PROSPECTUS
1,312,737 SHARES
ASR INVESTMENTS CORPORATION
COMMON STOCK
----------------
The 1,312,737 shares of Common Stock, $.01 par value per share ("Common
Stock"), of ASR Investments Corporation (the "Company") are being offered by
certain stockholders of the Company (the "Selling Stockholders"). See "Principal
and Selling Stockholders". The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders.
The Common Stock is listed on the American Stock Exchange (the "Amex") under
the Symbol "ASR." On June 6, 1997, the closing price for the Common Stock on the
Amex was $23.00 per share.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING AT PAGE
15.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is June 10, 1997
<PAGE>
AVAILABLE INFORMATION
The company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a registration statement on form S-3 under the
Securities Act of 1933, with respect to the shares offered hereby. This
prospectus does not contain all the information contained in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information regarding the Company and
the shares of Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits which are a part thereof, which may be
obtained upon request to the Commission and the payment of the prescribed fee.
Material contained in the Registration Statement may be examined at the
Commission's Washington, D.C. office and copies may be obtained at the
Commission's Washington, D.C. office upon payment of prescribed fees. Statements
contained in this Prospectus are not necessarily complete, and in each case
reference is made to the copy of such contracts or documents filed as an exhibit
to the Registration Statement, each such statement being qualified by this
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N. W.,
Washington, D. C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, New York, New
York 10048, and Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N. W., Washington, D. C. 20549 upon payment of the prescribed fees. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This Web
site can be accessed at http://www.sec.gov. The Common Stock of the Company is
listed on the American Stock Exchange. Reports, proxy or information statements
and, other information concerning the Company may be inspected at the American
Stock Exchange at 86 Trinity Place, New York, NY 10006-1881.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the following
documents previously filed with the Commission pursuant to the Exchange Act: (i)
the Company's Annual Report of form 10-K for the year ended December 31, 1996,
as filed by the Company on March 28, 1997; (ii) the description of the Company's
Common Stock contained in the Registration Statement on Form 8-A as filed with
the Commission on July 31, 1987, (iii) the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, as filed on May 14, 1997, and (iv)
the Company's Current Report on Form 8-K as filed with the Commission on May 15,
1997.
All reports and other documents subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus shall be deemed to be incorporated by reference herein and to be a
part hereof from the date of filing of such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein prior to the date hereof shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statment contained herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The information relating to the Company contained in this Prospectus
summarizes, is based upon, or refers to, information and financial statements
contained in one or more of the documents incorporated by reference herein;
accordingly, such information contained herein is qualified in its entirety by
reference to such documents and should be read in conjunction therewith.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above that have been incorporated by
reference herein (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates). Requests should be directed to ASR Investments
Corporation, 335 North Wilmot, Suite 250, Tucson, Arizona 85711, Attention:
Secretary.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere or
incorporated by reference in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) assumes no exercise of outstanding stock
options and no conversion of LP Units in the Operating Partnership as described
herein, and (ii) reflects a one-for-five reverse stock split affected in July
1995.
THE COMPANY
The Company currently owns and operates 36 apartment communities, containing
6,347 apartment units, located in Phoenix and Tucson, Arizona; Houston and
Dallas, Texas; Albuquerque, New Mexico; and Pullman, Washington. The apartment
communities are "garden apartments," typically consisting of two- and
three-story buildings in landscaped settings with ground level parking. The
communities are well maintained and targeted to provide attractive lifestyles at
low to moderate rates.
The apartment communities were built between 1967 and 1997 and have a
weighted average age by number of apartment units of approximately 13 years. The
number of units per apartment community ranges from 60 to 356 and averages 176
units. Average size per unit approximates 796 square feet. Average rent at March
31, 1997 was $544 per month, with community averages ranging from $375 to $994
per month. As of March 31, 1997, the communities had an average occupancy rate
of approximately 93%. The apartment communities typically provide residents with
attractive amenities, including a clubhouse, swimming pool, other recreational
facilities, laundry facilities, cable television access, patios or balconies,
and mini-blinds. Certain communities offer additional amenities, such as
fireplaces, storage or walk-in closets, microwave ovens, alarms, and limited
access gates.
The Company has acquired 17 of its 36 apartment communities since January 1,
1997. The Company's business objectives are to increase the cash flow and value
of its existing portfolio of apartment communities and to continue to expand its
portfolio of apartment communities through the acquisition and development of
additional communities. Key elements of the Company's strategy to achieve its
objectives include (i) enhancing the performance and value of its existing
properties by maintaining high occupancy and favorable rental rates, managing
operating expenses, and emphasizing regular programs of repairs and capital
improvements, (ii) acquiring and developing additional apartment communities
that have strong cash flows and capital appreciation potential, (iii) focusing
on middle income properties located in geographical areas that the Company
believes will experience higher growth rates in population, household formation,
and employment that the national average, and (iv) disposing of investments that
no longer satisfy the Company's objectives.
The Company has elected to be taxed as a REIT under sections 856 through 860
of the Internal Revenue 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 maintains its qualification as a REIT.
The Company owns the apartment communities through wholly owned subsidiaries
or through Heritage Communities L.P., a Delaware limited partnership ("Heritage
LP" or the "Operating Partnership"), or its subsidiaries. The Company and a
wholly owned subsidiary are the sole general partners of Heritage LP and own an
approximately 50.4% interest therein, consisting of 36% acquired by issuing
Common Stock for the Winton Properties and 14.4% acquired for cash.
The Company was incorporated in the state of Maryland on June 18, 1987. The
principal executive offices of the Company are located at 335 North Wilmot,
Suite 250, Tucson, Arizona 85711, and its telephone number is (520) 748-2111.
Unless the context otherwise requires, the terms "Company" and "ASR" mean ASR
Investments Corporation, its subsidiaries, and the Operating Partnership.
RECENT DEVELOPMENTS
In March 1997, the Company acquired a 266-unit apartment community in
Houston, Texas for $4,450,000 and expects to invest $700,000 in capital
improvements. The Company obtained a first mortgage loan of $3,700,000. The
Company issued 86,500 shares of Common Stock for net proceeds of $1,622,000 to
pay for the purchase.
3
<PAGE>
In April 1997, the Company acquired (i) the assets and properties of 15
separate limited partnerships owning 13 apartment communities, located in Dallas
and Houston, Texas and Pullman, Washington, containing a total of 2,260
apartment units and an office building located in Seattle, Washington (the
"Winton Properties") in which Don W. Winton was the general partner (the "Winton
Partnerships") and (ii) the stock of Winton & Associates, Inc. ("Winton &
Associates"), the property manager of the Winton Properties (together the
"Winton Acquisition"). In connection with the acquisition of the Winton
Properties, the Company (a) issued approximately 683,626 shares of its Common
Stock, (b) issued limited partnership interests ("LP Units") in the Operating
Partnership, which are convertible into 942,184 shares of the Company's Common
Stock commencing one year after the acquisition, (c) assumed or refinanced
existing first mortgage loans of $49,396,000, and (d) paid $1,250,000 of the
transaction costs for the Winton Partnerships. The Company issued 70,284 shares
of its Common Stock in connection with the acquisition of Winton & Associates.
In April 1997, the Company acquired a 257-unit apartment community in
Houston, Texas, for $6,000,000 and obtained a first mortgage loan for
$4,400,000. The Company expects to invest $500,000 in capital improvements. In
May 1997, the Company acquired a 175-unit apartment community in Seattle,
Washington, for $4,059,000 and obtained a first mortgage loan of $2,900,000. The
Company expects to invest $400,000 in capital improvements. The Company issued
187,847 shares of Common Stock for total net proceeds of $3,394,000 to pay for
these two purchases.
In May 1997, the Company acquired for $8,233,000 its joint venture partner's
85% interest in La Privada Apartments, a 350-unit apartment community in
Scottsdale, Arizona. The Company obtained a $3,000,000 loan to pay for the
aquisition. The Company also sold to its partner the Company's 15% interest in
five other joint ventures for total net proceeds of $2,062,000. As a result of
these transactions, the Company owns all of its apartment communities through
the Operating Partnership or subsidiaries.
In connection with the acquisition of the Winton Properties, the Company also
acquired Pima Mortgage Limited Partnership and Pima Realty Advisors, Inc., which
were affiliates of officers of the Company and served as the manager and
property manager, respectively, of the Company's day-to-day operations and
apartment communities, in exchange for 262,008 shares of its Common Stock (the
"Pima Mergers"). As a result, the Company became a self-administered and
self-managed REIT.
Prior to 1993, the Company invested in mortgage assets ("Mortgage Assets")
entitling 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. In June, 1997, the Company
sold its Mortgage Assets for approximately $13,350,000 with a gain of
$10,950,000. Together with earlier redemptions, the Company received total cash
flows of $14,850,000 during the second quarter of 1997 and $22,350,000 during
1997. As a result of the sale, the Company no longer owns any Mortgage Assets.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Stockholders ...... 1,312,737 shares
Common Stock currently outstanding .................... 4,437,419 shares(1)
Use of proceeds ....................................... The Company will not receive any proceeds of
sales by the Selling Stockholders
Risk factors .......................................... See "Risk Factors."
Amex symbol ........................................... ASR
</TABLE>
- ----------------
(1) Excludes 358,979 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options and options that may be granted in the
future under the Company's stock option plans and 942,184 shares of Common
Stock reserved for issuance upon conversion of LP Units issued in connection
with the acquisition of the Winton Properties. See "Management -- Stock
Option Plans."
4
<PAGE>
Summary Consolidated Financial Data
(In thousands except for per share data)
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
-------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data
Income from real estate
Rental and other income ................... $ 12,528 $ 14,034 $ 14,581 $ 3,642 $ 3,702
Operating and maintenance expenses, ......... (5,497) (6,719) (6,855) (1,614) (1,684)
real estate taxes and insurance
Interest expense ............................ (3,941) (4,387) (4,348) (1,082) (1,123)
Depreciation and amortization ............... (1,995) (2,692) (2,819) (680) (680)
-------- -------- -------- -------- --------
Income from real estate ..................... 1,095 236 559 266 215
-------- -------- -------- -------- --------
Income from mortgage assets
Prospective yield income .................. $ 919 $ 7,264 6,433 3,884 2,630 770 330
Income from redemptions and sales ........... 4,263 5,302 9,461 1,977 5,338
Interest expense ............................ (5,841) (4,794) (2,596) (347) (181) (75) (17)
Provision for reserves ...................... (57,588) (20,286)
-------- -------- -------- -------- --------
Income (loss) from mortgage assets .......... (62,510) (17,816) 8,100 8,839 11,910 2,672 5,651
-------- -------- -------- -------- -------- -------- --------
Income (loss) before administrative ........ (62,510) (17,816) 9,195 9,075 12,469 2,938 5,866
expenses and other income
Administrative expenses ..................... (3,104) (1,949) (2,216) (2,983) (3,203) (638) (1,107)
Other income, net ........................... 739 286 723 462 (425) 40 187
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect of ... (64,875) (19,479) 7,702 6,554 8,841 2,340 4,946
accouting change
Cumulative effect of accounting change ...... (21,091)
-------- -------- -------- -------- -------- -------- --------
Net income .................................. ($64,875) ($40,570) $ 7,702 $ 6,554 $ 8,841 $ 2,340 $ 4,946
======== ======== ======== ======== ======== ======== ========
Per average outstanding share
Net income (loss) before cumulative ....... $ (20.20) $ (6.27) $ 2.48 $ 2.09 $ 2.80 $ 0.74 $ 1.52
effect of accounting change
Cumulative effect of accounting change* ..... .. (6.79)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per share ................. $ (20.20) $ (13.07) $ 2.48 $ 2.09 $ 2.80 $ 0.74 $ 1.52
======== ======== ======== ======== ======== ======== ========
Dividends per share ......................... $ 2.25 $ 1.15 $ 0.50 $ 2.00 $ 2.00 $ 0.50 $ 0.50
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding ......... 3,209 3,104 3,100 3,141 3,153 3,154 3,159
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------- March 31,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Apartment and other real
estate assets ............... $ 3,855 $ 73,056 $ 79,510 $ 89,958 $ 98,713
Mortgage assets ................. $108,623 37,881 18,965 11,877 5,039 3,270
Total assets .................... 116,589 54,068 96,745 94,169 97,796 114,033
Real estate notes payable ....... 50,693 49,212 49,110 52,477
Mortgage assets borrowing, net .. 39,517 22,062 6,422 4,495 2,014 500
Stockholders' Equity ............ 75,284 30,948 37,100 37,395 40,102 45,097
</TABLE>
- ---------------
* 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.
5
<PAGE>
Unaudited Pro Forma Combined Financial Statements
The following unaudited pro forma combined financial statements give effect
to the following transactions (collectively the "Transactions") that occurred
during the period from April 1, 1997 to May 30, 1997, (i) the acquisition of the
Winton Properties, (ii) the acquisition of Winton & Associates, (iii) the
acquisition of Pima Mortgage Limited Partnership and Pima Realty Advisors, Inc.
(the "Pima Entities"), (iv) the acquisition of London Park Apartments, (v) the
acquisition of the remaining 85% interest in La Privada Apartments L.L.C. and
the related sale of the interests in the other five joint ventures, (vi) the
acquisitions of Ivystone/Woodsedge Apartments and The Court Apartments, and
(vii) the issuance of 187,847 shares of Common Stock for cash in April and May.
The acquisition of the Winton Properties, Winton & Associates and the Pima
Entities are collectively referred to as the "Winton Related Acquisitions" in
this section. The pro forma combined balance sheet as of March 31, 1997 has been
prepared as if the Transactions had occurred on March 31, 1997. The pro forma
combined income statements for the year ended December 31, 1996 and the three
months ended March 31, 1997 have been prepared as if the Transactions had been
consummated as of January 1, 1996. Adjustments necessary to reflect these
assumptions and to restate the historical combined financial statements are
presented in the Pro Forma Adjustments columns and are described in the Notes
thereto.
The historical financial information for the Company is derived from the
audited consolidated financial statements of the Company as of and for the year
ended December 31, 1996 and the unaudited consolidated financial statements as
of and for the three months ended March 31, 1997. The historical financial
information for the properties and entities acquired is derived from unaudited
financial statements of the properties or entities, as adjusted to reflect
certain preacquisition transactions.
The unaudited pro forma combined financial statements are not necessarily
indicative of what the actual financial position would have been at March 31,
1997 or the actual results of operations for the year ended December 31, 1996
and the three months ended March 31, 1997 had the Transactions occurred on the
assumed dates described above, nor does it purport to present the future
financial position or results of operations of the Company.
6
<PAGE>
Unaudited Pro Forma Combined Balance Sheet As of March 31, 1997
(In thousands except for per share data)
<TABLE>
<CAPTION>
Winton
Asr Related Pro Forma Pro Forma
Historical Acquisitions Adjustments Combined
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Real Estate Investments ............... $ 31,244 (A)
6,119 (D)
25,502 (E)
Properties, net of depreciation ...... $ 70,624 $ 53,361 4,114 (F) $ 190,964
1,757 (A)
538 (D)
Restricted cash and deferred loan cost 4,231 347 (F) 6,873
Investments in joint ventures ......... 2,788 (2,788)(E) 0
Construction in progress .............. 18,528 18,528
Land held for investment .............. 925 925
Other real estate ..................... 1,617 1,617
--------- -------- --------- ---------
Total real estate investments ....... 98,713 53,361 66,833 218,907
Mortgage assets ....................... 3,270 3,270
(4,507)(A)
(2,257)(D)
(3,171)(E)
Cash .................................. 10,781 127 (1,561)(F) 2,806
3,394 (G)
Goodwill .............................. 1,408 (B) 1,408
Other assets .......................... 1,269 738 2,007
--------- -------- --------- ---------
Total assets ........................ $ 114,033 $ 54,226 $ 60,139 $ 228,398
========= ======== ========= =========
LIABILITIES AND EQUITY
Liabilities ........................... $ 4,400 (D)
19,074 (E)
Real estate loans .................... $ 63,771 $ 49,396 2,900 (F) $ 139,541
Short-term borrowings ................. 500 500
Other liabilities ..................... 4,665 746 5,411
--------- -------- --------- ---------
Total liabilities ................... 68,936 50,142 26,374 145,452
469 (E)
5,250 (C)
(5,250)(C)
1,408 (B)
Stockholders' Equity .................. 45,097 4,084 28,494 (A) 82,946
--------- -------- --------- ---------
Total liabilities and Stockholders'
Equity ............................... $ 114,033 $ 54,226 $ 60,139 $ 228,398
========= ======== ========= =========
Outstanding common shares and LP Units.. 3,234 5,380
Book value per share (L) .............. $ 13.94 $ 15.42
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
7
<PAGE>
Unaudited Pro Forma Combined Income Statement For Year Ended December 31, 1996
(In Thousands Except For Per Share Data)
<TABLE>
<CAPTION>
WINTON
ASR RELATED LONDON OTHER PRO FORMA PRO FORMA
HISTORICAL ACQUISITIONS PARK LA PRIVADA ACQUISITIONS ADJUSTMENTS COMBINED
------------ -------------- -------- ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Operations
Rental income ...............$ 14,581 $14,602 $1,328 $ 3,299 $ 1,940 $ 35,750
Property management fees .... 1,859 ($ 1,103) (H) 756
Commission and other income . 34 34
------------ -------------- -------- ------------ -------------- -------------- -----------
Total real estate income .. 14,581 16,495 1,328 3,299 1,940 (1,103) 36,540
------------ -------------- -------- ------------ -------------- -------------- -----------
Operating and maintenance .. (5,404) (6,371) (514) (897) (838) 1,103 (H) (12,921)
Real estate taxes and (1,451) (1,882) (282) (160) (234) (4,009)
insurance ...................
Interest expense ............. (4,348) (6,408)(N) (10,756)
Depreciation and amortization (2,819) (4,860) (M) (7,679)
------------ -------------- -------- ------------ -------------- -------------- -----------
Real estate operating (14,022) (8,253) (796) (1,057) (1,072) (10,165) (35,365)
expenses ....................
------------ -------------- -------- ------------ -------------- -------------- -----------
Real estate operating income 559 8,242 532 2,242 868 (11,268) 1,175
------------ -------------- -------- ------------ -------------- -------------- -----------
Mortgage Asset Income
Prospective yield income ... 2,630 193 (I) 2,823
Income from redemptions and 9,461 9,461
sales .......................
Interest expense ............. (181) (181)
------------ -------------- -------- ------------ -------------- -------------- -----------
Income from mortgage assets . 11,910 0 0 0 0 193 12,103
------------ -------------- -------- ------------ -------------- -------------- -----------
Other Income and Expenses
Amortization of goodwill ... (70)(K) (70)
Management fees .............. 575 (575) (I) 0
Interest and other income ... (425) 70 (594)(J) (949)
Administrative expenses ..... (3,203) (593) 638 (I) (3,158)
------------ -------------- -------- ------------ -------------- -------------- -----------
Other income and expense .. (3,628) 52 0 0 0 (601) (4,177)
------------ -------------- -------- ------------ -------------- -------------- -----------
Net Income ...................$ 8,841 $ 8,294 $ 532 $ 2,242 $ 868 ($ 11,676) $ 9,101
============ ============== ======== ============ ============== ============== ===========
Net Income per share (L) ....$ 2.80 $ 1.72
Dividends declared per share $ 2.00 $ 2.00
Weighted average common
shares outstanding .......... 3,153 5,299
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
8
<PAGE>
Unaudited Pro Forma Combined Income Statement For Quarter Ended March 31, 1997
(In Thousands Except For Per Share Data)
<TABLE>
<CAPTION>
WINTON
ASR RELATED LONDON OTHER PRO FORMA PRO FORMA
HISTORICAL ACQUISITIONS PARK LA PRIVADA ACQUISITIONS ADJUSTMENTS COMBINED
------------ -------------- -------- ------------ -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Operations
Rental income ...............$ 3,702 $ 3,783 $ 353 $ 852 $ 481 $ 9,171
Property management fees .... 422 ($ 302)(H) 120
Commission and other income . 2 2
------------ -------------- -------- ------------ -------------- ------------- -----------
Total real estate income .. 3,702 4,207 353 852 481 (302) 9,293
------------ -------------- -------- ------------ -------------- ------------- -----------
Operating and maintenance .. (1,343) (1,695) (120) (188) (184) 302 (H) (3,228)
Real estate taxes and (341) (503) (80) (55) (53) (1,032)
insurance ...................
Interest expense ............. (1,123) (1,604) (N) (2,727)
Depreciation and amortization (680) (1,194) (M) (1,874)
------------ -------------- -------- ------------ -------------- ------------- -----------
Real estate operating (3,487) (2,198) (200) (243) (237) (2,496) (8,861)
expenses ....................
------------ -------------- -------- ------------ -------------- ------------- -----------
Real estate operating income 215 2,009 153 609 244 (2,798) 432
------------ -------------- -------- ------------ -------------- ------------- -----------
Mortgage Asset Income
Prospective yield income ... 330 40 (I) 370
Income from redemptions and 5,338 5,338
sales .......................
Interest expense ............. (17) (17)
------------ -------------- -------- ------------ -------------- ------------- -----------
Income from mortgage assets . 5,651 0 0 0 0 40 5,691
------------ -------------- -------- ------------ -------------- ------------- -----------
Other Income and Expenses
Amortization of goodwill ... (18)(K) (18)
Management fees .............. 135 (135)(I) 0
Interest and other income ... 187 12 (142)(J) 57
Administrative expenses ..... (1,107) (49) 60 (I) (1,096)
------------ -------------- -------- ------------ -------------- ------------- -----------
Other income and expenses . (920) 98 0 0 0 (235) (1,057)
------------ -------------- -------- ------------ -------------- ------------- -----------
Net Income ...................$ 4,946 $ 2,107 $ 153 $ 609 $ 244 ($ 2,993) $ 5,066
============ ============== ======== ============ ============== ============= ===========
Net Income per share (L) ....$ 1.52 $ 0.95
Dividends declared per share $ 0.50 $ 0.50
Weighted average common
shares outstanding .......... 3,159 5,305
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
9
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
Pro Forma Balance Sheet as of March 31, 1997
(A) The acquisition of the Winton Properties is recorded as a purchase in
accordance with generally accepted accounting principles and, accordingly,
the assets and liabilities acquired are presented at the estimated fair
values. The 15 Winton Partnerships contributed the Winton Properties to
Heritage LP in which the Company is the general partner and Heritage LP (i)
assumed or refinanced first mortgage loans totaling approximately
$49,396,000, (ii) paid $1,250,000 in cash to the sellers for transactional
costs, (iii) issued 683,626 shares of Common Stock, and (iv) issued 942,184
LP Units with each LP Unit convertible into one share of Common Stock after
one year. For financial reporting purposes, the Common Stock and LP Units
are recorded at a per share fair value of $20.038, which is the average
closing price of the Common Stock on the Amex for the 10-day period prior to
public announcement of the acquisition on November 19, 1996. The pro forma
adjustments are as follows (in thousands):
DEBIT (CREDIT)
--------------
Purchase price of Winton Properties .............................. $ 83,224
Estimated transaction costs ...................................... 1,500
Less historical carrying value of the Winton Properties
Properties, net of depreciation ................................. (53,361)
Other assets ..................................................... (119)
--------
Increase to real estate ........................................ 31,244
--------
Deposits to loan escrow accounts ................................. 1,286
Loan origination and assumption fees ............................. 471
--------
Increase in restricted cash and deferred loan costs ............ 1,757
--------
Estimated transaction costs ...................................... (1,500)
Cash payment to sellers .......................................... (1,250)
Loan escrow deposits and loan fees ............................... (1,757)
--------
Decrease in cash ............................................... (4,507)
--------
Increase in equity from issuance of Common Stock and LP Units .... (28,494)
--------
$ 0
========
(B) The acquisition of Winton & Associates is accounted for as a purchase in
accordance with generally accepted accounting principles. The Company issued
70,284 shares of Common Stock which are recorded at fair value of $20.038
per share. As it is an acquisition of a business from a third party, the
cost of $1,408,000 is recorded as goodwill and is being amortized to expense
over a 20-year period. The pro forma adjustments are as follows (in
thousands):
Increase in goodwill ........................................... $ 1,408
Increase in equity from issuance of Common Stock ............... (1,408)
-------
$ 0
=======
(C) The purchase price for the Pima Entities of $5,250,000 was negotiated
between the owners of the Pima Entities, who are also executive officers and
directors of the Company, and the Special Committee of the Board of
Directors. The Special Committee obtained an opinion from Oppenheimer &
Company, Inc. as to the fairness, from a financial point of view, of the
consideration paid. The 262,008 shares of Common Stock issued was calculated
based on a per share fair value of $20.038. The cost of the Pima Entities is
assigned to the contracts between the Company and the Pima Entities. As the
contracts are effectively terminated, the cost of $5,250,000 is charged to
contract termination expense
10
<PAGE>
in the second quarter of 1997. Since the cost will not be a recurring expense,
no adjustment is made in the Unaudited Pro Forma Combined Income Statements. The
pro forma adjustments are as follows (in thousands):
Write off of purchase price as a contract termination expense ..... $ 5,250
Increase in equity from issuance of Common Stock .................. (5,250)
-------
$ 0
=======
(D) The Company acquired London Park Apartments in April 1997 for $6,000,000 and
obtained a first mortgage loan of $4,400,000. The pro forma adjustments are
as follows:
Purchase price ................................................... $ 6,000
Estimated transaction costs ...................................... 119
-------
Increase to real estate ........................................ 6,119
-------
Deposits to loan escrow accounts ................................. 488
Loan origination and assumption fees ............................. 50
-------
Increase in restricted cash and deferred loan .................... 538
costs
Purchase price and transaction costs ............................. 6,119
Increase in real estate loans .................................... (4,400)
-------
Decrease in cash .................................($ ........... 2,257)
=======
(E) The Company acquired the remaining 85% interest in La Privada Apartments
L.L.C. (the "LLC") for $8,233,000. Accordingly, the assets and liabilities
of the LLC are included in the pro forma combined financial statements of
the Company. The Company obtained a $3,000,000 loan secured by its interest
in the LLC. The Company also sold its 15% interest in the other five joint
ventures for $2,062,000. Accordingly, the investment is joint ventures is
eliminated. The pro forma adjustments are as follows (in thousands):
DEBIT (CREDIT)
--------------
Purchase price of the 85% equity ................................. $ 8,233
Carrying value of 15% interest in the LLC ........................ 1,195
Mortgage loan of the LLC ......................................... 16,074
--------
Increase to real estate ........................................ 25,502
--------
Carrying value of 15% interest in the LLC ........................ (1,195)
Carrying value of equity in the joint ventures sold .............. (1,593)
--------
Elimination of investment in all joint ventures .................. (2,788)
--------
Purchase price of the 85% equity ................................. (8,233)
Proceeds from sale of interests in other joint ventures .......... 2,062
Increase in real estate loans .................................... 3,000
--------
Decrease in cash ............................................... (3,171)
--------
Increase in real estate loans .................................... (19,074)
--------
Sale price of interests in joint ventures ........................ (2,062)
Less carrying value of equity in the joint ventures sold ......... 1,593
--------
Gain on sale of joint ventures ................................... (469)
--------
Total .......................................................... $ 0
========
11
<PAGE>
(F) The Company acquired The Court Apartments in May 1997 for $4,059,000 and
obtained a mortgage loan for $2,900,000. The pro forma adjustments are as
follows (in thousands):
Purchase price ................................................. $ 4,059
Estimated transaction costs .................................... 55
-------
Increase to real estate ...................................... 4,114
-------
Deposits to loan escrow accounts ............................... 294
Loan origination and assumption fees ........................... 53
-------
Increase in restricted cash and deferred loan ................ 347
costs
Purchase price and transaction costs ........................... 4,114
Increase in real estate loans .................................. (2,900)
-------
Decrease in cash ............................................. ($1,561)
=======
(G) The Company issued 110,500 shares of Common Stock for cash in April 1997 and
77,347 shares of Common Stock in May for cash. The pro forma adjustments are
as follows:
Cash proceeds .............................................. $ 3,394
Increase in stockholders' equity ........................... (3,394)
-------
$ 0
=======
Pro Forma Combined Income Statement Adjustments For the Year Ended December 31,
1996 and the Three Months Ended March 31, 1997.
(H) Winton & Associates provided property management services relating to the
Winton Properties, and Pima Realty provided property management services on
the Company's properties. The adjustments to eliminate the property
management fees previously charged are as follows (in thousands):
1996 1997
------ ------
Pima Realty ................................ $ 472 $ 145
Winton & Associates ........................ 631 157
------ ------
$1,103 $ 302
====== ======
12
<PAGE>
(I) Pima Mortgage provided advisory and bond administration services to the
Company on a fee basis pursuant to a management agreement. The Company has
entered into employment agreements with the three officers of the corporate
partners of Pima Mortgage. The Company expects to eliminate the expenses
incurred by Pima Mortgage (consisting of salaries to the officers of the
corporate partners) offset by costs incurred by the Company under the
employment agreements. The adjustments to reflect elimination of the
advisory and bond administration fees, elimination of the Pima Mortgage
expenses, and the addition of salaries to be paid by the Company are as
follows (in thousands):
1996 1997
----- -----
Elimination of bond administration fees expense .......... $ 193 $ 40
===== =====
Elimination of management fee income
Bond administration fee income .......................... ($193) ($ 40)
Management fee income .................................... (382) (95)
----- -----
Total .................................................. ($575) ($135)
===== =====
Elimination of management fees expense and
addition of salary expense
Elimination of management fee expense ................... $ 382 $ 95
Elimination of Pima Mortgage salary expenses ............. 593 49
Addition of salaries under employment agreements ......... (337) (84)
----- -----
Reduction in operating expenses ........................ $ 638 $ 60
===== =====
(J) To eliminate interest and dividend income on certain assets of the Pima
Entities not acquired by the Company and to reduce the Company's interest
income to reflect cash used in the Transactions (in thousands).
1996 1997
---- ----
Elimination of the Pima Entities' income ............... $ 70 $ 12
Reduction of the Company's interest income ............. 520 130
---- ----
Reduction of other income ............................ $594 $142
==== ====
(K) To amortize the recorded purchase price of Winton & Associates over a
20-year period.
(L) The acquired entities include 15 independent partnerships and Pima Mortgage
for which there are no common partnership interests. As a result, no
historical or pro forma amounts for either book value or net income per
share are calculable for such entities.
(M) Increase in depreciation and amortization charges to reflect depreciation
and amortization based on ASR's acquisition costs calculated utilizing an
estimated life of 27.5 years on the property, seven years on personal
property and improvements, and the remaining life on loan costs and
acquisition costs are allocated 85% to buildings and improvements in
accordance with ASR's estimated allocations:
DEPRECIATION OR
AMORTIZATION
LIFE
----
Acquisition costs allocated to:
Land .......................................................
Buildings .................................................. 27.5
Personal property and improvement .......................... 7
Transaction and loan costs ................................. 7
13
<PAGE>
The resulting pro forma depreciation and amortization expense is (in thousands):
1996 1997
------ ------
Winton Properties ............................ $3,607 $ 875
London Park Apartments ....................... 164 46
La Privada Apartments ........................ 857 208
Other Communities ............................ 232 65
------ ------
Total Pro Forma ............................ $4,860 $1,194
Adjustment
====== ======
(N) The pro forma adjustments to the interest expense reflecting mortgage loans
obtained or assumed are as follows (in thousands):
1996 1997
------ ------
Winton Properties ................................ $4,004 $1,001
London Park Apartments ........................... 375 94
La Privada Apartments ............................ 1,470 368
Other Communities ................................ 559 141
------ ------
Total .......................................... $6,408 $1,604
====== ======
(O) Although the Company believes that funds from operations ("FFO") is a
measure commonly reported and widely used by analysts, investors, and other
interested parties in the REIT industry as a measure of performance of an
equity REIT, all REITs and financial analysts do not calculate FFO in the
same manner and, as a result, FFO as used in this Prospectus may not be
comparable to similarly titled measures as reported by other companies. FFO
is generally defined as net income plus certain non-cash charges (primarily
depreciation and amortization), less gains from sales of assets and after
adjustments for unconsolidated partnerships and joint ventures. As a result,
FFO provides a view of REIT performance without regard to depreciation and
amortization, gains on sales of assets, and corresponding income and
expenses in unconsolidated partnerships and joint ventures. The Company
considers income from redemptions and sales of Mortgage Assets to be similar
in nature to gains from sales of real estate and has thus excluded such
income in determining the Company's FFO, as modified. Other adjustments
consist of depreciation and amortization and amortization of goodwill. FFO,
as modified, should not be considered as an alternative to net income
(determined in accordance with generally accepted accounting principles) as
an indication of the Company's financial performance or to cash flow through
operating activities (determined in accordance with generally accepted
accounting principles) as a measure of liquidity. FFO, as presented, differs
from cash flow through operating activities (determined in accordance with
generally accepted accounting principles) as (i) FFO excludes income from
sales and redemptions of Mortgage Assets that are included in cash flow
through operating activities and (ii) FFO is not adjusted for changes in
accrual as is cash flow through operating activities. FFO is also not
adjusted for cash flow through investing or financing activities (determined
in accordance with generally accepted accounting principles). FFO, as
modified, is calculated as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------------- -----------------------
ASR ASR ASR ASR
HISTORICAL COMBINED HISTORICAL COMBINED
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net Income ..........................$ 8,841 $ 9,101 $ 4,946 $ 5,066
Depreciation and amortization ...... 2,819 7,679 680 1,874
Adjustment for unconsolidated 297 -- 105 --
joint ventures .....................
Amortization of goodwill ............ 70 18
Income from redemptions and sales of (9,461) (9,461) (5,338) (5,338)
mortgage assets ....................
------------ ---------- ------------ ----------
Funds from operations, as modified .$ 2,496 $ 7,389 $ 393 $ 1,620
============ ========== ============ ==========
</TABLE>
14
<PAGE>
RISK FACTORS
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 Company's properties do not generate revenues
sufficient to meet operating expenses, including debt service and capital
expenditures, the Company's cash flow and ability to make distributions to its
stockholders will be adversely affected. The revenues from and value of 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 to provide
adequate maintenance and insurance, and increased operating costs (including
real estate taxes and utilities). Certain significant expenditures associated
with an investment in real estate (such as mortgage payments, real estate taxes,
insurance, and maintenance costs) generally are not reduced when circumstances
cause a reduction in revenue from the investment. If a property is mortgaged to
secure payment of indebtedness and the Company is unable to meet its mortgage
payments, a loss could be sustained as a result of foreclosure on the property
by the mortgage. 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.
ILLIQUIDITY OF REAL ESTATE
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. In addition, the Internal Revenue Code
of 1986, as amended (the "Code"), places limits on the Company's ability to sell
properties held for fewer than four years, which may affect the Company's
ability to sell properties without adversely affecting returns to holders of
Common Stock.
DEPENDENCE ON SPECIFIC REGIONS
The Company's properties are concentrated in the southwestern region of the
United States (particularly in Arizona, New Mexico, Texas, and Washington) and
consist entirely of multifamily properties. The Company's performance will be
limited to economic conditions in those areas and in the market for multifamily
properties located in those areas.
OPERATING RISKS
The Company's properties are subject to all operating risks common to
apartment communities in general. These risks include competition from other
apartment communities and alternative housing; new construction of competing
properties or increases in unemployment in the areas in which the Company's
properties are located, either or both of which may adversely affect occupancy
or rental rates; increases in operating costs resulting from inflation and other
factors, which increases may not necessarily be offset by increased rents; the
inability or unwillingness of residents to pay rent increases; future enactment
of rental control laws or other laws regulating multifamily housing, including
current and possible future laws relating to access by disabled persons; and
disagreements with joint venture partners or other real estate co-investors. If
operating expenses increase, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. The occurrence of any of these factors could adversely affect
the Company's operating performance and its distributions to stockholders.
FUTURE ACQUISITIONS
The Company continually evaluates potential acquisitions of properties and
enterprises owning properties. There can be no assurance, however, that the
Company will be able to acquire any additional
15
<PAGE>
properties or property owners, that any acquisitions that are completed will be
on terms favorable to the Company, that costs of improvements will not exceed
original estimates, that any acquired properties will perform in accordance with
expectations or improve the overall performance of the Company, or that the
Company's systems, controls, management, financial and other resources, will be
adequate to support such expansion. Expansion into new markets may present
operating and marketing challenges that are different from those currently
encountered by the Company in its existing markets. There can be no assurance
that the Company will anticipate all of the changing demands that expanding
operations will impose on its management.
POTENTIAL ENVIRONMENTAL LIABILITIES
Under various federal, state, and local laws, ordinances and regulations, an
owner or operator 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 or operator 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. In
addition to investigation and clean-up actions brought by federal, state, and
local agencies, the presence of hazardous wastes on a property could result in
personal injury or similar claims by private plaintiffs. The Company has not
been notified by any governmental authority of any noncompliance, liability, or
other claim in connection with its properties. 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. Environmental Protection Agency ("EPA") and
the Arizona Department of Environmental 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
16
<PAGE>
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 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 carries comprehensive liability, fire, flood (where applicable),
extended coverage, and rental loss insurance with policy specifications, hits,
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
accommodations or commercial facilities, except to the extent por- tions of such
facilities, such as a leasing office, are open to the public. The Company
believes that the properties comply with all present requirements under the ADA.
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.
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 availability of construction
financing on favorable terms for development, construction delays, construction
costs in excess of the budgeted amounts, the achievement and maintenance of
anticipated rental rates and occupancy levels in the market, availability of
long-term permanent financing upon completion, shortages of materials or skilled
labor, labor disputes, unforeseen environmental or engineering problems, work
stoppages, fire and other natural disasters, and weather interferences. In
addition, the unavailability of permanent financing on acceptable terms to repay
construction financing could result in delays, increased costs, or the loss of
developed properties. New development activities, regardless of their ultimate
success, typically require a substantial amount of management's time and
attention. Development activities also are subject to risks relating to the
inability to obtain, or delays in obtaining,all necessary zoning, land use,
building, occupancy, and other required governmental permits and authorizations.
RISK OF MANAGEMENT BUSINESS
The Company manages on a fee basis properties owned by third parties. Risks
associated with the management of properties owned by third parties include the
possibility that management contracts
17
<PAGE>
(which generally are cancellable upon short notice or upon the sale of the
property) will be terminated by the property owner or will be cancelled in
connection with the sale of the property, that contracts may not be renewed upon
expiration or will be renewed on less favorable terms or that rental revenues
upon which the management fees are based will decline as a result of general
market conditions or specific market factors affecting the properties being
managed, in either case resulting in decreased management fee income.
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 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 and Properties -- Capital Resources." Each of the Company's 36
apartment communities has been pledged to secure a first mortgage loan. As of
May 9, 1997, real estate mortgage loans totalled $139 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 liquidation value thereof exceeds the
amounts due to the creditors. However, the liquidation value of the Company's
assets is uncertain and may fluctuate rapidly as a result of numerous market
factors 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
tenants for properties.
MARKET PRICE OF COMMON STOCK
The market price of the Company's Common Stock in the future could be subject
to wide fluctuations in response to quarterly variations in operating results of
the Company, changes in analysts' estimates of the Company's financial
performance, actual and anticipated dividend payments, prevailing interest
rates, general industry conditions, changes in the real estate market, local
economic factors, governmental regulations, modifications of tax laws or tax
rates, and other events and factors. An increase in market interest rates may
lead purchasers of the Company's Common Stock to demand a higher yield on the
price paid for shares from dividend distribution by the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock in the public market could adversely affect prevailing
market prices. A total of 1,312,737 shares of Common Stock are eligible for
resale in the public market. In addition, 942,184 limited partnership interests
("LP Units") in the Operating Partnership will be convertible into 942,184
shares of Common Stock at any time following April 30, 1998.
18
<PAGE>
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, and the terms upon which
its Common Stock could be sold.
POTENTIAL CONFLICTS OF INTEREST
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.
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 Company and that the investment policies of the Company must be reviewed
annually by these directors (the "Unaffiliated Directors").
CERTAIN CONSEQUENCES OF AND FAILURE TO MAINTAIN REIT STATUS
In order to maintain its qualification as a real estate investment trust
("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 to stockholders,
and the ownership of its stock. See "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 "Federal Income Tax Considerations." 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 "Federal Income Tax Considerations."
Alteratively, the Company may be required to borrow funds to make the required
distributions that 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
that 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." 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
19
<PAGE>
of income tax withholding in the case of nonresident alien stockholders. For
1996, the entire ordinary income portion ($0.17 per share) of the dividend was
excess inclusion income. See "Federal Income Tax Considerations -- Tax
Consequences of Common Stock Ownership."
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 that 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 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 Incorpo- ration. 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements and other information contained herein concerning future,
proposed, and intended activities of the Company or other matters that are not
historical facts are forward-looking statements (as defined in the Securities
Act). When used herein, the words "believe," "expect," "anticipate," "estimate,"
and similar expressions are intended to identify foward-looking statements. By
their nature, forward-looking statements are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove incorrect,
actual results may vary materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include those discussed under "Risk Factors."
20
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds of sales of shares by the Selling
Stockholders.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 and as adjusted to reflect the issuance of (i) 683,626 shares of Common
Stock and LP Units that are convertible into 942,184 shares of Common Stock for
the acquisition of the Winton Properties, (ii) 70,284 shares of Common Stock for
the acquisition of Winton & Associates, (iii) 262,008 shares of Common Stock for
the acquisition of the Pima Entities, (iv) 187,847 shares of Common Stock for
cash and (v) the sale of the Company's interest in five joint ventures in May
1997. The "As Adjusted" Deficit balance reflects the pro forma adjustments
consisting of the write-off of the acquisition cost of the Pima Entities
($5,250,000) and the gain on the sale of the interest in the joint ventures
($469,000). This table should be read in conjunction with the Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
Prospectus. (Dollars in thousands.)
ACTUAL AS ADJUSTED
------ -----------
LP Units, 942,184 units outstanding (adjusted) ......... $ 18,879
Common Stock, par value $0.01, 40,000,000 shares ....... $ 34 46
authorized;
3,394,392 shares issued (actual);
4,598,157 shares issued (adjusted)
Additional paid-in capital ............................. 157,496 181,235
Deficit ................................................ (109,502) (114,283)
Stock notes receivable ................................. (385) (385)
Treasury stock -- 160,742 shares ....................... (2,546) (2,546)
--------- ---------
Total stockholders' equity ............................. $ 45,097 $ 82,946
========= =========
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed and principally traded on the 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 on the
Amex and the cash dividends paid per share.
DIVIDEND
HIGH LOW PER SHARE
---- --- ---------
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
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
1996
First quarter ........ 17 3/4 15 3/8 0.50
Second quarter ....... 18 3/8 16 7/8 0.50
Third quarter ........ 19 3/4 17 1/2 0.50
Fourth quarter ....... 22 3/8 18 7/8 0.50
1997
First quarter ........ 24 3/4 20 1/4 0.50
Second quarter (through
June 6, 1997) ...... 23 3/8 18 3/4
On June 6, 1997, the closing sales price of the Common Stock on the Amex was
$23.00 per share and the approximate number of holders of record of Common Stock
was 2,000.
21
<PAGE>
SELECTED FINANCIAL INFORMATION
(In thousands except for per share data)
The selected consolidated financial data presented below as of and for the
five years ended December 31, 1996 are derived from the Company's audited
consolidated financial statements. The selected historical financial data as of
and for the three months ended March 31, 1996 and 1997 are derived from the
Company's unaudited financial statements. The historical financial data for the
three months ended March 31, 1996 and 1997, in the opinion of management,
include all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation for such periods. The results of operations
for the three months ended March 31, 1997 are not necessarily indicative of
results to be expected for the year ending December 31, 1997. These selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Income from real estate
Rental and other income ................. $12,528 $14,034 $14,581 $ 3,642 $ 3,702
Operating and maintenance expenses, (5,497) (6,719) (6,855) (1,614) (1,684)
real estate taxes and insurance ..........
Interest expense .......................... (3,941) (4,387) (4,348) (1,082) (1,123)
Depreciation and amortization ............. (1,995) (2,692) (2,819) (680) (680)
--------- --------- --------- --------- ---------
Income from real estate ................... 1,095 236 559 266 215
--------- --------- --------- --------- ---------
Income from mortgage assets
Prospective yield income ................$ 919 $ 7,264 6,433 3,884 2,630 770 330
Income from redemptions and sales ........ 4,263 5,302 9,461 1,977 5,338
Interest expense .......................... (5,841) (4,794) (2,596) (347) (181) (75) (17)
Provision for reserves .................... (57,588) (20,286)
----------- ----------- --------- --------- --------- --------- ---------
Income (loss) from mortgage assets ....... (62,510) (17,816) 8,100 8,839 11,910 2,672 5,651
----------- ----------- --------- --------- --------- --------- ---------
Income (loss) before administrative (62,510) (17,816) 9,195 9,075 12,469 2,938 5,866
expenses and other income ................
Administrative expenses ................... (3,104) (1,949) (2,216) (2,983) (3,203) (638) (1,107)
Other income, net ......................... 739 286 723 462 (425) 40 187
----------- ----------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect of (64,875) (19,479) 7,702 6,554 8,841 2,340 4,946
accouting change .........................
Cumulative effect of accounting change ... (21,091)
----------- ----------- --------- --------- --------- --------- ---------
Net income ................................($ 64,875) ($ 40,570) $ 7,702 $ 6,554 $ 8,841 $ 2,340 $ 4,946
=========== =========== ========= ========= ========= ========= =========
Per average outstanding share
Net income (loss) before cumulative $ (20.20) $ (6.27) $ 2.48 $ 2.09 $ 2.80 $ 0.74 $ 1.52
effect of accounting change ..............
Cumulative effect of accounting change* .. (6.79)
----------- ----------- --------- --------- --------- --------- ---------
Net income (loss) per share ...............$ (20.20) $ (13.07) $ 2.48 $ 2.09 $ 2.80 $ 0.74 $ 1.52
=========== =========== ========= ========= ========= ========= =========
Dividends per share .......................$ 2.25 $ 1.15 $ 0.50 $ 2.00 $ 2.00 $ 0.50 $ 0.50
=========== =========== ========= ========= ========= ========= =========
Weighted average shares outstanding ...... 3,209 3,104 3,100 3,141 3,153 3,154 3,159
=========== =========== ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------- -----------
1992 1993 1994 1995 1996 1997
---------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Apartment and other real estate $ 3,855 $73,056 $79,510 $89,958 $ 98,713
assets ................................
Mortgage assets ........................$108,623 37,881 18,965 11,877 5,039 3,270
Total assets ........................... 116,589 54,068 96,745 94,169 97,796 114,033
Real estate notes payable .............. 50,693 49,212 49,110 52,477
Mortgage assets borrowing, net ......... 39,517 22,062 6,422 4,495 2,014 500
Stockholders' Equity ................... 75,284 30,948 37,100 37,395 40,102 45,097
</TABLE>
* 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.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
ASR Investments Corporation (the "Company") is a real estate investment trust
engaged primarily in the acquisition and operation of apartment communities in
the southwestern United States. At March 31, 1997, the Company owned 20
apartments communities (3,305 units) located in Tucson, Arizona, Houston, Texas,
and Albuquerque, New Mexico. The Company also owned through joint ventures six
apartment communities (1,441 units) in Phoenix and Tucson, Arizona.
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 new apartment communities.
Prior to June 1997, the Company owned mortgage assets (all acquired prior to
1993) to generate cash flows for apartment acquisitions and development and
other corporate purposes. These mortgage assets entitled 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 secured. Income and
cash flows from mortgage assets were affected primarily by mortgage prepayment
rates and short-term interest rates. Higher mortgage prepayment rates or higher
short-term rates reduced the income and total cash flows over the life of the
mortgage assets. The losses from mortgage assets in 1992 and the charge for the
cumulative effect of accounting change in 1993 were caused by a decrease in
mortgage rates to their lowest level in 20 years.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1997 and 1996
Real Estate Operations -- Rental and other income for the 1997 quarter
increased by $60,000 primarily as a result of (i) $40,000 from rental rate
increases (attributable primarily to the Houston Communities), (ii) $81,000 from
higher occupancy rates (attributable primarily to the Houston and Tucson
communities), (iii) $13,000 from prior rental increases becoming effective as
leases are renewed or the apartment is re-leased, (iv) $6,000 from an increase
in income from the joint venture and (v) $23,000 from an increase in
laundry/vending and other miscellaneous income. The increases were mitigated by
an increase in rental concessions of $103,000 (attributable primarily to the
Albuquerque and Tucson communities). Operating and maintenance expenses
increased $89,000 (7.10%) as a result of an increase in turnover costs and other
expenses related to the increased occupancy in the Houston communities. Real
estate taxes and insurance and depreciation and amortization expenses remained
flat as there were no significant changes in rates and no acquisitions in 1996
or early in the 1997 quarter. Interest expense on real estate mortgages
increased $41,000 as a result of "catch up" costs for loan fees amortized on a
loan that is due at the end of 1997.
Mortgage Assets -- Prospective yield income decreased due to the decrease in
the mortgage asset balance as a result of amortization and redemptions. The
average mortgage asset balance was $3,761,000 for the 1997 quarter compared with
$11,672,000 for the 1996 quarter. The average prospective yield for the quarter
was 38% in 1997 compared to 35% in 1996. Income from redemptions and sales
increased by $3,361,000 as a result of the redemption of three mortgage assets
in the 1997 quarter for income of $5,338,000 compared to the sale of a 40%
interest in a mortgage asset in the 1996 quarter for income of $1,977,000.
Interest expense on mortgage asset decreased due to lower short-term borrowing
in 1997 ($500,000 at March 31, 1997 compared to $4,587,000 at March 31, 1996).
Administrative Expenses and Other Income -- Administrative expenses increased
in the 1997 quarter primarily as a result of an increase in expense accruals for
stock appreciation rights of $513,000 as a result of price increases in the
Company's Common Stock. Other income increased due to interest earned on the
Company's average cash balance which was higher during the 1997 quarter compared
to the 1996 quarter.
23
<PAGE>
1996 Compared to 1995
Real Estate Operations -- Rental and other income increased $547,000 in 1996
primarily as a result of (i) $346,000 from rental rate increases (attributable
primarily to a 3% increase in the Houston communities), (ii) $201,000 from
higher occupancy rates (attributable primarily to the Tucson communities), (iii)
$242,000 from prior rental increases becoming effective as leases are renewed or
the apartment is re-leased, and (iv) $69,000 from communities acquired through
joint ventures. The increases were mitigated by $238,000 from rental concessions
(attributable primarily to the Albuquerque communities). Operating and
maintenance expense increased $145,000 (2.8%) as a result of the community
acquired in February 1995 and to increased payroll expense (attributable
primarily to the Tucson communities). Real estate taxes and insurance remained
flat as there were no increases or decreases in rates. Depreciation and
amortization increased by $127,000 (4.7%) primarily as a result of the community
acquired in February 1995 and capital improvements on the apartment communities.
Interest expense on real estate mortgages decreased due to lower principal
balances resulting from monthly payments.
Mortgage Assets -- As a result of amortization of the investment in and
redemption and sales of mortgage assets in 1995 and 1996, the 1996 prospective
yield income decreased by $1,254,000. The average balance of mortgage assets
decreased from $14,827,000 for 1995 to $8,118,000 for 1996. The decrease in
income was mitigated by an increase in the average prospective yield from 28%
for 1995 to 35% for 1996. Redemptions and sales of nine mortgage assets in 1996
generated total income of $9,461,000. In 1995, redemptions and sales of five
mortgage assets generated total income of $2,882,000. In addition, the Company
recorded income of $2,420,000 in 1995 from the reversal of the excess yield
maintenance payment accrued in 1993 on notes payable secured by mortgage assets
which were paid off in February 1995. Interest expense related to the mortgage
assets decreased due to lower short-term borrowing and the payoff of a note in
April 1995.
Operating Expenses and Other Income -- Administrative expenses increased in
1996 primarily as a result of an increase in expense accruals for stock
appreciation rights of $151,000 as a result of price increases in the Company's
Common Stock. Other expenses increased in 1996 as a result of $380,000 in
expenses related to future acquisitions and to $380,000 in write offs of
cancelled real estate projects. The income in 1995 included a gain of $311,000
from the early payoff of a note payable and a $180,000 gain from the sale of an
asset. The 1995 income was offset by a $350,000 reserve on a real estate
investment.
1995 Compared to 1994
Real Estate Operations -- Income and expenses from real estate operations
increased in 1995 as a result of the acquisition of an apartment community in
February 1995 as well as new investments in joint ventures. Rental and other
income increased by $1,506,000 as a result of $931,000 in revenues from the
acquired community, a $569,000 increase in revenues from communities owned by
the Company, and a $60,000 increase in joint venture income. Operating expenses
increased as a result of $403,000 in expenses incurred by the Company in
connection with the acquired community as well as higher operating expenses in
the other communities owned by the Company, which resulted from a decrease in
occupancy rates from 94% in 1994 to 91% in 1995 (mostly in Tucson) and the
corresponding turnover, marketing and payroll expenses incurred by the Company
as a result of such decrease in occupancy rates. Depreciation expenses increased
as a result of the Company's acquisition of an apartment community in February
1995 and capital expenditures incurred in 1994 and 1995. Interest expense on
real estate mortgages also increased in 1995 as a result of the Company's
borrowing of additional funds for the acquisition in February 1995.
Mortgage Assets -- As a result of amortization of the investment in and
redemption of mortgage assets 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 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. Interest expense
related to the mortgage assets decreased as a result of the prepayment of the
notes payable secured by mortgage assets in February 1995 and the prepayment of
a note in April 1995.
24
<PAGE>
Operating Expenses and Other Income -- Administrative expenses increased in
1995 primarily as a result of 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.
Other income decreased in 1995 as a result of the use of the cash held by the
trustee to prepay the notes payable secured by mortgage assets in February 1995.
INCOME FROM REDEMPTION AND SALES OF MORTGAGE ASSETS
The Company's income includes income from redemption and sales of mortgage
assets of $5,338,000 and $1,977,000 for the quarters ended March 31, 1997 and
1996, and $9,461,000, $5,302,000, and $4,263,000 for the years ended December
31, 1996, 1995, and 1994, respectively. In June 1997, the Company sold all of
its remaining mortgage assets for approximately $13,350,000 and a gain of
$10,950,000. As a result of the sale, the Company no longer owns any mortgage
assets and will not realize any additional cash flow or income from mortgage
assets. The Company plans to use the proceeds to purchase additional apartment
communities that are under evaluation.
The Company expects net income for future periods will decrease substantially
because of the additional depreciation expense from the new apartment
communities and the absence of income from mortgage assets.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
Comparison of Three Months Ended March 31, 1997 and 1996
Cash provided by operations for the three months ended March 31, 1997 was
$6,244,000 compared with $3,123,000 for the same period in 1996. The increase
was primarily a result of a $3,361,000 increase in income from redemptions and
sales of mortgage assets ($5,338,000 for the three months ended March 31, 1997
compared to $1,977,000 for the same period in 1996) offset by a $440,000
decrease in prospective yield income on the mortgage assets.
Cash used in investing activities for the three months ended March 31, 1997
was $8,566,000 compared with $526,000 for the same period in 1996. The increase
in cash usage of $8,040,000 primarily reflects (i) an increase of $4,557,000 in
investments in apartments primarily as a result of the Company purchasing an
apartment community in March 1997, while making no purchases in 1996, (ii) an
increase of $2,810,000 of construction expenditures for the Company's Finisterra
apartment community, (iii) an increase of $615,000 in other real estate and land
held for development primarily related to the capitalized costs of 14 properties
acquired in April 1997 (iv) an increase of $633,000 in other assets primarily
due to funding a deferred compensation plan and (v) an increase of $99,000 in
the investment in joint ventures. The increase in cash usage was mitigated by an
increase of $674,000 in the reduction in mortgage assets.
Cash provided by financing activities for the three months ended March 31,
1997 was $10,700,000 compared with cash used in financing activities of $959,000
for the same period in 1996. The increase of $11,659,000 was primarily as a
result of (i) an increase in the issuance of real estate notes payable of
$3,700,000 related to the apartment acquisition made in March 1997, with no
similar purchases in 1996, (ii) an increase of $9,748,000 in proceeds from the
Finisterra Apartment's construction loan and (iii) an increase of $1,622,000
from stock issuance related to the apartment acquisition in March 1997. The
increase was mitigated by (i) an increase of short-term borrowing repayments of
$1,606,000, (ii) a decrease in the accrued construction cost payable of $551,000
for the Finisterra Apartment community and (iii) a decrease in other liabilities
and other financing activities of $1,254,000 primarily as a result of $487,000
paid to employees for stock appreciation rights exercised and to an increase in
the apartment's property tax accrual at March 31, 1996 from the accrual at
December 31, 1995.
On March 23, 1997, the Company acquired a 266-unit apartment community in
Houston, Texas for $4,450,000 and expects to invest $700,000 in capital
improvements. The Company obtained a first mortgage loan of $3,700,000. The
Company issued 86,500 shares of Common Stock for net proceeds of $1,622,000
which was used to pay the cash portion of the purchase price.
25
<PAGE>
In March 1996, the Company began the development of the Finisterra Apartments
in Tempe, Arizona. Total construction costs are estimated to be approximately
$21,000,000, of which the Company had invested $18,528,000 at March 31, 1997.
The Company began the lease-up phase in December 1996. At March 31, 1997, the
Company had borrowed $10,224,000 under the $15,350,000 construction loan. In
April 1997, the Company received an additional funding of $2,046,000.
Comparison of the Years Ended December 31, 1996, 1995 and 1994
Cash provided by operations for 1996 was $12,968,000 compared with $7,867,000
for the same period in 1995. The increase was primarily a result of a $4,159,000
increase in income from redemptions and sales of mortgage assets ($9,461,000 for
1996 compared to $5,302,000 for 1995, which included a non-cash credit of
$2,420,000 for the reversal of accrued excess yield maintenance payment on notes
payable) offset by a $1,254,000 decrease in prospective yield income on the
mortgage assets. Cash provided by operations in 1995 was lower than 1994 as a
result of lower net income and a non-cash credit described in the preceding
sentence.
Cash used in investing activities totaled $6,916,000 in 1996 compared to
$2,160,000 and $49,696,000 in 1995 and 1994, respectively. The increase in cash
usage of $4,756,000 in 1996 compared to 1995 primarily reflects the $11,753,000
of construction expenditures for the Company's Finisterra apartment community.
The increase was mitigated by (i) a decrease of $5,502,000 in investments in
apartments as the Company purchased an apartment community in February 1995 and
did not make any purchases in 1996, (ii) a decrease of $1,830,000 in investment
in joint ventures as the Company made investments in new joint ventures in 1995
to acquire two apartment communities and made no investments in new joint
ventures in 1996, (iii) a decrease of $250,000 in the amortization in the
carrying value of the mortgage assets, and (iv) a net decrease of $85,000 in
other real estate investments. Cash used in investing activities in 1995 were
lower than 1994 due to the Company acquiring its initial portfolio of 17
apartment communities in 1994 while acquiring only one apartment community in
1995. The decrease in 1994 cash used for the acquisition apartments was
mitigated by lower mortgage cash flow for 1995 as a result of amortization and
redemptions.
Cash used in financing activities was $6,070,000 in 1996 compared to
$7,415,000 in 1995. The decrease was primarily due to the repayment of real
estate notes of $7,955,000 in 1995, the construction costs payable of $1,581,000
and a net decrease of $1,678,000 from other financing activities. The decrease
was mitigated by real estate borrowing of $6,895,000 to finance real estate
acquisitions in 1995 and a net increase of $2,974,000 (cash used for) in
borrowing secured by mortgage assets. Cash used in financing activities was
$7,415,000 in 1995 compared with cash provided by financing activities of
$33,309,000 in 1994. The decrease of $40,724,000 in the cash provided by
financing activities resulted primarily from (i) a decrease of $43,941,000 in
real estate borrowing related to the acquisition of apartment communities, (ii)
an increase of $6,470,000 in the repayment of real estate notes, (iii) an
increase of $4,754,000 in dividend payment as the Company reinstated the regular
quarterly dividend in 1995, and (iv) a decrease of $1,692,000 from other
financing activities. The decrease in cash provided by financing activities was
mitigated by (a) a decrease of $11,638,000 in the repayment of borrowing secured
by mortgage assets, and (b) an increase of $4,495,000 in short-term borrowing.
Subsequent Acquisitions
On April 30, 1997, the Company completed the acquisition of 13 apartment
communities containing 2,260 units located in Houston and Dallas, Texas and
Pullman, Washington, and one office building located in Seattle, Washington (the
"Winton Properties"). The sellers were 15 separate limited partnerships in which
Don W. Winton was the general partner. The total purchase price of the
properties was approximately $83,223,000. The Company (i) assumed or refinanced
first mortgage loans totalling $49,396,000, (ii) issued 683,626 shares of Common
Stock, (iii) issued operating partnership units convertible to 942,184 shares of
Common Stock of the Company after one year, and (iv) paid the sellers $1,250,000
for transactional costs. As a part of the acquisition, the Company issued 70,284
shares of Common Stock to acquire the entire interests in Winton & Associates,
the property management company for the Winton Properties.
26
<PAGE>
In April 1997, the Company acquired an apartment community for $6,000,000 and
obtained a first mortgage loan for $4,400,000 with a fixed rate of 8.57%. On May
9, 1997, the Company acquired an apartment community for $4,059,000 and obtained
a first mortgage loan of $2,900,000 with a fixed rate of 8.67%. The Company
expects to invest $1,000,000 in capital improvements in these two communities.
The Company issued 187,850 shares of Common Stock for total net proceeds of
$3,394,000 to pay for the two purchases.
On May 1, 1997, the Company acquired the remaining interest in La Privada
Apartments L.L.C. for $8,233,000. The La Privada Apartments is a 350-unit
community in Scottsdale, Arizona. The Company also sold to its partner the
Company's entire interests in the other five joint ventures for total net
proceeds of $2,062,000. The Company obtained a $3,000,000 loan that bears
interest at LIBOR plus 3%.
Each of the apartment communities is pledged to secure a first mortgage loan.
With the above acquisitions, the total real estate mortgage loans total
approximately $139,000,000 and the carrying value of the real estate properties
is approximately $217,000,000. The total monthly principal and interest payments
on the real estate mortgage loans are approximately $985,000, and the monthly
deposits to loan escrow accounts for property taxes, insurance and capital
replacements are approximately $425,000. The Company estimates that it would
spend approximately $1,300,000 during the remainder of 1997 in capital
replacement expenditures.
Concurrent with the acquisition of the Winton Properties, the Company
acquired the entire interests in Pima Mortgage and Pima Realty (collectively the
"Pima Entities") in exchange for 262,008 shares of its common stock. The cost of
the acquisition of $5,250,000 is assigned to the contracts between the Company
and the Pima Entities. As the contracts are effectively terminated, the cost is
charged to contract termination expense in the second quarter of 1997.
The Company anticipates that the above acquisitions will result in (i)
significant increases in the Company's gross income and operating expenses, (ii)
an increase in interest expenses on real estate mortgages, (iii) a decrease in
administrative expenses resulting from the replacement of management fees
previously paid to the Pima Entities by Company with salaries to be paid to the
owners of the managers who will become employees of the Company. The net income
for 1997, however, will be reduced by the $5,250,000 charge to income for the
cost of the acquisition of the Pima entities. As this is a non-cash charge, it
will not have any effect on the cash provided by operations.
Cash Flow Information
The Company has realized substantial cash flows from mortgage assets to fund
its apartment acquisitions and development. A majority of the mortgage cash
flows was generated from redemption and sales. During 1996, the mortgage assets
generated cash flow of $18,929,000, including $13,625,000 from the redemption
and sales of nine mortgage assets. The Company used a portion of the proceeds to
reduce short-term borrowing by $2,481,000. During the first three months of
1997, the mortgage assets generated total cash flow of $7,420,000, including
$6,815,000 from the redemption of three mortgage assets. The Company used a
portion of the proceeds to reduce short-term borrowing by $1,514,000. In April
1997, the Company redeemed two additional mortgage assets for proceeds of
approximately $700,000. In June 1997, the Company sold all of its remaining
mortgage assets for approximately $13,350,000.
At March 31, 1997, the Company had cash of $10,781,000. In addition, the
Company received funding of approximately $2,046,000 in April 1997 from the
Finisterra apartments construction loan. The Company intends to use such funds,
and the proceeds from the redemptions in April 1997, and proceeds from sales of
mortgage assets in June 1997 to pay for the acquisitions described in the
preceding paragraphs, capital improvements on existing apartment communities, to
acquire additional apartment communities, and to pay dividends and operating
expenses.
27
<PAGE>
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
income and cash flows from the mortgage assets would be affected.
28
<PAGE>
BUSINESS AND PROPERTIES
Introduction
The Company currently owns and operates 36 apartment communities, containing
6,347 apartment units, located in Phoenix and Tucson, Arizona; Houston and
Dallas, Texas; Albuquerque, New Mexico; and Pullman, Washington. The apartment
communities are "garden apartments," typically consisting of two- and
three-story buildings in landscaped settings with ground level parking. The
communities are well maintained and targeted to provide attractive lifestyles at
low to moderate rates.
The apartment communities were built between 1967 and 1997 and have a
weighted average age by number of apartment units of approximately 13 years. The
number of units per apartment community ranges from 60 to 356 and averages 176
units. Average size per unit approximates 796 square feet. Average rent at March
31, 1997 was $544 per month, with community averages ranging from $375 to $994
per month. As of March 31, 1997, the communities had an average occupancy rate
of approximately 93%. Tenant leases generally are from six to 12 months and
require security deposits. The apartment communities typically provide residents
with attractive amenities, including a clubhouse, swimming pool, other
recreational facilities, laundry facilities, cable television access, patio or
balconies, and mini-blinds. Certain communities offer additonal amenities, such
as fireplaces, storage and walk-in closets, microwave ovens, alarms, and limited
access gates.
Growth Strategy
The Company's business objectives are to increase the cash flow and value of
its existing portfolio of apartment communities and to expand its portfolio of
apartment communities through the acquisition and development of additional
communities. Key elements of the Company's strategy to achieve its objectives
include (i) enhancing the performance and value of its existing properties by
maintaining high occupancy and favorable rental rates, managing operating
expenses, and emphasizing regular programs of repairs and capital improvements,
(ii) acquiring and developing apartment communities that have strong cash flows
and capital appreciation potential, (iii) focusing on middle income properties
located in geographical areas that the Company believes will experience higher
growth rates in population, household formation, and employment than the
national average, and (iv) disposing of investments that no longer satisfy the
Company's objective.
Investment Policies
The Company intends to continue to focus on apartment communities in Arizona,
New Mexico, Texas, and Washington. However, future investments 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 may expand its current geographic
focus and may acquire other types of income-producing properties.
The Company believes that attractive opportunities continue to be available
to acquire apartment communities. The Company may enter into agreements to
acquire newly developed communities upon completion or upon achievement of
certain specified occupancy rates. The Company also intends to develop new
apartment communities for its own account directly or through joint ventures
with others.
The Company may purchase or lease properties for long-term investment and to
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.
Acquisition and Development Policies
The Company acquired 35 of its 36 apartment communities, of which 17 were
acquired in 1997.
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
29
<PAGE>
projected cash flow of the property and the potential to increase cash flow
through lower debt service requirements, enhanced management, and other factors;
(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, (b) are well-located in their markets, and (c) are capable of
enhanced performance through intensive asset management and cosmetic
improvements.
In determining whether to develop an apartment community, the Company
considers many of the same factors relevant to a potential apartment community
acquisition. In addition, the Company considers whether the property can be
developed at a cost that is below the estimated value upon completion based upon
land acquisition costs; construction costs; terms of available financing; and
the availability of property acquisitions opportunities in the area.
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 $21,000,000, and the Company
has obtained a construction loan for $15,350,000 of which $10,224,000 was
outstanding at March 31, 1997. Leasing of the project began in December 1996. As
of March 31, 1997, the Company had invested $18,500,000. The Company has
acquired two other parcels of land for future development of apartment
communities. The Company may develop or sell one or more of these parcels. As of
March 31, 1997, the Company had invested $925,000.
In acquiring or developing apartment communities, the Company focuses on
geographic markets that it believes will experience higher growth rates in
population, household formation, and employment than national averages. The
Company also seeks to concentrate its properties in specific geographical areas
to achieve economies of scale in management and operations.
OPERATING POLICIES
The Company seeks 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.
The Company utilizes 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 Company also maintains and analyzes
demographic resident data. Prior to entering into a lease, the Company 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 Company 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
30
<PAGE>
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.
FINANCING POLICIES
The Company intends to finance acquisitions and developments 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 for acquisitions and developments 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
While the Company will emphasize equity investments in apartment communities,
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.
The Company has authority to offer its Common Stock or other equity or debt
securities in exchange for property and to repurchase or otherwise reacquire its
Common Stock 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.
31
<PAGE>
Current Properties
The following table sets forth certain information regarding the Company's
existing apartment communities.
<TABLE>
<CAPTION>
Asset Carrying Value Average
Or Acquisition Costs Monthly Rent Occupancy
------------------------ ------------ ----------
Per
Year No.of Avg. --------------- 3/31 12/31 3/31 12/31
Built Units Size Amount Unit Sq.Ft. Debt 1997 1996 1997 1996
----- ----- ---- ------ ---- ------ ---- ---- --------- ----
(Sq.Ft.) (000) (000)(5) (5) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills .................. 1986 64 540 $ 1,254 $19.6 $36.28 $ 1,016 $437 $437 96% 94%
Casa Del Norte ................ 1984 84 525 1,742 20.7 39.50 1,360 433 433 96% 93%
Desert Springs ................ 1985 248 590 5,492 22.1 37.53 4,557 435 435 94% 93%
Landmark ...................... 1986 176 641 4,385 24.9 38.87 3,008 428 415 92% 93%
Park Terrace .................. 1986 176 579 3,273 18.6 32.12 2,668 433 433 94% 92%
Park Village .................. 1985 60 540 735 12.3 22.69 581 393 393 93% 95%
Posado Del Rio ................ 1980 160 621 3,238 20.2 32.59 1,625 458 448 98% 95%
South Point ................... 1984 144 528 2,259 15.7 29.71 1,840 375 357 91% 91%
----- --- -------- ----- ------ -------- ---- ---- -- --
Total Tucson ................ 1,112 582 22,378 20.1 34.56 16,655 427 421 94% 93%
----- --- -------- ----- ------ -------- ---- ---- -- --
PHOENIX, ARIZONA
Contempo Heights .............. 1978 222 595 6,118 27.6 46.32 3,793 456 456 94% 92%
Finisterra(1) ................. 1997 356 918 18,528 11,294
La Privada .................... 1987 350 1,195 25,714 73.5 61.48 19,000 870 856 95% 94%
----- --- -------- ----- ------ -------- ---- ---- -- --
Total Phoenix ............... 928 945 50,360 55.7 57.84 34,087 672 647 95% 95%
----- --- -------- ----- ------ -------- ---- ---- -- --
HOUSTON, TEXAS
Clear Lake Falls .............. 1980 90 1,169 3,931 43.7 37.36 3,091 843 833 96% 95%
The Gallery ................... 1968 101 763 2,466 24.4 32.00 1,623 558 546 96% 91%
Memorial Bend ................. 1967 124 942 2,617 21.1 22.40 1,901 597 584 94% 89%
Nantucket Square .............. 1983 106 1,428 3,478 32.8 22.98 2,723 760 760 92% 90%
Prestonwood ................... 1978 156 956 3,409 21.9 22.86 2,441 517 509 97% 91%
Riviera Pines ................. 1979 224 717 4,445 19.8 27.68 3,231 501 491 93% 93%
Briar Park(2) ................. 1983 80 915 2,321 29.0 31.71 1,400 515 526 95% 94%
Country Club Place(2)(4) ..... 1985 169 814 5,656 33.5 41.11 3,581 540 556 92% 88%
Chelsea Park(2) ............... 1983 204 829 5,909 29.0 34.94 2,888 523 533 97% 94%
Marymont(2) ................... 1983 128 875 4,601 35.9 41.08 2,546 573 572 92% 93%
Riverway(2) ................... 1985 152 740 2,005 13.2 17.82 1,186 364 364 84% 78%
Timbercreek Landing(2) ........ 1984 204 775 5,804 28.4 36.71 3,391 488 490 96% 93%
Ivystone/Woodsedge ............ 1983 266 771 4,559 17.1 22.23 3,700 417 420 85% 85%
London Park ................... 1983 257 814 6,128 23.8 29.29 4,400 498 469 93% 93%
----- --- -------- ----- ------ -------- ---- ---- -- --
Total Houston ............... 2,261 857 57,329 25.4 29.60 38,102 525 483 93% 91%
----- --- -------- ----- ------ -------- ---- ---- -- --
DALLAS, TEXAS
Aspen Court(2) ................ 1986 140 742 4,643 33.2 44.70 2,051 562 568 84% 89%
Greenwood Creek(2)(4) ......... 1984 328 720 8,125 24.8 34.41 5,052 442 448 93% 88%
Highlands of Preston(2) ....... 1985 220 786 9,286 42.2 53.70 4,889 621 630 87% 96%
Montfort Townhomes(2) ......... 1986 83 1,112 5,962 71.8 64.60 4,120 994 987 95% 93%
Springfield(2)(4) ............. 1985 218 844 8,885 40.8 48.29 5,511 611 625 93% 88%
----- --- -------- ----- ------ -------- ---- ---- -- --
Total Dallas ................ 989 798 36,901 37.3 46.76 21,623 582 590 91% 90%
----- --- -------- ----- ------ -------- ---- ---- -- --
ALBUQUERQUE, NEW MEXICO
Dorado Terrace ................ 1986 216 598 6,804 31.5 52.68 5,152 530 519 93% 92%
Villa Serena .................. 1986 104 671 3,369 32.4 48.28 2,650 561 561 89% 94%
Whispering Sands .............. 1986 228 789 7,050 30.9 39.19 5,517 539 539 91% 91%
----- --- -------- ----- ------ -------- ---- ---- -- --
Total Albuquerque ........... 548 691 17,223 31.4 45.46 13,319 539 535 91% 92%
----- --- -------- ----- ------ -------- ---- ---- -- --
PULLMAN, WASHINGTON
Campus Commons-North(2) ....... 1985 234 913 11,502 49.2 53.84 6,720 758 758 95% 96%
Campus Common-South(2) ........ 1972 100 1,066 4,326 43.3 40.59 2,750 726 722 99% 94%
----- --- -------- ----- ------ -------- ---- ---- -- --
Total Pullman ............... 334 959 15,828 47.4 49.42 9,470 748 747 96% 95%
----- --- -------- ----- ------ -------- ---- ---- -- --
SEATTLE, WASHINGTON
Pacific South Center(2)(3) ... 1975 5,698 77.81 3,225
The Court ..................... 1980 175 590 4,116 23.52 39.89 2,900 416 416 93% 93%
----- --- -------- ----- ------ -------- ---- ---- -- --
Total Seattle ............... 175 590 9,814 23.52 39.89 6,125 416 416 93% 93%
----- --- -------- ----- ------ -------- ---- ---- -- --
Estimate of restricted cash and
deferred loan fees ............ 7,503
----------
Total .......................... 6,347 796 $217,336 $31.0 $39.27 $139,381 $544 $540 93% 92%
===== === ======== ===== ====== ======== ==== ==== == ==
</TABLE>
- -------------------
(1) Under construction
(2) Included in the "Winton Transaction"
(3) Office building
(4) Subject to substantial rehabilitation during 1996
32
<PAGE>
The following tables set forth certain additional information regarding each
of the Company's existing apartment communities.
<TABLE>
<CAPTION>
Apartment Amenities
--------------------------------------------------------------------------------------------------
Washer/Dryer Large
Connections Upper Unit Storage
Number And/Or Vaulted Or Walk-in Microwave
Of Units Equipment Fireplaces Ceilings Closets Ovens Icemakers Other Features
-------- --------- ---------- -------- ------- ----- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills .......... 64 -- -- Some Some -- --
Casa Del Norte ......... 84 -- -- Some Some -- --
Desert Springs ......... 248 -- -- -- Some -- --
Landmark ............... 176 -- -- -- Some -- -- Intrusion alarms
Park Terrace ........... 176 -- -- Some Some -- -- Intrusion alarms
Park Village ........... 60 -- -- Some Some -- --
Posada Del Rio ......... 160 All Some -- Some -- -- Covered parking
Southpoint ............. 144 -- -- -- Some -- --
Total Tucson ......... 1,112
-----
PHOENIX, ARIZONA
Contempo Heights ...... 222 -- -- -- Some -- Pass thru-kitchen
Finisterra ............. 356 All Some Some All All All Roman tubs, breakfast nook,
TV in kitchen
La Privada ............. 350 All -- -- All -- --
Total Phoenix ........ 928
-----
HOUSTON, TEXAS
Briar Park ............ 80 All 95% All All -- All
Clearlake Falls ........ 90 All -- Some -- -- -- TH, alarms, garages, covered
parking, gates
Country Club ........... 169 All 67% All All -- All
Chelsea Park ........... 204 All 80% All -- -- All Limited access gates
Ivystone ............... 266 All Some All -- -- Some
London Park ............ 257 All Some All All -- --
The Gallery ............ 101 -- -- -- All -- -- Covered parking, access gates
Marymont ............... 128 All -- -- 75% All All Limited access gates
Memorial Bend .......... 124 Some -- -- All -- --
Nantucket Square ....... 106 All All -- All All All Townhome, garages, covered
parking
Prestonwood ............ 156 All -- -- Some -- --
Riverway ............... 152 All 53% All 45% All All
Riviera Pines .......... 224 All Some Some All -- -- Storage, access gates
Timbercreek ............ 204 All 57% All All -- -- Covered parking, limited access
gates
Total Houston ........ 2,261
-----
DALLAS, TEXAS
Aspen Court ........... 140 94% 57% All 91% All All Intrusion alarms
Greenwood Creek ........ 328 All 73% -- All -- All Limited access gates
Highlands of Preston .. 220 All All All All -- All
Montfort ............... 83 All All All All All All Garages, alarms, covered
parking, limited access gates
Springfield ............ 218 All All All All -- All Limited access gates
Total Dallas ......... 989
-----
ALBUQUERQUE, NEW MEXICO
Dorado Terrace ........ 216 -- -- Some All -- --
Villa Serena ........... 104 -- -- Some All -- -- Intrusion alarms
Whispering Sands ....... 228 -- -- -- All -- -- Intrusion alarms
Total Albuquerque ... 548
-----
PULLMAN, WASHINGTON
Campus Common N. ...... 234 -- -- All -- -- --
Campus Common S. ....... 100 All -- All -- -- --
Total Pullman ........ 334
-----
SEATTLE, WASHINGTON
The Court ............. 175 None None -- -- -- -- Pass thru bar in kitchen
Grand Total ............ 6,347
=====
</TABLE>
- ------------------
1. All units have cable TV connections and miniblinds.
2. All units in all of the communities (except for Clearlake Falls and Memorial
Bend) have a patio or balcony. Some of the units in Clearlake Falls and
Memorial Bend have a patio or balcony.
33
<PAGE>
<TABLE>
<CAPTION>
Community Features
----------------------------------------------------------------------------------------
Swimming Fitness
Clubhouse Pool Center Spa Other Features
--------- ---- ------ --- --------------
<S> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills .............. -- Yes -- Yes BBQ, Picnic area
Casa Del Norte ............. -- Yes -- Yes BBQ, Picnic area
Desert Springs ............. Yes Yes Yes Yes Sauna, tennis courts, BBQ, racquetball
Landmark ................... Yes Yes Yes Yes BBQ, Racquetball
Park Terrace ............... Yes Yes Yes Yes BBQ, Picnic area, Racquetball, Playground
Park Village ............... -- Yes -- -- BBQ, Picnic area
Posada Del Rio ............. Yes Yes Yes Yes BBQ, Picnic area, Racquetball
Southpoint ................. Yes Yes Yes Yes BBQ
PHOENIX, ARIZONA
Contempo Heights .......... Yes Yes -- -- BBQ
Finisterra ................. Yes Yes Yes Yes Access gates, water features
La Privada ................. Yes Yes Yes Yes
HOUSTON, TEXAS
Briar Park ................ Yes Yes Yes Yes Sauna, playground
Clearlake Falls ............ Yes Yes -- Yes Access gates, water volleyball, playground
Country Club ............... Yes Yes -- Yes Golf course frontage
Chelsea Park ............... Yes Yes Yes Yes Playground
Ivystone ................... Yes Yes -- Yes
London Park ................ Yes Yes -- Yes Ponds w/gazebo, fountain
The Gallery ................ Yes Yes Yes Yes Access gates
Marymont ................... -- Yes -- -- Volleyball court
Memorial Bend .............. Yes Yes -- Yes
Nantucket Square ........... -- -- -- --
Prestonwood ................ -- Yes -- -- BBQ, playground
Riverway ................... Yes Yes -- Yes Tennis/volleyball courts, playground
Riviera Pines .............. Yes Yes -- Yes Access gates
Timbercreek ................ -- Yes -- Yes
DALLAS, TEXAS
Aspen Court ............... Yes Yes Yes -- Tanning bed, sport court
Greenwood Creek ............ Yes Yes Yes Yes Volleyball court
Highlands of Preston ....... Yes Yes Yes Yes
Montfort ................... -- Yes -- Yes
Springfield ................ Yes Yes Yes Yes Sauna
ALBUQUERQUE, NEW MEXICO
Dorado Terrace ............ Yes Yes -- Yes BBQ, Racquetball
Villa Serena ............... Yes Yes -- Yes Racquetball
Whispering Sands ........... Yes Yes -- Yes BBQ, Picnic Ramada, Playground
PULLMAN, WASHINGTON
Campus Common North ....... Yes Yes Yes Yes Tanning beds
Campus Common South ........ Yes Yes Yes -- Sauna
SEATTLE, WASHINGTON
The Court ................. -- Yes -- Yes Tennis court, sauna, sport court
</TABLE>
34
<PAGE>
DESCRIPTION OF RECENTLY ACQUIRED PROPERTIES
Ivystone/Woodsedge Apartments. The Ivystone/Woodsedge Apartments, located in
Houston, Texas, consist of 266 units built in 1983. The project was acquired in
March 1997 from a third-party seller. At March 31, 1997, the Ivystone/Woodsedge
Apartments had an average monthly rent of $417, or $.54 a square foot per month,
and an average occupancy rate of 85%. The purchase price for the property was
$4,450,000. The Company obtained a new fixed rate first mortgage debt of
$3,700,000 secured by the property and bearing interest at 8.39% per annum and
maturing in 2007. The main competition for tenants comes from existing
multifamily apartment projects in the surrounding FM 1960 West/Champions area of
northwest Houston. The Company plans numerous substantive improvements to the
property, which are expected to total approximately $700,000. Exterior
improvements include replacing all of the existing roofs, complete exterior
repaint, parking lot repair, additional landscaping, and installation of fencing
and gates. Interior improvements include carpet and vinyl replacement in
approximately 40% of the units, installation of new refrigerators in
approximately 40% of the units, and installation of washer and dryers in
approximately 15% of the units. There are 115 competing apartment projects in
the area with the majority of projects completed in the late 1970s to early
1980s, and several additional projects built in the last few years. Typically
units built in the 1990s are larger and more expensive and typically have more
amenities than older units, and therefore are not direct competition for
Ivystone/Woodsedge Apartments. The average occupancy for the area at April 30,
1997 was approximately 93% and the average rental rate was $504 a month or $.60
a square foot per month.
London Park Apartments. The London Park Apartments, located in Houston,
Texas, consist of 257 units built in 1983. The project was acquired in April
1997 from a third-party seller. At March 31, 1997, the London Park Apartments
had an average monthly rent of $498, or $.61 a square foot per month, and an
average occupancy rate of 93%. The purchase price for the property was
$6,000,000. The Company obtained a new fixed rate first mortgage debt of
$4,400,000, secured by the property, and bearing interest at 8.75% per annum and
maturing in 2007. The property's main competition for tenants comes from
existing multifamily apartment projects in the surrounding FM 1960
West/Champions area of northwest Houston. The Company plans numerous substantive
improvements to the property, which are expected to total approximately
$500,000. Exterior improvements include replacing all of the existing roofs,
siding repair and paint touchup, installation of carports, additional
landscaping, and installation of fencing and repair of existing gates. Interior
improvements include carpet and vinyl replacement in approximately 40% of the
units and replacement of cabinet doors and drawer fronts in approximately 50% of
the units. There are 115 competing apartment projects in the area with the
majority of projects completed in the late 1970s to early 1980s, and several
additional projects built in the last few years. Typically units built in the
1990s are larger and more expensive and typically have more amenities than older
units, and therefore are not direct competition for London Park Apartments. The
average occupancy for the area at April 30, 1997 was approximately 93% and the
average rental rate was $504 a month or $.60 a square foot per month.
La Privada Apartments. The La Privada Apartments, located in Scottsdale,
Arizona, consist of 350 units built in 1987. The project was acquired through a
joint venture partnership (in which the Company was the general partner and 15%
owner in the property) in June 1995 from a third-party seller. In May 1997, the
Company purchased the remaining 85% interest in the partnership from its limited
partner for $8,233,000. The Company retained the existing $16,000,000 fixed rate
first mortgage debt secured by the property that bears interest at 7.56% and
matures in 2001. Concurrently, the Company borrowed an additional $3,000,000
through a floating rate obligation secured by the Company's ownership interest
in the property. That loan matures in 1999 and floats at LIBOR plus 3.00%. At
March 31, 1997, the La Privada Apartments had an average monthly rent of $870,
or $.73 a square foot per month, and an average occupancy rate of 95%. The
property's main competition for tenants comes from existing multifamily
apartment projects in the surrounding north Scottsdale area of greater Phoenix.
The Company plans no major capital improvements due to the completion of
approximately $1,200,000 of improvements completed in 1995 and 1996. There are
41 competing apartment projects in the area with the majority of projects
completed in the mid-1980s to the mid-1990s, and numerous additional projects
built in the last few years. La Privada competes with luxury apartments built in
the 1980s as well as new projects built in the last few years. La Privada
typically has larger units and lower density (i.e. fewer units to the acre) than
its competition. In addition, with its recent improvements the tenant amenities
are more akin to a newer
35
<PAGE>
1990's apartment project than a typical 1980's constructed project. The avarage
occupancy for the area at 3/31/97 for stabilized projects was approximately 95%
and the average rental rate was $773 a month or $.80 a square foot per month.
The Court Apartments. The Court Apartments, located (in the Seattle area) in
Renton, Washington, consist of 175 units built in 1980. The project was acquired
in May, 1997 from a third-party seller. At March 31, 1997, the Court Apartments
had an average monthly rent per unit of $416, or $.71 a square foot per month,
and an average occupancy rate of 93%. The purchase price of the property was
$4,059,000. The Company obtained a new fixed rate first mortgage debt of
$2,900,000, secured by the property, bearing interest at 8.669% per annum and
maturing in 2007. The company plans numerous substantive improvements to the
property, which are expected to total approximately $400,000. Exterior
improvements include replacing existing roofs, siding repair and exterior paint,
and asphalt repair. Interior improvements include carpet and vinyl replacement
in approximately 60% of the units, replacing approximately 70% of the unit
refrigerators, replacing approximately 30% of the unit dishwashers, installation
of new thermal pane windows and doors, and replacement of cabinet doors and
drawer fronts. The property's main competition for tenants comes from existing
multifamily apartment projects in the surrounding area.
There are approximately 50 competing apartment projects in the area with the
majority of projects completed in the late 1970s to early 1980s, and several
additional projects built in the last few years. Typically units built in the
1990s are larger and more expensive and typically have more amenities than older
units, and therefore are not direct competition for The Court Apartments. The
average occupancy for the area at April 30, 1997 was approximately 97% and the
average rental rate was $604 a month or approximately $.73 a square foot per
month.
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 36 apartment
communities. At May 9, 1997, the mortgage loans totalled $139,400,000 , which
bear fixed interest rates that averaged 8.26%. The mortgage loans generally are
non-recourse to the Company and are not cross-collateralized.
The Company has obtained a $15,350,000 construction loan for the development
of its Finisterra apartment community. At March 31, 1997, $10,224,000 was
outstanding on the loan. In April 1997, the Company received funding of
$2,046,000 from the loan.
The Company also had outstanding short-term borrowings of $500,000 at March
31, 1997 that were secured by Mortgage Assets with a total carrying value of
$2,000,000. The Company paid off the borrowing in June 1997 in connection with
the sale of all of its Mortgage Assets.
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
36
<PAGE>
amount, timing or nature of future sales of its Common Stock as such sales will
depend upon market conditions and other factors. See "Risk Factors -- 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.
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 248 full-time salaried employees.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- -------------------- ----- ----------------------------------------------------------------------
<S> <C> <C>
Jon A. Grove 53 Chairman of the Board, President, Chief Executive Officer and Director
Frank S. Parise, Jr. 45 Vice Chairman, Executive Vice President, Chief Administrative Officer,
and Director
Joseph C. Chan 45 Executive Vice President, Chief Operating Officer, Secretary,
Treasurer and Director
Don W. Winton 43 Executive Vice President and Director
Dale A. Webber 36 Vice President
Roger A. Karber 42 Vice President, Property Development
Thomas A. Heeringa 43 Vice President
Mary C. Clements 30 Controller
Earl M. Baldwin 53 Director
Steven G. Davis 46 Director
John J. Gisi 51 Director
Raymond L. Horn 67 Director
Frederick C. Moor 65 Director
</TABLE>
Jon A. Grove has been Chairman of the Board of Directors, President, Chief
Executive Officer and a director of the Company since its organization in June
1987. Mr. Grove also served as the President of one of the general partners of
the Manager and was a director and principal stockholder of Pima Realty
Advisors, Inc. (the "Property Manager") from their respective organizations
until their acquisition by the Company in April 1997. From 1974 to 1989, Mr.
Grove was employed with The Estes Co. (now called GWS), a company which founded
the Company and which develops, constructs, and sells residential, multi-family,
commercial and industrial real estate, most recently as executive vice president
and chief operating officer. Mr. Grove also has been Chairman of the Board and a
Director of American Southwest Holdings, Inc. and its affiliates since their
organization; these companies are Arizona-based corporations involved in the
issuance and administration of mortgage-collateralized bonds.
Frank S. Parise, Jr. has been Vice Chairman of the Board of Directors,
Executive Vice President, and Chief Administrative Officer of the Company since
December 1988 and a director of the Company since its organization. Mr. Parise
also has served as the President of one of the general partners of the Manager
and was the President, a director and principal stockholder of the Property
Manager from their respective organizations until their acquisition by the
Company in April 1997 since its organization in November 1993. From 1985 to
1989, Mr. Parise was employed by The Estes Co., most recently as President of
its Financial Services Division and Multifamily Development Division. From 1982
to 1985, Mr. Parise was the President of E. Allen Development Corporation, a
company that acquired and managed apartments.
Joseph C. Chan has been a director of the Company since February 1989,
Executive Vice President and Chief Operating Officer since December 1988,
Treasurer since April 1994, and Secretary since March 1996. Mr. Chan served as
the Vice President and Treasurer of the Company from its organization until
December 1988. Mr. Chan also served as the President of one of the general
partners of the Manager since its organization and was a director and principal
stockholder of the Property Manager from their respective organizations until
their acquisition by the Company in April 1997. From 1986 to 1987, Mr. Chan
served as an officer of The Estes Co.
Don W. Winton has been an Executive Vice President and a director of the
Company since April 1997. Mr. Winton served as the general partner of each of
the Winton Partnerships and as the President of Winton & Associates, Inc., an
apartment property management company, for more than five years prior to the
acquisition of the properties of the Winton Partnerships and Winton &
Associates, Inc. by the
38
<PAGE>
Company in April 1997. Mr. Winton currently is the general partner in
partnerships that own 3,216 apartment units, 44 townhome/condominium units, two
office buildings and eight single family lots.
Dale A. Webber has been a Vice President of the Company since September 1987.
Roger A. Karber has been Vice President, Property Development of the Company
since January 1995. From 1989 to 1994, Mr. Karber was president of Festival
Markets, Inc., a company that developed specialty retail centers. From 1979 to
1989, Mr. Karber was employed by The Estes Co., where he was instrumental in
establishing its apartment operations, which included developing over 1,500
apartment units.
Thomas A. Heeringa has been a Vice President of the Company since March 1996.
He has been employed by the Company since December 1988.
Mary C. Clements has been Controller of the Company since May 1994. Ms.
Clements was employed by Deloitte & Touche LLP, an international accounting
firm, from her graduation in May 1990 until she joined the Company in May 1994.
Earl M. Baldwin has been a director of the Company since its organization.
Since 1985, Mr. Baldwin has been president of Baldwin Financial Corp., a risk
management consulting service company for mortgage lenders specializing in
hedging and secondary market strategy. From 1973 to 1985, Mr. Baldwin was
employed by Security Pacific Mortgage Corporation ("SPMC"), a mortgage banking
company, serving most recently as its executive vice president.
Steven G. Davis has been a director of the Company since May 1997. He
currently serves as a director of ROC Communities, Inc., a public REIT that owns
and operates manufactured home communities. Mr. Davis was a founding shareholder
of ROC and served as its Executive Vice President, Chief Financial Officer,
Secretary and Treasurer from 1993-1997. From 1990-1993, Mr. Davis was President
and a director of The Windsor Corporation which was merged with ROC. From
1985-1990, Mr. Davis was responsible for the real estate investment banking
division of LPL Financial Services.
John J. Gisi has been a director for the Company since February 1989. Mr.
Gisi has served as the President and Chief Executive Officer of National Bancorp
of Arizona, Inc., a wholly owned subsidiary of Zions Bancorporation, and as the
Chairman of the Board, President and Chief Executive Officer of National Bank of
Arizona since September 1984. Mr. Gisi also serves as a director of several
subsidiaries of Zions Bancorporation.
Raymond L. Horn has been a director of the Company since its organization.
Mr. Horn serves as tax advisor to several Phoenix-based real estate companies.
Mr. Horn, a certified public accountant and lawyer, presently is in private
practice after retiring from Deloitte Haskins & Sells (now Deloitte & Touche
LLP) as the partner-in-charge of that firm's Arizona tax practice. Mr. Horn is a
member of numerous professional and business associations including the American
Institute of Certified Public Accountants and the American Bar Association.
Frederick C. Moor has been a director of the Company since February 1989. Mr.
Moor presently is retired after 33 years of employment with The Valley National
Bank of Arizona (now Bank One, Arizona), most recently as Vice President and
Banking Services Manager for the Eastern Division.
All directors are elected at each annual meeting of the Company's
stockholders and hold office until their successors are elected and qualified.
All officers serve at the discretion of the Board of Directors.
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 1996, the Company paid an annual
director's fee to each Unaffiliated Director equal to $24,000 and a fee of $500
for each meeting of the Board of Directors attended by each Unaffiliated
Director and reimbursement of costs and expenses of all directors for attending
such meetings. Additionally, each member of the Audit Committee and the
Compensation Committee received a fee of $300 for each meeting attended by the
member. Affiliated Directors do not receive any fees for serving on the Board of
Directors.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid to the Company's
executive officers whose total cash and cash equivalent remuneration exceed
$100,000 for the year ended December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
AWARDS PAYOUTS
----------------------- ---------
NAME AND PRINCIPAL ANNUAL COMPENSATION RESTRICTED OPTIONS/ LTIP ALL OTHER
------------------------------- ------------ ---------- --------- --------------
POSITION YEAR SALARY BONUS OTHER STOCK SARS PAYOUT COMPENSATION
- ------------------------ ------ ---------- --------- ---------- ------------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JON A. GROVE (1) 1996 $179,114 -- --
Chairman, President, 1995 180,431 -- --
and Chief Executive 1994 251,747 -- --
Officer
Frank S. Parise, Jr. (1) 1996 $179,114 -- --
Vice Chairman, 1995 180,431 -- --
Executive Vice 1994 251,747 -- --
President,
and Chief
Administrative
Officer
Joseph C. Chan (1) 1996 $179,114 -- --
Director, Executive 1995 180,431 -- --
Vice President, 1994 251,747 -- --
Secretary, and
Chief Operating
Officer
Dale A. Webber 1996 $141,729 -- -- 70,000 --
Vice President 1995 108,447 -- -- -- --
1994 108,147 -- -- 8,000 --
Roger A. Karber 1996 $117,835 -- -- 50,000 --
Vice President 1995 100,000 $15,000 -- -- -- --
</TABLE>
- --------------------
(1) Messrs. Grove, Parise, and Chan were not salaried employees of the Company
and did not receive any cash or cash equivalent compensation directly from
the Company during the three-year period ended December 31, 1996. They
received their compensation from the Manager, the partners of which are
corporations owned by these individuals. See "Certain Relationships and
Related Transactions." The amounts listed under Other Compensation represent
the total cash payments received or receivable from the Manager by these
individuals and the corporations owned by them. Effective in May 1997, each
of Messrs. Grove, Parise, and Chan entered into an employment agreement with
the Company. See "Management -- Employment Agreements."
40
<PAGE>
OPTION GRANTS
The following table sets forth certain stock option information concerning
the officers included in the above table.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES
OPTIONS/ OPTIONS/SARS OF STOCK PRICE
SARS GRANTED TO EXERCISE APPRECIATION
GRANTED EMPLOYEES IN OR BASE EXPIRATION FOR OPTION TERM
(#) FISCAL YEAR PRICE DATE 5%(1) 10%(1)
--- ----------- ----- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Jon A. Grove None N/A N/A N/A N/A N/A
Frank S. Parise, Jr None N/A N/A N/A N/A N/A
Joseph C. Chan None N/A N/A N/A N/A N/A
Dale A. Webber 70,000 42% $16.625 12/16/98 $119,547 $244,563
Roger A. Karber 50,000 30% $ 16.50 12/16/98 118,738 233,800
</TABLE>
(1) This amount is the calculated future value of the stock options as of
December 16, 1998 assuming stock price appreciation rates of 5% and 10% per
year as specified in Item 402(c)(2) of Regulation S-K.
OPTION EXERCISES AND HOLDINGS
The following table represents certain information respecting the options
held by the officers included in the above table.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- -------------------- ------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Jon A. Grove -- -- 138,581 $1,589,234
-- --
Frank S. Parise, Jr. -- -- 140,287 1,653,343
-- --
Joseph C. Chan -- -- 138,581 1,589,234
-- --
Dale A. Webber 2,666 $19,995 47,930 191,194
23,334 90,419
Roger A. Karber -- -- 33,332 133,328
16,668 66,672
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors performs the functions
of making recommendations to the Board concerning the Company's compensation
policies applicable to its executive officers. Messrs. Grove, Parise and Chan
serve as both directors and the principal executive officers of the Company. All
compensation matters relating to the Company's principal executive officers,
however, are decided by the Unaffiliated Directors, consisting of Messrs.
Baldwin, Gisi, Horn and Moor. The principal executive officers make
recommendation to the Board concerning the compensation of other executive
officers of the Company. None of the Unaffiliated Directors are, or have ever
been, officers or employees of the Company or any of its subsidiaries. Messrs.
Grove, Parise and Chan abstain from participating in the deliberations of the
Board of Directors concerning the approval of the Management
41
<PAGE>
Agreement, the Property Management Agreements, the pending acquisition of the
Manager and the Property Manager by the Company (see "Business -- Pending
Transaction"), or any other matters relating to their compensation. In addition,
during 1996 none of the executive officers, including Messrs. Grove, Parise and
Chan, served on the board of directors or the compensation committee of the
entities that employed any of the Unaffiliated Directors.
STOCK OPTION PLANS
The Company has a nonstatutory stock option plan (the "Nonstatutory Stock
Option Plan") and an incentive stock option plan (the "Incentive Stock Option
Plan") (together the "Stock Option Plans"). The purpose of the Stock Option
Plans is to provide a means of performance-based compensation in order to
attract and retain qualified personnel and to provide incentive to others whose
job performance affects the Company. The Incentive Stock Option Plan provides
for incentive stock options which are intended to meet the requirements of
Section 422A of the Internal Revenue Code, (the "Code") ("ISOs") and which may
be granted to the officers and key personnel of the Company. The Nonstatutory
Stock Option Plan provides for non-qualified stock options which may be granted
to the Company's directors and key personnel of the Manager.
The Stock Option Plans are administered by the Board of Directors, which
determines whether such options will be granted, whether such options will be
ISOs or non-qualified options, which directors, officers and key personnel will
be granted options and the number of options to be granted, subject to the
maximum amount of shares issuable under the Stock Option Plans set forth below.
In making such determinations, the Board of Directors takes into account the
duties and responsibilities of the participants, their present and potential
contribution to the success of the Company and such other factors as the Board
deems relevant in connection with accomplishing the purpose of the Plan. Under
current law, ISOs cannot be granted to directors who are not also employees or
to directors or employees of entities unrelated to the Company.
Under the Stock Option Plans, options to purchase a maximum of 140,000 shares
of the Company's Common Stock may be granted to the Company's directors,
officers and key personnel as well as to the directors, officers and key
personnel of the Manager. The exercise price for any option granted may not be
less than 100% of the fair market value of shares of Common Stock at the time
the option is granted. The optionholder may pay the exercise price in cash or by
delivery of previously acquired shares of Common Stock of the Company.
Generally, one-third of the options granted at any one time are immediately
exercisable, one-third are exercisable one year after the date of grant and the
remaining one-third become exercisable two years after the date of grant. The
options expire 10 years after the date of grant. No option may be granted under
the Stock Option Plans to any person who, assuming exercise of all options held
by such person, would own or be deemed to own more than 9.8% of the total
outstanding shares of Common Stock of the Company.
Under each of the Stock Option Plans, an exercising optionholder has the
right to require the Company to purchase some or all of the optionholder's
shares of the Company's Common Stock. That redemption right is exercisable by
the optionholder only with respect to shares that he has acquired by exercise of
an option granted under the Stock Option Plans which are restricted from
transfer by federal securities law as a result of grants or exercise of options
under the Stock Option Plans and such right must be exercised during the six
months immediately following the expiration of any such restriction.
No option granted under the Stock Option Plans is exercisable for a period in
excess of the term of the option as provided in the Stock Option Plans, subject
to earlier termination in the event of termination of employment, retirement or
death of the optionholder. An option may be exercised in full or in part at any
time or from time to time during the term of the option or provide for its
exercise in stated installments at stated times during the option term.
The Board of Directors may amend the Stock Option Plans at any time, except
that approval by the Company's stockholders is required for any amendment that
increases the aggregate number of shares that may be issued pursuant to the
Stock Option Plans, changes the class of persons eligible to receive such
options, modifies the period within which the options may be exercised or the
terms upon which
42
<PAGE>
options may be exercised, or increases the material benefits accruing to the
participants under the Stock Option Plans. Unless previously terminated by the
Board of Directors, the Stock Option Plans will terminate in August 1997.
As of December 31, 1996, options to purchase 43,278 shares of Common Stock
were outstanding and options to purchase 5,901 shares were available for grant
under the Plans.
In connection with the renewal of the Management Agreement beginning with
1994, the Manager and the Company agreed to eliminate the incentive management
fee provision. On December 16, 1993, the Company granted to Messrs. Grove,
Parise and Chan options to purchase 309,800 shares of the Company's Common Stock
and stock appreciation rights ("SARs") covering 90,200 shares of the Company's
Common Stock. The exercise price is $8.60 per share, which was 110% of the
market price of the Common Stock on the grant date. If dividends are declared
during the period the stock options or SARs are outstanding, the holder of the
options and SARs can elect to receive currently or upon exercise cash in an
amount equal to the product of the per share dividend amount times the number of
options or SARs outstanding. In 1996, the Company paid Messrs. Grove, Parise and
Chan $266,667 each based on the total dividends of $2.00 per share paid in 1996.
All of the options and SARs are currently exercisable. The options will expire
on December 16, 1998. The options were subject to early termination if the
Management Agreement was terminated by the Manager or was terminated by the
Company for cause pursuant to the terms of the Management Agreement. As the
Company acquired the entire interests in the Manager and effectively terminated
the Management Agreement, these options will remain effective until December 16,
1998. In February 1997, Messrs. Chan and Parise of the Manager exercised their
share of SARs (30,067 each) and received approximately $440,000 each.
In 1996, Mr. Webber exercised options to purchase a total of 2,666 shares of
the Company's Common Stock by executing a full recourse promissory note for
$30,000 to the Company. The note is due on December 31, 1998 and can be repaid
by delivering to the Company shares of Common Stock owned by Mr. Webber based on
the then market price of the Common Stock. During 1996, Messrs. Chan and Webber
repaid the notes of $297,000 using 12,011 shares of Common Stock and cash of
$61,842.
EMPLOYMENT AGREEMENTS
Each of Messrs, Grove, Parise, Chan, and Winton has entered into an
employment agreement (collectively, the "Employment Agreements") with the
Company. Under the Employment Agreements, each of Messrs. Grove, Parise, Chan,
and Winton receive compensation of $100,000 per annum and are eligible to
receive an annual bonus in such amount, if any, as may be determined by the
non-management directors of the Company and fringe benefits generally made
available from time to time to employees of the Company.
Each of Messrs. Grove, Parise, Chan, and Winton is employed under the
Employment Agreements for a term of five years commencing from the date of the
Employment Agreements and from year-to-year thereafter until terminated by
either party. The Company may terminate the Employment Agreements during the
initial five-year term without penalty only for cause as defined in the
agreements. The Employment Agreements also contain provisions that (i) prohibit
Messrs. Grove, Parise, Chan, and Winton from competing with the business of the
Company while employed by the Company and for 12 months after the termination of
employment, and (ii) prohibit Messrs. Grove, Parise, Chan, and Winton, during
the term of employment and for a period of 12 months after termination of
employment, from directly or indirectly, for themselves or on behalf of any
other person, seeking to hire or hiring any of the Company's personnel or
employees. The Employment Agreements also require Messrs. Grove, Parise, Chan,
and Winton to take all necessary precautions to prevent any unauthorized
disclosure of any "Confidential Information" of the Company, as that term is
defined in the Employment Agreements.
In connection with the acquisition of the Winton Properties, the Company paid
each of Messrs. Grove, Chan and Parise a bonus of approximately $267,000. Winton
& Associates received commissions from the sellers of approximately $927,000, of
which approximately $268,000 was paid to employees of Winton & Associates and
$659,000 was paid to Mr. Winton. The bonuses paid to Messrs. Grove, Chan and
Parise were approved by the Unaffiliated Directors.
43
<PAGE>
MEETINGS AND COMMITTEES
During the year ended December 31, 1996, the Board of Directors of the
Company held a total of five meetings. No director attended fewer than 75% of
the meetings of the Board of Directors.
The Company's Bylaws authorize the Board of Directors to appoint among its
members an executive committee, an audit committee and other committees. A
majority of the members of any committee so appointed must be Unaffiliated
Directors. The Board of Directors has appointed an Audit Committee and a
Compensation Committee. Messrs. Gisi and Horn serve as the members of the
Company's Audit Committee and Compensation Committee. The Audit Committee
reviews the annual financial statements, any significant accounting issues and
the scope of the audit with the Company's independent auditors and is available
to discuss with the auditors any other accounting and audit related matters
which may arise during the year. The Audit Committee met separately at one
formal meeting during 1996 which was attended by all of the members of the
Committee. The Compensation Committee reviews all transactions with the Manager
and the Property Manager and their affiliates, including the renewal of the
Management Agreement and the Property Management Agreements and the proposed
acquisition of the Manager and the Property Manager (see "Business -- Pending
Transaction"). The Compensation Committee met twice during 1996 to review the
preliminary terms of the proposed acquisition of the Manager and the Property
Manager (see "Business -- Pending Transaction").
COMPLIANCE WITH SECTION 16A OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and the American
Stock Exchange. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of all Section
(16a) reports they file.
Based solely on the Company's review of such reports received by it during
the fiscal year ended December 31, 1996, and written representations that no
other reports were required, the Company believes that each person who, at any
time during such fiscal year, was a director, officer, or beneficial owner of
more than 10% of the Company's Common Stock complied with all Section 16(a)
filing requirements during such year or prior fiscal years.
44
<PAGE>
CERTAIN TRANSACTIONS
The Company's Bylaws provide that the Board of Directors has the full power
to conduct, manage and direct the business and affairs of the Company. On April
30, 1997, pursuant to the approval of the stockholders of the Company, the
Company acquired the entire interests in Pima Mortgage Limited Partnership (the
"Manager") and Pima Realty Advisors, Inc. (the "Property Manager"). The owners
of the Manager remain as Directors and executive officers of the Company. The
following description relates to the arrangement prior to May 1, 1997.
The Company was a party to a management agreement (the "Management
Agreement") with the Manager to manage the day-to-day operations of the Company,
subject to the supervision of the Company's Board of Directors. Jon A. Grove,
Frank S. Parise, Jr., and Joseph C. Chan served as directors or officers of
general partners of the Manager since its organization. See "Management --
Directors and Executive Officers of the Company."
The duties of the Manager under the Management Agreement included formulating
operating strategies; arranging for the acquisition of assets for the Company;
monitoring the performance of the Company's assets; and providing certain
administrative and overall managerial services necessary for the operation of
the Company. For performing these services, the Manager received an annual base
management fee in an amount equal to 3/8 of 1% per annum of the Average Invested
Assets of the Company (as defined in the Management Agreement), which was paid
monthly with adjustments made quarterly. The Manager also performed certain
analysis and other services in connection with the administration of mortgage
securities with respect to which the Company acquired mortgage interests. For
such services, the Company reimbursed the Manager for the fees paid under the
Subcontract Agreement described below and paid the Manager an annual
administration fee of $10,000 for each series of mortgage interests acquired
prior to 1991, $20,000 for the aggregate mortgage interests acquired in 1991 and
$20,000 for the aggregate mortgage interests acquired in 1992. In 1996, the
Company paid the Manager management fees of approximately $386,000 and
administration fees of approximately $193,000. The payment of such fees was
unanimously approved by the Unaffiliated Directors.
In the event that the Management Agreement was terminated by the Company or
was 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 in the Management Agreement), the Manager would
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 of such
termination (or failure to renew) 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 Manager granted the Company a right of first refusal, for as long as the
Manager or an affiliate of the Manager acted 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.
The Company was a party to a property management agreement (collectively the
"Property Management Agreements") with the Property Manager for each of the
apartments acquired by the Company. The Property Manager is an affiliate of the
Manager. Each Property Management Agreement, which had a current term through
December 31, 1997, was approved by the Unaffiliated Directors. Under the
agreement, the Property Manager provided the customary property management
services at its cost without profit or distribution to its owners, subject to
the limitation of the prevailing management fee rates for similar properties in
the market. In 1996, the Company paid the Property Manager $466,000, which
amounted to 3.2% of the total rental and other income of the apartments.
Prior to June 1997, the Company owned certain mortgage interests with respect
to structured financing issued by American Southwest Holdings, Inc. ("ASH"). An
affiliate of ASH performed the customary administration services and received
fees for such services of $12,500 per year for each series of structured
financing. The Company believed that the fees charged by ASH were comparable to
those
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<PAGE>
charged by other companies performing similar services. Jon A. Grove, Chairman
of the Board, President and Chief Executive Officer of the Company, is Chairman
of the Board of Directors of ASH and its affiliates and owns 12.5% of the voting
stock of ASH. The Company has agreed to indemnify and hold harmless ASH and
certain affiliates from any action or claim brought or asserted by any party by
reason of any allegation that ASH or such affiliates is an affiliate or is
otherwise accountable or liable for the debts or obligations of the Company or
its affiliates.
PRINCIPAL AND SELLING STOCKHOLDERS
As of May 16, 1997, there were outstanding 4,437,419 shares of Common Stock.
The following table sets forth the beneficial ownership of Common Stock of the
Company as of May 16, 1997, by each person known by the Company to own more than
5% of the outstanding shares of Common Stock of the Company, by each director of
the Company, and by all directors and executive officers of the Company as a
group, which information as to beneficial ownership is based upon statements
furnished to the Company by such persons. The number of shares also includes (1)
any shares of Common Stock owned of record by such person's minor children and
spouse and by other related individuals and entities over whose shares of Common
Stock such person has custody, voting control or the power of disposition and
(2) shares of Common Stock that such persons had the right to acquire within 60
days by the exercise of stock options (excluding the SARs) (see "Stock Option
Plans"). Each director and executive officer of the Company may be reached
through the Company at 335 North Wilmot, Suite 250, Tucson, Arizona 85711.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1)(2) SHARES BENEFICIALLY OWNED
----------------------- -------------------------
AFTER OFFERING(1)(2)
NAME AND NUMBER OF PERCENT OF SHARES BEING -------------------
BENEFICIAL OWNER SHARES TOTAL(1) REGISTERED FOR SALE NUMBER PERCENT
- ------------------------------------ ----------- ------------ ------------------- --------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Jon A. Grove ........................233,527 5.1% 95,336 138,191 2.9%
Joseph C. Chan ......................233,808 5.1 95,336 138,472 2.9%
Frank S. Parise, Jr. ................206,631 4.5 95,336 111,295 2.3%
Don W. Winton(4) ....................145,207 3.3 145,207 0 0
Earl M. Baldwin ..................... 3,477 (3) 0 3,477 (3)
Steven G. Davis ..................... 0 0 0 0 0
John J. Gisi ........................ 11,658 (3) 0 11,658 (3)
Raymond L. Horn ..................... 5,988 (3) 0 5,988 (3)
Frederick C. Moor ................... 3,378 (3) 0 3,378 (3)
All directors and executive officers 859,623 18.0 431,215 428,408 9.0%
as a group (12 persons) ............
NON-MANAGEMENT 5% STOCKHOLDERS
- ------------------------------
King William & Associates(6) .......531,269 11.1% 531,269 0 0
OTHER SELLING STOCKHOLDERS
- --------------------------
Allen Lozier ........................ 58,685 1.2% 58,685 0 0
Estate of Durwood Alkire ............ 11,513 (3) 11,513 0 0
John & Mary Lou Area III ............ 4,004 (3) 4,004 0 0
Philip & Charles Wohlstetter ....... 1,544 (3) 1,544 0 0
Eleanor Bergman ..................... 1,544 (3) 1,544 0 0
James Brockway ...................... 1,908 (3) 1,908 0 0
John Burgess ........................ 14,959 (3) 14,959 0 0
Grantor Trust of Former 56,178 1.2% 56,178 0 0
CHB Partners .......................
William Coburn ...................... 5,374 (3) 5,374 0 0
Terrance Cosgrove ................... 4,138 (3) 4,138 0 0
George & Sandra Cozzetto ............ 2,852 (3) 2,852 0 0
Thomas Cutillo & Priscilla Myrick .. 9,628 (3) 9,628 0 0
Don Davis Jr ........................ 1,194 (3) 1,194 0 0
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1)(2) SHARES BENEFICIALLY OWNED
----------------------- -------------------------
AFTER OFFERING(1)(2)
NAME AND NUMBER OF PERCENT OF SHARES BEING -------------------
BENEFICIAL OWNER SHARES TOTAL(1) REGISTERED FOR SALE NUMBER PERCENT
- ------------------------------------ ----------- ------------ ------------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Joseph & Barbara Delaney ............16,833 (3) 16,833 0 0
Daniel Doernberg .................... 1,544 (3) 1,544 0 0
Mark Donahue ........................ 1,544 (3) 1,544 0 0
Ershings, Inc. ...................... 3,223 (3) 3,223 0 0
James & Dorothy Frank Trust ......... 4,956 (3) 4,956 0 0
Capt. Fred Frink .................... 2,389 (3) 2,389 0 0
Edward & Betty Garman ............... 4,778 (3) 4,778 0 0
Anthony & Amalia Gatti .............. 1,568 (3) 1,568 0 0
Lewis Gridley ....................... 6,458 (3) 6,458 0 0
Jack & Eileen Hollandeer ............ 1,544 (3) 1,544 0 0
Hunt Engineering Co., Inc. .......... 4,102 (3) 4,102 0 0
Royce & Barbara Hunter .............. 6,511 (3) 6,511 0 0
1993 Martin & Sylvia Jacobs 9,176 (3) 9,176 0 0
Revocable Trust ....................
JMA Properties, Inc. ................ 2,784 (3) 2,784 0 0
Raymond Johnson ..................... 1,220 (3) 1,220 0 0
Clark Kennedy ....................... 3,073 (3) 3,073 0 0
A. George Lozier .................... 4,720 (3) 4,720 0 0
Michael Mulroy II ................... 3,243 (3) 3,243 0 0
Robert & Susan Murnen ...............11,161 (3) 11,161 0 0
Collins & Susan Oakley .............. 1,661 (3) 1,661 0 0
Raymond & Pamela Pinney ............. 2,601 (3) 2,601 0 0
Glen Poor ........................... 1,544 (3) 1,544 0 0
Robert Reynolds ..................... 3,190 (3) 3,190 0 0
Carol Rezek ......................... 1,296 (3) 1,296 0 0
Estate of Norman D. Runions ......... 5,712 (3) 5,712 0 0
John Ryan ........................... 1,573 (3) 1,573 0 0
Bill S. Schnall ..................... 1,587 (3) 1,587 0 0
Scriba Family Trust ................. 6,117 (3) 6,117 0 0
Sea Spray Investments LLC ........... 3,088 (3) 3,088 0 0
Lee & Linda Shultz .................. 6,294 (3) 6,294 0 0
John Sposare ........................ 4,778 (3) 4,778 0 0
Short Cressman Burgess Profit 7,140 (3) 7,140 0 0
Sharing Trust ......................
Jack & Maxine Sturza ................ 4,777 (3) 4,777 0 0
Robert Thurston ..................... 2,389 (3) 2,389 0 0
Susan Thurston ...................... 2,389 (3) 2,389 0 0
Robert & Betty Van Leer ............. 1,544 (3) 1,544 0 0
Manuel & Sahily Vellon .............. 1,544 (3) 1,544 0 0
Jack Wahlquist ...................... 4,890 (3) 4,890 0 0
Rick Whitney ........................ 638 (3) 638 0 0
Living Trust of Patricia Wolfstone . 6,329 (3) 6,329 0 0
Wolfstone Family Trust .............. 1,568 (3) 1,568 0 0
Zalutsky & Klarquist PPC Profit 5,201 (3) 5,201 0 0
Sharing Plan .......................
George Zoffel ....................... 8,055 (3) 8,055 0 0
</TABLE>
- ------------------
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all Common Stock beneficially
owned by such person, subject to applicable community property law. Each
such person may be reached through the Company at 335 North Wilmot, Suite
250, Tucson, Arizona 85711.
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<PAGE>
(2) In calculating the percentage of ownership, the number of shares of Common
Stock that the identified person or group had the right to acquire within 60
days upon the exercise of stock options is deemed to be outstanding for the
purpose of computing the percentage of the shares of Common Stock owned by
such person, but such shares are not deemed to be outstanding for the
purpose of computing the percentage of the shares of Common Stock owned by
any other person.
(3) Less than 1% of the outstanding shares of Common Stock.
(4) The number of shares shown are owned directly by Mr. Winton and does not
include any of the shares owned by (i) King Williams & Associates in which
Mr. Winton is a 15.4% general partner and (ii) Grantor Trust of Former CHB
Partners of which Mr. Winton is the trustee and owns a 9.25% interest. King
Williams & Associates and Grantor Trust of Former CHB Partners are selling
shareholders.
(5) Each of the Selling Stockholders is assumed to be selling all of the shares
of Common Stock registered for sale and will own no shares of Common Stock
after the offering other than those shares held by certain Selling
Stockholders as of May 16, 1997, that do not require further registration
for resale, as set forth under "Shares Beneficially Owned After Offering."
The Company has no assurance that the Selling Stockholders will sell any of
the securities being registered hereby.
(6) The address of King Williams & Associates is 3485 FM 1960 West, Suite 450,
Houston, TX 77060.
FEDERAL INCOME TAX CONSIDERATIONS
QUALIFICATION OF THE COMPANY AS A REIT
General
The Company has made an election to be treated as a REIT under the Code.
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 qualify 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 rates, 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 limitation.
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, such as dividend or interest income or capital gain on the sale of
stocks or securities. Thus, only 5% of a REIT's income each year is
unrestricted. Such non-qualifying income may include third-party management
fees, income from certain services provided to tenants, or rents from personal
property. Finally, the 30% income limitation 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
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<PAGE>
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 "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 limitation.
The Company anticipates that its gross income will continue to consist
principally of 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
limitation, 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.
This requirement is intended to assure that the bulk of REIT investments are
either equity or mortgage interests in real property. 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 Real Estate Mortgage Investment Conduits ("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). The distribution requirement does not
compel the Company to distribute that portion, if any, of its cash flow that
exceeds the REIT taxable income.
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 predistribution taxable
49
<PAGE>
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 predistribution 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 "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, 1996 of approximately $76 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).
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
Stock 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. Therefore, REIT dividends may not be
used to offset a stockholder's passive losses. 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.
50
<PAGE>
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 attributable to the
Company's ownership of residual interests in a REMIC. See "Excess Inclusion
Rule" below.
The total dividends of $2.00 per share for 1996 consists of ordinary income
of $0.17, return of capital of $0.45 per share, and long-term capital gain of
$1.38. Excess Inclusion Rule
Prior to June 1997, the Company owned residual interests in REMICs, which may
adversely affect the federal income taxation of the Company and of certain
stockholders to the extent those residual interests generated "excess inclusion
income." 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 is required to distribute at least 95 percent of its
taxable income, even if its taxable income is comprised exclusively of excess
inclusion income and the Company 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. Therefore,
all or a portion of the dividends received by the stockholders may be excess
inclusion income. Excess inclusion income constitutes 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 1996, the
entire ordinary income portion ($0.17 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. A portion of the Company's 1997 taxable income may be 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 the REIT is domestically
controlled, its stock is excluded from the definition of United States real
property interests, and sales of its stock by foreign investors generally escape
United States taxation.
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,
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<PAGE>
(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 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.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 40,000,000
shares of Common Stock, par value $.01 per share, of which 4,437,419 shares of
Common Stock were issued and outstanding as of May 16, 1997. The Company has
outstanding 942,184 LP Units convertible into 942,184 shares of Common Stock.
See "Summary of the Heritage LP Partnership Agreement."
Holders of the Company's Common Stock are entitled to one vote per share on
all matters on which stockholders are entitled to vote, including the election
of directors. The shares do not have cumulative voting rights. Consequently, the
holders of more than 50% of the outstanding shares of Common Stock elect all of
the directors. All shares of Common Stock are entitled to share equally in such
dividends as the Board of Directors may declare, in its discretion, from sources
legally available for such dividends. In the event of liquidation of the
Company, holders of Common Stock are entitled to share equally in the assets
available for distribution. Holders of Common Stock do not have preemptive
rights to subscribe for additional shares on a pro rata basis if and when
additional shares are offered for sale. No redemption rights or sinking funds
are available to holders of Common Stock.
The Board of Directors is authorized, without action by the Company's
stockholders, to classify and reclassify any unissued shares of the Company's
authorized capital stock in a class or classes of preferred stock, preference
stock, special stock, or other stock and to divide and classify any class into
one or more series of such class, by determining, fixing, or altering, among
other things, the designations, powers, preferences, and rights of the shares of
each such class or series (including matters relating to voting, dividends,
conversion, and redemptions) and the qualifications, limitations, or
restrictions thereof. As a result, the Board may authorize and issue classes or
series of capital stock with voting, conversion, dividend, or other rights that
could adversely affect the powers and rights of the holders of Common Stock. The
issuance of any such classes or series of capital stock may have the effect of
delaying, deferring, or preventing a change in control of the Company. The
Company has no current plan to issue any additional classes or series of capital
stock.
REGISTRATION AGREEMENTS
The Company has entered into a registration agreement (the "Exchange Offer
Registration Agreement") for the benefit of each of the Winton Partners that
received shares of the Company's Common Stock in the Exchange Offer providing
certain registration rights with respect to the shares of the Company's Common
Stock issued in connection with the Exchange Offer related to the Winton
Acquisition. Pursuant to the terms of the Exchange Offer Registration Agreement,
the Company filed a registration statement under the Securities Act covering
such shares of Common Stock for resale. The Company must use its best efforts to
keep such registration statement effective for a period of three years after the
closing of the Winton Acquisition. The Registration Agreement also requires the
Company, on one occasion, to file, and use its best efforts to cause to become
effective, an applicable registration statement, upon the request of holders of
at least $10.0 million of Common Stock subject to registration, to register such
shares of Common Stock in a firm underwriting by underwriters of national
reputation.
52
<PAGE>
In addition, if at any time the Company proposes to file a registration
statement under the Securities Act on Form S-1, S-2, or S-3 (or other
appropriate form), on its behalf or on behalf of any of its security holders,
the holders of shares of Common Stock received pursuant to the Exchange Offer
will be entitled to include their shares of Common Stock in that registration
statement. The right of the holders of shares of Common Stock received pursuant
to the Exchange Offer to have their shares registered pursuant to the Exchange
Offer Registration Agreement will be subject to certain limitations, including
the right of the Company to defer the filing of a registration statement if the
Company's Board of Directors determines, in its good faith judgement, that the
filing of such registration would be detrimental to the Company and its
stockholders or would interfere with any pending material corporate transaction
involving the Company.
The Company also entered into a registration agreement (the "Asset Transfer
Registration Agreement") with each of the Approving Winton Partnerships on
behalf of the Distributees under which the Distributees will have certain
registration rights with respect to the shares of Common Stock of the Company
into which the LP Units issued in connection with the Asset Transfer related to
the Winton Acquisition will be convertible at any time following the first
anniversary date of the closing of the Winton Acquisition. Pursuant to the terms
of the Registration Agreement, not later than nine months after the closing of
the Winston Acquisition, the Company must file a registration statement under
the Securities Act and any state securities laws covering such shares of Common
Stock for resale. The Company must use its best efforts to cause such
registration statement to become effective by the time that the LP Units may be
converted into shares of the Company's Common Stock and to keep such
registration statement available for a period of 10 years. The Registration
Agreement also requires the Company to file a registration statement, upon the
request of holders of at least $5.0 million of Common Stock subject to
registration, to register such shares of Common Stock in a firm underwriting by
underwriters of national reputation. The holders of such shares of Common Stock
will be entitled to require the Company to effect one such registration. In
addition, if at any time the Company proposes to file a registration under the
Securities Act on Form S-1, S-2, or S-3 (or other appropriate form), on its
behalf or on behalf of any of its security holders, the holders of shares of
Common Stock distributed pursuant to the Asset Transfer will be entitled to
include their shares of Common Stock in that registration statement. The right
of the holders of shares of Common Stock received pursuant to the Asset Transfer
to have their shares registered under the Registration Agreement will be subject
to certain limitations, including the right of the Company to defer the filing
of a registration statement if the Company's Board of Directors determines, in
its good faith judgment, that such registration would be detrimental to the
Company and its stockholders or would interfere with any pending material
corporate transaction involving the Company.
53
<PAGE>
HERITAGE COMMUNITIES L.P.
Heritage Communities L.P. (the "Heritage LP") is a Delaware limited
partnership in which the Company and a wholly owned subsidiary of the Company
are the general partners and own a 50.4% interest. Heritage LP acquired
substantially all of the assets and properties of the Winton Partnerships
through a capital contribution by the Winton Partnerships to Heritage LP of such
assets and properties in exchange for cash and LP Units.
SUMMARY OF THE HERITAGE LP PARTNERSHIP AGREEMENT
The following is a summary of some of the more significant provisions of the
Partnership Agreement of Heritage L.P.
DISTRIBUTIONS
The portion, if any, of Heritage LP's cash funds and other property, after
the payment of expenses and the making of all other expenditures that the
Company determines, in its sole discretion, to be in excess of Heritage LP's
working capital needs and such reserves as the Company deems appropriate for the
fixed and contingent obligations of Heritage LP ("Available Cash Flow"), will be
distributed quarterly. To the extent that Heritage LP has sufficient Available
Cash Flow, the holder of an LP Unit will receive distributions that are intended
to mirror the Company's dividends per share, which such holders would have
received as stockholders of the Company. To the extent that Heritage LP's
Available Cash Flow is insufficient to pay such amount, accounts for the holders
of LP Units will be credited for the unpaid distribution and with interest on
the unpaid distribution (the "Unpaid Balances"). Any Unpaid Balances will be
given priority for future distributions of Available Cash Flow. In addition,
until the tenth anniversary of the Partnership Agreement, proceeds from the
Heritage LP's capital transactions ("Capital Transaction Proceeds"), if any,
will also be applied to reduce any Unpaid Balances in the distribution accounts
of the holders of LP Units. To the extent that Heritage LP's Available Cash Flow
and Capital Transaction Proceeds exceed the Unpaid Balances and the current
distributions to holders of LP Units, all additional amounts will be distributed
to Heritage LP's general partners. In addition, following the tenth anniversary
of the Partnership Agreement, all Capital Transaction Proceeds will be
distributed to Heritage LP's general partners. Consequently, regardless of the
amount of Heritage LP's Available Cash Flow and Capital Transaction Proceeds,
the maximum amount of distributions payable to a holder of an LP Unit (excluding
interest on unpaid distributions) will not exceed the dividends paid with
respect to a share of the Company's Common Stock.
ALLOCATION OF PROFITS AND LOSSES
Heritage LP will maintains a capital account for each of its partners.
Heritage LP's items of income, gain, loss, and deduction will be allocated among
its partners, subject to certain special allocations, in a similar manner for
purposes of both book gain or loss and tax gain or loss. Net income will be
allocated (i) first, to each limited partner to the extent that, on a cumulative
basis, net losses previously allocated to the limited partners exceed net income
previously allocated to limited partners, (ii) second, to each limited partner
to the extent that such limited partner has been allocated on a cumulative
basis, net income equal to the sum of the distributions paid to such limited
partner and the unreturned balances in the accrual accounts and the unpaid
distribution accounts maintained with respect to the LP Units held by such
limited partner, and (iii) thereafter, to the Company and Heritage SGP, as
general partners, on a pro rata basis. Notwithstanding (i) and (ii), the Company
and Heritage SGP will be allocated on a combined basis not less than one percent
of each item of Heritage LP's gain, loss, income, and deduction for each year.
Net losses will be allocated to the partners in accordance with their
respective percentage interests in Heritage LP, except that net losses will not
be allocated to any limited partner to the extent that such allocation would
cause such limited partner to have an adjusted capital account deficit at the
end of such taxable year. All net losses in excess of such limitations will be
allocated to the Company and Heritage SGP, as general partners, on a pro rata
basis.
54
<PAGE>
CONVERSION OF LP UNITS
At any time following the first anniversary of the Partnership Agreement, the
holders of LP Units may convert such LP Units into shares of the Company's
Common Stock. Any holder of an LP Unit who exercises his conversion right on or
prior to the tenth anniversary of the Partnership Agreement will be paid, at the
time of such conversion, any outstanding Unpaid Balances in the distribution
accounts attributable to such Units. However, after the tenth anniversary of the
Partnership Agreement, Heritage LP will not be required to pay the holder of an
LP Unit who converts such LP Unit into a share of the Company's Common Stock the
Unpaid Balances in the holder's distribution accounts if the market value of a
share of the Company's Common Stock received upon conversion is equal to at
least 110% of the sum of the initial capital contribution and the Unpaid
Balances with respect to such LP Unit. Moreover, the Company's obligation to
keep its registration statement filed with respect to resales of shares of the
Company's Common Stock received upon conversion will expire after ten years.
Consequently, Winton Partners who elect not to participate in the Exchange Offer
should be aware that the economic consequences of conversion of an LP Unit will
change following the tenth anniversary of the Partnership Agreement.
MANAGEMENT
The Company has the exclusive discretion in the management and control of the
business and affairs of Heritage LP, except that the Company may delegate any of
its powers to Heritage SGP. The Partnership Agreement grants to the Company
broad authority in the exercise of the management and control of Heritage LP.
The general partners have complete power to do all things necessary or incident
to the management and conduct of the business of Heritage LP.
RIGHTS OF HOLDERS OF LP UNITS
Holders of LP Units do not have the right to take part in the management or
control of the business or affairs of Heritage LP, to transact any business for
Heritage LP, or to sign for or bind Heritage LP. The limited partners of
Heritage LP, however, have the right to receive tax reports and certain other
financial information, the most recent annual, quarterly, and current reports
and proxy statements as provided to the Company's stockholders and, upon
request, copies of documents as filed by the Company with the Commission under
the Securities Exchange Act of 1934. Holders of LP Units also have the right to
inspect certain records of Heritage LP. Upon the requisite vote of the holders
of LP Units, such persons will have the right to amend the Partnership
Agreement, subject to certain limitations specified in the Partnership
Agreement, with the consent of the general partners. The exercise of the
foregoing right will require the affirmative vote of the owners of record of
more than 50 percent of the LP Units.
LIMITED LIABILITY
No limited partner will be liable for Heritage LP's debts or other
obligations, except to the extent that Heritage LP withholds from or pays on
behalf of such limited partner any amount of federal, state, local, or foreign
taxes that the Company or Heritage SGP determines that Heritage LP is required
to withhold or pay with respect to any amount distributable or allocable to such
limited partner pursuant to the Partnership Agreement. The Partnership Agreement
requires the general partners to cause Heritage LP to operate in such manner as
they deem appropriate to avoid unlimited liability for the limited partners.
TERMINATION AND WINDING UP
Heritage LP will be dissolved upon the occurrence of any of the following
events: (i) the end of its term on December 31, 2086, (ii) the election of the
general partners, unless any original limited partner that holds an original LP
Unit objects in writing within 30 days of the notice of such election, (iii)
entry of a decree of judicial dissolution of Heritage LP, (iv) the sale or other
disposition of all or substantially all of Heritage LP's assets and properties,
(v) an event of withdrawal by a general partner as described in Section 17-402
of the Delaware Limited Partnership Act, unless all of the remaining partners
agree in writing, within 90 days after such event of withdrawal, to continue the
business of Heritage LP and elect one or more additional or successor general
partners if necessary or desirable to do so, or (vi) 120 days
55
<PAGE>
after the commencement of any proceeding against the last remaining general
partner seeking relief under certain statutes, including, among other things,
reorganization, liquidation, or dissolution unless all of the remaining partners
agree in writing, within 90 days after the occurrence of such event, to continue
the business of Heritage LP and to the appointment of a substitute general
partner.
In the event of Heritage LP's dissolution, (a) Heritage LP's affairs will be
terminated and wound up, (b) an accounting will be made, (c) Heritage LP's
liabilities (including any amounts owed to the partners) will be paid or
adequately provided for, and (d) Heritage LP's remaining assets will be
distributed to the partners as provided for in the Partnership Agreement.
BOOKS AND RECORDS
The Partnership Agreement requires the general partners to make available to
each limited partner, within 90 days following the close of Heritage LP's fiscal
year on December 31, annual information necessary for tax purposes.
The Partnership Agreement requires the general partners to maintain a list of
the names and last known business addresses of all partners at Heritage LP's
principal office and to make such list available for review by any limited
partner or such partner's representative at reasonable times. The Partnership
Agreement also requires the general partners to maintain at the Heritage LP's
principal office certain financial statements, a copy of the Certificate of
Limited Partnership for Heritage LP and executed copies of any powers of
attorney used by Heritage LP to file such certificate, a copy of the Partnership
Agreement, certain federal, state, and local income tax records, and a
description, including the amount, of the contributions by each partner and the
date on which each person became a partner, any of which documents may be
inspected by partners at any reasonable time and upon adequate notice.
POWER OF ATTORNEY
Each limited partner irrevocably designates the Company and Heritage SGP as
such limited partner's agent, with full power of substitution, to execute,
acknowledge, and file of record the Partnership Agreement, certificates of
limited partnership, and any and all other instruments that the general partners
deem necessary or appropriate to qualify and continue Heritage LP as a limited
partnership and also all conveyances and other instruments as the general
partners deem necessary or appropriate to reflect the dissolution and
termination of Heritage LP. In addition, the general partners have been
designated as the agent of each limited partner to execute, acknowledge, and
deliver all conveyance and other instruments that the general partners deem
appropriate, in accordance with the Partnership Agreement, to effect the
transfer of partnership interests, including assignments on the default of any
limited partner, to admit, substitute, or delete partners, to sell, exchange, or
dispose of assets or properties of Heritage LP, to borrow money and otherwise
enter into financing transactions, and to execute all amendments and/or
restatements of the Partnership Agreement. Such power will be deemed to be
coupled with an interest and will survive the death of the limited partner.
PLAN OF DISTRIBUTION
The Company is registering hereby, or has registered under another
Registration Statement to which this Prospectus relates, a total of 1,312,737
shares of currently outstanding Common Stock, all of which shares may be sold
from time to time by the Selling Stockholders. The Company has granted
registration rights to certain of the Selling Stockholders, which the
Registration Statement of which this Prospectus forms a part is intended to
satisfy. Each Selling Stockholder may use this Prospectus as updated from time
to time to offer the shares of Common Stock for sale in transactions in which
the Selling Stockholder is or may be deemed to be an underwriter within the
meaning of the Securities Act. The Company will not receive any proceeds from
the sale of any shares of Common Stock by the Selling Stockholders. The Company
will not pay any compensation to an NASD member in connection with this
offering. Brokerage commissions, if any, attributable to the sale of the shares
of Common Stock offered hereby will be borne by the holders thereof.
Each currently outstanding share of Common Stock being registered for resale
hereby may be sold by the holder thereof in transactions that are exempt from
registration under the Securities Act or as long
56
<PAGE>
as the Registration Statement of which this Prospectus forms a part is effective
under the Securities Act, and as long as there is a qualification in effect
under, or an available exemption from, any applicable state securities law with
respect to the resale of such shares. The Selling Stockholders, in addition to
selling pursuant to the Registration Statement of which this Prospectus is a
part, also may sell under Rule 144 as promulgated under the Securities Act, if
applicable. See "Description of Securities -- Shares Eligible for Future Sale."
The Selling Stockholders also may pledge the shares of Common Stock being
registered for resale hereby to NASD broker/dealers (each a "Pledgee") pursuant
to the margin provisions of each Selling Stockholder's customer agreements with
such Pledgees. Upon default by a Selling Stockholder, the Pledgee may offer and
sell shares of Common Stock from time to time as described above.
LEGAL OPINIONS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, a professional association, Phoenix, Arizona.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995 and
December 31, 1996 and for each of the three fiscal years in the period ended
December 31, 1996, the Combined Historical Summary of Revenues and Certain
Operating Expenses of the Winton Properties for the year ended December 31,
1996, the Historical Summary of Revenues and Certain Operating Expenses of
London Park Apartments for the year ended December 31, 1996, and the Historical
Summary of Revenues and Certain Operating Expenses of La Privada Apartments for
the year ended December 31, 1996, included in this Prospectus and Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
57
<PAGE>
ASR INVESTMENTS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ASR INVESTMENTS CORPORATION
Independent Auditors' Report ........................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 ........................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 ...................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 ...................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 ...................................................... F-6
Notes to Consolidated Financial Statements ............................................. F-7
Unaudited Consolidated Balance Sheets as of March 31, 1997 .............................F-17
Unaudited Consolidated Statements of Operations for the quarters ended
March 31, 1997 and 1996 ...............................................................F-18
Unaudited Consolidated Statements of Cash Flows for the quarters ended
March 31, 1997 and 1996 ...............................................................F-19
Unaudited Consolidated Statements of Stockholders' Equity for the quarters
ended March 31, 1997 ..................................................................F-20
Notes to Consolidated Financial Statements for the quarters ended
March 31, 1997 and 1996 ...............................................................F-21
WINTON PROPERTIES
Independent Auditors' Report ...........................................................F-24
Combined Historical Summary of Revenues and Certain Operating Expenses for the year
ended December 31, 1996 ...............................................................F-25
Unaudited Combined Historical Summary of Revenues and Certain Operating Expenses for
the quarter ended March 31, 1997 ......................................................F-26
Notes to Combined Historical Summary of Revenues and Certain Operating Expenses .......F-27
LONDON PARK APARTMENTS
Independent Auditors' Report ...........................................................F-28
Historical Summary of Revenues and Certain Operating Expenses for the year ended
December 31, 1996 and the three months ended March 31, 1997 (Unaudited) ...............F-29
Notes to Historical Summary of Revenues and Certain Operating Expenses ................F-30
LA PRIVADA APARTMENTS
Independent Auditors' Report ...........................................................F-31
Historical Summary of Revenues and Certain Operating Expenses for the year ended
December 31, 1996 and the three months ended March 31, 1997 (Unaudited) ...............F-32
Notes to Historical Summary of Revenues and Certain Operating Expenses ................F-33
OTHER ACQUISITION COMMUNITIES
Unaudited Combined Historical Summary of Revenues and Certain Operating Expenses for the year
ended December 31, 1996 and the three months ended March 31, 1997 .....................F-34
Notes to Combined Historical Summary of Revenues and Certain Operating Expenses .......F-35
</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 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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 1996, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, 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
March 18, 1997
F-2
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1995 1996
--------- ---------
ASSETS
Real estate investments
Apartments, net of depreciation ................ $ 71,338 $ 70,506
Investments in joint ventures .................. 3,043 2,811
Construction in progress ....................... 14,694
Land held for development ...................... 3,928 925
Other real estate .............................. 1,201 1,022
--------- ---------
Total real estate investments ................ 79,510 89,958
Mortgage assets .................................. 11,877 5,039
Cash ............................................. 2,421 2,403
Other assets ..................................... 361 396
--------- ---------
Total assets ................................. $ 94,169 $ 97,796
========= =========
LIABILITIES
Real estate notes payable ........................ $ 49,212 $ 49,110
Short-term borrowing ............................. 4,495 2,014
Construction costs payable ....................... 1,581
Other liabilities ................................ 3,067 4,989
--------- ---------
Total liabilities ............................ 56,774 57,694
--------- ---------
COMMITTMENTS AND CONTINGENCIES (NOTE 2, 3 AND 4)
STOCKHOLDERS' EQUITY
Common Stock, par value $.01 per share, 40,000,000 33 33
shares authorized; 3,303,226 and 3,307,892 shares
issued
Additional paid in capital ....................... 155,822 155,964
Deficit .......................................... (115,497) (112,964)
Stock note receivable ............................ (652) (385)
Treasury stock -- 148,731 and 160,742 shares ..... (2,311) (2,546)
--------- ---------
Total stockholders' equity ................... 37,395 40,102
--------- ---------
Total liabilities and stockholders' equity ..... $ 94,169 $ 97,796
========= =========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
REAL ESTATE OPERATIONS
Rental and other income ............................ $ 12,528 $ 14,034 $ 14,581
--------
Operating and maintenance expenses ................. 4,255 5,259 5,404
Real estate taxes and insurance .................... 1,242 1,460 1,451
Interest expense on real estate mortgages .......... 3,941 4,387 4,348
Depreciation and amortization ...................... 1,995 2,692 2,819
-------- -------- --------
Total operating expenses ......................... 11,433 13,798 14,022
-------- -------- --------
Income from real estate ........................... 1,095 236 559
-------- -------- --------
MORTGAGE ASSETS (NOTE 4)
Prospective yield income ........................... 6,433 3,884 2,630
Income from redemptions and sales .................. 4,263 5,302 9,461
Interest expense ................................... (2,596) (347) (181)
-------- -------- --------
Income from mortgage assets ........................ 8,100 8,839 11,910
-------- -------- --------
INCOME BEFORE ADMINISTRATIVE EXPENSES AND OTHER ..... 9,195 9,075 12,469
INCOME (EXPENSE)
Administrative expenses (Note 8) .................. (2,216) (2,983) (3,203)
Other income (expense), net ....................... 723 462 (425)
-------- -------- --------
NET INCOME .......................................... $ 7,702 $ 6,554 $ 8,841
======== ======== ========
NET INCOME PER SHARE OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS ........................................ $ 2.48 $ 2.09 $ 2.80
======== ======== ========
AVERAGE SHARES OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS ........................................ 3,100 3,141 3,153
======== ======== ========
DIVIDENDS DECLARED PER SHARE ........................ $ 0.50 $ 2.00 $ 2.00
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
-------- ------- --------
OPERATING ACTIVITIES
Net income ..................................... $ 7,702 $ 6,554 $ 8,841
Principal noncash charges (credits)
Depreciation and amortization ................ 2,083 3,028 3,271
Reversal of yield maintenance accrual ........ (2,420)
Increase in accrual .......................... 324 705 856
-------- ------- --------
Cash Provided By Operations .................... 10,109 7,867 12,968
-------- ------- --------
INVESTING ACTIVITIES
Investment in apartments ....................... (67,247) (7,644) (2,142)
Investment in joint ventures ................... (1,364) (1,895) (65)
Construction expenditures ...................... (11,753)
Purchase of land for development ............... (3,928)
Other real estate assets ....................... (1,331) 3,985 179
Reduction in mortgage assets ................... 18,916 7,088 6,838
Decrease in other assets ....................... 1,330 234 27
-------- ------- --------
Cash Used In Investing Activities .............. (49,696) (2,160) (6,916)
-------- ------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable ......... 52,178 6,895
Payment of loan costs .......................... (1,342)
Proceeds from construction loan ................ 255
Repayment of notes payable
Real estate notes ............................ (1,485) (7,955) (357)
Notes secured by mortgage assets ............. (15,640) (4,002)
Short-term borrowing ........................... 4,495 (2,481)
Construction costs payable ..................... 1,581
Stock issuance ................................. 45 85
Payment of dividends ........................... (1,550) (6,304) (6,308)
Increase (decrease) in other liabilities ...... 1,148 (589) 1,155
-------- ------- --------
Cash (Used In) Provided by Financing Activities 33,309 (7,415) (6,070)
-------- ------- --------
CASH
(Decrease) during the period ................. (6,278) (1,708) (18)
Balance -- beginning of period ............... 10,407 4,129 2,421
-------- ------- --------
Balance -- end of period ..................... $ 4,129 $ 2,421 $ 2,403
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest Paid .................................. $ 7,367 $ 5,033 $ 4,525
======== ======= ========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(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> <C>
Balance, January 1, 1994 .. 3,249 $32 $155,126 ($ 121,899) ($ 2,311) $30,948
Net income ................. 7,702 7,702
Dividends declared ......... (1,550) (1,550)
--------- ----- ---------- ---------- ---------- --------- -------
Balance, December 31, 1994 3,249 32 155,126 (115,747) (2,311) 37,100
Net income ................. 6,554 6,554
Dividends declared ......... (6,304) (6,304)
Stock issuance ............. 54 1 696 ($ 652) 45
--------- ----- ---------- ---------- ---------- --------- -------
Balance, December 31, 1995 3,303 33 155,822 (115,497) (652) (2,311) 37,395
Net Income ................. 8,841 8,841
Dividends Declared ......... (6,308) (6,308)
Stock Issuance (Repurchase) 5 53 267 (235) 85
Other ...................... 89 89
--------- ----- ---------- ---------- ---------- --------- -------
BALANCE, DECEMBER 31, 1996 3,308 $33 $155,964 ($ 112,964) ($ 385) ($ 2,546) $40,102
========= ===== ========== ========== ========== ========= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996
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, 1996, the Company
owned 25 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 ASSETS AND DEPRECIATION -- 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.
REVENUE RECOGNITION -- Rental income is recorded when due from tenants and is
recognized monthly as it is earned, which is generally on a straight line basis.
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 interests 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
financing 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 is completed.
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 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.
F-7
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
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.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK COMPENSATION -- In October 1995, the Financial Accounting Standards
Board issued FASB 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. Companies that do not adopt the new
accounting method are required to provide the disclosures required by the
Statement for any awards made in 1995 and after. After December 15, 1994, the
Company has not made any awards that would have been treated differently in the
determination of net income under FASB No. 123 and accordingly, pro forma
presentation is not required.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS -- The Company has adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets," which
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If the sum of the expected future cash flows (undiscounted and
without interest charges) from an asset to be held and used is less than the
carrying amount of the asset, an impairment loss must be recorded for the
difference between the carrying amount and the fair value. SFAS No. 121 had no
impact on the Company's consolidated financial statements.
NEW ACCOUNTING STANDARD -- In June 1996, the Financial Accounting Standards
Board issued FASB No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities", which requires an entity to recognize
the financial and servicing assets it controls and liabilities it has incurred
and to derecognize when controls has been surrendered in accordance with the
criteria provided in the Statements. The new statement is applicable
prospectively to transactions occurring after 1996. Based on current
circumstances, the Company believes the application of the new rules will not
have a material impact on the financial statements.
RECLASSIFICATION -- 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, 1996 and 1995, investment
in apartments consisted of the following (in thousands):
1995 1996
-------- --------
Land ..................................... $ 15,514 $ 15,514
Building and improvements ................ 57,214 58,476
Accumulated depreciation ................. (4,687) (7,504)
Restricted cash and deferred loan fees ... 3,297 4,020
-------- --------
Apartments, net .......................... $ 71,338 $ 70,506
======== ========
F-8
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
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 1996
------- -------
Real estate, at cost net of depreciation ... $54,489 $53,590
Cash and other assets ...................... 2,133 1,693
------- -------
Total Assets ............................. $56,622 $55,283
======= =======
Notes payable .............................. $35,754 $35,833
Other liabilities .......................... 575 731
------- -------
Total Liabilities ........................ 36,329 36,564
------- -------
Equity
The Company .............................. 3,043 2,811
Joint Venture Partner .................... 17,250 15,908
------- -------
Total Equity ............................... 20,293 18,719
------- -------
Total Liabilities and Equity ............... $56,622 $55,283
======= =======
CONDENSED COMBINED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------- -------
Revenues ...................... $ 1,263 $ 7,014 $ 9,138
Operating expenses ............ (551) (3,110) (3,688)
Interest expense .............. (373) (2,338) (2,879)
Depreciation .................. (283) (1,437) (1,979)
------- ------- -------
Net Income .................... $ 56 $ 129 $ 592
======= ======= =======
Allocation of Net Income
The Company ................. $ 9 $ 19 $ 89
Joint Venture Partner ....... $ 47 $ 110 $ 503
In November 1996, the partner in the six joint ventures initiated the
"buy-sell" provision in the joint venture agreements. The Company elected to
acquire the 85% interest in one joint venture from its partner and to sell to
its partner the Company's 15% interest in the other five joint ventures. The
purchase would increase the Company's investment in wholly owned apartments by
approximately $25,500,000 and real estate notes payable by $19,000,000. The sale
of the interests in the five joint ventures would result in net proceeds of
approximately $2,000,000 and would not have a significant impact on income. The
transactions are scheduled to be completed in April 1997.
CONSTRUCTION IN PROGRESS
In March 1996, the Company began construction of a 356-unit apartment
community, Finisterra Apartments in Tempe, Arizona. The total cost is estimated
be approximately $21,000,000. As of December 31, 1996, the Company had invested
$14,694,000 of its own cash and began the lease up phase in
F-9
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
December 1996. The Company has obtained a $15,350,000 construction loan of which
$255,000 was outstanding at December 31, 1996. In February 1997, the Company
received funding of $9,860,000 from the loan.
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 new apartment communities.
3. PENDING ACQUISITION
In November 1996, the Company entered into an agreement to acquire up to 13
apartment communities and one office building as well as the related property
management company. The apartment communities contain a total of 2,260 units and
the office building totals approximately 73,000 square feet. The Company will
pay up to $3,100,000 in cash, issue approximately 1,623,000 shares of common
stock and assume or refinance existing first mortgage loans of approximately
$49.3 million. The Company will also issue approximately 70,300 shares of common
stock for the property management company and the owner of the management
company will become an executive officer and appointed to the Board of Directors
of the Company.
Of the 13 apartment communities, six (937 units) are located in Houston,
Texas, five (989 units) are located in Dallas, Texas and two (334 units) are
located in Pullman, Washington. The office building is located in Seattle,
Washington.
As a part of the above transaction, the Company also concurrently entered
into an agreement to acquire the entire ownership interests of Pima Mortgage
L.P. (the "Manager") and Pima Realty Advisors, Inc. (the "Property Manager") for
262,000 shares of common stock. As a result of the acquisition, the Company will
become a self-administered and self-managed REIT. The owners of the Manager will
continue to be executive officers and members of the Board of Directors of the
Company. See Note 8 for information on the current arrangement with the Manager
and the Property Manager.
The sellers have approved the sale subject to ASR obtaining the approval of
its stockholders. The issuance of ASR common stock for the transaction and the
acquisition of the Manager and Property Manager are subject to approval by the
stockholders of the Company. The Company has distributed proxy materials for a
special meeting of the stockholders to be held in April 1997. Assuming the
stockholders approve the transaction, closing is anticipated to occur soon
thereafter.
4. MORTGAGE ASSETS
INCOME
For 1995 and 1996, the average carrying value of the mortgage assets was
$14,827,000 and $8,118,000, respectively, and the average prospective yield was
35% and 28%, respectively. At December 31, 1996 and 1995, the prospective yield
was 38% and 29%.
During 1996, the Company sold or exercised its redemption rights on nine
mortgage assets for net proceeds of $13,625,000 and income of $9,461,000. During
1995, the Company exercised its redemption rights on five mortgage assets for
net proceeds of $6,348,000 and income of $2,882,000. Using proceeds from one of
the redemptions, in 1995, the Company prepaid its notes payable secured by
mortgage assets and recorded income of $2,420,000 for the reversal of the excess
yield maintenance accrual on such notes payable. The income was included in the
1995 income from redemptions and sales 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. In January 1997, the Company exercised
the redemption rights on three mortgage assets and realized total net proceeds
of $6,800,000 and income of $5,320,000.
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
F-10
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
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 executed short sales of Eurodollar Futures Contracts on
the International Monetary Market exchange to hedge against the interest rate
impact on mortgage asset cash flows in 1995. The effect of the Futures Contracts
was to "fix" the interest rate on $190,000,000 of the structured financing at
approximately 6.75% for 1995. In 1994, the Company closed out its Futures
Contract position and realized a gain of $1,152,000 which 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, 1996 and 1995.
5. 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
1996. 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. In July 1996, the loan was
refinanced by a $3,800,000 first mortgage loan bearing 8.05% interest rate and a
ten year term. Amortization of deferred loan costs was $88,000, $120,000 and
$155,000 for 1994, 1995 and 1996.
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):
1997 ......................................... $ 2,646
1998 .......................................... 513
1999 .......................................... 558
2000 .......................................... 608
2001 .......................................... 661
2002-2006 ..................................... 44,124
-------
Total ....................................... $49,110
=======
As discussed in Note 2, the Company has obtained a $15,350,000 construction
loan to finance the construction of its Finisterra apartment community. The loan
bears interest at 1% per annum above the bank's prime rate. The interest rate at
December 31, 1996 was 9.25%. At December 31, 1996, the amount outstanding was
$255,000 and is included in the real estate notes payable amount on the
financial statements. In February 1997, the Company received funding of
$9,860,000 from the loan.
F-11
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
SHORT-TERM BORROWING -- At December 31, 1995 and 1996, the Company had
short-term borrowing of $4,495,000 and $2,014,000. These borrowings were secured
by mortgage assets with a total carrying value of $6,639,000 and $3,084,000,
respectively. The interest rate averaged 6.35% and 6.55% during 1995 and 1996
and was at 6.69% and 6.88% at December 31, 1995 and 1996.
6. 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. Upon exercise of the options, the Company can elect to distribute
cash in lieu of shares. The options and SARs will expire in December 1998. As of
December 31, 1996, all of the options and SARs are exercisable and none of them
have been exercised. In February 1997, two partners of the Manager exercised
their share of SARs (30,067 per partner) and the Company paid approximately
$881,000 in total for the excess of the market price over the exercise price.
In 1995, certain holders exercised options to purchase 50,496 shares by
giving full recourse notes totaling $652,000 to the Company. In 1996, one holder
exercised additional options of 2,667 shares by giving a full recourse note
totaling $30,000 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, 1998 and can be repaid by giving the Company shares of common stock
owned by the optionholders based on the then market price on the common stock.
During 1996, two optionholders paid off their notes of $297,000 using 12,011 of
common stock and cash of $61,842. Notes outstanding at December 31, 1996 totaled
$385,000.
During 1996, the Company granted to three employees 165,000 SARs that expire
December 16, 1998, in lieu of a salary or bonus compensation plan. The employee
receives payments equal to the product of the per share dividend amount times
the number of SARs outstanding. At December 31, 1996, 165,000 stock appreciation
rights were outstanding under this compensation plan. During 1996, as a result
of the increase in the Company's common stock price, the Company recorded an
accrual for the SARs of approximately $750,000 which is included in
administration expenses. In February 1997, the three employees exercised 71,666
shares of the SARs and repaid Company advances of $92,000.
F-12
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
Information on all stock options and stock appreciation rights granted is
summarized below:
WEIGHTED
NUMBER OF OPTION PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- --------------- --------------
Stock Options:
Outstanding at December 31, 1994 ....... 412,240 $ 8.13-$20.90 $10.02
Options exercised ...................... (54,496) $11.25-$13.13 $12.80
-------
Outstanding at December 31, 1995 ....... 357,744 $ 8.13-$20.90 $ 9.60
Options exercised ...................... (4,666) $11.25 $11.25
-------
Outstanding and exercisable at
December 31, 1996 ..................... 353,078 $ 8.13-$20.90 $ 9.60
=======
Options at December 31, 1996 consisted
of the following:
1991 options granted ................. 24,420 $20.00-$20.90 $20.07
1990, 1992-1994 options granted ...... 328,658 $ 8.13-$13.13 $ 8.80
-------
Outstanding at December, 31 1996 ....... 353,078 $ 8.13-$20.90 $ 9.60
-------
Stock Appreciation Rights:
Outstanding at December 31, 1994 ....... 90,200 $ 8.60 $ 8.60
SARs granted ........................... 0
-------
Outstanding at December 31, 1995 ....... 90,200 $ 8.60 $ 8.60
SARs granted ........................... 165,000 $16.50-$16.63 $16.55
-------
Outstanding at December 31, 1996 ....... 255,200 $ 8.60-$16.50 $13.74
=======
SARs exercisable at December 31, 1996 .. 200,200 $ 8.60-$16.50 $ 9.91
=======
At December 31, 1996, the weighted average contractual life of the above
stock options and stock appreciation rights was 2.4 and 2.0 years, respectively.
7. 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 on a
current transaction.
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 three mortgage assets on which the Company
has exercised the redemption rights in January 1997 for total net gains of
$5,320,000, the Company uses their carrying values as the estimated fair 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, 1996. The estimates without redemptions
assume that the mortgage assets are held until the stated maturity (with the
exception of the three mortgage assets on which the Company exercised the
redemption rights in
F-13
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
January 1997 for net gains of approximately $5,320,000). 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, 1996. (Dollars in thousands.)
DISCOUNT WITHOUT WITH
RATE REDEMPTIONS REDEMPTIONS
-------- ----------- -----------
10% .............................. $13,657 $26,938
20% .............................. 11,754 22,447
30% .............................. 10,757 19,151
40% .............................. 10,074 16,703
50% .............................. 9,558 14,861
Real Estate Notes Payable. The Company has used the carrying value of real
estate notes payable as their fair value. At December 31, 1996, 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 ...................... $ 5,039 $10,359
Real estate notes payable ............ 49,110 49,110
Short-term borrowing ................. 2,014 2,014
8. 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, 1997. 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 1994,
1995 and 1996 were $544,000, $374,000 and $386,000, 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 1994, 1995 and 1996.
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 $247,500 for 1994, $216,000 for 1995, and $193,000 for 1996.
As discussed in Note 6, 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 1994, 1995 and 1996, the
dividend equivalent payments were $200,000, $800,000 and $800,000 which are
included in administrative
F-14
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
expenses. As a result of the increase in the common stock price, the Company
recorded an accrual for the SARs of $324,000 in 1994, $705,000 in 1995 and
$101,000 in 1996, which amounts are included in administrative 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 1994, 1995 and 1996
were $184,000, $417,000 and $466,000 respectively (net of an allocated credit of
$246,000 applicable only in 1994), which were equal to approximately 1.4%, 3.0%
and 3.2% of rental and other income.
As discussed in Note 3, the Company has entered into an agreement to acquire
the entire ownership interest of the Manager and the Property Manager for
262,000 shares of common stock. As a result of the acquisition, the Company will
become a self-administered and self-managed REIT. The owners of the Manager
would continue to be executive officers and members of the Board of Directors of
the Company.
9. TAXABLE INCOME (LOSS)
As of December 31, 1996, the Company had an estimated net operating loss
("NOL") carryforward of $75,904,000 which can be used to offset taxable income
other than excess inclusion income through 2009 (1999 for state taxes). The
1994, 1995 and 1996 dividends consist of the following:
1994 1995 1996
------ ------ ------
Ordinary Income ..................... 90.0% 14.5% 8.5%
Long Term Capital Gain .............. -- -- 69.0%
Return of Capital ................... 10.0% 85.5% 22.5%
In 1994, 1995, and 1996, 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. Substantially, all
of the ordinary income for these years is 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 1996 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-15
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended
December 31, 1994, 1995 and 1996--(Continued)
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands Except Per Share Amounts)
NET INCOME
TOTAL ------------------ DIVIDEND
INCOME AMOUNT PER SHARE PER SHARE
--------- ------ --------- ---------
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
1995
----
First ............. $7,983 $3,359 $1.08 $ 0.50
Second ............ 6,410 2,015 0.65 0.50
Third ............. 4,798 570 0.18 0.50
Fourth ............ 4,491 610 0.18 0.50
1996
----
First ............. $6,429 $2,340 $ .74 $ 0.50
Second ............ 7,529 3,326 1.05 0.50
Third ............. 7,129 2,092 .66 0.50
Fourth ............ 5,585 1,083 .35 0.50
F-16
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
(UNAUDITED)
Assets
Real estate investments
Apartments, net of depreciation .............. $ 74,855 $ 70,506
Investments in joint ventures ................ 2,788 2,811
Construction in progress ..................... 18,528 14,694
Land held for development .................... 925 925
Other real estate ............................ 1,617 1,022
--------- ---------
Total real estate investments .............. 98,713 89,958
Mortgage assets .............................. 3,270 5,039
Cash ......................................... 10,781 2,403
Other assets ................................. 1,269 396
--------- ---------
Total assets ............................... $ 114,033 $ 97,796
========= =========
Liabilities
Real estate notes payable ..................... $ 52,477 $ 48,855
Construction loan payable ..................... 10,224 255
Short-term borrowing .......................... 500 2,014
Construction costs payable .................... 1,070 1,581
Other liabilities ............................. 4,665 4,989
--------- ---------
Total liabilities ........................... 68,936 57,694
--------- ---------
Committments and Contingencies
Stockholders' Equity
Common Stock, par value $.01 per share,
40,000,000 shares authorized; 3,394,392
and 3,307,892 shares issued .................. 34 33
Additional paid in capital .................... 157,496 155,875
Deficit ....................................... (109,502) (112,875)
Stock notes receivable ........................ (385) (385)
Treasury stock -- 160,742 shares .............. (2,546) (2,546)
--------- ---------
Total stockholders' equity .................. 45,097 40,102
--------- ---------
Total liabilities and stockholders' equity ... $ 114,033 $ 97,796
========= =========
See Notes to Consolidated Financial Statements.
F-17
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1997 1996
-------- --------
Real Estate Operations
Rental and other income ......................... $ 3,702 $ 3,642
------- -------
Operating and maintenance expenses .............. 1,343 1,254
Real estate taxes and insurance ................. 341 360
Interest expense on real estate mortgages ....... 1,123 1,082
Depreciation and amortization ................... 680 680
------- -------
Total operating expenses ....................... 3,487 3,376
------- -------
Income from real estate ......................... 215 266
------- -------
Mortgage Assets
Prospective yield income ........................ 330 770
Income from redemptions and sales ............... 5,338 1,977
Interest expense ................................ (17) (75)
------- -------
Income from mortgage assets ..................... 5,651 2,672
------- -------
Income Before Administrative Expenses and
Other Income (Expense) .......................... 5,866 2,938
Administrative expenses ......................... (1,107) (638)
Other income (expense), net ..................... 187 40
------- -------
Net Income ....................................... $ 4,946 $ 2,340
======= =======
Net Income Per Share of Common Stock and
Common Stock Equivalents ........................ $ 1.52 $ 0.74
======= =======
Average Shares of Common Stock and Common
Stock Equivalents ............................... 3,159 3,154
======= =======
Dividends Declared Per Share ..................... $ 0.50 $ 0.50
======= =======
See Notes to Consolidated Financial Statements.
F-18
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
1997 1996
-------- --------
OPERATING ACTIVITIES
Net income ..................................... $ 4,946 $ 2,340
Principal noncash charges (credits)
Depreciation and amortization ................. 785 783
Increase in accrual ........................... 513
-------- --------
Cash Provided By Operations .................... 6,244 3,123
-------- --------
INVESTING ACTIVITIES
Investment in apartments ....................... (4,984) (427)
Investment in joint ventures ................... (49) 50
Construction expenditures ...................... (3,834) (1,024)
Purchase of land for development ............... (60)
Other real estate assets ....................... (595) 80
Reduction in mortgage assets ................... 1,769 1,095
Increase in other assets ....................... (873) (240)
-------- --------
Cash Used In Investing Activities .............. (8,566) (526)
-------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable .......... 3,700
Payment of loan costs .......................... (78)
Proceeds from construction loan ................ 9,969 221
Repayment of real estate notes ................. (78) (137)
Short-term borrowing ........................... (1,514) 92
Construction cost payable ...................... (511)
Stock issuance ................................. 1,622
Payment of dividends ........................... (1,573) (1,577)
(Decrease) increase in other liabilities ....... (837) 442
-------- --------
Cash Provided By (Used In) Financing
Activities .................................... 10,700 (959)
-------- --------
Cash
Increase during the period .................... 8,378 1,638
Balance -- beginning of period ................ 2,403 2,421
-------- --------
Balance -- end of period ...................... $ 10,781 $ 4,059
======== ========
Supplemental Disclosure of Cash Flow
Information
Interest Paid .................................. $ 1,181 $ 1,160
======== ========
Interest Captalized ............................ $ 205 $ 82
======== ========
See Notes to Consolidated Financial Statements.
F-19
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<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> <C>
Balance, December 31, 1996 3,308 $33 $155,875 ($112,875) ($385) ($2,546) $40,102
Net income ................. 4,946 4,946
Dividends declared ......... (1,573) (1,573)
Stock issuance ............. 86 1 1,621 1,622
----- --- -------- --------- ----- ------- -------
Balance, March 31, 1997 ... 3,394 $34 $157,496 ($109,502) ($385) ($2,546) $45,097
===== === ======== ========= ===== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-20
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Quarters
Ended March 31, 1997 and 1996
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries (collectively the
"Company"). Investments in joint ventures in which the Company does not own a
controlling interest are accounted for under the equity method. All significant
inter-company balances and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. They do not
include all of the information and disclosures generally required for annual
financial statements. These interim operating results are not necessarily
indicative of the results that may be expected for the entire year. These
interim consolidated financial statements should be read in conjunction with the
December 31, 1996 audited consolidated financial statements and notes thereto.
Reclassification -- Certain reclassifications have been made to conform the
prior year with the current year presentation.
New Accounting Standard -- In February 1997, the Financial Accounting
Standards Board issued FASB No. 128, "Earnings Per Share", which establishes new
standards for computing and presenting earnings per share (EPS). It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The new statement is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. The Company has not determined the effect of application of
SFAS No. 128 on the financial statements at this time.
2. REAL ESTATE INVESTMENTS
At December 31, 1996, the Company owned directly nineteen apartment
communities (3,039 units) located in Arizona, Texas, and New Mexico. In March
1997, the Company acquired a 266-unit apartment community in northwest Houston,
Texas. The purchase price was approximately $4,450,000 and the Company expects
to invest $700,000 in capital improvements. The Company obtained a new mortgage
loan of $3,700,000 with a fixed rate of 8.39%. The Company issued 86,500 shares
of common stock for net proceeds of $1,622,000 to provide for the cash used in
the acquisition. As of March 31, 1997 and December 31, 1996, the Company's
directly owned apartment communities consisted of the following (in thousands):
1997 1996
-------- --------
Land ..................................... $ 15,514 $ 15,514
Building and improvements ................ 63,294 58,476
Accumulated depreciation ................. (8,184) (7,504)
Restricted cash and deferred loan fees ... 4,231 4,020
-------- --------
Apartments, net .......................... $ 74,855 $ 70,506
======== ========
In March 1996, the Company began construction of a 356-unit apartment
community, Finisterra Apartments, in Tempe, Arizona. The total cost is estimated
to be approximately $21,000,000. As of March 31, 1997 and December 31, 1996, the
Company had invested $18,528,000 and $14,694,000 in construction in progress.
The Company has obtained a $15,350,000 construction loan of which $10,224,000
and $255,000 were outstanding at March 31, 1997 and December 31, 1996. The
Company has begun the lease-up phase and anticipates construction to be
substantially completed at the end of the third quarter.
In addition, at March 31, 1997, the Company owned six apartment communities
(1,441 units) located in Arizona through joint ventures with a pension plan
affiliate of Citicorp. The Company is a 15% equity
F-21
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Quarters
Ended March 31, 1997 and 1996--(Continued)
partner and the managing partner or managing member of the joint ventures. On
May 1, 1997, the Company acquired the remaining interest in one joint venture
and sold its interests in the other five joint ventures. See Note 3 for
additional information.
3. SUBSEQUENT REAL ESTATE ACQUISITIONS
On April 30, 1997, the Company completed the acquisition of 13 apartment
communities containing 2,260 units located in Houston and Dallas, Texas and
Pullman, Washington, and one office building located in Seattle, Washington (the
"Winton Properties"). The acquisitions are pursuant to a Master Combination and
Contribution Agreement dated November 8, 1996. The sellers were 15 separate
limited partnerships in which Don W. Winton was the general partner. The total
purchase price of the properties is approximately $83,223,000. The Company (i)
assumed or refinanced first mortgage loans totalling $49,396,000, (ii) issued
683,626 shares of common stock, (iii) issued operating partnership units
convertible to 942,184 shares of common stock of the Company after one year, and
(iv) paid the sellers $1,250,000 for transaction costs. As a part of the
acquisition, the Company issued 70,284 shares of common stock to acquire the
entire interests in Winton & Associates, the property management company for the
Winton Properties.
In April 1997, the Company acquired a 257-unit community in Houston, Texas,
for $6,000,000 and obtained a first mortgage loan for $4,400,000 with an
interest rate of 8.57%. On May 9, 1997, the Company acquired a 176-unit
apartment community in Seattle, Washington, for $4,059,000 and obtained a first
mortgage loan of $2,900,000 with an interest rate of 8.67%. The Company expects
to invest $1,000,000 in capital improvements in these two communities. The
Company issued 187,850 shares of common stock for total net proceeds of
$3,394,000 to pay for the two purchases.
On May 1, 1997, the Company acquired the remaining interest in La Privada
Apartments L.L.C. for $8,233,000. The La Privada Apartments is a 350-unit
community in Scottsdale, Arizona. The Company also sold to its partner the
Company's entire interests in the other five joint ventures for total net
proceeds of $2,062,000. The Company obtained a $3,000,000 loan to pay for the
acquisition. As a result of these transactions, the Company owns all of its
apartment communities directly. The purchase increased the Company's investment
in apartments by approximately $25,500,000 and real estate notes payable by
$19,000,000. The sale of the interests in the joint ventures will not have a
significant impact on the operating results of the Company.
As of May 9, 1997, the Company owns 36 apartment communities containing 6,346
units with a total book value of approximately $217,000,000, and the total real
estate borrowing is approximately $139,000,000.
4. MORTGAGE ASSETS
During the first quarter of 1997, the Company redeemed three mortgage assets
for proceeds of $6,815,000 and realized redemption income of $5,338,000. During
the first quarter of 1996, the Company sold a 40% interest in a mortgage asset
that was later redeemed in the second quarter of 1996. The Company received
proceeds of $2,400,000 and redemption income of $1,977,000 from the sale. In
April 1997, the Company redeemed two additional assets for proceeds of $710,000
and estimated income of $330,000. In June 1997, the Company sold its remaining
mortgage assets for approximately $13,350,000 with a gain of $10,950,000. As a
result, the Company no longer owns any mortgage assets and will not realize any
additional cash flows or income from mortgage assets.
5. NOTES PAYABLE
In March 1997, the Company obtained a $3,700,000 new mortgage loan with a
fixed rate of 8.39% and a 10 year term in connection with the purchase of an
apartment community.
F-22
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Quarters
Ended March 31, 1997 and 1996--(Continued)
As discussed in Note 2, the Company has obtained a $15,350,000 construction
loan to finance the construction of its Finisterra apartment community. The loan
bears interest at 1% per annum above the bank's prime rate (8.5%). At March 31,
1997 and December 31, 1996, the amount outstanding on the loan was $10,224,000
and $255,000, respectively.
At March 31, 1997 and December 31, 1996, the Company's short-term borrowing
was secured by mortgage assets with a total carrying value of $2,029,000 and
$3,084,000, respectively. The Company repaid the borrowings in June 1997 in
connaection with the sale of its mortgage assets.
6. RELATED PARTY TRANSACTIONS
From the inception of the Company through April 30, 1997, Pima Mortgage
Limited Partnership (the "Manager"), managed the operations of the Company
pursuant to a management agreement. The management fee and administrative fee
were $95,000 and $40,000 for the quarter ended March 31, 1997 and $97,000 and
$52,000 for the 1996 quarter.
Prior to May 1, 1997, the Company had a property management agreement with
Pima Realty Advisors, Inc. (the "Property Manager"), an affiliate of the
Manager, for each of its apartment communities. Under the property management
agreements, the Property Manager provided 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 were 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 the
quarters ended March 31, 1997 and 1996 were $145,000 and $109,000, respectively,
which were equal to approximately 3.9% and 3.0%, respectively, of rental and
other income.
As a part of the acquisitions described in Note 3, the Company also acquired
the entire ownership interests of the Manager and the Property Manager for
262,008 shares of common stock. As a result, the Company has become a
self-administered and self-managed REIT. The owners of the Manager continue to
be executive officers and members of the Board of Directors of the Company. The
cost of the acquisition of $5,250,000 is assigned to the contracts between the
Company and the Pima entities. As the contracts are effectively terminated, the
cost is charged to contract termination expense in the second quarter of 1997.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
ASR Investments Corporation:
We have audited the accompanying combined historical summary of revenues and
certain operating expenses (the "Summary") of the Winton Properties (as
described in Note 2), for the year ended December 31, 1996. The Summary is the
responsiblity of the management of the Winton Properties. Our responsibility is
to express an opinion on the Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Summary. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Summary presentation. We believe that our audit provides
a reasonable basis for our opinion.
The accompanying Summary was prepared for the purpose of complying with Rule
3-14 of Regulation S-X of the Securities and Exchange Commission for inclusion
in ASR Investments Corporation's Registration Statement on Form S-3 as described
in Note 1 to the Summary and is not intended to be a complete presentation of
the Winton Properties' revenues and expenses.
In our opinion, such Summary presents fairly, in all material respects, the
combined revenues and certain operating expenses, as defined above, of the
Winton Properties for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Tucson, Arizona
April 25, 1997
F-24
<PAGE>
WINTON PROPERTIES
COMBINED HISTORICAL SUMMARY OF REVENUES AND
CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
Rental income .......................................... $14,348
Other apartment operating income ....................... 254
-------
Total revenue .......................................... 14,602
-------
Certain Operating Expenses
Operating and maintenance expenses ................... 4,891
Real estate taxes and insurance ...................... 1,882
-------
Total certain operating expenses ....................... 6,773
-------
Excess of revenue over certain operating expenses ...... $ 7,829
=======
See accompanying notes to the historical summary of
revenues and certain operating expenses.
F-25
<PAGE>
WINTON PROPERTIES
COMBINED HISTORICAL SUMMARY OF REVENUES AND
CERTAIN OPERATING EXPENSES
FOR THE QUARTER ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
Rental income ........................................... $3,719
Other apartment operating income ........................ 64
------
Total revenue ........................................... 3,783
------
Certain Operating Expenses
Operating and maintenance expenses .................... 1,229
Real estate taxes and insurance ....................... 503
------
Total certain operating expenses ........................ 1,732
------
Excess of revenue over certain operating expenses ....... $2,051
======
See accompanying notes to the historical summary of
revenues and certain operating expenses.
F-26
<PAGE>
WINTON PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF REVENUES
AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
1. BASIS OF PRESENTATION
The combined historical summary of revenues and certain operating expenses
(the "Summary") has been prepared in accordance with Rule 3-14 of Regulation S-X
of the Securities and Exchange Commission ("Rule 3-14"). The Summary reflects
the historical revenues and certain operating expenses of the thirteen apartment
communities and one commercial property as listed in Note 2 (the "Winton
Properties") for the year ended December 31, 1996. ASR Investments Corporation
("ASR") has entered into agreements to acquire the Winton Properties from
unaffiliated third parties. In accordance with Rule 3-14, the Summary includes
certain operating and maintenance costs, real estate taxes and insurance
expenses, but excludes mortgage interest, depreciation and corporate expenses as
they are dependent upon a particular owner, purchase price or other financial
arrangement. Accordingly, the expenses reflected in the Summary may not be
comparable to the expenses to be incurred by ASR in the operations of the
properties. ASR is not aware of any material factors relating to the Winton
Properties other than those set forth herein that would cause the Summary not to
be indicative of the future operating results of the properties.
The Summary has been prepared on the accrual method of accounting. The
apartment communities have operating leases with terms generally of one year or
less. The commercial property has operating leases with remaining terms of 11
months to 91 months as of March 31, 1997. Rental income is recognized as earned.
2. WINTON PROPERTIES
Below is certain information relating to the Winton Properties:
Apartment Communities
PROPERTY NAME LOCATION NO. OF UNITS
- ------------------------------- ------------------- --------------
Briar Park Apartments ................. Houston, Texas 80
Chelsea Park Apartments ............... Houston, Texas 204
Timbercreek Landings Apartments Houston, Texas 204
14400 Montfort Townhomes ............. Dallas, Texas 83
Springfield Apartments ................ Dallas, Texas 218
Greenwood Creek Apartments. ........... Fort Worth, Texas 328
Aspen Court Apartments ................ Arlington, Texas 140
Country Club Place Apartments ........ Richmond, Texas 169
Highlands of Preston Apartments Plano, Texas 220
Marymont Apartments ................... Tomball, Texas 128
Riverway Apartments ................... Bay City, Texas 152
Campus Commons North Apartments........ Pullman, Washington 234
Campus Commons South Apartments........ Pullman, Washington 100
Commercial Property
PROPERTY NAME LOCATION SQUARE FEET
- ------------------------------------ -------- -----------
Pacific South Center Office Building ........ Seattle, Washington 73,232
3. 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.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
ASR Investments Corporation:
We have audited the accompanying historical summary of revenues and certain
operating expenses (the "Summary") of London Park Apartments, for the year ended
December 31, 1996. The Summary is the responsiblity of the management of ASR
Investments Corporation. Our responsibility is to express an opinion on the
Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Summary. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Summary presentation. We believe that our audit provides
a reasonable basis for our opinion.
The accompanying Summary was prepared for the purpose of complying with Rule
3-14 of Regulation S-X of the Securities and Exchange Commission for inclusion
in ASR Investments Corporation's Registration Statement on Form S-3 as described
in Note 1 to the Summary and is not intended to be a complete presentation of
London Park Apartments' revenues and expenses.
In our opinion, such Summary presents fairly, in all material respects, the
revenues and certain operating expenses, as defined above, of London Park
Apartments for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Tucson, Arizona
May 29, 1997
F-28
<PAGE>
LONDON PARK APARTMENTS
HISTORICAL SUMMARY OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
1996 1997
------ ------
(UNAUDITED)
Rental income .................................... $1,306 $ 347
Other operating income ........................... 22 6
------ ------
Total revenue .................................... 1,328 353
------ ------
Certain Operating Expenses
Operating and maintenance expenses ............. 514 120
Real estate taxes and insurance ................ 282 80
------ ------
Total certain operating expenses ................. 796 200
------ ------
Excess of revenues over certain operating expenses $ 532 $ 153
====== ======
See accompanying notes to the historical summary of
revenues and certain operating expenses.
F-29
<PAGE>
LONDON PARK APARTMENTS
NOTES TO HISTORICAL SUMMARY OF REVENUES
AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
London Park Apartments is a 257-unit apartment community located in Houston,
Texas. The historical summary of revenues and certain operating expenses (the
"Summary") of London Park Apartments has been prepared in accordance with Rule
3-14 of Regulation S-X of the Securities and Exchange Commission ("Rule 3-14").
ASR acquired the property in April 1997 from an unrelated party. In accordance
with Rule 3-14, the Summary includes certain operating and maintenance expenses,
real estate taxes and insurance expenses, but excludes property management fee
expense, mortgage interest, depreciation and corporate expenses as they are
dependent upon a particular owner, purchase price or other financial
arrangement. Accordingly, the expenses reflected in the Summary may not be
comparable to the expenses to be incurred by ASR in the operations of the
property. ASR is not aware of any material factors relating to the property
other than those set forth herein that would cause the Summary not to be
indicative of the future operating results of the property.
The Summary has been prepared on the accrual method of accounting. The
property has operating leases with terms generally of one year or less.
Rental income is recognized as earned.
2. 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 financial statements. Actual results
could differ from those estimates.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
ASR Investments Corporation:
We have audited the accompanying historical summary of revenues and certain
operating expenses (the "Summary") of La Privada Apartments, for the year ended
December 31, 1996. The Summary is the responsiblity of the management of ASR
Investments Corporation. Our responsibility is to express an opinion on the
Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Summary. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Summary presentation. We believe that our audit provides
a reasonable basis for our opinion.
The accompanying Summary was prepared for the purpose of complying with Rule
3-14 of Regulation S-X of the Securities and Exchange Commission for inclusion
in ASR Investments Corporation's Registration Statement on Form S-3 as described
in Note 1 to the Summary and is not intended to be a complete presentation of La
Privada Apartments' revenues and expenses.
In our opinion, such Summary presents fairly, in all material respects, the
revenues and certain operating expenses, as defined above, of La Privada
Apartments for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Tucson, Arizona
May 23, 1997
F-31
<PAGE>
LA PRIVADA APARTMENTS
HISTORICAL SUMMARY OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
1996 1997
------ ------
(UNAUDITED)
Rental income .................................... $3,199 $ 829
Other operating income ........................... 100 23
------ ------
Total revenue .................................... 3,299 852
------ ------
Certain Operating Expenses
Operating and maintenance expenses ............. 897 188
Real estate taxes and insurance ................ 160 55
------ ------
Total certain operating expenses ................. 1,057 243
------ ------
Excess of revenues over certain operating expenses $2,242 $ 609
====== ======
See accompanying notes to the historical summary of
revenues and certain operating expenses.
F-32
<PAGE>
LA PRIVADA APARTMENTS
NOTES TO HISTORICAL SUMMARY OF REVENUES
AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
La Privada Apartments is a 350-unit apartment community located in
Scottsdale, Arizona which until May 1997 was owned by a joint venture between
ASR and an unrelated party. The historical summary of revenues and certain
operating expenses (the "Summary") has been prepared in accordance with Rule
3-14 of Regulation S-X of the Securities and Exchange Commission ("Rule 3-14").
On May 1, 1997, ASR acquired the remaining 85% interest in La Privada Apartments
L.L.C. (the "LLC") and thus owns 100% of the community. ASR was the managing
member of the LLC and an affiliate of ASR was the property manager of the
community. In accordance with Rule 3-14, the Summary includes certain operating
and maintenance expenses, real estate taxes and insurance expenses, but excludes
property management fee expense, mortgage interest, depreciation and corporate
expenses as they are dependent upon a particular owner, purchase price or other
financial arrangement. Accordingly, the expenses reflected in the Summary may
not be comparable to the expenses to be incurred by ASR in the operations of the
property. ASR is not aware of any material factors relating to the property
other than those set forth herein that would cause the Summary not to be
indicative of the future operating results of the property.
The Summary has been prepared on the accrual method of accounting. The
property has operating leases with terms generally of one year or less.
Rental income is recognized as earned.
2. 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 financial statements. Actual results
could differ from those estimates.
F-33
<PAGE>
OTHER ACQUIRED COMMUNITIES
COMBINED HISTORICAL SUMMARY OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
1996 1997
------ ------
Rental income .................................... $1,885 $ 468
Other operating income ........................... 55 13
------ ------
Total revenue .................................... 1,940 481
------ ------
Certain Operating Expenses
Operating and maintenance expenses ............. 838 184
Real estate taxes and insurance ................ 234 53
------ ------
Total certain operating expenses ................. 1,072 237
------ ------
Excess of revenues over certain operating expenses $ 868 $ 244
====== ======
See accompanying notes to the historical summary of
revenues and certain operating expenses.
F-34
<PAGE>
OTHER ACQUISITION COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF REVENUES
AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The combined historical summary of revenues and certain operating expenses
(the "Summary") has been prepared in accordance with Rule 3-14 of Regulation S-X
of the Securities and Exchange Commission ("Rule 3-14"). The Summary reflects
the combined historical operating revenues and certain operating expenses of two
apartment communities (the "Other Acquisition Communities"): the Ivystone/
Woodridge Apartments acquired in March 1997, and The Court Apartments acquired
in May 1997. In accordance with Rule 3-14, the Summary includes certain
operating and maintenance expenses, real estate taxes and insurance expenses,
but excludes property management fee expense, mortgage interest, depreciation
and corporate expenses as they are dependent upon a particular owner, purchase
price or other financial arrangement. Accordingly, the expenses reflected in the
Summary may not be comparable to the expenses to be incurred by ASR in the
operations of the properties. ASR is not aware of any material factors relating
to the properties other than those set forth herein that would cause the Summary
not to be indicative of the future operating results of the properties.
The Summary has been prepared on the accrual method of accounting. The
properties have operating leases with terms generally of one year or less.
Rental income is recognized as earned.
2. 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 financial statements. Actual results
could differ from those estimates.
F-35
<PAGE>
============================================ ==================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS 1,312,737 SHARES
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH ASR INVESTMENTS
SUCH OFFER OR SOLICITATION IS UNLAWFUL. CORPORATION
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER NO COMMON STOCK
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT (PAR VALUE $.01 PER SHARE)
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF OR THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information .................. 2
Incorporation of Certain Information by
Reference ............................. 2
Prospectus Summary ..................... 3
Risk Factors ........................... 15
Use of Proceeds ........................ 21 ------------------
Capitalization ......................... 21
Price Range of Common Stock ............ 21
Selected Financial Information ......... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 23
Business and Properties ................ 29
Management ............................. 38 ------------------
Certain Transactions ................... 45
Principal and Selling Shareholders ..... 46
Federal Income Tax Considerations ...... 48 June 10, 1997
Description of Capital Stock ........... 52
Heritage Communities L.P. .............. 54
Summary of the Heritage LP
Partnership Agreement ................. 54
Plan of Distribution ................... 56
Legal Matters .......................... 57
Experts ................................ 57
Index to Financial Statements ..........F-1
=========================================== ===================================
