AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------
ASR INVESTMENTS CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Maryland 6511 86-0587826
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
335 North Wilmot, Suite 250, Tucson, Arizona 85711, (520) 748-2111
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
Jon A. Grove
335 North Wilmot, Suite 250, Tucson, Arizona 85711, (520) 748-2111
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPY TO:
Robert S. Kant, Esq.
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback, Suite 1100
Phoenix, Arizona 85012
(602) 263-2606
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Amount Proposed Maximum Proposed Maximum
Title of Shares to be Offering Price Aggregate Amount of
to be Registered Registered Per Share(1) Offering Price(1) Registration Fee
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock........ 2,000,000 Shares $22.50 $45,000,000 $13,636.36
</TABLE>
================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c).
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 26, 1997
PROSPECTUS
2,000,000 SHARES
ASR INVESTMENTS CORPORATION
COMMON STOCK
---------------
This Prospectus covers 2,000,000 shares of Common Stock, par value $.01 per
share ("Common Stock"), of ASR Investments Corporation (the "Company") that may
be issued and sold by the Company from time to time in connection with the
acquisition by the Company, or subsidiaries of the Company, of apartment
communities, other assets, or other businesses. It is expected that the terms of
any such acquisitions will be determined by negotiations with the owners or
controlling persons of the assets or businesses to be acquired and that the
shares of Common Stock issued in connection with such acquisitions will be
valued at prices reasonably related to market prices current either at the time
of the agreement on the terms of an acquisition or at or about the time of
delivery of the shares.
No underwriting discounts or commissions will be paid, although finder's fees
may be paid from time to time in connection with specific acquisitions. Any
person receiving such fee may be deemed to be an Underwriter within the meaning
of the Securities Act of 1933, as amended (the "Securities Act").
The Common Stock is listed on the American Stock Exchange (the "Amex") under
the symbol "ASR." Application will be made to list the shares of Common Stock
offered hereby on the American Stock Exchange. On June 20, 1997, the closing
price for the Common Stock on the Amex was $22 3/8 per share.
All expenses of the Offering will be paid by the Company.
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
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is , 1997
<PAGE>
AVAILABLE INFORMATION
The company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on form S-4 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 by the
Company on July 31, 1987, (iii) the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, as filed by the Company on May 14, 1997, (iv)
the Company's Current Report on Form 8-K as filed by the Company on May 15,
1997, as amended on Form 8-K/A filed by the Company on June 16, 1997, and (v)
the Company's Current Report on Form 8-K as filed by the Company on June 18,
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 than the national average, and (iv) disposing of investments than
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.
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,
real estate taxes and insurance ....... (5,497) (6,719) (6,855) (1,614) (1,684)
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
expenses and other income ................. (62,510) (17,816) 9,195 9,075 12,469 2,938 5,866
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
accounting change .......................... (64,875) (19,479) 7,702 6,554 8,841 2,340 4,946
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
effect of accounting change ............. $ (20.20) $ (6.27) $ 2.48 $ 2.09 $ 2.80 $ 0.74 $ 1.52
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 asset... $ 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
insurance ................... (1,451) (1,882) (282) (160) (234) (4,009)
Interest expense ............. (4,348) (6,408)(N) (10,756)
Depreciation and amortization (2,819) (4,860)(M) (7,679)
-------- -------- -------- -------- -------- -------- --------
Real estate operating
expenses ................. (14,022) (8,253) (796) (1,057) (1,072) (10,165) (35,365)
-------- -------- -------- -------- -------- -------- --------
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
sales ...................... 9,461 9,461
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
expenses ................... (3,487) (2,198) (200) (243) (237) (2,496) (8,861)
------- ------- ----- ----- ----- -------- -------
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
sales ...................... 5,338 5,338
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 costs .......... 538
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 costs ........ 347
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 Adjustment .................. $4,860 $1,194
====== ======
(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
joint ventures ....................... 297 -- 105 --
Amortization of goodwill .............. 70 18
Income from redemptions and sales of
mortgage assets ...................... (9,461) (9,461) (5,338) (5,338)
------------ ---------- ------------ ----------
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
18
<PAGE>
shares of Common Stock at any time following April 30, 1998. The 2,000,000
shares of Common Stock available for issuance pursuant to the Registration
Statement to which this Prospectus relates will generally be freely tradeable
after their issuance under Rule 145 of the Securities Act, unless held by an
affiliate, in which case such shares will be subject to the volume and manner of
sale restrictions under Rule 144.
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
19
<PAGE>
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
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>
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 at
any time following April 30, 1998 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.)
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
LP Units, 942,184 units outstanding (adjusted) ............. $ 18,879
Common Stock, par value $0.01, 40,000,000 shares
authorized;
3,394,392 shares issued (actual);
4,598,157 shares issued (adjusted) ........................ $ 34 46
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
=========== ===========
</TABLE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed and principally traded on the Amex under
the symbol "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 20, 1997) ...... 23 3/8 18 3/4
On June 20, 1997, the closing sales price of the Common Stock on the Amex was
$22 3/8 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
expenses and other income ............... (62,510) (17,816) 9,195 9,075 12,469 2,938 5,866
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
accounting change ....................... (64,875) (19,479) 7,702 6,554 8,841 2,340 4,946
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
effect of accounting change ............. $ (20.20) $ (6.27) $ 2.48 $ 2.09 $ 2.80 $ 0.74 $ 1.52
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.
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,
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 one office building in Seattle,
Washington, and 36 apartment communities, containing 6,347 apartment units,
located in Phoenix and Tucson, Arizona; Houston and Dallas, Texas; Albuquerque,
New Mexico; and Seattle 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 and office building.
<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>
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 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.
35
<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
36
<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.
37
<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>
LONG TERM COMPENSATION
-------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION --------------------- -------
NAME AND PRINCIPAL -------------------------- RESTRICTED OPTIONS/ LTIP ALL OTHER
POSITION YEAR SALARY BONUS OTHER STOCK SARS PAYOUT COMPENSATION
- -------- ---- ------ ----- ----- ----- ---- ------ ------------
<S> <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."
38
<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>
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS/ OPTIONS/SARS AT ASSUMED ANNUAL RATES
SARS GRANTED TO EXERCISE OF STOCK PRICE 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% $16.50 12/16/98 118,738 233,800
</TABLE>
- --------------------
(1)This amount is the calculated future value of the stock options as of
December 16, 1998 assuming stock price appreciation rates of 5% and 10% per
year as specified in Item 402(c)(2) of Regulation S-K.
OPTION EXERCISES AND HOLDINGS
The following table represents certain information respecting the options
held by the officers included in the above table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------- -------------
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
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 abstained from participating in the deliberations of the
Board of Directors concerning the approval of the Management Agreement, the
Property Management Agreements,
39
<PAGE>
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 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.
40
<PAGE>
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.
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.
41
<PAGE>
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.
42
<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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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 STOCKHOLDERS
As of June 6, 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 June 6, 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>
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES TOTAL(1)
------------------------ ------ --------
<S> <C> <C>
Directors and Executive Officers
--------------------------------
Jon A. Grove 233,527 5.1%
Joseph C. Chan 233,808 5.1
Frank S. Parise, Jr 206,631 4.5
Don W. Winton(3) 145,204 3.3
Earl M. Baldwin 3,477 (2)
Steven G. Davis 0 (2)
John J. Gisi 11,658 (2)
Raymond L. Horn 5,988 (2)
Frederick C. Moor 3,378 (2)
All directors and executive officers 859,623 18.0
as a group (12 persons)
Non-Management 5% Stockholders
------------------------------
King William Associates(4)(5) 531,269 12.0%
</TABLE>
- -----------------
(1) 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 of June 6, 1997 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.
(2) Less than 1% of the outstanding shares of Common Stock.
(3) The number of shares shown are owned directly by Mr. Winton and does not
include any of the shares owned by (i) King William Associates in which Mr.
Winton is a 15.4% general partner and (ii) Grantor Trust of Former CHB
Partners (which owns 56,178 shares of Common Stock) of which Mr. Winton is
the trustee and his children own a 9.25% beneficial interest in the trust.
(4) King William Associates received the shares in connection with the Company's
acquisition of the Winton Properties. Mr. Winton is a general partner and
owns 15.4% interest in King William Associates.
(5) King William Associates may be reached at 3485 FM 1960 West, Suite 450,
Houston, Texas 77060
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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 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.
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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 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
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<PAGE>
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.
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.
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<PAGE>
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, (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.
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<PAGE>
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 at
any time following April 30, 1998. 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 Exchange Offer 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. 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
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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 Winton 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.
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
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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.
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
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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 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
52
<PAGE>
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
This Prospectus covers 2,000,000 shares of Common Stock that may be issued
and sold by the Company from time to time in connection with the acquisition by
the Company of apartment communities, other assets, and other businesses. It is
expected that the terms of any such acquisitions will be determined by
negotiations with the owners or controlling persons of the assets or businesses
to be acquired and that the shares of Common Stock issued in connection with
such acquisitions will be valued at prices reasonably related to market prices
current either at the time of agreement on the terms of an acquisition or at or
about the time of delivery of such shares.
No underwriting discounts or commissions will be paid, although finder's fees
may be paid from time to time in connection with specific acquisitions. Any
person receiving such fee may be deemed to be an Underwriter within the meaning
of Securities Act.
LEGAL OPINIONS
The validity of the Common Stock offered hereby will be passed upon for the
Company 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.
53
<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
shares authorized; 3,303,226 and 3,307,892 shares
issued .......................................... 33 33
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
INCOME (EXPENSE) ................................... 9,195 9,075 12,469
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)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF OPTION PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
------ --------- --------------
<S> <C> <C> <C>
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
=======
</TABLE>
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 flow 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
connection 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 combined 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 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 SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER NO CIRCUMSTANCES, CREATE ANY IMPLICATION THAT 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
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 ................................. 36
Certain Transactions ....................... 43
Principal Shareholders ..................... 44
Federal Income Tax Considerations .......... 45
Description of Capital Stock ............... 49
Heritage Communities L.P. .................. 50
Summary of the Heritage LP
Partnership Agreement ..................... 50
Plan of Distribution ....................... 53
Legal Opinions ............................. 53
Experts .................................... 53
Index to Financial Statements .............. F-1
================================================================================
================================================================================
2,000,000 SHARES
ASR INVESTMENTS
CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------------
-----------------
, 1997
================================================================================
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Articles of Incorporation provide for
indemnification of directors and officers of the Company to the fullest extent
permitted by Maryland law.
Section 2-418 of the General Corporation Law of the State of Maryland
generally permits indemnification of any director or officer made a party to any
proceeding by reason of service in that capacity unless it is provided that: (i)
the act or omission of the director or officer was material to the cause of
action adjudicated in the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the director or officer
actually received an improper personal benefit in money, property, or services;
or (iii) in the case of criminal proceedings, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements,
and reasonable expenses actually incurred by the director or officer in
connection with the proceeding; provided, however, that if the proceeding is one
by of in the right of the corporation, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the corporation. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that personal benefit was improperly received. The
termination of any proceeding by judgment, order, or settlement does not create
a presumption that the director or officer did not meet the requisite standard
of conduct required for indemnification to be permitted. The termination of any
proceeding by conviction, upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted.
Section 2-418 of the General Corporation Law of the State of Maryland further
provides that indemnification thereunder may not be made by the Company unless
authorized after a determination has been made that such indemnification is
proper, with that determination to be made (a) by the Board of Directors by
majority vote of a quorum consisting of directors not, at the time, parties to
the proceeding, or, if such a quorum cannot be obtained, then by a majority vote
of a committee of the Board of Directors consisting of two or more directors
not, at the time, parties to such proceeding and designated to act in the
matter, (b) by special legal counsel selected by the Board of Directors or a
committee of the Board of Directors as set forth in subparagraph (a) or, if the
requisite quorum of the Board of Directors cannot be obtained therefor and the
committee cannot be established, by a majority vote of the full Board of
Directors, including those directors who are parties to such proceeding, or (c)
by the stockholders.
Section 2-418 of the General Corporation Law of the State of Maryland
requires indemnification of any director or officer who has been successful, on
the merits or otherwise, in the defense of any proceeding against reasonable
expenses incurred by the director or officer in connection with the proceeding.
A court of appropriate jurisdiction, upon application of a director or officer
and such notice as the court shall require, may order indemnification (1) if the
court determines that a director or officer is entitled to reimbursement as a
result of a successful defense on the merits or otherwise, in which case the
director shall be entitled to recover the expenses of securing such
reimbursement, or (2) if the court determines that the director or officer is
fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not the director or officer has met the requisite
standards of conduct or has been adjudged liable with respect to any proceeding
charging improper personal benefit to the director or officer, in which case the
court may order such indemnification as the court shall deem proper; provided,
however, indemnification with respect to (i) any proceeding by or in the right
of the corporation or (ii) any proceeding in which the director or officer has
been adjudged liable with respect to a charge of improper personal benefit,
shall be limited to expenses.
II-1
<PAGE>
ITEM 21. EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
2(a) Master Combination and Contribution Agreement dated as of November
8, 1996 between ASR Investments Corporation, Don W. Winton, certain
limited partnerships in which Mr. Winton is the general partner,
Winton & Associates, Inc., Heritage Communities L.P., Heritage
Residential Group, Inc., Heritage SGP Corporation, Pima Mortgage
Limited Partnership, Pima Realty Advisors, Inc., Jon A. Grove,
Joseph C. Chan, and Frank S. Parise, Jr.(8)
2(b) Addendum to the Master Combination and Contribution Agreement dated
as of April 30, 1997 between ASR Investments Corporation, Don W.
Winton, certain limited partnerships for which Mr. Winton is the
general partner, Winton & Associates, Inc., Heritage Communities
L.P., Heritage Residential Group, Inc., Heritage SGP Corporation,
Pima Mortgage Limited Partnership, Pima Realty Advisors, Inc., Jon
A. Grove, Joseph C. Chan, and Frank S. Parise, Jr.(8)
2(c) Agreement and Plan of Reorganization dated as of November 8, 1996
between ASR Investments Corporation, Heritage Residential Group,
Inc., Winton & Associates, Inc., and Don W. Winton.(8)
2(d) Agreement and Plan of Reorganization dated as of November 8, 1996
between ASR Investments Corporation, Heritage Residential Group,
Inc., Pima Realty Advisors, Inc., Pima Mortgage Limited Partnership,
JG Mortgage Advisors, Inc., JC Mortgage Advisors, Inc., FP Mortgage
Advisors, Inc., Jon A. Grove, Joseph C. Chan, and Frank S. Parise,
Jr.(8)
3(a) First Amended and Restated Articles of Incorporation of the
Registrant(1)
3(b) Articles of Amendment to the First Amended and Restated Articles of
Incorporation of the Registrant(3)
3(c) Bylaws of the Registrant(1)
3(d) Second Amended and Restated Articles of Incorporation of the
Registrant
3(e) Amended Bylaws of the Registrant
4 Specimen Certificate representing $.01 par value Common Stock(1)
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears,
P.A.
10(a) Management Agreement between the Registrant and ASMA Mortgage
Advisors Limited Partnership(5)
10(b) Subcontract Agreement between ASMA Mortgage Advisors Limited
Partnership and American Southwest Financial Services, Inc.(3)
10(c) Right of First Refusal between the Company and the Manager(3)
10(d) Limited Partnership Agreement of Southwest Capital Mortgage Funding
Limited Partnership(2)
10(e) Amended and Restated Stock Option Plans(4)
10(f) Indemnification and Use of Name Agreement Between the Company and
American Southwest(4)
10(g) Dividend Reinvestment and Stock Purchase Plan(3)
10(h) Agreement for Purchase and Sale of Apartments ("Purchase Agreement")
dated July 15, 1993 by and between Buyer and Seller.(6)
10(i) First Amendment to Purchase Agreement dated August 18, 1993, by and
between Buyer and Seller.(6)
10(j) Second Amendment to Purchase Agreement dated September 21, 1993 by
and between Buyer and Seller.(6)
10(k) Third Amendment to Purchase Agreement dated October 27, 1993 by and
between Buyer and Seller.(6)
10(l) Master Property Management Agreement with Pima Realty Advisors, Inc.
for the year ending December 31, 1994 and the signature page for
each of the properties.(6)
10(m) Second Articles of Amendment to the First Amended and Restated
Articles of Incorporation of the Registrant.(7)
10(n) Third Articles of Amendment to the First Amended and Restated
Articles of Incorporation of the Registrant.(7)
10(o) First Amendment to the Bylaws of the Registrant.(7)
II-2
<PAGE>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10(p) Deed of Trust, Security Agreement, Financing Statement and
Assignment of Leases and Rents dated as of January 11, 1994 made by
the following entities for the benefit of Lexington Mortgage
Company(6):
ASV-I Properties, Inc.
ASV-III Properties, Inc.
ASV-IV Properties, Inc.
ASV-V Properties, Inc.
ASV-VI Properties, Inc.
ASV-VII Properties, Inc.
ASV-VIII Properties, Inc.
ASV-IX Properties, Inc.
ASV-X Properties, Inc.
ASV-XI Properties, Inc.
ASV-XII Properties, Inc.
ASV-XIII Properties, Inc.
ASV-XIV Properties, Inc.
ASV-XV Properties, Inc.
ASV-XVI Properties, Inc.
10(q) Registration Agreement dated as of April 30, 1997 between ASR
Investments Corporation and Don W. Winton on behalf of certain
partners in certain limited partnerships in which Mr. Winton is the
general partner.(8)
10(r) Registration Agreement dated as of April 30, 1997 between ASR
Investments Corporation, Heritage Communities L.P. and certain
limited partnerships in which Don W. Winton is the general
partner.(8)
10(s) Employment Agreement dated as of April 30, 1997 between ASR
Investments Corporation and Don W. Winton.(8)
10(t) Employment Agreement dated as of April 30, 1997 between ASR
Investments Corporation and Jon A. Grove.(8)
10(u) Employment Agreement dated as of April 30, 1997 between ASR
Investments Corporation and Joseph C. Chan.(8)
10(v) Employment Agreement dated as of April 30, 1997 between ASR
Investments Corporation and Frank S. Parise, Jr.(8)
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP.
- -----------------------
(1)Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33- 15232) filed August 19, 1987 and declared effective on
August 19, 1987.
(2)Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-20429) filed March 16, 1988 and declared effective on March
17, 1988.
(3)Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1988 as filed with the Commission on or about March 30,
1989.
(4)Incorporated herein by reference to Registrant's Registration Statement on
Form S-3 (33-42923) filed on September 30, 1991 and declared effective on
October 1, 1991.
(5)Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1992.
(6)Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about March 29, 1994.
(7)Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1995 as filed with the Commission on or about April 1,
1996.
(8)Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about May 15, 1997.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement,
provided, however, that clauses (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference into the Registration Statement.
(2)That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To Remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
derterming any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post- effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registration pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is,
II-4
<PAGE>
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10, 11, or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tucson, State of Arizona
on the 24th day of June, 1997.
ASR INVESTMENTS CORPORATION
By: /s/ JON A. GROVE
------------------------------------
Jon A. Grove
Chairman of the Board, President, and
Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints jointly and severally, Jon A. Grove and Joseph C.
Chan and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitition, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
pre-effective and post-effective amendments) to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Secuities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all which said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do, or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated:
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<S> <C> <C>
/s/ JON A. GROVE Chairman of the Board, President, and June 24, 1997
- ------------------------ Chief Executive Officer (Principal
Jon A. Grove Executive Officer)
/s/ FRANK S. PARISE, JR. Vice Chairman, Executive Vice President, June 24, 1997
- ------------------------ Chief Administrative Officer and Director
Frank S. Parise, Jr.
/s/ JOSEPH C. CHAN Executive Vice President, Chief June 24, 1997
- ------------------------ Operations Officer, Chief Financial
Joseph C. Chan Officer, Secretary, Treasurer and
Director (Principal Financial and Accounting Officer)
/s/ DON W. WINTON Executive Vice President and Director June 24, 1997
- ------------------------
Don W. Winton
/s/ EARL M. BALDWIN Director June 24, 1997
- ------------------------
Earl M. Baldwin
/s/ STEVEN G. DAVIS Director June 24, 1997
- ------------------------
Steven G. Davis
/s/ JOHN J. GISI Director June 24, 1997
- ------------------------
John J. Gisi
/s/ RAYMOND L. HORN Director June 24, 1997
- ------------------------
Raymond L. Horn
/s/ FREDERICK C. MOOR Director June 24, 1997
- ------------------------
Frederick C. Moor
</TABLE>
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
ARTICLES OF INCORPORATION
OF
ASR INVESTMENTS CORPORATION
ASR Investments Corporation, a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Corporation desires to amend and restate its
Charter as currently in effect. Therefore, the Charter of the Corporation is
hereby amended and restated to read in its entirety as follows:
ARTICLE I
INCORPORATORS
The undersigned Jon A. Grove and Joseph C. Chan, each of whose
address is 335 North Wilmot, Suite 250, Tucson, Arizona 85711, and each being at
least 18 years of age, do hereby act as incorporators, under and by virtue of
the General Corporation Law of the State of Maryland authorizing the formation
of corporations and with the intention of forming a corporation.
ARTICLE II
NAME
The name of the corporation shall be ASR Investments
Corporation (the "Corporation").
ARTICLE III
PURPOSES
The purposes for which the Corporation is formed, and the
business and objects to be carried on and promoted by it, are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust ("REIT") under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended, or any successor statute
(the "Code")) for which corporations may be organized under the General
Corporation Law of the State of Maryland as now or hereafter in force.
ARTICLE IV
PRINCIPAL OFFICE
The present address of the principal office of the Corporation
in the State of Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202.
ARTICLE V
RESIDENT AGENT
The name and address of the resident agent of the Corporation
in the State of Maryland are The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. Said resident agent is a Maryland
corporation.
<PAGE>
ARTICLE VI
CAPITAL STOCK
(a) Authorized Capital Stock. The total number of shares of
stock ("Capital Stock") which the Corporation has authority to issue is Forty
Million (40,000,000) shares of Capital Stock amounting in aggregate par value to
Four Hundred Thousand Dollars ($400,000). All of the authorized shares are
classified as Common Stock of the same class (the "Common Stock").
(b) Common Stock. Each share of Common Stock shall entitle the
owner thereof to vote at the rate of one (1) vote for each share held.
(c) Fractional Shares. The Corporation shall not issue
fractional shares of its Capital Stock.
(d) Capital Stock Restrictions. All persons who acquire shares
of Capital Stock in the Corporation shall acquire such shares subject to the
provisions of these Articles of Incorporation and the Bylaws of the Corporation.
ARTICLE VII
DIRECTORS
The number of directors of the Corporation shall be not less
than three nor more than fifteen, which number may be increased or decreased
pursuant to the Bylaws of the Corporation, but shall never be less than the
minimum number permitted by the General Corporation Law of the State of Maryland
now or hereafter in force. The names of the directors who shall serve until
their successors are duly elected and qualified are Jon A. Grove, Joseph C.
Chan, Frank S. Parise, Jr., John J. Gisi, Raymond L. Horn, Earl M. Baldwin and
Frederick C. Moor.
ARTICLE VIII
RIGHTS AND POWERS OF DIRECTORS AND OFFICERS
The following provisions are hereby adopted for the purpose of
defining, limiting and regulating the powers of the Corporation and of the
directors and stockholders:
(a) Issuance of Capital Stock. The Board of Directors of the
Corporation is hereby empowered to authorize the issuance from time to time of
shares of its Capital Stock of any class or series, whether now or hereafter
authorized, and securities convertible into shares of its Capital Stock of any
class or series, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable and without any action by the
stockholders, subject to such limitations as may be set forth in these Articles
of Incorporation, in the Bylaws of the Corporation or in the General Corporation
Law of the State of Maryland.
(b) No Preemptive Rights. No holder of any shares of Capital
Stock or any other securities of the Corporation, whether now or hereafter
authorized, shall have any preemptive right to subscribe for or purchase any
shares of Capital Stock or any other securities of the Corporation other than
such right, if any, as the Board of Directors, in its sole discretion, may
determine and at such price or prices and upon such other terms as the Board of
Directors, in its sole discretion, may fix; and any shares of Capital Stock or
other securities which the Board of Directors may determine to offer for
subscription may, as the Board of Directors in its sole discretion shall
determine, be offered to certain holders of shares of Capital Stock to the
exclusion of any other holders of shares of Capital Stock.
(c) Indemnification. To the maximum extent permitted by the
General Corporation Law of the State of Maryland, as from time to time amended,
the Corporation shall indemnify its currently acting and its former directors
against any and all liabilities and expenses incurred in connection with their
services in such
2
<PAGE>
capacities, shall indemnify its currently acting and its former officers to the
full extent that indemnification shall be provided to directors, and may
indemnify its employees and agents and persons who serve and have served, at its
request as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture or other enterprise as may be determined
by the Board of Directors. The Corporation shall, also to the same extent,
advance expenses to its directors and officers and may advance expenses to other
indemnified persons and may by Bylaw, resolution or agreement make further
provision for indemnification of directors, officers, employees and agents. In
addition, the Corporation may indemnify and advance expenses to its currently
acting and former officers who do not serve as directors to such further extent
as shall be authorized by the Board of Directors and be consistent with law.
(d) Agreements. Subject to such conditions, if any, as may be
required by any applicable law, the Board of Directors may authorize the
execution and performance by the Corporation of one or more agreements with any
person, corporation, association, company, trust, partnership (limited or
general) or other organization whereby any such other person, corporation,
association, company, trust, partnership (limited or general) or other
organization shall render or make available to the Corporation managerial,
investment, advisory and/or related services, office space and other services
and facilities (including, if deemed advisable by the Board of Directors, the
management or supervision of investments of the Corporation) upon such terms and
conditions as may be provided in such agreement or agreements (including,
without limitation and if deemed fair and reasonable by the Board of Directors,
the compensation payable thereunder by the Corporation).
(e) Related Party Transactions. A contract or other
transaction between the Corporation and any of its directors or between the
Corporation and any other corporation, firm or other entity in which any of its
directors is a director or has a material financial interest is not void or
voidable solely because of any one or more of the following: The common
directorship or interest; the presence of the director at the meeting of the
Board of Directors which authorizes, approves, or ratifies the contract or
transaction; or the counting of the vote of the director for the authorization,
approval, or ratification of the contract or transaction. This section (e)
applies only if:
(i) the fact of the common directorship or interest
is disclosed to or otherwise known by (A) the Board of
Directors and the Board of Directors authorizes, approves, or
ratifies the contract or transaction by the affirmative vote
of a majority of the disinterested directors, even if the
disinterested directors constitute less than a quorum; or (B)
the stockholders entitled to vote, and the contract or
transaction is authorized, approved, or ratified by a majority
of the votes cast by the stockholders entitled to vote other
than the votes of the shares owned or record or beneficially
by the interested director or Corporation, firm, or other
entity; or
(ii) the contract or transaction is fair and
reasonable to the Corporation.
Common or interested directors or the stock owned by them or
by an interested corporation, firm, or other entity may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
at a meeting of the stockholders, as the case may be, at which the contract or
transaction is authorized, approved, or ratified. If a contract or transaction
is not authorized, approved, or ratified in one of the ways provided for in
clause (i) of the second sentence of section (e), the person asserting the
validity of the contract or transaction bears the burden of proving that the
contract or transaction was fair and reasonable to the Corporation at the time
that it was authorized, approved, or ratified. The procedures in this section
(e) do not apply to the fixing by the Board of Directors of reasonable
compensation for a director, whether as a director or in any other capacity.
(f) Other Powers. The Board of Directors of the Corporation
shall have power from time to time and in its sole discretion to determine in
accordance with sound accounting practice, what constitutes annual or other net
profits, earnings, surplus or net assets in excess of capital; to fix and vary
from time to time the amount to be reserved as working capital, or determine
that retained earnings or surplus shall remain in the hands of the Corporation;
to set apart out of any funds of the Corporation such reserve or reserves in
such amount or amounts and for such proper purpose or purposes as it shall
determine and to abolish any such reserve or any part thereof;
3
<PAGE>
to distribute and pay distributions or dividends in stock, cash or other
securities or property, out of surplus or any other funds or amounts legally
available therefor, at such times and to the stockholders of record on such
dates as it may, from time to time, determine; to determine whether and to what
extent and at what times and places and under what conditions and regulations
the books, accounts and documents of the Corporation, or any of them, shall be
open to the inspection of stockholders, except as otherwise provided by
applicable statute or by the Bylaws, and, except as so provided, no stockholder
shall have any right to inspect any book, account or document of the Corporation
unless authorized so to do by resolution of the Board of Directors; and to
determine any matters relating to the acquisition, holding and disposition of
any assets by the Corporation.
(g) Statutory Powers. The enumeration and definition of
particular powers of the Board of Directors included in this Article VIII shall
in no way be limited or restricted by reference to or inference from the terms
of any other clause of this or any other Article of the Charter of the
Corporation or construed as or deemed by inference or otherwise in any manner to
exclude or limit any powers conferred upon the Board of Directors under the law
of the State of Maryland now or hereafter in force.
(h) Liability. To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, no director or officer
of this Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate the
benefits provided to directors and officers under this provision with respect to
any act or omission which occurred prior to such amendment or repeal.
(i) Majority Vote. Notwithstanding any provisions of law
requiring the authorization of any action by a greater proportion than a
majority of the total number of shares of all classes of capital stock or of the
total number of shares of any class of capital stock, such action shall be valid
and effective if authorized by the affirmative vote of the holders of a majority
of the total number of stockholders of all classes outstanding and entitled to
vote thereon, except as other wise provided in these Articles of Incorporation.
(j) Amendments to Charter. The Corporation reserves the right
from time to time to make any amendments of its Charter which may now or
hereafter be authorized by law, including any amendments altering the terms or
contract rights, as expressly set forth in the Charter, of any of its
outstanding Capital Stock.
(k) Bylaws. The Board of Directors, and not the stockholders,
shall have the exclusive power to make, alter, amend or repeal the Bylaws of the
Corporation.
ARTICLE IX
REIT-RELATED RESTRICTIONS AND LIMITATIONS ON THE
EQUITY SHARES OF THE CORPORATION
Subsequent to the Effective Date (as hereinafter defined) and
until the Restriction Termination Date (as hereinafter defined), all Capital
Stock of the Corporation shall be subject to the following restrictions and
limitations intended to preserve the Corporation's status as a REIT:
(a) Definitions. The following terms shall have the following
meanings:
"Acquire" shall mean the acquisition of Beneficial or
Constructive Ownership of Capital Stock, whether by a Transfer, Non-Transfer
Event or by any other means, including, without limitation, an acquisition
pursuant to the exercise of an option, warrant, pledge or other security
interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquiror would be
considered a Beneficial Owner, as defined below.
"Beneficial Ownership" shall mean ownership of Capital
Stock by a Person who would be treated as an owner of Capital Stock either
directly or indirectly under Code Section 542(a)(2), taking into account, for
this purpose, constructive ownership determined under Code Section 544, as
modified by Code Section
4
<PAGE>
856(h)(1)(B) (except where expressly provided otherwise). The terms "Beneficial
Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings.
"Beneficiary" shall mean, with respect to any Share Trust,
one or more organizations described in each of Code Section 170(b)(1)(A) (other
than clauses (vii) or (viii) thereof) and Code Section 170(c)(2) that are named
by the Share Trust as the beneficiary or beneficiaries of such Share Trust, in
accordance with the provisions of Article X.
"Closely-Held Restriction" shall mean the restriction
under Code Section 856(a)(6) that a REIT not be "closely held" within the
meaning of Code Section 856(h).
"Code" shall mean the Internal Revenue Code of 1986, as
amended and in effect from time to time, or any successor statute thereto, as
interpreted by the applicable regulations thereunder. Any reference herein to a
specific Code section or sections shall be deemed to include a reference to any
corresponding provision of future law.
"Constructive Ownership" shall mean ownership of Capital
Stock by a Person who would be treated as an owner of such Capital Stock either
directly or constructively through the application of Code Section 318, as
modified by Code Section 856(d)(5). The terms "Constructively Own,"
"Constructively Owned" and "Constructive Owner" shall have the correlative
meanings.
"Effective Date" shall mean the date upon which these
Amended and Restated Articles of Incorporation are received, approved and
recorded by the State of Maryland State Department of Assessments and Taxation.
"Market Price" on any date shall mean the average of the
Closing Price for the five consecutive Trading Days ending on such date. The
"Closing Price" on any day shall mean the last reported sale price, regular way,
or, in case no such sale takes place on such day, the average of the closing bid
and asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on a national securities exchange or included for quotation
on the NASDAQ- National Market System, of the class of Capital Stock of the
Corporation, or if not so listed or admitted to trading or included for
quotation, the last quoted price, or if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System or,
if such system is no longer in use, the principal other automated quotations
system that may then be in use or, if such Capital Stock is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in such Capital Stock as selected
in good faith by the Board of Directors of the Corporation. "Trading Day" shall
mean a day on which the principal national securities exchange on which such
Capital Stock is listed or admitted to trading is open for the transaction of
business or, if such Capital Stock is not listed or admitted on any national
securities exchange, any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
"Minimum Stockholder Requirement" shall mean the
requirement under Code Section 856(a)(5) that the capital stock of a REIT be
beneficially owned by no fewer than 100 Persons (determined without reference to
any rules of attribution under the Code).
"Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own or
Constructively Own Capital Stock in excess of the Ownership Limit (or would
cause the Corporation to fail to qualify as a REIT), including, without
limitation, a change in the capital structure of the Corporation.
"Ownership Limit" shall initially mean, with respect to
the Capital Stock, 9.8 percent of the lesser of (i) the total number, or (ii)
the value of the total number, of outstanding shares of Capital Stock,
5
<PAGE>
unless the Board of Directors exempts a person from the Ownership Limit in
accordance with section (f) of Article IX.
"Partnership" shall mean Heritage Communities, L.P., a
Delaware limited partnership formed pursuant to the Partnership Agreement and
any successor thereto.
"Partnership Agreement" shall mean the agreement of
limited partnership establishing the Partnership, as the same may be amended,
supplemented or restated from time to time.
"Permitted Transferee" shall mean any Person designated as
Permitted Transferee in accordance with the provisions of section (e) of Article
X.
"Person" shall mean an individual, corporation, general
partnership, limited partnership, limited liability company, joint venture,
estate, trust (including a trust qualified under Code Section 401(a) or
501(c)(17)), a portion of a trust permanently set aside for or to be used
exclusively for the purposes described in Code Section 642(c), association,
private foundation within the meaning of Code Section 509(a), joint stock
company, consortia, bank, trust company, government agency, political
subdivision or other entity and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
but does not include an underwriter who participates in any public offering of
Common Stock and/or securities convertible into or exchangeable for Common Stock
subsequent to the Effective Date (a "Secondary Offering") for a period of 60
days following the purchase by such underwriter of Common Stock and/or
securities convertible into or exchangeable for Common Stock in such Secondary
Offering.
"Purported Beneficial Transferee" shall mean, with respect
to any purported Transfer that results in Shares-in-Trust, the purported
beneficial transferee for whom the Purported Record Transferee would have
Acquired Capital Stock of the Corporation if such Transfer had been valid under
section (b) of this Article IX.
"Purported Record Transferee" shall mean, with respect to
any purported Transfer which results in Shares-in-Trust, the Person who would
have been the record holder of the Capital Stock of the Corporation if such
Transfer had been valid under section (b) of this Article IX.
"REIT" shall mean a real estate investment trust under
Code Section 856 et seq.
"Restriction Termination Date" shall mean the first day
after the Effective Date on which the Board of Directors determines that it is
no longer in the best interests of the Corporation to attempt to, or continue
to, qualify as a REIT.
"Share Trust" shall mean any separate trust created
pursuant to section (a) of Article X and administered in accordance with the
terms of Article X, for the exclusive benefit of any Beneficiary.
"Shares-in-Trust" shall mean any Capital Stock designated
Shares-in-Trust pursuant to section (a) of Article X.
"Share Trustee" shall mean the trustee of the Share Trust,
which is selected by the Corporation but not affiliated with the Corporation,
the Partnership or a Beneficiary, and any successor trustee appointed by the
Corporation.
"Tenant Ownership Limit" shall mean the limitation that
the Corporation may not Constructively Own 10 percent or more of the ownership
interests in a tenant of real property of the Corporation, the Partnership or
any wholly-owned subsidiary of the Corporation, which ownership would cause any
rents from such real property to not be considered "rents from real property"
under Code Section 856(d)(2)(B).
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"Transfer" (as a noun) shall mean any sale, transfer,
gift, assignment, devise or other disposition of Capital Stock or the right to
vote or receive dividends on Capital Stock (including without limitation (i) the
granting of any option or entering into any agreement for the sale, transfer or
other disposition of Capital Stock or the right to vote or receive dividends on
Capital Stock or (ii) the sale, transfer, assignment or other disposition or
grant of any securities or rights convertible into or exchangeable for Capital
Stock, or the right to vote or receive dividends on Capital Stock), whether
voluntary or involuntary, whether of record or beneficially and whether by
operation of law or otherwise. "Transfer" (as a verb) shall have a correlative
meaning.
(b) Ownership Limitation and Transfer Restrictions.
(i) Except as provided in section (f) of this Article IX,
from and after the Effective Date and prior to the Restriction Termination Date:
(1) no Person shall Beneficially Own or Constructively Own Capital Stock in
excess of the Ownership Limit; (2) no Person shall Acquire Capital Stock if, as
a result of such acquisition, the Minimum Stockholder Requirement would be
violated; (3) no Person shall Acquire Capital Stock or any interest therein if,
as a result of such acquisition, the Closely-Held Restriction would be violated
or the Corporation would otherwise fail to qualify as a REIT; and (4) no Person
shall Acquire Capital Stock or any interest therein if, as a result of such
acquisition, the Tenant Ownership Limit would be violated.
(ii) Any Transfer that would result in a violation of the
restrictions in section (b)(i) above shall be void ab initio as to the purported
Transfer of such number of shares of Capital Stock that would cause the
violation of the applicable restriction in section (b)(i) above, and the
Purported Record Transferee (and the Purported Beneficial Transferee, if
different) shall acquire no rights in such Capital Stock.
(c) Automatic Transfer to Share Trust
(i) If, notwithstanding the other provisions contained in
this Article IX, at any time from and after the Effective Date and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially Own or Constructively Own
Capital Stock in excess of the Ownership Limit, then, except as otherwise
provided in section (f) of this Article IX, (1) the Purported Record Transferee
(and the Purported Beneficial Transferee, if different) shall acquire no right
or interest (or, in the case of a Non-Transfer Event, the person holding record
title to the Capital Stock Beneficially Owned or Constructively Owned by such
Beneficial Owner or Constructive Owner, shall cease to own any right or
interest) in such number of shares of Capital Stock which would cause such
Purported Record Transferee (and Purported Beneficial Transferee, if different)
to Beneficially Own or Constructively Own Capital Stock in excess of the
Ownership Limit (rounded up to the nearest whole share), (2) such number of
shares of Capital Stock in excess of the Ownership Limit (rounded up to the
nearest whole share) shall be designated Shares-in-Trust and, in accordance with
the provisions of section (a) of Article X, transferred automatically and by
operation of law to the Share Trust to be held in accordance with Article X and
(3) such Purported Record Transferee (and the Purported Beneficial Transferee,
if different) shall submit such number of shares of Capital Stock to the Share
Trust for registration in the name of the Share Trustee.
(ii) If, notwithstanding the other provisions contained in
this Article IX, at any time from and after the Effective Date and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event that, if effective, would result in a violation of the Minimum Stockholder
Requirement, the Closely-Held Restriction, or the Tenant Ownership Limit, or
would otherwise result in a loss of the Corporation's REIT status (collectively,
a "Transfer Violation"), then, except as otherwise provided in section (f) of
this Article IX, (1) the Purported Record Transferee (and the Purported
Beneficial Transferee, if different) shall acquire no right or interest (or, in
the case of a Non-Transfer Event, the person holding record title to the Capital
Stock with respect to which such Non-Transfer Event occurred, shall cause to own
any right or interest) in such number of shares of Capital Stock, the ownership
of which by such Purported Record Transferee (and Purported Beneficial
Transferee, if different) would result in a Transfer Violation, (2) such number
of shares of Capital Stock (rounded up to the nearest whole share) shall be
designated Shares-in-Trust and, in accordance with the provisions of section (a)
of Article X, transferred automatically and by operation of law to the Share
Trust to be held in accordance with Article
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<PAGE>
X, and (3) the Purported Record Transferee (and the Purported Beneficial
Transferee, if different) shall submit such number of shares of Capital Stock to
the Share Trust for registration in the name of the Share Trustee.
(iii) Any Purported Record Transferee (and Purported
Beneficial Transferee, if different) shall acquire no right or interest (or, in
the case of a Non-Transfer Event, the person holding title to the shares of
Capital Stock Beneficially Owned or Constructively Owned by such Beneficial
Owner or Constructive Owner, shall cease to own any right or interest) in such
number of shares of Capital Stock which would cause such Person to violate the
Ownership Limit or trigger a Transfer Violation. Such transfer to a Share Trust
and the designation of shares as Shares-in-Trust shall be effective as of the
close of business on the business day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
(d) Remedies for Breach. If the Board of Directors or its
designee shall at any time determine in good faith that a purported Transfer of
Capital Stock has taken place in violation of section (b) of this Article IX or
that a Person intends to acquire or has attempted to acquire beneficial
ownership (determined without reference to any rules of attribution), Beneficial
Ownership or Constructive Ownership of any Capital Stock of the Corporation in
violation of section (b) of this Article IX, the Corporation's Board of
Directors shall take such action as it deems advisable to refuse to give effect
to such Transfer or acquisition on the books of the Corporation or instituting
proceedings to enjoin such Transfer or acquisition; provided, however, that any
Transfer, attempted Transfer, acquisition or attempted acquisition in violation
of section (b)(i) of this Article IX shall automatically result in the transfer
described in section (c) of this Article IX, irrespective of any action (or
non-action) by the Board of Directors, except as provided in section (f) of this
Article IX.
(e) Notices of Restricted Transfer.
(i) Any Person who acquires or attempts to acquire Capital
Stock in violation of section (b) of this Article IX, and any Person who is a
Purported Record Transferee or a Purported Beneficial Transferee of shares of
Capital Stock that are transferred to a Share Trust under section (c) of this
Article IX, shall immediately give written notice to the Corporation of such
event, shall submit to the Corporation such number of shares of Capital Stock to
be transferred to the Share Trust and shall provide to the Corporation such
other information as the Corporation may request in order to determine the
effect, if any, of such Transfer or attempted Transfer or such Non-Transfer
Event on the Corporation's status as a REIT.
(ii) From and after the Effective Date and prior to the
Restriction Termination Date, every Beneficial Owner or Constructive Owner of
more than 5 percent (or such other percentage, as provided in the pertinent
income tax regulations promulgated under the Code) of the number or value of the
outstanding shares of Capital Stock of the Corporation shall, within 30 days
after January 1 of each year, give written notice to the Corporation stating the
name and address of such Beneficial Owner or Constructive Owner, the number of
shares of Capital Stock Beneficially or Constructively Owned, and a description
of how such shares are held. Each such Beneficial Owner or Constructive Owner
shall provide to the Corporation such additional information that the
Corporation may reasonably request in order to determine the effect, if any, of
such Beneficial or Constructive Ownership on the Corporation's status as a REIT
and to ensure compliance with the Ownership Limit.
(iii) From and after the Effective Date and prior to the
Restriction Termination Date, each Person who is a Beneficial Owner or
Constructive Owner of shares of Capital Stock of the Corporation and each Person
(including the stockholder of record) who is holding Capital Stock of the
Corporation for a Beneficial Owner or Constructive Owner shall provide to the
Corporation such information as the Corporation may reasonably request to
determine the Corporation's status as a REIT, to comply with the requirements of
any taxing authority or governmental agency or to determine any such compliance
and to ensure compliance with the Ownership Limit.
(f) Exception. Upon the receipt of evidence satisfactory to
the Board of Directors that the restrictions contained in sections (b)(i)(2),
(3) or (4) of this Article IX will not be violated, and upon such other
conditions as the Board of Directors may impose, the Board of Directors in its
reasonable discretion may exempt a Person from the restriction in section
(b)(i)(1), but only provided the intended transferee has given written notice
8
<PAGE>
to the Board of Directors of the proposed transfer no later than the fifteenth
day prior to such transfer that, if consummated, would result in the intended
transferee's owning shares of Capital Stock in violation of section (b)(i)(1) of
this Article IX.
(g) Legend. Each certificate for shares of Capital Stock shall
bear substantially the following legend:
"THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE
CORPORATION'S MAINTENANCE OF ITS STATUS AS A
REAL ESTATE INVESTMENT TRUST UNDER THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"). EXCEPT AS OTHERWISE PROVIDED PURSUANT
TO THE CHARTER OF THE CORPORATION, NO PERSON
MAY BENEFICIALLY OWN OR CONSTRUCTIVELY OWN (1)
COMMON SHARES OF THE CORPORATION IN EXCESS OF
9.8 PERCENT OF THE LESSER OF THE TOTAL NUMBER
OR VALUE OF THE OUTSTANDING COMMON SHARES OF
THE CORPORATION, (2) CAPITAL STOCK THAT WOULD
RESULT IN THE TRUST BEING "CLOSELY HELD" UNDER
CODE SECTION 856(a)(6), (3) CAPITAL STOCK THAT
WOULD RESULT IN THE CAPITAL STOCK BEING
BENEFICIALLY OWNED BY FEWER THAN 100 PERSONS
(DETERMINED WITHOUT REFERENCE TO ANY RULES OF
ATTRIBUTION) OR (4) CAPITAL STOCK THAT WOULD
CAUSE THE CORPORATION OR HERITAGE COMMUNITIES,
L.P., A DELAWARE LIMITED PARTNERSHIP, TO
CONSTRUCTIVELY OWN 10 PERCENT OR MORE OF THE
OWNERSHIP INTERESTS IN A TENANT OF THE REAL
PROPERTY OF THE CORPORATION OR HERITAGE
COMMUNITIES, L.P. WITHIN THE MEANING OF CODE
SECTION 856(d)(2)(B), WITH FURTHER
RESTRICTIONS AND EXCEPTIONS SET FORTH IN THE
CORPORATION'S CHARTER. ANY PERSON WHO ATTEMPTS
OR PROPOSES TO BENEFICIALLY OWN OR
CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN
EXCESS OF THE ABOVE LIMITATIONS MUST
IMMEDIATELY NOTIFY THE CORPORATION IN WRITING.
IF AN ATTEMPT IS MADE TO VIOLATE OR THERE IS A
VIOLATION OF THESE RESTRICTIONS (i) ANY
PURPORTED TRANSFER WILL BE VOID AB INITIO AND
WILL NOT BE RECOGNIZED BY THE CORPORATION,
(ii) THE CAPITAL STOCK IN VIOLATION OF THESE
RESTRICTIONS, WHETHER AS A RESULT OF A
TRANSFER OR NON-TRANSFER EVENT, WILL BE
TRANSFERRED AUTOMATICALLY AND BY OPERATION OF
LAW TO A SHARE TRUST AND SHALL BE DESIGNATED
SHARES-IN-TRUST. ALL TERMS USED IN THIS LEGEND
AND DEFINED IN THE CORPORATION'S CHARTER HAVE
THE MEANINGS DEFINED IN THE CORPORATION'S
CHARTER, AS THE SAME MAY BE AMENDED FROM TIME
TO TIME, A COPY OF WHICH, INCLUDING THE
RESTRICTIONS ON OWNERSHIP AND TRANSFER, WILL
BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO
SO REQUESTS."
(h) Remedies Not Limited. Subject to section (k) of this
Article IX, nothing contained in this Article shall limit the authority of the
Board of Directors to take such other action as in its sole discretion deems
necessary or advisable to protect the Corporation and the interests of its
stockholders in preserving the Corporation's status as a REIT.
9
<PAGE>
(i) Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article IX, including any definition contained
in section (a) of this Article IX, the Board of Directors shall have the power
to determine the application of the provisions of this Article IX and Article X
with respect to any situation based on the facts known to it.
(j) Severability. If any provision of this Article IX or any
application of any such provision is determined to be invalid by a federal or
state court having jurisdiction over the issue, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
(k) Settlement. Nothing in this Article precludes the
settlement of transactions entered into through the facilities of any national
securities exchange, but the shares of Capital Stock which are the subject to
such transaction shall continue to be subject to the terms of this Article IX
and Article X subsequent to such settlement.
ARTICLE X
SHARES IN TRUST
(a) Share Trust. Any Capital Stock transferred to a Share
Trust and designated Shares-in- Trust pursuant to section (c) of Article IX
shall be held for the exclusive benefit of the Beneficiary. The Corporation
shall name a Beneficiary and Share Trustee of each Share Trust within five days
after discovery of the existence thereof. Any transfer to a Share Trust and
designation of Capital Stock as Shares-in-Trust, pursuant to section (c) of
Article IX shall be effective as of the close of business on the business day
prior to the date of the Transfer or Non-Transfer Event that results in the
transfer to the Share Trust. Shares-in-Trust shall remain issued and outstanding
shares of Capital Stock of the Corporation and shall be entitled to the same
rights and privileges on identical terms and conditions as are all other issued
and outstanding shares of Capital Stock of the same class and series. When
transferred to the Permitted Transferee in accordance with the provisions of
section (e) of this Article X, such Shares-in-Trust shall cease to be designated
as Shares-in-Trust.
(b) Dividend Rights. The Share Trustee, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors and shall hold such dividends or
distributions in trust for the benefit of the Beneficiary. The Purported Record
Transferee (or Purported Beneficial Transferee, if applicable) with respect to
Shares-in-Trust shall repay to the Share Trustee the amount of any dividends or
distributions received by it that (i) are attributable to any Capital Stock
designated as Shares-in- Trust and (ii) the record date of which was on or after
the date that such shares became Shares-in-Trust. The Corporation shall take all
measures that it determines reasonably necessary to recover the amount of any
such dividend or distribution paid to the Purported Record Transferee (or
Purported Beneficial Transferee, if applicable), including, if necessary,
withholding any portion of future dividends or distributions payable on Capital
Stock Beneficially Owned or Constructively Owned by the Person who, but for the
provisions of section (c) of Article IX would Constructively Own or Beneficially
Own the Shares-in-Trust; and, as soon as reasonably practicable following the
Corporation's receipt or withholding thereof, shall pay over to the Share
Trustee for the benefit of the Beneficiary the dividends so received or
withheld, as the case may be.
(c) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of (other than a dividend), the Corporation, each Share Trustee of
Shares-in-Trust shall be entitled to receive, ratably with each other holder of
Capital Stock of the same class or series, that portion of the assets of the
Corporation which is available for distribution to the holders of such class and
series of Capital Stock. The Share Trustee shall distribute to the Purported
Record Transferee the amounts received upon such liquidation, dissolution, or
winding up, or distribution; provided, however, that the Purported Record
Transferee shall not be entitled to receive amounts pursuant to this section (c)
in excess of, in the case of a purported Transfer in which the Purported Record
Transferee gave value for Capital Stock and which Transfer resulted in the
transfer of the shares to the Share Trust, the price per share, if any, such
Purported Record Transferee paid for the Capital Stock and, in the case of a
Non-Transfer Event or Transfer in which the Purported
10
<PAGE>
Record Transferee did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or Transfer, as
the case may be, resulted in the transfer of shares to the Share Trust, the
price per share equal to the Market Price on the date of such Non-Transfer Event
or Transfer. Any remaining amount in such Share Trust shall be distributed to
the Beneficiary.
(d) Voting Rights. The Share Trustee shall be entitled to vote
all Shares-in-Trust. Any vote by a Purported Record Transferee as a holder of
Capital Stock prior to the discovery by the Corporation that the Capital Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Purported Record
Transferee shall be deemed to have given, as of the close of business on the
business day prior to the date of the purported Transfer or non-Transfer Event
that results in the transfer to the Share Trust of Capital Stock under section
(c) of Article IX an irrevocable proxy to the Share Trustee to vote the
Shares-in-Trust in the manner in which the Share Trustee in its sole and
absolute discretion, desires.
(e) Designation of Permitted Transferee. The Share Trustee
shall have the exclusive and absolute right to designate a Permitted Transferee
of any and all Shares-in-Trust. In an orderly fashion so as not to materially
adversely affect the Market Price of the Shares-in-Trust, the Share Trustee
shall designate a Person as Permitted Transferee, provided, however, that (i)
the Permitted Transferee so designated purchases for valuable consideration
(whether in a public or private sale), at a price as set forth in section (g) of
this Article X, the Shares- in-Trust and (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition resulting
in a transfer to a Share Trust and the redesignation of such Capital Stock so
acquired as Shares-in-Trust under section (c) of Article IX. Upon the
designation by the Share Trustee of a Permitted Transferee in accordance with
the provisions of this section (e), the Share Trustee of a Share Trust shall (i)
cause to be transferred to the Permitted Transferee that number of
Shares-in-Trust acquired by the Permitted Transferee, (ii) cause to be recorded
on the books of the Corporation that the Permitted Transferee is the holder of
record of such number of Capital Stock, and (iii) distribute to the Beneficiary
any and all amounts held with respect to the Shares-in-Trust after making any
required payment to the Purported Record Transferee pursuant to section (f) of
this Article X.
(f) Compensation to Record Holder of Capital Stock that Became
Shares-in-Trust. Any purported Record Transferee shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with section (e) of this Article X) to receive from the
Share Trustee upon the sale or other disposition of such Shares-in-Trust the
lesser of (i) in the case of (1) a purported Transfer in which the Purported
Record Transferee (or Purported Beneficial Transferee, if applicable) gave value
for Capital Stock and which Transfer resulted in the transfer of the shares to
the Share Trust, the price per share, if any, such Purported Record Transferee
(or Purported Beneficial Transferee, if applicable) paid for the Capital Stock,
or (2) a Non-Transfer Event or Transfer in which the Purported Record Transferee
(or Purported Beneficial Transferee, if applicable) did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Share Trust, the price per share equal to the Market Price on the
date of such Non-Transfer Event or Transfer, and (ii) the price per share
received by the Share Trustee of the Share Trust from the sale or other
disposition of such Shares-in-Trust in accordance with section (e) or (g) of
this Article X. Any amounts received by the Share Trustee in respect of such
Shares-in-Trust and in excess of such amounts to be paid the Purported Record
Transferee pursuant to this section (f) shall be distributed to the Beneficiary
in accordance with the provisions of section (e) of this Article X. Each
Beneficiary and purported Record Transferee (and Purported Beneficial
Transferee, if different) waives any and all claims that each may have against
the Share Trustee and the Share Trust arising out of the disposition of the
Shares-in-Trust, except for claims arising out of the gross negligence or
willful misconduct of, or any failure to make payments in accordance with this
Article X by, such Share Trustee or the Corporation.
(g) Purchase Right in Shares-in-Trust. Shares-in-Trust shall
be deemed to have been offered for sale to the Corporation, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of a devise, gift
or Non-Transferee Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or
its designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of 90 days after the later of (i) the date of the
Non-Transfer Event or purported Transfer which resulted in
11
<PAGE>
such Shares-in-Trust, and (ii) the date the Corporation determines in good faith
that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred,
if the Corporation does not receive a notice of such Transfer or Non-Transfer
Event pursuant to section (e) of Article IX.
ARTICLE XI
AMENDMENTS
The Corporation reserves the right from time to time to make
any amendments to its Articles of Incorporation which may be now or hereafter
authorized by law, including any amendments changing the terms or contract
rights of any of its outstanding capital stock by classification,
reclassification, or otherwise.
ARTICLE XII
DURATION
The duration of the Corporation shall be perpetual.
SECOND: The amendment and restatement of the Charter of the
Corporation herein made was approved by a majority of the entire Board of
Directors, was advised by the Board of Directors of the Corporation and approved
by the stockholders of the Corporation as required by law.
THIRD: The provisions set forth in the above articles of
amendment and restatement are all of the provisions of the Corporation's Charter
currently in effect as hereby amended.
FOURTH: The current address of the principal office of the
Corporation is as set forth above in Article IV of these amended and restated
articles and the Corporation's current resident agent is as set forth in Article
V of these amended and restated articles.
FIFTH: The Corporation currently has seven directors; the
directors currently in office are named in Article VII of these amended and
restated articles.
SIXTH: These amended and restated articles do not increase the
authorized stock of the Corporation or the aggregate par value of such
authorized stock.
IN WITNESS WHEREOF, ASR Investments Corporation has caused
these amended and restated articles to be signed in its name and on its behalf
by its President, Jon A. Grove, and attested by its Secretary, Joseph C. Chan,
on the _____ day of ________________, 1997.
The undersigned President acknowledges these Articles of
Amendment to be the corporate act of the Corporation and states that, to the
best of his knowledge, information and belief, the matters and facts set forth
herein with respect to the authorization and approval hereof are true in all
material respects and that this statement is made under the penalties of
perjury.
Attest: ASR INVESTMENTS CORPORATION
- ------------------------------------ ------------------------------------
Secretary President
12
BYLAWS
OF
ASR INVESTMENTS CORPORATION
A Maryland Corporation
<PAGE>
AMENDED
BYLAWS
OF
ASR INVESTMENTS CORPORATION
A Maryland Corporation
TABLE OF CONTENTS
PAGE
----
ARTICLE 1
Offices and Fiscal Year
Section 1.1 Principal Office. .............................................. 1
Section 1.2 Other Offices. ................................................. 1
Section 1.3 Fiscal Year. ................................................... 1
ARTICLE 2
Meetings of Shareholders
Section 2.1 Place of Meeting. .............................................. 1
Section 2.2 Annual Meetings. ............................................... 1
Section 2.3 Special Meetings................................................. 1
Section 2.4 Notice of Meetings............................................... 2
Section 2.5 Quorum, Manner of Acting and Adjournment......................... 2
Section 2.6 Organization..................................................... 3
Section 2.8 Voting Lists..................................................... 3
Section 2.9 Judges of Election............................................... 4
Section 2.10 Determination of Shareholders of Record.......................... 4
Section 2.11 Consent of Shareholders in Lieu of Meeting....................... 5
ARTICLE 3
Board of Directors
Section 3.1 Powers........................................................... 5
Section 3.2 Number, Election and Term........................................ 5
Section 3.3 Vacancies........................................................ 5
Section 3.4 Resignations..................................................... 6
Section 3.5 Removal.......................................................... 6
<PAGE>
Section 3.6 Committees of the Board.......................................... 6
Section 3.7 Meetings of the Board of Directors............................... 7
Section 3.8 Quorum and Voting................................................ 8
Section 3.9 Organization..................................................... 8
Section 3.10 Meeting by Conference Telephone................................. 8
Section 3.11 Action Without Meeting.......................................... 9
Section 3.12 Compensation of Directors....................................... 9
Section 3.13 Investment Policies and Restrictions............................ 9
Section 3.14 Management Arrangements.........................................10
Section 3.15 Total Expenses..................................................11
ARTICLE 4
Notice - Waivers - Meetings
Section 4.1 Notice, What Constitutes.........................................14
Section 4.2 Waiver of Notice.................................................14
Section 4.3 Conference Telephone Meetings....................................14
ARTICLE 5
Officers
Section 5.1 Number, Qualifications and Designation...........................14
Section 5.2 Election and Term of Office......................................15
Section 5.3 Subordinate Officers, Committees and Agents......................15
Section 5.4 Resignations.....................................................15
Section 5.5 Removal..........................................................15
Section 5.6 Vacancies........................................................15
Section 5.7 General Powers...................................................15
Section 5.8 The Chairman and Vice Chairman of the Board......................15
Section 5.9 The President....................................................15
Section 5.10 The Vice Presidents.............................................16
Section 5.11 The Secretary...................................................16
Section 5.12 The Treasurer...................................................16
Section 5.13 Officers' Bonds.................................................16
Section 5.14 Salaries........................................................16
ARTICLE 6
Certificate of Stock, Transfers, Etc.
Section 6.1 Certificates.....................................................17
Section 6.2 Lost Certificates................................................17
Section 6.3 Transfer Agents and Registrars...................................18
ii
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Section 6.4 Transfer of Stock................................................18
Section 6.5 Fixing the Record Dates; Closing of Transfer Books...............18
Section 6.6 Registered Stockholders..........................................18
Section 6.7 Regulations......................................................18
ARTICLE 7
Indemnification of Directors, Officers, Etc.
Section 7.1 Directors and Officers; Third Party Actions......................19
Section 7.2 Directors and Officers; Derivative Actions.......................19
Section 7.3 Employees and Agents.............................................19
Section 7.5 Advancing Expenses...............................................20
Section 7.6 Scope of Article.................................................20
ARTICLE 8
Miscellaneous
Section 8.1 Corporate Seal...................................................20
Section 8.2 Checks...........................................................21
Section 8.3 Contracts........................................................21
Section 8.4 Deposits.........................................................21
Section 8.5 Reports..........................................................21
Section 8.6 Corporate Records................................................21
Section 8.7 Amendment of Bylaws..............................................22
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BYLAWS
OF
ASR INVESTMENTS CORPORATION
A Maryland Corporation
ARTICLE 1
Offices and Fiscal Year
Section 1.1 Principal Office. The principal office of the
corporation in the State of Arizona shall be located in Maricopa County until
otherwise established by a vote of a majority of the board of directors in
office.
Section 1.2 Other Offices. The corporation may also have
offices at such other places within or without the State of Arizona as the board
of directors may from time to time appoint or the business of the corporation
require.
Section 1.3 Fiscal Year. The fiscal year of the corporation
shall begin on the first day of January and end on the 31st day of December.
ARTICLE 2
Meetings of Shareholders
Section 2.1 Place of Meeting. All meetings of the shareholders
of the corporation shall be held at the principal office of the corporation
unless another place is designated by the President of the Corporation or by the
board of directors in the notice of such meeting.
Section 2.2 Annual Meetings. The President or the board of
directors may fix the date and time of the annual meeting of the shareholders,
but if no such date and time is fixed by the President or the board the meeting
for any calendar year shall be held on the second Tuesday in April in such year,
if not a legal holiday under the laws of Maryland, and, if a legal holiday, then
on the next succeeding business day, not a Saturday at 10:00 a.m. and at said
meeting the shareholders then entitled to vote shall elect directors and shall
transact such other business as may properly be brought before the meeting. If
the annual meeting shall not have been called and held during such calendar
year, any shareholder may call such meeting at any time thereafter.
Section 2.3 Special Meetings. Special Meetings of the
shareholders of the corporation for any purpose or purposes may be called at any
time by the president or by the board of directors,
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or by shareholders entitled to cast at least one-fifth of the votes which all
shareholders are entitled to cast at the particular meeting.
At any time, upon written consent of any person or persons who
have duly called a special meeting, which written request shall state the object
of the meeting, it shall be the duty of the secretary to fix the date of the
meeting to be held at such date and time as the secretary may fix, not less than
ten nor more than sixty days after the receipt of the request, and to give due
notice thereof. If the secretary shall neglect or refuse to fix the date and
time of such meeting and give notice thereof, the person or persons calling the
meeting may do so.
Section 2.4 Notice of Meetings. Written notice of every
meeting of the shareholders, whether annual or special, shall be given to each
shareholder of record entitled to vote at the meeting, at least ten and not more
than fifty days prior to the day named for the meeting. Every notice of a
special meeting shall state briefly the purpose or purposes thereof, and no
business, other than that specified in such notice and matters germane thereto,
shall be transacted at any special meeting without further notice to
shareholders not present in person or by proxy.
Whenever the language of a proposed resolution is included in
a written notice of a meeting of shareholders the resolution may be adopted at
such meeting with such clarifying or other amendments as do not enlarge its
original purpose without further notice to shareholders not present in person or
by proxy.
Section 2.5 Quorum, Manner of Acting and Adjournment. The
presence in person or by proxy of shareholders entitled to cast a majority of
the votes which all shareholders are entitled to cast on the particular matter
shall constitute a quorum for the purpose of considering such matter. Treasury
shares shall not be counted in determining the total number of outstanding
shares for voting purposes at any given time. The shareholders present in person
or by proxy at a duly organized meeting can continue to do business until
adjournment, notwithstanding withdrawal of enough shareholders to leave less
than a quorum.
If a meeting cannot be organized because a quorum has not
attended, the shareholders entitled to vote and present in person or represented
by proxy may adjourn the meeting to such time and place as they may determine.
At any such adjourned meeting at which a quorum may be present such business may
be transacted as might have been transacted at the meeting as originally called.
No notice of any adjourned meeting of the shareholders of the corporation shall
be required to be given, except by announcement at the meeting, unless the
adjournment is for more than thirty days or, after the adjournment a new record
date is fixed for the adjourned meeting. Any meeting at which directors are to
be elected shall be adjourned only from day to day, as may be directed by
shareholders who are present in person or by proxy and who are entitled to cast
at least a majority of the votes which all such shareholders would be entitled
to cast at an election of directors, until such directors are elected.
Except as otherwise specified in the articles or these bylaws
or provided by applicable law, the acts, at a duly organized meeting, of the
shareholders present, in person or by proxy,
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entitled to cast at least a majority of the votes which all shareholders present
in person or by proxy are entitled to cast shall be the acts of the
shareholders.
Section 2.6 Organization. At every meeting of the
shareholders, the chairman of the board, if there be one, or in the case of
vacancy in office or absence of the chairman of the board, one of the following
officers present in the order stated: the vice chairman of the board, if there
be one, the president, the vice presidents in their order of rank and seniority,
or a chairman chosen by the shareholders entitled to cast a majority of the
votes which all shareholders present in person or by proxy are entitled to cast,
shall act as chairman, and the secretary, or, in his absence, an assistant
secretary, or in the absence of both the secretary and assistant secretaries, a
person appointed by the chairman, shall act as secretary.
Section 2.7 Voting. Every shareholder entitled to vote at a
meeting of shareholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act for him
by proxy. Every proxy shall be executed in writing by the shareholders or by his
duly authorized attorney-in-fact and filed with the secretary of the
corporation. A proxy, unless coupled with an interest, shall be revocable at
will, notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until notice
thereof has been given to the secretary of the corporation. No unrevoked proxy
shall be valid after eleven months from the date of its execution, unless a
longer time is expressly provided therein, but in no event shall any proxy,
unless coupled with an interest, be voted on after three years from the date of
its execution. A proxy shall not be revoked by the death or incapacity of the
maker unless, before the vote is counted or the authority is exercised, written
notice of such death or incapacity is given to the secretary of the corporation.
A shareholder shall not sell his vote or execute a proxy to any person for any
sum of money or anything of value. A proxy coupled with an interest shall
include an unrevoked proxy in favor of a creditor of a shareholder and such a
proxy shall be valid as long as the debt owed by him to the creditor remains
unpaid.
Each shareholder of record except the holder of shares which
have been called for redemption and with respect to which an irrevocable deposit
of funds has been made, shall have the right, at every shareholders' meeting, to
such a vote for every share, and to such a fraction of a vote with respect to
every fractional share, of stock of the corporation standing in his name on the
books of the corporation as may be provided in the articles, and to one vote for
every share, and to a fraction of a vote equal to every fractional share, if no
express provision for voting rights is made in the articles. Treasury shares
shall not be voted, directly or indirectly, at any meeting of shareholders or be
counted in connection with the expression of consent or dissent to corporate
action in writing without a meeting.
Section 2.8 Voting Lists. The officer or agent of the
corporation having charge of the transfer books for shares of the corporation
shall make, at least five days before each meeting of shareholders, a complete
list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list shall be kept on file at the registered office of the corporation,
and shall be subject to inspection by any shareholder at any time during usual
business hours. If the corporation has less than 5,000 shareholders, such list
shall also be produced and kept open at the time and place of the meeting,
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and shall be subject to the inspection of any shareholder during the whole time
of the meeting. The original share ledger or transfer book, or a duplicate
thereof, kept in Arizona, shall be prima facie evidence as to who are the
shareholders entitled to examine such list or share ledger or transfer book, or
to vote, in person or by proxy, at any meeting of shareholders.
Section 2.9 Judges of Election. The vote upon any matter,
including the election of directors, need not be by ballot. In advance of any
meeting of shareholders the board of directors may appoint judges of election,
who need not be shareholders, to act at such meeting or any adjournment thereof.
If judges of election are not so appointed, the chairman of any such meeting
may, and upon the demand of any shareholder or his proxy at the meeting and
before voting begins shall, appoint judges of election. The number of judges
shall be either one or three, as determined, in the case of judges appointed
upon demand of a shareholder, by shareholders present entitled to cast a
majority of the votes which all shareholders present are entitled to cast
thereon. No person who is a candidate for office shall act as a judge. In case
any person appointed as judge fails to appear or fails or refuses to act, the
vacancy may be filled by appointment made by the board of directors in advance
of the convening of the meeting, or at a meeting by the chairman of the meeting.
If judges of election are appointed as aforesaid, they shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes or ballots, hear and determine all
challenges and questions in any way arising in connection with the right to
vote, count and tabulate all votes, determine the result, and do such acts as
may be proper to conduct the election or vote with fairness to all shareholders.
If there be three judges of election, the decision, act or certificate of a
majority shall be effective in all respects as the decision, act or certificate
of all.
On request of the Chairman of the meeting or of any
shareholder or his proxy, the judges shall make a report in writing of any
challenge or question or matter determined by them, and execute a certificate of
any fact found by them.
Section 2.10 Determination of Shareholders of Record. The
board of directors may fix a date, not more than ninety nor less than ten days
preceding the date of any meeting of shareholders, and not more than sixty days
preceding the date fixed for the payment of any dividend or distribution, or the
date for the allotment of rights, or the date when any change or conversion or
exchange of shares will be made or go into effect, as a record date for the
determination of the shareholders entitled to notice of, or to vote at, any such
meeting, or entitled to receive any such allotment of rights, or to exercise the
rights in respect to any such change, conversion or exchange of shares; and in
such case, if otherwise entitled, all shareholders of record on the date so
fixed, and no others, shall be entitled to notice of, or to vote at, such
meeting, or to receive payment of such dividend or distribution or to receive
such allotment of rights, or exercise such rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
any such record date fixed as aforesaid.
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Unless a record date is fixed by the board of directors for
such purpose, transferees of shares which are transferred on the books within
ten days next preceding the date of such meeting shall not be entitled to notice
of, or to vote at, such meeting.
Section 2.11 Consent of Shareholders in Lieu of Meeting. Any
action which may be taken at a meeting of the shareholders or a class of
share-holders of the corporation may be taken without a meeting if a consent or
consents in writing, setting forth the actions so taken, shall be signed by all
the shareholders who would be entitled to vote at a meeting of the shareholders
or of a class of shareholders for such purpose and shall be filed with the
Secretary of the Corporation.
If the articles so provide for any action (except any action
with respect to an amendment of articles or plan under which a class or classes
of shareholders are by statute entitled to claim the right to valuation of the
payment for their shares) which may be taken at a meeting of shareholders or of
a class of shareholders may be taken without a meeting, if a consent or consent
in writing to such action, setting forth the action so taken, shall be signed by
shareholders entitled to cast two-thirds of the total number of votes which all
shareholders of the corporation or of a class of shareholders are entitled by
the articles to cast upon such action and shall be filed with the secretary of
the corporation. Such action shall not become effective until after at least ten
days' written notice of such action shall have been given to each shareholders
of record entitled to vote thereon.
ARTICLE 3
Board of Directors
Section 3.1 Powers. The board of directors shall have full
power to conduct, manage, and direct the business and affairs of the
corporation; and all powers of the corporation, except those specifically
reserved or granted to the shareholders by statute or by the articles or these
bylaws, are hereby granted to and vested in the board of directors.
Section 3.2 Number, Election and Term. The number of directors
of the corporation shall be five (5). By vote of a majority of the entire board
of directors, the number of directors fixed by the corporation's articles of
incorporation or by these by-laws may from time to time be increased or
decreased, but may not exceed fifteen nor be less than three except as permitted
by law; provided, however, that the tenure of office of a director shall not be
affected by any decrease or increase in the number of directors so made by the
board. At such time as the corporation seeks to qualify as a real estate
investment trust, a majority of the board of directors shall be independent
directors (as hereinafter defined). For purposes of these by-laws, "independent
director" shall mean a director of the corporation who is not employed by, or
receiving any compensation (other than director's fees) from or otherwise
affiliated with, the corporation or any affiliate, or who is not affiliated,
directly or indirectly, with any person(s) or entity, if any, responsible for
directing and performing the day-to-day business affairs of the corporation (the
"Advisor"), whether by ownership of, ownership interest in, employment by, any
business or professional relationship with, or by servicing as an officer or
director of, such advisor or an affiliated business entity of such advisor. At
the first annual meeting of stockholders and at each annual meeting thereafter,
the stockholders shall elect directors to hold office until the next annual
meeting or until their successors are elected and qualify. Directors need not be
stockholders in the corporation.
Section 3.3 Vacancies. Any vacancy occurring in the board of
directors for any cause other than by reason of an increase in the number of
directors may, subject to the provisions of Section 3.5, be filled by a majority
of the remaining members of the board of directors, although
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such majority is less than a quorum; provided, however, that if the corporation
has sought to qualify as a real estate investment trust and in accordance with
Section 3.2 a majority of the board of directors are required to be independent
directors, then independent directors shall nominate replacements for vacancies
among the independent directors. Any vacancy occurring by reason of an increase
in the number of directors may be filled by action of a majority of the entire
board of directors. If the stockholders of any class or series are entitled
separately to elect one or more directors, a majority of the remaining directors
elected by that class or series or the sole remaining director elected by that
class or series may fill any vacancy among the number of directors elected by
that class or series. A director elected by the board of directors to fill a
vacancy shall be elected to hold office until the next annual meeting of
stockholders or until his successor is elected and qualifies.
Section 3.4 Resignations. Any director or member of a
committee may resign at any time. Such resignation shall be made in writing and
shall take effect at the time specified therein, or if no time be specified, at
the time of the receipt by the chairman of the board, the president or the
secretary. The acceptance of a resignation shall not be necessary to make it
effective.
Section 3.5 Removal. At any meeting of stockholders, duly
called and at which a quorum is present, the stockholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any director or directors from office with or without cause, and
may elect a successor or successors to fill any resulting vacancies for the
unexpired terms of removed directors.
Section 3.6 Committees of the Board. The board of directors
may appoint from among its members an executive committee, an audit committee
and other committees composed of three or more directors. A majority of the
members of any committee so appointed shall be independent directors (as defined
in Section 3.2). The board of directors may delegate to any committee any of the
powers of the board of directors except the power to declare dividends or
distributions on stock, recommend to the stockholders any action which requires
stockholder approval, amend the by-laws, approve any merger or share exchange
which does not require stockholder approval or issue stock. However, if the
board of directors has given general authorization for the issuance of stock, a
committee of the board, in accordance with a general formula or method specified
by the board of directors by resolution or by adoption of a stock option plan,
may fix the terms of stock subject to classification or reclassification and the
terms on which any stock may be issued.
Notice to committee meetings shall be given in the same manner
as notice for special meetings of the board of directors.
One-third, but not less than two, of the members of any
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority present shall be the act of such committee. The board of
directors may designate a chairman of any committee and such chairman or any two
members of any committee may fix the time and place of its meetings unless the
board shall otherwise provide. In the absence or disqualification of any member
of any such committee, the
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members thereof present at any meeting and not disqualified from voting, whether
or not they constitute a quorum, may unanimously appoint another director to act
at the meeting in the place of such absent or disqualified members; provided,
however, that in the event of the absence or disqualification of an independent
director, such appointee shall be an independent director.
Each committee shall keep minutes of its proceedings and shall
report the same to the board of directors at the meeting next succeeding, and
any action by the committees shall be subject to revision and alteration by the
board of directors, provided that no rights of third persons shall be affected
by an such revision or alteration.
Subject to the provisions hereof, the board of directors shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee.
Section 3.7 Meetings of the Board of Directors. Meetings of
the board of directors, regular or special, may be held at any place in or out
of the State of Maryland as the board may from time to time determine or as
shall be specified in the notice of such meeting.
The first meeting of each newly elected board of directors
shall be held as soon as practicable after the annual meeting of the
stockholders at which the directors were elected. The meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors as provided in
Article 4, except that no notice shall be necessary is such meeting is held
immediately after the adjournment, and at the site, of the annual meeting of
stockholders.
Regular meetings of the board of directors may be held without
notice at such time and place as shall from time to time be determined by the
board of directors.
Special meetings of the board of directors may be called at
any time by two or more directors or by a majority of the members of the
executive committee, if one be constituted, in writing with or without a meeting
of such committee or by the chairman of the board or the president. Special
meetings may be held at such place or places in or out of the State of Maryland
as may be designated from time to time by the board of directors; in the absence
of such designation, such meetings shall be held at such places as may be
designated in the notice of meeting.
Notice of the place and time of every special meeting of the
board of directors shall be delivered by the secretary to each director either
personally or by telephone, telegram or telegraph, or by leaving the same at his
residence or usual place of business at least twenty-four hours before the time
at which such meeting is to be held, or by first-class mail, at least four days
before the day on which such meeting is to be held. If mailed, such notice shall
be deemed to be given when deposited in the United States mail addressed to the
director at his post-office address as it appears on the records of the
corporation, with postage thereon prepaid.
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Section 3.8 Quorum and Voting. At all meetings of the board, a
majority of the entire board of directors shall constitute a quorum for the
transaction of business and the action of a majority of the directors present at
any meeting at which a quorum is present shall be the action of the board of
directors unless the concurrence of a greater proportion is required for such
action by law, the corporation's articles of incorporation or these by-laws. If
a quorum shall not be present at any meeting of directors, the directors present
thereat may, by a majority vote, adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Notwithstanding the first paragraph of this section 3.8, any
action pertaining to a transaction involving the corporation in which any
advisor, any director or officer of the corporation or any affiliate of any of
the foregoing persons has an interest shall specifically be approved with
respect to any isolated transactions or generally be approved with respect to
any series of similar transactions, by a majority of the members of the board of
directors who are not affiliates of such interested party, even if the
independent directors constitute less than a quorum. In approving any such
transaction or series of transactions the independent directors must determine
that:
(a) the transaction as contemplated is fair and
reasonable to the corporation and its stockholders;
(b) if an acquisition of property other than mortgage
loans is involved, the total consideration is not in excess of the appraised
value of such property being acquired or if an acquisition of or merger with
Pima Realty Advisors, Inc., JG Mortgage Advisors, Inc., FP Mortgage Advisors,
Inc., and JC Mortgage Advisors, Inc. is involved, the approval of such
transactions is recommended by a majority vote of a committee comprising the
independent members of, and is approved by, the board of directors following the
receipt by such committee of a favorable report as to the fairness to the
stockholders of the corporation of the consideration to be paid in connection
with such transactions, and so long as the issuance of any shares related to the
transactions is approved by a majority of votes cast by stockholders.
(c) if the transaction involves compensation to any
advisor or its affiliates for services rendered in a capacity other than that
contemplated by the management arrangements, to the knowledge of the directors
such compensation is not greater than the customary charges for comparable
services generally available from other competent unaffiliated persons.
Section 3.9 Organization. The chairman of the board shall
preside at each meeting of the board of directors. In the absence or inability
of the chairman of the board to preside at a meeting, the president, or, in his
absence or inability to act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting and preside thereat. The
secretary (or, in his absence or inability to act, any person appointed by the
chairman of the meeting) shall act as secretary of the meeting and keep the
minutes thereof.
Section 3.10 Meeting by Conference Telephone. Members of the
board of directors may participate in a meeting by means of a conference
telephone or similar communications
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equipment if all persons participating in the meeting can hear each other at the
same time. Participation in a meeting by these means constitutes presence in
person at a meeting.
Section 3.11 Action Without Meeting. Any action required or
permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting, if a written consent to such
action is signed by all members of the board or of such committee, as the case
may be, and such written consent is filed with the minutes of proceedings of the
board or committee.
Section 3.12 Compensation of Directors. Directors, as such,
shall not receive any stated salary for their services but, by resolution of the
board, a fixed sum, and expenses of attendance if any, may be allowed to
directors for attendance at each regular or special meeting of the board of
directors, or of any committee thereof, but nothing herein contained shall be
construed to preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 3.13 Investment Policies and Restrictions. It shall be
the duty of the board of directors to ensure that the purchase, sale, retention
and disposal of the corporation's assets, and the investment policies of the
corporation and the limitations thereon or amendment thereof are at all times:
(a) consistent with such policies, limitations and
restrictions as are contained in this Section 3.13, or recited in the
Registration Statement on Form S-11 (the "Registration Statement") filed with
the Securities and Exchange Commission in connection with this corporation's
initial offering of common stock (the "initial Offering"); and
(b) in compliance with the restrictions applicable to
real estate investment trusts pursuant to the Internal Revenue Code of 1986; as
amended.
In addition to the policies, limitations and restrictions
recited in the Registration Statement as not being subject to change without
approval of the stockholders of the corporation, the corporation shall not:
(i) invest in commodities or commodity
future contracts; provided that such limitation shall not apply to interest rate
futures when used solely for hedging purposes;
(ii) invest in mortgage loans secured by
junior mortgages;
(iii) issue equity securities which are
redeemable at the option of the holder thereof;
(iv) issue debt securities (other than
collateralized mortgage obligations and other mortgage-backed securities)
unless, in the determination of the independent directors, the historical debt
service coverage in the most recently completed fiscal year as adjusted for
known charges is sufficient properly to service the higher level of debt;
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(v) issue options or warrants to purchase
stock of the corporation (A) at exercise prices less than the fair market value
of such stock on the date of grant, (B) for consideration (which may include
services) which in the judgment of the independent directors has a fair market
value less than the value of such option on the date of grant, (C) which are
exercisable later than ten1 years from the date of the issuance thereof, or (D)
if such options or warrants together with all outstanding options and warrants
are exercisable at any time in the aggregate with respect to a number of shares
of the capital stock of the corporation exceeding ten percent (10%) of the
outstanding shares of such stock on the date of grant of such options or
warrants;
(vi) invest in contracts for the sale of
real estate;
(vii) invest any of its assets in unimproved
real property or mortgage loans on unimproved real property;
(viii) invest in mortgage loans secured by
multi-family residences; or
(ix) underwrite securities of other issuers.
The independent directors shall review the investment policies
of the corporation at least annually to determine that the policies then being
followed by the corporation are in the best interests of its stockholders. Each
such determination and the basis therefor shall be set forth in the minutes of
the board of directors.
The corporation shall not incur indebtedness if, after giving
effect to the incurrence thereof, aggregate indebtedness (other than
collateralized mortgage obligations and other mortgage-backed securities)
secured, and unsecured, would exceed three hundred percent (300%) of the
corporation's net assets, on a consolidated basis, unless approved by a majority
of the independent directors. For this purpose, the term "net assets" means the
total assets (less intangibles) of the corporation at cost, before deducting
depreciation or other noncash reserves, less total liabilities, as calculated at
the end of each quarter in accordance with generally accepted accounting
principles.
Section 3.14 Management Arrangements. The board of directors
may delegate the duty of management of the assets and the administration of the
corporation's day-to-day operations to a management company pursuant to a
written contract or contracts, or any renewal thereof, which have obtained the
requisite approvals of the board of directors, including a majority of the
independent directors, or the stockholders of the corporation, as provided in
the articles of incorporation.
The board of directors shall evaluate the performance of the
management company before entering into or renewing any management arrangement.
The minutes of meetings with
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1 Amended in accordance with a vote of the shareholders at the Annual Meeting
of Shareholders held in June 1988.
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respect to such evaluation shall reflect the criteria used by the board of
directors in making such evaluation. Upon any termination of the initial
management arrangements reflected in the Registration Statement, the board of
directors shall determine that any successor management company possesses
sufficient qualifications (a) to perform the management function for the
corporation and (b) to justify the compensation provided for in its contract
with the corporation. Each contract for the services of a management company
entered into by the board of directors shall have a term of no more than one
year, but may be renewed annually at or prior to the expiration of the contract.
Each contract shall be terminable by a majority of the independent directors, or
the management company, on sixty (60) days written notice without cause.
The independent directors shall determine at least annually
that the compensation which the corporation contracts to pay the management
company is reasonable in relation to the nature and quality of services
performed and also shall supervise performance of the management company and the
compensation paid to it by the corporation to determine that the provisions of
such contract are being carried out. Each such determination shall be based upon
the following factors and all other factors the independent directors may deem
relevant and the findings of the independent directors on each of such factors
shall be recorded in the minutes of the board of directors:
(a) the size of the management fee in relation to the
size, compensation and profitability of the investment portfolio of the
corporation;
(b) the success of the management company in
generating opportunities that meet the investment objectives of the corporation;
(c) the rates charges to other corporations similar
to the corporation and to other investors by advisors performing similar
services;
(d) additional revenues realized by the management
company and its affiliates through their relationship with the corporation,
including loan administration, underwriting or broker commissions, servicing,
engineering, inspection and other fees, whether paid by the corporation or by
others with whom the corporation does business;
(e) the quality and extent of service and advice
furnished to the corporation;
(f) the performance of the investment portfolio of
the corporation, including income, conservation or appreciation of capital,
frequency of problem investments and competence in dealing with distress
situations; and
(g) the quality of the investment portfolio of the
corporation in relationship to the investments generated by the management
company for its own account.
Section 3.15 Total Expenses. The independent directors shall
determine, from time to time but at least annually, that the total fees and
expenses of the corporation are reasonable in light of all relevant factors.
Within sixty days after the end of any fiscal quarter of the corporation for
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which "Operating Expenses" (for the twelve months then ended) exceed two percent
(2%) of "Average Invested Assets" or 25% of the Company's Net Income, whichever
is greater, there shall be sent to the stockholders of the corporation a written
disclosure of such fact, together with an explanation of the factors the
independent directors considered in arriving at the conclusion that such higher
operating expenses were justified. If the independent directors find that much
amounts in excess of the "Operating Expenses" were not justified, they shall
take such actions as they deem appropriate to obtain a refund of such amounts in
excess of the "Operating Expenses" from any management company then managing the
assets of the corporation. The corporation shall also publish to the
stockholders quarterly (i) the ratio of the cost of raising capital during the
quarter to the capital raised and (ii) the aggregate amount of advisory fees and
the aggregate amount of other fees paid to any management company and all
affiliates of such management company by the corporation and including fees or
charges paid to such management company and all of its affiliates by third
parties doing business with the corporation.
As used herein, the following terms shall have the following
meanings:
(a) "Operating Expenses" means the aggregate annual
expenses of every character which constitute ordinary operating expenses of the
corporation, exclusive of:
(i) expenses relating to raising capital and
all interest expense and discounts;
(ii) taxes and license fees;
(iii) expenses connected directly with the
issuance, sale and distribution, and of listing on any stock exchange, of
securities of the corporation, including underwriting and brokerage discounts
and commissions, private placement fees and expenses, legal and accounting
costs, printing, engraving and mailing costs, and listing and registration fees;
(iv) expenses connected directly with the
acquisition, disposition, operation, maintenance, management or ownership of the
corporation's assets, including costs of foreclosure, maintenance, repair and
improvement of property, maintenance and protection of the lien of mortgages,
property management fees, loan origination fees, servicing and master servicing
fees, legal fees, premiums for insurance on property owned by or mortgaged to
the corporation taxes, brokerage and acquisition fees and commissions, appraisal
fees, title insurance and abstract expenses, provisions for depreciation,
depletion and amortization, disposition fees and subordinated real estate
commissions, and losses upon the disposition of assets and provisions for such
losses;
(v) fees and expenses payable to public
accountants, consultants, or persons employed for the corporation;
(vi) legal, accounting and other expenses
incurred in connection with (A) formal or informal administrative actions or
legal proceedings which involve a challenge of the status of the corporation as
a real estate investment trust, (B) advice regarding obtaining or maintaining
such status, (C) determination by the corporation of its taxable income of (D) a
claim
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that the activities of the corporation or of any member of the board of
directors, any officer or any stockholder of the corporation were improper;
(vii) expenses of organizing, reorganizing
or terminating the corporation;
(viii) noncash expenditures (including
depreciation, amortization, and bad debt reserves);
(ix) fees and expenses of transfer agents,
registrars, warrant agents, rights agents, dividend payment and dividend
reinvestment agents, escrow holders and indenture trustees;
(x) all expenses connected with
communications to holders of securities of the corporation and other bookkeeping
and clerical work necessary in maintaining relations with holders of the
securities, including the cost of printing and mailing the certificates for
securities, proxy solicitation materials and reports to such holders and the
cost of holding meetings of holders of the securities of the corporation;
(xi) legal, accounting, printing and other
costs, including clerical costs, of reports required to be filed with state or
federal governmental agencies;
(xii) the incentive management fee payable
to the management company; and
(xiii) any expenses relating to the issuance
and administration of mortgage securities by the corporation or any of its
subsidiaries.
(b) "Average Invested Assets" for any period shall
mean the average of the aggregate book value of the consolidated assets of the
corporation and its subsidiaries, including those assets pledged to secure
mortgage securities, invested, directly or indirectly, in equity interests in
and loans secured by real estate before reserves for depreciation or bad debts
or other similar noncash reserves, has the book value of the issued and
outstanding mortgage securities of the corporation and its subsidiaries,
computed by taking the average of such values at the end of each month during
such period.
(c) "Net Income" for any period means the
corporation's taxable income for such period before the management company's
incentive compensation, net operating loss deduction and special deductions, as
calculated for federal income tax purposes.
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ARTICLE 4
Notice - Waivers - Meetings
Section 4.1 Notice, What Constitutes. Whenever written notice
is required to be given to any person under the provisions of the articles,
these bylaws, or the General Corporation Law, it may be given to such person,
either personally or by sending a copy thereof through the mail, or by
telegraph, charges prepaid, to his address appearing on the books of the
corporation, or supplied by him to the corporation for the purpose of notice. If
the notice is sent by mail or by telegraph, it shall be deemed to have been
given to the person entitled thereto when deposited in the United States Mail or
with a telegraph office for transmission to such person. A notice of a meeting
shall specify the place, day and hour of the meeting.
Section 4.2 Waiver of Notice. Whenever any written notice is
required to be given under the provisions of the articles, these bylaws, or the
General Corporation Law, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Except in the
case of a special meeting of shareholders, neither the business to be transacted
at, nor the purpose of, the meeting need be specified in the waiver of notice of
such meeting.
Attendance of a person, either in person or by proxy, at any
meeting, shall constitute a waiver of notice of such meeting, except where a
person attends a meeting for the express purpose of objecting to the transaction
of any business because the meeting was not lawfully called or convened.
Section 4.3 Conference Telephone Meetings. One or more
directors or shareholders may participate in a meeting of the board, of a
committee of the board or of the shareholders by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other. Participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
ARTICLE 5
Officers
Section 5.1 Number, Qualifications and Designation. The
officers of the corporation shall be a president, one or more vice presidents, a
secretary, a treasurer, and such other officers as may be elected in accordance
with the provisions of Section 5.3 of this article. One person may hold more
than one office. Officers may, but need not be, directors or shareholders of the
corporation. The president and secretary shall be natural persons of full age;
the treasurer, however, may be a corporation, but if a natural, person shall be
of full age. The board of directors may elect from among the members of the
board a chairman of the board and a vice chairman of the board who shall be
officers of the corporation.
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Section 5.2 Election and Term of Office. The officers of the
corporation, except those elected by delegated authority pursuant to Section 5.3
of this Article, shall be elected annually by the board of directors, and each
officer shall hold his office until the next annual organization meeting of
directors and until his successor shall have been duly chosen and qualified, or
until his death, resignation, or removal.
Section 5.3 Subordinate Officers, Committees and Agents. The
board of directors may from time to time elect such other officers and appoint
such committees, employees or other agents as the business of the corporation
may require, including one or more assistant secretaries, and one or more
assistant treasurers, each of whom shall hold office for such period, have such
authority, and perform such duties as are provided in these bylaws, or as the
board of directors may from time to time determine. The directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents.
Section 5.4 Resignations. Any officer or agent may resign at
any time by giving written notice to the board of directors, or to the president
or the secretary of the corporation. Any such resignation shall take effect at
the date of the receipt of such notice or at any later time specified therein
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 5.5 Removal. Any officer, committee, employee or other
agent of the corporation may be removed, either for or without cause, by the
board of directors or other authority which elected or appointed such officer,
committee or other agent whenever in the judgement of such authority the best
interests of the corporation will be served thereby.
Section 5.6 Vacancies. A vacancy in any office because of
death, resignation, removal, disqualification, or any other cause, shall be
filled by the board of directors or by the officer or committee to which the
power to fill such office has been delegated pursuant to Section 5.3 of this
Article, as the case may be, and if the office is one for which these bylaws
prescribe a term, shall be filed for the unexpired portion of the term.
Section 5.7 General Powers. All officers of the corporation as
between themselves and the corporation, shall, respectively, have such authority
and perform such duties in the management of the property and affairs of the
corporation as may be determined by resolution of the board of directors, or in
the absence of controlling provisions in a resolution of the board of directors,
as may be provided by these bylaws.
Section 5.8 The Chairman and Vice Chairman of the Board. The
chairman of the board or in his absence, the vice chairman of the board, shall
preside at all meetings of the shareholders and the board of directors, and
shall perform such other duties as may from time to time be requested of him by
the board of directors.
Section 5.9 The President. The president shall be the chief
executive officer of the corporation and shall have general supervision over the
business and operation of the corporation, subject, however, to the control of
the board of directors. He shall sign, execute, and acknowledge,
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in the name of the corporation, deeds, mortgages, bonds, contracts or other
instruments, authorized by the board of directors, except in cases where the
signing and execution thereof shall be expressly delegated by the board of
directors, or by these bylaws, to some other officer or agent of the
corporation, and, in general, shall perform all duties incident to the office of
president, and such other duties as from time to time may be assigned to him by
the board of directors.
Section 5.10 The Vice Presidents. The vice presidents shall
perform the duties of the president in his absence and such other duties as may
from time to time be assigned to them by the board of directors or by the
president.
Section 5.11 The Secretary. The secretary or an assistant
secretary shall attend all meetings of the shareholders and of the board of
directors and shall record all votes of the shareholders and of the directors
and the minutes of the meetings of the shareholders and of the board of
directors and of committees of the board in a book or books to be kept for that
purpose; shall see that notices are given and records and reports properly kept
and filed by the corporation as required by law; shall be the custodian of the
seal of the corporation and see that it is affixed to all documents to be
executed on behalf of the corporation under its seal; and, in general, shall
perform all duties incident to the office of secretary, and such other duties as
may from time to time be assigned to him by the board of directors or the
president.
Section 5.12 The Treasurer. The treasurer or an assistant
treasurer shall have or provide for the custody of the funds or other property
of the corporation and shall keep a separate book account of the same to his
credit as treasurer; shall collect and receive or provide for the collection and
receipts of moneys earned by or in any manner due to or received by the
corporation; shall deposit all funds in his custody as treasurer in such banks
or other places of deposit as the board of directors may from time to time
designate; shall, whenever so required by the board of directors, render an
account showing his transactions as treasurer, and the financial condition of
the corporation; and, in general, shall discharge such other duties as may from
time to time be assigned to him by the board of directors or the president.
Section 5.13 Officers' Bonds. Any officer shall give a bond
for the faithful discharge of his duties in such sum, if any, and with such
surety or sureties as the board of directors shall require.
Section 5.14 Salaries. The salaries of the officers elected by
the board of directors shall be fixed from time to time by the board of
directors or by such officer as may be designated by resolution of the board.
The salaries or other compensation of any other officers, employees and other
agents shall be fixed from time to time by the officer or committee to which the
power to elect such officers or to retain or appoint such employees or other
agents has been delegated pursuant to Section 5.3 of this Article. No officer
shall be prevented from receiving such salary or other compensation by reason of
the fact that he is also a director of the corporation.
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ARTICLE 6
Certificate of Stock, Transfers, Etc.
Section 6.1 Certificates. Each stockholder shall be entitled
to a certificate or certificates which shall represent and certify the number
and kind and class of shares owned by him in the corporation. Each certificate
shall be signed by the chairman of the board or the president or a vice
president and countersigned by the secretary or an assistant secretary or the
treasurer or an assistant treasurer and may be sealed with the corporate seal.
The signatures may be either manual or facsimile signatures
and the seal may be either facsimile or any other form of seal. In case any
officer who has signed any certificate ceases to be an officer of the
corporation before the certificate is issued, the certificate may nevertheless
be issued by the corporation with the same effect as if the officer had not
ceased to be such officer as of the date of its issue. Each stock certificate
shall include on its face the name of the corporation, the name of the
stockholder and the class of stock and number of shares represented by the
certificate. If the corporation has authority to issue stock of more than one
class, the stock certificate shall contain on its face or back a full statement
or summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the stock of each class which the
corporation is authorized to issue and if the corporation is authorized to issue
any preferred or special class in series, the differences in the relative rights
and preferences between the shares of each series to the extent they have been
set, and the authority of the board of directors to set the relative rights and
preferences of subsequent series. In lieu of such full statement or summary,
there may be set forth upon the face or back of the certificate a statement that
the corporation will furnish to any stockholder upon request and without charge,
a full statement of such information. A summary of such information included in
a registration statement permitted to become effective under the federal
Securities Act of 1933, as now or hereafter amended, shall be an acceptable
summary for the purposes of this section. Every stock certificate representing
shares of stock which are restricted to transferability by the corporation shall
contain a full statement of the restriction or state that the corporation will
furnish information about the restriction to the stockholder on request and
without charge. A stock certificate may not be issued until the stock
represented by it is fully paid, except in the case of stock purchased under an
option plan as permitted by law.
Section 6.2 Lost Certificates. The board of directors may
direct a new certificate to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been stolen,
lost or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be stolen, lost or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such stolen, lost or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and to give the corporation a bond, with sufficient surety,
to the corporation to indemnify it against any loss or claim which may arise by
reason of the issuance of a new certificate.
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Section 6.3 Transfer Agents and Registrars. The board of
directors may in its discretion, appoint one or more banks or trust companies in
such city or cities as the board of directors may deem advisable, from time to
time, to act as transfer agents and/or registrars of the shares of stock of the
corporation; and, upon such appointments being made, no certificate representing
shares shall be valid until countersigned by one of such transfer agents and
registered by one of such registrars.
Section 6.4 Transfer of Stock. No transfers of shares of stock
of the corporation shall be made if (i) void ab initio pursuant to Article 7 of
the corporation's articles of incorporation, or (ii) the board of directors,
pursuant to such Article 7, shall have refused to transfer such shares.
Permitted transfers of shares of stock of the corporation shall be made on the
stock records of the corporation only upon the instruction of the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the secretary or with a transfer agent or transfer
clerk, and upon surrender of the certificate or certificates, if issued, for
such shares properly endorsed or accompanied by a duly executed stock transfer
power and the payment of all taxes thereon. Upon surrender to the corporation or
the transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, as to any transfers not prohibited by such Article 7 of the articles
of incorporation or by action of the board of directors thereunder, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 6.5 Fixing the Record Dates; Closing of Transfer
Books. The board of directors may fix, in advance, a date as the record date for
the purpose of determining stockholders entitled to notice of, or to vote at,
any meeting of stockholders, or stockholders entitled to receive payment of any
dividend or the allotment of any rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall be not
more than ninety (90) days, and in case of meeting of stockholders not less than
ten (10) days, prior to the date on which the particular action requiring such
determination of stockholders is to be taken.
Section 6.6 Registered Stockholders. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments, if any, a person registered on its books as
the owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of an other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
Section 6.7 Regulations. The board of directors may make such
additional rules and regulations, not inconsistent with these by-laws, as it may
deem expedient concerning the issue, transfer and registration of certificates
for shares of stock of the corporation.
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ARTICLE 7
Indemnification of Directors, Officers, Etc.
Section 7.1 Directors and Officers; Third Party Actions. The
corporation shall indemnify any director or officer of the corporation who was
or is a party or is threatened to be made a party to any threatened, pending or
completed actions, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was an authorized representative of the
corporation (which, for the purposes of this Article, shall mean a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise) against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contenders or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 7.2 Directors and Officers; Derivative Actions. The
corporation shall indemnify any director or officer of the corporation who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was an authorized
representative of the corporation, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Superior court of the county
in which the principal office of the corporation is located or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Superior Court or such other court shall deem proper.
Section 7.3 Employees and Agents. To the extent that an
authorized representative of the corporation who neither was nor is a director
or officer of the corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 7.1 and 7.2 of
this Article or in defense of any claim, issue or matter therein, he shall be
indemnified by the corporation against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith. Such an
authorized representative may, at the discretion of the corporation, be
indemnified by the corporation in any other circumstances to any extent if the
corporation would be required by Sections 7.1 and 7.2 of this Article to
indemnify such person in such circumstances to such extent if he were or had
been a director or officer of the corporation.
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Section 7.4 Procedure for Effecting Indemnification.
Indemnification under Sections 7.1, 7.2 or 7.3 of this Article shall be made
when ordered by court (in which case the expense, including attorneys' fees, of
the authorized representative in enforcing such right of indemnification shall
be added to and be included in the final judgment against the corporation) and
may be made in a specific case upon a determination that indemnification of the
authorized representative is required or proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections 7.1 or 7.2 of
this Article. Such determination shall be made:
(1) By the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or
(2) If such a quorum is not obtainable, or, even if
obtainable a majority vote of a quorum of disinterested directors so direct, by
independent legal counsel in a written opinion, or
(3) By the shareholders.
Section 7.5 Advancing Expenses. Expenses (including attorneys'
fees) incurred in defending a civil or criminal action, suit or proceeding shall
be paid by the corporation in advance of the final disposition of such action,
suit or proceeding, upon receipt of an undertaking by or on behalf of a director
or officer to repay such amount unless it shall ultimately be determined that he
is entitled to be indemnified by the corporation as required in this Article or
authorized by law and may be paid by the corporation in advance on behalf of any
other authorized representative when authorized by the board of directors upon
receipt of a similar undertaking.
Section 7.6 Scope of Article. Each person who shall act as an
authorized representative of the corporation, shall be deemed to be doing so in
reliance upon such rights of indemnification as are provided in this Article.
The indemnification provided by this Article shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any agreement, vote of shareholders or disinterested
directors, statute or otherwise, both as to action in his official capacity and
as to action in another capacity while holding such office or position,m and
shall continue as to a person who has ceased to be an authorized representative
of the corporation and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE 8
Miscellaneous
Section 8.1 Corporate Seal. The corporation shall have a
corporate seal in the form of a circle containing the name of the corporation,
the year of incorporation and such other details as may be approved by the board
of directors.
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Section 8.2 Checks. All checks, notes, bills of exchange or
other orders in writing shall be signed by such person or persons as the board
of directors may from time to time designate.
Section 8.3 Contracts. Except as otherwise provided in these
bylaws, the board of directors may authorize any officer or officers, agent or
agents, to enter into any contract or to execute or deliver any instrument on
behalf of the corporation, and such authority may be general or confined to
specific instances.
Section 8.4 Deposits. All funds of the corporation shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
Section 8.5 Reports. The board of directors shall present at
the annual meeting of shareholders a report of the financial condition of the
corporation as of the closing date of the preceding fiscal year. Such report
shall be in such form as shall be approved by the board of directors and shall
be available for the inspection of shareholders at the annual meeting, but the
board of directors shall not be required to cause such report to be sent to the
shareholders. The board of directors may, but shall not be required to, have
such report prepared and verified by an independent certified public accountant
or by a firm of practicing accountants.
Section 8.6 Corporate Records. There shall be kept at the
principal office of the corporation an original or duplicate record of the
proceedings of the shareholders and of the directors, and the original or a copy
of the bylaws including all amendments or alterations thereto to date, certified
by the secretary of the corporation. An original or duplicate share register
shall also be kept at the registered office or principal place of business of
the corporation, or at the office of a transfer agent or registrar, giving the
names of the shareholders, their respective addresses and the number and class
of shares held by each. The corporation shall also keep appropriate, complete
and accurate books or records of account, which may be kept at its registered
office or at its principal place of business.
Every shareholder shall, upon written demand under oath
stating the purpose thereof, have a right to examine, in person or by agent or
attorney, during the usual hours for business, for any proper purpose, the share
register, books or records of account, and records of the proceedings of the
shareholders and directors, and make copies or extracts therefrom. A proper
purpose shall mean a purpose reasonably related to such person's interest as a
shareholder. In every instance where any attorney or other agent shall be the
person who seeks the right to inspection, the demand under oath shall be
accompanied by a power of attorney or such other writing which authorizes the
attorney or other agent to so act on behalf of the shareholder. The demand under
oath shall be directed to the corporation at its registered office in Arizona or
at its principal place of business. Where the shareholder seeks to inspect the
books and records of the corporation, other than its share register or list of
shareholders, he shall first establish (1) that he has complied with the
provisions of this section respecting the form and manner of making demand for
inspection of proper document; and (2) that the inspection he seeks is for a
proper purpose. Where the shareholder seeks to inspect
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the share register or list of shareholders of the corporation and he has
complied with the provisions of this section respecting the form and manner of
making demand for inspection of such documents, the burden of proof shall be
upon the corporation to establish that the inspection he seeks is for an
improper purpose.
Section 8.7 Amendment of Bylaws. These bylaws may be amended
or replaced, or new bylaws may be adopted, either (1) by the vote of
shareholders entitled to cast at least a majority of the votes which all
shareholders are entitled to cast thereon at any duly organized annual or
special meeting of shareholders, or (2), with respect to those matters which are
not by statute reserved exclusively to the shareholders, by vote of a majority
of the board of directors of the corporation in office at any regular or special
meeting of directors. It shall not be necessary to set forth such proposed
amendment, repeal or new bylaws, or a summary thereof, in any notice of such
meeting, whether annual, regular or special.
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EXHIBIT 5
June 26, 1997
ASR Investments Corporation
335 North Wilmot, Suite 250
Tucson, Arizona 85711
RE: REGISTRATION STATEMENT ON FORM S-4
ASR INVESTMENTS CORPORATION
Ladies and Gentlemen:
We have acted as legal counsel to ASR Investments Corporation (the
"Company"), in connection with the preparation of the Company's Registration
Statement on Form S-4 (the "Registration Statement"), to be filed with the
Securities and Exchange Commission (the "Commission") on or about June 26, 1997
in connection with the registration under the Securities Act of 1933, as
amended, of the shares of common stock, par value $0.01 per share, of the
Company covered by the Registration Statement (the "Shares"). The facts, as we
understand them, are set forth in the Registration Statement.
With respect to the opinion set forth below, we have examined originals,
certified copies, or copies otherwise identified to our satisfaction as being
true copies, of the Registration Statement and such other corporate records of
the Company, agreements and other instruments, and certificates of public
officials and officers of the Company as we have deemed necessary as a basis for
the opinions hereinafter expressed. As to various questions of fact material to
such opinions, we have, where relevant facts were not independently established,
relied upon statements of officers of the Company.
Subject to the assumptions that (i) the documents and signatures examined by
us are genuine and authentic, and (ii) the persons executing the documents
examined by us have the legal capacity to execute such documents, and subject to
such further limitations and qualifications set forth below, it is our opinion
that when (a) the Registration Statement as then amended shall have been
declared effective by the Commission, and (b) the Shares have been duly issued,
executed, authenticated, delivered, paid for and sold by the Company as
described in the Registration Statement, the Shares will be validly issued,
fully paid, and non-assessable.
We express no opinion as to the applicability or effect of any laws, orders
or judgments of any state or other jurisdiction other than federal securities
laws and the substantive laws of the states of Arizona and Maryland. In
rendering our opinion, we have conferred with Maryland counsel to the extent we
deemed appropriate. Further, our opinion is based solely upon existing laws,
rules and regulations, and we undertake no obligation to advise you of any
changes that may be brought to our attention after the date hereof.
We hereby expressly consent to any reference to our firm in the Registration
Statement, the inclusion of this opinion as an exhibit to the Registration
Statement, and to the filing of this opinion with any other appropriate
governmental agency.
Very truly yours,
/s/ O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
EXHIBIT 21
SUBSIDIARIES
STATE OF ORGANIZATION
---------------------
OVERALL PARENT COMPANY:
ASR Investments Corporation .............. Maryland
SUBSIDIARIES OF ASR INVESTMENTS CORPORATION:
CIMSA Financial Corporation .............. Arizona
ASR Finance Corporation .................. Arizona
ASR Mortgage Acceptance, Inc. ............ Arizona
Residential Mortgage Acceptance, Inc. .... Delaware
ASR Properties, Inc. ..................... Arizona
ASV -- II Properties, Inc. ............... Arizona
ASV -- XVII Properties, Inc. ............. Arizona
RMA Investments Holding, Inc. ............ Arizona
ASC -- I Properties, Inc. ................ Arizona
ASC -- II Properties, Inc. ............... Arizona
ASC -- III Properties, Inc. .............. Arizona
ASC -- IV Properties, Inc. ............... Arizona
ASC -- V Properties, Inc. ................ Arizona
ASC Properties, Inc. ..................... Arizona
Heritage Communities, L.P. ............... Delaware
Heritage Residential Group, Inc. ......... Arizona
Heritage SGP Corporation ................. Arizona
SUBSIDIARIES OF HERITAGE SGP CORPORATION:
Heritage -- 14400 Montfort L.P. .......... Arizona
Heritage -- Aspen Court L.P. ............. Arizona
Heritage -- Briar Park L.P. .............. Arizona
Heritage -- Chelsea Park L.P. ............ Arizona
Heritage -- Country Club Place L.P. ...... Arizona
Heritage -- Greenwood Creek L.P. ......... Arizona
Heritage -- Highlands of Preston L.P. .... Arizona
Heritage -- Marymont L.P. ................ Arizona
Heritage -- Riverway L.P. ................ Arizona
Heritage -- Springfield L.P. ............. Arizona
Heritage -- Timbercreek Landings L.P. .... Arizona
Heritage -- Campus Commons North, L.L.C .. Arizona
Heritage -- Campus Commons South, L.L.C .. Arizona
Heritage -- Pacific South Center, L.L.C .. Arizona
Heritage -- Ivystone L.P. ................ Arizona
Heritage -- Court, L.L.C ................. Arizona
Heritage -- London Park L.P. ............. Arizona
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Registration Statement of ASR Investments
Corporation on Form S-4 of (a) our report dated March 18, 1997 on the financial
statements of ASR Investments Corporation for each of the three years in the
period ended December 31, 1996; (b) our report dated April 25, 1997 on the
Winton Properties' combined historical summary of revenues and certain operating
expenses for the year ended December 31, 1996; (c) our report dated May 23, 1997
on La Privada Apartments' historical summary of revenue and certain operating
expenses for the year ended December 31, 1996; and (d) our report dated May 29,
1997 on London Park Apartments' historical summary of revenues and certain
operating expenses for the year ended December 31, 1996, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Tucson, Arizona
June 23, 1997
