturity period of the cash equivalents, the carrying amount of these
instruments approximates their fair value.
Investment Securities
Investment securities are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This standard requires that debt and
equity securities that have determinable fair values are classified as
available-for-sale unless they are classified as held-to-maturity or trading.
Securities classified as held-to-maturity are carried at amortized cost because
they are purchased with the intent and ability to hold to maturity. At November
30, 1997 and 1996, no securities were held for trading purposes.
Securities classified as available-for-sale are recorded at fair value in
the consolidated balance sheet, with unrealized holding gains or losses, net of
tax effects, reported as a separate component of stockholders' equity. Realized
gains and losses, as well as unrealized losses that are other than temporary,
are recognized in earnings. The cost of securities sold is based on the specific
identification method.
Mortgage Loans, Net
Mortgage loans held for sale are recorded at the lower of cost or market,
estimated on a discounted cash flow basis using market interest rates. Purchase
discounts recorded on these loans are presented as a reduction of the carrying
amount of the loans and are not amortized. Mortgage loans held for investment
are carried net of unamortized discounts and are amortized utilizing a
methodology that results in a level yield.
The Company provides an allowance for credit losses related to loans based
upon the Company's historical loss experience and other factors.
Operating Properties and Equipment, Net and Land Held for Investment
Operating properties and equipment and land held for investment are
recorded at cost. Depreciation for operating properties and equipment is
calculated to amortize the cost of depreciable assets over their estimated
useful lives using the straight-line method. The range of estimated useful lives
for operating properties is 15 to 40 years and for equipment is 2 to 10 years.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires companies to
evaluate long-lived assets for impairment based on the undiscounted future cash
flows of the asset. If a long-lived asset is identified as impaired, the value
of the asset must be reduced to its fair value. The Company's operating
properties and land holdings would be considered long-lived assets under this
F-8
<PAGE> 92
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pronouncement. The Company adopted this statement in the first quarter of its
fiscal year ended November 30, 1997 and it did not have any material effect on
the Company's financial position, results of operations or cash flows.
Revenue Recognition
Interest income is comprised of interest received plus amortization of the
discount between the carrying value of each mortgage loan held for investment or
investment security and its unpaid principal balance using a methodology which
results in a level yield.
Revenues from sales of real estate (including the sales of land held for
investment and operating properties) are recognized when a significant down
payment is received, the earnings process is complete and the collection of any
remaining receivables is reasonably assured. Management fees are recognized in
income when they are earned and realization is reasonably assured.
The Company applies the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
in accounting for sales of investment securities and other financial assets.
This statement requires that transfers of financial and servicing assets be
recognized as sales when control has been surrendered.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under SFAS 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured by
using enacted tax rates expected to apply to taxable income in the years in
which those differences are expected to reverse.
Stock Option Plans
At November 30, 1997, the Company had one stock option plan, which is
described in Note 11. The Company grants stock options to certain employees for
a fixed number of shares with an exercise price not less than the fair value of
the shares at the date of grant. The Company accounts for the stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company applies the disclosure
only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
statement is effective for the Company beginning with the first quarter of 1998
and earlier adoption is not permitted. This statement requires that the current
calculations of earnings per share be replaced by basic and diluted earnings per
share calculations. Under the new guidance, basic and diluted earnings per share
would be $1.22 for 1997.
Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129, which applies to all
entities that have issued securities, requires in summary form, the pertinent
rights and privileges of the various securities outstanding. Examples of
information that must be
F-9
<PAGE> 93
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosed are dividend and liquidation preferences, participation rights, call
prices and dates, conversion or exercise prices or rates and pertinent dates,
sinking-fund requirements, unusual voting rights and significant terms of
contracts to issue additional shares. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement is effective for fiscal
years beginning after December 15, 1997, and requires reclassification of
comparative purpose financial statements for all earlier periods presented.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 1997 presentation.
2. RESTRICTED CASH
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Short-term investment securities............................ $44,902 --
Funds held in trust for asset purchases..................... 10,007 --
Tenant security deposits.................................... 1,728 1,552
------- ------
$56,637 1,552
======= ======
</TABLE>
The short-term investment securities are collateral for a $44.5 million
letter of credit, which provides credit enhancement to $277.3 million of
tax-exempt bonds. The bonds are secured by five high-rise, class A, apartment
buildings in Manhattan, New York. The Company receives interest on the
short-term investment as well as 600 basis points per year for providing the
credit enhancement.
3. INVESTMENT SECURITIES
Investment securities consist of investments in various issues of rated and
unrated portions of CMBS. The Company's investment in rated CMBS is classified
as available-for-sale and its investment in unrated CMBS is classified as
held-to-maturity. In general, principal payments on each class of security are
made in the order of the stated maturities of each class so that no payment of
principal will be made on any class until all classes having an earlier maturity
date have been paid in full. The Company's investment securities have stated
maturity dates in years 2001 through 2028 and carry stated interest rates
ranging from 6.50% to 11.42%. These securities are, in effect, subordinate to
other securities of classes with earlier maturities. The annual principal
repayments on a particular class are dependent upon collections on the
underlying mortgages, affected by prepayments and extensions, and as a result,
the actual maturity of any class of securities may differ from its stated
maturity.
These investments represent securities which are collateralized by pools of
mortgage loans on commercial real estate assets located across the country.
Concentrations of credit risk with respect to these securities are limited due
to the diversity of the underlying loans across geographical areas and diversity
among property types. In addition, the Company only invests in these securities
when it performs significant due diligence analysis on the real estate
supporting the underlying loans and when it has the right to select itself as
special
F-10
<PAGE> 94
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
servicer for the entire securitization. As special servicer, the Company impacts
the performance of the securitization by using its loan workout and asset
management expertise to resolve non-performing loans.
The Company's investment securities consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Available-for-sale.......................................... $188,434 193,869
Held-to-maturity............................................ 116,226 69,973
-------- --------
$304,660 263,842
======== ========
</TABLE>
At November 30, 1997 and 1996, the amortized cost and fair value of
investment securities consisted of the following:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Available-for-sale...................... $154,734 33,918 (218) 188,434
Held-to-maturity........................ $116,226 37,291 -- 153,517
1996
Available-for-sale...................... $180,918 14,626 (1,675) 193,869
Held-to-maturity........................ $ 69,973 19,490 -- 89,463
</TABLE>
During 1997, proceeds from the sale of available-for-sale securities
amounted to $111.5 million and resulted in gross realized gains of $5.4 million,
primarily as a result of a Re-REMIC securitization transaction. The Re-REMIC
transaction was the securitization of the cash flows from certain pre-existing
CMBS bonds. In that transaction, the Company sold approximately $140.0 million
of rated non-investment grade CMBS bonds to a trust. During 1996, proceeds from
the sale of available-for-sale securities amounted to $18.1 million and resulted
in gross realized gains of $1.7 million.
4. MORTGAGE LOANS, NET
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans.............................................. $95,593 80,271
Allowance for losses........................................ (2,038) (4,979)
Unamortized discounts....................................... (6,706) (10,851)
------- --------
$86,849 64,441
======= ========
</TABLE>
At November 30, 1997 and 1996, the balance of mortgage loans classified as
held for sale were $64.4 million and $41.6 million, respectively, and classified
as held for investment were $22.4 million and $22.8 million, respectively.
F-11
<PAGE> 95
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING PROPERTIES AND EQUIPMENT, NET
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Rental apartments........................................... $ 98,068 70,357
Office buildings............................................ 67,455 65,725
Retail centers.............................................. 54,494 60,344
Hotels...................................................... 18,735 18,713
Industrial buildings........................................ 2,862 4,373
Other....................................................... 15,762 14,498
-------- -------
Total land and buildings.................................... 257,376 234,010
Furniture, fixtures and equipment........................... 7,318 5,028
-------- -------
264,694 239,038
Accumulated depreciation.................................... (36,096) (35,772)
-------- -------
$228,598 203,266
======== =======
</TABLE>
The Company leases as lessor its retail, office and other facilities under
non-cancelable operating leases with terms in excess of twelve months. The
future minimum rental revenues under these leases subsequent to November 30,
1997 are as follows (in thousands): 1998 -- $14,857; 1999 -- $13,599;
2000 -- $11,958; 2001 -- $9,798; 2002 -- $9,786 and thereafter -- $55,435.
6. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Summarized financial information on a combined 100% basis related to the
Company's significant partnerships accounted for by the equity method at
November 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash...................................................... $ 36,792 53,109
Portfolio investments..................................... 872,090 839,441
Other assets.............................................. 32,585 16,213
-------- -------
$941,467 908,763
======== =======
Liabilities and equity
Accounts payable and other liabilities.................... $ 61,105 57,557
Notes and mortgages payable............................... 385,115 425,716
Equity of:
The Company............................................ 164,065 119,133
Others................................................. 331,182 306,357
-------- -------
$941,467 908,763
======== =======
</TABLE>
The equity of the Company in the partnerships' financial statements shown
above exceeds the Company's recorded investment in and advances to the
partnerships by $4.7 million and $9.0 million at November 30, 1997 and 1996,
respectively, primarily due to purchase discounts. Portfolio investments consist
primarily of mortgage loans and business loans collateralized by real property,
as well as commercial properties and land held for development, investment or
sale.
F-12
<PAGE> 96
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................. $213,238 257,062 280,286
Costs and expenses................................... 125,693 87,629 115,269
-------- ------- -------
Earnings of partnerships............................. $ 87,545 169,433 165,017
======== ======= =======
The Company's share of earnings...................... $ 30,149 51,862 31,203
======== ======= =======
</TABLE>
In connection with the Spin-off, Lennar transferred parcels of land to the
Company and the Company transferred these parcels to Lennar Land Partners in
exchange for a 50% partnership interest in Lennar Land Partners. The net book
value of the assets contributed to Lennar Land Partners was $92.3 million.
Lennar Land Partners was formed so that Lennar and the Company could share the
risks and profits of ownership of real property previously acquired by Lennar,
primarily for use in its homebuilding activities. Lennar manages the day-to-day
activities of Lennar Land Partners under a management agreement.
At November 30, 1997 and 1996, the Company's equity interests in all other
significant partnerships ranged from 15% to 50%. These partnerships are involved
in the acquisition and management of portfolios of real estate loans and
properties. The Company shares in the profits and losses of these partnerships
and, when appointed the manager of the partnerships, receives fees for the
management and disposition of the assets. The outstanding debt of Lennar Land
Partners and one second-tier partnership, amounting to $119.0 million at
November 30, 1997, is guaranteed by the Company.
7. MORTGAGE NOTES AND OTHER DEBTS PAYABLE
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Secured without recourse to LNR
Mortgage notes on operating properties and land with a
fixed interest rate of 7.4%, due December 2003......... $ 20,640 23,994
Mortgage notes on operating properties and land with a
floating interest rate (8.5% at November 30, 1997), due
July 1999.............................................. 21,998 --
Other secured debt
Mortgage notes on operating properties and land with fixed
interest rates from 7.4% to 8.0%, due through 2004..... 25,659 47,648
Mortgage notes on operating properties and land with
floating interest rates (4.2% to 9.5% at November 30,
1997), due through December 2010....................... 21,972 --
Repurchase agreements with floating interest rates (6.7%
to 7.2% at November 30, 1997), secured by CMBS, due
through October 1998................................... 177,386 118,182
Revolving credit lines with floating interest rates (6.7%
to 6.9% at November 30, 1997), secured by CMBS and
mortgage loans, due through August 1998................ 110,909 97,582
Unsecured revolving credit notes payable with floating
interest rates............................................ -- 67,000
Unsecured note payable to Lennar with a fixed interest rate
of 10%, due December 1997................................. 12,607 --
-------- --------
$391,171 354,406
======== ========
</TABLE>
F-13
<PAGE> 97
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the Company's more significant debt instruments is
as follows:
Repurchase Agreements
The Company, through certain subsidiaries, has entered into two reverse
repurchase agreements through which it finances selected CMBS. The agreements
have an aggregate commitment of $310 million under which $177 million was
outstanding at November 30, 1997. Interest is variable, corresponds to the
rating assigned to the CMBS and is based on LIBOR plus specified percentages.
The agreements mature during 1998 and are expected to be refinanced or extended
on substantially the same terms as the existing agreements. LNR has guaranteed
the obligations of its subsidiaries under these agreements and the agreements
are collateralized by the CMBS.
Revolving Credit Lines
The Company, through certain subsidiaries, has three revolving credit lines
with an aggregate commitment of $125 million under which $111 million was
outstanding at November 30, 1997. Interest is variable and is based on LIBOR or
commercial paper rates plus specified percentages. The lines are collateralized
by CMBS and mortgage loans. The lines mature during 1998 and are expected to be
refinanced or extended on substantially the same terms as the existing lines.
The agreements also contain certain financial tests and restrictive covenants,
none of which are currently expected to restrict the Company's activities. LNR
has guaranteed the obligations of its subsidiaries under these agreements.
Unsecured Revolving Credit Notes Payable
On December 5, 1997, the Company and certain of its subsidiaries, entered
into a $200 million revolving credit agreement (the "Revolving Credit
Agreement") which expires on December 31, 2000, with the option of a one year
extension. As of closing of the Revolving Credit Agreement, the Company had
commitments totaling $82 million. The remaining amount is currently being
syndicated. Interest is calculated at LIBOR plus a margin, which varies based on
the Company's leverage and debt ratings. Had there been outstanding amounts
under this facility at November 30, 1997, the interest rate would have been
7.0%. The agreements also contain certain financial tests and restrictive
covenants, none of which are currently expected to restrict the Company's
activities.
The aggregate principal maturities of mortgage notes and other debts
payable subsequent to November 30, 1997, are as follows (in thousands):
1998 -- $302,668; 1999 -- $24,432; 2000 -- $5,844; 2001 -- $1,359;
2002 -- $7,606 and thereafter -- $49,262. All of the notes secured by land
contain collateral release provisions.
8. MINORITY INTERESTS
Minority interests relate to the third party ownership interest in
partnerships in which the Company has a controlling interest. For financial
reporting purposes the partnerships' assets, liabilities and earnings are
consolidated with those of the Company, and the other partners' interests in the
partnerships are included in the Company's consolidated financial statements as
minority interest. The primary component of minority interests at November 30,
1997, representing $18.9 million, relates to the Company's interest in a
partnership which provides credit enhancement to $44.5 million of a $277.3
million issue of tax-exempt bonds collateralized by commercial real estate. See
Note 2.
F-14
<PAGE> 98
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The Company was included in the consolidated federal income tax returns of
Lennar through the date of the Spin-off. Under the Agreement with Lennar, the
Company is required to reimburse Lennar for the income taxes resulting from the
Company's 1997 activity. Lennar is responsible for the preparation of all income
tax returns prior to the Spin-off and it will be determined at the time of
filing of the relevant returns whether the Company has under or over paid its
portion of the liability. The final cash settlement with Lennar for income taxes
will result in an adjustment of the Company's recorded deferred tax asset and
liability balances. The Company's provision for federal and state income taxes
in the accompanying consolidated statement of earnings for the period prior to
the Spin-off have been calculated based on the Company's income and temporary
differences as if it filed a separate return. For the post Spin-off period, the
provision for income taxes has been based on the stand-alone operations of the
Company.
The provisions for income taxes consisted of the following for the years
ended November 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................ $ 43,802 37,866 35,593
State.............................................. 6,467 4,960 5,048
-------- ------- -------
50,269 42,826 40,641
-------- ------- -------
Deferred
Federal............................................ (18,432) (12,337) (15,303)
State.............................................. (3,567) (277) 561
-------- ------- -------
(21,999) (12,614) (14,742)
-------- ------- -------
Total expense........................................ $ 28,270 30,212 25,899
======== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
F-15
<PAGE> 99
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax effects of significant temporary differences of the Company's deferred tax
assets and liabilities at November 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Reserves and accruals..................................... $ 7,398 8,472
Investment securities income.............................. 19,091 13,043
Investment in partnerships................................ 24,704 11,251
Acquisition adjustments................................... 15,943 3,236
Other..................................................... 277 --
------- -------
Total deferred tax assets......................... 67,413 36,002
------- -------
Deferred tax liabilities
Capitalized expenses...................................... 2,662 2,603
Deferred gains............................................ 10,042 4,306
Acquisition adjustments................................... 16,736 12,786
Installment sales......................................... -- 845
Unrealized gain on available-for-sale securities.......... 13,143 5,051
Other..................................................... 856 344
------- -------
Total deferred tax liabilities.................... 43,439 25,935
------- -------
Net deferred tax asset...................................... $23,974 10,067
======= =======
</TABLE>
Based on management's assessment, it is more likely than not that the
deferred tax assets will be realized through future taxable income.
A reconciliation of the statutory rate to the effective tax rate for the
years ended November 30, 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
% OF PRE-TAX INCOME
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate.............................................. 35.0 35.0 35.0
State income taxes, net of federal income tax benefit....... 4.0 4.0 4.0
---- ---- ----
Effective rate.............................................. 39.0 39.0 39.0
==== ==== ====
</TABLE>
F-16
<PAGE> 100
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of financial instruments held by the Company at November 30, 1997 and 1996,
using available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies might have a material effect on the estimated fair
value amounts. The table excludes cash and cash equivalents, restricted cash and
accounts payable, which had fair values approximating their carrying values.
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------------------
1997 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Mortgages loans....................... $ 86,849 92,285 64,441 74,809
Investment securities
available-for-sale................. 188,434 188,434 193,869 193,869
Investment securities
held-to-maturity................... 116,226 153,517 69,973 89,463
Liabilities
Mortgage notes and other debts
payable............................ $391,171 391,171 354,406 354,406
</TABLE>
The following methods and assumptions were used by the Company in
estimating fair values:
Mortgages loans: The fair values are based on discounting future cash flows
using the current interest rates at which similar loans would be made or are
estimated by the Company on the basis of financial or other information.
Investment securities available-for-sale and held-to-maturity: The fair
values are based on quoted market prices, if available. The fair values for
instruments which do not have quoted market prices are estimated by the Company
on the basis of the acquisition price paid or financial and other information.
Mortgages notes and other debts payable: The fair value of fixed rate
borrowings is based on discounting future cash flows using the Company's
incremental borrowing rate. Variable rate borrowings are tied to market indices
and thereby, approximate fair value.
11. CAPITAL STOCK
Preferred Stock
The Company has 500,000 shares of authorized preferred stock, $10 par
value. At November 30, 1997, no shares of preferred stock were issued or
outstanding. The preferred stock may be issued in series with any rights, powers
and preferences which may be authorized by the Company's Board of Directors.
Common Stock
The Company has two classes of common stock. The common stockholders have
one vote for each share owned in matters requiring stockholder approval and
during the fourth quarter of 1997 received quarterly dividends of $.0125 per
share. Class B common stockholders have ten votes for each share of stock owned
and during the fourth quarter of 1997 received quarterly dividends of $.01125
per share. As of November 30, 1997, Mr. Leonard Miller, a member of the Board of
Directors, owned or controlled 9.9 million shares of Class B common stock, which
represented approximately 74% of the voting control of the Company.
F-17
<PAGE> 101
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plan
In connection with the Spin-off, the Company adopted the 1997 Stock Option
Plan (the "1997 Plan"). The 1997 Plan provides for the granting of options to
certain officers, employees and directors of the Company to purchase shares at
prices not less than market value on the date of the grant. Options granted
under the 1997 Plan will expire not more than 10 years after the date of grant,
except that options granted to a key employee who is a 10% stockholder will
expire not more than five years after the date of grant. The exercise price of
each stock option granted under the 1997 Plan will be 100% of the fair market
value of the common stock on the date the stock option is granted, except in the
case of a key employee who is a 10% stockholder, in which case the option price
may not be less than 110% of the fair market value of the common stock on the
date the stock option is granted, and except as to stock options granted to
replace Lennar stock options held by Lennar employees who became employees of
the Company as a result of the Spin-off.
The following table summarizes the status of the 1997 Plan (in thousands,
except for option prices):
<TABLE>
<CAPTION>
OUTSTANDING
WEIGHTED OUTSTANDING WEIGHTED EXERCISABLE
OPTION AVERAGE WEIGHTED AVERAGE WEIGHTED
PRICE NUMBER OF REMAINING AVERAGE EXERCISE AVERAGE
PER SHARE OPTIONS LIFE FAIR VALUE PRICE FAIR VALUE
--------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options assumed at
Spin-off.............. $ 3.98 --
$16.23 410 5.13 Years 18.70 7.64 19.05
Options granted......... $24.82 1,069 9.72 Years 13.28 24.82 --
-----
Ending balance.......... 1,479
=====
Exercisable............. 61
=====
Options available for
future grant.......... 521
=====
</TABLE>
The Company has elected to account for its employee stock options under APB
25 and related Interpretations. No compensation expense is recorded under APB 25
because the exercise price of the Company's employee common stock options
equaled the market price for the underlying common stock on the grant date.
Under the terms of the Lennar 1991 Stock Option Plan (the "Lennar Option
Plan"), participants in the Lennar Option Plan who exercise their options after
the Spin-off (and who did not amend the terms of their options prior to the
Spin-off to provide otherwise) will receive upon exercise of Lennar stock
options both shares of Lennar common stock and LNR common stock. The Company has
agreed to deliver shares of its common stock to participants in the Lennar
Option Plan who exercise options and are entitled to LNR common stock. There
were Lennar stock options outstanding at the time of the Spin-off which could
entitle the holders to purchase up to 615,600 shares of LNR common stock. None
of these options had been exercised as of November 30, 1997. The Company will
not receive any portion of the exercise price of the Lennar stock options.
SFAS 123 requires "as adjusted" information regarding net income and net
income per share to be disclosed for new options granted after fiscal year 1996.
The Company determined this information using the fair value method of that
statement. The fair value of these options was determined at the date of grant
using the Black-Scholes option-pricing model. The significant weighted average
assumptions used were as follows for the year ended November 30, 1997: expected
dividend yield, .20%; calculated volatility rate, .45%; risk-free interest rate,
5.50%; and expected life of the option in years, 2-7 years.
The estimated fair value of the options is recognized in expense over the
options' vesting period for "as adjusted" disclosures. The net income per share
"as adjusted" for the effects of SFAS 123 is not indicative of the effects on
reported net income/loss for future years. For purposes of these calculations,
the Company has
F-18
<PAGE> 102
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
excluded shares subject to options which are held by participants in the Lennar
Option Plan who are not employees, and do not otherwise receive compensation
from, the Company. The Company's reported "as adjusted" information for the year
ended November 30, 1997 is as follows (in thousands, except per share amounts):
<TABLE>
<S> <C>
Net earnings....................................... $44,218
Net earnings "As adjusted"......................... $43,042
Net earnings per share as reported -- primary...... $ 1.21
Net earnings per share "As adjusted"-- primary..... $ 1.18
</TABLE>
In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
that have vesting provisions and are not transferable. In addition,
option-pricing models require the input of highly subjective assumptions,
including expected stock price volatility.
Employee Stock Ownership Plan /401(k) Plan
The Employee Stock Ownership Plan/401(k) Plan (the "Plan") provides shares
of stock to employees who have completed one year of continuous service with the
Company. All contributions for employees with five years or more of service are
fully vested. Under the 401(k) portion of the Plan, employees may make
contributions which are invested on their behalf, and the Company may also make
contributions for the benefit of employees. The Company records as compensation
expense an amount which approximates the vesting of the contributions to the
Employee Stock Ownership portion of the Plan, as well as the Company's
contribution to the 401(k) portion of the Plan. Amounts contributed by the
Company to the Plan during 1997, 1996 and 1995 were immaterial.
Restrictions on Payments of Dividends
Other than as required to maintain the financial ratios and net worth
requirements under the revolving credit and term loan agreements, there are no
restrictions on the payment of dividends on common stock by the Company. The
cash dividends paid with regard to a share of Class B common stock in a calendar
year may not be more than 90% of the cash dividends paid with regard to a share
of common stock in that calendar year. One of the Company's major subsidiaries
is also restricted on the payment of dividends to its parent company, LNR
Property Corporation, under the revolving credit and loan agreements.
12. RELATED PARTY TRANSACTIONS
During the period December 1, 1996 through October 31, 1997, and for the
years ended November 30, 1996 and 1995, Lennar provided various general and
administrative services to the Company including: data processing, treasury,
legal, human resources, payroll, accounting, risk management and others. Costs
for these services are designed to approximate the actual costs incurred by
Lennar to render these services. Management believes the methods used to
determine these costs are reasonable, however, such costs may not be
representative of those which would be incurred if the Company had operated as
an independent entity during the periods presented. Charges for these costs are
included in general and administrative expenses and amounted to $3.3 million,
$3.1 million and $2.6 million for the period December 1, 1996 through October
31, 1997 and for the years ended November 30, 1996 and 1995, respectively.
The Company provided a portion of Lennar's facilities on a rent-free basis
for the period December 1 through October 31, 1997 and for the years ended
November 30, 1996 and 1995. Subsequent to the Spin-off, the Company has
negotiated market-based lease agreements with Lennar and its subsidiaries that
result in additional rental income of over $1.4 million annually.
F-19
<PAGE> 103
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into agreements whereby Lennar provides data
processing and construction management services for a period of up to one year
from the Spin-off. Data processing services are charged at a monthly rate of
$16,000. Services under this agreement were provided after the Spin-off and
aggregated $16,000 for 1997. No charges were incurred under the construction
management services agreement in 1997 and charges for 1998 are not expected to
be material.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, the
disposition of these matters will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
The Company is subject to the usual obligations associated with entering
into contracts for the purchase, development and sale of real estate as well as
the management of partnerships and special servicing of CMBS in the routine
conduct of its business.
The Company is committed, under various letters of credit or other
agreements, to provide certain guarantees. Outstanding letters of credit and
guarantees under these arrangements totaled approximately $56.2 million at
November 30, 1997.
The Company leases certain premises and equipment under various
noncancellable operating leases with terms expiring through 2003, exclusive of
renewal option periods. The annual aggregate minimum rental commitments under
these leases are summarized as follows (in thousands): 1998 -- $182;
1999 -- $163; 2000 -- $149; 2001 -- $158; 2002 -- $166 and thereafter $170.
14. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Revenues........................................... $44,760 44,411 43,368 34,944
Operating earnings................................. $27,166 29,150 26,689 16,067
Earnings before income taxes....................... $20,357 22,758 19,168 10,205
Net earnings....................................... $12,418 13,882 11,693 6,225
1996
Revenues........................................... $38,814 41,773 41,336 41,513
Operating earnings................................. $22,801 27,081 23,739 24,359
Earnings before income taxes....................... $18,169 21,721 18,405 19,172
Net earnings....................................... $11,083 13,250 11,227 11,695
</TABLE>
F-20
<PAGE> 104
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As a result of the Spin-off and formation of Lennar Land Partners, the
Company believes that pro forma information provides the best information to
compare the results of operations and trends in earnings and costs. Results for
1997 have been adjusted to give pro forma effect to these transactions as if
such transactions had been completed as of the beginning of the period. The pro
forma information does not purport to be indicative of the results of operations
which would actually have been reported if the transactions had occurred on the
dates or for the periods indicated:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
1997 ADJUSTMENTS 1997
---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Rental income................................. $ 56,334 56,334
Equity in earnings of partnerships............ 30,149 13,292(a) 43,441
Interest income............................... 41,446 41,446
Gains on sales of:
Real estate................................ 18,076 18,076
Investment securities...................... 5,359 5,359
Management fees............................... 13,385 13,385
Other, net.................................... 2,734 2,734
-------- ------ -------
Total revenues........................ 167,483 13,292 180,775
-------- ------ -------
Costs and expenses
Cost of rental operations..................... 35,767 35,767
General and administrative.................... 26,584 (4,408)(b) 22,176
Depreciation.................................. 6,060 6,060
-------- ------ -------
Total costs and expenses.............. 68,411 (4,408) 64,003
-------- ------ -------
Operating earnings.............................. 99,072 17,700 116,772
Interest expense................................ 26,584 (2,100)(c) 24,484
-------- ------ -------
Earnings before income taxes.................... 72,488 19,800 92,288
Income taxes.................................... 28,270 7,721(d) 35,991
-------- ------ -------
Net earnings.................................... $ 44,218 12,079 56,297
======== ====== =======
Net earnings per share.......................... $ 1.21 1.55
======== =======
</TABLE>
Adjustments to the historical results to arrive at the pro forma results
are as follows:
(a) Represents entries to reflect the Company's 50% interest in the earnings of
Lennar Land Partners.
(b) Represents entries to reflect the elimination of costs related to the
Spin-off and addition of incremental administrative costs associated with
creating a stand-alone public company.
(c) Represents entries to reflect reductions in interest expense due to the use
of proceeds from funds advanced by Lennar to repay debt.
(d) The adjustment to taxes represents the estimated income tax effect of the
pro forma adjustments to the Company's effective tax rate of 39.0%.
F-21
<PAGE> 105
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENTS
In February 1998, the Company agreed to purchase interests in 41 entities
that own approximately 6,000 residential rental apartments. The purchase price,
which is subject to closing adjustments, is approximately $86 million plus the
assumption of approximately $44 million of future equity commitments, subject to
certain adjustments. The Company will manage the existing assets and is expected
to both develop and acquire new low-income tax credit properties. The
transaction remains subject to the receipt of third party consents.
F-22
<PAGE> 106
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Of LNR Property Corporation:
We have audited the consolidated financial statements of LNR Property
Corporation (the "Company") as of November 30, 1997 and 1996, and for each of
the three years in the period ended November 30, 1997, and have issued our
report thereon dated February 3, 1998 (February 18, 1998, as to Note 16); such
report is included elsewhere in this Prospectus Supplement. Our audits also
included the financial statement schedules of LNR Property Corporation. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Miami, Florida
February 3, 1998
F-23
<PAGE> 107
LNR PROPERTY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
------------------------
CHARGED
CHARGED (CREDITED)
TO COSTS TO OTHER BEGINNING ENDING
DESCRIPTION BALANCE AND EXPENSES ACCOUNTS (DEDUCTIONS) BALANCE
- ----------- ----------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year ended November 30, 1997
Allowances deducted from
assets to which they
apply:
Allowances for doubtful
accounts and notes
receivable........... $ 938,000 467,000 (702,000) -- 703,000
=========== ========= ========= ============ ==========
Deferred income and
unamortized
Discounts............ $10,851,000 -- 235,000 (4,380,000)(A) 6,706,000
=========== ========= ========= ============ ==========
Loan loss reserve...... $ 2,071,000 -- -- (33,000) 2,038,000
=========== ========= ========= ============ ==========
Valuation allowance.... $ 2,908,000 -- -- (2,908,000)(A) --
=========== ========= ========= ============ ==========
Year ended November 30, 1996
Allowances deducted from
assets to which they
apply:
Allowances for doubtful
accounts and notes
receivable........... $ 871,000 511,000 -- (444,000) 938,000
=========== ========= ========= ============ ==========
Deferred income and
unamortized
Discounts............ $13,112,000 -- (746,000)(B) (1,515,000)(A) 10,851,000
=========== ========= ========= ============ ==========
Loan loss reserve...... $ -- 1,869,000 1,396,000 (1,194,000) 2,071,000
=========== ========= ========= ============ ==========
Valuation allowance.... $ 340,000 2,711,000 580,000 (723,000) 2,908,000
=========== ========= ========= ============ ==========
Year ended November 30, 1995
Allowances deducted from
assets to which they
apply:
Allowances for doubtful
accounts and notes
receivable........... $ 273,000 1,190,000 4,000 (596,000) 871,000
=========== ========= ========= ============ ==========
Deferred income and
unamortized
discounts............ $10,600,000 -- 4,186,000(B) (1,674,000)(A) 13,112,000
=========== ========= ========= ============ ==========
Valuation allowance.... $ 172,000 -- 168,000 -- 340,000
=========== ========= ========= ============ ==========
</TABLE>
Notes:
(A) Includes transfers to Lennar Corporation of approximately $4.2 million and
amortization of discount and other.
(B) Includes discounts on mortgages purchased.
F-24
<PAGE> 108
LNR PROPERTY CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (D)(E)
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
COST
CAPITALIZED
INITIAL COST SUBSEQUENT TO
TO COMPANY ACQUISITION
-------------------------- ----------------------
BUILDING AND IMPROVE- CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS MENTS COSTS
- ----------- ------------ ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Rental apartment
property - FL........ $20,640,000 1,872,000 9,063,000 4,624,000 359,000
Rental office property
- FL................. 12,709,000 1,779,000 -- 13,577,000 1,959,000
Hotel - FL............ -- 1,000,000 3,478,000 8,867,000 367,000
Rental apartment
property - CO........ 21,998,000 -- 5,375,000 24,055,000 441,000
Rental office property
- GA................. -- 1,263,000 11,700,000 -- --
Rental office property
- GA................. -- 5,238,000 20,020,000 1,570,000 --
Rental retail property
- AZ................. -- 11,945,000 -- 1,023,000 --
Other miscellaneous
properties which are
individually less
than 5% of total..... 34,922,000 44,362,000 51,821,000 29,420,000 2,198,000
----------- ----------- ----------- ---------- ---------
$90,269,000 67,459,000 101,457,000 83,136,000 5,324,000
=========== =========== =========== ========== =========
<CAPTION>
GROSS AMOUNT
AT WHICH DATE OF
CARRIED AT ACCUMULATED COMPLETION OF DATE
CLOSE OF PERIOD DEPRECIATION(B) CONSTRUCTION ACQUIRED
--------------------------------------- ---------------- ------------- --------
DESCRIPTION LAND(A) BUILDINGS(A) TOTAL(C)
- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Rental apartment
property - FL........ 2,046,000 13,872,000 15,918,000 9,946,000 1979 1977
Rental office property
- FL................. 4,319,000 12,996,000 17,315,000 3,250,000 Various 1980
Hotel - FL............ 1,367,000 12,345,000 13,712,000 3,046,000 Various 1987
Rental apartment Under
property - CO........ -- 29,871,000 29,871,000 446,000 Construction 1996
Rental office property Under
- GA................. 1,263,000 11,700,000 12,963,000 -- Construction 1997
Rental office property Under
- GA................. 5,239,000 21,589,000 26,828,000 984,000 Construction 1996
Rental retail property Under
- AZ................. 11,945,000 1,023,000 12,968,000 -- Construction 1997
Other miscellaneous
properties which are
individually less
than 5% of total..... 49,632,000 78,169,000 127,801,000 14,232,000 Various Various
---------- ----------- ----------- ----------
75,811,000 181,565,000 257,376,000 31,904,000
========== =========== =========== ==========
</TABLE>
Notes:
(A) Includes related improvements and capitalized carrying costs.
(B) Depreciation is calculated using the straight-line method over the estimated
useful lives which vary from 15 to 40 years.
(C) The aggregate cost of the listed property for federal income tax purposes
was $220,000,000 at November 30, 1997.
(D) The listed real estate includes operating properties completed or under
construction.
(E) Reference is made to Notes 1, 5, and 7 of the consolidated financial
statements.
(F) The changes in the total cost of investment properties and accumulated
depreciation for the years ended November 30, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cost:
Balance at beginning of year.............................. $234,010 204,833 206,022
Additions, at cost........................................ 76,921 34,410 6,808
Cost of real estate sold.................................. (55,381) (9,051) (8,304)
Transfers................................................. 1,826 3,818 307
-------- ------- -------
Balance at end of year.................................. $257,376 234,010 204,833
======== ======= =======
Accumulated depreciation:
Balance at beginning of year.............................. $ 31,971 28,686 25,763
Depreciation and amortization charged against earnings.... 5,195 5,170 4,992
Depreciation of real estate sold.......................... (5,262) (1,885) (2,069)
-------- ------- -------
Balance at end of year.................................. $ 31,904 31,971 28,686
======== ======= =======
</TABLE>
F-25
<PAGE> 109
LNR PROPERTY CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF LOANS
CARRYING SUBJECT TO
FINAL FACE AMOUNT OF DELINQUENT
INTEREST MATURITY PERIODIC PAYMENT PRIOR AMOUNT OF MORTGAGES PRINCIPAL OR
DESCRIPTION RATE DATE TERMS LIENS MORTGAGES (A)(B) INTEREST
- ----------- ----------- --------- ---------------- -------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage notes
secured real estate and
other:
Office building -- CA...... 7.89% 2003 Varying payment $16,788,000 12,227,000
Convention center -- NV.... Libor + 300 2000 Interest Only 45,000,000 45,000,000
Hotel -- NJ................ 9.50% 1999 Varying payment 4,500,000 4,194,000
Retail center -- TX........ 10.00% 1998 Interest Only 3,704,000 3,355,000
Other...................... 6%-10.5% 1998-2005 Various 5,613,000 4,295,000
----------- ----------
75,605,000 69,071,000
----------- ----------
Second mortgage notes
secured by real estate:
Residential land -- FL..... Prime + 2% 2001 Varying payment $314,436 4,400,000 4,400,000
Residential land -- CA..... 15% 1999 Varying payment 3,180,000 3,133,000
Residential land -- NV..... 15% 1999 Varying payment 7,760,000 7,690,000
Industrial land -- CA...... 25% 1999 Varying payment 4,648,000 4,593,000
----------- ----------
19,988,000 19,816,000
Loan loss reserve.......... (2,038,000)
----------
$95,593,000 86,849,000
=========== ==========
</TABLE>
Notes:
(A) For Federal income tax purposes, the aggregate basis of the listed mortgages
was $86,849,000 at November 30, 1997.
(B) Carrying amounts are net of unamortized discounts and valuation allowance.
(C) The changes in the carrying amounts of mortgages for the years ended
November 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year................ $64,441,000 53,551,000 55,893,000
Additions (deductions):
New mortgage loans, net................... 67,319,000 77,369,000 42,572,000
Collections of principal.................. (20,085,000) (53,347,000) (44,495,000)
Transfers to Lennar Corporation........... (24,918,000) (7,063,000) (1,779,000)
Amortization of discount.................. 92,000 488,000 344,000
Deferred income recognized................ 0 0 1,066,000
Other..................................... 0 (6,557,000) (50,000)
----------- ----------- -----------
Balance at end of year...................... $86,849,000 64,441,000 53,551,000
=========== =========== ===========
</TABLE>
F-26
<PAGE> 110
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
AUGUST 31, NOVEMBER 30,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 57,745 34,059
Restricted cash............................................. 78,033 56,637
Investment securities....................................... 402,719 304,660
Mortgage loans, net......................................... 199,966 86,849
Operating properties and equipment, net..................... 623,147 228,598
Land held for investment.................................... 162,008 83,297
Investments in and advances to partnerships................. 196,289 159,359
Deferred income taxes....................................... 6,236 23,974
Other assets................................................ 82,477 45,904
---------- ---------
Total assets...................................... $1,808,620 1,023,337
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable.......................................... $ 9,106 4,244
Accrued expenses and other liabilities.................... 75,608 36,708
Mortgage notes and other debts payable.................... 1,080,491 391,171
---------- ---------
Total liabilities................................. 1,165,205 432,123
---------- ---------
Minority interests.......................................... 29,252 22,126
---------- ---------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized,
25,046 shares issued and outstanding................... 2,504 2,515
Class B common stock, $.10 par value, 40,000 shares
authorized, 10,755 shares issued and outstanding....... 1,076 1,098
Additional paid-in capital................................ 539,287 544,548
Retained earnings......................................... 51,434 370
Unrealized gain on available-for-sale securities, net..... 19,862 20,557
---------- ---------
Total stockholders' equity........................ 614,163 569,088
---------- ---------
Total liabilities and stockholders' equity........ $1,808,620 1,023,337
========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-27
<PAGE> 111
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 31,
-------------------
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
Revenues
Rental income............................................. $ 49,887 43,578
Equity in earnings of partnerships........................ 40,640 26,452
Interest income........................................... 54,830 30,899
Gains on sales of:
Real estate............................................ 21,439 13,874
Investment securities.................................. 1,386 5,359
Management and servicing fees............................. 6,898 10,170
Other, net................................................ 822 2,207
-------- -------
Total revenues.................................... 175,902 132,539
-------- -------
Costs and expenses
Cost of rental operations................................. 31,439 28,159
General and administrative................................ 20,578 16,897
Depreciation.............................................. 8,412 4,322
Minority interests........................................ 1,567 156
-------- -------
Total costs and expenses.......................... 61,996 49,534
-------- -------
Operating earnings.......................................... 113,906 83,005
Interest expense............................................ 34,260 20,722
-------- -------
Earnings before income taxes................................ 79,646 62,283
Income taxes................................................ 26,974 24,290
-------- -------
Net earnings................................................ $ 52,672 37,993
======== =======
Weighted average shares outstanding:
Basic..................................................... 36,138 36,128
======== =======
Diluted................................................... 36,472 36,298
======== =======
Net earnings per share:
Basic..................................................... $ 1.46 1.05
======== =======
Diluted................................................... $ 1.44 1.05
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-28
<PAGE> 112
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
AUGUST 31,
--------------------
1998 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 52,672 37,993
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation............................................ 8,412 4,322
Minority interests...................................... 1,567 156
Amortization of discount on mortgage loans and CMBS..... (4,593) --
Gains on sales of real estate........................... (21,439) (13,874)
Equity in earnings of partnerships...................... (40,640) (26,452)
Gains on sales of investment securities................. (1,386) (5,359)
Changes in assets and liabilities:
Decrease (increase) in restricted cash................ 3,193 (15,899)
Increase in other assets and deferred taxes........... (14,252) (16,170)
Increase in mortgage loans held for sale.............. (12,787) (6,049)
Increase in accounts payable and accrued
liabilities.......................................... 30,216 8,910
--------- -------
Net cash provided by (used in) operating
activities........................................ 963 (32,422)
--------- -------
Cash flows from investing activities:
Operating properties and equipment
Additions............................................... (242,533) (47,923)
Sales................................................... 38,660 47,495
Land held for investment
Additions............................................... (97,916) (4,318)
Sales................................................... 20,042 8,983
Investments in and advances to partnerships............... (38,293) (3,715)
Distributions from partnerships........................... 54,856 71,644
Purchases of other investments............................ -- (6,857)
Purchases of mortgage loans held for investment........... (36) (349)
Proceeds from mortgage loans held for investment.......... 4,831 213
Purchase of investment securities......................... (70,693) (84,965)
Proceeds from sales of investment securities.............. 7,336 110,714
Interest received on CMBS in excess of income
recognized.............................................. 8,817 14,186
Acquisition of AHG, net of cash acquired.................. (75,525) --
--------- -------
Net cash provided by (used in) investing
activities........................................ (390,454) 105,108
--------- -------
Cash flows from financing activities:
Purchase and retirement of treasury stock................. (5,600) --
Payment of dividends...................................... (1,314) --
Net borrowings under repurchase agreements and revolving
credit lines............................................ 161,014 (9,572)
Mortgage notes and other debts payable
Proceeds from borrowings................................ 277,743 16,721
Principal payments...................................... (6,140) (4,059)
Payments to Lennar Corporation............................ (12,526) (73,752)
--------- -------
Net cash provided by (used in) financing activities... 413,177 (70,662)
--------- -------
Net increase in cash and cash equivalents................. 23,686 2,024
Cash and cash equivalents at beginning of period.......... 34,059 2,295
--------- -------
Cash and cash equivalents at end of period................ $ 57,745 4,319
========= =======
Supplemental disclosures of non-cash investing and financing
activities:
Purchases of investment securities financed............... $ 34,956 47,171
Purchase of a mortgage loan financed...................... $ 105,000 --
Spin-off of LNR from Lennar Corporation:
Increase in Lennar Corporation's investment due to
transfers of assets and liabilities to Lennar
Corporation, prior to the spin-off...................... $ -- 4,612
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-29
<PAGE> 113
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
AUGUST 31, 1998
1. BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated condensed financial statements include the
accounts of LNR Property Corporation and its subsidiaries (the "Company"). The
assets, liabilities and results of operations of entities (both corporations and
partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company's investments in partnerships
(and similar entities) in which less than a controlling interest is held are
accounted for by the equity method (when significant influence can be exerted by
the Company), or the cost method. All significant intercompany transactions and
balances have been eliminated. The financial statements have been prepared by
management without audit by independent public accountants and should be read in
conjunction with the November 30, 1997 audited financial statements in the
Company's Annual Report on Form 10-K for the year then ended. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for fair presentation of the accompanying consolidated
condensed financial statements have been made.
2. NET EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" beginning in the first quarter
of 1998. The statement requires that earnings per share be calculated and
presented on a basic and diluted basis. Net earnings per share for all periods
presented have been restated to conform with SFAS No. 128.
Basic net earnings per share is computed by dividing the Company's net
earnings by the weighted average number of shares outstanding during the period.
Diluted net earnings per share is computed by dividing the Company's net
earnings by the weighted average number of shares outstanding and the dilutive
impact of common stock equivalents, primarily stock options. The dilutive impact
of common stock equivalents is determined by applying the treasury stock method.
3. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current year presentation.
4. ACQUISITION
On February 18, 1998, the Company entered into an agreement to purchase
from Pacific Harbor Capital, Inc., a wholly-owned subsidiary of PacifiCorp,
controlling interests in a group of entities as well as certain direct
partnership interests, known as the Affordable Housing Group ("AHG"), which own
multi-family and senior housing properties, many of which qualify for Low-Income
Housing Tax Credits under Section 42 of the Internal Revenue Code.
As of August 31, 1998, the Company completed the purchase of certain
interests which own 40 of the properties. The remaining two interests closed
during the fourth quarter. The aggregate amount of consideration was $81
million, subject to certain post-closing adjustments, plus the assumption of
approximately $45 million of future equity commitments. The purchase price paid
for assets acquired as of August 31, 1998 was approximately $76 million. At
August 31, 1998, the Company's balance sheet included AHG balances as follows:
operating properties of approximately $194 million, investments in partnerships
of approximately $14 million and approximately $133 million of property-specific
mortgage financing that is non-recourse to the Company.
F-30
<PAGE> 114
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE AMENDED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
DATED DECEMBER 9, 1998
PROSPECTUS
LNR PROPERTY CORPORATION
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
DEBT SECURITIES
WARRANTS
AND GUARANTEES
We may from time to time offer our common stock, preferred stock (which we
may issue in one or more series), depositary shares representing shares of
preferred stock, debt securities (which we may issue in one or more series) or
warrants entitling the holders to purchase common stock, preferred stock,
depositary shares or debt securities, at an aggregate initial offering price
which will not exceed $400,000,000. We may also issue guarantees of the
obligations of our subsidiaries or others under securities they issue. We will
determine when we sell securities, the amounts of securities we will sell and
the prices and other terms on which we will sell them. We may sell securities to
or through underwriters, through agents or directly to purchasers.
We will describe in a prospectus supplement, which we will deliver with
this prospectus, the terms of particular securities which we offer in the
future. We may describe the terms of those securities in a term sheet which will
precede the prospectus supplement.
In each prospectus supplement we will include the following information:
- The names of the underwriters or agents, if any, through which we will
sell the securities;
- The proposed amounts of securities, if any, which the underwriters will
purchase;
- The compensation, if any, of those underwriters or agents;
- The initial public offering price of the securities;
- Information about securities exchanges or automated quotation systems on
which the securities will be listed or traded; and
- Any other material information about the offering and sale of the
securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
December , 1998
<PAGE> 115
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD-LOOKING INFORMATION..... 2
THE COMPANY..................... 2
USE OF PROCEEDS................. 3
RATIO OF EARNINGS TO FIXED
CHARGES....................... 3
DESCRIPTION OF DEBT
SECURITIES.................... 3
DESCRIPTION OF WARRANTS......... 7
DESCRIPTION OF COMMON STOCK AND
PREFERRED SECURITIES.......... 7
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF DEPOSITARY
SHARES........................ 9
DESCRIPTION OF GUARANTEES....... 11
LEGAL MATTERS................... 11
EXPERTS......................... 12
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE........ 12
INFORMATION WE FILE............. 12
</TABLE>
-------------------------
FORWARD-LOOKING INFORMATION
We make forward-looking statements about our business in our filings with
the Securities and Exchange Commission. Although we believe the expectations
reflected in our forward-looking statements are reasonable, it is possible they
will prove not to have been correct, particularly given the cyclical nature of
the commercial real estate market, in addition to the cyclical nature of the
commercial real estate business. Among the factors which create uncertainties
about our future performance are changes in interest rates, changes in demand
for commercial real estate nationally, in areas in which we own properties, or
in areas in which properties securing mortgages we own are located, changes in
the demand for real estate related securities, and national or regional business
conditions which affect the ability of mortgage obligors to pay principal or
interest when it is due.
THE COMPANY
We are a real estate investment and management company. We structure and
make real estate related investments and, through our expertise in developing
and managing properties, we seek to enhance the value of those investments. We
and our predecessor have been engaged in the development, ownership and
management of commercial and multi-family residential properties since 1969.
Our activities primarily consist of:
- Developing and managing commercial and multi-family residential
properties;
- Acquiring, managing and repositioning commercial and multi-family
residential real estate loans and properties;
- Acquiring (often in partnership with financial institutions and real
estate funds) and managing portfolios of real estate assets;
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- Investing in unrated and non-investment grade rated commercial mortgage-
backed securities ("CMBS") as to which we have the right to be special
servicer (i.e., to oversee workouts of underperforming and nonperforming
loans); and
- Making high yielding real estate related loans and equity investments.
We adjust our investment focus from time to time to adapt to changes in
markets and phases of the real estate cycle.
Lennar Corporation formed our company in June 1997 to separate Lennar's
real estate investment and management business from its homebuilding business.
On October 31, 1997, Lennar distributed our stock to Lennar's stockholders in a
tax-free spin-off. We treat activities conducted by Lennar, as our predecessor,
of the type we currently conduct as our own historical activities.
USE OF PROCEEDS
Except as may be set forth in a particular prospectus supplement, we will
add the net proceeds from sales of securities to our general corporate funds,
which we may use to repay indebtedness, for acquisitions or for other general
corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED NOVEMBER 30,
ENDED -------------------------------------
AUGUST 31, 1998 1997 1996 1995 1994 1993
----------------- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(1)... 3.0x 3.6x 4.8x 5.5x 10.4x 9.6x
</TABLE>
- -------------------------
(1) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income taxes
and cumulative effect of changes in accounting principles plus "fixed
charges" and certain other adjustments. "Fixed charges" consist of interest
incurred on all indebtedness related to continuing operations (we did not
have any material original issue discount, interest within rental expense or
capitalized lease obligations during the periods presented).
There was no preferred stock outstanding for any of the periods shown
above. Accordingly, the ratio of earnings to combined fixed charges and
preferred stock dividends is identical to the ratio of earnings to fixed
charges.
DESCRIPTION OF DEBT SECURITIES
We will issue the debt securities under an indenture dated as of December
, 1998 with The Bank of New York, as trustee, which we may supplement from
time to time. The following paragraphs describe the provisions of the indenture.
We are filing the indenture as an exhibit to the registration statement of which
this prospectus is a part and you may inspect it at the office of the trustee.
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GENERAL
The debt securities will be direct, unsecured obligations of our company
and may be either senior debt securities or subordinated debt securities. The
indenture does not limit the principal amount of debt securities that we may
issue. We may issue debt securities in one or more series. A supplemental
indenture will set forth specific terms of each series of debt securities. There
will be prospectus supplements relating to particular series of debt securities
offered. Each prospectus supplement will describe:
- the title of the debt securities and whether the debt securities are
senior or subordinated debt securities;
- any limit upon the aggregate principal amount of a series of debt
securities which we may issue;
- the date or dates on which principal of the debt securities will be
payable and the amount of principal which will be payable;
- the rate or rates (which may be fixed or variable) at which the debt
securities will bear interest, if any, as well as the dates from which
interest will accrue, the dates on which interest will be payable, the
persons to whom interest will be payable, if other than the registered
holders on the record date, and the record date for the interest payable
on any payment date;
- the currency or currencies in which principal, premium, if any, and
interest, if any, will be paid;
- the place or places where principal, premium, if any, and interest, if
any, on the debt securities will be payable and where debt securities
which are in registered form can be presented for registration of
transfer or exchange;
- any provisions regarding our right to prepay debt securities or of
holders to require us to prepay debt securities;
- the right, if any, of holders of the debt securities to convert them into
common stock or other securities, including any provisions intended to
prevent dilution of the conversion rights;
- any provisions requiring or permitting us to make payments to a sinking
fund which will be used to redeem debt securities or a purchase fund
which will be used to purchase debt securities;
- any index or formula used to determine the required payments of
principal, premium, if any, or interest, if any;
- the percentage of the principal amount of the debt securities which is
payable if maturity of the debt securities is accelerated because of a
default;
- any special or modified events of default or covenants with respect to
the debt securities; and
- any other material terms of the debt securities.
To the extent that the description of a particular series of debt
securities contained in a prospectus supplement is inconsistent with the general
description in this "Description of Debt Securities," the description contained
in the prospectus supplement will replace the description in this prospectus.
The indenture does not contain any restrictions on the payment of dividends
or the repurchase of our securities or any financial covenants. However, supple-
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mental indentures relating to particular series of debt securities may contain
provisions of that type.
We may issue debt securities at a discount from their stated principal
amount. A prospectus supplement may describe federal income tax considerations
and other special considerations applicable to a debt security issued with
original issue discount.
If the principal of, premium, if any, or interest with regard to any series
of debt securities is payable in a foreign currency, we will describe in the
prospectus supplement relating to those debt securities any restrictions on
currency conversions, tax considerations or other material restrictions with
respect to that issue of debt securities.
FORM OF DEBT SECURITIES
We may issue debt securities in certificated or uncertificated form, in
registered form with or without coupons or in bearer form with coupons, if
applicable.
We may issue debt securities of a series in the form of one or more global
certificates evidencing all or a portion of the aggregate principal amount of
the debt securities of that series. We may deposit the global certificates with
depositaries, and the certificates may be subject to restrictions upon transfer
or upon exchange for debt securities in individually certificated form.
EVENTS OF DEFAULT AND REMEDIES
An event of default with respect to each series of debt securities will
include:
- our default in payment of the principal of or premium, if any, on any
debt securities of that series;
- our default for a period specified in a supplemental indenture, which may
be no period, in payment of any installment of interest, if any, on any
debt securities of that series;
- our default for a period specified in the supplemental indenture after
notice in the observance or performance of any other covenants in the
indenture; and
- certain events involving our bankruptcy, insolvency or reorganization.
Supplemental indentures relating to particular series of debt securities
may include other events of default.
The indenture provides that the trustee may withhold notice to the holders
of any series of debt securities of any default (except a default in payment of
principal, premium, if any, or interest, if any) if the trustee considers it in
the interest of the holders of the series to do so.
The indenture provides that if any event of default has occurred and is
continuing, the trustee or the holders of not less than 25% in principal amount
of the series of debt securities then outstanding may declare the principal of
and accrued interest, if any, on all the series of debt securities to be due and
payable immediately. However, if we cure all defaults (except the failure to pay
principal, premium or interest which became due solely because of the
acceleration) and
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certain other conditions are met, that declaration may be annulled and past
defaults may be waived by the holders of a majority in principal amount of the
series of debt securities then outstanding.
The holders of a majority in outstanding principal amount of a series of
debt securities will have the right to direct the time, method and place of
conducting proceedings for any remedy available to the trustee, subject to
certain limitations specified in the indenture.
A prospectus supplement will describe any additional or different events of
default which apply to any series of debt securities.
MODIFICATION OF THE INDENTURE
We and the trustee may:
- without the consent of holders of debt securities, modify the indenture
to cure errors or clarify ambiguities;
- with the consent of the holders of not less than a majority in principal
amount of the debt securities which are outstanding under the indenture,
modify the indenture or the rights of the holders of the debt securities
generally; and
- with the consent of the holders of not less than a majority in
outstanding principal amount of any series of debt securities, modify any
supplemental indenture relating solely to that series of debt securities
or the rights of the holders of that series of debt securities.
However, we may not:
- extend the fixed maturity of any debt securities, reduce the rate or
extend the time for payment of interest, if any, on any debt securities,
reduce the principal amount of any debt securities or the premium, if
any, on any debt securities, impair or affect the right of a holder to
institute suit for the payment of principal, premium, if any, or
interest, if any, with regard to any debt securities, change the currency
in which any debt securities are payable or impair the right, if any, to
convert any debt securities into common stock or any of our other
securities, without the consent of each holder of debt securities who
will be affected; or
- reduce the percentage of holders of debt securities required to consent
to an amendment, supplement or waiver, without the consent of the holders
of all the then outstanding debt securities or outstanding debt
securities of the series which will be affected.
MERGERS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity, or transfer or
lease our properties and assets substantially as an entirety to another person,
unless (i) the entity formed by the consolidation or into which we are merged,
or which acquires or leases our properties and assets substantially as an
entirety, assumes by a supplemental indenture all our obligations with regard to
outstanding debt securities and our other covenants under the indenture, and
(ii) with regard to each series of debt securities, immediately after giving
effect to the transaction, no event of default, with respect to that series of
debt securities,
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and no event which would become an event of default, will have occurred and be
continuing.
CONCERNING THE TRUSTEE
The Bank of New York, the trustee under the indenture, provides, and may
continue to provide, loans and banking services to us in the ordinary course of
its business.
GOVERNING LAW
The indenture, each supplemental indenture, and the debt securities issued
under them will be governed by, and construed in accordance with, the laws of
New York State.
DESCRIPTION OF WARRANTS
Each issue of warrants will be the subject of a warrant agreement which
will contain the terms of the warrants. We will distribute a prospectus
supplement with regard to each issue of warrants. Each prospectus supplement
will describe, as to the warrants to which it relates:
- the securities which may be purchased by exercising the warrants (which
may be common stock, preferred stock, debt securities, depositary shares
or units consisting of two or more of those types of securities);
- the exercise price of the warrants (which may be wholly or partly payable
in cash or wholly or partly payable with other types of consideration);
- the period during which the warrants may be exercised;
- any provision adjusting the securities which may be purchased on exercise
of the warrants and the exercise price of the warrants in order to
prevent dilution or otherwise;
- the place or places where warrants can be presented for exercise or for
registration of transfer or exchange; and
- any other material terms of the warrants.
DESCRIPTION OF COMMON STOCK AND PREFERRED SECURITIES
Our authorized capital stock consists of 150,000,000 shares of common
stock, $0.10 par value, 40,000,000 shares of class B common stock, $0.10 par
value, and 500,000 shares of preferred stock, $10.00 par value. At October 31,
1998, 24,846,000 shares of common stock, 10,754,000 shares of class B common
stock and no shares of preferred stock were outstanding.
PREFERRED STOCK
We may issue preferred stock in series with any rights and preferences
which may be authorized by our board of directors. We will distribute a
prospectus
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supplement with regard to each series of preferred stock. Each prospectus
supplement will describe, as to the preferred stock to which it relates:
- the title of the series;
- any limit upon the number of shares of the series which may be issued;
- the preference, if any, to which holders of the series will be entitled
upon our liquidation;
- the date or dates on which we will be required or permitted to redeem
shares of the series;
- the terms, if any, on which we or holders of the series will have the
option to cause shares of the series to be redeemed;
- the voting rights of the holders of the preferred stock;
- the dividends, if any, which will be payable with regard to the series
(which may be fixed dividends or participating dividends and may be
cumulative or non-cumulative);
- the right, if any, of holders of the series to convert them into another
class of our stock or securities, including provisions intended to
prevent dilution of those conversion rights;
- any provisions by which we will be required or permitted to make payments
to a sinking fund which will be used to redeem shares of the series or a
purchase fund which will be used to purchase shares of the series; and
- any other material terms of the series.
Holders of shares of preferred stock will not have preemptive rights.
COMMON STOCK
All the outstanding shares of our common stock are fully paid and
nonassessable and entitled to participate equally and ratably in dividends and
in distributions available for the common stock on liquidation. Each share is
entitled to one vote for the election of directors and upon all other matters on
which the common stockholders vote. Holders of common stock are not entitled to
cumulative votes in the election of our directors.
The transfer agent and registrar for the common stock is Boston EquiServe
L.P., Canton, Massachusetts.
CLASS B COMMON STOCK
Our class B common stock is identical in every respect with our common
stock, except that (a) each share of class B common stock is entitled to ten
votes on each matter submitted to the vote of the common stockholders, while
each share of common stock is entitled to only one vote, (b) the cash dividends,
if any, paid with regard to the class B common stock in a year cannot be more
than 90% of the cash dividends, if any, paid with regard to the common stock in
that year, (c) a holder cannot transfer class B common stock, except to a
limited group of Permitted Transferees (primarily close relatives of the class B
stockholder, fiduciaries for the class B stockholder or for close relatives, and
entities of which the class B stockholder or close relatives are majority
owners), (d) class B
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common stock may at any time be converted into common stock, but common stock
may not be converted into class B common stock, (e) amendments to provisions of
our Certificate of Incorporation relating to the common stock or the class B
common stock require the approval of a majority of the shares of common stock
which are voted with regard to them (as well as approval of a majority in voting
power of all the outstanding common stock and class B common stock combined),
and (f) under Delaware law, certain matters affecting the rights of holders of
class B common stock may require approval of the holders of the class B common
stock voting as a separate class.
Leonard Miller, a member of our Board, currently owns, through two limited
partnerships of which a corporation wholly-owned by him is the sole general
partner, 9,897,930 shares of class B common stock, which is 92.0% of the
outstanding class B common stock and 27.8% of the outstanding common stock of
both classes. Mr. Miller's class B common stock gives him 74.8% of the total
votes which can be cast by the holders of both classes of common stock. Even if
Mr. Miller converted 5,961,315 shares of class B common stock into common stock
and sold that common stock, thereby reducing his holdings to 11.1% of the total
common stock of both classes, Mr. Miller would be entitled to cast more than 50%
of the votes. Mr. Miller has no current intention to convert any class B common
stock into common stock, or to sell any common stock, although, unless otherwise
stated in a particular prospectus supplement, he would be free to do so at any
time.
The existence of class B common stock, which has substantially greater
voting rights than the common stock, probably would discourage non-negotiated
tender offers and other types of non-negotiated takeovers, if any were
contemplated. Mr. Miller's ownership of class B common stock would make it
impossible for anyone to acquire voting control of us as long as Mr. Miller's
class B common stock represents at least 9.1% of the combined common stock of
both classes and the total outstanding class B common stock is at least 10% of
the combined common stock of both classes (if at any time the outstanding shares
of class B common stock are less than 10% of the outstanding shares of both
classes of common stock taken together, the class B common stock will
automatically be converted into common stock).
DESCRIPTION OF DEPOSITARY SHARES
We may issue depositary receipts representing interests in shares of
particular series of preferred stock which are called depositary shares. We will
deposit the preferred stock of a series which is the subject of depositary
shares with a depositary, which will hold that preferred stock for the benefit
of the holders of the depositary shares, in accordance with a deposit agreement
between the depositary and us. The holders of depositary shares will be entitled
to all the rights and preferences of the preferred stock to which the depositary
shares relate, including dividend, voting, conversion, redemption and
liquidation rights, to the extent of their interests in that preferred stock.
While the deposit agreement relating to a particular series of preferred
stock may have provisions applicable solely to that series of preferred stock,
all deposit
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agreements relating to preferred stock we issue will include the following
provisions:
DIVIDENDS AND OTHER DISTRIBUTIONS. Each time we pay a cash dividend or
make any other type of cash distribution with regard to preferred stock of a
series, the depositary will distribute to the holder of record of each
depositary share relating to that series of preferred stock an amount equal to
the dividend or other distribution per depositary share the depository receives.
If there is a distribution of property other than cash, the depositary either
will distribute the property to the holders of depositary shares in proportion
to the depositary shares held by each of them, or the depositary will, if we
approve, sell the property and distribute the net proceeds to the holders of the
depositary shares in proportion to the depositary shares held by them.
WITHDRAWAL OF PREFERRED STOCK. A holder of depositary shares will be
entitled to receive, upon surrender of depositary receipts representing
depositary shares, the number of whole or fractional shares of the applicable
series of preferred stock, and any money or other property, to which the
depositary shares relate.
REDEMPTION OF DEPOSITARY SHARES. Whenever we redeem shares of preferred
stock held by a depositary, the depositary will be required to redeem, on the
same redemption date, depositary shares constituting, in total, the number of
shares of preferred stock held by the depositary which we redeem, subject to the
depositary's receiving the redemption price of those shares of preferred stock.
If fewer than all the depositary shares relating to a series are to be redeemed,
the depositary shares to be redeemed will be selected by lot or by another
method we determine to be equitable.
VOTING. Any time we send a notice of meeting or other materials relating
to a meeting to the holders of a series of preferred stock to which depositary
shares relate, we will provide the depositary with sufficient copies of those
materials so they can be sent to all holders of record of the applicable
depositary shares, and the depositary will send those materials to the holders
of record of the depositary shares on the record date for the meeting. The
depositary will solicit voting instructions from holders of depositary shares
and will vote or not vote the preferred stock to which the depositary shares
relate in accordance with those instructions.
LIQUIDATION PREFERENCE. Upon our liquidation, dissolution or winding up,
the holder of each depositary share will be entitled to, what the holder of the
depositary share would have received if the holder had owned the number of
shares (or fraction of a share) of preferred stock which is represented by the
depositary share.
CONVERSION. If shares of a series of preferred stock are convertible into
common stock or other of our securities or property, holders of depositary
shares relating to that series of preferred stock will, if they surrender
depositary receipts representing depositary shares and appropriate instructions
to convert them, receive the shares of common stock or other securities or
property into which the number of shares (or fractions of shares) of preferred
stock to which the depositary shares relate could at the time be converted.
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AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT. We and the depositary
may amend a deposit agreement, except that an amendment which materially and
adversely affects the rights of holders of depositary shares, or would be
materially and adversely inconsistent with the rights granted to the holders of
the preferred stock to which they relate, must be approved by holders of at
least two-thirds of the outstanding depositary shares. No amendment will impair
the right of a holder of depositary shares to surrender the depositary receipts
evidencing those depositary shares and receive the preferred stock to which they
relate, except as required to comply with law. We may terminate a deposit
agreement with the consent of holders of a majority of the depositary shares to
which it relates. Upon termination of a deposit agreement, the depositary will
make the whole or fractional shares of preferred stock to which the depositary
shares issued under the deposit agreement relate available to the holders of
those depositary shares. A deposit agreement will automatically terminate if:
- all outstanding depositary shares to which it relates have been redeemed
or converted or
- the depositary has made a final distribution to the holders of the
depositary shares issued under the deposit agreement upon our
liquidation, dissolution or winding up.
MISCELLANEOUS. There will be provisions (i) requiring the depositary to
forward to holders of record of depositary shares any reports or communications
from us which the depositary receives with respect to the preferred stock to
which the depositary shares relate, (ii) regarding compensation of the
depositary, (iii) regarding resignation of the depositary, (iv) limiting our
liability and the liability of the depositary under the deposit agreement
(usually to failure to act in good faith, gross negligence or willful
misconduct) and (v) indemnifying the depositary against certain possible
liabilities.
DESCRIPTION OF GUARANTEES
We may guarantee debt securities, preferred stock or other securities
issued by our subsidiaries or others. Our guarantee may be total or may be
limited to particular amounts or to particular obligations under the guaranteed
securities. If the issuance of the guaranteed securities must be registered
under the Securities Act of 1933, as amended, the prospectus relating to the
guaranteed securities will also constitute a prospectus supplement regarding our
guarantee. That prospectus /prospectus supplement will include a description of
the nature and the extent of our guarantee.
LEGAL MATTERS
Rogers & Wells LLP, 200 Park Avenue, New York, New York 10166, will pass
upon the validity of the securities we are offering by this prospectus. If the
validity of any securities is also passed upon by counsel for the underwriters
of an offering of those securities, that counsel will be named in the prospectus
supplement relating to that offering.
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EXPERTS
Deloitte & Touche LLP, independent auditors, have audited our consolidated
financial statements and the related financial statement schedules incorporated
by reference into this prospectus and the registration statement of which it is
a part from our Annual Report on Form 10-K for the fiscal year ended November
30, 1997. Deloitte & Touche's reports are incorporated by reference in this
Prospectus in reliance upon their reports given upon their authority as experts
in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference in this prospectus the following
documents which we have previously filed with the Securities and Exchange
Commission under the File Number 1-13223:
(a) our Annual Report on Form 10-K for the fiscal year ended November
30, 1997;
(b) our Quarterly Reports on Form 10-Q for the fiscal quarters ended
February 28, 1998, May 31, 1998 and August 31, 1998;
(c) our Current Reports on Form 8-K and 8-K/A filed May 18, 1998 and
July 14, 1998;
(d) our definitive proxy statement filed March 9, 1998; and
(e) the description of our common stock contained in our registration
statement under Section 12 of the Securities Exchange Act of 1934, as
amended, as that description has been altered by amendment or reports filed
for the purpose of updating that description.
Whenever after the date of this prospectus we file reports or documents
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended, those reports and documents will be deemed to be part of this
prospectus from the time they are filed. If anything in a report or document we
file after the date of this prospectus changes anything in it, this prospectus
will be deemed to be changed by that subsequently filed report or document
beginning on the date the report or document is filed.
We will provide to each person to whom a copy of this prospectus is
delivered a copy of any or all of the information that has been incorporated by
reference in this prospectus, but not delivered with this prospectus. We will
provide this information at no cost to the requestor upon written or oral
request addressed to LNR Property Corporation, 760 Northwest 107th Avenue,
Miami, Florida 33172, attention: Director of Investor Relations
(Telephone:305-485-2000).
INFORMATION WE FILE
We file annual, quarterly and current reports, proxy statements and other
materials with the SEC. The public may read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an
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Internet site that contains reports, proxy and information statements and other
information regarding issuers (including us) that file electronically with the
SEC. The address of that site is http:\\www.sec.gov. Reports, proxy statements
and other information we file also can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
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- ------------------------------------------------------
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ABOUT THE TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN. IF YOU ARE
GIVEN ANY INFORMATION OR REPRESENTATIONS ABOUT THESE MATTERS THAT IS NOT
DISCUSSED IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, YOU MUST
NOT RELY ON THAT INFORMATION. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY SECURITIES ANYWHERE OR TO ANYONE WHERE OR
TO WHOM WE ARE NOT PERMITTED TO OFFER OR SELL SECURITIES UNDER APPLICABLE LAW.
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND ANY SALE OF SECURITIES OFFERED
HEREBY DOES NOT, UNDER ANY CIRCUMSTANCES, MEAN THAT THERE HAS NOT BEEN A CHANGE
IN OUR AFFAIRS SINCE THE DATE HEREOF. IT ALSO DOES NOT MEAN THAT THE INFORMATION
IN THIS PROSPECTUS SUPPLEMENT IS CORRECT AFTER THIS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Forward-Looking Information.......... S-2
Prospectus Supplement Summary........ S-3
Risk Factors......................... S-16
Use of Proceeds...................... S-22
Capitalization....................... S-23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... S-24
Business............................. S-32
Management........................... S-42
Description of Certain
Indebtedness....................... S-46
Description of the Notes............. S-49
Underwriting......................... S-81
Legal Matters........................ S-82
Experts.............................. S-82
Information We File.................. S-82
Index to Financial Statements........ F-1
PROSPECTUS
Forward-Looking Information.......... 2
The Company.......................... 2
Use of Proceeds...................... 3
Ratio of Earnings to Fixed Charges... 3
Description of Debt Securities....... 3
Description of Warrants.............. 7
Description of Common Stock and
Preferred Securities............... 7
Description of Depositary Shares..... 9
Description of Guarantees............ 11
Legal Matters........................ 11
Experts.............................. 12
Incorporation of Certain Documents by
Reference.......................... 12
Information We File.................. 12
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
LNR PROPERTY LOGO
$100,000,000
% SENIOR SUBORDINATED
NOTES DUE 2008
----------------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------------
BT ALEX. BROWN
December , 1998
------------------------------------------------------
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<PAGE> 128
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities being registered, other
than underwriting discounts and commissions:
<TABLE>
<S> <C>
Registration fee -- Securities and Exchange Commission ..... $111,200
Accounting fees and expenses ............................... 7,500(1)
Legal fees and expenses .................................... 15,000(1)
Trustees' fees and expenses ................................ 5,000(1)
Miscellaneous .............................................. 11,300
--------
Total ...................................................... $150,000
========
</TABLE>
(1) Does not include expenses of preparing prospectus supplements and
other expenses relating to offerings of particular securities.
ITEM 15 INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the General Corporation Law of Delaware,
our Certificate of Incorporation provides that an officer, director, employee or
agent of our company is entitled to be indemnified for the expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him by
reason of any action, suit or proceeding brought against him by virtue of his
acting as such officer, director, employee or agent, provided he acted in good
faith or in a manner he reasonably believed to be in or not opposed to the best
interests of our company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful, except that in any
action or suit by or in the right of our company that person shall be
indemnified only for the expenses actually and reasonably incurred by him and,
if that person shall have been adjudged to be liable for negligence or
misconduct, he shall not be indemnified unless and only to the extent that a
court of appropriate jurisdiction shall determine that such indemnification is
fair and reasonable.
ITEM 16 EXHIBITS
2(a). Restated Certificate of Incorporation of the company --
incorporated by reference to the Company's Form 8-K, File
number 1-11749, dated November 17, 1997.
2(b). Amendment to Certificate of Incorporation dated April 28, 1998
-- incorporated by reference to the Company's definitive proxy
statement, File number 1-13223, filed March 9, 1998.
2(c). By-laws -- incorporated by reference to the Company's Form
8-K, File number 1-11749, dated November 17, 1997.
4. Form of Indenture*
5. Opinion of Counsel*
12. Statement of computation of ratios of earnings to fixed
charges*
23. Consents
(i). Rogers & Wells LLP (counsel)--included in Exhibit 5*
(ii). Deloitte & Touche LLP (accountants)*
25. Statement of Eligibility of Trustee on Form T-1*
______________
* Previously filed.
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<PAGE> 129
ITEM 17 UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i). To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii). To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii). To include any material information with respect to the
plan of distribution not previously disclosed in this registration statement or
any material change to such information in the registration statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above shall not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by LNR pursuant to Section 13 or Section 15(d) of the Exchange Act that
are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment will be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of LNR's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in this
registration statement will be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering thereof.
(5) That, (i) for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective and (ii) for the
purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
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<PAGE> 130
The undersigned registrants hereby undertake to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act of 1939.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of LNR
pursuant to the foregoing provisions, or otherwise, LNR has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by LNR of expenses incurred or paid by a director, officer or
controlling person of LNR in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, LNR will, unless in the opinion
of counsel for LNR the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this amendment to Form S-3 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Miami and State of Florida on
December 9, 1998.
LNR PROPERTY CORPORATION
By: /s/ Steven J. Saiontz
------------------------------------
Steven J. Saiontz
Chief Executive Officer and Director
Pursuant to the requirement of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ Steven J. Saiontz
- ----------------------------------
Steven J. Saiontz Principal Executive Officer;
Director December 9, 1998
/s/ Shelly Rubin
- ----------------------------------
Shelly Rubin Principal Financial Officer December 9, 1998
/s/ John T. McMickle
- ----------------------------------
John T. McMickle Principal Accounting Officer December 9, 1998
/s/ Stuart A. Miller *
- ----------------------------------
Stuart A. Miller Director December 9, 1998
</TABLE>
S-1
<PAGE> 132
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ Leonard Miller *
- ----------------------------------
Leonard Miller Director December 9, 1998
/s/ Jeffrey P. Krasnoff *
- ----------------------------------
Jeffrey P. Krasnoff Director December 9, 1998
/s/ Brian Bilzin *
- ----------------------------------
Brian Bilzin Director December 9, 1998
/s/ Sue M. Cobb *
- ----------------------------------
Sue M. Cobb Director December 9, 1998
/s/ Carlos M. de la Cruz *
- ----------------------------------
Carlos M. de la Cruz Director December 9, 1998
* /s/ Shelly Rubin
- ----------------------------------
Shelly Rubin Attorney In Fact December 9, 1998
</TABLE>
S-2
