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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission file number: 1-9646
ASR INVESTMENTS CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
Maryland 86-0587826
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
335 North Wilmot, Suite 250, Tucson, Arizona 85711
(Address of principal executive offices) (Zip Code)
</TABLE>
(520) 748-2111
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
title of each class which registered
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Common stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 21, 1996, 3,154,495 shares of ASR Investments Corporation common
stock were outstanding, and the aggregate market value of the 3,033,960 shares
held by non-affiliates (based upon the closing price of the shares on the
American Stock Exchange) was approximately $50,060,340. Shares of Common Stock
held by each officer and director of the Company and the Manager have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed pursuant to
Regulation 14A on or before April 29, 1996, are incorporated by reference into
Part III.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business .....................................................................3
Item 2. Properties ...................................................................24
Item 3. Legal Proceedings ............................................................24
Item 4. Submission of Matters to a Vote of Security Holders ..........................24
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ...25
Item 6. Selected Financial Data ......................................................26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................26
Item 8. Financial Statements and Supplementary Data ..................................30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ...................................................................30
PART III
Item 10. Directors and Executive Officers of the Registrant ..........................30
Item 11. Executive Compensation ......................................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management .............30
Item 13. Certain Relationships and Related Transactions ..............................30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............30
SIGNATURES ...........................................................................33
FINANCIAL STATEMENTS .................................................................F-1
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<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
The Company is a real estate investment trust engaged in the acquisition and
operation of apartment communities in the Southwestern United States. At
December 31, 1995, the Company owned 18 apartment communities, containing 2,683
units, located in Phoenix and Tucson, Arizona, Houston, Texas and Albuquerque,
New Mexico. As of such date, the total book value of the apartments was $71.3
million, and the apartments were subject to first mortgage loans totaling $49.6
million. Each of the properties is owned by a wholly owned subsidiary of the
Company and the first mortgage loans are generally non-recourse and non-cross
collateralized. The Company also owned through joint ventures six apartment
communities, containing 1,441 units, located in Phoenix and Tucson, Arizona. The
Company's investments in the joint ventures totalled $3.0 million at December
31, 1995.
Prior to 1993, the Company invested in mortgage assets ("Mortgage Assets")
that entitled it to receive the excess cash flows from a pool of mortgage
instruments over the required payments on the related structured financing. In
early 1993, the Company determined to shift its focus to the acquisition,
development and operation of apartment communities. The Company plans to hold
the existing Mortgage Assets and use the cash flows for apartment acquisitions,
operations, payment of dividends and other corporate purposes. At December 31,
1995, the Mortgage Assets had a carrying value of $11.9 million, of which $7.6
million were pledged as collateral for short-term borrowing of $4.5 million.
Pima Mortgage Limited Partnership (the "Manager") manages the day-to-day
operations of the Company, subject to the supervision of the Company's Board of
Directors, pursuant to the terms of a management agreement. The Company also has
entered into property management agreements with Pima Realty Advisors, Inc. (the
"Property Manager"), an affiliate of the Manager, for each of its current
apartment properties.
The Company has elected to be taxed as a real estate investment trust
("REIT") pursuant to sections 856 through 860 of the Code. The Company generally
will not be subject to tax on its income to the extent that it distributes its
taxable income to its stockholders and it maintains its qualification as a REIT.
See "Business -- Federal Income Tax Considerations."
The Company was incorporated in the State of Maryland on June 18, 1987 and
commenced its operations on August 26, 1987. The Company's Common Stock is
listed on the American Stock Exchange under the symbol "ASR." The Company
effected a reserve stock split on July 7, 1995 under which one new share of
common stock was issued in exchange for five shares of outstanding common stock.
Accordingly, all data relating to the number of shares and per share amounts for
prior periods have been adjusted to reflect the reverse stock split.
The principal executive offices of the Company and the Manager are located at
335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone number (520)
748-2111. Unless the context otherwise requires, the term Company means ASR
Investments Corporation and its subsidiaries.
Operating Policies And Strategies
Real Estate Activities
Introduction
The Company has developed various business objectives and operating,
acquisition, financing and investment strategies and policies relative to its
real estate activities. These policies and strategies have been determined by
the directors of the Company and may be amended or revised from time to time at
the discretion of the directors without a vote of the stockholders of the
Company.
<PAGE>
Business Objectives
The Company's current business objectives are to increase the cash flow and
value of its existing portfolio of apartment communities and to acquire
additional communities.
Investment Policies
The Company's current portfolio consists of apartment communities in the
southwestern region of the United States and investments in joint ventures that
own apartment communities. The Company intends to continue to focus on apartment
communities in this region. However, future investments, including the
activities described below, are not limited (as to percentage of assets or
otherwise) to any geographic area or any specific type of property. In this
regard, the Company expand its current geographic focus and may acquire other
types of income-producing properties, including hotels, motels, shopping centers
and office buildings.
The Company believes that attractive opportunities continue to be available
to acquire apartment communities. The Company may enter into agreements to
acquire newly developed properties upon completion or upon achievement of
certain specified occupancy rates. The Company also intends to develop new
apartment communities for its own account or through joint ventures with others.
The Company may purchase or lease income-producing properties for long-term
investment and improve its properties, or sell such properties, in whole or in
part, when circumstances warrant. The Company also may participate with other
entities in property ownership, through joint ventures or other types of
co-ownership. Equity investments may be subject to existing mortgage financing
and other indebtedness or such financing or indebtedness may be incurred in
connection with acquiring investments. Any such financing or indebtedness will
have a priority over the equity interest of the Company.
While the Company will emphasize equity real estate investments in
properties, it may, in its discretion, invest in mortgages and other real estate
interests or make loans secured by mortgages on or interests in real estate
properties. Its investments in mortgages may include participating or
convertible mortgages if the Company concludes that it may benefit from the cash
flow and/or any appreciation potential in the value of the property. Such
mortgages may be similar to equity participations.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification (see "Federal Income Tax Considerations"), the
Company also may invest in securities of concerns engaged in real estate
activities or securities of other issuers. The Company in the future may acquire
all or substantially all of the securities or assets of other REITs or similar
entities when it believes such investments would be consistent with the
Company's investment policies. In any event, the Company does not intend that
its investments in securities will require the Company to register as an
"investment company" under the Investment Company Act of 1940, and the Company
intends to divest securities before any such registration would be required.
Acquisitions
In evaluating acquisitions, the Company considers such factors as: (i) the
geographic location and type of property; (ii) the age, construction quality,
condition and design of the property; (iii) the current and projected cash flow
of the property and the potential to increase cash flow; (iv) the potential for
capital appreciation of the property; (v) the terms of tenant leases, including
the potential for rent increases; (vi) the potential for economic growth and the
tax and regulatory environment of the community in which the property is
located; (vii) the occupancy and demand by tenants for properties of similar
type in the vicinity; and (viii) the prospects for liquidity through sale,
financing or refinancing of the property.
In acquiring apartment properties, the Company generally seeks properties
that (a) are available at prices below estimated replacement cost after initial
renovations and improvements, or can be developed at a cost that is below the
estimated value upon completion, (b) are well-located in their markets and (c)
are capable of enhanced performance through intensive asset management and
cosmetic improvements.
<PAGE>
Operating Strategies
The Company's operating strategies are to (i) achieve and maintain high
occupancy and increase rental rates through effective leasing, reducing turnover
rates and providing quality maintenance and services to maximize tenant
satisfaction; (ii) manage operating expenses and achieve cost reductions through
operating efficiencies and economies of scale generally inherent in the
management of a large property portfolio in a specific region; and (iii)
emphasize regular programs of repairs and capital improvements to enhance the
properties' competitive advantages in their respective markets.
Financing Policies
The Company intends to finance acquisitions with the most appropriate sources
of capital, which may include undistributed funds from operations, the issuance
of equity securities, the sale of assets, bank and other institutional
borrowings and the issuance of debt securities. Future borrowings by the Company
for acquisitions may be either on a secured or unsecured basis.
The Company also may incur indebtedness for purposes other than the
acquisition of properties when the Company believes it is advisable to do so.
For short-term purposes, the Company, from time to time, may arrange for
short-term borrowings from banks or in the commercial paper market or otherwise.
The Company also may arrange for long-term borrowings from institutional lenders
or through public or private offerings or other means. The Company has no
commitments from anyone with respect to any such borrowings, and there is no
assurance that any such borrowings will be available.
In addition, the Company may incur debt secured by equity investments held in
its portfolio. The Company may invest in properties subject to existing loans
secured by mortgages, deeds of trust or similar liens on the properties, or such
financing and other indebtedness may be incurred in connection with acquiring
investments. The Company also may obtain other mortgage financing for
unleveraged or underleveraged properties or may refinance properties acquired on
a leveraged basis. The mortgage financings may be recourse, non- recourse or
cross-collateralized. The Company does not have a policy limiting the number or
amount of mortgages that may be placed on any particular property, but mortgage
financing instruments usually limit additional indebtedness on such properties.
The Company also may determine to finance acquisitions through the exchange of
properties or issuance of stock or other securities.
Policies with Respect to Other Activities
The Company may make investments other than as previously described. The
Company has authority to offer its Common Shares or other equity or debt
securities in exchange for property and to repurchase or otherwise reacquire its
Common Shares or any other securities and may engage in such activities in the
future. The Company also may in the future make loans to joint ventures in which
it participates. The Company will not engage in trading, underwriting or the
agency distribution or sale of securities of other issuers. At all times, the
Company intends to make investments in such a manner as to be consistent with
the requirements of the Code to qualify as a REIT unless, because of
circumstances applicable to the Company, changes in the Code (or changes in the
regulations promulgated under the Code), the Company determines that it is no
longer in the best interests of the Company to qualify as a REIT. The Company's
policies with respect to such activities may be reviewed and modified from time
to time by the Company without the vote of the stockholders.
Property Management
The Company has entered into property management agreements with Pima Realty
Advisors, Inc. (the "Property Manager") for each of its current apartment
communities. The Property Manager is an affiliate of the Manager. Each property
management agreement, which has a current term through December 31, 1996, was
approved by the Unaffiliated Directors. Under each agreement, the Property
Manager provides the customary property management services at its cost without
profit or distributions to its owners, subject to the maximum limitation of the
prevailing management fee rates for similar properties in the market. The
Property Manager currently manages over 5,000 apartment units, including those
owned by the Company.
<PAGE>
The Property Manager has developed computer, accounting, management,
reporting and control systems to monitor property operations. Detailed annual
budgets are prepared for each property. Monthly, quarterly and annual reports
are prepared addressing occupancy rates, turnover ratios, budget variances,
delinquencies and other operating information. Weekly reports are provided for
each property detailing leasing and occupancy activities. The Property Manager
also maintains and analyzes demographic resident data. Prior to entering into a
lease, the Property Manager generally reviews the credit of the prospective
tenant to attempt to minimize bad credit risks and identify tenants having a
poor rental history. This information is intended to enable the Property Manager
to identify and act quickly on specific conditions affecting individual
properties.
Each of the current properties is operated by a staff, including a resident
manager and a maintenance and apartment preparation staff. Policies and
procedures utilized at the property sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection and eviction standards. As a result of active onsite
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
Individual property lease programs are structured to respond to local market
conditions. The Company attempts to balance rent increases with high occupancy
and stabilized turnover costs. None of the current properties is currently
subject to rent control or rent stabilization regulations. Standard lease terms
stipulate due dates for rent payments, late charges, no offset or withholding
provisions, security deposits and damage reimbursement clauses and other
provisions considered favorable to the Company.
Development of Properties
In March 1996, the Company commenced the development of a luxury apartment
community located in Tempe, Arizona. The community is being built on 20 acres
and is planned for 356 units with an average size of 919 square feet. The total
estimated cost of the community is approximately $20 million, and the Company
has obtained a construction loan for $15,350,000. The Company expects to have
the first group of units available for rent near the end of 1996 and the
community completed in the third quarter of 1997. As of December 31, 1995, the
Company had invested $3.0 million.
The Company has acquired three other parcels of land for future development
of apartment communities. The Company may develop or sell one or more of these
parcels. As of December 31, 1995, the Company had invested $900,000.
Current Properties
As of December 31, 1995, the Company owned 24 apartment communities
consisting of 4,124 units located in Arizona, New Mexico and Texas. All of the
apartment communities are owned directly by the Company with the exception of
six which are owned through joint ventures with affiliates of Citicorp.
The apartment communities are "garden apartments" (two to three story
apartments with ground level parking) with recreational facilities such as pools
and clubhouses. They are well maintained and landscaped and are targeted at
providing an attractive lifestyle at low to moderate rents. Average monthly rent
at year end was $495 per month, with community averages ranging from $385 to
$862.
The following table set forth certain information regarding the Company's
existing apartment communities.
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Asset Carrying Value Weighted Average
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Monthly
Rent Average
Year No. of Avg. Per Related 12/31 Occupancy
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Built Units Size Amount Unit Sq. Ft. Debt 1995 1994 1995 1994
------- -------- --------- ---------- -------- --------- ---------- ------- ------- ------ ------
(Sq. Ft.) (000s) (000s) (000s)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WHOLLY OWNED APARTMENTS
Tucson, Arizona
Acacia Hills ...................1986 64 540 $ 1,307 $20.4 $37.82 $ 1,448 $429 $421 95% 96%
Casa del Norte .................1984 84 525 1,800 21.4 40.82 1,376 429 410 93% 94%
Desert Springs .................1985 248 590 5,691 22.9 38.89 4,609 424 419 85% 96%
Landmark .......................1986 176 641 4,584 26.0 40.63 3,042 417 410 85% 94%
Park Terrace ...................1986 176 579 3,418 19.4 33.54 2,699 433 405 89% 93%
Park Village ...................1985 60 540 774 12.9 23.89 588 409 372 93% 95%
Posada del Rio .................1980 160 621 3,384 21.2 34.06 1,603 440 434 91% 97%
South Point ....................1984 144 528 2,359 16.4 31.03 1,861 385 354 90% 94%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------ ------
Total Tucson ................... 1,112 582 23,317 21.0 36.03 17,226 421 406 89% 94%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------ ------
Phoenix, Arizona
Contempo Heights** .............1978 222 595 6,290 28.3 47.62 3,758 451 443 93%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------
Total Phoenix .................. 222 595 6,290 28.3 47.62 3,758 451 443 93%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------
Houston, Texas
Clear Lake Falls ...............1980 90 1,169 4,070 45.2 36.68 3,127 810 783 95% 92%
The Gallery ....................1968 101 763 2,548 25.2 33.06 1,642 535 481 90% 90%
Memorial Bend ..................1967 124 942 2,588 20.9 22.16 1,924 584 528 89% 94%
Nantucket Square ...............1983 106 1,428 3,599 34.0 23.78 2,754 752 728 90% 92%
Prestonwood ....................1978 156 956 3,538 22.7 23.72 2,468 509 478 91% 92%
Riviera Pines ..................1979 224 717 4,624 20.6 28.79 3,269 487 452 92% 95%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------ ------
Total Houston .................. 801 949 20,967 26.2 27.58 15,184 584 543 91% 93%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------ ------
Albuquerque, N.M.
Dorado Terrace .................1986 216 598 6,778 31.4 52.47 5,212 519 508 91% 94%
Villa Serena ...................1986 104 671 3,381 32.5 48.45 2,680 561 544 93% 95%
Whispering Sands ...............1986 228 789 7,306 32.1 40.62 5,573 530 521 94% 92%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------ ------
Total Albuquerque .............. 548 691 17,467 31.9 46.13 13,465 531 520 93% 93%
-------- --------- ---------- -------- --------- ---------- ------- ------- ------ ------
Restricted cash & deferred
loan fees ...................... 3,297
-------- --------- ---------- -------- --------- ----------
Total owned apartments ......... 2,683 715 $71,338 $26.6 $ 37.18 $ 49,633 $ 495 $ 477 91% 94%
======== ========= ========== ======== ========= ========== ======= ======= ====== ======
Joint Venture Apartments
Tucson, Arizona
Woodridge ...................... 204 579 $ 4,878 $ 23.9 $ 41.30 $ 2,801 $421 $408
The Woods ...................... 360 658 10,139 28.2 42.80 6,835 $862 $800
Phoenix, Arizona
Candelero ...................... 220 842 4,502 20.5 24.30 3,452 435 414
La Privada** ................... 350 1,195 24,153 69.0 57.75 15,765 898
Lemon/Pear Tree** .............. 163 1,043 6,893 42.3 40.54 4,431 626
Rancho Encanto ................. 144 643 3,924 27.3 42.38 2,470 472 431
-------- --------- ---------- -------- --------- ---------- ------- -------
Total joint venture apartments 1,441 847 $54,489 $ 37.8 $44.62 $ 35,754 $495 $415
======== ========= ========== ====== ========= ========== ======= =======
<FN>
- ----------
** Acquired in 1995
</FN>
</TABLE>
Mortgage Assets
General
Each of the Company's Mortgage Assets entitle the Company to receive the
excess of the cash flows (the "Net Cash Flows") on pools of residential mortgage
loans and mortgage-backed certificates (collectively the "Mortgage Instruments")
over the required payments on the related series of structured financing (the
"Structured Financing") secured by such Mortgage Instruments. All of the
Mortgage Instruments bear fixed interest rates and a portion of the Structured
Financing bears variable interest rates that are adjusted monthly or quarterly.
The Net Cash Flows result primarily from (i) the favorable spread between the
interest rates on the Mortgage Instruments over those on the Structured
Financing, (ii) reinvestment income on the funds collected on the Morgage
Instruments before payment on the Structured Financing, (iii) any prepayments of
the Mortgage Instruments that are not necessary for payments on the Structured
Financing, and (iv) net proceeds from early redemption of Structured Financing.
For most of the Mortgage Assets, the Company has the option to redeem the
Structured
<PAGE>
Financing (generally at par) after the specified conditions are met, generally
when the outstanding balance of the Structured Financing declines below a
specified amount or after a specified date. In such event, the Mortgage
Instruments are sold and the net proceeds after redemption of the Structured
Financing are remitted to the Company.
At December 31, 1995, the carrying value of the Company's Mortgage Assets was
$11.9 million. The Company does not intend to acquire any additional Mortgage
Assets, but plans to hold the existing Mortgage Assets and use the cash flows
for apartment acquisitions, operations, payment of dividends and other corporate
purposes.
Each Structured Financing is issued in series consisting of several classes.
Each series of Structured Financing generally constitutes a nonrecourse
obligation of the Company, which is payable solely from the pledged Mortgage
Instruments. Each series is structured so that the monthly payments on the
pledged Mortgage Instruments, together with the reinvestment income at assumed
rates, are sufficient to make the required interest and principal payments on
the series on a timely basis. Principal and interest payments (including
prepayments) on the Morgage Instruments are first applied to principal and
interest payments on one or more classes of the Structured Financing according
to the terms of the related indenture, and any excess cash flow is remitted to
the Company. Factors Affecting Net Cash Flows
The Net Cash Flows represent both the return of and the return on the
investment in the Mortgage Assets. Thus, Mortgage Assets are amortizing assets.
The principal factors which influence the Net Cash Flows of a Mortgage Asset are
as follows:
(1) Other factors being equal, Net Cash Flows in each payment period tend to
decline over the life a Structured Financing, because (a) as normal amortization
of principal and principal prepayments occur on the Mortgage Instruments, the
principal balances of the Mortgage Instruments are reduced; (b) the principal
payments on the Mortgage Instruments generally are first used to pay the
principal on the earlier, lower-yielding classes of such Structured Financing,
thereby resulting in a reduction of the favorable spread between the interest
rate on the Mortgage Instruments and the interest rates on the outstanding
classes, and (c) the higher coupon Mortgage Instruments are likely to be prepaid
faster, reinforcing the same effect.
(2) The rate of prepayments on the Mortgage Instruments significantly affects
the Net Cash Flows. Because prepayments shorten the life of the Mortgage
Instruments, a higher rate of prepayments normally reduces overall Net Cash
Flows. The rate of prepayments is affected by mortgage interest rates and other
factors. Generally, increases in mortgage interest rates reduce prepayment
rates, while decreases in mortgage interest rates increase prepayment rates. In
addition, prepayments occuring during the early life of a Structured Financing
have a more negative effect on Net Cash Flows than the same volume of
prepayments have at a later date.
(3) With respect to variable rate classes of the Structured Financing,
increases in the interest rate index increase the interest payments and thus
reduce or, in some instances, eliminate the Net Cash Flows, while decreases in
the index decrease the interest payments and thus increase the Net Cash Flows.
(4) The interest rate at which the monthly cash flow from the Mortgage
Instruments may be reinvested until payment dates for the Structured Financing
influences the amount of the Net Cash Flows unless such reinvestment income is
not paid to the owner of the Mortgage Asset.
(5) The administrative expenses, if any, of a series of Structured Financing
may increase as a percentage of Net Cash Flows where some of such administrative
expenses are fixed. In later years, it can be expected that fixed expenses will
exceed the available cash flow. Although reserve funds generally are established
to cover such shortfalls, there can be no assurance that such reserves will be
sufficient to cover such shortfalls. The Company may be liable for
administrative expenses relating to a series of Structured Financing if reserves
prove to be insufficient. Moreover, any unanticipated liability or expenses with
respect to the Structured Financing could adversely affect Net Cash Flows.
(6) The Net Cash Flows from the early redemptions of a Mortgage Asset are
determined by the principal balance and market value of the Mortgage
Instruments. Generally, lower mortgage interest rates
<PAGE>
result in higher market value for the Mortgage Instruments. Furthermore, when
a Mortgage Asset is redeemed, there will not be any future Net Cash Flows from
that Mortgage Asset.
CAPITAL RESOURCES
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions and restrictions that may be contained in
the Company's financing arrangements from time to time and other factors as
described herein, the Company increases the amount of funds available for its
activities with the proceeds of borrowings including mortgage loans, short-term
borrowing and other credit arrangements. It can be anticipated that a
substantial portion of the assets of the Company will be pledged to secure
indebtedness incurred by the Company. Accordingly, such assets will not be
available for distribution to the stockholders of the Company in the event of
the Company's liquidation except to the extent that the value of such assets
exceeds the amount of such indebtedness.
The Company has obtained a first mortgage loan for each of its 18 apartment
communities. At December 31, 1995, the mortgage loans totalled $49.6 million, of
which $46.0 million bears fixed interest rates that averaged 8.6% and $3.6
million bears a variable interest rate at the LIBOR rate plus 2.25%. In
addition, each of the Company's joint ventures has obtained a first mortgage
loan. The mortgage loans generally are non-recourse to the Company and are not
cross-collateralized.
The Company also had outstanding short-term borrowings of $4.5 million at
December 31, 1995 that were secured by Mortgage Assets with a total carrying
value of $7.6 million. Under the short-term borrowings, if the value of the
collateral (as estimated by the lender) declines, the Company is required to
provide additional collateral or reduce the borrowed amount.
During 1995, the Company used the proceeds from Mortgage Asset redemptions
and short-term borrowing to prepay the notes payable secured by Mortgage Assets
and the unsecured real estate notes payable. The Company plans to use the
proceeds from Mortgage Asset redemptions in 1996 to reduce the short-term
borrowing.
The Company's Bylaws provide that it may not incur indebtedness if, after
giving effect to the incurrence thereof, aggregate indebtedness , secured and
unsecured, would exceed 300% of the Company's net assets, on a consolidated
basis, unless approved by a majority of the Unaffiliated Directors. For this
purpose, the term "net assets" means the total assets (less intangibles) of the
Company at cost, before deducting depreciation or other non-cash reserves, less
total liabilities, as calculated at the end of each quarter in accordance with
generally accepted accounting principles.
The Company may increase its capital resources by making additional offerings
of its Common Stock or securities convertible into the Company's Common Stock.
The actual or perceived effect of such offerings may be the dilution of the book
value or earnings per share which may result in the reduction of the market
price of shares of the Company's Common Stock. The Company is unable to estimate
the amount, timing or nature of future sales of its Common Stock as such sales
will depend upon market conditions and other factors. See "Business -- Special
Considerations -- Future Offerings of Common Stock."
Operating Restrictions
The Company presently may not purchase commodities or commodity futures
contracts (other than interest rate futures when used solely for hedging). The
Company may not invest in unimproved real property or underwrite securities of
other issuers. The foregoing restrictions may not be changed without the
approval of the holders of a majority of the outstanding shares of the Company's
Common Stock.
Except as otherwise restricted, the operating policy of the Company is
controlled by its Board of Directors, which has the power to modify or alter
such policy without the consent of the stockholders. Although the Company has no
present intention of modifying its operating policies described herein, the
Board of Directors in the future may conclude that it would be advantageous for
the Company to do so.
<PAGE>
Competition
There are numerous real estate companies, insurance companies, financial
institutions, pension funds and other property owners that compete with the
Company in seeking properties for acquisition and in attracting and retaining
tenants.
Employees
The Company currently has five full-time salaried employees.
Management Agreement
The Manager is an Arizona limited partnership. The Manager engages in the
business of advising the Company with respect to various aspects of the
Company's business and operations, managing the overall business and operations
of the Company and representing the Company in its dealings with third parties.
Jon A. Grove, Frank S. Parise, Jr. and Joseph C. Chan have been directors or
officers of general partners of the Manager since its organization.
Terms Of The Management Agreement
The Company and the Manager are parties to a Management Agreement with a term
expiring on December 31, 1996, subject to annual extensions between the Company
and the Manager. The Management Agreement may be terminated by the Company
without cause at any time upon 60 days written notice by a majority vote of its
Unaffiliated Directors or by a vote of the holders of a majority of the
outstanding shares of Common Stock. In addition, the Company has the right to
terminate the Management Agreement for cause in the event of (i) a breach by the
Manager of any provision contained in the Management Agreement occurs; (ii) an
order for relief is entered with respect to the Manager in an involuntary case
under federal or state bankruptcy, insolvency or other similar laws; or (iii)
the Manager (a) ceases or admits in writing its inability to pay its debts as
they become due, or makes a general assignment for the benefit of or enters into
an arrangement with creditors, (b) applies for or consents to the appointment of
a receiver, trustee, assignee, custodian, liquidator or sequestrator, or
proceedings seeking such appointment are commenced, (c) authorizes or files a
voluntary petition in bankruptcy, or applies for or consents to the application
of any bankruptcy, reorganization, arrangement, readjustment of debt,
insolvency, dissolution, liquidation or other similar law, or proceedings to
such end are instituted against the Manager, or (d) permits or suffers all or
any substantial part of its properties or assets to be sequestered or attached
by court order, or (iv) if any two of Messrs. Grove, Parise or Chan shall cease
to be a director, officer or shareholder of at least one partner of the Manager
or if they collectively cease to control the majority of the voting decisions of
the Manager.
The Manager at all times is subject to the supervision of the Company's Board
of Directors and has only such functions and authority as the Company may
delegate to it. The Manager is responsible for the day-to-day operations of the
Company and performs such services and activities relating to the assets and
operations of the Company as may be appropriate, including:
(a) serving as the Company's consultant with respect to formulation of
investment criteria by the Board of Directors;
(b) representing the Company in connection with the purchase of assets;
(c) structuring financings of the Company;
(d) furnishing reports and statistical and economic research to the Company
regarding the Com- pany's activities and the services performed for the Company
by the Manager;
(e) providing the executive and administrative personnel, office space and
services required in rendering services to the Company;
(f) administering the day-to-day operations of the Company and performing and
supervising the performance of such other administrative functions necessary in
the management of the Company as may
<PAGE>
be agreed upon by the Manager and the Board of Directors, including the
collection of revenues, the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such administrative
functions;
(g) communicating on behalf of the Company with the holders of the equity and
debt securities of the Company as required to satisfy the reporting and other
requirements of any governmental bodies or agencies and to maintain effective
relations with such holders;
(h) counseling the Company in connection with policy decisions to be made by
the Board of Directors; and
(i) upon request by and in accordance with the direction of the Board of
Directors, investing or reinvesting any money of the Company.
Management Fee
The Manager receives an annual management fee equal to 3/8 of 1% of the
"Average Invested Assets" of the Company and its subsidiaries for each year. The
Management Agreement provides for a quarterly management fee, although the Board
of Directors has approved payment of the management fee monthly, with
adjustments made quarterly. The term "Average Invested Assets" for any period
means the average of the aggregate book value of the consolidated assets of the
Company and its subsidiaries before reserves for depreciation or bad debts or
other similar non-cash reserves. In the event that the Management Agreement is
terminated by the Company or is not renewed by the Company on terms at least as
favorable to the Manager as the current Management Agreement, other than as a
result of a termination by the Company for cause (as specified above and defined
in the Management Agreement), the Manager will be entitled to receive from the
Company the management fee that would have been payable by the Company to the
Manager pursuant to such Management Agreement based on the investments made by
the Company prior to the date on which the Management Agreement is so terminated
(or not renewed) for the 12 full fiscal quarters beginning on the date of such
termination (or failure to renew) as more fully described in the Management
Agreement.
The management fee must be calculated by the Manager within 45 days after the
end of each quarter, and such calculation must be promptly delivered to the
Company for payment within 60 days of the end of each fiscal quarter, subject to
adjustment at the end of the year.
For information relating to management fees, see Note 7 to consolidated
financial statements.
Administration Fees
The Manager also performs certain analysis and other services in connection
with the administration of the Structured Financing relating to the Company's
Mortgage Assets, including working with the Master Servicer, if any, and the
Company or the other Issuer to ensure proper servicing and administration. For
such activities, the Company currently pays the Manager an annual administration
fee of $10,000 for each Mortgage Asset acquired before 1991, $20,000 for the
total Mortgage Assets acquired in 1991 and $20,000 for the total Mortgage Assets
acquired in 1992.
Expenses
The Manager is required to pay employment expenses of its personnel, rent,
telephone, utilities and other office expenses (except those relating to a
separate office or office facilities, if any, maintained by the Company or its
subsidiaries, if any), and certain travel and miscellaneous administrative
expenses of the Manager. The Company is required to pay all other expenses of
operation (as set forth in the Management Agreement) up to an amount per year
with respect to certain of such expenses equal to the greater of 2% of the
Company's Average Invested Assets or 25% of the Company's Net Income for that
year. Expenses in excess of such amount will be paid by the Manager, unless the
Unaffiliated Directors determine that, based upon unusual or non-recurring
factors, a higher level of expenses is justified for such fiscal year. In the
event that the Company's operating expenses for any fiscal year total less than
the greater of 2% of the Company's Average Invested Assets or 25% of its Net
Income for that fiscal year, then, within 120 days after the end of such fiscal
year, with the consent of the Unaffiliated Directors, the
<PAGE>
Manager will be repaid all compensation previously reimbursed by the Manager to
the Company on account of operating expenses having exceeded the greater of 2%
of its Average Invested Assets or 25% of its Net Income during one or more prior
fiscal years, except that the amount of any repayment of compensation to the
Manager may not, when added to all other operating expenses of the Company for
such fiscal year, exceed the greater of 2% of the Company's Average Invested
Assets or 25% of its Net Income for that fiscal year. The Manager's right to
repayment of previously reimbursed compensation will be cumulative, and the
amount of previously reimbursed compensation which has not been repaid to the
Manager will be carried forward to and be repaid to the Manager in subsequent
fiscal years. Prior to any such repayment, the Unaffiliated Directors must
determine that the Company's operating expenses which were in excess of the
limitation set forth above in one or more prior fiscal years were reasonable
when incurred in connection with the operations of the Company.
Right of First Refusal
The Manager has granted the Company a right of first refusal, for as long as
the Manager or an affiliate of the Manager acts as the Company's manager
pursuant to the Management Agreement or any extension thereof, to purchase any
assets held by the Manager or its affiliates prior to any sale, conveyance or
other transfer, voluntarily or involuntarily, of such assets by the Manager or
its affiliates. See "Business -- Special Considerations -- Potential Conflicts
of Interest."
Limits of Responsibility
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager, the
partners of the Manager and any of their partners, directors, officers,
stockholders and employees will not be liable to the Company, any other Issuer,
any subsidiary of the Company, the Unaffiliated Directors, the Company's
stockholders or any subsidiary's stockholders for acts performed in accordance
with and pursuant to the Management Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement. The Company has agreed
to indemnify the Manager, the partners of the Manager and any of their partners,
directors, officers, stockholders and employees, with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from any of
their acts or omissions not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement. The Management
Agreement does not limit or restrict the right of the Manager, the partners of
the Manager or any of their partners, directors, officers, stockholders,
employees or affiliates from engaging in any business or rendering services of
any kind to any other person, including the purchase of, or rendering advice to
others purchasing, assets which meet the Company's policies and criteria, except
that the Manager (but not its partners or any of their partners, directors,
officers, stockholders, employees or agents) is not permitted to provide any
such services to any residential mortgage REIT other than the Company and its
subsidiaries. The Manager has the right to subcontract with third parties,
including affiliates of the Manager, to provide services to the Manager and the
Company. Any payment of fees to such third parties will be the sole
responsibility of the Manager.
The Subcontract Agreement
The Manager and American Southwest Financial Services ("ASFS"), Inc. are
parties to a Subcontract Agreement pursuant to which ASFS performs certain
services for the Manager in connection with the administration of the Structured
Financing issued by any Issuer affiliated with ASFS with respect to which the
Company owns the Mortgage Asset. Under the Subcontract Agreement, ASFS charges
an administration fee for each series of Structured Financing of $12,500 per
year. ASFS is a wholly-owned subsidiary of American Southwest Holdings, Inc., a
privately held Arizona corporation engaged in the business of issuing and
administering the Structured Financing. Jon A. Grove, Chairman and President of
the Company, owns 12.5% of American Southwest Holdings, Inc.
The Subcontract Agreement extends through December 31, 1996. Thereafter,
successive extensions, each for a period not to exceed one year, may be made by
agreement between the Manager and ASFS.
<PAGE>
The Subcontract Agreement may be terminated by either party upon six months
prior written notice, except that the Manager may terminate the Subcontract
Agreement at any time upon 60 days written notice in the event the Company no
longer retains the Manager. In addition, the Manager has the right to terminate
the Subcontract Agreement upon the happening of certain specified events,
including a breach by ASFS of any provision contained in the Subcontract
Agreement.
The Company has agreed to indemnify and hold harmless ASFS, its affiliates
and their officers and directors from any action or claim brought or asserted by
any party by reason of any allegation that ASFS or its affiliates is an
affiliate or is otherwise accountable or liable for the debts or obligations of
the Company or its affiliates. The Company has no affiliations, agreements or
relationships with ASFS or its affiliates, except for (i) the Subcontract
Agreement with ASFS, (ii) the indemnification granted by the Company to ASFS,
its affiliates and their officers and directors against certain liabilities,
(iii) one common director and officer and (iv) the indirect ownership by a
general partner of the Manager of 12.5% of the voting stock of American
Southwest Holdings, Inc.
Property Management Agreement
The Company has entered into property management agreements with Pima Realty
Advisors, Inc. (the "Property Manager") for each of its current properties. The
Property Manager is an affiliate of the Manager. Each property management
agreement, which has a current term through December 31, 1996, was approved by
the Unaffiliated Directors. Under the agreements, the Property Manager provides
the customary property management services at its cost without profit or
distributions to its owners, subject to the limitation of the prevailing
management fee rates for similar properties in the market. The Property Manager
currently manages over 5,000 apartment units, including those owned by the
Company.
The Property Manager has developed computer, accounting, management,
reporting and control systems to monitor property operations. Detailed annual
budgets are prepared for each property. Monthly, quarterly and annual reports
are prepared addressing occupancy rates, turnover ratios, budget variances,
delinquencies and other operating information. Weekly reports are provided for
each property detailing leasing and occupancy activities. The Property Manager
also maintains and analyzes demographic resident data. Prior to entering into a
lease, the Property Manager generally reviews the credit of the prospective
tenant to attempt to minimize bad credit risks and identify tenants having a
poor rental history. This information is intended to enable the Property Manager
to identify and act quickly on specific conditions affecting individual
properties.
Each of the current properties is operated by a staff including a resident
manager and a maintenance and apartment preparation staff. Policies and
procedures utilized at the property sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection and eviction standards. As a result of active onsite
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
Special Considerations
Real Estate Investment Considerations
General
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
earned and capital appreciation generated by the related properties as well as
the expenses incurred. If the properties do not generate income sufficient to
meet operating expenses, including debt service and capital expenditures, the
Company's income will be adversely affected. Income from the properties may be
adversely affected by the general economic climate (including unemployment
rates), local conditions such as oversupply of competing properties or a
reduction in demand for properties in the area, the attractiveness of the
properties to tenants, competition from other available properties, the
affordability of single family homes, the ability of the Company
<PAGE>
to provide adequate maintenance and insurance and increased operating costs
(including real estate taxes). Certain significant expenditures associated with
an investment in real estate (such as mortgage payments, real estate taxes and
maintenance costs) generally are not reduced when circumstances cause a
reduction in income from the investment. In addition, income from properties and
real estate values are also affected by a variety of other factors, such as
governmental regulations and applicable laws (including real estate, zoning and
tax laws), interest rate levels and the availability of financing. Furthermore,
real estate investments are relatively illiquid and, therefore, will tend to
limit the Company's ability to vary its portfolio promptly in response to
changes in economic or other conditions.
Potential Environmental Liability
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate may be held liable for the costs of removal or remediation
of certain hazardous or toxic substances located on or in the property. These
laws often impose such liability without regard to whether the owner knew of, or
was responsible for, the presence of the hazardous or toxic substances. The
presence of such substances, or the failure to remediate such substances
properly, may adversely affect the owner's ability to sell or rent the property
or to borrow using the property as collateral. Other federal and state laws
require the removal of damaged asbestos-containing material in the event of
remodeling or renovation.
All of the current properties have been subject to a Phase I environmental
site assessment and limited asbestos survey (which involve inspection without
soil or groundwater analysis) by independent environmental consultants engaged
by the Company at the time of acquisition. As a result of the findings of the
Phase I environmental assessment, a Phase II assessment involving soil and
groundwater testing was performed at four properties by independent
environmental consultants. The assessment shows that the groundwater at one of
the properties is contaminated. Based on the report of the environmental
engineers, the Company believes that the contamination has been caused by a
nearby service station and that the owner of the station has commenced clean up
procedures under the direction of the local governmental authority. The Company
has informed the local governmental authority of the groundwater contamination
and asked the authority to expand the clean up procedures to include the
Company's property. The Company believes that the environmental liability for
its property would not have a material adverse effect on the Company's business
or results of operations.
The Company has determined that there are minor amounts of
asbestos-containing materials ("ACMs") in five of the Company's properties. The
Company maintains an Operations and Maintenance Program that details operating
procedures with respect to ACMs prior to any renovation and that requires
periodic inspection by the Company's employees for any change in condition of
existing ACMs.
In addition, the apartment site under development in Tempe, Arizona was
formerly used for agricultural purposes and a portion of the site was used as
the runway for a pesticide aerial application firm located adjacent to the
apartment site. The site of the pesticide aerial application firm is currently a
subject of remediation by the U.S. Enviromental Protection Agency ("EPA") and
the Arizona Department of Enviromental Quality ("ADEQ"). Extensive soil tests on
the apartment site revealed that a few samples contained minor amounts of
toxaphene above the regulatory level. The Company engaged an independent
environmental consulting firm to conduct a "site specific risk assessment" to
evaluate the potential threat to human health based on exposures and conditions
unique to the site. The consulting firm's report indicates that the potential
threat is minimal and no further action is necessary prior to the development of
the site as an apartment community. The EPA and ADEQ have not required the
Company to take any remedial actions on the site. The agencies also have not
informed the Company of any regulatory actions on the site.
Except as set forth above, the reports have not revealed any environmental
liability, nor is the Company aware of any environmental liability, that the
Company believes would have a material adverse effect on the Company's business,
assets or results of operation. No assurance, however, can be given that these
reports reveal all environmental liabilities, or that no prior owner created any
material environmental condition not known to the Company or that future uses
and conditions (including changes in
<PAGE>
applicable environmental laws and regulations) will not result in imposition
of environmental liability. In the event the Company discovers a material
environmental condition relating to any of its properties, the Company could
be required to expend funds to remedy such condition.
Uninsured Loss
The Company will carry comprehensive liability, fire, flood (where
applicable), extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses (such as
losses resulting from earthquakes) that may be either uninsurable or not
economically insurable. Should an uninsured loss occur, the Company could lose
its investment in and anticipated profits and cash flow from a property and
would continue to be obligated on any mortgage indebtedness on the property.
Americans with Disabilities Act
The Company's properties must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that the properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public access areas of the Company's properties,
where such removal is readily achievable. The ADA does not, however, consider
residential properties, such as apartment communities to be public accommodation
or commercial facilities, except to the extent portions of such facilities, such
as a leasing office, are open to the public. Noncompliance with the ADA could
result in imposition of fines or an award of damages to private litigants. If
required changes involve a greater expenditure than the Company currently
anticipates, or if the changes must be made on a more accelerated basis than it
anticipates, the Company's operations could be adversely affected. No specific
regulations have been promulgated under the ADA and, thus, it is uncertain how
enforcement of the ADA would affect specific building attributes. However, the
Company believes that the properties comply with all present requirements under
the ADA.
Fair Housing Amendments Act of 1988
The Fair Housing Amendments Act of 1988 (the "FHA") requires multifamily
residential properties first occupied after March 13, 1991 to be accessible to
the handicapped. Noncompliance with the FHA could result in the imposition of
fines or an award of damages to private litigants. The Company believes that its
properties that are subject to the FHA are in compliance with such law.
Risks of Real Estate Development
The Company plans to seek selective opportunities for development. The real
estate development business involves significant risks in addition to those
involved in the acquisition, ownership and operation of established apartment
communities. The development risks include the risks that construction financing
may not be available on favorable terms for development, construction delays,
construction costs in excess of the budgeted amounts, adverse changes in rental
rates and occupancy rates in the market, and availability of long-term permanent
financing upon completion.
Market Risks Relating To Mortgage Assets
General
The results of the Company's operations depend, among other things, on the
level of Net Cash Flows generated by the Company's Mortgage Assets. The Net Cash
Flows vary primarily as a result of changes in mortgage prepayment rates,
short-term interest rates, reinvestment income and borrowing costs, all of which
involve various risks and uncertainties as set forth below. Prepayment rates,
interest rates, reinvestment income and borrowing costs depend upon the nature
and terms of the Mortgage Assets, the geographic location of the properties
securing the mortgage loans included in or underlying the Mortgage Assets,
conditions in financial markets, the fiscal and monetary policies of the United
States Government and the Board of Governors of the Federal Reserve System,
international economic and financial conditions, competition and other factors,
none of which can be predicted with any certainty. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- General" and
"Business -- Operating Policies and Strategies -- Net Cash Flows."
<PAGE>
The projected rates of return to the Company on its Mortgage Assets will be
based upon assumed levels of prepayments on the underlying Mortgage Instruments,
assumed rates of interest or pass-through rates on the Structured Financings
that bear variable interest rates, and assumed rates of reinvestment income and
expenses with respect to such Structured Financing. The actual levels of
interest rates on Structured Financing bearing variable interest rates,
prepayment rates, reinvestment income and administration expenses will affect
the level of the Company's Net Cash Flows. To the extent that the assumptions
employed by the Company vary from actual experience, the actual Net Cash Flows
received by the Company may vary significantly from those projected by the
Company as to timing and amount over the lives of such Structured Financing and
from one period to another, and such returns could be negative under certain
circumstances.
Prepayment Risks
Mortgage prepayments shorten the life of the Mortgage Instruments underlying
the Company's Mortgage Assets, thereby reducing the overall Net Cash Flows and
causing and inherent decline in the Company's income. Prepayments of Mortgage
Instruments generally increase when then current mortgage interest rates fall
below the interest rates on the fixed-rate mortgage loans included in such
Mortgage Instruments. Conversely, prepayments decrease when then current
mortgage interest rates exceed the interest rates on the mortgage loans included
in such Mortgage Instruments. Prepayment experience also may be affected by the
geographic location of the mortgage loans included in Mortgage Instruments, the
types (whether fixed or adjustable rate) and assumability of such mortgage
loans, conditions in the mortgage loan, housing and financial markets, and
general economic conditions.
Interest Rate Fluctuation Risks
Changes in interest rates affect the performance of the Company and its
Mortgage Assets. A portion of the outstanding Structured Financing bears
variable interest rates. As of December 31, 1995, $65 million of the $882
million of the outstanding Structured Financing relating to the Company's
Mortgage Assets bore variable interest rates. Consequently, changes in
short-term interest rates significantly influence the Company's net income.
Risks of Decline in Net Cash Flows and Income from Mortgage Assets
The Company's income derives primarily from the Net Cash Flows received on
its Mortgage Assets, which decline over time. For both tax and accounting
purposes, the Company's Net Cash Flows consist of two components -- one
representing return of a portion of the purchase price of the Mortgage Asset
(the "Cost Component") and one representing income on the investment (the
"Income Component"). The Income Component will be highest in years immediately
following the purchase of the Mortgage Asset and will decline over time. In
addition, to the extent that actual mortgage prepayments or variable interest
rates experienced exceed those assumed, this inherent decline in Net Cash Flows
and income is accelerated.
As the Company has made the determination to reinvest the Net Cash Flows in
income-producing properties which may have a lower current yield than Mortgage
Assets, without regard to the mortgage prepayment rates and variable interest
rates, the Company may report declining operating income over time without the
effect of any gain or loss on the sale of the properties. See "Business --
Special Considerations -- Competition."
Inability to Predict Effects of Market Risks
Because none of the above factors including changes in prepayment rates,
interest rates, reinvestment income, expenses and borrowing costs are
susceptible to accurate projection, the Net Cash Flows generated by the
Company's Mortgage Assets, and thus distributions to the Company's stockholders,
cannot be predicted.
Borrowing Risks
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions, restrictions that may be contained in the
Company's financing arrangements from time to time and other factors, the
Company increases the amount of funds available for its activities with funds
from
<PAGE>
borrowings including borrowings under loan agreements, repurchase agreements and
other credit facilities. The Company's borrowings may bear fixed or variable
interest rates, may require additional collateral in the event that the value of
existing collateral declines on a market value basis and may be due on demand or
upon the occurrence of certain events. To the extent that the Company's
borrowings bear variable interest rates, changes in short-term interest rates
will significantly influence the cost of such borrowings and can result in
losses in certain circumstances. The Company also may increase the amount of its
available funds through the issuance of debt securities.
The Company's Bylaws limit borrowings, to no more than 300% of the amount of
its net assets (as described herein) unless borrowings in excess of that amount
are approved by a majority of the Unaffiliated Directors (as defined herein).
See "Business -- Operating Policies and Strategies -- Capital Resources." Each
of the Company's 18 apartment communities has been pledged to secure a first
mortgage loan; such mortgage loans totalled $49.6 million at December 31, 1995.
In addition, the Company had short-term borrowing of $4.5 million secured by
Mortgage Assets having an aggregate carrying value of $7.6 million.
No assurance can be given as to the actual effect of borrowings by the
Company.
Pledged Assets
A substantial portion of the Company's assets currently are and in the future
can be expected to be pledged to secure its borrowings. Therefore, such assets
will not be available to the stockholders in the event of the liquidation of the
Company except to the extent that the market value thereof exceeds the amounts
due to the creditors. However, the market value of the Mortgage Assets is
uncertain because the market for Mortgage Assets of the type owned by the
Company is not well developed and fluctuates rapidly as the result of numerous
market factors (including interest rates and prepayment rates) as well as the
supply of and demand for such assets.
Competition
There are numerous real estate companies, insurance companies, financial
institutions, pension funds and other property owners that compete with the
Company in seeking properties for acquisition and in attracting and retaining
clients.
Market Price Of Common Stock
The market price of the Company's Common Stock has been extremely sensitive
to a wide variety of factors including the Company's operating results, dividend
payments (if any), actual or perceived changes in short-term and mortgage
interest rates and their relationship to each other, actual or perceived changes
in mortgage prepayment rates, and any variation between the net yield on the
Company's assets and prevailing market interest rates. It can be expected that
the performance of the Company's income-producing properties will have an
increasingly important effect on the market price of the Company's Common Stock.
Any actual or perceived unfavorable changes in the real estate market and other
factors may adversely affect the market price of the Company's Common Stock.
Future Offerings Of Common Stock
The Company in the future may increase its capital resources by making
additional offerings of its Common Stock or securities convertible into its
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share of the Company's Common Stock
which may result in the reduction of the market price of the Company's Common
Stock. The Company is unable to estimate the amount, timing or nature of future
sales of its Common Stock as such sales will depend upon market conditions and
other factors such as its need for additional equity, its ability to apply or
invest the proceeds of such sales of its Common Stock, the terms upon which its
Common Stock could be sold.
Management Fees
The Manager advises the Company with respect to various aspects of the
Company's business and operations, manages the Company's overall business and
operations, and represents the Company in its
<PAGE>
dealings with third parties pursuant to the terms of the Management Agreement.
In the event that the Management Agreement is terminated by the Company or is
not renewed by the Company on terms at least as favorable to the Manager as the
current Management Agreement other than as a result of a termination by the
Company for cause (as specified above and defined in the Management Agreement),
the Manager will be entitled to receive from the Company the management fee that
would have been payable by the Company to the Manager pursuant to such
Management Agreement based on the investments made by the Company prior to the
date on which the Management Agreement is so terminated (or not renewed) for the
12 full fiscal quarters beginning on the date of such termination (or failure to
renew) as more fully described in the Management Agreement.
Potential Conflicts Of Interest
The Company is subject to potential conflicts of interest arising from its
relationship with the Manager, the Property Manager and ASFS under the
"Subcontract Agreement." The Management Agreement does not limit or restrict the
right of the Manager, the partners of the Manager or any of their directors,
officers or employees from engaging in any business or rendering services of any
kind to any other person except that the Manager (but not its partners or their
directors, officers or employees) are not permitted to provide any such services
to any residential mortgage REIT other than the Company. The Company may
purchase assets from entities which may be affiliates of the Manager. Although
certain agreements and activities must be approved by the Unaffiliated directors
(as described below), the day-to-day transactions between the Company and the
Manager and the Property Manager are not subject to the specific pre-approval of
the Unaffiliated Directors. See "Business -- Management Agreement -- Terms of
Management Agreement" and "Business -- Property Management Agreement."
The Company's Articles of Incorporation limit the liability of its directors
and officers to the Company and its stockholders to the fullest extent permitted
by Maryland law, and both the Company's Articles and Bylaws provide for
indemnification of the directors and officers to such extent. The Management
Agreement also limits the responsibilities and liabilities of the Manager, the
partners of the Manager and any of their partners, directors, officers,
stockholders and employees and provides for their indemnification against
liabilities except in certain circumstances. See "Business -- Management
Agreement -- Terms of the Management Agreement -- Limits of Responsibility." The
Property Management Agreement also limits the responsibilities and liabilities
of the Property Manager. See "Business -- Property Management Agreement." In
addition, the Subcontract Agreement limits the responsibilities of ASFS and
provides for the indemnification of ASFS, its affiliates and their directors and
officers against various liabilities. See "Business -- Management Agreement --
The Subcontract Agreement."
Counsel to the Company has furnished, and in the future may furnish, legal
services to the Manager, affiliates of the Manager and certain Issuers
(including those affiliated with ASFS). There is a possibility that in the
future the interests of certain of such parties may become adverse, and counsel
may be precluded from representing one or all of such parties. If any situation
arises in which the interests of the Company appear to be in conflict with those
of the Manager, or its affiliates, additional counsel may be retained by one or
more of the parties.
With a view toward protecting the interests of the Company's stockholders,
the Bylaws of the Company provide that a majority of the Board of Directors (and
a majority of each committee of the Board of Directors) must not be
"Affiliates"of the Manager or "Advisors," as these terms are defined in the
Bylaws, and that the investment policies of the Company must be reviewed
annually by these directors (the "Unaffiliated Directors"). Moreover, the annual
renewals of the Management Agreement and the Property Management Agreement
require the affirmative vote of a majority of the Unaffiliated Directors. In
addition, a majority of such Unaffiliated Directors may terminate the Management
Agreement or the Property Management Agreement at any time upon 60 days' notice.
See "Business -- The Management Agreement."
Certain Consequences Of And Failure To Maintain Reit Status
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to the
sources of its income, the nature and diversification of
<PAGE>
its assets, the amount of its distributions to stockholders and the ownership of
its stock. See "Business -- Federal Income Tax Considerations -- Qualification
of the Company as a REIT." Among other things, these restrictions may limit the
Company's ability to acquire certain types of assets that it otherwise would
consider desirable, limit the ability of the Company to dispose of assets that
it has held for less than four years if the disposition would result in gains
exceeding specified amounts, limit the ability of the Company to engage in
hedging transactions that could result in income exceeding specified amounts,
and require the Company to make distributions to its stockholders at times that
the Company may deem it more advantageous to utilize the funds available for
distribution for other corporate purposes (such as the purchase of additional
assets or the repayment of debt) or at times that the Company may not have funds
readily available for distribution.
The Company's operations from time to time generate taxable income in excess
of its net income for financial reporting purposes. The Company also may
experience a situation in which its taxable income is in excess of the actual
cash receipts. See "Business -- Federal Income Tax Considerations -- Activities
of the Company." To the extent that the Company does not otherwise have funds
available, either situation may result in the Company's inability to distribute
substantially all of its taxable income as required to maintain its REIT status.
See "Business -- Federal Income Tax Considerations." Alternatively, the Company
may be required to borrow funds to make the required distributions which could
have the effect of reducing the yield to its stockholders, to sell a portion of
its assets at times or for amounts that are not advantageous, or to distribute
amounts that represent a return of capital which would reduce the equity of the
Company. In evaluating assets for purchase, the Company considers the
anticipated tax effects of the purchase including the possibility of any excess
of taxable income over projected cash receipts.
If the Company should not qualify as a REIT in any tax year, it would be
taxed as a regular domestic corporation and, among other consequences,
distributions to the Company's stockholders would not be deductible by the
Company in computing its taxable income. Any such tax liability could be
substantial and would reduce the amount of cash available for distributions to
the Company's stockholders. See "Business -- Federal Income Tax Considerations."
In addition, the unremedied failure of the Company to be treated as a REIT for
any one year would disqualify the Company from being treated as a REIT for the
four subsequent years.
Excess Inclusions
A portion of the dividends paid by the Company constitutes unrelated business
taxable income to certain otherwise tax-exempt stockholders which will
constitute a floor for the taxable income of stockholders not exempt from tax,
and will not be eligible for any reduction (by treaty or otherwise) in the rate
of income tax withholding in the case of nonresident alien stockholders. For
1995, the entire ordinary income portion ($0.29 per share) of the dividend was
excess inclusion income. See "Business -- Federal Income Tax Considerations --
Tax Consequences of Common Stock Ownership -- Excess Inclusion Rule."
Marketability Of Shares Of Common Stock And Restriction On Ownership
The Company's Articles of Incorporation prohibit ownership of its Common
Stock by tax-exempt entities that are not subject to tax on unrelated business
taxable income and by certain other persons (collectively "Disqualified
Organizations"). Such restrictions on ownership exist so as to avoid imposition
of a tax on a portion of the Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are designed to
prevent concentrated ownership of the Company which might jeopardize its
qualification as a REIT under the Code. Among other things, these provisions
provide (i) that any acquisition of shares that would result in the
disqualification of the Company as a REIT under the Code will be void, and (ii)
that in the event any person acquires, owns or is deemed, by operation of
certain attribution rules set out in the Code, to own a number of shares in
excess of 9.8% of the outstanding shares of the Company's Common Stock ("Excess
Shares"), the Board of Directors, at its discretion, may redeem the Excess
Shares. In addition, the Company may refuse to effectuate any transfer of Excess
Shares and certain stockholders, and proposed transferees of
<PAGE>
shares, may be required to file an affidavit with the Company setting forth
certain information relating, generally, to their ownership of the Company's
Common Stock. These provisions may inhibit market activity and the resulting
opportunity for the Company's stockholders to receive a premium for their shares
that might otherwise exist if any person were to attempt to assemble a block of
shares of the Company's Common Stock in excess of the number of shares permitted
under the Articles of Incorporation. Such provisions also may make the Company
an unsuitable investment vehicle for any person seeking to obtain (either alone
or with others as a group) ownership of more than 9.8% of the outstanding shares
of Common Stock. Investors seeking to acquire substantial holdings in the
Company should be aware that this ownership limitation may be exceeded by a
stockholder without any action on such stockholder's part in the event of a
reduction in the number of outstanding shares of the Company's Common Stock.
Federal Income Tax Considerations
Qualification Of The Company As A Reit
General
The Company has made an election to be treated as a real estate investment
trust ("REIT"). Thus, if the Company satisfies certain tests in each taxable
year with respect to the nature of its income, assets, share ownership and the
amount of its distributions, among other things, it generally should not be
subject to tax at the corporate level on its income to the extent that it
distributes cash in the amount of such income to its stockholders.
Generally, the unremedied failure of the Company to be treated as a REIT for
any taxable year could materially and adversely affect the stockholders as net
income of the Company would be taxed at ordinary corporate rate, and the Company
would not receive a deduction for any dividends to the stockholders and thus
cause a material reduction of the cash available for distribution to the
stockholders as dividends.
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to the
sources of its income, the nature and diversification of its assets, the amount
of its distributions, and the ownership of the Company. The following is a
summary discussion of those various tests.
Sources of Income
The Company must satisfy three separate income tests for each taxable year
with respect to which it intends to qualify as a REIT: (i) the 75% income test;
(ii) the 95% income test; and (iii) the 30% income test.
Under the first test, at least 75% of the Company's gross income for the
taxable year must be derived from certain qualifying real estate related
sources. The 95% income test requires that at least 95% of the Company's gross
income for the taxable year must be derived from the items of income that either
qualify under the 75% test or are from certain other types of passive
investments. Finally, the 30% income test requires the Company to derive less
than 30% of its gross income for the taxable year from the sale or other
disposition of (1) real property, including interests in real property and
interests in mortgages on real property, held for less than four years, other
than foreclosure property or property involuntarily converted through
destruction, condemnation or similar events, (2) stock or securities or swap
agreements held for less than one year, and (3) property in "prohibited
transactions." A prohibited transaction is a sale or disposition of dealer
property that is not foreclosure property or, under certain circumstances, a
real estate asset held for at least four years.
If the Company inadvertently fails to satisfy either the 75% income test or
the 95% income test, or both, and if the Company's failure to satisfy either or
both tests is due to reasonable cause and not willful neglect, the Company may
avoid loss of REIT status by satisfying certain reporting requirements and
paying a tax equal to 100% of any excess nonqualifying income. See "Business --
Federal Income Tax Considerations -- Taxation of the Company." There is no
comparable safeguard that could protect against REIT disqualification as a
result of the Company's failure to satisfy the 30% income test.
<PAGE>
The Company anticipates that its gross income will continue to consist
principally of the income that satisfies the 75% income test. The composition
and sources of the Company income should allow the Company to satisfy the income
tests during each year of its existence. Certain short-term reinvestments,
however, may generate qualifying income for purposes of the 95% income test but
nonqualifying income for purposes of the 75% income test, and certain hedging
transactions could give rise to income that, if excessive, could result in the
Company's disqualification as a REIT for failing to satisfy the 30% income test,
the 75% income test, and/or the 95% income test. The Company intends to monitor
its reinvestments and hedging transactions closely to attempt to avoid
disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75% of the
value of the Company's assets must be cash and cash items (including
receivables), federal government securities and qualifying real estate assets.
Qualifying real estate assets include interests in real property, and mortgages,
equity interests in other REITs, any stock or debt instrument for so long as the
income therefrom is qualified temporary investment income and, subject to
certain limitations, interests in REMICs. The balance of the Company's assets
may be invested without restriction, except that holdings of the securities of
any one non-governmental issuer may not exceed 5% of the value of the Company's
assets or 10% of the outstanding voting securities of that issuer.
If the Company fails to satisfy the 75% asset test at the end of any quarter
of its taxable year as a result of its acquisition of securities or other
property during that quarter, the failure can be cured by a disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company will take such action as may be required to cure any failure to
satisfy the 75% asset test within 30 days after the close of any quarter. The
Company may not be able to cure any failure to satisfy the 75% asset test,
however, if assets that the Company believes are qualifying assets for purposes
of the 75% asset test are later determined to be nonqualifying assets.
Distributions
Each taxable year the Company must distribute as dividends to its
stockholders an amount at least equal to (i) 95% of its REIT taxable income
(determined before the deduction of dividends paid and excluding any net capital
gain) plus (ii) 95% of the excess of its net income from foreclosure property
over the tax imposed on such income by the Code, less (iii) any excess noncash
income (as determined under the Code).
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in the
following year if certain guidelines are followed. Further, if the Company fails
to meet the 95% distribution requirement as a result of an adjustment to the
Company's tax returns by the Internal Revenue Service ("IRS "), the Company may,
if the deficiency is not due to fraud with intent to evade tax or a willful
failure to file a timely tax return, retroactively cure the failure by paying a
deficiency dividend to stockholders and certain interest and penalties to the
IRS. The Company intends to make distributions to its stockholders on a basis
that will allow the Company to satisfy the distribution requirement. In certain
instances, however, the Company's pre-distribution taxable income may exceed its
cash flow and the Company may have difficulty satisfying the distribution
requirement. The Company intends to monitor closely the relationship between its
pre-distribution taxable income and its cash flow. It is possible, although
unlikely, that the Company may decide to terminate its REIT status as a result
of any such cash shortfall. Such a termination would have adverse consequences
to the stockholders. See "Business -- Federal Income Tax Considerations --
Status of the Company as a REIT."
The Company has a net operating loss carryforward for income taxes (the
"NOL") at December 31, 1995 of approximately $75 million. Under REIT tax rules,
the Company is allowed to offset taxable income (except for Excess Inclusion
Income) by the available NOL and thus, under most circumstances, is not
currently required to make distributions to stockholders except for Excess
Inclusion Income. The NOL expires in 2009 (1999 for state tax purposes).
<PAGE>
Ownership of the Company
Shares of the Company's Common Stock must be held by a minimum of 100 persons
for at least 335 days in each taxable year after the Company's first taxable
year. Further, at no time during the second half of any taxable year after the
Company's first taxable year may more than 50% of the Company's shares be owned,
actually or constructively, by five or fewer individuals (including pension
funds and certain other types of tax-exempt entities). To evidence compliance
with these requirements, the Company is required to maintain records that
disclose the actual ownership of its outstanding shares. Each year, in order to
satisfy that requirement, the Company will demand written statements from record
holders owning designated percentages of Common Stock disclosing, among other
things, the identities of the actual owners of such shares. The Company's
Articles of Incorporation contain repurchase provisions and transfer
restrictions designed to prevent violation of the latter requirement. Therefore,
the Company believes that its shares of Common Stock currently are owned by a
sufficient number of unrelated persons to allow the Company to satisfy the
ownership requirements for REIT qualification.
Taxation of The Company
For any taxable year in which the Company qualifies and elects to be treated
as a REIT under the Code, it generally will not be subject to federal income tax
on that portion of its taxable income that is distributed to its stockholders in
or with respect to that year. Regardless of distributions to stockholders,
however, the Company may become subject to a tax on certain types of income.
The Company uses the calendar year both for tax purposes and for financial
reporting purposes. Due to the differences between tax accounting rules and
generally accepted accounting principles, the Company's REIT Taxable Income will
vary from its net income for financial reporting purposes.
Tax Consequences Of Common Stock Ownership
The federal income tax consequences of ownership in the Company's common is a
complex matter and may vary depending on the income tax status of the
stockholder. Accordingly, the following discussion is intended to be general in
nature. Stockholders should consult their own tax advisors regarding the income
tax considerations with respect to their investments in the Company.
Dividend Income
Distributions to stockholders out of the Company's current or accumulated
earnings and profits will be taxable as "portfolio income" in the year received
and not as income from a passive activity. With respect to any dividend payable
to stockholders of record as of a specified date prior to the end of the year,
that dividend is deemed to have been received by the stockholder on December 31
if the dividend is paid in January of the following calendar year.
The Company's dividends are not eligible for the dividends-received deduction
for corporations. If the Company's total distributions for a taxable year exceed
its current and accumulated earnings and profits, a portion of each distribution
will be treated first as a return of capital, reducing a stockholder's basis in
his shares (but not below zero), and then as capital gain in the event such
distributions are in excess of a stockholder's adjusted basis in his shares.
Distributions properly designated by the Company as "capital gain dividends"
will be taxable to the stockholders as long-term capital gain, to the extent
those dividends do not exceed the Company's actual net capital gain for the
taxable year, without regard to the stockholder's holding period for his shares.
The Company will notify stockholders after the close of its taxable year
regarding the portions of the distributions that constitute ordinary income,
return of capital and capital gain. The Company also will notify shareholders
regarding their reported share of excess inclusion income. See "Excess Inclusion
Rule" below.
The total dividends of $2.00 per share for 1995 consists of ordinary income
of $0.29 and return of capital of $1.71 per share.
<PAGE>
Excess Inclusion Rule
Ownership by the Company of residual interests in REMICs may adversely affect
the federal income taxation of the Company and of certain stockholders to the
extent those residual interests generate "excess inclusion income." The
Company's excess inclusion income during a calendar quarter generally will equal
the excess of its taxable income from residual interests in REMICs over its
"daily accruals" with respect to those residual interests for the calendar
quarter. The daily accruals are calculated by multiplying the adjusted issue
price of the residual interest by 120 percent of the long-term federal interest
rate in effect on the REMIC's startup date. It is possible that the Company will
have excess inclusion income without associated cash. In taxable years in which
the Company has both a net operating loss and excess inclusion income it will
still have to report a minimum amount of taxable income equal to its excess
inclusion income. In order to maintain its REIT status, the Company will be
required to distribute at least 95 percent of its taxable income, even if its
taxable income is comprised exclusively of excess inclusion income and otherwise
has a net operating loss.
In general, each stockholder is required to treat the stockholder's allocable
share of the portion of the Company's "excess inclusions" that is not taxable to
the Company as an "excess inclusion" received by such stockholder. The portion
of the Company's dividends that constitute excess inclusions typically will rise
as the degree of leveraging of the Company's activities increase. Therefore, all
or a portion of the dividends received by the stockholders may be excess
inclusion income. Excess inclusion income will constitute unrelated business
taxable income for tax-exempt entities and may not be used to offset deductions
or net operating losses from other sources for most other taxpayers. For 1995,
the entire ordinary income portion ($0.29 per share) of the dividend was excess
inclusion income.
Tax-exempt Organizations As Stockholders
The Code requires a tax-exempt stockholder of the Company to treat as
unrelated business taxable income its allocable share of the Company's excess
inclusions. The Company is likely to receive excess inclusion income. See
"Excess Inclusion Rule," above. The Company's Common Stock may not be held by
tax-exempt entities which are not subject to tax on unrelated business taxable
income.
Taxation Of Foreign Stockholders
Distributions of cash generated by the Company in its operations that are
paid to foreign persons generally will be subject to United States withholding
tax rate at a rate of 30 percent or at a lower rate if a foreign person can
claim the benefit of a tax treaty. Notwithstanding the foregoing, distributions
made to foreign stockholders will not be subject to treaty withholding
reductions to the extent of their allocable shares of the portion of the
Company's excess inclusions that are not taxable to the Company for the period
under review. It is expected that the Company will continue to have excess
inclusions. Distributions to foreign persons of cash attributable to gain on the
Company's sale or exchange of real properties, if any, generally will be subject
to full United States taxation and withholding. If a foreign person holds more
than five percent of the shares of the Company, gain from the sale of the
person's shares could be subject to full United States taxation if the Company
held any real property interests and was not a domestically controlled REIT.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many considerations. Accordingly, foreign investors in
the Company should consult their own tax advisors regarding the income and
withholding tax considerations with respect to their investments in the Company.
Foreign governments and organizations, and their instrumentalities, may not
invest in the Company.
Backup Withholding
The Company is required by the Code to withhold from dividends 20% of the
amount paid to stockholders, unless the stockholder (i) files a correct taxpayer
identification number with the Company, (ii) certifies as to no loss of
exemption from backup withholding and (iii) otherwise complies with the
applicable requirements of the backup withholding rules. The Company will report
to its stockholders and
<PAGE>
the IRS the amount of dividends paid during each calendar year and the amount of
tax withheld, if any. Stockholders should consult their tax advisors as to the
procedure for insuring that the Company dividends to them will not be subject to
backup withholding.
State And Local Taxes
The discussion herein concerns only the federal income tax treatment likely
to be accorded the Company and its stockholders. No discussion has been provided
regarding the state or local tax treatment of the Company and its stockholders.
The state and local tax treatment may not conform to the federal income tax
treatment described above and each investor should discuss such issues with his
state and local tax advisor.
ITEM 2. PROPERTY
See "Business -- Operating Policies and Strategies -- Real Estate
Activities -- Current Properties."
The principal executive offices of the Company and the Manager are located at
335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone (520) 748-2111.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed and principally traded on the American
Stock Exchange ("AMEX") under the symbol the "ASR". The following table sets
forth for the periods indicated the high and low sales prices of the Company's
Common Stock as reported by the AMEX and the cash dividends paid per share on
the Company's Common Stock for the periods indicated.
Dividend
High Low Per Share
-------- ------- -------------
1995
First quarter .....$20 $10 15/16 $0.50
Second quarter ... 19 3/8 16 1/4 0.50
Third quarter ..... 20 1/2 17 3/4 0.50
Fourth quarter ... 18 3/8 15 0.50
1994
First quarter ..... 10 15/16 7 1/2 --
Second quarter ... 15 5 15/16 --
Third quarter ..... 13 3/4 6 1/4 --
Fourth quarter ... 14 1/16 9 3/8 0.50
1993
First quarter ..... 15 15/16 10 --
Second quarter ... 10 15/16 5 15/16 --
Third quarter ..... 9 3/8 6 1/4 0.25
Fourth quarter ... 10 15/16 7 1/2 0.90
On March 21, 1996, the closing sales prices for shares of the Company's
Common Stock on the AMEX Composite Tape was $16 1/2 per share and the
approximate number of holders of common shares was 2,000.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The following selected financial data are qualified in its entirety by, and
should be read in conjunction with, the consolidated financial statements and
notes thereto appearing elsewhere herein. The data below have been derived from
the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Income from real estate, before
depreciation .......................$ 7,315 $ 7,031
Depreciation ....................... (2,692) (1,995)
Income from mortgage assets ....... 9,186 10,696 $(13,022) $ (56,669) $ 31,775
Other income ....................... 462 723 286 739
Operating expenses ................. (2,983) (2,216) (1,949) (3,104) (6,355)
Interest expense ................... (4,734) (6,537) (4,794) (5,841) (6,594)
Cumulative effect of accounting
change ............................. (21,091)
--------- --------- ------------ ------------ ----------
Net income (loss) ..................$ 6,554 $ 7,702 $(40,570) $ (64,875) $ 18,826
========= ========= ============ ============ ==========
Per average outstanding share
Net income (loss) before
cumulative effect of accounting
change .............................$ 2.09 $ 2.48 $ (6.25) $ (20.20) $ 6.25
Cumulative effect of accounting
change ............................. $ (6.80)
--------- --------- ------------ ------------ ----------
Net income per share ...............$ 2.09 $ 2.48 $ (13.05) $ (20.20) $ 6.25
========= ========= ============ ============ ==========
Dividends per share ................$ 2.00 $ 0.50 $ 1.15 $ 2.25 $ 7.20
========= ========= ============ ============ ==========
Weighted average shares outstanding 3,141 3,100 3,110 3,209 3,007
========= ========= ============ ============ ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
--------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Apartments and other real estate
assets ..........................$79,510 $73,056 $ 3,855
Mortgage assets ................. 11,877 18,965 37,881 $108,623 $ 215,747
Total assets .................... 94,169 96,745 54,068 116,589 219,582
Real estate notes payable ...... 49,633 50,693
Mortgage assets borrowing, net . 4,495 6,422 22,062 39,517 61,527
Stockholders' Equity ............ 37,395 37,100 30,948 75,284 149,585
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Years Ended December 31, 1995, 1994 and 1993
General
In 1993, the Company determined to become an apartment real estate investment
trust. The Company continues to hold its mortgage assets and use the cash flows
for apartment acquisitions and development, operations, payment of dividends and
other corporate purposes.
In January 1994, the Company acquired its initial portfolio of seventeen
apartment communities (2,461 units) located in Tucson, Arizona, Houston, Texas,
and Albuquerque, New Mexico. The total cost was approximately $61,600,000 which
was financed by non-recourse first mortgage loans of $45,700,000, seller
carryback financing of $6,500,000 and cash of $9,400,000. In February 1995, the
Company acquired a 222-unit apartment community in Mesa, Arizona for $6,356,000,
which was financed with a $3,770,000 non-recourse first mortgage loan.
In addition to wholly owned apartment communities, the Company has acquired
six apartment communities (1,441 units) in Phoenix and Tucson, Arizona through
joint ventures with a pension plan affiliate of Citicorp. The Company is a 15%
equity partner and managing member of the joint ventures. The Company receives
between 15% and 51% of the net profits and cash flow depending on the
performance of the joint ventures.
The operating income from apartments is affected primarily by rental rates,
occupancy rates and operating expenses. Rental rates and occupancy rates are
affected by the strength of the local economy, the local housing market and the
supply of and demand for apartment communities.
The Company continues to own mortgage assets acquired prior to 1993 to
generate cash flows for apartment acquisitions and development and other
corporate purposes. These mortgage assets entitle the Company to receive the
excess of the cash flow on pools of mortgage instruments over the required
payments on a series of structured financings which they secure. Income and cash
flows from mortgage assets are affected primarily by mortgage prepayment rates
and short-term interest rates. Higher mortgage prepayment rates or higher
short-term rates reduce the income and total cash flows over the life of the
mortgage assets. Prepayment rates are affected primarily by mortgage interest
rates. Mortgage assets are amortizing assets and the cash flows decline over
time.
In 1993, mortgage interest rates dropped to their lowest level in twenty
years and prepayment rates reached record levels. In 1994, mortgage interest
rates increased and actual and anticipated prepayment rates decreased. In 1995,
although prepayment rates increased because mortgage rates declined to near the
1993 lows by year end, they were well below the 1993 record levels.
The Company also has the option to cause the early redemption of the
structured financings at par after specified conditions are met (generally when
the structured financing is below a specified balance or after a specified
date). In such event, the mortgage instruments are sold and the net proceeds
after the redemption of the structured financing are remitted to the Company.
Mortgage asset redemptions have the effect of accelerating the cash flows and
increasing the value. Redemption transactions occur from time to time as
specified conditions are met rather than on a monthly or quarterly basis, and
the net proceeds are affected by the market price of the mortgage instruments.
Thus, the cash flows and income from redemption transactions fluctuate
significantly between periods. Mortgage asset redemptions reduce the cash flows
and income in future periods.
<PAGE>
On July 7, 1995, the Company completed a reverse stock split under which one
new share of common stock was issued in exchange for five shares of outstanding
stock. Accordingly, the number of common stock issued and all per share amounts
for all years have been adjusted for the reverse stock split.
Results of Operations
1995 Compared to 1994
Income and expenses from real estate operations increased in 1995 due to the
acquisition of an apartment community in February 1995 as well as new
investments in joint ventures. Net operating income (before depreciation) from
apartments (including the Company's share of results of the joint venture) for
1995 and 1994 was $7,651,000 and $7,119,000, respectively. On a same store
basis, net operating income for 1995 decreased by 5% primarily due to a 10%
increase in operating expenses and real estate taxes. The increase in operating
expenses was caused by a decrease in occupancy rates from 94% in 1994 to 91% in
1995 (mostly in Tucson) which resulted in higher turnover, marketing and payroll
expenses. The increase in expenses was mitigated by a 2% increase in rental and
other income due to higher rental rates. Depreciation expenses increased due to
acquisitions and capital expenditures incurred in 1994 and 1995.
As a result of amortization of the investment in and redemption of mortgage
assets during 1994 and 1995, the average balance of mortgage assets decreased
from $26,691,000 for 1994 to $14,827,000 for 1995. While the average prospective
yield was 28% for 1995 compared with 24% for 1994, the prospective yield income
decreased by $2,549,000. Income from redemptions in 1995 totaled $5,302,000
consisting of $2,882,000 from redemption of five mortgage assets and $2,420,000
from the reversal of the excess yield maintenance payment accrued in 1993 on
notes payable. Income from redemptions of $4,263,000 in 1994 resulted from the
redemption of four mortgage assets.
Operating and administrative expenses increased in 1995 primarily due to an
increase in expense accruals for stock appreciation rights of $381,000 (caused
by higher stock price) and dividend equivalent payments on stock options of
$600,000. The higher stock appreciation rights and dividend equivalent expenses
were mitigated by a decrease in management fees of $170,000 in 1995 compared to
1994.
Interest and other income decreased in 1995 due to the use of the cash held
by trustee to prepay the notes payable secured by mortgage assets in February
1995. Interest expense on real estate mortgages increased due to the borrowing
for the February 1995 purchase of an apartment community. Other interest expense
decreased due to the prepayment of the notes payable secured by mortgage assets
in February 1995 and the prepayment of the real estate notes in April 1995.
1994 Compared to 1993
The Company had net income of $7,702,000 in 1994 compared with a net loss of
$40.6 million in 1993. The income in 1994 resulted from operating income
generated by the apartments and the existing mortgage assets.
In 1994, net operating income (before depreciation) from the apartments was
$7,119,000 (including the Company's share of results of the joint ventures)
which, after deducting related interest expense, amounted to an annualized
return of 20% on the average invested equity. As a result of high demand, rental
rates in the Company's apartment communities increased during 1994 by 10% in
Tucson, 5% in Albuquerque and 2% in Houston while maintaining each apartment
community's occupancy rate.
<PAGE>
Prospective yield income from mortgage assets decreased due to a reduction of
$18,916,000 in the net carrying value, mitigated by a higher yield in 1994 due
to significantly lower mortgage prepayment rates. The average yield on the
mortgage assets for 1994 was approximately 24%. The Company realized income in
1994 of $4,263,000 from the redemption of four mortgage assets and the sale of
the underlying mortgage instruments. The provision for reserve for 1993 was due
to the decrease in the estimated future cash flows of certain mortgage assets.
The charge from the cumulative effect of accounting change in 1993 was due to
adoption of SFAS No. 115 which resulted in the reduction of the net carrying
values of substantially all of the mortgage assets to their estimated fair
market values. Both the provision for reserve and the cumulative effect of
accounting change were caused by very low mortgage interest rates which resulted
in historically high levels of mortgage prepayment rates.
Interest and other interest income increased due to higher interest rates on
investments and a write down of a short-term investment ($254,000) in 1993.
Operating expenses increased in 1994 due to the accrual in 1994 of expenses
relating to the stock appreciation rights ($324,000) and dividend equivalent
payments on the options and stock appreciation rights ($200,000), offset by a
reduction in the 1994 management fees of $81,000, the Company's efforts to
reduce operating expenses and a reduction in the 1993 expenses of $470,000
relating to the legal fees reimbursement from insurance carriers relating to
legal fees relating to the class action suit settled in 1992.
Interest expense on real estate mortgages increased because of the borrowing
incurred in connection with acquisition of the apartments in January 1994. Other
interest expense decreased due to a decrease in the notes payable secured by
mortgage assets.
Liquidity, Capital Resources and Commitments
Cash provided by operations in 1995 was lower than 1994 as $2,420,000 of the
1995 income from redemption related to the reversal of the yield maintenance
payment which did not provide cash. Cash provided by operations in 1995 and 1994
were both higher than 1993 primarily due to the addition of real estate
operations and redemption income.
Operating cash flow (net of interest expense) from apartments was $3,264,000
for 1995 compared to $3,178,000 for 1994. Cash flow generated from mortgage
assets was $13,854,000 during 1995 compared to $29,612,000 during 1994. As
mortgage assets are amortizing assets, the cash flows generally decline over
time as they are amortized or redeemed. The Company also realized higher cash
flows from mortgage asset redemptions in 1994.
In 1995, the Company acquired (i) an apartment community for $6,241,000 which
was financed by a first mortgage loan of $3,770,000; (ii) land for development
of the Finisterra Apartments in Tempe, Arizona for $2,670,000 and (iii) two
apartment communities through joint ventures for equity investments of
$1,853,000. The Company reduced its borrowing in 1995 by (i) prepaying the notes
secured by mortgage assets (net balance of $6,422,000 at December 31, 1994) and
(ii) prepaying the unsecured real estate notes ($4,868,000 at December 31,
1994). The Company incurred short-term borrowing of $4,495,000 to fund a portion
of these debt prepayments. The Company plans to use the cash flows from mortgage
asset redemptions in 1996 to reduce the short-term borrowing.
The Company continues to rely on the cash flows from mortgage assets to fund
its apartment acquisitions and development. A majority of the mortgage cash
flows is from early redemptions and sales which in effect accelerate the cash
flows and thus increase the present value. In March 1996, the
<PAGE>
Company sold for $2.4 million a 40% interest in one mortgage asset anticipated
to be redeemed in the second quarter, resulting in income of approximately $1.9
million. The subsequent redemption is expected to generate an additional cash
flow of $3.6 million and income of $3.0 million.
The Company has prepared the following estimates of future cash flows from
the mortgage assets. Cases 1, 2 and 3 assume that except for the early
redemption of the mortgage asset in April as described in the preceding
paragraph, there will be no further early redemptions of mortgage assets. The
assumed interest rate and mortgage prepayment rates in Case 2 are the
approximate interest rate and forecasts of prepayment rates made by market
participants as of December 31, 1995. The estimates in Case 4 have been prepared
using the same interest rate and mortgage prepayment rates as Case 2 except that
each mortgage asset is assumed to be redeemed at the first available date and
the underlying mortgages sold at the December 31, 1995 prices. Mortgage
prepayment rates represent the average annual prepayment rate assumed for the
underlying mortgage instruments. (Dollars in thousands.)
Case 1 Case 2 Case 3 Case 4
------- ------- ------- -------
Assumed one
month LIBOR 4.0% 6.0% 8.0% 6.0%
Assumed mortgage
prepayments 21.3% 10.6% 6.9% 10.6%
Average sale price of
mortgages (% of par) 107.1%
Estimated cash flows
1996 $12,148 $11,452 $10,746 $16,444
1997 4,527 4,120 3,541 11,642
1998 3,052 3,112 2,917 2,244
1999 2,116 2,368 2,398 13,223
2000 1,422 1,812 1,991 7,785
2001-2018 6,568 13,480 24,599 470
------- ------- ------- -------
Total $29,833 $36,344 $46,192 $51,808
======= ======= ======= =======
There can be no assurance that the actual interest and prepayment rates will
be as assumed or that the prices of the mortgage instruments will remain at the
assumed levels. Proceeds from redemptions are highly dependent on prices
available upon sale of the mortgages as well as the timing of meeting the
conditions for redemption (generally reduction of the structured financing to a
specified percentage of the original balance or a specified date). As an
example, if the average price assumed for mortgage sales in Case 4 above were to
decrease by half (the average mortgage prices decreases to 103.5%), the
estimated total cash flow in Case 4 would decline by $15,187,000 of which
$3,257,000 would relate to 1996.
The Company has commenced the development of its Finisterra Apartment
community in Tempe, Arizona. The total construction costs are estimated to be
approximately $20,000,000. As of December 31, 1995, the Company has invested
approximately $2,800,000. The Company has obtained a $15,350,000 construction
loan. Construction is expected to be completed in mid-1997.
At December 31, 1995, the Company had unrestricted cash of $2,421,000. The
Company intends to use such funds for acquisition of apartments, capital
improvements on existing properties and working capital.
<PAGE>
Each of the apartment communities is pledged to secure a nonrecourse and
non-cross collateralized first mortgage loan. The loans generally bear fixed
interest rates which averaged 8.6% at December 31, 1995. The principal and
interest payments on these loans are approximately $385,000 per month. In
addition, the Company is required to deposit $55,000 per month with the lender
to be used for specified capital replacement expenditures, property taxes and
insurance premiums. At December 31, 1995, $2,122,000 was held by lenders.
Other Information
Apartment leases generally are for terms of six to 12 months. Management
believes that such short-term leases lessen the impact of inflation as a result
of the ability to adjust rental rates to market levels as leases expire. To the
extent that the inflation rate influences federal monetary policy and results in
rising short-term interest rates or declines in mortgage interest rates, the
timing of income and cash flows from the mortgage assets would be affected.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the notes
thereto and the supplementary data commencing at page F-1 of this report, which
financial statements, report, notes and data are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules filed as part
of this report:
1. Financial Statements of the Company -- as listed in the "Index to
Financial Statements and Financial Statement Schedule" on page F-1 of
this Annual Report Form 10-K.
2. Financial Statement Schedules -- Schedule III on page F- 15. No other
schedules are required because of the absense of conditions under
which they are required or because the information is given in the
financial statements and notes beginning on page F-1 of this Annual
Report on Form 10-K.
<PAGE>
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ----------- -------------------------------------------------------------------------------------------
<S> <C>
3(a) First Amended and Restated Articles of Incorporation of the Registrant(1)
3(b) Articles of Amendment to the First Amended and Restated Articles of Incorporation of the
Registrant(3)
3(c) Bylaws of the Registrant(1)
4 Specimen Certificate representing $.01 par value Common Stock(1)
10(a) Management Agreement between the Registrant and ASMA Mortgage Advisors Limited
Partnership(5)
10(b) Subcontract Agreement between ASMA Mortgage Advisors Limited Partnership and American
10(c) Southwest Financial Services, Inc.(3)
Right of First Refusal between the Company and the Manager(3)
10(d) Limited Partnership Agreement of Southwest Capital Mortgage Funding Limited
Partnership(2)
10(e) Amended and Restated Stock Option Plans(4)
10(f) Indemnification and Use of Name Agreement Between the Company and American
Southwest(4)
10(g) Dividend Reinvestment and Stock Purchase Plan(3)
10(h) Agreement for Purchase and Sale of Apartments ("Purchase Agreement") dated July 15, 1993 by
and between Buyer and Seller.(6)
10(i) First Amendment to Purchase Agreement dated August 18, 1993, by and between Buyer and
Seller.(6)
10(j) Second Amendment to Purchase Agreement dated September 21, 1993 by and between Buyer and
Seller.(6)
10(k) Third Amendment to Purchase Agreement dated October 27, 1993 by and between Buyer and
Seller.(6)
10(l) Master Property Management Agreement with Pima Realty Advisors, Inc. for the year ending
December 31, 1994 and the signature page for each of the properties.(6)
10(m) Second Articles of Amendment to the First Amended and Restated Articles of Incorporation of
the Registrant.
10(n) Third Articles of Amendment to the First Amended and Restated Articles of Incorporation of
the Registrant.
10(o) First Amendment to the Bylaws of the Registrant.
10(p) Deed of Trust, Security Agreement, Financing Statement and
Assignment of Leases and Rents dated as of January 11, 1994 made by
the following entities for the benefit of
Lexington Mortgage Company(6):
ASV-I Properties, Inc.
ASV-III Properties, Inc.
ASV-IV Properties, Inc.
ASV-V Properties, Inc.
ASV-VI Properties, Inc.
ASV-VII Properties, Inc.
ASV-VIII Properties, Inc.
ASV-IX Properties, Inc.
ASV-X Properties, Inc.
ASV-XI Properties, Inc.
ASV-XII Properties, Inc.
ASV-XIII Properties, Inc.
ASV-XIV Properties, Inc.
ASV-XV Properties, Inc.
ASV-XVI Properties, Inc.
11 Statement re: Computation of Per Share Earnings
22 Subsidiaries of the Registrant
<FN>
(Footnotes on next page)
</FN>
</TABLE>
<PAGE>
(Footnotes to table on previous page)
- ----------
(1) Incorporated herein by reference to Registrant's Registration Statement
on Form S-11 (No. 33- 15232) filed August 19, 1987 and declared effective
on August 19, 1987.
(2) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-20429) filed March 16, 1988 and declared effective on
March 17, 1988.
(3) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1988 as filed with the Commission on or about March 30,
1989.
(4) Incorporated herein by reference to Registrant's Registration Statement on
Form S-3 (33-42923) filed on September 30, 1991 and declared effective on
October 1, 1991.
(5) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1992.
(6) Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about March 29, 1994.
(c) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASR INVESTMENTS CORPORATION
By:
/s/ JON A. GROVE
-----------------------------------------------
Jon A. Grove
Date: March 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- ------------------------------------------ ------------------
<S> <C> <C>
/s/ JON A. GROVE Director, Chairman of the Board, President
---------------------------- and Chief Executive Officer (Principal
Jon A. Grove Executive Officer) March 22, 1996
/s/ FRANK S. PARISE, JR.
---------------------------- Director, Vice Chairman, Chief
Frank S. Parise, Jr. Administrative Officer and Secretary March 22, 1996
/s/ JOSEPH C. CHAN Director, Executive Vice President and
---------------------------- Chief Operating Officer (Principal
Joseph C. Chan Financial and Accounting Officer) March 22, 1996
/s/ EARL M. BALDWIN
----------------------------
Earl M. Baldwin Director March 22, 1996
/s/ JOHN J. GISI
----------------------------
John J. Gisi Director March 22, 1996
/s/ RAYMOND L. HORN
---------------------------- Director March 22, 1996
RAYMOND L. HORN
/s/ FREDERICK C. MOOR
----------------------------
Frederick C. Moor Director March 22, 1996
</TABLE>
<PAGE>
ASR INVESTMENTS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report .............................................................F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 .............................F-3
Consolidated Statements of Operations for the years ended December 31, 1995,
1994 and 1993 ...........................................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995,
1994 and 1993 ...........................................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993 ...........................................................................F-6
Notes to Consolidated Financial Statements ...............................................F-7
Schedule III--Real Estate and Accumulated Depreciation ...................................F-15
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ASR Investments Corporation.
We have audited the accompanying consolidated balance sheets of ASR
Investments Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audit also
included the financial statement schedule listed in the Index at Item 14. The
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and 1994, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, which considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 19, 1996
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1995 1994
---- ----
<S> <C> <C>
Assets
Real estate investments (Notes 2 and 4)
Apartments, net of depreciation $71,338 $66,506
Investments in joint ventures 3,043 1,364
Land held for development 3,928
Other real estate 1,201 5,186
------- -------
Total real estate investments 79,510 73,056
Mortgage assets (Notes 3 and 4) 11,877 18,965
Cash 2,421 4,129
Other assets 361 595
------- -------
Total assets $94,169 $96,745
======= =======
Liabilities
Real estate notes payable (Note 4)
Secured $49,633 $45,825
Unsecured 4,868
------- -------
Total real estate notes payable 49,633 50,693
Notes payable secured by mortgage assets, net of funds
held by trustee of $21,583 (Note 4) 6,422
Short-term borrowing (Note 4) 4,495
Other liabilities 2,646 2,530
------- -------
Total liabilities 56,774 59,645
Stockholders' Equity
40,000,000 shares of $.01 Common Stock authorized;
3,303,226 and 3,248,729 shares issued with
148,731 held in Treasury 37,395 37,100
------- -------
Total liabilities and stockholders' equity $94,169 $96,745
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1994 and 1993
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C>
Real Estate Operations
Rental and other income $ 14,034 $ 12,528
-------- --------
Operating and maintenance expenses 5,259 4,255
Real estate taxes and insurance 1,460 1,242
Depreciation and amortization 2,692 1,995
-------- --------
Total operating expenses 9,411 7,492
-------- --------
Income from real estate 4,623 5,036
-------- --------
Mortgage Assets (Notes 1 and 3)
Prospective yield income 3,884 6,433 $ 7,264
Income from redemptions 5,302 4,263
Provision for reserves (20,286)
-------- -------- --------
Income (Loss) from mortgage assets 9,186 10,696 (13,022)
-------- -------- --------
Operating and administrative expenses (Note 7) (2,983) (2,216) (1,949)
-------- -------- --------
Total Operating Income (Loss) 10,826 13,516 (14,971)
Interest expense and other income
Interest and other income 462 723 286
Interest expense on real estate mortgages (4,387) (3,941)
Other interest expense (347) (2,596) (4,794)
-------- -------- --------
Income (Loss) before cumulative effect
of accounting change 6,554 7,702 (19,479)
Cumulative effect of accounting change (Note 1) (21,091)
-------- -------- --------
Net Income (Loss) $ 6,554 $ 7,702 $(40,570)
======== ======== ========
Per Share Amounts
Income (Loss) before cumulative effect
of accounting change $ 2.09 $ 2.48 $ (6.27)
Cumulative effect of accounting change (6.79)
-------- -------- --------
Net Income (Loss) Per Share of Common
Stock and Common Stock Equivalents $ 2.09 $ 2.48 $ (13.07)
======== ======== ========
Average Shares of Common Stock and
Common Stock Equivalents 3,141 3,100 3,104
======== ======== ========
Dividends Declared Per Share $ 2.00 $ 0.50 $ 1.15
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1994 and 1993
(In Thousands)
<TABLE>
<CAPTION>
Common
Additional Stock in
Number of Par Paid-In Notes Treasury -
Shares Value Capital Deficit Receivable at Cost Total
------ ----- ------- ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 3,249 $ 32 $ 155,126 $(77,764) $ (2,110) $ 75,284
Stock (repurchase) (201) (201)
Net (loss) (40,570) (40,570)
Dividends declared (3,565) (3,565)
----- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1993 3,249 32 155,126 (121,899) (2,311) 30,948
Net Income 7,702 7,702
Dividends declared (1,550) (1,550)
----- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 3,249 32 155,126 (115,747) (2,311) 37,100
Stock issuance 54 1 696 $ (652) 45
Net income 6,554 6,554
Dividends declared (6,304) (6,304)
----- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 3,303 $ 33 $ 155,822 $(115,497) $ (652) $ (2,311) $ 37,395
===== ========= ========= ========= ========= ========= =========
All of the above amounts have been adjusted to reflect the one for five reverse
stock split effected in July 1995.
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
(In Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 6,554 $ 7,702 $(40,570)
Principal noncash charges (credits)
Depreciation and amortization 3,028 2,083
Income from redemption of mortgage assets (2,420)
Provision for reserves 20,286
Cumulative effect of accounting changes 21,091
Increase in accrual 705 324 1,961
-------- -------- --------
Cash Provided By Operations 7,867 10,109 2,768
-------- -------- --------
INVESTING ACTIVITIES
Investment in apartments (7,644) (67,247)
Investment in joint ventures (1,895) (1,364)
Purchase of land for development (3,928)
Other real estate assets 3,985 (1,331) (3,855)
Purchases of mortgage assets (4,447)
Reduction in mortgage assets 7,088 18,916 35,520
Decrease in other assets 234 1,330 912
-------- -------- --------
Cash (Used in) Provided By Investing Activities (2,160) (49,696) 28,130
-------- -------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable 6,895 52,178
Payment of loan costs (1,342)
Repayment of notes payable
Real estate notes (7,955) (1,485)
Notes secured by mortgage assets (4,002) (15,640) (21,124)
Short-term borrowing 4,495
Stock repurchases (201)
Exercise of stock options 45
Payment of dividends (6,304) (1,550) (3,565)
(Decrease) Increase in other liabilities (589) 1,148 (730)
-------- -------- --------
Cash (Used in) Provided By Financing Activities (7,415) 33,309 (25,620)
-------- -------- --------
Cash
(Decrease) Increase during the period (1,708) (6,278) 5,278
Balance -- beginning of period 4,129 10,407 5,129
-------- -------- --------
Balance -- end of period $ 2,421 $ 4,129 $ 10,407
======== ======== ========
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 5,033 $ 7,367 $ 5,121
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
1995, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - ASR Investments Corporation (the Company) is a real estate investment
trust engaged in the acquisition and operation of apartment communities in the
southwestern United States. At December 31, 1995, the Company owned 24 apartment
communities (including six owned through joint ventures) located in Arizona,
Texas and New Mexico. In addition, the Company continues to hold mortgage assets
and use the cash flows for apartment acquisitions, operations, payment of
dividends and other corporate purposes.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Investments in joint ventures are accounted on the equity method as the Company
does not own a controlling interest. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
Common Stock - On July 7, 1995, the Company effected a reverse stock split under
which one new share of common stock was issued in exchange for five shares of
outstanding stock. Accordingly, the consolidated financial statements reflect
the reverse stock split and the number of common stock issued and the per share
amounts have been adjusted for the reverse stock split for all years.
Real Estate - Real estate is recorded at cost. Depreciation is computed on a
declining balance basis over the estimated remaining useful lives of the assets,
which are 27-1/2 years for buildings and improvements and 7 years for furniture,
fixture and equipment. Expenditures for ordinary maintenance and repairs are
charged to operations as incurred, and significant renovations and improvements
that improve or extend the useful life of the asset are capitalized. Rental
income is recorded when due from tenants.
Deferred Loan Costs - Deferred loan costs are amortized using the interest
method over the terms of the related debt.
Mortgage Assets - The Company owns mortgage assets which entitle it to receive
the excess of the cash flows on pools of mortgage instruments over the required
payments on a series of structured financings which they secure. The Company
also has the right to cause the early redemption of the structured financings
under specified limited conditions; in such event, the mortgage instruments are
sold and the net proceeds after the redemption of the structured financings are
remitted to the Company. Redemption transactions occur from time to time as
specified conditions are met rather than on a monthly or quarterly basis;
therefore, the amount of net proceeds and the income from the redemption
transactions fluctuates significantly between periods.
Presentation and Income Recognition. Mortgage assets are stated at their net
investment amounts. Income is recognized using the prospective yield method
prescribed by EITF 89-4. Under this method, an effective yield is calculated at
the beginning of an accounting period using the then net carrying value of the
asset and the estimated future net cash flow assuming no early redemption. The
estimated future net cash flow is calculated using variable interest rates and
current projected mortgage prepayment rates for the underlying mortgages. The
calculated yield is used to accrue income for the accounting period. Actual cash
flow received is first applied to the accrued income and any remaining amount is
used to reduce the carrying value of the asset. Income from early redemption is
recognized when the transaction occurs.
Write-down or reserves for impairment. Prior to December 1993, the Company
followed the practice of writing down the carrying value of a mortgage asset
(including an allocated portion of the deferred hedging cost) to its estimated
future cash flows. In December 1993, the Company adopted SFAS No. 115 which
requires that the carrying value of a mortgage asset be written down to its
estimated fair value when its estimated yield is less than a "risk-free yield."
As a result, the Company wrote down substantially all its mortgage assets in
1993 to their estimated fair value and recorded a charge of $21,091,000 which
was reported as a cumulative effect of accounting change.
Income Taxes - The Company has elected to be taxed as a real estate investment
trust (REIT) under the Internal Revenue Code of 1986, as amended. As a REIT, the
F-7
<PAGE>
Company must distribute to its stockholders at least 95% of the higher of (i)
its annual taxable income after the use of net operating loss carryforward or
(ii) its annual excess inclusion income. Accordingly, no provision has been made
for income taxes in the accompanying consolidated financial statements.
Earnings Per Share - Earnings per share are computed using the weighted average
number of shares of common stock and common stock equivalents (if dilutive)
outstanding during the year.
New Accounting Standards - In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." This
Statement encourages, but does not require, companies to adopt a new accounting
method for stock-based compensation awards. Beginning with 1996 financial
statements, companies that do not adopt the new accounting method will be
required to provide the disclosures required by the Statement for any awards
made in 1995 and after. The Company, which currently follows APB Opinion No. 25,
does not plan to adopt the new accounting method, and will provide the required
disclosures in the 1996 financial statements.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect some of the amounts reported in the
consolidated financial statements. Actual results could differ from those
estimates.
Reclassifications - Certain reclassifications have been made to conform the
prior years with the current year presentation.
2. REAL ESTATE INVESTMENTS
Wholly Owned Apartments
In January 1994, the Company acquired its initial portfolio of seventeen
apartment communities (2,461 units) located in Tucson, Arizona, Houston, Texas,
and Albuquerque, New Mexico. In February 1995, the Company acquired a 222-unit
apartment community in Mesa, Arizona. At December 31, 1995 and 1994, investment
in apartments consisted of the following (in thousands):
1995 1994
---- ----
Land $ 15,514 $ 13,681
Building and Improvements 57,214 50,583
Accumulated Depreciation (4,687) (1,995)
Restricted Cash and
Deferred Loan fees 3,297 4,237
-------- --------
Apartments, net $ 71,338 $ 66,506
======== ========
Investments in Joint Ventures
The Company has acquired six apartment communities (1,441 units) in Phoenix
and Tucson, Arizona through joint ventures with a pension plan affiliate of
Citicorp. The Company is a 15% equity partner and the managing partner or
managing member of the joint ventures. The Company is entitled to receive
between 15% and 51% of the total profits and cash flows depending on the
financial performance of the joint ventures. The condensed combined financial
statements for the joint ventures are as follows (in thousands):
Condensed Combined Balance Sheets
December 31,
1995 1994
---- ----
Real estate, at cost net
of depreciation $54,489 $23,778
Cash and other assets 2,133 1,424
------- -------
Total Assets $56,622 $25,202
======= =======
Notes payable $35,754 $15,644
Other liabilities 575 424
------- -------
Total Liabilities 36,329 16,068
------- -------
Equity
The Company 3,043 1,364
Joint venture partner 17,250 7,770
------- -------
Total Equity 20,293 9,134
------- -------
Total Liabilities and Equity $56,622 $25,202
======= =======
F-8
<PAGE>
Condensed Combined Statement of Operations
Years Ended December 31
-----------------------
1995 1994
---- ----
Revenues $ 7,014 $ 1,263
Operating expenses (3,110) (551)
Depreciation (1,437) (283)
Interest expense (2,338) (373)
------- -------
Net Income $ 129 $ 56
======= =======
Allocation of Net Income
The Company $ 19 $ 9
Joint Venture Partner $ 110 $ 47
In December 1994, the Company entered into a joint venture to develop and
construct the Finisterra Apartments community in Tempe, Arizona. In April 1995,
the Company acquired the land from the joint venture for $2,670,000 and
terminated the joint venture. As of December 31, 1995, the investment in the
Finisterra Apartments land was $2,732,000. The Company expects to begin
construction in March 1996.
Operating income from apartments is affected primarily by rental rates,
occupancy rates and operating expenses. Rental rates and occupancy rates are
affected by the strength of the local economy, the local housing market and the
supply of and demand for apartment communities.
3. MORTGAGE ASSETS
Income
For 1995 and 1994, the average carrying value of the mortgage assets was
$14,827,000 and $26,691,000, respectively, and the average prospective yield was
28% and 24%, respectively. At December 31, 1995, the prospective yield was 29%.
As discussed in Note 1, in 1993, a majority of the mortgage assets were not
accounted for under the prospective yield method and the Company recorded
substantial amount of reserves for write down.
During 1995, the Company exercised its redemption rights on five mortgage
assets for net proceeds of $6,438,000 and income of $2,882,000. Using proceeds
from one of the redemptions, the Company prepaid its Secured Notes (see Note 4)
and recorded income of $2,420,000 for the excess accrual of the yield
maintenance payment on the Notes. The income has been included in income from
redemptions of mortgage assets. During 1994, the Company exercised its
redemption rights on four mortgage assets for net proceeds of $11,227,000 and
income of $4,263,000.
The cash flows and prospective yield income are affected primarily by
mortgage prepayment rates and short-term interest rates. Higher mortgage
prepayment rates or higher short-term rates reduce the income and total cash
flows over the life of the mortgage assets. Income from mortgage asset
redemptions is affected by the timing of meeting the specified conditions for
redemptions and the value of the underlying mortgage instruments. As a result,
mortgage asset redemptions do not occur on a regular basis and the income can
fluctuate significantly between periods. In addition, redemption of mortgage
assets reduces the prospective yield income in future periods.
Hedging transactions
In 1992, the Company purchased "Cap Agreements" to protect against the
negative effect on mortgage asset cash flows of increases in interest rates in
1994. The "Cap Agreements," purchased for $2,459,000, called for payments to the
Company equal to the excess of one-month LIBOR over 5.5% on specified dates
during 1994 (generally monthly) times $240,000,000. The effect of the Cap
Agreements was to provide that the interest paid on structured financing during
1994 did not exceed 5.5%.
Also in 1992, the Company executed short sales of Eurodollar Futures Contracts
on the International Monetary Market exchange. The effect of the Futures
Contracts was to "fix" the interest rate on $190,000,000 of the structured
financings at approximately 6.75% for 1995. In 1993, the Company recorded losses
of $4,168,000 on the
F-9
<PAGE>
Future Contracts. In 1994, the Company closed out its Futures Contract position
and realized a gain of $1,152,000 which was recorded as set forth below.
Both the Cap Agreements and Futures Contracts transactions were entered into
as hedges against the interest rate impact on mortgage asset cash flows in 1994
and 1995. The cost of the Cap Agreements ($2,459,000) and the losses incurred on
the Futures Contracts during 1993 ($4,168,000) were accounted for as additional
costs of the mortgage assets and were written off in connection with the
adoption of SFAS No. 115 in December 1993. Such amounts are included in the
"cumulative effect of accounting change" in the accompanying consolidated
statements of operations. The 1994 gain on the Futures Contracts ($1,152,000)
was recorded as a reduction in the carrying value of the mortgage assets.
Because of (1) the decline in importance of mortgage assets as a result of
the Company's emphasis on investments in apartments and (2) the decline in the
amount of variable rate structured financing underlying the mortgage assets, the
Company no longer plans to invest in similar hedging transactions and had no
such investments at December 31, 1995 and 1994.
4. NOTES PAYABLE
Real estate notes payable
The apartment communities acquired in January 1994 were financed by first
mortgage loans totaling $45,700,000 and seller carryback notes of $6,500,000.
The first mortgage loans are nonrecourse and non-cross collateralized. They
generally have a ten year term and bear fixed interest rates ranging from 8.5%
to 10.1%, with a weighted average fixed rate of 8.6% at December 31, 1995 and
1994. The wholly owned 222-unit community in Mesa, Arizona, which was purchased
in February 1995, was financed by a $3,770,000 first mortgage loan bearing
interest at 225 basis points over three-month LIBOR. Amortization of deferred
loan fees was $120,000 and $88,000 for 1995 and 1994
The seller carryback notes were unsecured, bore a fixed interest rate of 7.5%
and were to be amortized over a three-year period ending February 1, 1997 with
monthly principal and interest payments of $202,000. As provided for by the note
agreements, the Company repaid the notes in 1995 at a discount of $311,000 which
was recorded as a credit to income.
The scheduled maturities of the real estate notes payable are as follows (in
thousands):
1996 $ 773
1997 2,317
1998 440
1999 4,227
2000 552
2001-2004 41,324
---- ---------------
Total $ 49,633
===============
Mortgage assets notes payable
In 1992, the Company issued $80,000,000 of Secured Notes ("Notes") at an
interest rate of 9.02% per year. The Notes were collateralized by a majority of
the Company's mortgage assets and funds held by the trustee (restricted cash).
The Company was required to use the net proceeds from the redemptions of the
mortgage interest to prepay the Notes at a premium. During 1994, the Company
made prepayments of $10,355,000.
In February 1995, the Company used the proceeds from a mortgage asset
redemption of $2,800,000, $393,000 of its cash and the funds held by the trustee
to prepay the
F-10
<PAGE>
entire balance of the Notes. Accordingly, the funds held by the trustee
($21,583,000 at December 31, 1994) were presented as a reduction of the Notes
balance in the consolidated balance sheets. Amortization of deferred loan cost
was $549,000 for 1993.
Short-term Borrowing
At December 31, 1995, the Company had borrowings under reverse repurchase
agreements of $2,170,000 secured by five mortgage assets with a total carrying
value of $2,645,000. The Company also had short-term borrowings of $2,325,000
secured by two mortgage assets with a total carrying value of $4,994,000. The
interest rate averaged 6.55% during 1995 and 6.69% at December 31, 1995.
5. STOCK OPTIONS
The Company has two stock option plans which are administered by the Board of
Directors. The purpose of the plans is to provide a means of performance-based
compensation to attract and retain directors and key personnel.
Under the plans, options to acquire a maximum of 140,000 shares of the
Company's common stock may be granted at an exercise price not less than the
fair market value of the stock. The options expire ten years after the date of
grant. Upon exercise of the options, the Company can elect to distribute cash in
lieu of shares.
In addition, in connection with the renewal of the management agreement for
1994, the Company and the Manager agreed to eliminate the incentive management
fee provision and the Company granted to the partners of the Manager
non-qualified options to purchase 309,800 shares of common stock and 90,200
shares of stock appreciation rights ("SARs") with an exercise price of $8.60 per
share. The exercise price was 10% above the closing market price of the common
stock on the grant date. The holders will also receive payments equal to the
product of the per share dividend amount times the number of options and SARs
outstanding. The options and SARs will expire in December 1998. As of December
31, 1995, all of the options and SARs are exercisable and none of them have been
exercised. Upon exercise of the options, the Company can elect to distribute
cash in lieu of shares.
In 1995, certain holders exercised options to purchase 50,496 shares by
giving full recourse notes totaling $653,000 to the Company. The notes are
secured by the shares of common stock issued and bear interest at the prime rate
plus 1%. The notes are due on December 31, 1996 and can be repaid by giving the
Company shares of common stock owned by the optionholders based on the then
market price of the common stock.
Information on all stock options granted is summarized below:
Number Option
of Price
Shares Per Share
------ ---------
Outstanding at
December 31, 1993 403,141 $ 8.13-$20.90
Options and DERs
canceled (4,901) 11.19-$20.00
Options granted 14,000 $11.25
Outstanding at -------
December 31, 1994 412,240 $8.13-$20.90
Options exercised (54,496) $11.25-13.13
Outstanding at -------
December 31, 1995 357,744 $8.13-$20.90
=======
6. Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No.107, "Disclosures about
Fair Values of Financial Instruments." Although management uses its best
judgement in estimating the fair value of these instruments, there are inherent
limitations in any estimation technique and the estimates are thus not
necessarily indicative of the amounts which the Company could realize in a
current transaction.
F-11
<PAGE>
Basis of Estimates
Mortgage Assets. The fair value of mortgage assets is generally dependent on
interest rate and other economic factors, including (1) the characteristics of
the asset, (2) estimates of future cash flows and (3) the discount rate used to
calculate the present value of the cash flows. The market for the Company's
mortgage assets is very illiquid and traded prices are determined on a privately
negotiated basis. Thus, except for one mortgage asset which the Company has
agreed to redeem in the second quarter of 1996 for total income of $4.9 million,
the Company uses the carrying values as the estimated values.
Management believes, however, that it is meaningful to provide the following
present value of the estimated cash flows using the interest rates and mortgage
prepayment rates as of December 31, 1995. The estimates without redemptions
assume that the mortgage assets are held until the stated maturity (with the
exception of one mortgage asset which the Company has agreed to redeem in April
1996 for estimated net proceeds of $6,000,000). The estimates with redemptions
assume that the Company would exercise the redemption rights at the earliest
dates and sell the mortgage instruments at the estimated market prices as of
December 31, 1995. (Dollars in thousands.)
Discount With Without
Rate Redemptions Redemptions
---- ----------- -----------
10% $41,442 $22,967
20% $34,032 $18,484
30% $28,595 $15,890
40% $24,505 $14,048
50% $21,354 $12,635
Real Estate Notes Payable. The Company has used the carrying value of real
estate notes payable as their fair value. At December 31, 1995, the interest
rates on the Company's notes payable approximated the market rates for debt
instruments with similar terms and maturities.
Short-term borrowing. The Company has used the carrying value of short-term
borrowing as its fair value as the interest rates are adjusted monthly and the
maturity terms are less than one year.
Estimated Fair Values (in thousands):
Carrying Estimated
Amount Fair Value
------ ----------
Mortgage assets $11,877 $16,777
Real estate notes payable 49,633 49,633
Short-term borrowing 4,495 4,495
7. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors, Pima Mortgage
Limited Partnership (the "Manager") manages the day-to-day operations of the
Company pursuant to a management agreement which has a current term through
December 31, 1996. Pursuant to the agreement, the Manager receives a base
management fee of 3/8 of 1% per annum of the Company's average invested assets
before deduction for reserves and depreciation. The management fees for 1995,
1994 and 1993 were $374,000, $544,000, and $625,000, respectively.
Under the agreement, the Manager must reimburse the Company for any
management fees received for the year to the extent that the operating expenses
(as defined) for the year exceed the greater of 2% of the Company's average
invested assets or 25% of its net income (as defined), unless the unaffiliated
directors determine that a higher level of expenses is justified for such year.
There were no such excess operating expenses in 1995, 1994 or 1993.
Additionally, if the agreement is terminated without cause (as defined) or not
renewed on terms as favorable to the Manager, the Manager will be entitled to
receive the management fees relating to the invested assets purchased prior to
the termination date, for a three-year period as if the agreement had remained
in effect.
Under the agreement, the Manager also performs certain analyses and other
services in connection with the administration of structured financing related
to the Company's mortgage assets. For such services, the Company paid the
Manager $216,000 for 1995, $247,500 for 1994, and $260,000 for 1993.
F-12
<PAGE>
As discussed in Note 5, the Company and the Manager agreed to eliminate the
incentive fee provision in the management agreement beginning with 1994. The
Company granted to the owners of the Manager options and stock appreciation
rights ("SARs") that provide for dividend equivalent payments based on the per
share amounts of dividends paid on the common stock. In 1995 and 1994, the
dividend equivalent payments were $800,000 and $200,000 which are included in
operating expenses. As a result of the increase in the common stock price, the
Company recorded an accrual for the SARs of $705,000 in 1995 and $324,000 in
1994, which amounts are included in operating expenses.
The Company has entered into a property management agreement with Pima Realty
Advisors, Inc. the "Property Manager"), an affiliate of the Manager, for each of
its apartment properties. Under the property management agreements, the Property
Manager provides the customary property management services at its cost without
profit or distributions to its owners, subject to the limitation of the
prevailing management fee rates for similar properties in the market. The costs
are allocated to the Company monthly based on the ratio of the number of units
owned by the Company relative to the total apartment units managed by the
Property Manager. The costs allocated to the Company for 1995 and 1994 were
$417,000 and $184,000 respectively (net of an allocated credit of $246,000
applicable only in 1994), which were equal to approximately 3% and 1.4% of the
real estate operating income.
8. TAXABLE INCOME (LOSS) (unaudited)
As of December 31, 1995, the Company had an estimated net operating loss
("NOL") carryforward of $75,000,000 which can be used to offset taxable income
other than excess inclusion income through 2009 (1999 for state taxes).
Substantially all of the dividends for 1994 and 1993 constitute ordinary income.
Approximately 14.5% of the 1995 dividend is ordinary income and 85.5% is a
return of capital for income tax purposes. During 1995, 1994, and 1993, the
Company had excess inclusion income from the residual interest in certain real
estate mortgage investment conduits ("REMICs") which cannot be used to offset
operating losses (including NOL carryforward) and deductions from other sources.
Under the current tax law for REITs, excess inclusion income is required to be
distributed as dividends. The estimated taxable income of $900,000 for 1995
represents excess inclusion income.
Net income reported in the accompanying consolidated financial statements is
different than the taxable income due to the reporting of some income and
expense items in different periods for income tax purposes. The difference
consists primarily of (1) reserves taken on mortgage assets in prior years which
were not allowed for income taxes, (2) differences in income recognition methods
on mortgage assets and (3) excess inclusion income for tax purposes. These
timing differences will reverse in future years.
Taxable income for 1995 is subject to change when the Company prepares and
files its income tax returns. The taxable income amounts also are subject to
adjustments, if any, resulting from audits of the Company's tax returns by the
Internal Revenue Service.
F-13
<PAGE>
9. QUARTERLY FINANCIAL DATA (unaudited)
(Dollars in Thousands Except Per Share Amounts)
Net Income Dividend
Total ---------------- Per
Income Amount Per share share
------ ------ --------- -----
1995
First $ 7,983 $ 3,359 $ 1.10 $ 0.50
Second 6,410 2,015 0.65 0.50
Third 4,798 570 0.18 0.50
Fourth 5,008 610 0.19 0.50
1994
First $ 5,263 $ 1,218 $ 0.56 $ --
Second 7,369 2,698 0.85 --
Third 6,228 2,074 0.65 --
Fourth 5,087 1,712 0.55 0.50
1993
First $ (9,069) $(11,174) $ (3.60) $ --
Second (1,126) (2,877) (0.95) --
Third 530 (1,320) (0.45) 0.25
Fourth (2,288) (25,199) (8.10) 0.90
F-14
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(Dollars In Thousands)
<CAPTION>
Initial cost to company Gross amount at which carried at
December 31, 1995
--------------------------- --------------------------------------------
Cost
Building capitalized Building Depreciable
Year and subsequent to and Accumulated lives
Apartment property built Encumbrances Land improvements acquisition Land improvements depreciation years
- --------------------- ------- -------------- ---------- -------------- --------------- ---------- ------------ ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tucson, Arizona
Acacia Hills ...........1986 $ 1,448 $ 255 $ 1,089 $ 63 $ 255 $ 1,152 $ 100 27.5
Casa Del Norte .........1984 1,376 386 1,453 104 386 1,557 143 27.5
Desert Springs .........1985 4,609 1,115 4,754 247 1,115 5,001 425 27.5
Landmark ...............1986 3,042 409 4,138 408 409 4,546 371 27.5
Park Terrace ...........1986 2,699 316 3,191 211 316 3,402 300 27.5
Park Village ...........1985 588 92 672 82 92 754 72 27.5
Posada Del Rio .........1980 1,603 534 3,022 101 534 3,123 273 27.5
South Point ............1984 1,861 291 2,135 142 291 2,277 209 27.5
------- -------- -------- ------- -------- -------- -------
Total Tucson ........... 17,226 3,398 20,454 1,358 3,398 21,812 1,893
------- -------- -------- ------- -------- -------- -------
Phoenix, Arizona .......
Contempo Heights .......1976 3,758 1,833 4,523 99 1,833 4,622 165 27.5
------- -------- -------- ------- -------- -------- -------
Total Phoenix .......... 3,758 1,833 4,523 99 1,833 4,622 165
------- -------- -------- ------- -------- -------- -------
Houston, Texas
Clear Lake Falls .......1980 3,127 867 3,261 236 867 3,497 294 27.5
The Gallery ............1968 1,642 732 1,196 776 732 1,972 156 27.5
Memorial Bend ..........1967 1,924 1,187 1,287 266 1,187 1,553 152 27.5
Nantucket Square Ii ...1983 2,754 686 2,925 252 686 3,177 264 27.5
Prestonwood ............1978 2,468 761 2,696 367 761 3,063 286 27.5
Riviera Pines ..........1979 3,269 1,025 3,073 832 1,025 3,905 306 27.5
------- -------- -------- ------- -------- -------- -------
Total Houston .......... 15,184 5,258 14,438 2,729 5,258 17,167 1,458
------- -------- -------- ------- -------- -------- -------
Albuquerque, New Mexico
Dorado Terrace .........1986 5,212 2,700 4,224 204 2,700 4,428 350 27.5
Villa Serena ...........1986 2,680 883 2,647 91 883 2,746 248 27.5
Whispering Sands .......1986 5,573 1,442 6,149 290 1,442 6,439 573 27.5
------- -------- -------- ------- -------- -------- -------
Total Albuquerque ...... 13,465 5,025 13,020 593 5,025 13,613 1,171
------- -------- -------- ------- -------- -------- -------
Total .................. $ 49,633 $ 15,514 $ 52,435 $ 4,779 $ 15,514 $ 57,214 $ 4,687
======== ======== ======== ======= ======== ======== =======
<FN>
- ----------
(a) The aggregate cost of real estate investments for federal income tax
purposes is approximately $68,041 at December 31, 1995.
(b) Except for Contempo Heights which was aquired in 1995, all of the above
apartment properties were acquired in 1994.
(c) Building and improvements are depreciated using 27.5 years while furniture
and fixtures are depreciated using seven years.
</FN>
</TABLE>
F-15
<PAGE>
ASR INVESTMENTS CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
A summary of activity for real estate investments and accumulated
depreciation is as follows:
1995 1994
---------- ---------
Real Estate Investments:
Balance, beginning of year $64,264 $ 0
Acquisitions .............. 6,358 61,593
Improvements .............. 2,106 2,671
Dispositions and other ... 0 0
---------- ---------
Balance, end of year .....$ 72,728 $64,264
========== =========
Accumulated Depreciation:
Balance, beginning of year $ 1,995 $ 0
Depreciation .............. 2,692 1,995
Dispositions and other ... 0 0
---------- ---------
Balance, end of year .....$ 4,687 $ 1,995
========== =========
F-16
AMERICAN SOUTHWEST MORTGAGE INVESTMENTS CORPORATION
SECOND ARTICLES OF AMENDMENT
TO THE FIRST AMENDED AND RESTATED
ARTICLES OF INCORPORATED
American Southwest Mortgage Investments Corporation, a Maryland corporation
(the "Corporation"), having its principal office in Tucson, Arizona, hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
First: The first amended and Restated Articles of Incorporation of the
Corporation, as amended b the Articles of Amendment filed with the State
Department of Assessments and Taxation of Maryland on July 26, 1988, are hereby
further amended by striking out Article 1 of the Articles of Incorporation and
by inserting in lieu thereof a new Article 1 so that Article 1 shall read as
follows:
ARTICLE 1
NAME
The name of the corporation (which is hereinafter called the "Corporation") is:
ASR Investments Corporation.
Second: There will be no change in the capitalization of the Corporation as
a result of the amendment.
Third: The foregoing amendment has been advised the Board of Directors and
approved by the stockholders of the Corporation. The manner of approval was as
follows:
(a) The Board of Directors of the Corporation, at a meeting of the
Board of Directors held on April 28, 1992, adopted resolutions which set forth
the proposed amendment to the First Amended and Restated Articles of
Incorporation of the Corporation and declared that they were advisable and
directed that the proposed amendment be submitted to the stockholders for
consideration.
(b) The proposed amendment was approved by the stockholders of the
Corporation by a majority vote at their annual meeting held on June 16, 1992,
and filed with the minutes of proceedings of the stockholders.
IN WITNESS WHEREOF, the Corporation has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Assistant Secretary all as of June 18, 1992.
WITNESS: AMERICAN SOUTHWEST MORTGAGE
INVESTMENTS CORPORATION
/s/ Robert S. Kant By /s/ Jon A. Grove
- -------------------- ---------------------------
Assistant Secretary President
<PAGE>
CERTIFICATE OF PRESIDENT
The undersigned, the President of American Southwest Mortgage Investments
Corporation (the "Corporation"), who executed on behalf of the Corporation the
foregoing Second Articles of Amendment to the First Amended and Restated
Articles of Incorporation of which this Certificate is made a part, hereby
acknowledges in the name of and on behalf of said Corporation and hereby
certifies that to the best of his knowledge, information and belief the matters
and facts set forth therein with respect to the authorization and approval
thereof are true in all material respects under the penalties of perjury.
Date as of June 8, 1992.
/s/ Jon A.Grove
--------------------------------
President
ASR INVESTMENTS CORPORATION
THIRD ARTICLES OF AMENDMENT
TO THE FIRST AMENDED AND RESTATED
ARTICLES OF INCORPORATION
ASR Investments Corporation, a Maryland corporation(the"Corporation"),
having its principal office in Tucson, Arizona, hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The First Amended and Restated Articles of Incorporation of the
Corporation, as amended by the Articles of Amendment and the Second Articles of
Amendment filed with the State Department of Assessments and Taxation of
Maryland on July 26, 1988 and June 19, 1992, respectively, are hereby further
amended to provide for a one-for-five reverse stock split of the Corporation's
Common Stock by amending the text of Section 1 of Article VI, to add the
following language:
Upon the Third Articles of Amendment to the First
Amended and Restated Articles of Incorporation
becoming effective pursuant to the Maryland
General Corporation Law (the "Effective Time"),
each outstanding share of Common Stock, par value
$ .01 per share ("Existing Stock"), shall
thereupon be reclassified and changed into
one-fifth of one share of Common Stock, par value
$ .01 per share ("New Stock"). Upon such Effective
Time, each holder of Existing Stock shall
thereupon automatically be and become the holder
of one-fifth of one share of New Stock for every
share of Existing Stock then held by such holder.
Upon such Effective Time, each certificate
formerly representing a stated number of shares of
Existing Stock shall thereupon be a certificate
for and shall represent one-fifth of the number of
shares of New Stock as is stated in such
certificate. As soon as practicable after such
Effective Time, stockholders as of the date of the
reclassification will be notified thereof and,
upon their delivery of their certificates for
Existing Stock to the Company, will be sent stock
certificates representing their shares of New
Stock, rounded down to the nearest whole number,
together with cash representing the fair value of
such holder's fractional shares of Existing Stock.
No script of fractional share certificates for
Existing Stock will be issued in connection with
this reverse stock split. The fair value paid in
lieu of fractional shares will be determined by
calculating the average of the closing price on
the American Stock Exchange for shares of Existing
Stock, on the 15 trading days prior to the date
the Third
<PAGE>
Articles of Amendment if filed.
SECOND: Upon completion of the reverse stock split, the Corporation's
stated capital account will be reduced from the aggregate par value of the
Corporation's issued and outstanding shares as of the Effective Time to the
aggregate par value of the Corporation's issued and outstanding shares upon
consummation of the reverse stock split, and the excess of such reduced
aggregate par value will be transferred to the Corporation's capital surplus
account.
THIRD: The foregoing amendment has been advised by the Board of Directors
and approved by the stockholders of the Corporation. The manner of approval was
a follows
(a) The Board of Directors of the Corporation, at a meeting of the
Board of Directors held on February 22, 1995, adopted resolutions which set
forth the proposed amendment to the First Amended and Restated Articles of
Incorporation of the Corporation and declared that the proposed amendment was
advisable and directed that the proposed amendment be submitted to the
stockholders for consideration.
(b) The proposed amendment was approved by the stockholders of the
Corporation by a majority vote at the annual meeting of stockholders held on May
17, 1995, and filed with the minutes of proceedings of the stockholders.
IN WITNESS WHEREOF, the Corporation has caused these presents to be signed
in its name and on its behalf by its President and witnessed by its Secretary
all as of July 6, 1995.
WITNESS: ASR INVESTMENTS CORPORATION
By: /s/ Joseph C. Chan By: /s/ Jon A. Grove
------------------- -----------------------
Joseph C. Chan Jon A. Grove, President
Assistant Secretary
2
<PAGE>
CERTIFICATION OF PRESIDENT
The undersigned, the President of ASR Investment Corporation (the
"Corporation"), who executed on behalf of the Corporation the foregoing Third
Articles of Amendment to the First Amended and Restated Articles of
Incorporation of which this Certificate is made a part, hereby acknowledges in
the name of and on behalf of said Corporation the foregoing Third Articles of
Amendment to be the corporate act of said Corporation and hereby certifies that
to the best of his knowledge, information and belief the matters and fact set
forth therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
Dated as of July 6, 1995.
/s/ Jon A. Grove
-----------------------
Jon A. Grove, President
<PAGE>
- --------------------------------------------------------------------------------
STATE OF MARYLAND [LOGO] Department of Assessments and Taxation
PARRIS N. GLENDENING CHARTER DIVISION
Governor Room 809
RONALD W. WINEHOLT 301 West Preston Street
Director
Baltimore, Maryland 21201
PAUL B. ANDERSON
Administrator
- --------------------------------------------------------------------------------
DOCUMENT CODE 09 BUSINESS CODE COUNTY 74
#D23622421 P.A. Religious code Close Stock Nonstock
Merging Surviving
(Transferor) (Transferee)
CODE AMOUNT FEE REMITTED
- ---- ------ ------------
10 70 Expedited Fee (New Name)
61 Rec. Fee (Arts. Of Inc.)
20 Organ. & Capitalization
62 20 Rec. Fee(Amendment)
63 Rec. Fee(Merger, Consol.)
64 Rec. Fee (Transfer)
66 Rec. Fee (Revival) Change of Name
65 Rec. Fee (Dissolution) Change of Principal Office
75 Special Fee Change of Resident Agent
73 Certificate of Conveyance Change of Resident Agent Address
Resignation of Resident Agent
Designation of Resident Agent
21 Recordation Tax and Resident Agent's Address
22 State Transfer Tax Change of Business Code
23 Local Transfer Tax
70 Change of P.O., R.A. Adoption of Assumed Name
or R..A.A.
31 Corp. Good Standing
600 Returns
52 Foreign Qualification
NA Foreign Registration Other Changes(s)
51 Foreign Name Registration
53 Foreign Resolution
54 For. Supplemental Cert.
56 Penalty CODE
50 Cert. Of Qual. Or Reg.
83 Cert. Limited Partnership ATTENTION:
84 Amendment to Limited
Partnership
85 Termination of Limited
Partnership
80 For. Limited Partnership
91 Amend/Cancellation, For.
Limited Part.
87 Limited Part. Good Standing
67 Cert. Limited Liability
Partnership
68 LLP Amendment - Domestic MAIL TO ADDRESS:
69 Foreign Limited Liability
Partnership
74 LLP Amendment - Foreign
99 Art. of Organization (LLC)
98 LLC Amend, Diss, Continuation
97 LLC Cancellation.
96 Registration Foreign LLC
94 Foreign LLC Supplemental
92 LLC Good Standing (short)
13 13 2 Certified Copy 64
- ---- ---- ---- ----
Other
TOTAL [ ] Credit Card NOTE:
FEES $103.00
[X] Check [ ] Cash
1 Documents of 3 checks
- --- ---
APPROVED BY: NS
----
ASR INVESTMENTS CORPORATION
First Amendment to Bylaws
Dated as of September 2, 1993
This First Amendment to the Bylaws of ASR Investments Corporation (the
"Company") was approved by the stockholders of the Company at the annual meeting
of stockholders held on September 2, 1993.
The Bylaws of the Company are amended as follows:
FIRST: Section 3.01 is hereby amended by adding the following sentence to
the end of the Section:
The Board of Directors shall have full power to
approve the issuance of equity securities of the
Company of its subsidiaries in exchange for real
estate and other assets.
SECOND: Section 3.13 is hereby amended by deleting subparagraphs (ii), (vi)
and (viii).
IN WITNESS WHEREOF, the Company has caused these presents to be signed in
its name and on its behalf by its President and witnessed by its Executive Vice
President all as of September 2, 1993.
ASR INVESTMENTS CORPORATION WITNESS:
By: /s/ Jon A. Grove By: /s/ Joseph Chan
---------------- ------------------------
Jon A. Grove Joseph Chan
President Executive Vice President
<TABLE>
EXHIBIT 11
ASR INVESTMENTS CORP.
CALCULATION OF EARNING PER SHARE
For The Quarters And Year Ended December 31, 1995
(in Thousands)
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Primary Earnings Per Share
Number Average common shares outstanding 3,099,999 3,149,848 3,149,848 3,154,495 3,141,049
============= ============= ============= ============= ============
Net Income ..............................$3,359,000 $2,015,000 $ 570,000 $ 610,000 $6,554,000
Primary Earnings per Share ..............$ 1.08 $ 0.64 $ 0.18 $ 0.20 $ 2.09
============= ============= ============= ============= ============
Fully Diluted Earnings Per Share
Number Average common shares outstanding 3,099,999 3,149,848 3,149,848 3,154,495 3,141,049
------------- ------------- ------------- ------------- ------------
Exercisable, in the money, stock options 161,519 184,830 180,889 159,228 157,761
------------- ------------- ------------- ------------- ------------
Total Shares ............................ 3,261,518 3,334,678 3,330,737 3,313,723 3,298,810
============= ============= ============= ============= ============
Net Income ..............................$3,513,900 $2,169,900 $ 724,900 $ 764,900 $7,173,600
Fully Diluted Earnings per Share .......$ 1.08 $ 0.65 $ 0.22 $ 0.23 $ 2.17
============= ============= ============= ============= ============
<FN>
Note: the above data reflects the one for five reverse stock split which was
effected in July 1995. See Note 1 to the consolidated financial
statements.
</FN>
</TABLE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------------------------------ --------------------------
CIMSA Financial Corporation ............... Arizona
ASR Finance Corporation ................... Arizona
ASR Mortgage Acceptance, Inc. ............. Arizona
Residential Mortgage Acceptance, Inc. .... Delaware
ASR Properties, Inc. ...................... Arizona
ASV -- II Properties, Inc. ................ Arizona
ASV -- XVII Properties, Inc. .............. Arizona
RMA Investments Holding, Inc. ............. Arizona
ASC -- I Properties, Inc. ................. Arizona
ASC -- II Properties, Inc. ................ Arizona
ASC -- III Properties, Inc. ............... Arizona
ASC -- IV Properties, Inc. ................ Arizona
ASC -- V Properties, Inc. ................. Arizona
ASC Properties, Inc. ...................... Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,421
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,421
<PP&E> 76,025
<DEPRECIATION> 4,687
<TOTAL-ASSETS> 94,169
<CURRENT-LIABILITIES> 0
<BONDS> 0
37,395
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 94,169
<SALES> 0
<TOTAL-REVENUES> 23,682
<CGS> 0
<TOTAL-COSTS> 12,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,734
<INCOME-PRETAX> 6,554
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,554
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.17
</TABLE>
