SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the
Commission Only (as permitted by
|X| Definitive Proxy Statement Rule 14a-6(e)(2))
|_| Definitive Additional Materials
|_| Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
ASR INVESTMENTS CORPORATION
(Name of Registrant as Specified In Its Charter)
---------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share
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2) Aggregate number of securities to which transaction applies:
1,980,000
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
$4,903,000 (1)
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4) Proposed maximum aggregate value of transaction:
$4,903,000 (1)
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5) Total fee paid:
$980.60
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(1) Estimated solely for the purpose of computing the amount of the
filing fee pursuant to Rule 0-11 under the Securities Exchange
Act of 1934, as amended. The fee was computed based upon the
book value of the assets to be acquired by the registrant in
the transactions contemplated in the proxy statement.
|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
ASR INVESTMENTS CORPORATION
335 NORTH WILMOT, SUITE 250
TUCSON, ARIZONA 85711
MARCH 27, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of the stockholders
(the "Special Meeting") of ASR Investments Corporation, a Maryland corporation
(the "Company"), to be held on April 23, 1997 at 9:00 a.m., local time, at the
Viscount Suite Hotel, 4855 E. Broadway Boulevard, Tucson, Arizona.
As described in the accompanying Proxy Statement, the Company has entered
into a Master Combination and Contribution Agreement (the "Combination
Agreement") contemplating various transactions (the "Transactions") pursuant to
which the Company, directly or through either a limited partnership in which the
Company is the general partner or through a subsidiary of the Company, will
acquire (i) up to 13 apartment communities and one office building owned by 14
separate partnerships (the "Winton Partnerships") in which Don W. Winton is the
general partner, (ii) Winton & Associates, Inc., the property manager of the
properties owned by the Winton Partnerships (the "Associates Merger"), and (iii)
Pima Mortgage Limited Partnership and Pima Realty Advisors, Inc., which serve as
the manager and property manager, respectively, of the Company's day-to-day
operations and apartment properties (the "Pima Mergers"). The Pima Mergers
include a proposed amendment to the Company's Bylaws to exclude the Pima Mergers
from the Bylaw provision requiring an appraisal of property being purchased from
an affiliated or related party. The transactions involve (a) an exchange of
shares of the Company's Common Stock for partnership interests in the Winton
Partnerships (the "Exchange Offer"), (b) the subsequent acquisition of
substantially all of the assets and properties of the Winton Partnerships in
exchange for cash and limited partnership units that will be convertible into
shares of the Company's Common Stock on a one-for-one basis commencing
approximately 12 months after the acquisitions (the "Asset Transfer"), and (c)
the acquisition of Winton & Associates, Inc., Pima Mortgage Limited Partnership,
and Pima Realty Advisors, Inc., in exchange for 70,284, 235,440, and 26,560
shares of the Company's Common Stock, respectively. Upon completion of the
Transactions, the officers of Winton & Associates, Inc., Pima Realty Advisors,
Inc., and the owners of the partners of Pima Mortgage Limited Partnership,
including the Company's principal executive officers and Mr. Winton, will enter
into employment agreements with the Company.
As described in the attached Proxy Statement, including Note M to the
Unaudited Pro Forma Combined Financial Statements, the consummation of the
Transactions will expand the Company's apartment portfolio from 3,039 units in
19 apartment communities to 5,299 units in 32 apartment communities and also is
expected to increase the percentage of the Company's revenue and income derived
from apartment communities, increase the Company's real estate operating income,
and increase the Company's equity on a financial statement basis. If the
Transactions had taken place on January 1, 1996, the Transactions would have
resulted in (a) an increase in real estate operating income from $3.8 million to
$7.0 million for the nine months ended September 30, 1996 on a pro forma basis
and (b) an increase in Stockholders' Equity from $40.5 million to $74.4 million
at September 30, 1996 on a pro forma basis. While the Transactions would have
had the effect of decreasing net income per share from $2.46 to $1.59 for the
nine months ended September 30, 1996 on a pro forma basis, they would have
increased funds from operations, as modified, from $.76 to $1.07 per share.
At the Special Meeting, you will be asked to approve a proposal (the
"Combination Proposal") providing for the issuance of up to 1,980,000 shares of
the Company's Common Stock in connection with the Transactions. In addition, you
will be asked to approve an amendment to and a restatement of the Company's
First Amended and Restated Articles of Incorporation (the "Articles of
Incorporation") to include additional provisions designed to further protect the
Company's status as a real estate investment trust.
<PAGE>
You will have the opportunity to vote either (a) on the entire Combination
Proposal or (b) separately on the components of the Combination Proposal
relating to the Exchange Offer, the Asset Transfer, and the Associates Merger
(the "Winton Components") and on the components of the Combination Proposal
relating to the Pima Mergers and the Bylaw amendment (the "Pima Components").
The Winton Components will not be consummated unless either the entire
Combination Proposal is approved or both the Winton Components and the Pima
Components are approved, but the Pima Components will be consummated if either
the entire Combination Proposal is approved or the Pima Components are approved.
The Board of Directors of the Company has approved the terms and conditions
of the Transactions, and a Special Committee of the Board of Directors of the
Company has approved the terms and conditions of the Pima Mergers following the
receipt of a fairness opinion from Oppenheimer & Company, Inc. to the effect
that, as of the date of such opinion and based on the asssumptions and subject
to the qualifications and limitations set forth therein, the consideration to be
paid by the Company in the Pima Mergers is fair to the Company from a financial
point of view.
AT A MEETING OF THE COMPANY'S BOARD OF DIRECTORS HELD TO CONSIDER THE
COMBINATION PROPOSAL AND THE AMENDMENT AND RESTATEMENT OF THE ARTICLES OF
INCORPORATION, THE DIRECTORS OF THE COMPANY CAREFULLY CONSIDERED AND APPROVED
THE TERMS OF THE COMBINATION PROPOSAL AND THE RELATED ISSUANCE OF SHARES OF
COMMON STOCK AND THE AMENDMENT AND RESTATEMENT OF THE ARTICLES OF INCORPORATION
AS BEING IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. AT A MEETING
OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS HELD TO CONSIDER THE PIMA
MERGERS, THE SPECIAL COMMITTEE CAREFULLY CONSIDERED AND APPROVED THE TERMS OF
THE PIMA MERGERS AND RELATED ISSUANCE OF SHARES OF COMMON STOCK AS BEING IN THE
BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
COMBINATION PROPOSAL PROVIDING FOR THE ISSUANCE OF SHARES OF THE COMPANY'S
COMMON STOCK IN CONNECTION WITH THE TRANSACTIONS AND VOTE FOR THE AMENDMENT AND
RESTATEMENT OF THE ARTICLES OF INCORPORATION. THE ENCLOSED PROXY STATEMENT SETS
FORTH DETAILED INFORMATION, INCLUDING FINANCIAL DATA, RELATING TO THE MATTERS TO
BE CONSIDERED AT THE SPECIAL MEETING.
It is important that your shares be represented at the Special Meeting,
whether or not you plan to attend. Accordingly, you are requested to sign, date,
and mail the enclosed proxy as promptly as possible. You may revoke your proxy
if you decide to attend the Special Meeting and vote in person. Should you
require assistance in completing your proxy or if you have any questions about
the voting procedure or the accompanying Proxy Statement, please feel free to
contact the Company at 335 North Wilmot, Suite 250, Tucson, Arizona 85711
(telephone 520-748-2111).
Very truly yours,
/s/ Jon A. Grove
Jon A. Grove
Chairman of the Board, President,
and Chief Executive Officer
<PAGE>
ASR INVESTMENTS CORPORATION
335 NORTH WILMOT, SUITE 250
TUCSON, ARIZONA 85711
(520) 748-2111
-------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 23, 1997
-------------------------------------------
A Special Meeting of Stockholders (together with any adjournment or
adjournments thereof (the "Special Meeting")) of ASR Investments Corporation, a
Maryland corporation (the "Company"), will be held on April 23, 1997 at 9:00
a.m., local time, at the Viscount Suite Hotel, 4855 E. Broadway Boulevard,
Tucson, Arizona for the following purposes, as more fully described in the
accompanying Proxy Statement:
1. To consider a vote upon a proposal (the "Combination Proposal") to
issue up to 1,980,000 shares of the Company's Common Stock (including shares
issuable upon the conversion of limited partnership interests ("LP Units") in
Heritage Communities L.P. ("Heritage LP"), a Delaware limited partnership in
which the Company and a wholly owned subsidiary are the general partners) in
connection with transactions (the "Transactions") contemplated by a Master
Combination and Contribution Agreement providing for the Company directly or
indirectly through either Heritage LP or a subsidiary of the Company to (i)
exchange shares of its Common Stock for partnership interests in up to 14
separate limited partnerships (the "Winton Partnerships") in which Don W.
Winton is the general partner (the "Exchange Offer"); (ii) acquire
substantially all of the assets and properties of the Winton Partnerships
through a capital contribution of such assets and properties by the Winton
Partnerships to Heritage LP in exchange for cash and LP Units in Heritage LP,
which will be convertible into shares of the Company's Common Stock on a
one-for-one basis commencing approximately 12 months after the acquisition
(the "Asset Transfer"); (iii) acquire Winton & Associates, Inc., the property
manager of the properties owned by the Winton Partnerships, in exchange for
shares of the Company's Common Stock in a merger transaction (the "Associates
Merger"); and (iv) acquire Pima Mortgage Limited Partnership and Pima Realty
Advisors, Inc., which serve as the manager and property manager,
respectively, of the Company's day-to-day operations and apartment
properties, in exchange for shares of the Company's Common Stock in a merger
transaction (the "Pima Mergers") and amend the Company's Bylaws to exclude
the Pima Mergers from the Bylaw provision requiring an appraisal of property
being purchased from an affiliated or related party. Stockholders will have
the opportunity to vote either (a) on the entire Combination Proposal or (b)
separately on the components of the Combination Proposal relating to the
Exchange Offer, the Asset Transfer, and the Associates Merger (the "Winton
Components") and on the components of the Combination Proposal relating to
the Pima Mergers and the Bylaw amendment (the "Pima Components"). The Winton
Components will not be consummated unless either the entire Combination
Proposal is approved or both the Winton Components and the Pima Components
are approved, but the Pima Components will be consummated if either the
entire Combination Proposal is approved or the Pima Components are approved.
2. To consider and vote upon a proposal to amend and restate the
Company's Amended and Restated Articles of Incorporation to include
additional provisions designed to further protect the Company's status as a
real estate investment trust.
3. To transact such other business as may properly come before the
Special Meeting.
Only stockholders of record at the close of business on February 14, 1997 are
entitled to notice of and to vote at the Special Meeting.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. TO
ASSURE YOUR REPRESENTATION AT THE MEETING, HOWEVER, YOU ARE URGED TO MARK, SIGN,
DATE, AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE POST-PREPAID
ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING THE MEETING MAY
VOTE IN PERSON EVEN IF SUCH STOCKHOLDER PREVIOUSLY HAS RETURNED A PROXY.
TUCSON, ARIZONA
March 27, 1997 Sincerely,
/s/ Joseph C. Chan
Joseph C. Chan
Secretary
<PAGE>
ASR INVESTMENTS CORPORATION
335 NORTH WILMOT, SUITE 250
TUCSON, ARIZONA 85711
(520) 748-2111
-------------------------------------------
PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 23, 1997
-------------------------------------------
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors of ASR Investments Corporation, a Maryland
corporation (the "Company"). The proxies will be used at a Special Meeting of
Stockholders of the Company (the "Special Meeting") to be held on Wednesday,
April 23, 1997, at 9:00 a.m. local time, at the Viscount Suite Hotel, 4855 E.
Broadway Boulevard, Tucson, Arizona, and at any adjournment thereof.
At the Special Meeting, holders of Common Stock of the Company, par value
$.01 per share ("Common Stock"), will be asked to consider a vote upon a
proposal (the "Combination Proposal") to issue up to 1,980,000 shares of the
Company's Common Stock (including shares issuable upon the conversion of limited
partnership interests ("LP Units") in Heritage Communities L.P. ("Heritage LP"),
a Delaware limited partnership in which the Company and a wholly owned
subsidiary are the general partners) in connection with transactions (the
"Transactions") contemplated by a Master Combination and Contribution Agreement
providing for the Company directly or indirectly through either Heritage LP or a
subsidiary of the Company to (i) exchange shares of the Company's Common Stock
for partnership interests in up to 14 separate limited partnerships (the "Winton
Partnerships") in which Don W. Winton is the general partner (the "Exchange
Offer"); (ii) acquire substantially all of the assets and properties of the
Winton Partnerships through a capital contribution of such assets and properties
by the Winton Partnerships to Heritage LP in exchange for cash and LP Units in
Heritage LP, which will be convertible into shares of the Company's Common Stock
on a one-for-one basis commencing approximately 12 months after the acquisition
(the "Asset Transfer"); (iii) acquire Winton & Associates, Inc., the property
manager of the properties owned by the Winton Partnerships, in exchange for
shares of the Company's Common Stock in a merger transaction (the "Associates
Merger"); and (iv) acquire Pima Mortgage Limited Partnership and Pima Realty
Advisors, Inc., which are affiliates of officers of the Company and which serve
as the manager and property manager, respectively, of the Company's day-to-day
operations and apartment properties, in exchange for shares of the Company's
Common Stock in a merger transaction (the "Pima Mergers") and amend the
Company's Bylaws to exclude the Pima Mergers from the Bylaw provision requiring
an appraisal of property being purchased from an affiliated or related party.
Stockholders will have the opportunity to vote either (a) on the entire
Combination Proposal or (b) separately on the components of the Combination
Proposal relating to the Exchange Offer, the Asset Transfer, and the Associates
Merger (the "Winton Components") and on the components of the Combination
Proposal relating to the Pima Mergers and the Bylaw amendment (the "Pima
Components"). The Winton Components will not be consummated unless either the
entire Combination Proposal is approved or both the Winton Components and the
Pima Components are approved, but the Pima Components will be consummated if
either the entire Combination Proposal is approved or the Pima Components are
approved.
The stockholders also will be asked to approve an amendment and restatement
of the Company's Articles of Incorporation to include additional provisions
designed to further protect the Company's status as a real estate investment
trust.
This Proxy Statement and the accompanying form of proxy are first being
mailed to the stockholders of the Company on or about March 27, 1997.
IN DETERMINING WHETHER TO APPROVE THE COMBINATION PROPOSAL AND THE AMENDMENT TO
AND RESTATEMENT OF THE COMPANY'S ARTICLES OF INCORPORATION AS DESCRIBED HEREIN,
STOCKHOLDERS SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT.
The date of this Proxy Statement is March 27, 1997.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
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AVAILABLE INFORMATION ..................................................... ii
SUMMARY OF PROXY STATEMENT ................................................ 1
RISK FACTORS .............................................................. 24
THE SPECIAL MEETING ....................................................... 33
Special Meeting ......................................................... 33
Matters to be Considered at the
Special Meeting ....................................................... 33
Voting Securities ....................................................... 33
Quorum and Voting Requirements .......................................... 33
Reasons for Solicitating
Stockholder Approval .................................................. 34
Proxies; Right to Revoke Proxies ........................................ 34
Solicitation ............................................................ 34
Other Matters ........................................................... 34
THE TRANSACTIONS .......................................................... 35
General ................................................................. 35
Vote Required ........................................................... 35
Background .............................................................. 36
Reasons For The Transactions;
Recommendations ....................................................... 37
Employment Agreements ................................................... 39
Indemnification Of Don W. Winton ........................................ 40
Approving Winton Partnerships ........................................... 40
Conditions To The Transactions;
Termination .......................................................... 40
Exemption From Registration Of
Common Stock ......................................................... 41
No Solicitation Of Other Transactions ................................... 41
Closing ................................................................. 42
The Exchange Offer ...................................................... 42
Offer To Purchase .................................................... 42
Election To Tender; Purchase Price ................................... 42
Consent To Admission of the
Company As A Winton Partner ...................................... 43
Representations And Warranties ....................................... 43
Federal Income Tax Consequences ...................................... 43
Exchange Offer Registration
Agreement And Listing Of
Common Stock ..................................................... 44
The Asset Transfer ...................................................... 44
Effect Of Asset Transfer ............................................. 44
Capital Contributions To Heritage Lp ................................. 45
Mortgage Debt ........................................................ 45
Prorations ........................................................... 45
Issuance Of Lp Units And Cash ........................................ 46
Representations And Warranties ....................................... 46
Conduct Of Operations
Prior To Closing ................................................ 46
Plan Of Dissolution And Liquidation .................................. 47
Federal Income Tax Consequences ...................................... 47
Asset Transfer Registration
Agreement And Listing Of
Common Stock .................................................... 48
The Associates Merger ................................................... 49
General .............................................................. 49
Effect Of The Associates Merger ...................................... 49
Representations And Warranties ....................................... 49
Conduct Prior To The Pima Mortgage ................................... 50
Associates Merger ................................................. 51
Conditions To Associates Merger ...................................... 51
Waivers, Modifications, And
Abandonment ....................................................... 52
Federal Income Tax Consequences ...................................... 52
Dissenters' Rights ................................................... 52
Registration And Listing Of
Common Stock ...................................................... 53
Accounting Treatment ................................................. 53
Page
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The Pima Mergers ....................................................... 53
General ............................................................. 53
Effect Of The Pima Mergers .......................................... 53
Representations And Warranties ...................................... 54
Conduct Prior To The Pima Mergers ................................... 54
The Company ......................................................... 55
Conditions To The Pima Mergers ...................................... 55
Waivers, Modifications, And Abandonment ............................. 56
Interests Of Certain Persons ........................................ 57
Special Committee Of The Company's Board Of
Directors ....................................................... 57
Opinion Of Financial Advisor To The
Special Committee .............................................. 58
Amendment To Bylaws ................................................. 61
Federal Income Tax Consequences ..................................... 62
Dissenters' Rights .................................................. 62
Registration And Listing Of Common Stock ............................ 62
Accounting Treatment ................................................ 62
INFORMATION REGARDING THE COMPANY ........................................ 63
Introduction .......................................................... 63
Selected Consolidated Financial Data .................................. 63
Management's Discussion And Analysis Of
Financial Condition
And Results Of Operations ........................................... 65
Operating Policies And Strategies ..................................... 71
Federal Income Tax Considerations ..................................... 76
Capital Resources ..................................................... 80
Operating Restrictions ................................................ 81
Competition ........................................................... 81
Employees ............................................................. 81
Properties ............................................................ 81
Legal Proceedings ..................................................... 81
Management ............................................................ 81
Summary Compensation Table ............................................ 85
Option/sar Grants In Last Fiscal Year ................................. 86
Aggregated Option/sar Exercises In .................................... 86
Last Fiscal Year And Fiscal
Year-end Option/sar Values
Principal Stockholders ................................................ 88
Market Price And Dividend Information ................................. 89
Description Of Capital Stock .......................................... 89
INFORMATION REGARDING PIMA MORTGAGE .................................. 90
INFORMATION REGARDING ................................................. 93
PIMA REALTY
INFORMATION REGARDING THE WINTON PARTNERSHIPS 94
INFORMATION REGARDING
WINTON & ASSOCIATES, INC .............................................. 103
SUMMARY OF THE HERITAGE LP PARTNERSHIP AGREEMENT ...................... 103
PROPOSED AMENDMENT TO AND RESTATEMENT OF THE
ARTICLES OF INCORPORATION ......................................... 106
OTHER MATTERS ......................................................... 106
FINANCIAL STATEMENTS .................................................. F-1
APPENDICES
Combination Agreement ................................................. A-1
Partnership Agreement ................................................. B-1
Associates Merger Agreement ........................................... C-1
Pima Realty/pima Mortgage Merger Agreement ............................ D-1
Form Of Employment Agreement .......................................... E-1
Exchange Offer Registration Agreement ................................. F-1
Asset Transfer Registration Agreement ................................. G-1
Oppenheimer Fairness Opinion .......................................... H-1
Amendment To The Bylaws ............................................... I-1
Proposed Amended And Restated Articles Of
Incorporation ........................................................ J-1
i
<PAGE>
AVAILABLE INFORMATION
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 and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information may be
inspected and copied at public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549,
and at the Commission's Regional Offices at 13th Floor, 7 World Trade Center,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and copies may be obtained at the prescribed
rates from the Public Reference Section of the Commission at its principal
office in Washington D.C. 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. In addition, the
Company's Common Stock is currently listed on the American Stock Exchange and
such materials may be inspected at the offices of the American Stock Exchange,
86 Trinity Place, New York, New York 10006.
The Winton Partnerships, Winton & Associates, Pima Realty, Pima Mortgage, JG
Mortgage, FP Mortgage, and JC Mortgage are not subject to the informational
requirements of the Exchange Act.
This Proxy Statement incorporates by reference documents relating to the
Company that are not presented herein or delivered herewith. Documents relating
to the Company (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference) are available without charge upon
request by any person, including any beneficial owner, to whom this Proxy
Statement is delivered, from ASR Investments Corporation, Attention: Corporate
Secretary, 335 North Wilmot, Suite 250, Tucson, Arizona 85711 (the principal
executive offices of the Company), telephone (520) 748-2111. In order to ensure
timely delivery of the documents, requests should be received by April 10, 1997.
All information contained in this Proxy Statement relating to the Company has
been supplied by the Company. All information in this Proxy Statement relating
to the Winton Partnerships has been supplied by the Winton Partnerships. All
information contained in this Proxy Statement relating to Winton & Associates
has been supplied by Winton & Associates. All information contained in this
Proxy Statement relating to Pima Realty has been supplied by Pima Realty. All
information contained in this Proxy Statement relating to Pima Mortgage has been
supplied by Pima Mortgage. All information in this Proxy Statement relating to
each of JG Mortgage, FP Mortgage, and JC Mortgage has been supplied by JG
Mortgage, FP Mortgage, and JC Mortgage, respectively.
<PAGE>
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SUMMARY OF PROXY STATEMENT
The following is a summary of certain information contained in this Proxy
Statement. Stockholders are urged to read this Proxy Statement and the
Appendices in their entirety.
INTRODUCTION
This Proxy Statement relates to transactions (the "Transactions") in which
ASR Investments Corporation, a Maryland corporation (the "Company" or "ASR"), or
a limited partnership in which the Company and a wholly owned subsidiary are the
general partners or a subsidiary of the Company, will acquire substantially all
of the assets and properties of up to 14 limited partnerships in which Don W.
Winton is the general partner (collectively, the "Winton Partnerships") through
(i) an offer (the "Exchange Offer") by the Company of shares of the Company's
Common Stock, par value $.01 per share ("Common Stock"), to partners of the
Winton Partnerships (the "Winton Partners") in exchange for partnership
interests in the Winton Partnerships ("Winton Partnership Interests"), and (ii)
an asset transfer (the "Asset Transfer") of substantially all of the assets and
properties of the Winton Partnerships (the "Winton Properties") to Heritage
Communities L.P., a Delaware limited partnership in which the Company and a
wholly owned subsidiary of the Company are the general partners ("Heritage LP"),
through a capital contribution by the Winton Partnerships of such assets and
properties to Heritage LP in exchange for cash and limited partnership interests
("LP Units") in Heritage LP. The Transactions also include (a) the acquisition
of the property manager of the Winton Properties through the merger of Winton &
Associates, Inc., a Washington corporation ("Winton & Associates" or
"Associates"), with and into Heritage Residential Group, Inc. ("Heritage
Residential"), an Arizona corporation that is a newly formed subsidiary of the
Company (the "Associates Merger"), and (b) the acquisition of the manager and
the property manager, respectively, of the Company's day-to-day operations and
apartment properties through the merger (the "Pima Mortgage Merger") of the
three corporate partners (JG Mortgage Advisors, Inc., FP Mortgage Advisors,
Inc., JC Mortgage Advisors, Inc.) of Pima Mortgage Limited Partnership, an
Arizona limited partnership ("Pima Mortgage"), and the merger (the "Pima Realty
Merger") of Pima Realty Advisors, Inc., an Arizona corporation ("Pima Realty"),
with and into Heritage Residential (together the "Pima Mergers") and the
amendment of the Company's Bylaws to exclude the Pima Mergers from the Bylaw
provision requiring an appraisal of property being purchased from an affiliated
or related party.
The Exchange Offer, the Asset Transfer, the Associates Merger, and the Pima
Mergers are provided for in (1) the Master Combination and Contribution
Agreement (the "Combination Agreement") among the Company, the Winton
Partnerships, Don W. Winton, Winton & Associates, Heritage LP, Heritage
Residential, Heritage SGP Corporation, an Arizona corporation ("Heritage SGP"),
Pima Mortgage, Pima Realty, Jon A. Grove, Frank S. Parise, Jr., and Joseph C.
Chan; (2) the Amended and Restated Agreement of Limited Partnership of Heritage
LP (the "Partnership Agreement") among the Company, Heritage SGP, and the Winton
Partnerships; (3) the Agreement and Plan of Reorganization among the Company,
Heritage Residential, Mr. Winton, and Winton & Associates (the "Associates
Merger Agreement"); and (4) the Agreement and Plan of Reorganization among the
Company, Pima Realty, Pima Mortgage, Heritage Residential, JG Mortgage Advisors,
Inc., an Arizona corporation ("JG Mortgage"), FP Mortgage Advisors, Inc., an
Arizona corporation ("FP Mortgage"), JC Mortgage Advisors, Inc., an Arizona
corporation ("JC Mortgage"), and Messrs. Grove, Parise, and Chan (the "Pima
Realty/Pima Mortgage Merger Agreement"). The Transactions also provide for each
of Messrs. Grove, Parise, Chan, and Winton to enter into an employment agreement
with the Company (collectively, the"Employment Agreements"). Copies of the
Combination Agreement, the Partnership Agreement, the Associates Merger
Agreement, the Pima Realty/Pima Mortgage Merger Agreement, and a form of the
Employment Agreements are attached hereto as Appendix A, Appendix B, Appendix C,
Appendix D, and Appendix E, respectively.
Stockholders of the Company also will be asked to vote to amend and restate
the Company's First Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") to include additional provisions designed to
further protect the Company's status as a real estate investment trust. A copy
of the proposed Amended and Restated Articles of Incorporation is attached
hereto as Appendix J.
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1
<PAGE>
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PRINCIPAL PARTIES TO THE TRANSACTIONS
ASR Investments Corporation The Company is a real estate investment
335 North Wilmot, Suite 250 trust engaged in the acquisition and
Tucson, Arizona 85711 operation of apartment communities. At
(520) 748-2111 .................. September 30, 1996, the Company owned 19
apartment communities, containing 3,039
units, located in Phoenix and Tucson,
Arizona, Houston, Texas, and Albuquerque,
New Mexico. As of such date, the Company
also owned through joint ventures six
apartment communities, containing 1,441
units, located in Phoenix and Tucson,
Arizona. Prior to 1994, the Company
invested in mortgage assets, entitling it
to receive the excess cash flows from
pools of mortgage instruments over the
required payments on the related
structured financings. In early 1993, the
Company determined to shift its focus to
the acquisition, development, and
operation of apartment communities. The
Company was incorporated in the state of
Maryland on June 18, 1987 and commenced
its operations on August 26, 1987. The
Company's Common Stock is listed on the
American Stock Exchange under the symbol
"ASR."
The Winton Partnerships The Winton Partnerships consist of 14
3845 FM 1960 West, Suite 450 limited partnerships organized under the
Houston, Texas 77068 laws of Washington or Texas that own and
(281) 580-1990 .................. operate 13 apartment communities and one
office building in Washington and Texas.
Don W. Winton is the general partner of
each of the Winton Partnerships. Mr.
Winton currently has no relationship with
the Company or any of its affiliates
except as described herein. The Winton
Partnerships are as follows: First Aspen
Court Associates, L.P., a Texas limited
partnership; First Briar Park Associates,
a Washington limited partnership; First
Chelsea Park Associates, L.P., a Texas
limited partnership; First Appian Way
Associates, L.P., a Washington limited
partnership; First Greenwood Creek
Associates, L.P., a Texas limited
partnership; First Highlands Associates,
L.P., a Texas limited partnership; First
Marymont Associates, L.P., a Texas
limited partnership; First Montfort
Associates, L.P., a Texas limited
partnership; First Riverway Associates,
L.P., a Washington limited partnership;
First Springfield Associates, L.P., a
Texas limited partnership; First
Timbercreek Landing Associates, L.P., a
Washington limited partnership; Campus
Development Associates Limited
Partnership, a Washington limited
partnership; Campus Commons Associates --
Limited Partnership, a Washington limited
partnership; and First Pacific South
Center Associates, L.P., a Washington
limited partnership. The Winton
Partnerships that approve the
Transactions are referred to as
"Approving Winton Partnerships."
Winton & Associates, Inc. Winton & Associates engages in the
3845 FM 1960 West, Suite 450 business of providing customary property
Houston, Texas 77068 management services for the apartment
(281) 580-1990 .................. communities and office building owned
and operated by the Winton Partnerships.
Pima Mortgage Pima Mortgage engages in the business of
Limited Partnership advising the Company with respect to
335 North Wilmot, Suite 250 various aspects of the Company's
Tucson, Arizona 85711 business and operations, managing the
(520) 748-2111 .................. overall business and operations of the
Company, and representing the Company in
its dealings with third parties. Pima
Mortgage is an Arizona limited
partnership whose
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three corporate partners consist of JG
Mortgage, FP Mortgage, and JC Mortgage.
Jon A. Grove, Frank S. Parise, Jr., and
Joseph C. Chan have been the directors,
officers, and sole shareholders of JG
Mortgage, FP Mortgage, and JC Mortgage,
respectively, since their organizations.
Pima Realty Advisors, Inc. Pima Realty provides customary on-site
6300 East El Dorado Plaza, property management services for more
Suite 200 than 4,400 apartment units, including
Tucson, Arizona those owned by the Company. Messrs.
(520) 290-1500 .................. Grove, Parise, and Chan own all of the
outstanding capital stock of Pima
Realty.
Heritage Communities L.P. ....... Heritage LP is a Delaware limited
partnership in which the Company and a
wholly owned subsidiary are the general
partners. Heritage LP will acquire
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.
Heritage Residential Heritage Residential, an Arizona
Group, Inc. ..................... corporation, is a wholly owned
subsidiary of the Company that was formed
to acquire Winton & Associates, Pima
Mortgage, and Pima Realty. Heritage
Residential will enter into property
management agreements to manage all of
the Company's properties as well as
certain properties owned by independent
parties and managed by Pima Realty or
Winton Associates. The Company will
account for Heritage Residential on a
consolidated basis.
Heritage SGP Corporation ........ Heritage SGP, an Arizona corporation, is
a wholly owned subsidiary of the Company
that was formed to be a special general
partner of Heritage LP.
JG Mortgage Advisors, Inc., FP JG Mortgage, FP Mortgage, and JC
Mortgage Advisors, Inc., and JC Mortgage (collectively the "Pima Mortgage
Mortgage Advisors, Inc. ......... Partners") are Arizona corporations,
which are owned by Jon A. Grove, Frank S.
Parise, Jr., and Joseph C. Chan,
respectively, and which are the three
corporate partners of Pima Mortgage.
Jon A. Grove, Messrs. Grove, Parise, and Chan are
Frank S. Parise, Jr., directors and officers of the Company
and Joseph C. Chan .............. and own JG Mortgage, FP Mortgage, and JC
Mortgage, respectively, and collectively
own Pima Realty.
Don W. Winton ................... Mr. Winton is the general partner of
each of the Winton Partnerships and owns
all of the capital stock of Winton &
Associates.
THE SPECIAL MEETING
Date, Time, And Place Of The Special Meeting will be held on
Special Meeting ................. Wednesday, April 23, 1997, at 9:00 a.m.
local time, at the Viscount Suite Hotel,
4855 East Broadway Boulevard, Tucson,
Arizona. See "The Special Meeting --
Special Meeting."
Purposes of the Special At the Special Meeting, stockholders of
Meeting ......................... the Company will (i) consider and vote
upon the Combination Proposal providing
for the
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issuance of up to 1,980,000 shares of
Common Stock, or 63% of the total number
of shares of Common Stock currently
outstanding, in the Transactions (see
"Special Meeting -- Matters to be
Considered at the Special Meeting" and
"The Transactions"); (ii) consider and
vote upon a proposal to amend and restate
the Company's Articles of Incorporation
to include additional provisions designed
to further protect the Company's status
as a real estate investment trust (see
"Special Meeting -- Matters to be
Considered at the Special Meeting" and
"Proposed Amendment to and Restatement of
the Articles of Incorporation"); and
(iii) transact any other business as may
properly come before the Special Meeting
or any adjournment or adjournments
thereof.
The Combination Prioposal includes (a)
the Exchange Offer, (b) the Asset
Transfer, (c) the Associates Merger, and
(d) the Pima Mergers and related
amendment of the Company's Bylaws, as
described herein. Stockholders will have
the opportunity to vote either (1) on the
entire Combination Proposal or (2)
separately on the components of the
Combination Proposal relating to the
Exchange Offer, the Asset Transfer, and
the Associates Merger (the "Winton
Components") and on the components of the
Combination Proposal relating to the Pima
Mergers and the Bylaw amendment (the
"Pima Components"). The Winton Components
will not be consummated unless either the
entire Combination Proposal is approved
or both the Winton Components and the
Pima Components are approved, but the
Pima Components will be consummated if
either the entire Combination Proposal is
approved or the Pima Components are
approved.
Vote by Proxy ................... A proxy is enclosed for use at the
Special Meeting. Unless otherwise
instructed, shares represented by the
proxy will be voted for both the
Combination Proposal and proposal to
amend the Company's Articles of
Incorporation as described herein. The
proxy may be revoked at any time before
it is voted by (i) filing a written
notice of revocation bearing a later date
with the Secretary of the Company prior
to the Special Meeting, (ii) delivering
to the Company a duly executed proxy
bearing a later date, or (iii) attending
the Special Meeting and voting in person.
Record Date; Voting Rights; Stockholders of record of the Company's
Quorum .......................... Common Stock at the close of business on
February 14, 1997 (the "Record Date") are
entitled to notice of and to vote at the
Special Meeting and any adjournment or
adjournments thereof. As of the Record
Date, 3,147,150 shares of Common Stock
were issued and outstanding, each of
which will be entitled to one vote on
each matter to be acted upon or which may
properly come before the Special Meeting.
The presence of stockholders, in person
or by proxy, at the Special Meeting of
stockholders, entitled to cast a majority
of all votes entitled to be cast at such
meeting, will constitute a quorum.
Voting Requirements ............. Under the rules of the American Stock
Exchange (the "Amex"),
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the affirmative vote of a majority of the
votes cast on the Combination Proposal or
the Winton Components or the Pima
Components is required. Under the
Maryland General Corporation Law and the
Company's Articles of Incorporation, the
affirmative vote of two-thirds of the
votes entitled to be cast is required to
approve the amendment to and restatement
of the Company's Articles of
Incorporation. As of the Record Date,
directors and officers of the Company and
their affiliates owned a total of
approximately 110,990 shares of Common
Stock, representing approximately 3.5% of
the outstanding shares of Common Stock.
Reasons for Solicitating The Company is seeking stockholder
Stockholder Approval ............ approval of the Combination Proposal
providing for the issuance of shares of
its Common Stock in connection with the
Transactions as a result of the
requirements of the Amex to seek
stockholder approval for transactions
increasing outstanding shares by more
than 20%. Stockholder approval of the
Transactions themselves is not required
by Maryland law, the Company's Articles
of Incorporation, or the Company's
Bylaws. The Company is seeking
stockholder approval of the amendment to
and restatement of its Articles of
Incorporation in accordance with Maryland
law.
THE TRANSACTIONS
The Exchange Offer .............. The Exchange Offer provides for the offer
by the Company to Winton Partners to
exchange their Winton Partnership
Interests in whole or in part for shares
of the Company's Common Stock. The number
of shares of the Company's Common Stock
offered in exchange for each partner's
interest in a Winton Partnership is equal
to the Exchange Value (as defined herein)
of such Winton Partnership multiplied by
the percentage interest in such Winton
Partnership represented by such partner's
interest, divided by $18.10, which is the
average closing price of the Company's
Common Stock on the American Stock
Exchange (the "Amex") during the 36-week
period prior to the execution of the
Combination Agreement. The consummation
of the Exchange Offer depends upon the
consummation of the Asset Transfer, the
Associates Merger, and the Pima Mergers.
Only Winton Partners that (i) tender
Winton Partnership Interests in the
Winton Partnerships that have approved
the transactions contemplated by the
Combination Agreement ("Approving Winton
Partnerships"), and (ii) qualify as
"accredited investors" under the
Securities Act of 1933, as amended (the
"Securities Act"), will be eligible to
participate in the Exchange Offer. Each
Winton Partner participating in the
Exchange Offer must consent to the
admission of the Company as a substituted
limited partner in the related Winton
Partnership.
The Asset Transfer .............. The Asset Transfer provides for each of
the Approving Winton Partnerships to
transfer substantially all of its assets
and properties as a capital contribution
to Heritage LP in exchange for LP Units
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and cash. The number of LP Units that
will be issuable to each Approving Winton
Partnership will be calculated by
dividing the Exchange Value attributable
to the "accredited investor" partners of
such Approving Winton Partnership's
property by $18.10, which is the average
closing price of the Company's Common
Stock on the Amex during the 36-week
period prior to the execution of the
Combination Agreement. The LP Units will
be convertible into shares of Common
Stock at any time following the first
anniversary of the Closing Date. The
amount of cash that will be issuable to
each Approving Winton Partnership will be
calculated by dividing the Exchange Value
attributable to the "non-accredited
investor" partners of such Approving
Winton Partnership's property by the
average closing price of the Company's
Common Stock during the 90 trading days
prior to the Closing Date. For purposes
of determining the amount of cash and
number of LP Units to be issuable in the
Asset Transfer, the Exchange Value
reflects the deemed value of each
property less the first mortgage debt at
the Closing Date and less cash paid to
each Approving Winton Partnership for its
closing costs (with a total cash payment
of $1.6 million). Promptly following the
Closing Date, the Approving Winton
Partnerships will distribute (i) the LP
Units in a liquidating distribution to
their respective partners that are
accredited investors as defined under the
Securities Act, and (ii) cash to their
respective partners that are not deemed
accredited investors. As a result of the
Exchange Offer, the Company will be a
limited partner in the Approving Winton
Partnerships to the extent of the
participation of the Winton Partners in
those partnerships in the Exchange Offer.
The Associates Merger ........... The Associates Merger provides for the
merger of Associates with and into
Heritage Residential, a subsidiary of the
Company. Upon the consummation of the
Associates Merger, Heritage Residential
will provide property management services
for the apartment communities and office
buildings owned and operated by the
Company or Heritage LP as well as for
apartment communities owned by third
parties. Pursuant to the Associates
Merger Agreement, the outstanding shares
of capital stock of Associates will be
converted into 70,284 shares of the
Company's Common Stock.
The Pima Mergers ................ The Pima Mergers provide for the merger
of Pima Realty and each of the three
corporate partners of Pima Mortgage (JG
Mortgage, FP Mortgage, and JC Mortgage)
with and into Heritage Residential. Upon
the consummation of the Pima Mergers,
Heritage Residential will provide
property management services for the
apartment communities owned and operated
by the Company or Heritage LP as well as
for apartment communities owned by third
parties. Pursuant to the Pima Realty/Pima
Mortgage Merger Agreement, the
outstanding shares of capital stock of
Pima Realty and each of JG Mortgage, FP
Mortgage, and JC Mortgage will be
converted into a total of 262,000 shares
of the Company's Common Stock.
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Background and Reasons for the The Company has been actively pursuing
Transactions; Advantages and opportunities to increase its capital
Disadvantages ................... base and apartment portfolio in order to
(i) increase the portion of its operating
cash flows generated from its apartment
operations, (ii) increase the efficiency
of its apartment operations, (iii)
diversify its apartment operations, and
(iv) increase the liquidity of its Common
Stock. In that regard, the management of
the Company and the Company's Board of
Directors held several discussions
relating to the merits of becoming a
"self-managed and self-administered" real
estate investment trust to, among other
things, become more attractive to
investors and provide for greater
operating efficiency as the Company
continues to expand. Jon A. Grove, the
Company's Chief Executive Officer, and
Don W. Winton, the general partner of
each of the Winton Partnerships, began
negotiations with respect to the
Transactions in early 1996. These
discussions included Mr. Winton's desire
to internalize the management of the
Company with the Company becoming a
self-managed, self-administered real
estate investment trust. Negotiations
progressed after that time, and the
Company and Mr. Winton exchanged
business, financial, operating, and
property information regarding the
Company and the Winton Partnerships,
respectively.
In connection with the negotiations of
the terms of the Exchange Offer and the
Asset Transfer, each of the Winton
Partnerships has been assigned a deemed
value that, subject to certain
adjustments and reduction for debts
assumed (after such adjustments, the
"Exchange Value"), will determine the
number of LP Units, shares of Common
Stock, or the amount of cash to be
received by the Winton Partners of such
Winton Partnership. The total Exchange
Values assigned to the Winton
Partnerships were determined by
arms-length negotiations between Mr.
Winton and ASR based on the agreed fair
market values of the properties owned by
the Winton Partnerships and the debt
thereon to be assumed or repaid by
Heritage LP, and the Exchange Values
allocated to each Winton Partnership were
determined by such negotiations, subject
to the input of Mr. Winton, which was
agreed to by ASR. For a description of
the calculation of Exchange Values, see
"Information Regarding the Winton
Partnerships -- Exchange Values."
The Company's Board of Directors
established the Special Committee (as
described below) in May 1996, and the
Special Committee retained independent
legal counsel and engaged Oppenheimer &
Co., Inc. ("Oppenheimer") in August 1996
to act as its financial advisor, to
assist in the negotiations of the terms
of the Pima Mergers (including the
related employment agreements), and to
deliver a written opinion as to the
fairness of the consideration to be paid
in the Pima Mergers. The Company, the
Winton Partnerships, and others executed
the Combination Agreement and related
agreements in November 1996. See "The
Transactions -- Background."
The Company believes that the acquisition
of the Winton Properties, together with
the resulting enlargement of the
Company's apartment portfolio, will be in
the best interests of the Company
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based on their geographic locations;
their age, construction quality,
condition, and design; their current and
projected cash flow; their potential for
capital appreciation; the terms of tenant
leases, including potential rent
increases; their location in areas of
potential economic growth; their current
occupancy and demands for future
occupancy; their prospects for liquidity
through sale, financing, and refinancing;
and their strong management. The
consummation of the Transactions will
expand the Company's apartment portfolio
from 3,039 units in 19 apartment
communities to 5,299 units in 32
apartment communities.
The consummation of the Transactions also
is expected to increase the percentage of
the Company's revenue and income derived
from apartment communities, increase the
Company's real estate operating income,
and increase the Company's equity on a
financial statement basis. If the
Transactions had taken place on January
1, 1996, the Transactions would have
resulted in an increase in real estate
operating income from $3.8 million to
$7.0 million for the nine months ended
September 30, 1996 on a pro forma basis
and an increase in Stockholders' Equity
from $40.5 million to $74.4 million at
September 30, 1996 on a pro forma basis.
While the Transactions would have had the
effect of decreasing net income per share
from $2.46 to $1.59 for the nine months
ended September 30, 1996 on a pro forma
basis, they would have increased funds
from operations, as modified, from $.76
to $1.07 per share. Funds from operations
is generally defined as net income plus
certain non-cash items (primarily
depreciation and amortization), less
gains from sales of assets and after
adjustments for unconsolidated
partnerships and joint ventures. The
Company considers income from redemption
and sale of mortgage assets to be similar
in nature to gains on sales of real
estate and, as a result, has excluded
such income in determining funds from
operations, as modified (see Note M to
the Unaudited Pro Forma Combined
Financial Statements). See "The
Transactions -- Reasons for the
Transactions; Recommendations."
The Company has considered in the past
and plans to consider in the future other
acquisitions of apartment communities.
See "Risk Factors -- Risks Relating to
the Transactions -- Difficulty in
Integrating Business Operations." The
Company considers the acquisition of the
Winton Properties to be the most
favorable of the transactions it has
considered to date. The acquisition will
be subject to certain risks, however,
including the fact that the Exchange
Values of the Winton Properties may not
reflect the actual values of those
properties and the difficulties of
integrating the Winton Properties into
the Company's operations. See "Risk
Factors -- Risks Relating to the
Transactions."
The internalization of the Company's
management fulfills an important
condition to the Winton Partnerships'
willingness to effect the Transactions.
In addition, the Company believes that
the internalization of its management
will enhance the Company's long-term
profitability and make the Company a more
attractive
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investment for institutional investors.
The cost attributable to the purchase of
the Pima Entities will be assigned to the
contract between the Company and the Pima
Entities and will be charged to contract
termination expenses in 1997. Based on
the analysis prepared by the Company and
the Pima Entities, in 1997 the Company
will incur an expense of $5,250,000 for
the contract termination expenses, offset
by estimated income attributable to the
Pima Entities of approximately $694,000
or $2.65 per share based on the 262,000
shares of the Company's Common Stock to
be issued in the Pima Mergers. The
estimated per share amount is accretive
to the net income of the Company on an
ongoing basis and is significantly higher
than the current $2.00 per share dividend
rate of the Company. See "The
Transactions -- Reasons for the
Transactions; Recommendations."
Recommendation of the The Board of Directors of the Company
Board of Directors believes that the Transactions are in the
and the Special Committee of best interests of, and are fair to, the
the Board of Directors .......... stockholders of the Company. In reaching
this determination, the Board of
Directors considered a number of factors.
See "The Transactions -- Reasons for the
Transactions; Recommendations." A special
committee, consisting entirely of
independent directors of the Company who
are not members of management or
employees of the Company, Pima Realty, or
Pima Mortgage (the "Special Committee"),
negotiated the terms of the Pima Mergers
and the Pima Realty/Pima Mortgage Merger
Agreement. In connection therewith, the
Special Committee retained Oppenheimer to
act as its financial advisor, to
negotiate the terms of the Pima Mergers
(including the related employment
agreements), and to deliver a written
opinion as to the fairness of the
consideration to be paid by the Company
in the Pima Mergers to the shareholders
of Pima Realty and each of JG Mortgage,
FP Mortgage, and JC Mortgage. See "The
Pima Mergers -- Opinion of Financial
Advisor to the Special Committee." After
careful consideration, the Special
Committee determined that the Pima
Mergers are fair and in the best
interests of the Company and its
stockholders and unanimously recommended
that the Board of Directors approve the
Pima Realty/Pima Mortgage Merger
Agreement and the issuance of 262,000
shares of the Company's Common Stock in
connection therewith. The Board of
Directors of the Company unanimously
approved the Transactions (including the
Pima Mergers following the determination
of the Special Committee) and the
issuance of Common Stock in connection
therewith and recommends that the
stockholders of the Company vote FOR the
Combination Proposal.
Opinion of Financial Advisor .... Oppenheimer has delivered a written
opinion dated November 11, 1996 (the
"Fairness Opinion") to the Special
Committee to the effect that, as of the
date of such opinion and based on the
assumptions and subject to the
qualifications and limitations set forth
therein, the consideration to be paid by
the Company in connection with the Pima
Realty Merger and the Pima Mortgage
Merger
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is fair to the Company from a financial
point of view. A copy of the Fairness
Opinion, which sets forth the assumptions
made, matters considered, and limitations
thereon, is attached hereto as Appendix H
and should be read in its entirety.
Oppenheimer was not requested to and did
not render any financial advice or
provide any fairness opinion or other
analysis with regard to the Exchange
Offer, the Asset Transfer, or the
Associates Merger or any other
transaction described herein except for
the Pima Mergers.
Risk Factors .................... In deciding whether to approve the
Combination Proposal, the stockholders of
the Company should consider the
information set forth under "Risk
Factors."
Dissenters' Rights of The stockholders of the Company are not
Appraisal ....................... entitled to dissenters' rights of
appraisal in connection with the
Transactions.
Interests of Certain Persons .... Messrs. Grove, Parise, and Chan are the
sole shareholders of JG Mortgage, FP
Mortgage, and JC Mortgage, respectively.
Messrs. Grove, Parise, and Chan also own
all of the outstanding capital stock of
Pima Realty. As a result of the Pima
Mergers, Messrs. Grove, Parise, and Chan
will acquire a total of 262,000 shares of
the Company's Common Stock. Each of
Messrs. Grove, Parise, and Chan also will
enter into an employment agreement with
the Company, a form of which is attached
as Appendix E hereto, in accordance with
the Pima Realty/Pima Mortgage Merger
Agreement. See "The Transactions -- The
Pima Mergers -- Interests of Certain
Persons" and "The Transactions --
Employment Agreements."
Indemnification of Don W. Under the terms of the Combination
Winton by Heritage LP ........... Agreement, Heritage LP has agreed to
indemnify Mr. Winton, subject to certain
limitations, for claims arising out of
Mr. Winton serving as the general partner
of the Approving Winton Partnerships. The
maximum amount of indemnification will be
equal to the aggregate value of assets
and properties transferred by the
Approving Winton Partnerships in the
Asset Transfer. See "The Transactions --
Indemnification of Don W. Winton."
Conditions to the Transactions; The respective obligations of the parties
Termination ..................... to the Combination Agreement to
consummate the Transactions are subject
to the satisfaction of certain
conditions, including (i) obtaining the
requisite approval of the Company's
stockholders to the Combination Proposal,
(ii) the simultaneous closing of all of
the Transactions, and (iii) the aggregate
value attributable to the properties, as
adjusted, of the Approving Winton
Partnerships equaling or exceeding 70% of
the value of the properties, as adjusted,
of all Winton Partnerships. See "The
Transactions -- Conditions to the
Transactions; Termination," "The
Transactions -- The Associates Merger --
Conditions to Associates Merger," and
"The Transactions -- The Pima Mergers --
Conditions to the Pima Mergers." The
Combination Agreement may be terminated
by either the Winton Partnerships or the
Company (a) if the Exchange Offer shall
not have been completed, (b) if the
Closing Date (as defined
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herein) shall not have occurred on or
before April 30, 1997, (c) if certain
legal proceedings with respect to the
Combination Agreement have been
instituted or threatened before any court
or governmental agency, (d) if the other
fails to comply with a material
obligation under the Combination
Agreement or related agreements, (e) if a
representation or warranty made by the
other under the Combination Agreement or
related agreements is not true and
correct in any material respect, (f) if
the stockholders of the Company do not
approve the Combination Proposal, and (g)
by mutual written consent of the Winton
Partnerships and the Company. The
Combination Agreement also may be
terminated by the Winton Partnerships
prior to the completion of the Exchange
Offer if some or all of the Winton
Partnerships receive an alternative
acquisition proposal that the general
partner of the Winton Partnerships
determines, based upon written advice of
counsel, that his fiduciary obligations
require that such alternative acquisition
proposal be accepted. The Company or Mr.
Winton and the Winton Partnerships may
receive a break-up fee of $1.0 million,
plus the reimbursement of expenses up to
$1.0 million incurred in connection with
the Transactions, upon the occurrence of
certain events in connection with the
termination of the Combination Agreement.
See "The Transactions -- Conditions of
the Transactions; Termination."
Closing Date .................... It is expected that the Transactions with
respect to the Approving Winton
Partnerships, except First Appian Way
Associates, L.P. ("First Appian Way"),
First Greenwood Creek Associates, L.P.
("Greenwood Creek"), and First
Springfield Associates, L.P.
("Springfield"), will be completed (the
"Closing") on a date (the "Closing Date")
as promptly as practicable following the
approval of the Combination Proposal by
the requisite vote of the stockholders of
the Company, the approval of the Asset
Transfer by the requisite vote of the
Winton Partners of each Winton
Partnership, and the satisfaction or
waiver of the other conditions to the
Transactions. The consummation of the
Transactions with respect to First Appian
Way, Greenwood Creek, and Springfield
(the "Subsequent Closing") will be
completed on a date (the "Subsequent
Closing Date") that is agreed upon by the
Company and Mr. Winton, but in no event
earlier than March 1, 1997. In the event
that the Closing Date does not occur
prior to the Subsequent Closing Date, the
Subsequent Closing will occur
simultaneously with the Closing. See "The
Transactions -- Closing."
Registration Agreements ......... The shares of the Company's Common Stock
to be issued pursuant to the Exchange
Offer and Asset Transfer will not be
registered under the Securities Act. In
connection with the Exchange Offer and
the Asset Transfer, however, the Company
will enter into registration agreements,
requiring the Company to file a
registration statement covering the
resale of the shares of Common Stock
issued in the Exchange Offer and a
registration statement covering the
resale of the shares of Common Stock to
be issued upon the
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
conversion of LP Units distributed to the
partners of the Winton Partnerships
following the Asset Transfer. In
addition, each of the registration
agreements will grant certain other
registration rights with respect to the
shares of Common Stock issued in
connection with the Exchange Offer and
upon the conversion of LP Units
distributed in the Asset Transfer. See
"The Transactions -- The Exchange Offer
-- Exchange Offer Registration Agreement
and Listing of Common Stock" and "The
Transactions -- The Asset Transfer --
Asset Transfer Registration Agreement and
Listing of Common Stock."
Management of the Company The Board of Directors and the executive
following the Transactions ...... officers of the Company will remain the
same following the Transactions, except
that Mr. Winton will become a member of
the Board of Directors and an executive
officer of the Company and a currently
unidentified, unaffiliated person will
become a member of the Board of Directors
pursuant to the Company's Bylaws. The
employees of each of Pima Mortgage, Pima
Realty, and Winton & Associates will
become employees of the Company or
Heritage Residential. Each of Messrs.
Grove, Parise, Chan, and Winton will
enter into an employment agreement with
the Company upon the consummation of the
Transactions.
Federal Income Tax The Company will not recognize any
Consequences .................... taxable gain or loss in connection with
the Exchange Offer or in connection with
its initial capital contribution to
Heritage LP in the Asset Transfer. The
Company also will not recognize any
taxable gain or loss in connection with
the issuance of its Common Stock in
exchange for LP Units. See "The
Transactions -- The Exchange Offer --
Federal Income Tax Consequences" and "The
Transactions -- The Asset Transfer --
Federal Income Tax Consequences." It is
intended that the Associates Merger and
the Pima Mergers will be treated for
federal income tax purposes as tax-free
reorganizations within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Internal Revenue Code of 1986, as
amended. The Company will not recognize
gain or loss upon the issuance of its
Common Stock in connection with the
Associates Merger or the Pima Mergers.
Accounting Treatment ............ The Winton Components will be accounted
for by the Company using the purchase
method under generally accepted
accounting principles for accounting and
financial reporting purposes. The costs
attributable to the Pima Components will
be accounted for by the Company as the
cost of terminating the contracts between
the Company and the Pima Entities and
charged to expense as of the date of the
acquisitions.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
(1) The Exchange Offer. The Exchange Offer provides for the offer by the Company
to Winton Partners to exchange their Winton Partnership Interests in whole or in
part for shares of the Company's Common Stock, subject to certain conditions.
(2) The Asset Transfer. The Asset Transfer provides for each of the Approving
Winton Partnerships to transfer substantially all of its properties as a capital
contribution to Heritage LP in exchange for LP Units and cash. The LP Units will
be convertible into shares of Common Stock at any time following the first
anniversary of the Closing Date.
(3) The Pima Mergers. The Pima Mergers provide for the merger of Pima Realty and
each of the three corporate partners of Pima Mortgage (JG Mortgage, FP Mortgage,
and JC Mortgage) with and into Heritage Residential. Pursuant to the Pima
Realty/Pima Mortgage Merger Agreement, the outstanding shares of capital stock
of Pima Realty and each of JG Mortgage, FP Mortgage, and JC Mortgage will be
converted into a total of 262,000 shares of the Company's Common Stock.
(4) The Associates Merger. The Associates Merger provides for the merger of
Winton & Associates with and into Heritage Residential. Pursuant to the
Associates Merger Agreement, the outstanding shares of capital stock of
Associates will be converted into 70,284 shares of the Company's Common Stock.
(5) Dissolution and Liquidation. Immediately following the consummation of the
Transactions, each of the Approving Winton Partnerships will dissolve and
liquidate by distributing LP Units to Winton Partners that are accredited
investors and cash to Winton Partners that are unaccredited investors.
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The selected consolidated financial data presented below for the five years
ended December 31, 1995 and as of December 31, 1995, 1994, 1993, 1992, and 1991
were derived from the audited Consolidated Financial Statements of the Company.
The selected consolidated financial data as of September 30, 1996 and for the
nine months ended September 30, 1996 and 1995 have been derived from the
unaudited consolidated financial statements of the Company included elsewhere
herein. The unaudited consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results of
operations for the periods presented.
The data set forth below should be read in conjunction with "Information
Regarding the Company -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements,
including the Notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Income from real estate
Rental and other income ................ $ 14,034 $ 12,528 $ 10,941 $ 10,493
Operating and maintenance expenses,
real estate taxes and insurance ...... (6,719) (5,497) (5,076) (4,943)
Interest expense ....................... (4,387) (3,941) (3,269) (3,373)
Depreciation and amortization .......... (2,692) (1,995) (2,074) (1,959)
-------- -------- -------- --------
Income from real estate ............. 236 1,095 522 218
-------- -------- -------- --------
Income from mortgage assets
Prospective yield income ............... 3,884 6,433 $ 7,264 $ 919 $ 34,512 2,174 3,063
Income from redemptions and sales ...... 5,302 4,263 7,725 4,927
Interest expense ....................... (347) (2,596) (4,794) (5,841) (6,594) (152) (170)
Provision for reserves ................. (20,286) (57,588) (2,737)
-------- -------- -------- -------- -------- -------- --------
Income from mortgage assets ......... 8,839 8,100 (17,816) (62,510) 25,181 9,747 7,820
-------- -------- -------- -------- -------- -------- --------
Income (loss) before administrative
expenses and other income ............. 9,075 9,195 (17,816) (62,510) 25,181 10,269 8,038
Administrative expenses ................. (2,983) (2,216) (1,949) (3,104) (6,355) (2,759) (2,802)
Other income, net ....................... 462 723 286 739 248 708
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect of
accouting change ...................... 6,554 7,702 (19,479) (64,875) 18,826 7,758 5,944
Cumulative effect of accounting change .. (21,091)
-------- -------- -------- -------- -------- -------- --------
Net income .............................. $ 6,554 $ 7,702 ($40,570) ($64,875) $ 18,826 $ 7,758 $ 5,944
======== ======== ======== ======== ======== ======== ========
Per average outstanding share
Net income (loss) before cumulative
effect of accounting change ......... $ 2.09 $ 2.48 $ (6.27) $ (20.20) $ 6.25 $ 2.46 $ 1.90
Cumulative effect of accounting change* (6.79)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per share ........... $ 2.09 $ 2.48 $ (13.07) $ (20.20) $ 6.25 $ 2.46 $ 1.90
======== ======== ======== ======== ======== ======== ========
Dividends per share ................... $ 2.00 $ 0.50 $ 1.15 $ 2.25 $ 7.20 $ 1.50 $ 1.50
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding ... 3,141 3,100 3,104 3,209 3,007 3,155 3,137
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------
1995 1994 1993 1992 1991 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Apartment and other real estate assets .. $79,510 $73,056 $ 3,855 $85,657
Mortgage assets ........................ 11,877 18,965 37,881 $108,623 $ 215,747 5,527
Total assets ........................... 94,169 96,745 54,068 116,589 219,582 97,644
Real estate notes payable .............. 49,633 50,693 49,564
Mortgage assets borrowing, net ......... 4,495 6,422 22,062 39,517 61,527 1,954
Stockholders' Equity ................... 37,395 37,100 30,948 75,284 149,585 40,531
</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.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The following Unaudited Pro Forma Financial Information presents the
results of operations of the Company assuming the acquisition of (i) the Winton
Properties, (ii) Winton & Associates (the property manager of the Winton
Properties), and (iii) Pima Mortgage Limited Partnership and Pima Realty
Advisors, Inc. (respectively the manager of the Company and property manager of
the Company's apartment communities and together the "Pima Entities") for the
year ended December 31, 1995 and the nine months ended September 30, 1996 as if
the Transactions had been consummated as of January 1, 1995. The Unaudited Pro
Forma Combined Balance Sheet Data presents the financial position of the
Company, assuming the acquisition of the Winton Properties, Winton & Associates,
and the Pima Entities occurred on September 30, 1996. Adjustments necessary to
reflect these assumptions and to restate historical combined balance sheets and
income statements are presented in the Pro Forma Adjustments columns, which are
further described in the Notes to Selected Unaudited Pro Forma Combined
Financial Data.
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, 1995 and the unaudited consolidated financial statements of
the Company as of and for the nine months ended September 30, 1996. The
historical financial information for the Winton Properties, Winton & Associates,
and the Pima Entities is derived from unaudited financial statements of the
entities as of and for the year ended December 31, 1995 and the unaudited
financial statements of the entities as of and for the nine months ended
September 30, 1996, 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 September
30, 1996 or of the actual results of operations for the year ended December 31,
1995 or the nine months ended September 30, 1996 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.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASR, INITIAL AND SUBSEQUENT CLOSINGS
ASR AND INITIAL CLOSINGS COMBINED(D) COMBINED(1)
------------------------------------ ------------------------------------
INITIAL SUBSEQUENT ADDITIONAL
ASR PIMA CLOSING WINTON & PRO FORMA PRO FORMA CLOSING PRO FORMA PRO FORMA
HISTORICAL ENTITIES PROPERTIES ASSOCIATES ADJUSTMENTS COMBINED(D) PROPERTIES ADJUSTMENTS COMBINED(1)
---------- -------- ---------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Investments
Properties, net of
depreciation .......... $66,822 $35,499 $26,772(E) $129,093 $ 18,596 $ 3,934(E) $ 151,623
Restricted cash and
deferred loan costs . 4,035 684(E) 4,719 304(E) 5,023
Investments in joint
ventures ............ 2,853 2,853 2,853
Construction in
progress ............ 9,968 9,968 9,968
Land held for
investment .......... 1,047 1,047 1,047
Other real estate ..... 932 932 932
------- ----- ------- ---- --------- --------- --------- --------- ---------
Total real estate
investments ....... 85,657 $ 0 35,499 27,456 148,612 18,596 4,238 171,446
Mortgage assets ......... 5,527 5,527 5,527
Cash .................... 5,917 (3,224)(E) 2,693 (864)(E) 1,829
Goodwill ................ 1,408(F) 1,408 1,408
Other assets ............ 543 102 119 $ 57 821 821
------- ----- ------- ---- --------- --------- --------- --------- ---------
Total assets ........ $97,644 $ 102 $35,618 $ 57 $ 25,640 $ 159,061 $ 18,596 $ 3,374 $ 181,031
======= ===== ======= ==== ========= ========= ========= ========= =========
Liabilities
Real estate loans ...... $49,564 $35,167 $ 84,731 $ 14,144 $ 98,875
Short-term borrowings . 1,954 1,954 1,954
Other liabilities ..... 5,595 $ 102 $ 57 5,754 5,754
------- ----- ------- ---- --------- --------- --------- --------- ---------
Total liabilities .. 57,113 102 35,167 $ 57 $ 0 92,439 14,144 106,583
5,250(F)
(5,250)(F)
1,408(F)
Stockholders' Equity .... 40,531 451 24,232(E) 66,622 4,452 $ 3,374(E) 74,448
------- ----- ------- ---- --------- --------- --------- --------- ---------
Total Liabilities
and Stockholders'
Equity .......... $97,644 $ 102 $35,618 $ 57 $ 25,640 $ 159,061 $ 18,596 $ 3,374 $ 181,031
======= ===== ======= ==== ========= ========= ========= ========= =========
Weighted average common
shares outstanding ..... 3,141 4,706 5,096
======= ========= =========
Book value per weighted
average common shares
outstanding(M) ......... $ 12.90 $ 14.16 $ 14.61
======= ========== =========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT FOR YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASR, INITIAL AND SUBSEQUENT
ASR AND INITIAL CLOSINGS COMBINED CLOSINGS COMBINED
--------------------------------------------------------------- --------------------------------
INITIAL SUBSEQUENT ADDITIONAL
ASR PIMA CLOSING WINTON & PRO FORMA PRO FORMA CLOSING PRO FORMA PRO FORMA
HISTORICAL ENTITIES PROPERTIES ASSOCIATES ADJUSTMENTS COMBINED PROPERTIES ADJUSTMENTS COMBINED
---------- -------- ---------- ---------- ----------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Operations $ 3,934 $ 28,541
Rental income ..................... $14,034 $ 10,573 $ 24,607 878
Property management fees .......... $ 1,010 $ 770 ($ 902)(G) 878 270
Commissions and other income ...... 270 270 ------ ------ --------
------ -------- -------- -------- ------ -------- 3,934 29,689
Total real estate income ........ 14,034 1,280 10,573 770 (902) 25,755 ------ ------ --------
------ -------- -------- -------- ------ -------- (1,385) (10,755)
Operating and maintenance expenses (5,259) (865) (3,465) (683) 902(G) (9,370) (515) (3,272)
Real estate taxes and insurance ... (1,460) (1,297) (2,757) (750) ($ 175)(L) (6,258)
Depreciation and amortization ..... (2,692) (51) (2,186) (13) (391)(L) (5,333) ------ ------ --------
------ -------- -------- -------- ------ --------
Real estate operating (2,650) (175) (20,285)
expenses ....................... (9,411) (916) (6,948) (696) 511 (17,460) ------ ------ --------
------ -------- -------- -------- ------ --------
Real estate operating 1,284 (175) 9,404
income ......................... 4,623 364 3,625 74 (391) 8,295 ------ ------ --------
------ -------- -------- -------- ------ --------
Mortgage Asset Income 4,100
Prospective yield income........... 3,884 216(H) 4,100
Income from redemptions 5,302
and sales ....................... 5,302 5,302 ------ ------ --------
------ -------- -------- -------- ------ --------
Income from mortgage 0 0 9,402
assets .......................... 9,186 0 0 216 9,402 ------ ------ --------
------ -------- -------- -------- ------ --------
Other Operating Income
and Expenses (70)
Amortization of goodwill .......... (70)(J) (70) 0
Management fees ................... 590 (590)(H) 0 (2,961)
Administrative expenses ........... (2,983) (589) 611(H) (2,961) ------ ------ --------
------ -------- -------- -------- ------ --------
Other operating income 0 0 (3,031)
and expenses ................... (2,983) 1 0 0 (49) (3,031) ------ ------ --------
------ -------- -------- -------- ------ -------- 1,284 15,775
Operating Income ................... 10,826 365 3,625 74 (224) 14,666 (43)(I) 261
Interest and other income .......... 462 52 0 3 (213)(I) 304
Interest expense (1,072) (8,458)
Real estate loans ................. (4,387) (2,999) (7,386) (354)
Other borrowings .................. (347) 0 (7) (354) ------ ------ --------
------ -------- -------- -------- ------ -------- $ 212 ($ 218) $ 7,223
Net Income ......................... $6,554 $ 417 $ 626 $ 70 ($ 438) $ 7,229 ====== ====== ========
====== ======== ======== ======== ====== ======== $ 1.42
Net income per share(M) ............ $ 2.09 $ 1.54 ========
====== ========
Dividends declared per share ....... $ 2.00
====== 5,096
Weighted average common ========
shares outstanding ............... 3,141 4,706
====== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT FOR NINE MONTHS
ENDED SEPTEMBER 30, 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASR, INITIAL AND SUBSEQUENT
ASR AND INITIAL CLOSINGS COMBINED CLOSINGS COMBINED
------------------------------------------------------------------ -----------------------------------
INITIAL SUBSEQUENT ADDITIONAL
ASR PIMA CLOSING WINTON & PRO FORMA PRO FORMA CLOSING PRO FORMA PRO FORMA
HISTORICAL ENTITIES PROPERTIES ASSOCIATES ADJUSTMENTS COMBINED PROPERTIES ADJUSTMENTS COMBINED
---------- --------- ---------- ---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Operations
Rental income ............... $ 10,941 $ 7,922 $ 18,863 $ 2,857 $ 21,720
Property management fees .... $ 688 $ 746 ($696)(G) 738 ($ 97)(G) 641
Commissions and other
income..................... 36 36 36
-------- -------- -------- ----- ----- -------- ------- ----- --------
Total real estate income .. 10,941 724 7,922 746 (696) 19,637 2,857 (97) 22,397
-------- -------- -------- ----- ----- -------- ------- ----- --------
Operating and maintenance
expenses .................. (4,007) (559) (2,723) (544) 696(G) (7,137) (1,106) 97(G) (8,146)
Real estate taxes and
insurance ................. (1,069) (1,001) (2,070) (413) (2,483)
Depreciation and amortization (2,074) (19) (1,640) (303)(L) (4,036) (563) (131)(L) (4,730)
-------- -------- -------- ----- ----- -------- ------- ----- --------
Real estate operating
expenses ............... (7,150) (578) (5,364) (544) 393 (13,243) (2,082) (34) (15,359)
-------- -------- -------- ----- ----- -------- ------- ----- --------
Real estate operating
income ................. 3,791 146 2,558 202 (303) 6,394 775 (131) 7,038
-------- -------- -------- ----- ----- -------- ------- ----- --------
Mortgage Asset Income
Prospective yield income .... 2,174 150(H) 2,324 2,324
Income from redemptions and
sales ..................... 7,725 7,725 7,725
-------- -------- -------- ----- ----- -------- ------- ----- --------
Income from mortgage assets . 9,899 0 0 150 10,049 0 0 10,049
-------- -------- -------- ----- ----- -------- ------- ----- --------
Other Operating Income and
Expenses
Amortization of goodwill .... (53)(J) (53) (53)
Management fees ............. 430 (430)(H) 0 0
Administrative expenses ..... (2,759) (404) 431(H) (2,732) (2,732)
-------- -------- -------- ----- ----- -------- ------- ----- --------
Other operating income
and expenses .............. (2,759) 26 0 (52) (2,785) 0 0 (2,785)
-------- -------- -------- ----- ----- -------- ------- ----- --------
Operating income ............. 10,931 172 2,558 202 (205) 13,658 775 14,302
Interest and other income .... 248 39 (160)(I) 127 (32)(I) 95
Interest expense
Real estate loans ........... (3,269) (2,210) (5,479) (666) (6,145)
Other borrowings ........... (152) (152) (152)
-------- -------- -------- ----- ----- -------- ------- ----- --------
Net income ................... $ 7,758 $ 211 $ 348 $ 202 ($365) $ 8,154 $ 109 ($163) $ 8,100
======== ======== ======== ===== ===== ======== ======= ===== ========
Net income per share(M) ...... $ 2.46 $ 1.73 $ 1.59
======== ======== ========
Dividends declared per share . $ 1.50
========
Weighted average common
shares outstanding .......... 3,155 4,720 5,110
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
18
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Overview. The Unaudited Pro Forma Combined Income Statements are presented as
if the acquisition of 11 of the 14 Winton Properties, Winton & Associates, and
the Pima Entities (the "Initial Closing") and the acquisition of three
additional Winton Properties, the closing of which is to occur on or before May
1, 1997 assuming specified operating income levels are achieved by the
properties (the "Subsequent Closing"), occurred as of January 1, 1995. The
Unaudited Pro Forma Combined Balance Sheet is presented assuming the
Transactions occurred on September 30, 1996.
The Transactions are expected to be recorded as purchases in accordance with
generally accepted accounting principles, and accordingly the assets and
liabilities being acquired are presented at the estimated acquisition prices.
The Combination Agreement provides as follows:
(A) The 14 Winton Partnerships owning the Winton Properties will contribute
the Winton Properties to Heritage LP in which the Company will be the
general partner and Heritage LP will (i) assume or refinance existing
loans totaling approximately $49,300,000, based on loan balances as of
September 30, 1996, (ii) pay $1,600,000 in cash, and (iii) issue
approximately 1,623,000 LP Units with each LP Unit convertible into one
share of the Company's Common Stock after one year. The actual number
of LP Units to be issued in connection with acquisition of the Winton
Properties will be adjusted for changes in the principal balance of the
assumed and refinanced loans at the closing dates divided by $18.10.
For financial reporting purposes, the LP Units are valued at a fair
value of $20.038, determined based upon the average closing price of
the Company's Common Stock on the Amex for the 10-day period prior to
public announcement of the Transactions on November 19, 1996.
(B) The Company will acquire Winton & Associates for 70,284 shares of the
Company's Common Stock. The price being paid for Winton & Associates of
$1,408,000, was determined in accordance with generally accepted
accounting principles based on the fair value share price of $20.038,
determined based upon the average closing price for the 10-day period
prior to public announcement of the Transactions on November 19, 1996.
(C) The Company will acquire the Pima Entities for approximately 262,000
shares of the Company's Common Stock. The price being paid for the Pima
Entities of $5,250,000 was negotiated between the owners of the Pima
Entities, who are also officers and directors of the Company, and the
Special Committee of the Board of Directors. The Special Committee
obtained an opinion from Oppenheimer as to the fairness, from a
financial point of view, of the consideration to be paid. The number of
shares of Common Stock to be issued was determined by dividing the
price by $20.038, the fair value of the shares issued, determined based
upon the average closing price for the 10-day period prior to public
announcement of the Transactions on November 19, 1996.
(D) The Combination Agreement provides for acquisition of 11 of the 14
Winton Properties, Winton & Associates, and the Pima Entities at the
Initial Closing. The remaining three Winton Properties will be acquired
at the Subsequent Closing on or before May 1, 1997, assuming that
operating income for the properties achieves certain specified levels
prior to that time. The Pro Forma statements show the combined results
of the Company and the Initial Closing and the Company and both the
Initial and Subsequent Closings.
2. Pro Forma Condensed Balance Sheet Adjustments As Of September 30, 1996.
(E) The purchase price for financial reporting purposes for the 14 Winton
Properties is $83,420,000 based on the fair value of shares of Common
Stock or LP Units to be issued in connection with the Exchange Offer
and Asset Transfer of $20.038, determined based upon the average
closing price of the Company's Common Stock on the Amex for the 10-day
period prior to the public announcement of the Transactions on November
19, 1996.
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
CLOSINGS CLOSINGS
DEBIT-(CREDIT) DEBIT-(CREDIT)
-------------- --------------
<S> <C> <C>
Purchase price of Winton Properties ....................... $ 61,190 $ 22,230
Estimated transaction costs ............................... 1,200 300
Less historical carrying value of the Winton Properties
Properties, net of depreciation ......................... (35,499) (18,596)
Other assets ............................................ (119)
-------- --------
Increase to real estate ............................... $ 26,772 $ 3,934
-------- --------
Required escrow deposits .................................. 234 104
Estimated loan and assumption fees ........................ 450 200
-------- --------
Increase in restricted cash and deferred loan costs ... 684 304
-------- --------
Estimated transaction costs ............................... (1,200) (300)
Cash payment to Sellers ................................... (1,340) (260)
Required escrow deposits and loan and assumption fees ..... (684) (304)
-------- --------
Decrease in cash ...................................... (3,224) (864)
-------- --------
Increase in equity resulting from issuance of Common
Stock and LP Units ...................................... (24,232) (3,374)
-------- --------
$ 0 $ 0
======== ========
</TABLE>
(F) The purchase price for financial reporting purposes for Winton &
Associates is $1,408,000 based on 70,284 shares valued at a fair value
of $20.038, determined based upon the average closing price of the
Company's Common Stock on the Amex during the 10-day period prior to
public announcement of the Transactions on November 19, 1996. Because
the purchase of Winton & Asociates results from acquisition of a
business from a third party, the cost attributable to the purchase is
being charged to goodwill in the Unaudited Pro Forma Combined Financial
Statements and will be amortized to expense over a 20-year period. The
purchase price for the Pima Entities is $5,250,000 based on 262,000
shares valued at a fair value of $20.038, determined based upon the
average closing price of the Company's Common Stock on the Amex for the
10-day period prior to public announcement of the Transactions on
November 19, 1996 as negotiated between representatives of the Pima
Entities and the Special Committee in consultation with their advisor.
The cost attributable to the purchase of the Pima Entities of
$5,250,000 will be assigned to the contracts between the Company and
the Pima Entities. As the contracts will be effectively terminated, the
costs will be charged to contract termination expenses in 1997. Since
the costs of acquiring the contracts will not be a recurring expense,
no adjustment is made in the Unaudited Pro Forma Combined Financial
Statements.
The adjustments to record the purchase of Winton & Associates are:
INITIAL SUBSEQUENT
CLOSINGS CLOSINGS
DEBIT-(CREDIT) DEBIT-(CREDIT)
------------- --------------
Increase in goodwill in excess of carrying value... $ 1,408
Increase in equity resulting from issuance of
Common Stock ..................................... (1,408)
-------
$ 0
=======
The adjustments to record the purchase of the Pima
Entities are:
Charge to equity for write off of Pima Entities
purchase price as a contract termination expense
(see above)....................................... $ 5,250
Increase in equity resulting from issuance of
Common Stock ..................................... (5,250)
-------
$ 0
=======
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
3. Pro Forma Condensed Combined Income Statement Adjustment For The Nine
Months Ended September 30, 1996 and Year Ended December 31, 1995.
(G) The Combination Agreement provides for the Company to acquire Winton &
Associates and the Pima Entities. Winton & Associates provides property
management services relating to the Winton Properties, and Pima Realty
provides property management services on the Company's properties. The
adjustments to eliminate the property management fees previously
charged are as follows:
INITIAL SUBSEQUENT
CLOSINGS CLOSINGS
-------------- -----------
1995 1996 1995 1996
---- ---- ---- ----
Pima Realty ....................... $428 $330
Winton & Associates ............... 474 366 $ 97
---- ---- ----
$902 $696 $ 97
==== ==== ====
(H) The Combination Agreement provides for the acquisition of Pima
Mortgage, which provides advisory and bond administration services to
the Company on a fee basis pursuant to a management agreement. As part
of the Combination Agreement, the Company will enter into the
Employment Agreements with the three officers of the corporate partners
of Pima Mortgage. As a result of the Pima Mortgage Merger, 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:
1995 1996
----- -----
Elimination of bond administration fees expense .. $ 216 $ 150
===== =====
Elimination of management fee income
Bond administration fee income .................. ($216) ($150)
Management fee income ........................... (374) (280)
----- -----
Total .......................................... ($590) ($430)
===== =====
Elimination of management fees expense and
addition of salary expense
Elimination of management fee expense ........... $ 374 $ 280
Elimination of Pima Mortgage salary expenses ..... 574 404
Addition of salaries under employment agreements . (337) (253)
----- -----
Reduction in operating expenses ................ $ 611 $ 431
===== =====
(I) 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.
INITIAL SUBSEQUENT
CLOSINGS CLOSINGS
----------- -----------
1995 1996 1995 1996
---- ---- ---- ----
Elimination of the Pima Entities' income ... $ 52 $ 39
Reduction of the Company's interest income.. 161 121 $43 $32
----- ----- ---- -----
Reduction of other income ................ $213 $160 $43 $32
===== ===== ==== =====
(J) To amortize the recorded purchase price of Winton & Associates over a
20-year period. The cost attributable to the purchase of the Pima
Entities ($5,250,000) will be accounted for in 1997 as a charge to
contract termination expenses. Since the contract termination expense
will not be a recurring expense, no adjustment is made in the Unaudited
Pro Forma Combined Financial Statement. See Note (F) above.
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
(K) The acquired entities include 14 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.
(L) Increase in depreciation and amortization charges relating to the
Winton Properties to reflect depreciation and amortization based on
ASR's purchase price calculated utilizing an estimated life of 27.5
years on the property, seven years on personal property and
improvements, the remaining life on loan costs and acquisition costs
allocated 85% to buildings and improvements in accordance with ASR's
estimated allocations:
DEPRECIATION OR INITIAL SUBSEQUENT
AMORTIZATION CLOSING CLOSING
LIFE PROPERTIES PROPERTIES
--------------- ---------- ----------
Acquisition costs allocated to:
Land ............................ $ 9,976 $ 3,815
Buildings ........................ 27.5 46,607 16,573
Personal property and improvement 7 4,607 1,842
------- -------
61,190 22,230
Transaction and loan costs ..... 7 1,650 500
------- -------
$62,840 $22,730
======= =======
The resulting adjustment to depreciation and amortization is:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------------- -------------------------
INITIAL SUBSEQUENT INITIAL SUBSEQUENT
CLOSING CLOSING CLOSING CLOSING
PROPERTIES PROPERTIES PROPERTIES PROPERTIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro forma depreciation and
amortization expense based on
allocated cost of assets acquired... $ 2,590 $ 925 $ 1,943 $ 694
Less historical depreciation and
amortization:
Winton & Associates ................ (13)
Winton Properties (adjusted to
assume ownership during the
entire period shown) ............. (2,186) (750) (1,640) (563)
------ ---- ------ ----
Pro forma adjustment ................ $ 391 $ 175 $ 303 $ 131
======= ===== ======= =====
</TABLE>
(M) 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
Proxy Statement may not be comparable to similarly titled measures as
reported by other companies. FFO is generally defined as net income
plus certain non-cash items (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
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
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. Funds from operations, as
presented, differs from cash flow through operating activities
(determined in accordance with generally accepted accounting
principles) as (i) funds from operations excludes income from sales and
redemptions of mortgage assets which are included in cash flow through
operating activities and (ii) funds from operations is not adjusted for
changes in accrual as is cash flow through operating activities. Funds
from operations is also not adjusted for cash flow through investing of
financing activities (determined in accordance with generally accepted
accounting principles). FFO, as modified, is calculated as follows:
<TABLE>
<CAPTION>
PRO FORMA COMBINED
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------
ASR AND ASR, INITIAL CLOSINGS
INITIAL & SUBSEQUENT
ASR CLOSINGS CLOSINGS
HISTORICAL COMBINED COMBINED
---------- -------- --------
<S> <C> <C> <C>
Net Income .......................... $ 7,758 $ 8,154 $ 8,100
Depreciation and amortization ...... 2,074 4,036 4,730
Adjustment for unconsolidated 287 287 287
joint ventures ....................
Amortization of goodwill ............ 53 53
Income from redemptions and sales of
mortgage assets ................... (7,725) (7,725) (7,725)
------ ------ ------
Funds from operations, as modified . $ 2,394 $ 4,805 $ 5,445
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
RISK FACTORS
In addition to the other information set forth herein, the following risk
factors should be considered by the stockholders of the Company in evaluating
whether to approve the Combination Proposal.
RISKS RELATING TO THE TRANSACTIONS
Exchange Values May Not Reflect Value Of Assets
The number of LP Units to be issued by Heritage LP in the Asset Transfer and
the number of shares of Common Stock to be issued by ASR in the Exchange Offer
has been established based upon the Exchange Values assigned to the assets and
liabilities of the Winton Partnerships. The total Exchange Values assigned to
the Winton Partnerships were determined by arms-length negotiations between Mr.
Winton and ASR based on the agreed fair market values of the properties owned by
the Winton Partnerships and the debt thereon to be assumed or repaid by Heritage
LP, and the Exchange Values allocated to each Winton Partnership were determined
by such negotiations, subject to the input of Mr. Winton, which was agreed to by
ASR. There can be no assurance that the Exchange Values reflect the value of the
Winton Properties.
Affiliated Transaction
Members of the management and the Board of Directors of the Company have
certain interests in the Pima Realty Merger and the Pima Mortgage Merger that
are in addition to the interests of stockholders of the Company in general.
Messrs. Grove, Parise, and Chan are the sole shareholders of JG Mortgage, FP
Mortgage, and JC Mortgage, respectively. In addition, Messrs. Grove, Parise, and
Chan own all of the outstanding shares of common stock of Pima Realty,
constituting all of the outstanding capital stock of Pima Realty. Pursuant to
the terms of Pima Realty/Pima Mortgage Merger Agreement, Messrs. Grove, Parise,
and Chan will collectively receive an aggregate of 262,000 shares of the
Company's Common Stock in the Pima Mergers.
Non-Survival of Representations and Warranties
The Winton Partnerships have made various representations and warranties with
respect to their respective business, properties, and financial conditions as
well as the accuracy and completeness of the information supplied by them. See
"The Transactions -- The Asset Transfer -- Representations and Warranties." In
addition, the Winton Partners participating in the Exchange Offer have made
various representations and warranties to the Company with respect to their
ownership of Winton Partnership Interests being exchanged in the Exchange Offer;
their authority to sell such Winton Partnership Interests; their good title to
such Winton Partnership Interests; and their suitability to acquire the
Company's Common Stock. See "The Transactions -- The Exchange Offer --
Representations and Warranties." These representations and warranties will not
survive the Closing. As a result, the Company will not have the ability to
obtain any recoveries against the Winton Partnerships or the Winton Partners in
the event of a breach of any of these representations and warranties.
Difficulty in Integrating Business Operations
Although certain members of the management of the Company have extensive
experience in managing the business and operations of apartment communities,
there can be no assurance that the Company will be able to manage effectively
the combined operations of the Company, the Approving Winton Partnerships, Pima
Mortgage, Pima Realty, and Winton & Associates or achieve the Company's
operating and growth strategies. The integration of the management, operations,
and facilities of the Company, the Approving Winton Partnerships, Winton &
Associates, Pima Mortgage, and Pima Realty, and other businesses that the
Company may acquire could involve unforeseen difficulties, which could have a
material adverse effect on the Company's business, financial condition, and
operating results.
The Company has conducted due diligence reviews of each of the Winton
Properties, has received representations and warranties regarding each of the
Winton Properties, and has negotiated certain price adjustments with respect to
the acquisition of the property and assets of each of the Winton Partnerships.
The Company intends to pursue any future acquisitions on a similar basis. There
can be no assurance,
24
<PAGE>
however, that unforeseen liabilities will not arise in connection with the
operation of the Winton Properties, Pima Mortgage, Pima Realty, Winton &
Associates, or future acquired businesses or that any contractual purchase price
adjustments or other remedies available to the Company will be sufficient to
compensate the Company in the event unforeseen liabilities arise.
The Company anticipates using the opportunities created by the combination of
Pima Mortgage, Pima Realty, Winton & Associates, and each of the Winton
Properties to effect what the Company believes will be substantial cost savings,
including a reduction in operating expenses, as a result of the internalization
of the Company's management. Significant uncertainties, however, accompany any
business combination, and there can be no assurance that the Company will be
able to achieve its anticipated integration of facilities, functions,
management, and personnel in order to achieve operating efficiencies as a result
of the Transactions or any future acquisitions. The inability to achieve the
anticipated operating efficiency could have a material adverse effect on the
Company's business, financial condition, and operating results.
Mortgage Debt
Upon the consummation of the Transactions, the Company will either assume or
refinance $49,311,000 in mortgage debt attributable to the Winton Properties. As
of September 30, 1996, on a pro forma basis after giving effect to the
consummation of the Transactions, the Company would have had approximately
$98,875,000 of mortgage debt. The ability of the Company to make payments of
principal and interest on its mortgage debt will depend primarily upon its
future financial performance. Many factors, some of which will be beyond the
Company's control (such as prevailing economic conditions), will affect the
Company's financial performance. There can be no assurance that the Company will
be able to generate sufficient cash flow to cover required interest and
principal payments for its mortgage debt.
Heritage Residential Subject to Additional Liabilities
As a result of the Pima Mergers and the Associates Merger, Heritage
Residential, a subsidiary of the Company, will succeed to the liabilities of
Pima Realty, Pima Mortgage, and Winton & Associates, including, among other
things, liabilities relating to employees. As a result of the Pima Mergers and
the Associates Merger, Heritage Residential will directly employ persons that
are currently employees of Pima Realty, Pima Mortgage, and Winton & Associates.
As an employer, Heritage Residential will be subject to those potential
liabilities that are commonly faced by employers, such as workers' disability
and compensation claims, potential labor disputes, and other employee-related
grievances.
Resale of Common Stock
Neither the shares of Common Stock issued in the Exchange Offer nor the LP
Units issued in the Asset Transfer will be registered under the Securities Act.
Consequently, except as described below, following the Transactions, holders of
LP Units or Common Stock will not be entitled to resell such securities without
complying with the registration requirements of the Securities Act or an
exemption from such registration requirements. The Company has agreed to
register for resale the Common Stock issued to Winton Partners in the Exchange
Offer or received by Winton Partners upon the conversion of LP Units issued in
connection with the Asset Transfer. See "The Transactions -- The Exchange Offer
- -- Exchange Offer Registration Agreement and Listing of Common Stock" and "The
Transactions -- The Asset Transfer -- Asset Transfer Registration Agreement and
Listing of Common Stock." Sales of substantial amounts of shares of the
Company's Common Stock by the former Winton Partners may adversely affect the
trading price of the Company's Common Stock.
Indemnification of Don W. Winton
Under the Combination Agreement, Heritage LP has agreed to indemnify and hold
harmless Mr. Winton in the event that Mr. Winton becomes a party to or a
witness, or other participant in, or is threatened to be made a party to or a
witness, or other participant in, a threatened, pending, or completed action,
suit, investigation, or proceeding, and appeal thereof, whether civil, criminal,
administrative or investigative, and/or any inquiry or investigation by reason
of or arising out of Mr. Winton having been the general partner of an Approving
Winton Partnership. The maximum amount of such indemnification
25
<PAGE>
(which covers expenses, judgments, fines, penalties, and amounts paid in
settlement) will be equal to the aggregate value of the assets and properties
contributed by the Approving Winton Partnerships to Heritage LP in the Asset
Transfer on the Closing Date.
Other Relationships with Don W. Winton
In January 1997, Mr. Winton and the Company entered into an agreement under
which the Company will have the option to purchase certain apartment communities
that Mr. Winton or partnerships in which Mr. Winton is a partner (together the
"Optionor") may acquire the right to purchase. To the extent that the Company
exercises its option to acquire such a property, the Company will have the right
to sell and the Optionor the right to buy shares of the Company's Common Stock
in an amount equal to the cash portion of the purchase price of the apartment
community subject to the option, at prices ranging from $18.10 to $21.00 per
share, subject to a maximum of $5.0 million in the Company's Common Stock.
REAL ESTATE INVESTMENT CONSIDERATIONS
General
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
earned and capital appreciation generated by the related properties as well as
the expenses incurred. If the 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, and Texas) and consist
entirely of multifamily properties. The Winton Properties are concentrated in
the states of Texas and Washington. The Company's performance will be limited to
economic conditions in those areas and in the market for multifamily properties
located in those areas.
Future Property 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
26
<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, or that any acquired properties will perform in accordance
with expectations or improve the overall performance of the Company.
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.
Potential Environmental Liability
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
27
<PAGE>
potential threat to human health based on exposures and conditions unique to the
site. The consulting firm's report indicates that the potential threat is
minimal and no further action is necessary prior to the development of the site
as an apartment community. The EPA and ADEQ have not required the Company to
take any remedial actions on the site. The agencies also have not informed the
Company of any regulatory actions on the site.
Except as set forth above, the reports have not revealed any environmental
liability, nor is the Company aware of any environmental liability, that the
Company believes would have a material adverse effect on the Company's business,
assets, or results of operation. No assurance, however, can be given that these
reports reveal all environmental liabilities, or that no prior owner created any
material environmental condition not known to the Company or that future uses
and conditions (including changes in 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, and availability of
long-term permanent financing upon completion. 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
28
<PAGE>
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 (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.
MARKET RISKS RELATING TO MORTGAGE ASSETS
General
The results of the Company's operations depend, among other things, on the
level of Net Cash Flows generated by the Company's Mortgage Assets. The Net Cash
Flows vary primarily as a result of changes in mortgage prepayment rates,
short-term interest rates, market price of mortgage instruments, reinvestment
income, and borrowing costs, all of which involve various risks and
uncertainties as set forth below. Prepayment rates, interest rates, reinvestment
income, and borrowing costs depend upon the nature and terms of the Mortgage
Assets, the geographic location of the properties securing the mortgage loans
included in or underlying the Mortgage Assets, conditions in financial markets,
the fiscal and monetary policies of the United States Government and the Board
of Governors of the Federal Reserve System, international economic and financial
conditions, competition, and other factors, none of which can be predicted with
any certainty. See "Information Regarding the Company -- Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- General" and
"Information Regarding the Company -- Operating Policies and Strategies --
Factors Affecting Net Cash Flows."
The projected rates of return to the Company on its Mortgage Assets will be
based upon assumed levels of prepayments on the underlying Mortgage Instruments,
assumed rates of interest or pass-through rates on the Structured Financings (as
defined herein) that bear variable interest rates, and assumed rates of
reinvestment income and expenses with respect to such Structured Financing. The
actual levels of interest rates on Structured Financing bearing variable
interest rates, prepayment rates, reinvestment income, and administration
expenses will affect the level of the Company's Net Cash Flows. To the extent
that the assumptions employed by the Company vary from actual experience, the
actual Net Cash Flows received by the Company may vary significantly from those
projected by the Company as to timing and amount over the lives of such
Structured Financing and from one period to another, and such returns could be
negative under certain circumstances.
Prepayment Risks
Mortgage prepayments shorten the life of the Mortgage Instruments underlying
the Company's Mortgage Assets, thereby reducing the overall Net Cash Flows and
causing an inherent decline in the Company's income. Prepayments of Mortgage
Instruments generally increase when then current mortgage interest rates fall
below the interest rates on the fixed-rate mortgage loans included in such
Mortgage Instruments. Conversely, prepayments decrease when then current
mortgage interest rates exceed the interest rates on the mortgage loans included
in such Mortgage Instruments. Prepayment experience also may be affected by the
geographic location of the mortgage loans included in Mortgage Instruments, the
types (whether fixed or adjustable rate) and assumability of such mortgage
loans, conditions in the mortgage loan, housing and financial markets, and
general economic conditions.
Interest Rate Fluctuation Risks
Changes in interest rates affect the performance of the Company and its
Mortgage Assets. A portion of the outstanding Structured Financing bears
variable interest rates. As of September 30, 1996, $29
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million of the $524 million of the outstanding Structured Financings relating to
the Company's Mortgage Assets bore variable interest rates. Consequently,
changes in short-term interest rates significantly influence the Company's net
income.
Risk of Decline in Net Cash Flows and Income from Mortgage Assets
The Company's income derives primarily from the Net Cash Flows received on
its Mortgage Assets, which decline over time. For both tax and accounting
purposes, the Company's Net Cash Flows consist of two components -- one
representing return of a portion of the purchase price of the Mortgage Asset
(the "Cost Component") and one representing income on the investment (the
"Income Component"). The Income Component will be highest in years immediately
following the purchase of the Mortgage Asset and will decline over time. In
addition, to the extent that actual mortgage prepayments or variable interest
rates experienced exceed those assumed, this inherent decline in Net Cash Flows
and income is accelerated.
As the Company has made the determination to reinvest the Net Cash Flows in
income-producing properties that may have a lower current yield than Mortgage
Assets, without regard to the mortgage prepayment rates and variable interest
rates, the Company may report declining operating income over time without the
effect of any gain or loss on the sale of the properties. See "Risk Factors --
Competition."
Inability to Predict Effects of Market Risks
Because none of the above factors including changes in prepayment rates,
interest rates, market price of mortgage instruments, reinvestment income,
expenses, and borrowing costs are susceptible to accurate projection, the Net
Cash Flows generated by the Company's Mortgage Assets, and thus distributions to
the Company's stockholders, cannot be predicted.
BORROWING RISKS
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions, restrictions that may be contained in the
Company's financing arrangements from time to time and other factors, the
Company increases the amount of funds available for its activities with funds
from 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 "Information Regarding the Company -- Capital Resources." Each of the
Company's 19 apartment communities has been pledged to secure a first mortgage
loan; such mortgage loans totalled $49.6 million at September 30, 1996. In
addition, the Company had short-term borrowings of $2.0 million secured by
Mortgage Assets having an aggregate carrying value of $3.3 million.
No assurance can be given as to the actual effect of borrowings by the
Company.
PLEDGED ASSETS
A substantial portion of the Company's assets currently are and in the future
can be expected to be pledged to secure its borrowings. Therefore, such assets
will not be available to the stockholders in the event of the liquidation of the
Company except to the extent that the market value thereof exceeds the amounts
due to the creditors. However, the market value of the Mortgage Assets is
uncertain because the
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market for Mortgage Assets of the type owned by the Company is not well
developed and fluctuates rapidly as a result of numerous market factors
(including interest rates and prepayment rates) as well as the supply of and
demand for such assets.
COMPETITION
There are numerous real estate companies, insurance companies, financial
institutions, pension funds, and other property owners that compete with the
Company in seeking properties for acquisition and in attracting and retaining
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. Prevailing
market prices also may be affected by the sale or potential sales of shares of
the Company's Common Stock to be issued in connection with the Transactions,
including shares of Common Stock issuable upon the conversion of the LP Units.
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.
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 "Information Regarding the Company --
Operating Policies and Strategies -- 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 "Information Regarding the Company -- Federal Income Tax
Considerations -- Activities of the Company." To the extent that the Company
does not otherwise have funds available, either situation may result in the
Company's inability to distribute substantially all of its taxable income as
required to maintain its REIT status. See "Information Regarding the Company --
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
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represent a return of capital that would reduce the equity of the Company. In
evaluating assets for purchase, the Company considers the anticipated tax
effects of the purchase including the possibility of any excess of taxable
income over projected cash receipts.
If the Company should not qualify as a REIT in any tax year, it would be
taxed as a regular domestic corporation and, among other consequences,
distributions to the Company's stockholders would not be deductible by the
Company in computing its taxable income. Any such tax liability could be
substantial and would reduce the amount of cash available for distributions to
the Company's stockholders. See "Information Regarding the Company." In
addition, the unremedied failure of the Company to be treated as a REIT for any
one year would disqualify the Company from being treated as a REIT for the four
subsequent years.
EXCESS INCLUSIONS
A portion of the dividends paid by the Company constitutes unrelated business
taxable income to certain otherwise tax-exempt stockholders which will
constitute a floor for the taxable income of stockholders not exempt from tax,
and will not be eligible for any reduction (by treaty or otherwise) in the rate
of income tax withholding in the case of nonresident alien stockholders. For
1995, the entire ordinary income portion ($0.29 per share) of the dividend was
excess inclusion income. See "Information Regarding the Company -- Operating
Policies and Strategies -- Dividend Income -- Excess Inclusion Rule."
MARKETABILITY OF SHARES OF COMMON STOCK AND RESTRICTION ON OWNERSHIP
The Company's Articles of Incorporation prohibit ownership of its Common
Stock by tax-exempt entities that are not subject to tax on unrelated business
taxable income and by certain other persons (collectively "Disqualified
Organizations"). Such restrictions on ownership exist so as to avoid imposition
of a tax on a portion of the Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are designed to
prevent concentrated ownership of the Company 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."
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THE SPECIAL MEETING
SPECIAL MEETING
This Proxy Statement is being furnished to the stockholders of the Company in
connection with the solicitation of proxies by the Board of Directors of
Company. The proxies will be used at a Special Meeting of Stockholders of the
Company (the "Special Meeting") to be held on Wednesday, April 23, 1997, at 9:00
a.m. local time, at the Viscount Suite Hotel, 4855 East Broadway Boulevard,
Tucson, Arizona, and at any adjournment or adjournments thereof.
This Proxy Statement and the accompanying proxy are first being mailed to
stockholders of the Company on or about March 27, 1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, stockholders of the Company will:
(i) Consider and vote on a proposal (the "Combination Proposal") providing
for the Company to issue up to 1,980,000 shares of its Common Stock in
connection with the Transactions contemplated by the Combination Agreement
consisting of (i) the Exchange Offer; (ii) the Asset Transfer; (iii) the
Associates Merger; and (iv) the Pima Mergers, which also will serve to amend
the Company's Bylaws to exclude the Pima Mergers from the Bylaw provision
requiring an appraisal of property being purchased from an affiliated or
related party.
(ii) Consider and vote upon a proposal to amend and restate the Company's
First Amended and Restated Articles of Incorporation (the "Articles of
Incorporation") to include additional provisions designed to further protect
the Company's status as a real estate investment trust.
(iii) Transact any and all other business as may properly come before the
Special Meeting or any adjournment thereof.
Stockholders will have the opportunity to vote either (a) on the entire
Combination Proposal or (b) separately on the components of the Combination
Proposal relating to the Exchange Offer, the Asset Transfer, and the Associates
Merger (the "Winton Components") and on the components of the Combination
Proposal relating to the Pima Mergers and the Bylaw amendment (the "Pima
Components"). The Winton Components will not be consummated unless either the
entire Combination Proposal is approved or both the Winton Components and the
Pima Components are approved, but the Pima Components will be consummated if
either the entire Combination Proposal is approved or the Pima Components are
approved.
VOTING SECURITIES
The only outstanding voting securities of the Company are shares of Common
Stock, each of which entitles the holder thereof to one vote. Only stockholders
of record of the Company at the close of business on February 14, 1997 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting or
any adjournment or adjournments thereof. As of the Record Date, 3,147,150 shares
of Common Stock were issued and outstanding.
QUORUM AND VOTING REQUIREMENTS
The presence at the Special Meeting in person or by proxy of holders of
record of a majority of the outstanding shares of Common Stock will constitute a
quorum for the transaction of business at the Special Meeting. Any proxy marked
"abstain" as to any matter will be counted as present for purposes of
determining the existence of a quorum, but will not be counted for voting
purposes on such matter. Under the rules of the Amex, the affirmative vote of a
majority of votes cast on the Combination Proposal or the Winton Components and
the Pima Components is required for approval. Under Maryland General Corporation
Law, the affirmative vote of two-thirds of the votes entitled to be cast is
required to approve the amendment to and restatement of the Articles of
Incorporation of the Company.
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As of the Record Date, directors and officers of the Company and their
affiliates owned a total of approximately 110,990 shares of Common Stock,
representing approximately 3.5% of the outstanding shares of Common Stock.
REASONS FOR SOLICITATING STOCKHOLDER APPROVAL
The Company is seeking stockholder approval of the Combination Proposal
pursuant to certain requirements of the Amex regarding the continued listing of
the Common Stock on the Amex. Stockholder approval of the Transactions
themselves is not required by Maryland law, the Company's Articles of
Incorporation, or the Company's Bylaws. The Company is seeking stockholder
approval of the amendment to and restatement of the Company's Articles of
Incorporation in accordance with Maryland law.
PROXIES; RIGHT TO REVOKE PROXIES
All shares of Common Stock that are represented at the Special Meeting, by
properly executed proxies received prior to or at the Special Meeting, and not
revoked, will be voted at the Special Meeting in accordance with the
instructions indicated on such proxies. If no instructions are indicated, such
proxies will be voted FOR approval of the Combination Proposal and FOR the
proposal to amend and restate the Articles of Incorporation. The Board of
Directors of the Company does not know of any other matters that are to come
before the Special Meeting. If any other matters are properly presented at the
Special Meeting for consideration, the persons named in the enclosed proxy and
acting thereunder will have discretion to vote on such matters in accordance
with their judgment, including any proposal to adjourn the Special Meeting or
otherwise concerning the conduct of the Special Meeting.
Any holder of Common Stock granting the proxy enclosed with this Proxy
Statement has the power to revoke such proxy at any time prior to the exercise
thereof by giving written notice of such revocation, or by delivering a later
dated proxy, to the Secretary of the Company, Joseph C. Chan, 335 North Wilmot,
Suite 250, Tucson, Arizona 85711, prior to the Special Meeting in the manner
specified therein. All proxies will be voted at the Special Meeting and at any
adjournment or adjournments thereof in the manner specified therein.
SOLICITATION
All costs of soliciting proxies by the Company's Board of Directors, and the
costs of printing and mailing this Proxy Statement, will be borne by the
Company. In addition to solicitation by mail, officers of the Company or
employees of the manager of the Company may solicit proxies from stockholders of
the Company by telephone, telegram, or personal interview. Such persons will
receive no additional compensation for such services. In addition, the Company
will request persons holding Common Stock in their name or custody, or in the
name of a nominee, to send the proxy materials to the principals and request
authority for the execution of the proxies, and the Company will reimburse such
persons for the reasonable expenses in so doing.
OTHER MATTERS
The management of the Company is not aware of any matters to be presented for
action at the Special Meeting other than the matters described in this Proxy
Statement. If any other matters are properly presented for action, it is the
intention of the person named in the enclosed form of proxy to vote in
accordance with their judgment on such matters.
It is currently expected that representatives of the Company's independent
auditors will be present at the Special Meeting where they will have the
opportunity to make a statement if they so decide and will be available to
respond to appropriate questions.
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THE TRANSACTIONS
GENERAL
The Company, the Winton Partnerships, and certain other parties entered into
the Combination Agreement on November 8, 1996. The Combination Agreement
provides for (i) the Exchange Offer, (ii) the Asset Transfer, (iii) the
Associates Merger, and (iv) the Pima Mergers.
The terms and conditions of the Exchange Offer, the Asset Transfer, and the
Associates Merger were determined by arms-length negotiations between the
management of the Company and Don W. Winton who is the general partner of each
of the Winton Partnerships and the sole stockholder of Winton & Associates. The
Board of Directors of the Company approved the consummation of the Exchange
Offer and the execution of the Combination Agreement and Associates Merger
Agreement providing for the Asset Transfer and the Associates Merger,
respectively, in each case subject to the approval of the stockholders of the
Company of the issuance of shares of the Company's Common Stock in connection
therewith. Mr. Winton approved the consummation of the Exchange Offer and the
execution of the Combination Agreement and Associates Merger Agreement,
respectively, subject to the determinations of the individual Winton Partners in
the case of the Exchange Offer and to the requisite approval of the Winton
Partnerships in the case of the Asset Transfer.
The terms and conditions of the Pima Mergers were determined by negotiations
between Jon A. Grove, Frank S. Parise, Jr., and Joseph C. Chan as the directors
and shareholders of the corporate partners of Pima Mortgage and the directors
and shareholders of Pima Realty on the one hand and the Special Committee on the
other hand. In connection with the negotiations, the Special Committee retained
independent legal counsel and engaged Oppenheimer & Co., Inc. ("Oppenheimer") to
act as its financial advisor, to assist in the negotiation of the terms of the
Pima Mergers (including the related employment agreements), and to deliver a
written opinion as to the fairness of the consideration to be paid in the Pima
Mergers (the "Fairness Opinion").
The following descriptions of the Transactions are subject in their entirety
to the detailed provisions of the (i) Combination Agreement, (ii) the
Partnership Agreement, (iii) the Associates Merger Agreement, (iv) the Pima
Realty/Pima Mortgage Merger Agreement, (v) the Employment Agreements between the
Company and each of Messrs. Grove, Parise, Chan, and Winton, (vi) the
Registration Agreement (the "Exchange Offer Registration Agreement") between the
Company and Mr. Winton on behalf of the partners of the Winton Partnerships
participating in the Exchange Offer, (vii) the Registration Agreement (the
"Asset Transfer Registration Agreement") among the Company, Heritage LP, and the
Approving Winton Partnerships, and (viii) a Letter of Transmittal and Assignment
(the "Letter of Transmittal") to be delivered by each partner of a Winton
Partnership participating in the Exchange Offer. Copies of the Combination
Agreement, the Partnership Agreement, the Associates Merger Agreement, the Pima
Realty/Pima Mortgage Merger Agreement, a form of the Employment Agreements, the
Exchange Offer Registration Agreement, and the Asset Transfer Registration
Agreement (collectively, the "Agreements"), are attached hereto as Appendix A,
Appendix B, Appendix C, Appendix D, Appendix E, Appendix F, and Appendix G,
respectively.
VOTE REQUIRED
Stockholder Approval
Pursuant to the rules of the Amex, approval of the Combination Proposal
providing for the issuance of up to 1,980,000 shares of the Company's Common
Stock in connection with the Transactions, or 63% of the total number of shares
of Common Stock currently outstanding, requires the affirmative vote of a
majority of the votes cast on the Combination Proposal.
Approval of Winton Partnerships
Approval of the Combination Agreement and the Asset Transfer contemplated
thereby with respect to each Winton Partnership requires that the sum of (i) the
value of the properties attributable to the Winton Partners of each such Winton
Partnership that participate in the Exchange Offer, and (ii) the value of
properties attributable to the Winton Partners of each such Winton Partnership
that approve the
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Asset Transfer exceed one-half of the value of the properties attributable to
all Winton Partners of each such Winton Partnership. Approval of the Asset
Transfer with respect to each Winton Partnership requires the affirmative vote
of the majority of the limited partnership interests of such Winton Partnership.
Such approval will constitute a vote to dissolve and liquidate each such Winton
Partnership.
BACKGROUND
In 1993, the Company changed its primary business focus from ownership of
mortgage assets to acquisition, ownership, and development of apartment
communities. The Company has been actively pursuing opportunities to expand its
capital base and increase its apartment portfolio in order to (i) increase the
portion of its operating cash flows generated from its apartment operations,
(ii) increase the efficiency of its apartment operations, (iii) diversify its
apartment operations, (iv) become more competitive in acquisition opportunities,
and (v) increase the attractiveness of its Common Stock to potential investors
as a result of its increased size and liquidity.
Acquisition of Winton Properties and Winton & Associates
In early 1996, Jon A. Grove, the Chief Executive Officer of the Company,
began negotiations with Don W. Winton, the general partner of the Winton
Partnerships, for the acquisition of 13 apartment communities, one office
building, and a related property management operation in exchange for shares of
the Company's Common Stock. Messrs. Grove and Winton agreed that the structure
of the acquisition should take a form, commonly referred to as a "Down REIT," in
which each Winton Partnership would make a capital contribution of its assets
and properties to a newly formed operating partnership in exchange for limited
partnership units in such operating partnership. The limited partnership units
in the operating partnership would be convertible into Common Stock. During the
initial negotiations, Mr. Winton indicated that the Winton Partnerships would be
interested in the acquisition only if the Company became a self-managed and
self-administered real estate investment trust.
The management of the Company met with the Company's Board of Directors in
February 1996 to discuss the status of the negotiations with Mr. Winton with
respect to the Company's acquisition of the assets and properties of the Winton
Partnerships. The Board of Directors of the Company indicated a desire to pursue
the acquisition of the assets and properties of the Winton Partnerships and
directed the management of the Company to proceed with negotiations with Mr.
Winton. By early May 1996, the management of the Company and Mr. Winton reached
an understanding regarding the basic terms and conditions of the Company's
acquisition of the assets and properties of the Winton Partnerships.
Representatives of the Company and the Winton Partnerships continued to
negotiate the terms and conditions of the proposed acquisition of the assets and
properties of the Winton Partnerships between May 1996 and November 1996. By
early November 1996, a general agreement was reached with respect to the
acquisition of the assets and properties of the Winton Partnerships in a
modified "Down REIT" structure. On November 8, 1996, a special meeting of the
Company's Board of Directors was held telephonically to consider the acquisition
proposal as negotiated. At this meeting, the Company's management made a
presentation concerning material events of the proposed acquisition. After a
discussion concerning certain terms and conditions to the acquisition, the Board
of Directors formally approved the acquisition proposal.
Pima Mergers
Since its inception, the Company has been externally managed under a
management agreement that compensates Pima Mortgage in the form of fees based on
the Company's assets. This form of management agreement was typical of those
found in real estate investment trusts organized before and at the time of the
formation of the Company. During 1993, the Company changed its primary business
focus to the acquisition and ownership of apartment communities and entered into
agreements with Pima Realty under which Pima Realty currently manages apartment
communities owned by the Company.
During the last several years, there has been significant growth in the
number and size of real estate investment trusts in the United States, including
real estate investment trusts formed to own apartment properties. This growth
has been fueled in part by increasing interest from institutional investors,
such as
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mutual funds and pension funds, and has been marked by investors' and investment
bankers' preference for real estate investment trusts that meet certain
characteristics. Among these characteristics has been a "self-managed and
self-administered" structure.
As a result of the Company's observation of trends within the real estate
investment trust industry, discussions with various investment bankers and
others, and Mr. Winton's desire to internalize the management of the Company as
a condition to the acquisition of the assets and properties of the Winton
Partnerships, management of the Company concluded that it would be beneficial to
convert to an "internally managed" structure to enhance the Company's ability to
attract additional capital and thus grow in terms of size, liquidity, and
revenue and to effect the acquisition of the assets and properties of the Winton
Partnerships. Management discussed its conclusion with the Company's Board of
Directors.
In May 1996, representatives from Pima Mortgage and Pima Realty met with the
Special Committee of the Board of Directors, consisting of the independent
directors of the Company (Earl M. Baldwin, John J. Gisi, Raymond L. Horn, and
Frederick C. Moor), established by the Board of Directors in May 1996, to
discuss the acquisition of Pima Mortgage and Pima Realty by the Company.
Representatives of Pima Mortgage and Pima Realty presented a proposal to the
Special Committee in July 1996 for the merger of Pima Mortgage and Pima Realty
with and into a subsidiary of the Company in exchange for shares of the
Company's Common Stock and employment agreements under which the principals of
Pima Mortgage and Pima Realty would become employees of the Company. In August
1996, the Special Committee retained special counsel and engaged Oppenheimer to
act as its financial advisor, to assist the Special Committee in the negotiation
of the terms of the Pima Mergers, and to deliver a fairness opinion respecting
the consideration to be paid in the Pima Mergers.
Representatives of Oppenheimer, the Special Committee, and the principals of
Pima Mortgage and Pima Realty had numerous discussions relating to the terms of
the Pima Mergers and employment agreements between August 1996 and November
1996. On November 1, 1996, a general agreement was reached with respect to the
Pima Mergers and on November 7, 1996 the agreement was approved by the Special
Committee. In making such a determination, the Special Committee was advised by
representatives of Oppenheimer that Oppenheimer was then prepared to deliver its
written fairness opinion with regard to the Pima Mergers. On November 11, 1996,
Oppenheimer delivered its fairness opinion to the effect that, as of the date of
such opinion and based on the assumptions and subject to the qualifications and
limitations set forth therein, the consideration to be paid by the Company in
the Pima Mergers is fair to the Company from a financial point of view. A copy
of the opinion, which sets forth the assumptions made, matters considered, and
limitations thereon, is attached as Appendix H and should be read in its
entirety.
The Company, the Winton Partnerships, Winton & Associates, Pima Mortgage, and
Pima Realty, among other parties, entered into the Combination Agreement on
November 8, 1996, which provides for, among other things, the acquisition of the
assets and properties of the Winton Partnerships, the Associates Merger, and the
Pima Mergers.
REASONS FOR THE TRANSACTIONS; RECOMMENDATIONS
The Company
The Company's Board of Directors believes that the terms of the Transactions
are fair to, and in the best interests of, the Company and its stockholders.
Accordingly, the Board of Directors of the Company by unanimous vote approved
the Transactions and recommended that the Company's stockholders approve the
Combination Proposal. In reaching its conclusion to recommend that the
stockholders approve the Combination Proposal with respect to the Winton
Partnerships, the Board of Directors considered a number of factors, including
the following: (i) the geographic location of the Winton Properties; (ii) the
age, construction quality, condition, and design of the Winton Properties; (iii)
the current and projected cash flow of the Winton Properties and the potential
to increase cash flow through lower debt service requirements, economies of
scale, and other factors; (iv) the potential for capital appreciation of the
Winton Properties; (v) the terms of tenant leases, including the potential for
rent increases on the Winton
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Properties; (vi) the potential for economic growth and the tax and regulatory
environment of the communities in which the Winton Properties are located; (vii)
the occupancy and demand by tenants for the Winton Properties of similar type in
the vicinity; (viii) the prospects for liquidity through sale, financing, or
refinancing of the Winton Properties; and (ix) the strong management of the
Winton Properties. The consummation of the Transactions will expand the
Company's apartment portfolio from 3,039 units in 19 apartment communities to
5,299 units in 32 apartment communities and also is expected to increase the
percentage of the Company's revenue and income derived from apartment
communities, increase the Company's real estate operating income, and increase
the Company's equity on a financial statement basis. If the Transactions had
taken place on January 1, 1996, the Transactions would have resulted in (a) an
increase in real estate operating income from $3.8 million to $7.0 million for
the nine months ended September 30, 1996 on a pro forma basis and (b) an
increase in Stockholders' Equity from $40.5 million to $74.4 million at
September 30, 1996 on a pro forma basis. While the Transactions would have had
the effect of decreasing net income per share from $2.46 to $1.59 for the nine
months ended September 30, 1996 on a pro forma basis, they would have increased
funds from operations, as modified, from $.76 to $1.07 per share (see Note M to
the Unaudited Pro Forma Combined Financial Statements).
The Company has considered in the past and plans to consider in the future
other acquisitions of apartment communities. See "Risk Factors -- Risks Relating
to the Transactions -- Difficulty in Integrating Business Operations." The
Company considers the acquisition of the Winton Properties to be the most
favorable of the transactions it has considered to date. The acquisition will be
subject to certain risks, however, including the fact that the Exchange Values
of the Winton Properties may not reflect the actual values of those properties
and the difficulties of integrating the Winton Properties into the Company's
operations. See "Risk Factors -- Risks Relating to the Transactions."
Prior to approving the Transactions, the Special Committee, consisting solely
of non-management directors, unanimously determined the Pima Mergers and the
issuance of 262,000 shares of Common Stock in connection therewith to be fair
to, and in the best interests of, the Company and its stockholders. Accordingly,
the Special Committee unanimously approved the Pima Mergers. In reaching its
conclusion to recommend that the Board of Directors approve the Pima Mergers and
the issuance of 262,000 shares of Common Stock in connection therewith, the
Special Committee considered, without assigning relative weights to, a number of
factors, including the following: (1) the potential for the Company to become
more attractive to investors through the conversion of the Company from an
externally managed real estate investment trust to a self-managed and
self-administered real estate investment trust; (2) the potential for the
Company to realize certain efficiencies arising from a self-managed structure by
paying for management and advisory services directly rather than paying a third
party for such services; (3) the proven expertise and substantial experience of
the employees of Pima Mortgage and Pima Realty, who will become employees of the
Company through the Pima Mergers, in the development, acquisition, and
management of apartment communities, including the Company's existing portfolio
of properties; (4) the belief of the Special Committee that the Pima Mergers
will result in greater alignment of the interests of the principals of Pima
Mortgage and Pima Realty with those of the Company's stockholders; (5) the
structure of the Pima Mergers, which will not result in recognition of income or
gain for federal income tax purposes by the Company; (6) the alternatives to the
Pima Mergers, including the direct and indirect relative costs and benefits of
(A) terminating the agreements with Pima Mortgage and Pima Realty and hiring a
new management team or (B) continuing to be advised by Pima Mortgage and Pima
Realty; (7) the terms of the Pima Mergers (based on a pro forma basis for 1997
(see "Pima Mergers -- Opinion of Financial Advisor to the Special Committee")),
which may result in an increase in the Company's per share income (excluding
depreciation expenses and income from redemption and sales of mortgage assets);
(8) the valuation analysis performed by Oppenheimer; and (9) the oral opinion of
Oppenheimer delivered to the Special Committee on November 1, 1996 to the effect
that, as of the date of such opinion and based on the assumptions and subject to
the qualifications and limitations set forth therein, the consideration to be
paid by the Company in the Pima Mergers is fair to the Company and its
stockholders from a financial point of view.
The estimated per share amount is accretive to the net income of the Company.
The cost attributable to the purchase of the Pima Entities will be assigned to
the contract between the Company and the Pima
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Entities and will be charged to contract termination expenses in 1997. Based on
the analysis prepared by the Company and the Pima Entities, in 1997 the Company
will incur an expense of $5,250,000 for the contract termination expenses,
offset by estimated income attributable to the Pima Entities of approximately
$694,000 or $2.65 per share based on the 262,000 shares of the Company's Common
Stock to be issued in the Pima Mergers. The estimated per share amount is
accretive to the net income of the Company on an ongoing basis and is
significantly higher than the current $2.00 per share dividend rate of the
Company.
Winton Partnerships
As the general partner of each of the Winton Partnerships, Mr. Winton (i)
determined that the Combination Agreement and the transactions contemplated
thereby are in the best interest of the partners (the "Winton Partners") of the
Winton Partnerships, (ii) approved the Combination Agreement and the
transactions contemplated thereby, and (iii) recommended that the Winton
Partners either exchange their partnership interests in the Winton Partnerships
in the Exchange Offer or approve and adopt the Combination Agreement and the
Asset Transfer.
In reaching his conclusions to approve the Exchange Offer and the Asset
Transfer and recommend the participation of the Winton Partners, Mr. Winton
considered a number of factors, including (a) the desire of Mr. Winton and other
Winton Partners to convert their real estate holdings into a more liquid form of
investment, (b) the ability of the Winton Partners to determine the timing of
any dispositions of their investments in the Winton Partnerships and the fact
that the Winton Partners will no longer be subject to the restrictions contained
in each Winton Partnership's partnership agreement requiring a majority vote for
the sale of an interest, (c) the terms of the acquisition proposal made by the
Company, which were more favorable than alternative proposals, (d) the structure
of the proposal made by the Company, which enables Winton Partners to
participate either in the Exchange Offer or the Asset Transfer depending on
their individual circumstances, (e) Mr. Winton's assessment of the apartment
communities owned or operated by the Company, (f) Mr. Winton's assessment of the
strength of the Company's management team, including their experience,
knowledge, and integrity, (g) Mr. Winton's ability to participate in the
management of the Company following the Transactions, which will enable him to
have a meaningful impact on the investments made by the Winton Partners, and (h)
the fact that the Company's current dividends exceed those currently paid by the
Winton Partnership and the ability of the Winton Partners to participate in any
appreciation of the trading price of the Company's Common Stock.
EMPLOYMENT AGREEMENTS
As condition precedent to the obligations of the Company and Heritage
Residential under the Pima Realty/Pima Mortgage Merger Agreement and the
Associates Merger Agreement, each of Messrs, Grove, Parise, Chan, and Winton
will enter into an employment agreement (collectively, the "Employment
Agreements") with the Company. Under the Employment Agreements, each of Messrs.
Grove, Parise, Chan, and Winton will receive compensation of $100,000 per annum
and be 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 will be 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.
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INDEMNIFICATION OF DON W. WINTON
Under the Combination Agreement, Heritage LP has agreed to indemnify and hold
harmless Mr. Winton in the event that Mr. Winton becomes a party to or a
witness, or other participant in, or is threatened to be made a party to or a
witness, or other participant in, a threatened, pending, or completed action,
suit, investigation, or proceeding, and appeal thereof, whether civil, criminal,
administrative or investigative, and/or any inquiry or investigation by reason
of or arising out of Mr. Winton having been the general partner of an Approving
Winton Partnership. The maximum amount of such indemnification (which covers
expenses, judgments, fines, penalties, and amounts paid in settlement) will be
equal to the aggregate value of the assets and properties contributed by the
Approving Winton Partnerships to Heritage LP in the Asset Transfer on the
Closing Date.
APPROVING WINTON PARTNERSHIPS
The Company will not be required to accept for payment or pay for any
partnerships interests tendered by a Winton Partner pursuant to the Exchange
Offer, and Heritage LP will not be required to consummate the Asset Transfer
with a Winton Partnership, unless (i) such Winton Partnership satisfies certain
conditions (as set forth below), and (ii) such Winton Partnership is an
Approving Winton Partnership. A Winton Partnership will be deemed an Approving
Winton Partnership if the Company and Heritage LP perform all of their
respective obligations with respect to such Winton Partnership and if each of
the following conditions with respect to such Winton Partnership has been
satisfied by such Winton Partnership at the Closing Date or waived by the
Company (with respect to the Exchange Offer) or Heritage LP (with respect to the
Asset Transfer): (a) the accuracy in all material respects of the
representations and warranties made by such Winton Partnership; (b) the absence
of any action or proceeding by any governmental agency that might result in
substantial damages with respect to the property owned by such Winton
Partnership; (c) the absence of any court order in an action or proceeding that
enjoins, restrains, or prohibits the consummation of the Transactions with
respect to such Winton Partnership; (d) the delivery of certain items by such
Winton Partnership and the performance by such Winton Partnership of its
obligations under the Combination Agreement; (e) the sum of the aggregate
percentage interest of partners in the Winton Partnership that participates in
the Exchange Offer and the percentage interest of all partners approving the
Asset Transfer totals at least one-half of all partnership interests in such
Winton Partnership; (f) the absence of a material default under any of the
leases of certain tenants on the property of such Winton Partnership and the
absence of insolvency or bankruptcy proceedings by any such tenants; (g) the
delivery of certain owners' policies of title insurance by such Winton
Partnership; (h) receipt of lender consent for the transfer of property subject
to mortgage debt, unless Heritage LP agrees to refinance or repay such debt; and
(i) the absence of any material adverse change in the business, properties, net
income, or financial condition of such Winton Partnership.
CONDITIONS TO THE TRANSACTIONS; TERMINATION
In addition to approval of the Combination Proposal by the stockholders of
the Company and certain other conditions described herein, the respective
obligations of the parties to consummate the Transactions are subject to
satisfaction or waiver of certain conditions, including the following
conditions: (i) the satisfaction or waiver of all of the conditions to the
transactions contemplated by the Pima Realty/Pima Mortgage Merger Agreement and
the Associates Merger Agreement; (ii) no withdrawal of the Fairness Opinion;
(iii) the aggregate value attributable to the properties, as adjusted, of the
Approving Winton Partnerships equals or exceeds 70% of the value of the
properties, as adjusted, of all Winton Partnerships, provided that First Appian
Way, Greenwood Creek, and Springfield will be considered Approving Winton
Partnerships (the "Minimum Condition"); (iv) the absence of any action or
proceeding by any governmental agency that would enjoin, restrain, or prohibit,
or might result in substantial damages in respect of, the Combination Agreement
or the Transactions; and (v) the cash payment by Heritage LP to the Approving
Winton Partnerships in the Asset Transfer in an amount not exceeding $1.5
million.
The respective obligations of each Approving Winton Partnership to consummate
the Transactions also are subject, among other things, to (a) the accuracy in
all material respects of the representations and warranties made by the Company,
(b) the delivery by the Company of certain items as set forth in the Combination
Agreement, and (c) the performance by the Company of its obligations under the
Combination Agreement.
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The Combination Agreement may be terminated by either the Winton Partnerships
or the Company (1) if the Exchange Offer shall not have occurred, (2) if the
Closing Date shall not have occurred on or before April 30, 1997, (3) if certain
legal proceedings with respect to the Combination Agreement have been instituted
or threatened before any court or governmental agency, (4) if the other fails to
comply with a material obligation in the Combination Agreement or any of the
related agreements, (5) if a representation or warranty of the other in the
Combination Agreement or any of the related agreements is not true and correct
in any material respect, (6) if the stockholders of the Company do not approve
the Combination Proposal, and (7) by mutual written consent of the Winton
Partnerships and the Company. The Combination Agreement also may be terminated
by the Winton Partnerships prior to the completion of the Exchange Offer if some
or all of the Winton Partnerships receives an alternative acquisition proposal
that the general partner of the Winton Partnerships determines, based upon
written advice of counsel, that his fiduciary obligations require that such
alternative acquisition proposal be accepted.
The Company will receive a break-up fee of $1.0 million, plus the
reimbursement of its expenses up to $1.0 million incurred in connection with the
Transactions, from any Winton Partnerships that (i) terminate the Combination
Agreement to accept an alternative acquisition proposal within 18 months of the
date of termination or (ii) accept a pre-existing alternative acquisition
proposal within 18 months of the termination of the Combination Agreement by the
Company or the Winton Partnerships as a result of the non-occurrence of the
Exchange Offer. The Winton Partnerships and Mr. Winton will receive a break-up
fee of $1.0 million, plus the reimbursement of their expenses up to $1.0 million
incurred in connection with the Transactions, from the Company if (a) the
Company's stockholders do not approve the Combination Proposal and (b) (1) a
person acquires 50% or more of the Company's Common Stock, (2) the Company
enters into or approves of an agreement to merge the Company with and into
another entity or transfer substantially all of its assets to another entity,
(3) a person proposes a merger of the Company with and into another entity or
the purchase of substantially all of the Company's assets, or (4) a person makes
a tender offer that would make such person a 50% or more owner of the Company's
Common Stock. The Company or the Winton Partnerships also will be entitled to
receive its expenses incurred in connection with the Combination Proposal from
the other if the Combination Agreement is terminated by the other's breach or
failure to comply with the terms and conditions of the Combination Agreement.
EXEMPTION FROM REGISTRATION OF COMMON STOCK
Shares of the Company's Common Stock issued in connection with the
Transactions will not be registered under the Securities Act and, as a result,
will be subject to substantial restrictions on transfer. The Company is relying
on an exemption from registration for certain offerings set forth in Section
4(2) of the Securities Act and Securities Act Rule 506, which provides an
exemption from registration for securities offered to accredited investors as
defined in Regulation D promulgated under the Securities Act. As a result,
Winton Partners that wish to receive Common Stock in the Exchange Offer or LP
Units in the Asset Transfer must make certain representations and warranties to
the Company with respect to, among other things, their status as accredited
investors as defined in Regulation D promulgated under the Securities Act. In
addition, Messrs. Grove, Parise, Chan, and Winton must make certain
representations and warranties to the Company with respect to, among other
things, their status as accredited investors as defined in Regulation D to
receive Common Stock in the Pima Mergers or the Associates Merger.
NO SOLICITATION OF OTHER TRANSACTIONS
Mr. Winton and each of the Winton Partnerships have agreed that they will
not, nor will any of their officers, directors, affiliates, representatives or
agents solicit or initiate discussions concerning a merger, a sale of assets or
partnership interests of any of the Winton Partnerships, or, subject to the
fiduciary duties of Mr. Winton as the general partner of each of the Winton
Partnerships, disclose any non-public information concerning the business or
assets of any of the Winton Partnerships.
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CLOSING
Closing Date
The consummation of the Transactions (the "Closing") with respect to the
Approving Winton Partnerships, except First Appian Way Associates, L.P. ("First
Appian Way"), First Greenwood Creek Associates, L.P. ("Greenwood Creek"), and
First Springfield Associates, L.P. ("Springfield"), will be completed on a date
as promptly as practicable following the approval of the Combination Proposal by
the requisite vote of the stockholders of the Company and the satisfaction and
waiver of the other conditions to the Transactions (the "Closing Date"). The
consummation of the Transactions with respect to First Appian Way, Greenwood
Creek, and Springfield (the "Subsequent Closing") will be completed on a date
that is agreed upon by the Company and Mr. Winton, but in no event earlier than
March 1, 1997 (the "Subsequent Closing Date").
At the time the Company entered into the Combination Agreement, each of First
Appian Way, Greenwood Creek, and Springfield were being refurbished. As a
result, the Company chose to provide for the Subsequent Closing in order to
evaluate the operation of each of First Appian Way, Greenwood Creek, and
Springfield under normal conditions and to provide each of these properties
additional time to increase their respective occupancy levels. The obligation of
the Company to participate in the Subsequent Closing is contingent upon each of
First Appian Way, Greenwood Creek, and Springfield realizing certain
pre-established net operating incomes for the three months prior to the
Subsequent Closing Date. In the event that the Closing Date does not occur prior
to the Subsequent Closing Date, the Subsequent Closing will occur simultaneously
with the Closing. It currently is anticipated that the Closing Date will take
place in April 1997 if the Combination Proposal is approved.
Sequence of Closings
The Transactions shall be deemed to occur in the following order: (i) the
Exchange Offer will be deemed to close with respect to Approving Winton
Partnerships participating in the Closing; (ii) the Asset Transfer will be
deemed to close with respect to Approving Winton Partnerships participating in
the Closing; (iii) the Pima Realty Merger will close; (iv) the Pima Mortgage
Merger will close; (v) the Associates Merger will close; (vi) each of Messrs.
Grove, Parise, Chan, and Winton will enter into an employment agreement with the
Company; (vii) the Exchange Offer will be deemed to close with respect to
Approving Winton Partnerships participating in the Subsequent Closing (in the
event the Subsequent Closing does not occur simultaneously with the Closing);
and (viii) the Asset Transfer will be deemed to close with respect to Approving
Winton Partnerships participating in the Subsequent Closing (in the event the
Subsequent Closing does not occur simultaneously with the Closing).
THE EXCHANGE OFFER
OFFER TO PURCHASE
The Combination Agreement requires the Company to make the Exchange Offer to
Winton Partners to exchange their Winton Partnership Interests in whole or in
part for shares of the Company's Common Stock. The purpose of the Exchange Offer
is to enable Winton Partners the opportunity to acquire Common Stock of the
Company rather than LP Units in Heritage LP through the Asset Transfer. The
Combination Agreement, however, limits the eligibility to participate in the
Exchange Offer to those Winton Partners that (i) tender Winton Partnership
Interests in Winton Partnerships that approve the transactions contemplated by
the Combination Agreement (the "Approving Winton Partnerships"), and (ii)
qualify as "accredited investors" as defined in Regulation D promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). The Company will
not be entitled to purchase any Winton Partnership Interests tendered pursuant
to the Exchange Offer unless all of the conditions to the consummation of the
Transactions contemplated by the Combination Agreement have been satisfied or
waived.
ELECTION TO TENDER; PURCHASE PRICE
The election of a Winton Partner to tender all or a part of such partner's
Winton Partnership Interests is made upon the execution of a Letter of
Transmittal by such Winton Partner and the delivery of the
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Letter of Transmittal to Don W. Winton, general partner of each of the Winton
Partnerships, as custodian (the "Custodian") pursuant to a Custody Agreement.
All tenders by Winton Partners are irrevocable. The Custodian will deliver the
executed Letters of Transmittal to the Company at the Closing only if the
conditions to the consummation of the Transactions contemplated by the
Combination Agreement have been satisfied or waived. The Custody Agreement
requires the Custodian to return a Letter of Transmittal to each such Winton
Partner of a Winton Partnership that does not approve the transactions
contemplated by the Combination Agreement and, as a result, no shares of Common
Stock will be exchanged in the Exchange Offer for Winton Partnership Interests
held by such Winton Partners.
Upon delivery of the executed Letters of Transmittal by the Custodian to the
Company, the Company will deliver to each Winton Partner of an Approving Winton
Partnership that number of shares of Common Stock equal to the quotient obtained
by dividing that portion of such Winton Partnership's property value
attributable to such tendered Winton Partnership Interests by $18.10, which is
equal to the average closing price of the Company's Common Stock on the Amex
during the 36-week period prior to the execution of the Combination Agreement.
Each Winton Partner participating in the Exchange Offer must acknowledge that
such shares of Common Stock have not been registered under the Securities Act or
any state securities laws and cannot be resold without registration thereunder
or exemption therefrom. The Company will issue a whole share of Common Stock in
lieu of any fractional share interest in which each Winton Partner would be
entitled under the Exchange Offer.
CONSENT TO ADMISSION OF THE COMPANY AS A WINTON PARTNER
The Letters of Transmittal provide that in the event that the Transactions
contemplated by the Combination Agreement are consummated, the Winton Partners,
including Mr. Winton, that participate in the Exchange Offer by tendering all or
any part of their Winton Partnership Interests by executing and properly
delivering a Letter of Transmittal to the Custodian, consent to the admission of
the Company as a substituted limited partner in such Winton Partnership. Mr.
Winton has the right to tender all or any part of his right to receive
distributions as a general partner in each of the Winton Partnerships in
exchange for shares of Common Stock pursuant to the Exchange Offer. In such
case, Mr. Winton will remain as the general partner of each of the Winton
Partnerships and the Company will only have the right to receive distributions
as a general partner of each of such Winton Partnerships.
REPRESENTATIONS AND WARRANTIES
The Letters of Transmittal require the Winton Partners participating in the
Exchange Offer to make certain representations and warranties to the Company
with respect to their ownership of Winton Partnership Interests being exchanged
in the Exchange Offer; their authority to sell such Winton Partnership
Interests; their good and marketable title to such Winton Partnership Interests;
their acquisition of Common Stock of the Company being for their own respective
accounts and not with a view to distribution or resale; their knowledge and
experience in financial and business matters; their capability to evaluate the
merits and risks of acquiring Common Stock of the Company; their ability to bear
the economic risk of acquiring Common Stock of the Company; their receipt of and
access to information that a reasonable investor would attach significance in
making investment decisions and any other information that they have requested;
and their status as accredited investors as defined in Regulation D promulgated
under the Securities Act. The Company also has made certain representations and
warranties in connection with the Exchange Offer with respect to (i) the
sufficiency of the number of shares of Common Stock that have been reserved from
the authorized capital stock of the Company for the Exchange Offer, and (ii) the
shares of Common Stock transferred to the Winton Partners being duly authorized,
validly issued, fully paid, and nonassessable and not being subject to any
preemptive or similar right.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences of the Exchange Offer, but does not purport to be a complete
analysis of all the potential tax effects. The discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
Internal Revenue Service (the "Service") rulings, and judicial, or
administrative action, and any such change may be applied retroactively. No
information is provided herein with respect to foreign, state, or local tax laws
or estate and gift tax considerations.
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A corporation's issuance of its own stock is not a taxable event to the
corporation. Therefore, the Company will not recognize any taxable gain or loss
in connection with the Exchange Offer. In addition, the Company's existing
stockholders will have no federal income tax consequences as a result of the
Exchange Offer. The Company will receive a tax basis in each Winton Partnership
Interest acquired in the Exchange Offer equal to the fair market value of the
Company's Common Stock issued in exchange for such interest. The fair market
value of the Company's Common Stock will be the market price of a share of the
Company's Common Stock on the Closing Date multiplied by the number of shares of
Company's Common Stock issued in exchange for the Winton Partnership Interest.
EXCHANGE OFFER REGISTRATION AGREEMENT AND LISTING OF COMMON STOCK
The Combination Agreement provides for the Company to enter into a
registration agreement (the "Exchange Offer Registration Agreement") for the
benefit of each of the Winton Partners that participates 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. Pursuant to
the terms of the Exchange Offer Registration Agreement, immediately following
the Closing, 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 as soon as practicable, but in no event later than
May 31, 1997, and to keep such registration statement effective for a period of
three years. The Registration Agreement also requires the Company, on one
occasion, to file, and use its best efforts to cause to become effective, an
applicable registration statement, upon the request of holders of at least $10.0
million of Common Stock subject to registration, to register such shares of
Common Stock in a firm underwriting by underwriters of national reputation. 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 intends to file an additional listing application for shares of
Common Stock issued in the Exchange Offer on the Amex.
THE ASSET TRANSFER
EFFECT OF ASSET TRANSFER
The Asset Transfer provides for each of the Approving Winton Partnerships to
transfer substantially all of its assets and properties as a capital
contribution to Heritage LP in exchange for LP Units in Heritage LP and cash.
The LP Units will be convertible into shares of the Company's Common Stock at
any time following the first anniversary of the Closing Date in accordance with
the Partnership Agreement of Heritage LP. Promptly following the Closing Date,
each of the Approving Winton Partnerships will distribute the LP Units in a
liquidating distribution to its partners (the "Distributees") that are deemed to
be accredited investors as defined in Regulation D promulgated under the
Securities Act and will distribute cash in a liquidating distribution to its
partners that are not deemed accredited investors. The consummation of the Asset
Transfer depends upon the consummation of the Exchange Offer, the Associates
Merger, and the Pima Mergers. As a result of the Exchange Offer, the Company
will be a limited partner in each Approving Winton Partnership to the extent of
acceptances of the Exchange Offer by Winton Partners in such Approving Winton
Partnerships.
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CAPITAL CONTRIBUTIONS TO HERITAGE LP
The Company and Heritage SGP
The Company and Heritage SGP will make an initial capital contribution to
Heritage LP in connection with the Asset Transfer equal to the sum of (i) that
portion of debt that will be repaid by Heritage LP, (ii) that portion of
monetary liens on the properties of the Approving Winton Partnerships that the
Company elects to satisfy, (iii) $1.6 million to pay the closing costs of the
Approving Winton Partnerships, (iv) certain taxes and assessments, collected
rent, utility costs, fees and charges under service contracts, common area and
maintenance charges, transfer debt, insurance costs, amounts payable to persons
that have performed services or labor or supplied material in connection with
any of the properties of the Approving Winton Partnerships, and any leasing
commissions relating to the properties of the Approving Winton Partnerships (the
"Prorations"), (v) due diligence expenses incurred by Heritage LP, the Company,
and Heritage SGP in connection with the Asset Transfer, and (vi) any cash
required to be distributed to Winton Partners that are deemed to be
non-accredited in accordance with the Asset Transfer and the subsequent
liquidation of the Approving Winton Partnerships up to a maximum of $1.5
million.
The Company and Heritage SGP will receive general partnership units in
Heritage LP ("GP Units") in consideration for their initial capital contribution
to Heritage LP and, as a result, will be the sole general partners of Heritage
LP.
The Approving Winton Partnerships
Each of the Approving Winton Partnerships will make an initial capital
contribution to Heritage LP in connection with the Asset Transfer of the real
properties of such Approving Winton Partnership, together with (i) all
improvements located on such properties, (ii) all the rights, benefits,
privileges, easements, tenements, hereditaments, and appurtenances on such
properties, and (iii) all right, title, and interest in certain land adjoining
such properties. In addition, each Approving Winton Partnership will contribute
to Heritage LP the intangible personal property relating to its real property,
certain leases relating to the improvements on its real property, and certain
tangible personal property, including equipment, machinery, furniture,
furnishings, and other tangible personal property relating to its real property.
Each of the Approving Winton Partnerships will receive LP Units and cash in
consideration for its initial capital contribution to Heritage LP and, as a
result, the Approving Winton Partnerships initially will be the sole limited
partners of Heritage LP.
MORTGAGE DEBT
The properties of each of the Approving Winton Partnerships that will be
contributed to Heritage LP are subject to mortgage debt. Heritage LP will have
the right to (i) refinance all or a portion of the mortgage debt, (ii) pay all
or a portion of such mortgage debt from the proceeds of the Company's initial
capital contribution to Heritage LP, or (iii) exclude the property subject to
mortgage debt from the Asset Transfer. See "Information Regarding the Winton
Partnerships -- Exchange Values" for a description of the mortgage debt
attributable to the property held by each Winton Partnership.
PRORATIONS
In connection with the determination of the amount of the Exchange Values and
the initial capital contribution of the Company and Heritage SGP to Heritage LP,
certain items with respect to the properties of the Approving Winton
Partnerships will be apportioned and prorated between each respective Approving
Winton Partnership and Heritage LP as of the end of the day preceding the
Closing Date. The Prorations include (i) general real estate taxes and
assessments for each property, (ii) all collected rent and other income under
the leases in effect at the Closing Date, (iii) certain utility costs, including
water, sewer, electric, and gas, (iv) fees and charges under service contracts
relating to the properties that are the obligations of any Approving Winton
Partnership and are being assigned to and assumed by Heritage LP at the Closing
Date, (v) common area maintenance charges and other operating expenses paid by
tenants to any Approving Winton Partnership, (vi) interest accrued on
transferred debt not yet due and payable
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through the day prior to the Closing Date and any principal, interest, and other
amounts due and payable on the Closing Date pursuant to the transferred debt,
(vii) premiums or other fees payable in connection with insurance policies that
are being assigned to and assumed by Heritage LP, (viii) other expenses relating
to the ownership or operation of the properties of the Approving Winton
Partnerships being assumed by Heritage LP, (ix) amounts payable for services,
labor, or supplied materials in connection with any of the properties of the
Approving Winton Partnerships, including, among other things, amounts payable to
architects, contractors, subcontractors, designers, suppliers, and engineers,
and (x) certain leasing or other fees or commissions payable in connection with
leases or any renewal or extension of a lease relating to the properties of the
Approving Winton Partnerships.
ISSUANCE OF LP UNITS AND CASH
In exchange for the capital contributions made by the Approving Winton
Partnerships, Heritage LP will issue LP Units and cash to each Approving Winton
Partnership. The number of LP Units to be distributed to each Approving Winton
Partnership will be equal to the Exchange Value of such Approving Winton
Partnership's property less the related mortgage debt and cash used for
partnership closing costs attributable to its partners that are accredited
investors divided by $18.10, which is the average closing price of the Company's
Common Stock on the Amex during the 36-week period prior to the execution of the
Combination Agreement. Heritage LP will issue a whole LP Unit in lieu of any
fractional LP Unit to which such Approving Winton Partnership would otherwise be
entitled. The maximum aggregate number of LP Units to be distributed to the
Approving Winton Partnerships based on September 30, 1996 mortgage debt balances
would be 1,623,000. Heritage LP also will distribute cash to each Approving
Winton Partnership in an amount equal to the Exchange Value of such Approving
Winton Partnership attributable to its partners that are non-accredited
investors divided by the average closing price of the Company's Common Stock on
the Amex during the 90 trading days immediately prior to the Closing Date,
provided that the aggregate amount of cash distributed by Heritage LP to the
Approving Winton Partnerships in no event will exceed $1.5 million.
REPRESENTATIONS AND WARRANTIES
The Company and each of the Approving Winton Partnerships have made certain
representations and warranties regarding their respective businesses,
properties, and financial conditions as well as the accuracy and completeness of
the information supplied by them for inclusion herein. These representations and
warranties will not survive beyond the Closing. The termination of these
representations and warranties, however, will not affect the potential liability
of the Company under the Securities Act for any material misstatements or
omissions.
Heritage SGP and Heritage LP have made certain representations and warranties
with respect to their valid existence or incorporation, good standing, and
authority to enter into the Combination Agreement. In addition, Heritage SGP and
Heritage LP have made certain representations and warranties with respect to the
absence of (i) violation of laws or their respective partnership agreement or
corporate documents by their execution and delivery of the Combination Agreement
and their consummation of the transactions contemplated thereby, and (ii)
pending or threatening litigation or legal proceedings.
The Distributees have made certain representations and warranties to the
Company with respect to their acquisition of LP Units being for their own
respective accounts and not with a view to distribution or resale; their
knowledge and experience in financial and business matters; their capability to
evaluate the merits and risks of acquiring LP Units; their ability to bear the
economic risk of acquiring LP Units; their receipt of and access to information
that a reasonable investor would attach significance in making investment
decisions and any other information that they have requested; and their status
as accredited investors as defined in Regulation D promulgated under the
Securities Act.
CONDUCT OF OPERATIONS PRIOR TO CLOSING
Each of the Approving Winton Partnerships has agreed that, prior to the
Closing, it will (i) operate and manage its properties in the ordinary course of
business, perform regular maintenance, maintain existing insurance coverage,
perform its obligations under all leases with tenants, service contracts, and
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loan documents applicable to the real properties owned by it, and pay and
discharge, in the ordinary course of business, all obligations and liabilities
relating to its properties; (ii) consult with the Company prior to terminating
any lease or service contract (except in the ordinary course of business) or
entering into or modifying any contract or agreement relating to its properties
that would be binding on Heritage LP or the Company after the Closing; (iii)
enter into new leases and modify existing leases relating to its properties only
with the Company's consent, except for modifications typically made in the
ordinary course of business; and (iv) notify the Company of any matters that may
arise prior to the Closing that could have a material effect on any of its
properties, such as pending or threatened litigation, notices of violations from
governmental or quasi-governmental authorities or agencies, tenant defaults,
bankruptcies or insolvencies, and asserted landlord defaults.
Each of the Approving Winton Partnerships also has agreed that, without the
prior consent of the Company, it will not (a) incur, create, or assume any new
indebtedness, other than amounts incurred in the ordinary course of business, or
grant any new lien, mortgage, security interest, or pledge of any kind on any of
its properties prior to the Closing; (b) accept rents or occupancy payments from
any tenant of its properties for more than one month in advance, except in the
ordinary course of business; or (c) increase the compensation payable to any
employee or partner or the fees payable pursuant to any management or consulting
agreement or introduce or change any pension or profit sharing plan or any other
employee benefit arrangement.
Each of the Approving Winton Partnerships, the Company, and Heritage SGP has
agreed that, without the prior written consent of the other parties to the Asset
Transfer, it will (1) use its best efforts to preserve intact its present
business organization, present goodwill, and advantageous relationships; (2)
preserve and maintain in force all licenses, registrations, franchises, patents,
trademarks, copyrights, bonds, and other similar rights; (3) maintain insurance
policies currently in effect; (4) operate its business only in the usual,
regular, and ordinary course and manner; (5) maintain its books, accounts, and
records in the usual, regular, and ordinary manner and on a basis consistent
with prior years; (6) refrain from amending its articles of incorporation,
bylaws, partnership agreement, or management agreements or changing its capital
or capital stock, except as contemplated by the terms of the Asset Transfer; (7)
refrain from declaring, making, or paying any dividends or other distributions;
and (8) use its best efforts to obtain all necessary consents and approvals of
other persons and governmental authorities necessary for the full and timely
performance of its obligations under the Combination Agreement.
PLAN OF DISSOLUTION AND LIQUIDATION
Subject to the terms and conditions of the Combination Agreement, each of the
Approving Winton Partnerships organized under the laws of the state of
Washington will dissolve by filing Articles of Dissolution with the Washington
Secretary of State and each of the Approving Winton Partnerships organized under
the laws of the state of Texas will dissolve by filing Articles of Dissolution
with the Texas Secretary of State. Immediately following the filing of Articles
of Dissolution, each of the Approving Winton Partnerships will liquidate by
distributing its net assets to its partners as promptly as practicable (the
"Liquidating Distribution"). At such time, the only assets of the Approving
Winton Partnerships will be the LP Units and cash received pursuant to the Asset
Transfer. As of the date that each of the Approving Winton Partnerships pays its
Liquidating Distribution to its partners, all partnership interests in each such
Approving Winton Partnership will be converted into the right to receive a pro
rata share of the Liquidating Distribution. Each Winton Partner that is an
accredited investor as defined in Regulation D promulgated under the Securities
Act will receive such partner's pro rata share of LP Units. The maximum number
of LP Units to be distributed by the Approving Winton Partnerships in the
Liquidating Distributions will be 1,623,000 based on September 30, 1996 mortgage
debt balances. Each Winton Partner that is not an accredited investor will
receive cash.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences of the Asset Transfer, but does not purport to be a complete
analysis of all the potential tax effects. The discussion is based upon the
Code, Treasury Regulations, Service rulings, and judicial decisions now in
effect, all of
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which are subject to change at any time by legislative, judicial, or
administrative action, and any of which may be applied retroactively. No
information is provided herein with respect to foreign, state, or local tax laws
or estate and gift tax considerations.
In connection with the Asset Transfer, the Company and Heritage SGP will make
an initial capital contribution to Heritage LP as described herein. See "The
Transactions -- The Asset Transfer -- Capital Contributions to Heritage LP."
Generally, capital contributions to a partnership do not cause the recognition
of gain or loss. The contributing partner receives a basis in its partnership
interest equal to the amount of money and the adjusted basis of any property
contributed to the partnership. The Company and Heritage SGP will receive
general partnership units in Heritage LP in consideration for their initial
capital contribution to Heritage LP and, as a result, will be the sole general
partners of Heritage LP.
As general partners in Heritage LP, the Company and Heritage SGP have
committed to contribute to Heritage LP a minimum of $400,000 in each partnership
fiscal year in exchange for additional GP Units. The Company and Heritage SGP
also will be required to make minimum aggregate capital contributions to
Heritage LP in an amount equal to at least 1.01% of aggregate capital
contributions of the limited partners. Such minimum aggregate amount will be
satisfied by the initial capital contribution, and the required additional
annual contribution, and sums in addition to these contributions, will only be
necessary if Heritage LP makes significant additional acquisitions. Upon
liquidation of Heritage LP, the Company and Heritage SGP will also be required
to contribute funds to Heritage LP in an amount necessary to eliminate their
negative capital account balances, if any.
The Company and Heritage SGP will be entitled to receive quarterly
distributions from Heritage LP to the extent that Heritage LP's available cash
flow exceeds the amount necessary to distribute to the limited partners, on a
cumulative basis, equal to an amount per LP Unit equal to the dividend per share
paid by the Company for each quarter. The Company and Heritage SGP also will be
entitled to receive distributions of all capital proceeds from Heritage SGP,
except that for 10 years following the execution of the Partnership Agreement,
Heritage LP must first distribute cash from capital transactions to the limited
partners to the extent of any unpaid operating cash flow distributions and
interest thereon.
Profits from Heritage LP's operations will be allocated to the partners (i)
first, based upon prior losses allocated to the partners, (ii) second, to the
limited partners to the extent of distributions and any required but unpaid
distributions and interest thereon, and (iii) third, to the Company and Heritage
SGP. Losses from Heritage LP's operations will be allocated to the partners
based upon their percentage interests in Heritage LP, except that the Company
and Heritage SGP will be allocated all losses at any time that the allocation of
losses to the limited partners would cause such limited partners to have
adjusted capital account deficits.
As a limited partner in Heritage LP, the Company will also be subject to the
tax consequences of a limited partner, including the receipt of a proportionate
share of the distributions to the limited partners and the allocation of a
proportionate share of the profits and losses of the limited partners.
The Company also will be required to issue additional shares of its Common
Stock upon the conversion of any LP Units by the limited partners of Heritage
LP. A corporation's issuance of its own stock is not a taxable event to the
corporation. Therefore, the Company will not recognize any taxable gain or loss
in connection with the issuance of its Common Stock in exchange for LP Units. In
addition, the Company's existing stockholders will have no federal income tax
consequences as a result of the exchange of LP Units for the Company's Common
Stock.
ASSET TRANSFER REGISTRATION AGREEMENT AND LISTING OF COMMON STOCK
The Combination Agreement provides for the Company to enter into a
registration agreement (the "Asset Transfer Registration Agreement") with each
of the Approving Winton Partnerships on behalf of the Distributees under which
the Distributees will have certain registration rights with respect to the
shares of Common Stock of the Company into which the LP Units issued in
connection with the Asset Transfer will be convertible at any time following the
first anniversary date of the Closing. Pursuant to the terms of the Registration
Agreement, not later than nine months after the Closing, the Company must file a
registration statement under the Securities Act and any state securities laws
covering such shares of
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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.
The Company intends to file an additional listing application with the Amex
for shares of its Common Stock issued upon the conversion of LP Units.
THE ASSOCIATES MERGER
GENERAL
The Associates Merger Agreement provides for Winton & Associates, the manager
of the operations of each of the apartment properties and the office building
held by the Winton Partnerships, to merge with and into Heritage Residential
with Heritage Residential being the surviving corporation. The consummation of
the Associates Merger depends upon the consummation of the Exchange Offer, the
Asset Transfer, the Pima Mergers, and the other transactions contemplated by the
Combination Agreement. Reference is made to the text of the Combination
Agreement and the Associates Merger Agreement, which are attached as Appendix A
and Appendix C, respectively.
EFFECT OF THE ASSOCIATES MERGER
Upon the Associates Merger becoming effective under applicable state law,
Winton & Associates will be merged with and into Heritage Residential and the
separate existence of Winton & Associates will terminate. All of the business
assets and rights of Winton & Associates will be transferred to Heritage
Residential, and Heritage Residential will assume all of the obligations and
liabilities of Winton & Associates at the Closing Date. The Associates Merger
Agreement provides that the Articles of Incorporation and Bylaws of Heritage
Residential as in effect immediately prior to the Closing Date will be the
Articles of Incorporation and Bylaws of Heritage Residential after the Closing
Date.
At the Closing Date, all of the issued and outstanding shares of Associates
Common Stock will be converted into a total of 70,284 shares of Common Stock. In
addition, Mr. Winton will enter into an employment agreement with the Company
for a term of five years in accordance with the Associates Merger Agreement.
REPRESENTATIONS AND WARRANTIES
Each of Winton & Associates, Heritage Residential, and the Company has made
certain representations and warranties with respect to its incorporation, good
standing, and qualification to do business; corporate authority; capital stock,
options, warrants, and rights; subsidiaries; financial statements and financial
condition; title to assets and properties; accounts receivable; contracts;
insurance; delivery of complete and accurate corporate documents and records;
and the accuracy and completeness of the information supplied by it in
connection with the Associates Merger Agreement. In addition, each of Winton &
Associates, Heritage Residential, and the Company has made certain
representations and warranties with respect to the absence of any (i) material
change in its financial condition, business, assets,
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or properties; (ii) pending or threatening litigation or legal proceedings;
(iii) disability or liability for failure to possess any right or license or to
comply with any law or regulation; and (iv) the absence of any violation of laws
or its corporate documents by its execution and delivery of the Associates
Merger Agreement and consummation of the transactions contemplated thereby.
In addition, Mr. Winton has made certain representations and warranties with
respect to (a) certain claims by Mr. Winton for indemnification against the
Company or Heritage Residential by reason of the fact that he was a director,
officer, employee, or agent of Winton & Associates or a director, officer,
employee, or agent of another entity, (b) the acquisition of the Company's
Common Stock being for Mr. Winton's own account and not with a view to public
distribution or resale; (c) his knowledge and experience in financial and
business matters; (d) his access to available information to which a reasonable
investor would attach significance in making investment decisions; and (e) his
status as an accredited investor as such term is defined in Regulation D
promulgated under the Securities Act. Winton & Associates also has made certain
representations and warranties with respect to the assets of Winton & Associates
constituting all of the assets necessary to conduct the business as it has been
conducted by Winton & Associates. The Company has made certain representations
and warranties with respect to (1) the accuracy of the reports filed by it with
the Securities and Exchange Commission, and (2) the listing on the Amex of the
shares of its Common Stock into which the shares of Associates Common Stock will
be converted pursuant to the Associates Merger Agreement.
The representations and warranties will survive the Closing.
CONDUCT PRIOR TO THE ASSOCIATES MERGER
Winton & Associates
Winton & Associates has agreed that, unless previously consented to in
writing by the Company, it will (i) use its best efforts to preserve intact its
present business organization, present goodwill, and advantageous relationships;
(ii) preserve and maintain in force all licenses, registrations, franchises,
patents, trademarks, copyrights, bonds, and other similar rights; (iii) operate
its business only in the usual, regular, and ordinary course and manner; (iv)
maintain its books, accounts, and records in the usual, regular, and ordinary
manner and on a basis consistent with prior years; (v) maintain insurance
policies currently in effect; (vi) make all filings, applications, statements,
and reports to all federal and state governmental agencies or entities, which
are required to be made prior to the Closing Date by it or on its behalf,
pursuant to any statute, rule, or regulation; and (vii) use its best efforts to
obtain all necessary consents and approvals of other persons and governmental
authorities necessary for the full and timely performance of its obligations
under the Associates Merger Agreement.
Winton & Associates also has agreed that, unless previously consented to in
writing by the Company, it will not (a) amend its Articles of Incorporation or
Bylaws; (b) make any change in its capital stock by reclassification,
subdivision, reorganization, or otherwise; (c) merge or consolidate with any
other corporation, trust, or entity or change the character of its business; (d)
increase the compensation payable to any elected officer or to other management
personnel from the amount payable as of June 30, 1996; (e) introduce or change
any pension or profit sharing plan or any other employee benefit arrangement,
with certain minor exceptions or as required by applicable laws; (f) enter into
employment agreements with any of its officers or management personnel that may
not be cancelled without penalty upon notice not exceeding 90 days; (g) declare
any dividends or other distributions with respect to its capital stock, except
for certain distributions to be made to Mr. Winton in connection with cash and
securities held by Winton & Associates on the Closing Date, or acquire directly
or indirectly any shares of its capital stock; (h) enter into material
transactions or obligations otherwise than in the ordinary course of business;
or (i) issue any shares of its capital stock or grant any option, warrant, or
other right to purchase or to convert any obligation into shares of its capital
stock.
The Company
The Company has agreed, for itself and its subsidiaries, that, unless
previously consented to in writing by Winton & Associates, it will (i) use its
best efforts to preserve intact its present business organization,
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present goodwill, and advantageous relationships; (ii) preserve and maintain in
force all licenses, registrations, franchises, patents, trademarks, copyrights,
bonds, and other similar rights; (iii) operate its business only in the usual,
regular, and ordinary course and manner; (iv) maintain its books, accounts, and
records in the usual, regular, and ordinary manner and on a basis consistent
with prior years; (v) maintain insurance policies currently in effect; (vi) make
all filings, applications, statements, and reports to all federal and state
governmental agencies or entities, which are required to be made prior to the
Closing Date by it or on its behalf, pursuant to any statute, rule, or
regulation; and (vii) use its best efforts to obtain all necessary consents and
approvals of other persons and governmental authorities necessary for the full
and timely performance of its obligations under the Associates Merger Agreement.
The Company also has agreed that, unless previously consented to in writing
by Winton & Associates, neither it nor its subsidiaries will (a) amend its
Articles of Incorporation or Bylaws, except for those amendments described
herein; (b) make any change in its capital stock by reclassification,
subdivision, reorganization, or otherwise; (c) merge or consolidate with any
other corporation, trust, or entity or change the character of its business; (d)
increase the compensation payable to any elected officer or to other management
personnel from the amount payable as of June 30, 1996, except for a cash bonus
in the aggregate amount of the greater of 1% of the total acquisition price or
$800,000 in cash, deferred compensation, or Common Stock that may be paid to
officers of the Company in connection with their efforts relating to the
Transactions; (e) introduce or change any pension or profit sharing plan or any
other employee benefit arrangement, with certain minor exceptions or as required
by applicable laws; (f) enter into employment agreements with any of its
officers or management personnel that may not be cancelled without penalty upon
notice not exceeding 90 days; (g) declare any dividends or other distributions
with respect to its capital stock, other than regular quarterly cash dividends
of $.50 per share, or acquire directly or indirectly any shares of its capital
stock; (h) enter into material transactions or obligations otherwise than in the
ordinary course of business; or (i) issue any shares of its capital stock or
grant any option, warrant, or other right to purchase or to convert any
obligation into shares of its capital stock other than the grant of options
covering a maximum of 5,901 shares of Common Stock under the Company's Stock
Option Plan.
CONDITIONS TO ASSOCIATES MERGER
The obligations of Winton & Associates and Mr. Winton to consummate the
Associates Merger are subject to, among other things, the satisfaction of the
following conditions: (i) all representations and warranties made by the Company
and Heritage Residential in the Associates Merger Agreement shall be true in all
material respects on the Closing Date; (ii) the Company and Heritage Residential
shall have performed in all material respects all of their respective
obligations under the Associates Merger Agreement on or prior to the Closing
Date; (iii) all necessary corporate action on the part of the directors and
stockholders of the Company and Heritage Residential to approve the Combination
Agreement shall have been taken by the Closing Date; (iv) counsel to the Company
and Heritage Residential shall have rendered a legal opinion to Winton &
Associates in form and substance satisfactory to Winton & Associates; (v) there
shall have been no material adverse change in the financial condition,
properties, or business of the Company and Heritage Residential since the
execution of the Associates Merger Agreement; (vi) neither the Company nor
Winton & Associates shall have been made (or have threatened to be made) a party
to any litigation that, in the judgment of Winton & Associates or Mr. Winton,
would make the Associates Merger inadvisable or impracticable to Winton &
Associates or Mr. Winton; (vii) the Company shall have taken all necessary
action to increase the number of directors on its Board of Directors to appoint
Mr. Winton as a director of the Company to serve until the next annual meeting
of stockholders; and (viii) all of the shares of the Company's Common Stock to
be issued pursuant to the Associates Merger Agreement shall have been authorized
for listing, subject to official notice of issuance, on the Amex.
The obligations of the Company and Heritage Residential to consummate the
Associates Merger are subject to, among other things, the satisfaction of the
following conditions: (a) all representations and warranties made by Winton &
Associates and Mr. Winton in the Associates Merger Agreement shall be true in
all material respects on the Closing Date; (b) Winton & Associates and Mr.
Winton shall have performed in all material respects all of their respective
obligations under the Associates Merger Agreement on or prior to the Closing
Date; (c) all necessary corporate action on the part of the directors and
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stockholders of Winton & Associates adopting the Associates Merger Agreement and
approving the transactions contemplated thereby shall have been taken; (d)
counsel to Mr. Winton and Winton & Associates shall have rendered a legal
opinion to the Company in form and substance satisfactory to the Company; (e)
there shall have been no material adverse change in the financial condition,
properties, or business of Winton & Associates since the execution of the
Associates Merger Agreement; (f) Winton & Associates shall not have been made
(or have threatened to be made) a party to any litigation that, in the judgment
of the Company or Heritage Residential, would make the Associates Merger
inadvisable or impracticable to the Company and Heritage Residential; (g) all of
the shares of the Common Stock to be issued pursuant to the Associates Merger
Agreement shall have been authorized for listing, subject to official notice of
issuance, on the Amex; (h) Mr. Winton shall have entered into an employment
agreement with the Company; (i) the stockholders of the Company shall have
approved the Combination Proposal; and (j) all parties to the Combination
Agreement shall have executed the Combination Agreement and the transactions
contemplated thereby shall be effected contemporaneously with the transactions
contemplated in the Associates Merger Agreement.
WAIVERS, MODIFICATIONS, AND ABANDONMENT
The failure of either Winton & Associates or Mr. Winton to comply with any of
their respective obligations, agreements, or conditions as set forth in the
Associates Merger Agreement may be waived in writing by the Company and Heritage
Residential by action of their respective Boards of Directors. The failure of
either the Company or Heritage Residential to comply with any of their
respective obligations, agreements, or conditions as set forth in the Associates
Merger Agreement may be waived in writing by the Board of Directors of Winton &
Associates. The Associates Merger Agreement also may be modified in any respect
by the mutual consent of the respective Boards of Directors of the Company,
Heritage Residential, and Winton & Associates, and Mr. Winton. However, no such
modification may be made that would increase the number of shares of the
Company's Common Stock to be issued in exchange for the shares of Associates
Common Stock without the consent of the Company's stockholders or that would
decrease the number of shares of Common Stock to be issued in exchange for the
shares of Associates Common Stock without the consent of Associates.
Despite the approval of the Combination Proposal by the stockholders of the
Company, Heritage Residential, and Winton & Associates, the Associates Merger
Agreement may be abandoned on or before the Closing Date through appropriate
action taken (i) by the mutual agreement of the Boards of Directors of the
Company, Heritage Residential, and Winton & Associates; (ii) by the Boards of
Directors of the Company, Heritage Residential, and Winton & Associates in the
event that any condition precedent to its obligation to consummate the Closing
under the Associates Merger Agreement has not been satisfied or waived; or (iii)
at the option of the Company, Heritage Residential, and Winton & Associates if
any legal proceeding is pending or threatened, which would prohibit the
consummation of the transactions contemplated by the Associates Merger Agreement
or which would cause damages with respect to the Associates Merger Agreement.
If the transactions contemplated by the Associates Merger Agreement are
abandoned, the Associates Merger Agreement will become wholly void and of no
effect without liability to any party to the Associates Merger Agreement or any
of their respective directors, officers, representatives, or agents other than
the payment of certain expenses and other amounts in certain circumstances
described below.
FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Associates Merger will be treated for federal income
tax purposes as a tax-free reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code. The Company will not recognize any
gain or loss upon the issuance of its Common Stock in connection with the
Associates Merger.
DISSENTERS' RIGHTS
The stockholders of the Company will not have statutory rights to dissent
from and obtain payment of the fair value of their shares in connection with the
Associates Merger.
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REGISTRATION AND LISTING OF COMMON STOCK
The Company will register the Common Stock to be issued in the Associates
Merger for resale under the Securities Act pursuant to a Registration Statement
on Form S-3 to be filed with the Securities and Exchange Commission following
the Closing Date. The Company intends to file an additional listing application
for such shares on the Amex.
ACCOUNTING TREATMENT
The Associates Merger will be accounted for as a purchase for accounting and
financial reporting purposes. The fair market value of the consideration given
by the Company will be determined using the average closing price on the Amex of
the Company's Common Stock for the 10-day period prior to public announcement of
the Transactions on November 19, 1996.
THE PIMA MERGERS
GENERAL
Subject to the terms of the Pima Realty/Pima Mortgage Merger Agreement, (i)
Pima Realty will merge with and into Heritage Residential (the "Pima Realty
Merger") with Heritage Residential being the surviving corporation, and (ii)
immediately following the Pima Realty Merger, each of the Pima Mortgage Partners
will merge with and into Heritage Residential (collectively, the Pima Mortgage
Merger) with Heritage Residential being the surviving corporation. The
consummation of the Pima Realty Merger and the Pima Mortgage Merger does not
depend upon the consummation of the Exchange Offer, the Asset Transfer, the
Associates Merger, or the other transactions contemplated by the Combination
Agreement. Reference is made to the text of the Combination Agreement and the
Pima Realty/Pima Mortgage Merger Agreement, which are attached as Appendix A and
Appendix D, respectively.
Pima Mortgage manages the day-to-day operations of the Company, subject to
the supervision of the Company's Board of Directors, pursuant to the terms of a
management agreement. The three corporate partners of Pima Mortgage are JG
Mortgage, FP Mortgage, and JC Mortgage. Pima Realty, an affiliate of Pima
Mortgage, manages each of the Company's apartment properties.
EFFECT OF THE PIMA MERGERS
Upon the Pima Realty Merger becoming effective under applicable state law,
Pima Realty will be merged with and into Heritage Residential and the separate
existence of Pima Realty will terminate. All of Pima Realty's business assets
and rights will be transferred to Heritage Residential, and Heritage Residential
will assume all of Pima Realty's obligations and liabilities at the Closing
Date. The Pima Realty/Pima Mortgage Merger Agreement provides that the Articles
of Incorporation and Bylaws of Heritage Residential as in effect immediately
prior to the Closing Date will be the Articles of Incorporation and Bylaws of
Heritage Residential after the Closing Date.
Upon the Pima Mortgage Merger becoming effective under applicable state law,
each of the Pima Mortgage Partners will be merged with and into Heritage
Residential and the separate existence of each of the Pima Mortgage Partners
will terminate. All of the business assets and rights of each of the Pima
Mortgage Partners will be transferred to Heritage Residential, and Heritage
Residential will assume all of the obligations and liabilities of the Pima
Mortgage Partners at the Closing Date. The Pima Realty/Pima Mortgage Merger
Agreement provides that the Articles of Incorporation and Bylaws of Heritage
Residential as in effect immediately prior to the Closing Date will be the
Articles of Incorporation and Bylaws of Heritage Residential after the Closing
Date.
At the Closing Date, all of the issued and outstanding shares of Pima Realty
Common Stock will be converted into 26,560 shares of the Company's Common Stock
and all of the outstanding shares of JG Mortgage Common Stock, FP Mortgage
Common Stock, and JC Mortgage Common Stock will be converted into an aggregate
of 235,440 shares of the Company's Common Stock. In addition, each of
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Messrs. Grove, Parise, and Chan will enter into an employment agreement with the
Company for a term of five years in accordance with the Pima Realty/Pima
Mortgage Merger Agreement.
REPRESENTATIONS AND WARRANTIES
Each of Pima Realty, the Pima Mortgage Partners, Heritage Residential, and
the Company has made certain representations and warranties with respect to its
incorporation, good standing, and qualification to do business; corporate
authority; capital stock, options, warrants, and rights; subsidiaries; financial
statements and financial condition; title to assets and properties; accounts
receivable; contracts; insurance; delivery of complete and accurate corporate
documents and records; and the accuracy and completeness of the information
supplied by it in connection with the Pima Realty/Pima Mortgage Merger
Agreement. In addition, each of Pima Realty, the Pima Mortgage Partners,
Heritage Residential, and the Company has made certain representations and
warranties with respect to the absence of (i) material change in its respective
financial condition, business, assets, or properties; (ii) pending or
threatening litigation or legal proceedings; (iii) disability or liability for
failure to possess any right or license or to comply with any law or regulation;
and (iv) the absence of any violation of laws or its corporate documents by its
execution and delivery of the Pima Realty/Pima Mortgage Merger Agreement and
consummation of the transactions contemplated thereby. Each of Pima Realty, Pima
Mortgage, and the Pima Mortgage Partners also has made certain representations
and warranties with respect to its assets constituting all of the assets
necessary to conduct the business as it has been conducted by it. The Company
also has made certain representations and warranties with respect to (i) the
accuracy of the reports filed by it with the Securities and Exchange Commission,
and (ii) the listing on the Amex of the shares of its Common Stock into which
the shares of common stock of Pima Realty and each of the Pima Mortgage Partners
will be converted pursuant to the Pima Realty/Pima Mortgage Merger Agreement.
Each of Messrs. Grove, Parise, and Chan has made certain representations and
warranties with respect to certain claims by Messrs. Grove, Parise, or Chan,
respectively, for indemnification against the Company or Heritage Residential by
reason of the fact that he was a director, officer, employee, or agent of Pima
Realty or any of the Pima Mortgage Partners, or a director, officer, employee,
or agent of another entity. Each of Messrs. Grove, Parise, and Chan also has
made certain representations and warranties with respect to (a) the acquisition
of Common Stock being for his own account; (b) his knowledge and experience in
financial and business matters; (c) his access to available information to which
a reasonable investor would attach significance in making investment decisions;
and (d) his status as an accredited investor as such term is defined in
Regulation D promulgated under the Securities Act.
The representations and warranties will survive the Closing.
CONDUCT PRIOR TO THE PIMA MERGERS
Pima Realty, Pima Mortgage, JG Mortgage, FP Mortgage, and JC Mortgage
Each of Pima Realty, Pima Mortgage, JG Mortgage, FP Mortgage, and JC Mortgage
has agreed that, unless previously consented to in writing by the Company, it
will (i) use its best efforts to preserve intact its present business
organization, present goodwill, and advantageous relationships; (ii) preserve
and maintain in force all licenses, registrations, franchises, patents,
trademarks, copyrights, bonds, and other similar rights; (iii) operate its
business only in the usual, regular, and ordinary course and manner; (iv)
maintain its books, accounts, and records in the usual, regular, and ordinary
manner and on a basis consistent with prior years; (v) maintain insurance
policies currently in effect; (vi) make all filings, applications, statements,
and reports to all federal and state governmental agencies or entities, which
are required to be made prior to the Closing Date by it or on its behalf,
pursuant to any statute, rule, or regulation; and (vii) use its best efforts to
obtain all necessary consents and approvals of other persons and governmental
authorities necessary for the full and timely performance of its obligations
under the Pima Realty/Pima Mortgage Merger Agreement.
Each of Pima Realty, Pima Mortgage, JG Mortgage, FP Mortgage, and JC Mortgage
also has agreed that, unless previously consented to in writing by the Company,
it will not (a) amend its Articles of Incorporation or Bylaws; (b) make any
change in its capital stock by reclassification, subdivision, reorganization, or
otherwise; (c) merge or consolidate with any other corporation, trust, or entity
or change
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the character of its business; (d) increase the compensation payable to any
elected officer or to other management personnel from the amount payable as of
June 30, 1996; (e) introduce or change any pension or profit sharing plan or any
other employee benefit arrangement, with certain minor exceptions or as required
by applicable laws; (f) enter into employment agreements with any of its
officers or management personnel that may not be cancelled without penalty upon
notice not exceeding 90 days; (g) declare any dividend or other distribution
with respect to its capital stock, except for certain distributions to be made
to Messrs. Grove, Parise, and Chan in connection with cash and securities held
by JG Mortgage, FP Mortgage, and JC Mortgage, respectively, on the Closing Date,
or acquire directly or indirectly any shares of its capital stock; (h) enter
into material transactions or obligations otherwise than in the ordinary course
of business; or (i) issue any shares of its capital stock or, in the case of
Pima Mortgage, issue any general partnership interests or limited partnership
interests, or grant any option, warrant, or other right to purchase or to
convert any obligation into shares of its capital stock.
THE COMPANY
The Company has agreed, for itself and its subsidiaries, that, unless
previously consented to in writing by Pima Realty, Pima Mortgage, JG Mortgage,
FP Mortgage, and JC Mortgage, it will (i) use its best efforts to preserve
intact its present business organization, present goodwill, and advantageous
relationships; (ii) preserve and maintain in force all licenses, registrations,
franchises, patents, trademarks, copyrights, bonds, and other similar rights;
(iii) operate its business only in the usual, regular, and ordinary course and
manner; (iv) maintain its books, accounts, and records in the usual, regular,
and ordinary manner and on a basis consistent with prior years; (v) maintain
insurance policies currently in effect; (vi) make all filings, applications,
statements, and reports to all federal and state governmental agencies or
entities, which are required to be made prior to the Closing Date by it or on
its behalf, pursuant to any statute, rule, or regulation; and (vii) use its best
efforts to obtain all necessary consents and approvals of other persons and
governmental authorities necessary for the full and timely performance of its
obligations under the Pima Realty/Pima Mortgage Realty Agreement.
The Company also has agreed that, unless previously consented to in writing
by Pima Realty, Pima Mortgage, JG Mortgage, FP Mortgage, and JC Mortgage,
neither it nor its subsidiaries will (a) amend its Articles of Incorporation or
Bylaws, except for those amendments described herein; (b) make any change in its
capital stock by reclassification, subdivision, reorganization, or otherwise;
(c) merge or consolidate with any other corporation, trust, or entity or change
the character of its business; (d) increase the compensation payable to any
elected officer or to other management personnel from the amount payable as of
September 30, 1996, except for a cash bonus in the aggregate amount of the
greater of 1% of the total acquisition price or $800,000 in cash, deferred
compensation, or Common Stock that may be paid to officers of the Company in
connection with their efforts relating to the Transactions; (e) introduce or
change any pension or profit sharing plan or any other employee benefit
arrangement, with certain minor exceptions or as required by applicable laws;
(f) enter into employment agreements with any of its officers or management
personnel that may not be cancelled without penalty upon notice not exceeding 90
days; (g) declare any dividends or other distributions with respect to its
capital stock, other than the Company's regular quarterly cash dividends of $.50
per share, or acquire directly or indirectly any shares of its capital stock;
(h) enter into material transactions or obligations otherwise than in the
ordinary course of business; or (i) issue any shares of its capital stock or
grant any option, warrant, or other right to purchase or to convert any
obligation into shares of its capital stock other than the grant of options
covering a maximum of 5,901 shares of Common Stock under the Company's Stock
Option Plan.
CONDITIONS TO THE PIMA MERGERS
The obligations of Pima Realty, Pima Mortgage, each of the Pima Mortgage
Partners, and each of Messrs. Grove, Parise, and Chan to consummate the Pima
Realty Merger and the Pima Mortgage Merger are subject to, among other things,
the satisfaction of the following conditions: (i) all representations and
warranties made by the Company and Heritage Residential in the Pima Realty/Pima
Mortgage Merger Agreement shall be true in all material respects on the Closing
Date; (ii) the Company and Heritage Residential shall have performed in all
material respects all of their respective obligations under the Pima
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Realty/Pima Mortgage Merger Agreement on or prior to the Closing Date; (iii) all
necessary corporate action on the part of the directors and stockholders of the
Company and Heritage Residential to approve the Pima Realty/Pima Mortgage Merger
Agreement shall have been taken; (iv) Pima Realty and each of the Pima Mortgage
Partners shall have received a legal opinion regarding the Company and Heritage
Residential in form and substance satisfactory to each of them; (v) there shall
have been no material adverse change in the financial condition, properties, or
business of the Company and Heritage Residential since the execution of the Pima
Realty/Pima Mortgage Merger Agreement; (vi) neither the Company nor Heritage
Residential shall have been made (or shall have been threatened to be made) a
party to any litigation that, in the judgment of Pima Realty, any of the Pima
Mortgage Partners, or Messrs. Grove, Parise, or Chan, would make the Pima Realty
Merger or the Pima Mortgage Merger inadvisable or impracticable to Pima Realty,
any of the Pima Mortgage Partners, or Messrs. Grove, Parise, or Chan; and (vii)
all of the shares of the Company's Common Stock to be issued pursuant to the
Pima Realty/Pima Mortgage Merger Agreement shall have been authorized for
listing, subject to official notice of issuance, on the Amex.
The obligations of the Company and Heritage Residential to consummate the
Pima Realty Merger and the Pima Mortgage Merger are subject to, among other
things, the satisfaction of the following conditions: (a) all representations
and warranties made by Pima Realty, Pima Mortgage, each of the Pima Mortgage
Partners, and each of Messrs. Grove, Parise, and Chan in the Pima Realty/Pima
Mortgage Merger Agreement shall be true in all material respects on the Closing
Date; (b) Pima Realty, Pima Mortgage, each of the Pima Mortgage Partners, and
each of Messrs. Grove, Parise, and Chan shall have performed in all material
respects all of their respective obligations under the Pima Realty/Pima Mortgage
Merger Agreement on or prior to the Closing Date; (c) all necessary corporate
action on the part of the directors and stockholders of Pima Realty and each of
JG Mortgage, FP Mortgage, and JC Mortgage adopting the Pima Realty/Pima Mortgage
Merger Agreement and approving the transactions contemplated thereby shall have
been taken; (d) the Company and the Special Committee of the Company's Board of
Directors shall have received a legal opinion regarding Pima Realty and each of
the Pima Mortgage Partners in form and substance satisfactory to the Company,
the Special Committee of the Company's Board of Directors, and their respective
counsel; (e) there shall have been no material adverse change in the financial
condition, properties, or business of Pima Realty, Pima Mortgage, or the Pima
Mortgage Partners since the execution of the Pima Realty/Pima Mortgage Merger
Agreement; (f) none of Pima Realty, Pima Mortgage, or any of the Pima Mortgage
Partners shall have been made (or have been threatened to be made) a party to
any litigation that, in the judgment of the Company or Heritage Residential,
would make the Pima Realty Merger or the Pima Mortgage Merger inadvisable or
impracticable to the Company and Heritage Residential; (g) all of the shares of
the Company's Common Stock to be issued pursuant to the Pima Realty/Pima
Mortgage Merger Agreement shall have been authorized for listing, subject to
official notice of issuance, on the Amex; (h) each of Messrs. Grove, Parise, and
Chan shall have entered into an employment agreement with the Company; (i) the
Special Committee of the Company's Board of Directors shall have received a
favorable fairness opinion from Oppenheimer with respect to the Pima Realty
Merger and the Pima Mortgage Merger; and (j) the Special Committee shall have
approved the Pima Realty Merger and the Pima Mortgage Merger and the
stockholders of the Company shall have approved the Combination Proposal.
WAIVERS, MODIFICATIONS, AND ABANDONMENT
The failure of any of Pima Realty, Pima Mortgage, the Pima Mortgage Partners,
or Messrs. Grove, Parise, or Chan to comply with any of their respective
obligations, agreements, or conditions as set forth in the Pima Realty/Pima
Mortgage Merger Agreement may be waived in writing by the Company and Heritage
Residential by action of their respective Boards of Directors and the Special
Committee. The failure of either the Company or Heritage Residential to comply
with any of their respective obligations, agreements, or conditions as set forth
in the Pima Realty/Pima Mortgage Merger Agreement may be waived in writing by
Pima Realty and each of the Pima Mortgage Partners by action of their respective
Boards of Directors. The Pima Realty/Pima Mortgage Merger Agreement also may be
modified in any respect by the mutual consent of all parties. However, no such
modification may be made that would increase the number of shares of Common
Stock to be issued in exchange for the shares of common stock
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of Pima Realty or any of the Pima Mortgage Partners without the consent of the
Company's stockholders or that would decrease the number of shares of the
Company's Common Stock to be issued in exchange for the shares of common stock
of Pima Realty, without the consent of Messrs Grove, Parise, and Chan.
Despite the approval of the entire Combination Proposal or the Pima
Components by the stockholders of the Company or the Pima Realty/Pima Mortgage
Merger Agreement by the Company, Heritage Residential, Pima Realty, and each of
the Pima Mortgage Partners, the Pima Realty/Pima Mortgage Merger Agreement may
be abandoned on or before the Closing Date through appropriate action taken (i)
by the mutual agreement of the Boards of Directors of the Company, Heritage
Residential, Pima Realty, and each of the Pima Mortgage Partners; (ii) by the
Boards of Directors of the Company, Heritage Residential, Pima Realty, and the
Pima Mortgage Partners, in the event that any condition precedent to its
obligation to consummate the Closing under the Pima Realty/Pima Mortgage Merger
Agreement has not been satisfied or waived; or (iii) at the option of the
Company, Heritage Residential, Pima Realty, and the Pima Mortgage Partners if
any legal proceeding is pending or threatened, which would prohibit the
consummation of the transactions contemplated by the Pima Realty/Pima Mortgage
Merger Agreement or which would cause damages with respect to the Pima
Realty/Pima Mortgage Merger Agreement.
If the transactions contemplated by the Pima Realty/Pima Mortgage Merger
Agreement are abandoned, the Pima Realty/Pima Mortgage Merger Agreement will
become wholly void and of no effect without liability to any party to the Pima
Realty/Pima Mortgage Merger Agreement or any of their respective directors,
officers, representatives, or agents other than the payment of certain expenses
and other amounts in certain circumstances described below.
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Special Committee of the Company's
Board of Directors with respect to the transactions contemplated by the Pima
Realty/Pima Mortgage Merger Agreement, stockholders should be aware that certain
members of the management and the Board of Directors of the Company have certain
interests in the Pima Realty Merger and the Pima Mortgage Merger that are in
addition to the interests of stockholders of the Company in general.
Messrs. Grove, Parise, and Chan are the sole shareholders of JG Mortgage, FP
Mortgage, and JC Mortgage, respectively. In addition, Messrs. Grove, Parise, and
Chan own all of the outstanding shares of common stock of Pima Realty,
constituting all of the outstanding capital stock of Pima Realty. Pursuant to
the terms of Pima Realty/Pima Mortgage Merger Agreement, Messrs. Grove, Parise,
and Chan will collectively receive an aggregate of 262,000 shares of the
Company's Common Stock in the Pima Mergers.
Each of Messrs. Grove, Parise, and Chan also will enter into an employment
agreement with the Company, a form of which is attached as Appendix E, in
accordance with the Pima Realty/Pima Mortgage Merger Agreement. Under the
Employment Agreements, each of Messrs. Grove, Parise, and Chan will receive
compensation of $100,000 per annum and be 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, and Chan will be
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. In the event of the termination of employment
of Messrs. Grove, Chan, or Parise by the Company prior to the expiration of the
Employment Agreement for a reason other than death, disability, or cause, such
person will be entitled to receive his fixed compensation for the remainder of
the term of the Employment Agreement. See "The Transactions -- Employment
Agreements."
SPECIAL COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS
Pursuant to the Bylaws of the Company, the Special Committee, consisting
entirely of independent directors who are not members of management or employees
of Pima Realty or Pima Mortgage, negotiated the terms of the Pima Mergers and
the Pima Realty/Pima Mortgage Merger Agreement. In connection therewith, the
Special Committee retained independent legal counsel and engaged Oppenheimer to
act as its financial advisor, to assist in the negotiation of the terms of the
Pima Mergers
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(including the related employment agreements), and to deliver a written opinion
as to the fairness of the consideration to be paid by the Company in the Pima
Mergers, from a financial point of view. The Special Committee has determined
that the Pima Mergers are (i) fair and reasonable to the Company and the
stockholders of the Company, (ii) the total consideration paid for Pima Realty
and the Pima Mortgage Partners is not in excess of the value of the property of
Pima Realty and Pima Mortgage, and (iii) the compensation to Messrs. Grove,
Parise, and Chan for services rendered in a capacity other than that
contemplated by the management arrangements for Pima Realty or Pima Mortgage is
not greater than the customary charges for comparable services generally
available from other competent unaffiliated persons.
In reaching its conclusion to recommend that the Board of Directors approve
the Pima Mergers and the issuance of 262,000 shares of Common Stock related
thereto, the Special Committee considered a number of factors, including the
following: (a) the proven expertise and substantial experience of the employees
of Pima Mortgage and Pima Realty, who will become employees of the Company
through the Pima Mergers, in the development, acquisition, and management of
apartment communities, including the Company's existing portfolio of properties;
(b) the potential for the Company to realize certain efficiencies arising from a
self-managed structure by paying for management and advisory services directly
rather than paying a third party for such services; (c) the interests of the
management of Pima Mortgage and Pima Realty, which will be aligned with those of
the Company upon the consummation of the Pima Mergers; (d) the potential for the
Company to become more attractive to investors and, as a result, increase the
size and revenue of the Company and increase the liquidity of the Company's
Common Stock, through the conversion of the Company from an externally managed
real estate investment trust to a self-managed and self-administered real estate
investment trust; (e) the structure of the Pima Mergers, which will not result
in recognition of income or gain for federal income tax purposes by the Company;
(f) the alternatives to the Pima Mergers, including the direct and indirect
relative costs and benefits of (A) terminating the agreements with Pima Mortgage
and Pima Realty and hiring a new management team or (B) continuing to be advised
by Pima Mortgage and Pima Realty; and (g) the written opinion of Oppenheimer
delivered to the Special Committee on November 11, 1996 to the effect that, as
of the date of such opinion and based on the assumptions and subject to the
qualifications and limitations set forth therein, the consideration to be paid
by the Company in the Pima Mergers is fair to the stockholders of the Company
from a financial point of view.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
The Special Committee retained Oppenheimer to assist in the negotiation of
the Pima Mergers and to render its opinion (the "Fairness Opinion") as to the
fairness, from a financial point of view, of the consideration to be paid by the
Company in the Pima Mergers. Oppenheimer was not requested to and does not make
any recommendation to the stockholders of the Company regarding the Pima
Mergers. The consideration paid by the Company in the Pima Mergers was
determined by the Special Committee and Pima Mortgage and Pima Realty in
arms-length negotiations. Oppenheimer was not requested to and did not render
any financial advice or provide any fairness opinion or other analysis with
regard to the Exchange Offer, the Asset Transfer, or the Associates Merger or
any other transaction described herein except for the Pima Mergers.
Oppenheimer, as part of its investment banking business, is regularly engaged
in the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. The Special Committee's
selection of Oppenheimer was based upon several factors, including experience,
reputation and price.
In rendering its written Fairness Opinion, which was dated November 11, 1996,
and as the basis therefore, Oppenheimer, among other things, reviewed the
following: the Pima Mortgage/Pima Realty Merger Agreement; a draft of this Proxy
Statement; the Company's Form 10-K for the year ended December 31, 1995 and Form
10-Q for the quarter ended June 30, 1996; the advisory agreement between the
Company and Pima Mortgage, the property management agreements between the
Company and Pima Realty and between Pima Realty and affiliates of Citibank, NA
and a non-affiliated third-party; and certain financial and other information
relating to the Company, Pima Mortgage, and Pima Realty,
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including certain internal financial analysis, financial and operating
forecasts, reports, and other information prepared by their respective
managements or representatives. Oppenheimer also held discussions with various
members of management and representatives of the Company, Pima Mortgage, and
Pima Realty concerning each company's historical and current operations,
financial condition and prospects. In addition, Oppenheimer (i) reviewed certain
publicly available information of selected companies whose securities are
publicly traded that Oppenheimer considered generally comparable to Pima
Mortgage and/or Pima Realty; (ii) considered the terms, to the extent publicly
available, of selected transactions Oppenheimer deemed generally comparable with
the Pima Mergers; (iii) reviewed the most recent market price data and trading
activity for the Company's Common Stock; (iv) reviewed the projected financial
results of the Pima Mergers on the Company; and (v) conducted such other
investigation, financial analysis, and studies and reviewed such other
information and factors as it deemed appropriate for the purposes of its
opinion. Oppenheimer did not review the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1996 because such report was not complete
prior to Oppenheimer's rendering of the Fairness Opinion. Since November 11,
1996, the Company has not experienced any change in its operations that would
materially affect the Fairness Opinion.
In rendering the Fairness Opinion, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness of
all financial and operating data, financial analysis, financial and operating
forecasts, reports, and other information that were publicly available or
furnished or otherwise communicated to Oppenheimer by or on behalf of the
Company, Pima Mortgage and Pima Realty. With respect to financial and operating
forecasts, Oppenheimer assumed, with the Special Committee's approval, that they
reflected the best current judgment of the managements of the Company, Pima
Mortgage, and Pima Realty as to future financial performance, and that there was
a reasonable probability that the projections made would prove to be
substantially correct. Oppenheimer did not make an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company,
Pima Mortgage, or Pima Realty nor was Oppenheimer furnished with any such
evaluation or appraisal.
The following paragraphs summarize the significant quantitative and
qualitative analyses performed by Oppenheimer in arriving at its opinion.
Oppenheimer considered all such quantitative and qualitative analysis in
connection with its analysis, and no one method of analysis was given particular
emphasis.
1. Comparable Acquisition Analysis. Oppenheimer reviewed publicly available
financial information on selected transactions in which real estate investment
trusts ("REITs") acquired their external advisor and manager. These transactions
included Berkshire Realty Company, Inc.'s acquistion of the Berkshire Companies
Limited Partnership; Boddie-Noell Restaurant Properties, Inc.'s acquistion of BT
Venture Corporation; Bradley Real Estate Trust, Inc.'s acquistion of R.M.
Bradley & Co. Inc.; CRIIMI MAE Inc.'s acquisition of the mortgage advisory,
servicing, and related businesses of C.R.I., Inc.; Franchise Finance Corporation
of America's acquisition of Franchise Finance Corporation of America I; Health
Care REIT's acquisition of First Toledo Advisory Co.; Realty Income
Corporation's acquisition of R.I.C. Advisor, Inc.; and Shurguard Storage
Centers, Inc.'s acquisition of Shurguard Inc. (together, the "Comparable REIT
Advisor Transactions"). Oppenheimer compared the purchase price, excluding any
contingent payments, paid by each REIT in the Comparable REIT Advisor
Transactions with the latest twelve months, or reported period on an annualized
basis, earnings before interest, taxes, depreciation and amortization ("EBITDA")
of the Comparable REIT Advisors and calculated the following range of multiples
of purchase price to advisor EBITDA of 1.9x to 15.4x. Oppenheimer then applied
the range of acquisition multiples or percentages to Pima Mortgage's and Pima
Realty's combined EBITDA for the 12-month period ended June 30, 1996, as
adjusted to reflect management's pro-forma adjustments and certain additional
adjustments that Oppenheimer deemed appropriate, to determine a combined implied
range of values for Pima Mortgage and Pima Realty of from $1.3 to $10.7 million.
Oppenheimer supplemented this analysis by including in the group of transactions
reviewed in the Comparable Acquisition Analysis selected transactions in which
companies which act as managers of real estate acquired companies in the same
line of business or in which REITs acquired non-affiliated companies in the real
estate management business. These transactions included Carr Realty
Corporation's acquisition of the Evans Co.; Highwoods Properties, Inc.'s
acquisition of the property management business of Forsyth Properties,
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Inc.; and Insignia Financial Group, Inc.'s acquisition of Angeles Corporation,
Edward S. Gordon Company, Paragon Group, Inc., and Security Management, Inc.
(the "Comparable Manager Transactions", and together with the Comparable REIT
Advisor Transactions, the "Comparable Acquisition Transactions"). Oppenheimer
compared the purchase price, excluding any contingent payments, paid in each of
the Comparable Manager Transactions with the EBITDA and net earnings of the
acquired company for the latest twelve months, or reported period on an
annualized basis, immediately prior to the date of the acquisition and
calculated the following range of multiples or purchase price to each company's
EBITDA of 4.9x to 7.9x. Oppenheimer then applied the range of acquisition
multiples to Pima Mortgage's and Pima Realty's combined EBITDA and net earnings
for the 12-month period ended June 30, 1996, as adjusted to reflect management's
pro-forma adjustments and certain additional adjustments that Oppenheimer deemed
appropriate, to determine the implied range of value of Pima Mortgage and Pima
Realty of from $3.4 to $5.5 million. Oppenheimer believes the comparable
acquisition analysis supports its fairness determination because the value of
the consideration to be paid in the Pima Mergers is within the range of the
combined implied range of equity value of Pima Mortgage and Pima Realty under
the comparable acquisition analysis.
2. Discounted Cash Flow Analysis. Oppenheimer performed a discounted cash
flow analysis of the (i) present value of the forecasted combined EBITDA of Pima
Mortgage and Pima Realty from future operations and (ii) the present value of
the terminal value of Pima Mortgage and Pima Realty at the conclusion of the
forecast period. In completing its analysis, Oppenheimer utilized financial and
operating forecasts of Pima Mortgage's and Pima Realty's EBITDA for the period
January 1, 1997 to December 31, 2001 and applied discount rates of 12.5% to
20.0% to forecasted EBITDA and to forecasted terminal value which was determined
by applying a range of EBITDA multiples of 6.67x to 8.0x to forecasted EBITDA
for the period January 1, 2002 to December 31, 2002. This analysis resulted in a
range of combined discounted cash flow values of Pima Mortgage and Pima Realty
of $4.2 to $6.0 million. Oppenheimer believes the discounted cash flow analysis
supports its fairness determination because the value of the consideration to be
paid in the Pima Mergers is within the range of the combined implied range of
equity values of Pima Mortgage and Pima Realty under the discounted cash flow
analysis.
3. Comparable Company Analysis. Oppenheimer reviewed publicly available
financial information on selected publicly held companies which act as managers
of real estate. These companies included CB Commercial Real Estate Services
Group Inc., Christina Companies, Inc., Grubb & Ellis Company, Insignia Financial
Group, Inc., and NHP Incorporated (the "Comparable Real Estate Managers").
Oppenheimer compared the adjusted market value (market value plus net debt) or
market value of each of the Comparable Real Estate Managers (except CB
Commercial Real Estate Services Group Inc.) with its latest twelve months, or
reported period on an annualized basis, EBITDA and net earnings. For CB
Commercial Real Estate Services Group, Inc., Oppenheimer utilized pro-forma
financial results, on an annualized basis, contained in the company's
registration statement dated November 4, 1996. Based upon the closing market
trading prices as of November 8, 1996, and the mid-point of CB Commercial Real
Estate Services Group Inc.'s range of anticipated initial public offering price,
Oppenheimer calculated that the Comparable Real Estate Managers traded in the
following ranges: a range of adjusted market value to the latest 12 months
EBITDA of 6.3x to 20.7x; a range of market value to latest 12 months net
earnings of 4.8x to 122.4x; and a range of market value to projected 1997 net
earnings of 10.7x to 63.2x. Oppenheimer then applied the range of trading
multiples to Pima Mortgage's and Pima Realty's combined EBITDA and net earnings
for the 12-month period ended June 30, 1996, as adjusted to reflect management's
pro-forma adjustments and certain additional adjustments that Oppenheimer deemed
appropriate, to determine the implied combined range of value of Pima Mortgage
and Pima Realty of from $4.5 to $26.3. All projected estimates for the
Comparable Real Estate Managers were based upon independently published
estimates, except CB Commercial Real Estate Services Group Inc. for whom no
projected estimates were available. Oppenheimer believes the comparable company
analysis supports its fairness determination because the value of the
consideration to be paid in the Pima Mergers is within the range of the implied
range of equity values of Pima Mortgage and Pima Realty under the comparable
company analysis.
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4. Pro-Forma Merger Analysis. Oppenheimer analyzed the financial impact
resulting exclusively from the Pima Mergers on the Company's pro-forma projected
funds from operations ("FFO") for calendar year 1997 based on internal estimates
provided by respective managements of the Company, Pima Mortgage and Pima
Realty. Oppenheimer considered the pro-forma merger analysis to be relevant to
its fairness determination because, among other things, such analysis estimated
the extent to which the Pima Mergers would be accretive or dilutive to the FFO
per share of the Company. Oppenheimer's analysis indicated the projected FFO per
share for the pro-forma combined Company in 1997 would be accretive (i.e.,
result in an incremental increase) to the projected FFO per share for the
Company if the Pima Mergers were to have occurred as of January 1, 1997.
Oppenheimer viewed the pro-forma merger analysis as positive to its fairness
determination, primarily because of the projected accretion to FFO per share
from the Pima Mergers. The results of the pro-forma merger analysis are not
necessarily indicative of future operating results or financial position.
5. Pro-Forma Contribution Analysis. Oppenheimer reviewed historical and
projected FFO estimates for the Company provided by management of the Company
and the Company's forecasted pro- forma calendar year 1997 FFO assuming the Pima
Mergers occurred as of January 1, 1997. Oppenheimer then calculated the combined
contribution of Pima Mortgage and Pima Realty to the Company's forecasted
pro-forma calendar year 1997 FFO to determine the combined percentage
contribution of Pima Mortgage and Pima Realty. Oppenheimer's analysis indicated
that the forecasted combined contribution of Pima Mortgage and Pima Realty
equaled 10.14% of the Company's forecasted pro-forma calendar year 1997 FFO
which amount Oppenheimer observed was greater than the 7.67% pro-forma
percentage of the Company's outstanding shares proposed to be issued in the Pima
Mergers. Oppenheimer observed that the combined contribution of Pima Mortgage
and Pima Realty to the Company's combined forecasted pro-forma FFO for calendar
year 1997 was greater than the proportion of the Company's Common Stock to be
received by Pima Mortgage and Pima Realty in the Pima Mergers. Oppenheimer
viewed the pro-forma contribution analysis as positive to its fairness
determination.
The preparation of a fairness opinion involves determinations as to the most
appropriate and relevant quantitative and qualitative methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Accordingly, Oppenheimer believes that its analysis must
be considered as a whole and that considering any portion of such analysis and
of the factors considered, without considering all analysis and factors, could
create a misleading or incomplete view of the process underlying its Fairness
Opinion. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth herein. In addition,
analysis relating to the value of the business of the Company do not purport to
be appraisals or to reflect the prices at which the Company's assets may
actually be sold. Oppenheimer expressed no opinion as to the price or trading
range at which the Company's Common Stock would trade following completion of
the Pima Mergers. Oppenheimer's Fairness Opinion dated November 11, 1996, was
based solely upon information available to Oppenheimer and the economic market
and other circumstances that existed as of the date of the Fairness Opinion. In
general, Oppenheimer used historical financial information through June 30,
1996. Although events occurring after such date could affect the assumptions and
conclusions contained in the Fairness Opinion, the Company has not experienced
any changes since November 11, 1996 that would materially alter Oppenheimer's
assumptions and conclusions in the Fairness Opinion. Oppenheimer was not
requested to and will not undertake to reaffirm or revise the Fairness Opinion
or otherwise comment upon any events occurring after the date thereof.
As compensation for its written opinion as to the fairness of the Pima
Mergers, Oppenheimer received a fee of $200,000, consisting of a $25,000
retainer paid at the time of Oppenheimer's engagement, and $175,000 paid upon
delivery of the written Fairness Opinion. Oppenheimer did not provide any
services to the Company prior to its services in rendering the Fairness Opinion.
AMENDMENT TO BYLAWS
In the Pima Realty/Pima Mortgage Merger Agreement dated as of November 8,
1996, the Company agreed, among other things, that the mergers of Pima Realty
and Pima Mortgage would be subject, among
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other things, to compliance with the Bylaws of the Company. Section 3.08 of the
Bylaws of the Company prohibits the Company's purchase of property in which any
advisor, director, or officer of the Company, or any affiliate of such persons,
has an interest unless, among other things, after disclosure to the Board of
Directors, a majority of the members of the Board of Directors who are not
affiliates of such interested party approve the transaction. In approving the
transaction, the independent directors must determine, among other things, that
if the acquisition is of property other than mortgage loans, the total
consideration is not in excess of the appraised value of such property. No
appraisal of the property of Pima Realty or Pima Mortgage has been made in
connection with the Pima Realty/Pima Mortgage Merger Agreement, which was
negotiated on an arm's-length basis between the Special Committee and
representatives of Pima Mortgage and Pima Realty. In view of the role of the
Special Committee, which retained legal counsel and engaged Oppenheimer in
negotiating the terms of the Pima Mergers on behalf of the Company and received
a fairness opinion from Oppenheimer, the Board of Directors believes it
unnecessary for purposes of protecting the interests of stockholders of the
Company to appraise the assets and properties of Pima Mortgage or Pima Realty.
There can be no assurance that an appraisal of the assets and properties of Pima
Realty and Pima Mortgage would not have revealed values for such assets and
properties that are significantly less than the value of shares of the Company's
Common Stock being issued in exchange therefor. The Special Committee, however,
believes that the procedures and due diligence undertaken by the Special
Committee with respect to the assessment of the valuation of Pima Realty and
Pima Mortgage provided it with a reasonable basis in determining whether the
values of Pima Realty and Pima Mortgage approximated the value of the Common
Stock exchanged therefor. The approval of the Combination Proposal will serve to
amend the Company's Bylaws to exclude the Pima Mergers from the applicable
provisions of the Bylaws.
The foregoing discussion of the amendment to the Bylaws constitutes a summary
of the proposed amendment to the Company's Bylaws. Reference is made to the
complete text of such amendment, which is set forth in the form of the Amendment
to the Bylaws, a copy of which is attached as Appendix I.
FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Pima Realty Merger and the Pima Mortgage Merger will
be treated for federal income tax purposes as tax-free reorganizations within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code. The Company
will not recognize gain or loss upon the issuance of its Common Stock in
connection with the Pima Mergers.
DISSENTERS' RIGHTS
The stockholders of the Company will not have statutory rights to dissent
from and obtain payment of the fair value of their shares in connection with the
Pima Mergers.
REGISTRATION AND LISTING OF COMMON STOCK
The Company will register the Common Stock to be issued in the Pima Mergers
for resale under the Securities Act pursuant to a Registration Statement on Form
S-3 to be filed with the Securities and Exchange Commission following the
Closing Date. The Company intends to file an additional listing application for
such shares of Common Stock on the Amex.
ACCOUNTING TREATMENT
The Pima Mergers will be accounted for by the Company as the termination of
the contracts between the Company and Pima Mortgage for financial reporting
purposes. The cost of the acquisitions will be charged to contract termination
expenses as of the Closing Date. The fair value of the consideration given by
the Company was determined using the average closing price on the Amex of the
Company's Common Stock for the 10-day period prior to public announcement of the
Transactions on November 19, 1996.
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INFORMATION REGARDING THE COMPANY
INTRODUCTION
The Company is a real estate investment trust engaged in the acquisition and
operation of apartment communities in the southwestern United States. At
September 30, 1996, the Company owned 19 apartment communities, containing 3,093
units, located in Phoenix and Tucson, Arizona, Houston, Texas and Albuquerque,
New Mexico. As of such date, the total book value of the apartments was $71.3
million, and the apartments were subject to first mortgage loans totaling $49.6
million. Each of the properties is owned by a wholly owned subsidiary of the
Company, and the first mortgage loans are generally non-recourse and non-cross
collateralized. The Company also owned through joint ventures six apartment
communities, containing 1,441 units, located in Phoenix and Tucson, Arizona. The
Company's investments in the joint ventures totalled $3.0 million at September
30, 1996.
Prior to 1993, the Company invested in mortgage assets ("Mortgage Assets")
that entitled it to receive the excess cash flows from a pool of mortgage
instruments over the required payments on the related structured financing. In
early 1993, the Company determined to shift its focus to the acquisition,
development and operation of apartment communities. The Company plans to hold
the existing Mortgage Assets and use the cash flows for apartment acquisitions,
operations, payment of dividends and other corporate purposes. At September 30,
1996, the Mortgage Assets had a carrying value of $5.5 million, of which $3.3
million were pledged as collateral for short-term borrowing of $2.0 millon.
Pima Mortgage has managed the day-to-day operations of the Company, subject
to the supervision of the Company's Board of Directors, pursuant to the terms of
a management agreement. The Company also has entered into property management
agreements with Pima Realty, an affiliate of Pima Mortgage, for each of its
current apartment properties.
The Company has elected to be taxed as a REIT pursuant to sections 856
through 860 of the Code. The Company generally will not be subject to tax on its
income to the extent that it distributes its taxable income to its stockholders
and maintains its qualification as a REIT. See "Information Regarding the
Company -- Federal Income Tax Considerations."
The Company was incorporated in the state of Maryland on June 18, 1987 and
commenced its operations on August 26, 1987. The Company's Common Stock is
listed on the Amex under the symbol "ASR." The Company effected a reserve stock
split on July 7, 1995 under which one new share of common stock was issued in
exchange for five shares of outstanding common stock. Accordingly, all data
relating to the number of shares and per share amounts for prior periods have
been adjusted to reflect the reverse stock split.
The principal executive offices of the Company and Pima Mortgage are located
at 335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone number (520)
748-2111. Unless the context otherwise requires, the terms "Company" and "ASR"
mean ASR Investments Corporation and its subsidiaries.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
The selected consolidated financial data presented below for the five years
ended December 31, 1995 and as of December 31, 1995, 1994, 1993, 1992, and 1991
were derived from the audited Consolidated Financial Statements of the Company.
The selected consolidated financial data as of September 30, 1996 and for the
nine months ended September 30, 1996 and 1995 have been derived from the
unaudited consolidated financial statements of the Company included elsewhere
herein. The unaudited consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results of
operations for the periods presented.
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The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Income from real estate
Rental and other income ...................... $ 14,034 $ 12,528 $ 10,941 $ 10,493
Operating and maintenance expenses, real
estate taxes and insurance ................. (6,719) (5,497) (5,076) (4,943)
Interest expense ............................. (4,387) (3,941) (3,269) (3,373)
Depreciation and amortization ................ (2,692) (1,995) (2,074) (1,959)
-------- -------- -------- --------
Income from real estate .................... 236 1,095 522 218
-------- -------- -------- --------
Income from mortgage assets
Prospective yield income ..................... 3,884 6,433 $ 7,264 $ 919 $ 34,512 2,174 3,063
Income from redemptions and sales ............ 5,302 4,263 2,596 7,725 4,927
Interest expense ............................. (347) (2,596) (4,794) (5,841) (6,594) (152) (170)
Provision for reserves ....................... (20,286) (57,588) (2,737)
-------- -------- -------- -------- -------- -------- --------
Income from mortgage assets ................ 8,839 8,100 (17,816) (62,510) 25,181 9,747 7,820
-------- -------- -------- -------- -------- -------- --------
Income (loss) before administrative
expenses and other income .................... 9,075 9,195 (17,816) (82,510) 25,181 10,269 8,038
Administrative expenses ........................ (2,983) (2,216) (1,949) (3,104) (6,355) (2,759) (2,802)
Other income, net .............................. 462 723 286 739 248 708
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect
of accounting change ......................... 6,554 7,702 (19,479) (64,875) 18,826 7,758 5,944
Cumulative effect of accounting change ......... (21,091)
-------- -------- -------- -------- -------- -------- --------
Net Income ..................................... $ 6,554 $ 7,702 $(40,570) ($64,875) $ 18,826 $ 7,758 $ 5,944
======== ======== ======== ======== ======== ======== ========
Per average outstanding share
Net income (loss) before cumulative
effect of accounting change ................ $ 2.09 $ 2.48 $ (6.27) $ (20.20) $ 6.25 $ 2.46 $ 1.90
Cumulative effect of accounting change* ...... (6.79)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per share .................. $ 2.09 $ 2.48 $ (13.07) $ (20.20) $ 6.25 $ 2.46 $ 1.90
======== ======== ======== ======== ======== ======== ========
Dividends per share ............................ $ 2.00 $ 0.50 $ 1.15 $ 2.25 $ 7.20 $ 1.50 $ 1.50
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding ............ 3,141 3,100 3,104 3,209 3,007 3,155 3,137
======== ======== ======== ======== ======== ======== ========
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------
1995 1994 1993 1992 1991 1996
--------- --------- --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Apartment and other real estate
assets .................................... $ 79,510 $ 73,056 $ 3,855 $ 85,657
Mortgage assets .............................. 11,877 18,965 37,881 $108,623 $215,747 5,527
Total assets ................................. 94,169 96,745 54,068 116,589 219,582 97,644
Real estate notes payable .................... 49,633 50,693 49,564
Mortgage assets borrowing, net ............... 4,495 6,422 22,062 39,517 61,527 1,954
Stockholders' Equity ......................... 37,395 37,100 30,948 75,284 149,585 40,531
</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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
In 1993, the Company determined to become an apartment real estate investment
trust. The Company continues to hold its mortgage assets and use the cash flows
for apartment acquisitions and development, operations, payment of dividends,
and other corporate purposes.
In January 1994, the Company acquired its initial portfolio of seventeen
apartment communities (2,461 units) located in Tucson, Arizona, Houston, Texas,
and Albuquerque, New Mexico. The total cost was approximately $61,600,000, which
was financed by non-recourse first mortgage loans of $45,700,000, seller
carryback financing of $6,500,000, and cash of $9,400,000. In February 1995, the
Company acquired a 222-unit apartment community in Mesa, Arizona for $6,356,000,
which was financed with a $3,770,000 non-recourse first mortgage loan.
In March 1996, the Company began construction of a 356-unit luxury apartment
community in Tempe, Arizona. Leasing of the project commenced in December 1996.
Total project costs are estimated to be approximately $21 million and the
Company has obtained a construction loan of $15.4 million.
In addition to wholly owned apartment communities, the Company has acquired
six apartment communities (1,441 units) in Phoenix and Tucson, Arizona through
joint ventures with a pension plan affiliate of Citicorp. The Company is a 15%
equity partner and managing member of the joint ventures. The Company receives
between 15% and 51% of the net profits and cash flow depending on the
performance of the joint ventures.
The operating income from apartments is affected primarily by rental rates,
occupancy rates and operating expenses. Rental rates and occupancy rates are
affected by the strength of the local economy, the local housing market, and the
supply of and demand for apartment communities.
The Company continues to own mortgage assets acquired prior to 1993 to
generate cash flows for apartment acquisitions and development and other
corporate purposes. These mortgage assets entitle the Company to receive the
excess of the cash flow on pools of mortgage instruments over the required
payments on a series of structured financings which they secure. Income and cash
flows from mortgage assets are affected primarily by mortgage prepayment rates
and short-term interest rates. Higher mortgage prepayment rates or higher
short-term rates reduce the income and total cash flows over the life of the
mortgage assets. Prepayment rates are affected primarily by mortgage interest
rates. Mortgage assets are amortizing assets and the cash flows decline over
time.
In 1993, mortgage interest rates dropped to their lowest level in twenty
years and prepayment rates reached record levels. In 1994, mortgage interest
rates increased and actual and anticipated prepayment rates decreased. In 1995,
although prepayment rates increased because mortgage rates declined to near the
1993 lows by year end, they were well below the 1993 record levels. In 1996,
prepayment rates remained well below the 1993 record levels, as mortgage rates
did not change substantially from the 1995 levels.
The Company also has the option to cause the early redemption of the
structured financings at par after specified conditions are met (generally when
the structured financing is below a specified balance or after a specified
date). In such event, the mortgage instruments are sold and the net proceeds
after the redemption of the structured financing are remitted to the Company.
Mortgage asset redemptions have the effect of accelerating the cash flows and
increasing the value. Redemption transactions occur from time to time as
specified conditions are met rather than on a monthly or quarterly basis, and
the net proceeds are affected by the market price of the mortgage instruments.
Thus, the cash flows and income from redemption transactions fluctuate
significantly between periods. Mortgage asset redemptions reduce the cash flows
and income in future periods.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Real Estate Operations -- Rental and other income for the 1996 period
increased by $448,000, or 4.39%, due primarily to improved rental income from
the Company's wholly owned properties. Rental
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rate increases provided $335,000 of the additional rental income due primarily
to the Houston communities which had a 4% rental rate increase over the 1995
period. Improved occupancy contributed $96,000 of the additional rental income,
due primarily to an increase in the Tucson communities' occupancy rate, which
increased from 89.8% in the 1995 period to 93.1% in the 1996 period. The Company
believes the improved occupancy rate is due to improved economic conditions in
the Tucson market as well as aggressive marketing strategies used by the
property management company. Rental revenue also increased due to approximately
$200,000 from prior rate increases becoming effective as leases are renewed or
the apartment is re-leased. These prior rent increases were experienced
primarily in the Tucson communities. The increases in rental income were
mitigated by an increase in rental concession expense of $183,000 primarily
attributable to the Albuquerque communities. The increased rental concessions
result from competition from new apartment communities in their rent up phase.
Operating and maintenance expenses increased by 4.7% due to the 1995 apartment
acquired in February 1995 and increases in payroll expenses and marketing
expenses. Real estate taxes and insurance expenses decreased 4.2% due to an
adjustment made in 1995 based on the actual property tax assessment.
Depreciation expense in 1996 increased 5.9% due to capital improvements on the
apartment communities. Interest expense on real estate mortgages decreased due
to lower principal balances resulting from monthly payments.
Mortgage Assets -- Prospective yield income decreased in 1996 due to the
decrease in the mortgage asset balance as a result of amortization and
redemptions. The average mortgage asset balance was $9,284,000 for the 1996
period compared with $15,559,000 for the 1995 period. The decrease was mitigated
by an increase in the average prospective yield from 29% in the 1995 period to
34% in the 1996 period. Income from redemptions and sales increased by
$2,798,000 as a result of the sale and redemption of seven mortgage assets in
1996 for income of $7,725,000 compared to the sales of four mortgage assets in
1995 for income of $4,927,000. Included in the 1995 income was $2,420,000 from
the reversal of an excess yield maintenance payment accrued in 1993 on borrowing
secured by mortgage assets.
Operating Expenses and Other Income -- Operating expenses were $43,000 lower
in 1996 than the comparable period in 1995. The 1996 amount included an accrual
of stock appreciation rights expense of $507,000 and an accrual of $400,000 of
expenses related to the acquisition costs of the Transactions. The 1995 amount
included an accrual of stock appreciation expense of $705,000 and also included
approximately $100,000 of costs related to the reverse stock split in July 1995.
Administrative expenses for 1996 were also lower by approximately $145,000
primarily due to lower costs for officer and director's insurance. Interest and
other income decreased as the 1995 amount included a gain of $311,000 from the
early payoff of a note payable and a gain of $180,000 from the sale of an asset.
Other interest expense decreased as the Company paid off the unsecured real
estate note payable in April 1995.
On July 7, 1995, the Company completed a reverse stock split under which one
new share of common stock was issued in exchange for five shares of outstanding
stock. Accordingly, the number of common stock issued and all per share amounts
for all years have been adjusted for the reverse stock split.
1995 COMPARED TO 1994
Income and expenses from real estate operations increased in 1995 due to the
acquisition of an apartment community in February 1995 as well as new
investments in joint ventures. 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 due to 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 due to the Company's borrowing of additional funds for the
acquisition in February 1995.
As a result of amortization of the investment in and redemption of mortgage
assets during 1994 and 1995, the average balance of mortgage assets decreased
from $26,691,000 for 1994 to $14,827,000 for 1995.
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While the average prospective yield was 28% for 1995 compared with 24% for 1994,
the prospective yield income decreased by $2,549,000. Income from redemptions in
1995 totaled $5,302,000 consisting of $2,882,000 from redemption of five
mortgage assets and $2,420,000 from the reversal of the excess yield maintenance
payment accrued in 1993 on notes payable. Income from redemptions of $4,263,000
in 1994 resulted from the redemption of four mortgage assets.
Operating and administrative expenses increased in 1995 primarily due to an
increase in expense accruals for stock appreciation rights of $381,000 (caused
by higher stock price) and dividend equivalent payments on stock options of
$600,000. The higher stock appreciation rights and dividend equivalent expenses
were mitigated by a decrease in management fees of $170,000 in 1995 compared to
1994.
Interest and other income decreased in 1995 due to the use of the cash held
by trustee to prepay the notes payable secured by mortgage assets in February
1995. Interest expense on real estate mortgages increased due to the borrowing
for the February 1995 purchase of an apartment community. Other interest expense
decreased due to the prepayment of the notes payable secured by mortgage assets
in February 1995 and the prepayment of the real estate notes in April 1995.
1994 COMPARED TO 1993
The Company had net income of $7,702,000 in 1994 compared with a net loss of
$40.6 million in 1993. The income in 1994 resulted from operating income
generated by the apartments and the existing mortgage assets.
In 1994, the first year that the Company had earnings from real estate,
rental and other income totaled $12,528,000 and, after the related operating,
interest and depreciation expenses, income from real estate totaled $1,095,000
(including the Company's share of results of the joint ventures). As a result of
high demand, rental rates in the Company's apartment communities increased
during 1994 by 10% in Tucson, 5% in Albuquerque, and 2% in Houston while
maintaining each apartment community's occupancy rate.
Prospective yield income from mortgage assets decreased due to a reduction of
$18,916,000 in the net carrying value, mitigated by a higher yield in 1994 due
to significantly lower mortgage prepayment rates. The average yield on the
mortgage assets for 1994 was approximately 24%. The Company realized income in
1994 of $4,263,000 from the redemption of four mortgage assets and the sale of
the underlying mortgage instruments. The provision for reserve for 1993 was due
to the decrease in the estimated future cash flows of certain mortgage assets.
The charge from the cumulative effect of accounting change in 1993 was due to
adoption of SFAS No. 115 which resulted in the reduction of the net carrying
values of substantially all of the mortgage assets to their estimated fair
market values. Both the provision for reserve and the cumulative effect of
accounting change were caused by very low mortgage interest rates which resulted
in historically high levels of mortgage prepayment rates.
Interest and other interest income increased due to higher interest rates on
investments and a write down of a short-term investment ($254,000) in 1993.
Operating expenses increased in 1994 due to the accrual in 1994 of expenses
relating to the stock appreciation rights ($324,000) and dividend equivalent
payments on the options and stock appreciation rights ($200,000), offset by a
reduction in the 1994 management fees of $81,000, the Company's efforts to
reduce operating expenses and a reduction in the 1993 expenses of $470,000
relating to the legal fees reimbursement from insurance carriers relating to
legal fees relating to the class action suit settled in 1992.
Interest expense on real estate mortgages increased because of the borrowing
incurred in connection with acquisition of the apartments in January 1994. Other
interest expense decreased due to a decrease in the notes payable secured by
mortgage assets.
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INCOME FROM REDEMPTION AND SALES OF MORTGAGE ASSETS
The Company's income includes income from redemption and sales of mortgage
assets of $7,725,000 for the nine months ended September 30, 1996 and
$5,302,000, $263,000, and $2,596,000 for the years ended December 31, 1995,
1994, and 1993, respectively. Such income is not necessarily indicative of
future operating results or of the Company's future financial condition because
income from redemptions and sales of mortgages (i) results from the sale or
redemption of a finite number of assets that are no longer being purchased by
the Company and (ii) is highly dependent on future levels of mortgage prepayment
and interest rates.
LIQUIDITY, CAPITAL RESOURCES, AND COMMITMENTS
Cash provided by operations for the nine months ended September 30, 1996 was
$10,680,000 compared with $6,277,000 for the same period in 1995. The increase
was primarily due to a $5,218,000 increase in cash from redemptions and sales of
mortgage assets ($7,725,000 for the 1996 period compared to $4,927,000 for the
1995 period, which included a non-cash credit of $2,420,000 for the reversal of
accrued excess yield maintenance payment on notes payable) offset by an $871,000
decrease in prospective yield income on the mortgage assets.
Cash used in investing activities for the nine months ended September 30,
1996 was $2,394,000 compared with $3,592,000 for the same period in 1995. The
decrease was due to (i) a decrease of $6,142,000 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 $1,723,000 in investment in joint
ventures as the Company made investments in new joint ventures in 1995 to
acquire two apartment communities and made no investment in new joint ventures
in 1996 and (iii) an increase of $189,000 in the amortization in the carrying
value of mortgage assets. The decrease was mitigated by (i) an increase of
$3,208,000 in expenditures for construction of Finisterra Apartments and other
land development, (ii) a decrease of $3,326,000 in proceeds from dispositions of
other real estate assets and (iii) an increase in other assets of $322,000.
Cash used in financing activities for the nine months ended September 30,
1996 was $4,790,000 compared with $4,524,000 for the same period in 1995. The
increase was primarily due to (i) a decrease in the issuance of real estate
notes payable of $6,895,000 as the Company did not make any purchases in 1996,
(ii) a decrease of $3,034,000 in notes payable secured by mortgage assets and
short-term borrowing, and (iii) a decrease of $22,000 in the exercise of stock
options. The increase in cash used in financing activities was mitigated by (a)
an increase of $247,000 from proceeds from the Finisterra Apartments
construction loan, (b) a decrease of $7,508,000 in the repayment of real estate
notes payable as the Company prepaid the unsecured real estate notes in 1995,
(c) accrued construction cost payable of $1,384,000 for the Finisterra Apartment
community for September that was paid in October, and (d) an increase in other
liabilities of $546,000 primarily due to accrued 1996 legal and consulting fees
related to future acquisitions.
The Company continues to realize substantial cash flows from its mortgage
assets. A majority of the cash flows is generated from redemptions of the
mortgage assets. The Company may also sell a mortgage asset that is redeemable
in the foreseeable future. The redemptions or sales accelerate the mortgage
asset cash flows and increase the present value. During the first nine months of
1996, the mortgage assets generated total cash flow of $16,229,000, including
$11,750,000 from the redemption of seven mortgage assets. The Company used a
portion of the proceeds to reduce short-term borrowing by $2,541,000. In
addition, the Company sold or redeemed two mortgage assets in October 1996 for
total proceeds of $1,825,000.
The Company has prepared the following estimates of future cash flows from
the mortgage assets. Cases 1, 2 and 3 assume that except for the early
redemptions or sales of the mortgage assets in October 1996 as described in the
preceding paragraph, there would be no further early redemptions or sales of
mortgage assets. The assumed interest rate and mortgage prepayment rates in Case
2 are the approximate interest rate and forecasts of prepayment rates made by
market participants as of September 30, 1996. Mortgage prepayment rates
represent the average annual prepayment rate assumed for the underlying
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mortgage instruments. The estimates in Case 4 have been prepared using the same
interest rate and mortgage prepayment rates as Case 2 except that each mortgage
asset is assumed to be redeemed at the first available date and the underlying
mortgages are sold at the September 30, 1996 prices.
<TABLE>
<CAPTION>
CASE 1 CASE 2 CASE 3 CASE 4
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assumed one month LIBOR ............................................ 3.5% 5.5% 7.5% 5.5%
Assumed annual mortgage prepayments ................................ 19.63% 12.45% 8.45% 12.45%
Average sale price of mortgages (% of par) ......................... 106.92%
Estimated cash flows
1996 (fourth quarter) ............................................ $ 2,729 $ 2,660 $ 2,590 $ 2,660
1997 ............................................................. 3,389 2,874 2,354 8,815
1998 ............................................................. 2,440 2,240 1,914 868
1999 ............................................................. 1,732 1,740 1,612 3,995
2000 ............................................................. 1,232 1,386 1,388 17,847
2001-2020 ........................................................ 5,378 10,865 18,353 967
------- ------- ------- -------
Total ......................................................... $16,900 $21,765 $28,211 $35,152
======= ======= ======= =======
</TABLE>
There can be no assurance that the actual interest and prepayment rates will
be as assumed or that the prices of the mortgage instruments will remain at the
assumed levels. Proceeds from redemptions are highly dependent on prices
available upon sale of the mortgages as well as the timing of meeting the
conditions for redemption (generally reduction of the structured financing to a
specified balance or a specified date). As an example, if the assumed average
price above par for mortgage sales in Case 4 above were to decrease by half (the
average mortgage prices decreases to 103.46%), the estimated total cash flow in
Case 4 would decline by $12,227,000 of which $2,806,000 would relate to 1997.
At September 30, 1996, the Company had cash of $5,917,000. In October, the
Company received cash proceeds of $1,825,000 from the sale or redemption of two
mortgage assets. In addition, the Company will receive funding from the
Finisterra apartments construction loan for the costs paid by the Company, which
amount to approximately $2,500,000. The Company intends to use such funds to pay
for capital improvements on existing apartment communities, to acquire apartment
communities, and to pay dividends and operating expenses.
In November 1996, the Company entered into the Combination Agreement, which
provides for the Transactions, including the acquisitions of the Winton
Properties, Winton & Associates, and the Pima Entities. The Transactions will be
financed by the Company (i) assuming or refinancing approximately $49,311,000 in
mortgage debt attributable to the Winton Properties, (ii) paying an aggregate of
$1,600,000 in cash to the Approving Winton Partnerships for closing costs, and
(iii) exchanging a combination of shares of the Company's Common Stock and LP
Units in an amount equal to $29,359,000. The Company's cash obligations in
connection with the Transactions include (a) approximately $1,500,000 in
transaction costs, (b) $1,600,000 to be paid to the Approving Winton
Partnerships for closing costs, (c) $988,000 for required escrow deposits and
loan and assumption fees relating to the mortgage debt to be assumed or
refinanced, and (d) up to $1,500,000 to be paid to the Approving Winton
Partnerships and thereafter distributed to Winton Partners that are not
accredited investors upon the dissolution and liquidation of the Winton
Partnerships.
The Company anticipates that the Transactions will result in (1) significant
increases in the Company's real estate income, operating, real estate, and
insurance expenses, and depreciation and amortization of real estate, (2) an
increase in interest expense related to real estate, (3) an increase in income
from real estate, (4) a decrease in administrative expenses resulting from the
replacement of management fees previously paid to the Pima Entities for the
management of the Company's properties and operations with salaries to be paid
by the Company to the officers of the Pima Entities who will become employees of
the Company, all based on pro forma combined statements for the nine months
ended September 30, 1996 assuming that the Transactions had occurred on January
1, 1995.
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<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.
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<PAGE>
OPERATING POLICIES AND STRATEGIES
REAL ESTATE ACTIVITIES
Introduction
The Company has developed various business objectives and operating,
acquisition, financing and investment strategies and policies relative to its
real estate activities. These policies and strategies have been determined by
the directors of the Company and may be amended or revised from time to time at
the discretion of the directors without a vote of the stockholders of the
Company.
Business Objectives
The Company's current business objectives are to increase the cash flow and
value of its existing portfolio of apartment communities and to seek continued
growth through the acquisition or development of additional apartment
communities.
Investment Policies
The Company's current portfolio consists of apartment communities in the
southwestern region of the United States and investments in joint ventures that
own apartment communities. The Company intends to continue to focus on apartment
communities in this region. However, future investments, including the
activities described below, are not limited (as to percentage of assets or
otherwise) to any geographic area or any specific type of property. In this
regard, the Company may expand its current geographic focus and may acquire
other types of income-producing properties, including hotels, motels, shopping
centers, and office buildings.
The Company believes that attractive opportunities continue to be available
to acquire apartment communities. The Company may enter into agreements to
acquire newly developed properties upon completion or upon achievement of
certain specified occupancy rates. The Company also intends to develop new
apartment communities for its own account directly or through joint ventures
with others.
The Company may purchase or lease income-producing 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.
While the Company will emphasize equity investments in real estate
properties, it may, in its discretion, invest in mortgages and other real estate
interests or make loans secured by mortgages on or interests in real estate
properties. Its investments in mortgages may include participating or
convertible mortgages if the Company concludes that it may benefit from the cash
flow and/or any appreciation potential in the value of the property. Such
mortgages may be similar to equity participations.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification (see "Information Regarding the Company --
Federal Income Tax Considerations"), the Company also may invest in securities
of concerns engaged in real estate activities or securities of other issuers.
The Company in the future may acquire all or substantially all of the securities
or assets of other REITs or similar entities when it believes such investments
would be consistent with the Company's investment policies. In any event, the
Company does not intend that its investments in securities will require the
Company to register as an "investment company" under the Investment Company Act
of 1940, and the Company intends to divest securities before any such
registration would be required.
Acquisitions
In evaluating acquisitions, the Company considers such factors as (i) the
geographic location and type of property; (ii) the age, construction quality,
condition and design of the property; (iii) the current and projected cash flow
of the property and the potential to increase cash flow 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
71
<PAGE>
economic growth and the tax and regulatory environment of the community in which
the property is located; (vii) the occupancy and demand by tenants for
properties of similar type in the vicinity; and (viii) the prospects for
liquidity through sale, financing, or refinancing of the property.
In acquiring apartment properties, the Company generally seeks properties
that (a) are available at prices below estimated replacement cost after initial
renovations and improvements, or can be developed at a cost that is below the
estimated value upon completion, (b) are well-located in their markets, and (c)
are capable of enhanced performance through intensive asset management and
cosmetic improvements. Operating Strategies
The Company's operating strategies are to (i) achieve and maintain high
occupancy and increase rental rates through effective leasing, reducing turnover
rates and providing quality maintenance and services to maximize tenant
satisfaction; (ii) manage operating expenses and achieve cost reductions through
operating efficiencies and economies of scale generally inherent in the
management of a large property portfolio in a specific region; and (iii)
emphasize regular programs of repairs and capital improvements to enhance the
properties' competitive advantages in their respective markets.
Financing Policies
The Company intends to finance acquisitions with the most appropriate sources
of capital, which may include undistributed funds from operations, the issuance
of equity securities, the sale of assets, bank and other institutional
borrowings, and the issuance of debt securities. Future borrowings by the
Company for acquisitions may be either on a secured or unsecured basis.
The Company also may incur indebtedness for purposes other than the
acquisition of properties when the Company believes it is advisable to do so.
For short-term purposes, the Company, from time to time, may arrange for
short-term borrowings from banks or in the commercial paper market or otherwise.
The Company also may arrange for long-term borrowings from institutional lenders
or through public or private offerings or other means. The Company has no
commitments from anyone with respect to any such borrowings, and there is no
assurance that any such borrowings will be available.
In addition, the Company may incur debt secured by equity investments held in
its portfolio. The Company may invest in properties subject to existing loans
secured by mortgages, deeds of trust or similar liens on the properties, or such
financing and other indebtedness may be incurred in connection with acquiring
investments. The Company also may obtain other mortgage financing for
unleveraged or underleveraged properties or may refinance properties acquired on
a leveraged basis. The mortgage financings may be recourse, non-recourse, or
cross-collateralized. The Company does not have a policy limiting the number or
amount of mortgages that may be placed on any particular property, but mortgage
financing instruments usually limit additional indebtedness on such properties.
The Company also may determine to finance acquisitions through the exchange of
properties or issuance of stock or other securities.
Policies with Respect to Other Activities
The Company may make investments other than as previously described. The
Company has authority to offer its Common Shares or other equity or debt
securities in exchange for property and to repurchase or otherwise reacquire its
Common Shares or any other securities and may engage in such activities in the
future. The Company also may in the future make loans to joint ventures in which
it participates. The Company will not engage in trading, underwriting or the
agency distribution or sale of securities of other issuers. At all times, the
Company intends to make investments in such a manner as to be consistent with
the requirements of the Code to qualify as a REIT unless, because of
circumstances applicable to the Company, changes in the Code (or changes in the
regulations promulgated under the Code), the Company determines that it is no
longer in the best interests of the Company to qualify as a REIT. The Company's
policies with respect to such activities may be reviewed and modified from time
to time by the Company without the vote of the stockholders.
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<PAGE>
Property Management
The Company has entered into property management agreements with Pima Realty
Advisors, Inc. (the "Property Manager") for each of its current apartment
communities. The Property Manager is an affiliate of the Manager. Each property
management agreement, which has a current term through December 31, 1997, was
approved by the Unaffiliated Directors. Under each agreement, the Property
Manager provides the customary property management services at its cost without
profit or distributions to its owners, subject to the maximum limitation of the
prevailing management fee rates for similar properties in the market. The
Property Manager currently manages over 4,400 apartment units, including those
owned by the Company.
The Property Manager has developed computer, accounting, management,
reporting, and control systems to monitor property operations. Detailed annual
budgets are prepared for each property. Monthly, quarterly, and annual reports
are prepared addressing occupancy rates, turnover ratios, budget variances,
delinquencies, and other operating information. Weekly reports are provided for
each property detailing leasing and occupancy activities. The Property Manager
also maintains and analyzes demographic resident data. Prior to entering into a
lease, the Property Manager generally reviews the credit of the prospective
tenant to attempt to minimize bad credit risks and identify tenants having a
poor rental history. This information is intended to enable the Property Manager
to identify and act quickly on specific conditions affecting individual
properties.
Each of the current properties is operated by a staff, including a resident
manager and a maintenance and apartment preparation staff. Policies and
procedures utilized at the property sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection, and eviction standards. As a result of active on-site
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
Individual property lease programs are structured to respond to local market
conditions. The Company attempts to balance rent increases with high occupancy
and stabilized turnover costs. None of the current properties is currently
subject to rent control or rent stabilization regulations. Standard lease terms
stipulate due dates for rent payments, late charges, no offset or withholding
provisions, security deposits and damage reimbursement clauses and other
provisions considered favorable to the Company.
Development of Properties
In March 1996, the Company commenced the development of a luxury apartment
community located in Tempe, Arizona. The community is being built on 20 acres
and is planned for 356 units with an average size of 919 square feet. The total
estimated cost of the community is approximately $21.0 million, and the Company
has obtained a construction loan for $15,350,000. The Company expects to have
the first group of units available for rent in early 1997 and the community
completed in the third quarter of 1997. As of September 30, 1996, the Company
had invested $10.0 million.
The Company has acquired three other parcels of land for future development
of apartment communities. The Company may develop or sell one or more of these
parcels. As of September 30, 1996, the Company had invested $1.0 million.
Current Properties
As of September 30, 1996, the Company owned 25 apartment communities
consisting of 4,480 units located in Arizona, New Mexico, and Texas. All of the
apartment communities are owned directly by the Company with the exception of
six which are owned through joint ventures with affiliates of Citicorp.
The apartment communities are "garden apartments" (two to three story
apartments with ground level parking) with recreational facilities such as pools
and clubhouses. They are well maintained and landscaped and are targeted at
providing an attractive lifestyle at low to moderate rents. Average monthly rent
at September 30, 1996 was $500 per month, with community averages ranging from
$375 to $833.
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The following table sets forth certain information regarding the Company's
existing wholly owned apartment communities.
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
Average Occupancy
Monthly Rent -------------------------
Asset Carrying -------------- 9 Months 12 Months
Value Per 9/30 12/31 Ending Ending
Year No. of Avg. ----------------- ---- ----- ---------- ----------
built units size Amount Unit Sq. ft. 1996 1995 30 Sep. 96 31 Dec. 95
----- ----- ---- ------ ---- ------ ---- ---- ---------- ----------
(Sq. Ft.) (000s) (000s)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly Owned Apartments
Tucson, Arizona
Acacia Hills .......... 1986 64 540 $ 1,278 $ 20.0 $36.99 $437 $429 94% 95%
Casa del Norte ........ 1984 84 525 1,770 21.1 40.12 433 429 93% 93%
Desert Springs ........ 1985 248 590 5,561 22.4 38.03 435 424 92% 85%
Landmark .............. 1986 176 641 4,460 25.3 39.59 426 417 92% 85%
Park Terrace .......... 1986 176 579 3,330 18.9 32.66 433 433 92% 89%
Park Village .......... 1985 60 540 747 12.5 23.06 393 408 95% 93%
Posada del Rio ........ 1980 160 621 3,293 20.6 33.17 449 440 96% 91%
South Point ........... 1984 144 626 2,292 15.9 30.24 375 385 92% 90%
----- ----- ------- ------ ------ ---- ---- -- --
Total Tucson ....... 1,112 582 22,731 20.4 35.13 425 421 93% 89%
===== ===== ======= ====== ====== ==== ==== == ==
Phoenix, Arizona
Contempo Heights* ..... 1978 222 595 6,178 27.8 46.77 456 451 93% 93%
Finisterra** .......... 1995 356 919
----- ----- ------- ------ ------ ---- ---- -- --
Total Phoenix ...... 578 795 6,178 27.8 46.77 456 451 93% 93%
----- ----- ------- ------ ------ ---- ---- -- --
Houston, Texas
Clear Lake Falls ...... 1980 90 1,169 3,989 44.3 37.92 833 810 95% 95%
The Gallery ........... 1968 101 763 2,488 24.6 32.30 546 535 93% 90%
Memorial Bend ......... 1967 124 939 2,636 21.3 22.63 584 584 88% 89%
Nantucket Square ...... 1983 106 1,428 3,531 33.3 23.32 780 752 89% 90%
Prestonwood ........... 1978 156 957 3,447 22.1 23.09 509 509 91% 91%
Riviera Pines ......... 1979 224 717 4,509 20.1 28.07 491 487 94% 92%
----- ----- ------- ------ ------ ---- ---- -- --
Total Houston ...... 801 949 20,600 25.7 27.10 590 584 92% 91%
----- ----- ------- ------ ------ ---- ---- -- --
Albuquerque, N.M.
Dorado Terrace ........ 1986 216 608 6,824 31.6 51.93 519 519 91% 91%
Villa Serena .......... 1986 104 681 3,322 31.9 46.94 561 561 93% 93%
Whispering Sands ...... 1986 228 808 7,164 31.4 38.89 530 521 90% 94%
----- ----- ------- ------ ------ ---- ---- -- --
Total Albuquerque .. 548 705 17,310 31.6 44.80 635 531 91% 94%
----- ----- ------- ------ ------ ---- ---- -- --
Restricted cash & deferred
loan fees .............. 4,036
----- ----- ------- ------ ------ ---- ---- -- --
Total wholly owned
apartments***........... 3,039 741 $70,855 $ 26.4 $36.80 $500 $495 92% 91%
===== ===== ======= ====== ====== ==== ==== == ==
</TABLE>
- -----------
* Acquired in 1995
** Under construction, open for initial occupancy in December 1996
*** Finisterra included in total of units and average unit size, excluded in
all other totals
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<PAGE>
MORTGAGE ASSETS
General
Each of the Company's Mortgage Assets entitle the Company to receive the
excess of the cash flows (the "Net Cash Flows") on pools of residential mortgage
loans and mortgage-backed certificates (collectively the "Mortgage Instruments")
over the required payments on the related series of structured financing (the
"Structured Financing") secured by such Mortgage Instruments. All of the
Mortgage Instruments bear fixed interest rates and a portion of the Structured
Financing bears variable interest rates that are adjusted monthly or quarterly.
The Net Cash Flows result primarily from (i) the favorable spread between the
interest rates on the Mortgage Instruments over those on the Structured
Financing, (ii) reinvestment income on the funds collected on the Mortgage
Instruments before payment on the Structured Financing, (iii) any prepayments of
the Mortgage Instruments that are not necessary for payments on the Structured
Financing, and (iv) net proceeds from early redemption of Structured Financing.
For most of the Mortgage Assets, the Company has the option to redeem the
Structured Financing (generally at par) after the specified conditions are met,
generally when the outstanding balance of the Structured Financing declines
below a specified amount or after a specified date. In such event, the Mortgage
Instruments are sold and the net proceeds after redemption of the Structured
Financing are remitted to the Company.
At September 30, 1996, the carrying value of the Company's Mortgage Assets
was $5.5 million. The Company does not intend to acquire any additional Mortgage
Assets, but plans to hold the existing Mortgage Assets and use the cash flows
for apartment acquisitions, operations, payment of dividends and other corporate
purposes.
Each Structured Financing is issued in series consisting of several classes.
Each series of Structured Financing generally constitutes a nonrecourse
obligation of the Company, which is payable solely from the pledged Mortgage
Instruments. Each series is structured so that the monthly payments on the
pledged Mortgage Instruments, together with the reinvestment income at assumed
rates, are sufficient to make the required interest and principal payments on
the series on a timely basis. Principal and interest payments (including
prepayments) on the Mortgage Instruments are first applied to principal and
interest payments on one or more classes of the Structured Financing according
to the terms of the related indenture, and any excess cash flow is remitted to
the Company.
Factors Affecting Net Cash Flows
The Net Cash Flows represent both the return of and the return on the
investment in the Mortgage Assets. Thus, Mortgage Assets are amortizing assets.
The principal factors which influence the Net Cash Flows of a Mortgage Asset are
as follows:
(1) Other factors being equal, Net Cash Flows in each payment period tend
to decline over the life a Structured Financing, because (a) as normal
amortization of principal and principal prepayments occur on the Mortgage
Instruments, the principal balances of the Mortgage Instruments are reduced;
(b) the principal payments on the Mortgage Instruments generally are first
used to pay the principal on the earlier, lower-yielding classes of such
Structured Financing, thereby resulting in a reduction of the favorable
spread between the interest rate on the Mortgage Instruments and the interest
rates on the outstanding classes, and (c) the higher coupon Mortgage
Instruments are likely to be prepaid faster, reinforcing the same effect.
(2) The rate of prepayments on the Mortgage Instruments significantly
affects the Net Cash Flows. Because prepayments shorten the life of the
Mortgage Instruments, a higher rate of prepayments normally reduces overall
Net Cash Flows. The rate of prepayments is affected by mortgage interest
rates and other factors. Generally, increases in mortgage interest rates
reduce prepayment rates, while decreases in mortgage interest rates increase
prepayment rates. In addition, prepayments occurring during the early life of
a Structured Financing have a more negative effect on Net Cash Flows than the
same volume of prepayments have at a later date.
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<PAGE>
(3) With respect to variable rate classes of the Structured Financing,
increases in the interest rate index increase the interest payments and thus
reduce or, in some instances, eliminate the Net Cash Flows, while decreases
in the index decrease the interest payments and thus increase the Net Cash
Flows.
(4) The interest rate at which the monthly cash flow from the Mortgage
Instruments may be reinvested until payment dates for the Structured
Financing influences the amount of the Net Cash Flows unless such
reinvestment income is not paid to the owner of the Mortgage Asset.
(5) The administrative expenses, if any, of a series of Structured
Financing may increase as a percentage of Net Cash Flows where some of such
administrative expenses are fixed. In later years, it can be expected that
fixed expenses will exceed the available cash flow. Although reserve funds
generally are established to cover such shortfalls, there can be no assurance
that such reserves will be sufficient to cover such shortfalls. The Company
may be liable for administrative expenses relating to a series of Structured
Financing if reserves prove to be insufficient. Moreover, any unanticipated
liability or expenses with respect to the Structured Financing could
adversely affect Net Cash Flows.
(6) The Net Cash Flows from the early redemptions of a Mortgage Asset are
determined by the principal balance and market value of the Mortgage
Instruments. Generally, lower mortgage interest rates result in higher market
value for the Mortgage Instruments. Furthermore, when a Mortgage Asset is
redeemed, there will not be any future Net Cash Flows from that Mortgage
Asset
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
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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 "Information
Regarding the Company -- Federal Income Tax Considerations -- Taxation of the
Company." There is no comparable safeguard that could protect against REIT
disqualification as a result of the Company's failure to satisfy the 30% income
limitation.
The Company anticipates that its gross income will continue to consist
principally of income that satisfies the 75% income test. The composition and
sources of the Company income should allow the Company to satisfy the income
tests during each year of its existence. Certain short-term reinvestments,
however, may generate qualifying income for purposes of the 95% income test but
nonqualifying income for purposes of the 75% income test, and certain hedging
transactions could give rise to income that, if excessive, could result in the
Company's disqualification as a REIT for failing to satisfy the 30% income
limitation, the 75% income test, and/or the 95% income test. The Company intends
to monitor its reinvestments and hedging transactions closely to attempt to
avoid disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75% of the
value of the Company's assets must be cash and cash items (including
receivables), federal government securities and qualifying real estate assets.
This requirement is intended to assure that the bulk of REIT investments are
either equity or mortgage interests in real property. Qualifying real estate
assets include interests in real property, and mortgages, equity interests in
other REITs, any stock or debt instrument for so long as the income therefrom is
qualified temporary investment income and, subject to certain limitations,
interests in Real Estate Mortgage Investment Conduits ("REMICs"). The balance of
the Company's assets may be invested without restriction, except that holdings
of the securities of any one non-governmental issuer may not exceed 5% of the
value of the Company's assets or 10% of the outstanding voting securities of
that issuer.
If the Company fails to satisfy the 75% asset test at the end of any quarter
of its taxable year as a result of its acquisition of securities or other
property during that quarter, the failure can be cured by a disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company will take such action as may be required to cure any failure to
satisfy the 75% asset test within 30 days after the close of any quarter. The
Company may not be able to cure any failure to satisfy the 75% asset test,
however, if assets that the Company believes are qualifying assets for purposes
of the 75% asset test are later determined to be nonqualifying assets.
Distributions
Each taxable year the Company must distribute as dividends to its
stockholders an amount at least equal to (i) 95% of its REIT taxable income
(determined before the deduction of dividends paid and excluding any net capital
gain), plus (ii) 95% of the excess of its net income from foreclosure property
over the tax imposed on such income by the Code, less (iii) any excess noncash
income (as determined under the Code). The distribution requirement does not
compel the Company to distribute that portion, if any, of its cash flow that
exceeds the REIT taxable income.
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in the
following year if certain guidelines are followed. Further, if the Company fails
to meet the 95% distribution requirement as a result of an adjustment to the
Company's tax returns by the Internal Revenue Service ("IRS"), the Company may,
if the deficiency is not due to fraud with intent to evade tax or a willful
failure to file a timely tax return, retroactively cure the failure by paying a
deficiency dividend to stockholders and certain interest and penalties to the
IRS. The Company intends to make distributions to its stockholders on a basis
that will allow the Company to
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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
"Information Regarding the Company -- Federal Income Tax Considerations --
Status of the Company as a REIT."
The Company had a net operating loss carryforward for income taxes (the
"NOL") at December 31, 1995 of approximately $75 million. Under REIT tax rules,
the Company is allowed to offset taxable income (except for Excess Inclusion
Income) by the available NOL and thus, under most circumstances, is not
currently required to make distributions to stockholders except for Excess
Inclusion Income. The NOL expires in 2009 (1999 for state tax purposes).
Ownership of the Company
Shares of the Company's Common Stock must be held by a minimum of 100 persons
for at least 335 days in each taxable year after the Company's first taxable
year. Further, at no time during the second half of any taxable year after the
Company's first taxable year may more than 50% of the Company's shares be owned,
actually or constructively, by five or fewer individuals (including pension
funds and certain other types of tax-exempt entities). To evidence compliance
with these requirements, the Company is required to maintain records that
disclose the actual ownership of its outstanding shares. Each year, in order to
satisfy that requirement, the Company will demand written statements from record
holders owning designated percentages of Common Stock disclosing, among other
things, the identities of the actual owners of such shares. The Company's
Articles of Incorporation contain repurchase provisions and transfer
restrictions designed to prevent violation of the latter requirement. Therefore,
the Company believes that its shares of Common Stock currently are owned by a
sufficient number of unrelated persons to allow the Company to satisfy the
ownership requirements for REIT qualification.
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies and elects to be treated
as a REIT under the Code, it generally will not be subject to federal income tax
on that portion of its taxable income that is distributed to its stockholders in
or with respect to that year. Regardless of distributions to stockholders,
however, the Company may become subject to a tax on certain types of income.
The Company uses the calendar year both for tax purposes and for financial
reporting purposes. Due to the differences between tax accounting rules and
generally accepted accounting principles, the Company's REIT Taxable Income will
vary from its net income for financial reporting purposes.
TAX CONSEQUENCES OF COMMON STOCK OWNERSHIP
The federal income tax consequences of ownership in the Company's Common
Stock is a complex matter and may vary depending on the income tax status of the
stockholder. Accordingly, the following discussion is intended to be general in
nature. Stockholders should consult their own tax advisors regarding the income
tax considerations with respect to their investments in the Company.
Dividend Income
Distributions to stockholders out of the Company's current or accumulated
earnings and profits will be taxable as "portfolio income" in the year received
and not as income from a passive activity. Therefore, REIT dividends may not be
used to offset a stockholder's passive losses. With respect to any dividend
payable to stockholders of record as of a specified date prior to the end of the
year, that dividend is deemed to have been received by the stockholder on
December 31 if the dividend is paid in January of the following calendar year.
The Company's dividends are not eligible for the dividends-received deduction
for corporations. If the Company's total distributions for a taxable year exceed
its current and accumulated earnings and
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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 1995 consisted of ordinary income
of $0.29 and return of capital of $1.71 per share.
Excess Inclusion Rule
Ownership by the Company of residual interests in REMICs may adversely affect
the federal income taxation of the Company and of certain stockholders to the
extent those residual interests generate "excess inclusion income." The
Company's excess inclusion income during a calendar quarter generally will equal
the excess of its taxable income from residual interests in REMICs over its
"daily accruals" with respect to those residual interests for the calendar
quarter. The daily accruals are calculated by multiplying the adjusted issue
price of the residual interest by 120 percent of the long-term federal interest
rate in effect on the REMIC's startup date. It is possible that the Company will
have excess inclusion income without associated cash. In taxable years in which
the Company has both a net operating loss and excess inclusion income it will
still have to report a minimum amount of taxable income equal to its excess
inclusion income. In order to maintain its REIT status, the Company will be
required to distribute at least 95 percent of its taxable income, even if its
taxable income is comprised exclusively of excess inclusion income and the
Company otherwise has a net operating loss.
In general, each stockholder is required to treat the stockholder's allocable
share of the portion of the Company's "excess inclusions" that is not taxable to
the Company as an "excess inclusion" received by such stockholder. The portion
of the Company's dividends that constitute excess inclusions typically will rise
as the degree of leveraging of the Company's activities increase. Therefore, all
or a portion of the dividends received by the stockholders may be excess
inclusion income. Excess inclusion income will constitute unrelated business
taxable income for tax-exempt entities and may not be used to offset deductions
or net operating losses from other sources for most other taxpayers. For 1995,
the entire ordinary income portion ($0.29 per share) of the dividend was excess
inclusion income.
TAX-EXEMPT ORGANIZATIONS AS STOCKHOLDERS
The Code requires a tax-exempt stockholder of the Company to treat as
unrelated business taxable income its allocable share of the Company's excess
inclusions. The Company is likely to receive excess inclusion income. See
"Excess Inclusion Rule," above. The Company's Common Stock may not be held by
tax-exempt entities which are not subject to tax on unrelated business taxable
income.
TAXATION OF FOREIGN STOCKHOLDERS
Distributions of cash generated by the Company in its operations that are
paid to foreign persons generally will be subject to United States withholding
tax rate at a rate of 30 percent or at a lower rate if a foreign person can
claim the benefit of a tax treaty. Notwithstanding the foregoing, distributions
made to foreign stockholders will not be subject to treaty withholding
reductions to the extent of their allocable shares of the portion of the
Company's excess inclusions that are not taxable to the Company for the period
under review. It is expected that the Company will continue to have excess
inclusions. Distributions to foreign persons of cash attributable to gain on the
Company's sale or exchange of real properties, if any, generally will be subject
to full United States taxation and withholding. If 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.
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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.
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 19 apartment
communities. At September 30, 1996, the mortgage loans totalled $49.6 million,
of which $46.0 million bears fixed interest rates that averaged 8.6% and $3.6
million bears a variable interest rate at the LIBOR rate plus 2.25%. In
addition, each of the Company's joint ventures has obtained a first mortgage
loan. The mortgage loans generally are non-recourse to the Company and are not
cross-collateralized.
The Company also had outstanding short-term borrowings of $2.0 million at
September 30, 1996 that were secured by Mortgage Assets with a total carrying
value of $3.3 million. Under the short-term borrowings, if the value of the
collateral (as estimated by the lender) declines, the Company is required to
provide additional collateral or reduce the borrowed amount.
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."
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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 five full-time salaried employees.
PROPERTIES
The principal executive offices of the Company and the Manager are located at
335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone (520) 748-2111.
See "Information Regarding the Company -- Operating Policies and Strategies
- -- Real Estate Activities -- Current Properties."
LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party or to which
any of its properties are subject other than routine litigation incident to the
Company's business, none of which is expected to have a material adverse effect
on the Company's operations.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 52 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
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
John J. Gisi 51 Director
Raymond L. Horn 67 Director
Frederick C. Moor 65 Director
</TABLE>
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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 has served as the President of one of the general partners
of the Manager since its organization and has been a director and principal
stockholder of Pima Realty Advisors, Inc. (the "Property Manager") since its
organization in November 1993. 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
since its organization and has been the President, a director and principal
stockholder of the Property Manager 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 has served as the President of one of the general
partners of the Manager since its organization and a director and principal
stockholder of the Property Manager since its organization in November 1993.
From 1986 to 1987, Mr. Chan served as an officer of The Estes Co.
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 with 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.
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.
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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. The Company
currently has five salaried employees.
Directors and executive officers of the Company who are not salaried
employees of the Company are required to devote only so much of their time to
the Company's affairs as is necessary or required for the effective conduct and
operation of the Company's business. Because the Management Agreement between
the Company and the Manager provides that the Manager will assume principal
responsibility for managing the day-to-day affairs of the Company, the
non-salaried officers of the Company, in their capacities as such, are not
expected to devote substantial portions of their time to the affairs of the
Company. However, in their capacities as officers or employees of general
partners of the Manager, they will devote such portion of their time to the
affairs of the Manager as is required for the performance of the duties of the
Manager under the Management Agreement.
MEETINGS AND COMMITTEES
During the year ended December 31, 1995, the Board of Directors of the
Company held a total of six meetings. No director attended fewer than 75% of the
meetings of the Board of Directors.
The Company's Bylaws authorize the Board of Directors to appoint among its
members an executive committee, an audit committee and other committees. A
majority of the members of any committee so appointed must be Unaffiliated
Directors. The Board of Directors has appointed an Audit Committee and a
Compensation Committee. Messrs. Gisi and Horn serve as the members of the
Company's Audit Committee and Compensation Committee. The Audit Committee
reviews the annual financial statements, any significant accounting issues and
the scope of the audit with the Company's independent auditors and is available
to discuss with the auditors any other accounting and audit related matters
which may arise during the year. The Audit Committee met separately at one
formal meeting during 1995 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. As there were no
changes to the Management Agreement or the Property Management Agreements for
1996, the Compensation Committee did not meet separately during 1995. The Board
of Directors has not appointed any other committees.
CERTAIN RELATIONSHIPS AND RELATED 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. The
Company is a party to a management agreement (the "Management Agreement") with
Pima Mortgage (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 have been directors or officers
of general partners of the Manager since its organization. For further
information respecting these individuals, see "Information Concerning Directors
and Executive Officers of the Company."
The duties of the Manager under the Management Agreement include 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 receives 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 is paid
monthly with adjustments made quarterly. The Manager also performs certain
analysis and other services in connection with the administration of mortgage
securities with respect to which the Company acquires mortgage interests. For
such services, the Company reimburses the Manager for the fees paid under the
Subcontract Agreement described below
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and pays 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 1995, the Company paid the Manager management fees of
approximately $374,000 and administration fees of approximately $216,000. The
payment of such fees was unanimously approved by the Unaffiliated Directors.
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 1995, the Company paid Messrs. Grove, Parise
and Chan $266,667 each based on the total dividends of $2.00 per share paid in
1995. All of the options and SARs are currently exercisable. The options will
expire on December 16, 1998, if not terminated earlier pursuant to the terms of
the agreements.
In the event that the Management Agreement is terminated by the Company or is
not renewed by the Company on terms at least as favorable to the Manager as the
current Management Agreement other than as a result of a termination by the
Company for cause (as specified in the Management Agreement), the Manager will
be entitled to receive from the Company the management fee that would have been
payable by the Company to the Manager pursuant to such Management Agreement
based on the investments made by the Company prior to the date 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 has granted the Company a right of first refusal, for as long as
the Manager or an affiliate of the Manager acts as the Company's manager
pursuant to the Management Agreement or any extension thereof, to purchase any
assets held by the Manager or its affiliates prior to any sale, conveyance or
other transfer, voluntarily or involuntarily, of such assets by the Manager or
its affiliates.
The Company has entered into 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 has a current term through
December 31, 1997, was approved by the Unaffiliated Directors. Under the
agreement, the Property Manager provides 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. The Property Manager currently manages approximately 5,000 apartment
units. In 1995, the Company paid the Property Manager $417,000 which amounted to
3% of the total revenues of the apartments.
The Company owns certain mortgage interests with respect to structured
financing issued by American Southwest Holdings, Inc. ("ASH"). An affiliate of
ASH performs the customary administration services and receives fees for such
services of $12,500 per year for each series of structured financing. The
Company believes that the fees charged by ASH are comparable to those 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.
In 1995, Messrs. Grove, Chan, Gisi, and Webber exercised options to purchase
a total of 50,496 shares of the Company's Common Stock by executing full
recourse promissory notes totaling $653,000 to the Company. The notes are
secured by the shares of Common Stock issued and bear interest, payable
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monthly, at the prime rate plus 1%. The notes are due on December 31, 1996 and
can be repaid by delivering to the Company shares of Common Stock owned by the
individuals based on the then market price of the Common Stock.
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, 1995.
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> <C>
Jon A. Grove (1) 1995 $180,431 -- --
Chairman, President, 1994 251,747 -- --
and Chief Executive 1993 284,520 133,333(2) --
Officer
Frank S. Parise, Jr.(1) 1995 $180,431 -- --
Vice Chairman, 1994 251,747 -- --
Executive Vice 1993 285,393 134,628(2) --
President,
and Chief
Administrative
Officer
Joseph C. Chan(1) 1995 $180,431 -- --
Director, Executive 1994 251,747 -- --
Vice President, 1993 284,520 133,333(2) --
Secretary, and
Chief Operating
Officer
Dale A. Webber 1995 $108,447 -- --
Vice President 1994 108,447 -- 8,000
1993 108,150 -- --
Roger A. Karber 1995 $100,000 $ 15,000
Vice President
</TABLE>
- -----------
(1) Messrs. Grove, Parise, and Chan are not salaried employees of the Company
and do not receive any cash or cash equivalent compensation directly from
the Company. They receive 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.
(2) Includes the stock options and SARs granted on December 16, 1993 in
connection with the renewal of the Management Agreement for 1994.
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The following tables set forth certain stock option information concerning
the officers included in the above table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS/ OPTIONS/SARS
SARS GRANTED TO EXERCISE POTENTIAL
GRANTED EMPLOYEES IN OR BASE EXPIRATION REALIZABLE
(#) FISCAL YEAR PRICE DATE VALUE
----- ------------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
Jon A. Grove None N/A N/A N/A N/A
Frank S. Parise, Jr. None N/A N/A N/A N/A
Joseph C. Chan None N/A N/A N/A N/A
Dale A. Webber None N/A N/A N/A N/A
Roger A. Karber None N/A N/A N/A N/A
</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 18,065 $79,033 138,581 $970,000
-- --
Frank S. Parise, Jr. -- -- 140,287 986,500
-- --
Joseph C. Chan 18,065 79,033 138,581 970,000
-- --
Dale A. Webber 5,334 36,003 1,306 4,521
2,624 12,331
Roger A. Karber None N/A N/A N/A
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors performs the functions
of making recommendations to the Board concerning the Company's compensation
policies applicable to its executive officers. Messrs. Grove, Parise, and Chan
serve as both directors and the principal executive officers of the Company. All
compensation matters relating to the Company's principal executive officers,
however, are decided by the Unaffiliated Directors, consisting of Messrs.
Baldwin, Gisi, Horn, and Moor. The principal executive officers make
recommendation to the Board concerning the compensation of other executive
officers of the Company. None of the Unaffiliated Directors are, or have ever
been, officers or employees of the Company or any of its subsidiaries. Messrs.
Grove, Parise, and Chan abstain from participating in the deliberations of the
Board of Directors concerning the approval of the Management Agreement, the
Property Management Agreements, or any other matters relating to their
compensation. In addition, during 1995, 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.
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<PAGE>
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 1995, the Company paid an annual
director's fee to each Unaffiliated Director equal to $24,000, 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.
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 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
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<PAGE>
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.
As of December 31, 1995, options to purchase 47,944 shares of Common Stock
were outstanding and options to purchase 5,901 shares were available for grant
under the Plans.
PRINCIPAL STOCKHOLDERS
As of December 31, 1996, there were outstanding 3,142,484 shares of Common
Stock. The following table sets forth the beneficial ownership of Common Stock
of the Company as of December 31, 1996, 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 of December 31, 1996 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.
NAME AND NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL(1)
- ---------------- -------- --------
Jon A. Grove ............................................ 146,191 4.5%
Joseph C. Chan .......................................... 146,472 4.5
Frank S. Parise, Jr. .................................... 119,295 3.7
Earl M. Baldwin ......................................... 3,477 (2)
John J. Gisi ............................................ 11,658 (2)
Raymond L. Horn ......................................... 5,988 (2)
Frederick C. Moor ....................................... 3,378 (2)
All directors and executive officers as a
group (10 persons) .................................. 452,411 13.0%
- -----------
(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 December 31, 1996 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.
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<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
The Company's Common Stock is listed and principally traded on the Amex under
the symbol the "ASR." The following table sets forth for the periods indicated
the high and low sales prices of the Company's Common Stock as reported by the
Amex and the cash dividends paid per share of the Company's Common Stock for the
periods indicated.
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 ................... 22-1/2 18-7/8 0.50
1997
First quarter
(Through March 24, 1997) ....... 23-5/8 20-1/4 --
On March 24, 1997, the closing sales price for shares of the Company's Common
Stock on the Amex Composite Tape was $21-7/8 and the approximate number of
holders of Common Stock was 2,000.
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 3,147,150 shares of
Common Stock were issued and outstanding as of January 31, 1997. Upon
consummation of the Transactions, an aggregate of 1,980,000 shares of the
Company's Common Stock or LP Units convertible into Common Stock will be issued,
representing approximately 39% of the voting power of the Company. See "The
Transactions."
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 shares of Common Stock to be issued pursuant to the Exchange Offer, the
Asset Transfer, the Associates Merger, and the Pima Mergers will not be
registered under the Securities Act. In connection with the Exchange Offer and
the Asset Transfer, the Company will enter into registration agreements,
requiring the Company to file a registration statement covering the resale of
shares of Common Stock issued in the Exchange Offer and a registration statement
covering the resale of shares of Common Stock to be issued upon the conversion
of LP Units distributed in the Asset Transfer into shares of Common
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<PAGE>
Stock. See "The Transactions -- The Exchange Offer -- Exchange Offer
Registration Agreement and Listing of Common Stock" and "The Transactions -- The
Asset Transfer -- Asset Transfer Registration Agreement and Listing of Common
Stock." The shares of Common Stock to be issued pursuant to the Transactions
will have the same rights as described above. All of the outstanding shares of
the Common Stock are, and the shares of Common Stock to be issued pursuant to
the Transactions, when issued in accordance with the terms of the Exchange
Offer, the Asset Transfer, the Associates Merger, and the Pima Mergers will be,
fully paid and non-assessable.
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.
INFORMATION REGARDING PIMA MORTGAGE
GENERAL
Pima Mortgage is an Arizona limited partnership whose three corporate
partners are JG Mortgage, FP Mortgage, and JC Mortgage. Pima Mortgage engages in
the business of advising the Company with respect to various aspects of the
Company's business and operations, managing the overall business and operations
of the Company and representing the Company in its dealings with third parties.
Jon A. Grove, Frank S. Parise, Jr., and Joseph C. Chan have been directors or
officers of general partners of Pima Mortgage since its organization.
TERMS OF THE MANAGEMENT AGREEMENT
The Company and Pima Mortgage are parties to a management agreement (the
"Management Agreement") with a term expiring on December 31, 1997, subject to
annual extensions between the Company and Pima Mortgage. The Management
Agreement may be terminated by the Company without cause at any time upon 60
days written notice by a majority vote of its Unaffiliated Directors or by a
vote of the holders of a majority of the outstanding shares of Common Stock. In
addition, the Company has the right to terminate the Management Agreement for
cause in the event of (i) a breach by Pima Mortgage of any provision contained
in the Management Agreement occurs; (ii) an order for relief is entered with
respect to Pima Mortgage in an involuntary case under federal or state
bankruptcy, insolvency or other similar laws; (iii) Pima Mortgage (a) ceases or
admits in writing its inability to pay its debts as they become due, or makes a
general assignment for the benefit of or enters into an arrangement with
creditors, (b) applies for or consents to the appointment of a receiver,
trustee, assignee, custodian, liquidator or sequestrator, or proceedings seeking
such appointment are commenced, (c) authorizes or files a voluntary petition in
bankruptcy, or applies for or consents to the application of any bankruptcy,
reorganization, arrangement, readjustment of debt, insolvency, dissolution,
liquidation or other similar law, or proceedings to such end are instituted
against Pima Mortgage, or (d) permits or suffers all or any substantial part of
its properties or assets to be sequestered or attached by court order; or (iv)
if any two of Messrs. Grove, Parise, or Chan shall cease to be a director,
officer, or shareholder of at least one partner of Pima Mortgage or if they
collectively cease to control the majority of the voting decisions of Pima
Mortgage.
Pima Mortgage at all times is subject to the supervision of the Company's
Board of Directors and has only such functions and authority as the Company may
delegate to it. Pima Mortgage is responsible for the day-to-day operations of
the Company and performs such services and activities relating to the assets and
operations of the Company as may be appropriate, including:
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<PAGE>
(a) serving as the Company's consultant with respect to formulation of
investment criteria by the Board of Directors;
(b) representing the Company in connection with the purchase of assets;
(c) structuring financings of the Company;
(d) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by Pima Mortgage;
(e) providing the executive and administrative personnel, office space
and services required in rendering services to the Company;
(f) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by Pima Mortgage and the Board of Directors, including the collection of
revenues, the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such
administrative functions;
(g) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies
and to maintain effective relations with such holders;
(h) counseling the Company in connection with policy decisions to be
made by the Board of Directors; and
(i) upon request by and in accordance with the direction of the Board
of Directors, investing or reinvesting any money of the Company.
MANAGEMENT FEE
Pima Mortgage receives an annual management fee equal to 3/8 of 1% of the
"Average Invested Assets" of the Company and its subsidiaries for each year. The
Management Agreement provides for a quarterly management fee, although the Board
of Directors has approved payment of the management fee monthly, with
adjustments made quarterly. The term "Average Invested Assets" for any period
means the average of the aggregate book value of the consolidated assets of the
Company and its subsidiaries before reserves for depreciation or bad debts or
other similar non-cash reserves. In the event that the Management Agreement is
terminated by the Company or is not renewed by the Company on terms at least as
favorable to Pima Mortgage as the current Management Agreement, other than as a
result of a termination by the Company for cause (as specified above and defined
in the Management Agreement), Pima Mortgage will be entitled to receive from the
Company the management fee that would have been payable by the Company to Pima
Mortgage pursuant to such Management Agreement based on the investments made by
the Company prior to the date on which the Management Agreement is so terminated
(or not renewed) for the 12 full fiscal quarters beginning on the date of such
termination (or failure to renew) as more fully described in the Management
Agreement.
The management fee must be calculated by Pima Mortgage within 45 days after
the end of each quarter, and such calculation must be promptly delivered to the
Company for payment within 60 days of the end of each fiscal quarter, subject to
adjustment at the end of the year.
For information relating to management fees, see Note 7 to the Company's
consolidated financial statements.
ADMINISTRATION FEES
Pima Mortgage also performs certain analysis and other services in connection
with the administration of the Structured Financing relating to the Company's
Mortgage Assets, including working with the Master Servicer, if any, and the
Company or the other Issuer to ensure proper servicing and administration. For
such activities, the Company currently pays Pima Mortgage an annual
administration fee of $10,000 for each Mortgage Asset acquired before 1991,
$20,000 for the total Mortgage Assets acquired in 1991, and $20,000 for the
total Mortgage Assets acquired in 1992.
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<PAGE>
EXPENSES
Pima Mortgage is required to pay employment expenses of its personnel, rent,
telephone, utilities and other office expenses (except those relating to a
separate office or office facilities, if any, maintained by the Company or its
subsidiaries, if any), and certain travel and miscellaneous administrative
expenses of Pima Mortgage. The Company is required to pay all other expenses of
operation (as set forth in the Management Agreement) up to an amount per year
with respect to certain of such expenses equal to the greater of 2% of the
Company's Average Invested Assets or 25% of the Company's Net Income for that
year. Expenses in excess of such amount will be paid by Pima Mortgage, unless
the Unaffiliated Directors determine that, based upon unusual or non-recurring
factors, a higher level of expenses is justified for such fiscal year. In the
event that the Company's operating expenses for any fiscal year total less than
the greater of 2% of the Company's Average Invested Assets or 25% of its Net
Income for that fiscal year, then, within 120 days after the end of such fiscal
year, with the consent of the Unaffiliated Directors, Pima Mortgage will be
repaid all compensation previously reimbursed by Pima Mortgage to the Company on
account of operating expenses having exceeded the greater of 2% of its Average
Invested Assets or 25% of its Net Income during one or more prior fiscal years,
except that the amount of any repayment of compensation to Pima Mortgage may
not, when added to all other operating expenses of the Company for such fiscal
year, exceed the greater of 2% of the Company's Average Invested Assets or 25%
of its Net Income for that fiscal year. Pima Mortgage's right to repayment of
previously reimbursed compensation will be cumulative, and the amount of
previously reimbursed compensation which has not been repaid to Pima Mortgage
will be carried forward to and be repaid to Pima Mortgage in subsequent fiscal
years. Prior to any such repayment, the Unaffiliated Directors must determine
that the Company's operating expenses which were in excess of the limitation set
forth above in one or more prior fiscal years were reasonable when incurred in
connection with the operations of the Company.
RIGHT OF FIRST REFUSAL
Pima Mortgage has granted the Company a right of first refusal, for as long
as Pima Mortgage or an affiliate of Pima Mortgage acts as the Company's manager
pursuant to the Management Agreement or any extension thereof, to purchase any
assets held by Pima Mortgage or its affiliates prior to any sale, conveyance or
other transfer, voluntarily or involuntarily, of such assets by Pima Mortgage or
its affiliates.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, Pima Mortgage will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. Pima Mortgage,
the partners of Pima Mortgage and any of their partners, directors, officers,
stockholders, and employees will not be liable to the Company, any other Issuer,
any subsidiary of the Company, the Unaffiliated Directors, the Company's
stockholders or any subsidiary's stockholders for acts performed in accordance
with and pursuant to the Management Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence, or reckless
disregard of their duties under the Management Agreement. The Company has agreed
to indemnify Pima Mortgage, the partners of Pima Mortgage and any of their
partners, directors, officers, stockholders, and employees, with respect to all
expenses, losses, damages, liabilities, demands, charges, and claims arising
from any of their acts or omissions not constituting bad faith, willful
misconduct, gross negligence, or reckless disregard of duties, performed in good
faith in accordance with and pursuant to the Management Agreement. The
Management Agreement does not limit or restrict the right of Pima Mortgage, the
partners of Pima Mortgage or any of their partners, directors, officers,
stockholders, employees, or affiliates from engaging in any business or
rendering services of any kind to any other person, including the purchase of,
or rendering advice to others purchasing, assets which meet the Company's
policies and criteria, except that Pima Mortgage (but not its partners or any of
their partners, directors, officers, stockholders, employees or agents) is not
permitted to provide any such services to any residential mortgage REIT other
than the Company and its subsidiaries. Pima Mortgage has the right to
subcontract with third parties, including affiliates of Pima Mortgage, to
provide services to Pima Mortgage and the Company. Any payment of fees to such
third parties will be the sole responsibility of Pima Mortgage.
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THE SUBCONTRACT AGREEMENT
Pima Mortgage and American Southwest Financial Services ("ASFS"), Inc. are
parties to a Subcontract Agreement pursuant to which ASFS performs certain
services for Pima Mortgage in connection with the administration of the
Structured Financing issued by any Issuer affiliated with ASFS with respect to
which the Company owns the Mortgage Asset. Under the Subcontract Agreement, ASFS
charges an administration fee for each series of Structured Financing of $12,500
per year. ASFS is a wholly owned subsidiary of American Southwest Holdings,
Inc., a privately held Arizona corporation engaged in the business of issuing
and administering the Structured Financing. Jon A. Grove, Chairman and President
of the Company, owns 12.5% of American Southwest Holdings, Inc.
The Subcontract Agreement extends through December 31, 1997. Thereafter,
successive extensions, each for a period not to exceed one year, may be made by
agreement between Pima Mortgage and ASFS.
The Subcontract Agreement may be terminated by either party upon six months
prior written notice, except that Pima Mortgage may terminate the Subcontract
Agreement at any time upon 60 days written notice in the event the Company no
longer retains Pima Mortgage. In addition, Pima Mortgage has the right to
terminate the Subcontract Agreement upon the happening of certain specified
events, including a breach by ASFS of any provision contained,in the Subcontract
Agreement.
The Company has agreed to indemnify and hold harmless ASFS, its affiliates
and their officers and directors from any action or claim brought or asserted by
any party by reason of any allegation that ASFS or its affiliates is an
affiliate or is otherwise accountable or liable for the debts or obligations of
the Company or its affiliates. The Company has no affiliations, agreements or
relationships with ASFS or its affiliates, except for (i) the Subcontract
Agreement with ASFS, (ii) the indemnification granted by the Company to ASFS,
its affiliates and their officers and directors against certain liabilities,
(iii) one common director and officer, and (iv) the indirect ownership by a
general partner of Pima Mortgage of 12.5% of the voting stock of American
Southwest Holdings, Inc.
INFORMATION REGARDING PIMA REALTY
The Company has entered into property management agreements with Pima Realty
for each of its current properties. Pima Realty is an affiliate of Pima
Mortgage. Each property management agreement, which has a current term through
December 31, 1997, was approved by the unaffiliated directors of the Company's
Board of Directors. Under the agreements, Pima Realty 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. Pima Realty currently manages over 4,400
apartment units, including those owned by the Company.
Pima Realty has developed computer, accounting, management, reporting, and
control systems to monitor property operations. Detailed annual budgets are
prepared for each property. Monthly, quarterly, and annual reports are prepared
addressing occupancy rates, turnover ratios, budget variances, delinquencies,
and other operating information. Weekly reports are provided for each property
detailing leasing and occupancy activities. Pima Realty also maintains and
analyzes demographic resident data. Prior to entering into a lease, Pima Realty
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 Pima Realty 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 on-site
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
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INFORMATION REGARDING THE WINTON PARTNERSHIPS
GENERAL
The Winton Partnerships consist of 14 limited partnerships organized under
the laws of Washington or Texas that own and operate 13 apartment communities
and one office property in Washington or Texas. Don W. Winton is the general
partner of each of the Winton Partnerships, which are as follows: First Aspen
Court Associates, L.P., a Texas limited partnership; First Briar Park
Associates, a Washington limited partnership; First Chelsea Park Associates,
L.P., a Texas limited partnership; First Appian Way Associates, L.P., a
Washington limited partnership; First Greenwood Creek Associates, L.P., a Texas
limited partnership; First Highlands Associates, L.P., a Texas limited
partnership; First Marymont Associates, L.P., a Texas limited partnership; First
Montfort Associates, L.P., a Texas limited partnership; First Riverway
Associates, L.P., a Washington limited partnership; First Springfield
Associates, L.P., a Texas limited partnership; First Timbercreek Landing
Associates, L.P., a Washington limited partnership; Campus Development
Associates Limited Partnership, a Washington limited partnership; Campus Commons
Associates -- Limited Partnership, a Washington limited partnership; and First
Pacific South Center Associates, L.P., a Washington limited partnership.
Each of the Winton Partnerships individually owns and operates an apartment
community or, in the case of First Pacific South Center Associates, L.P., owns
and operates an office building. For purposes of the acquisition of the Winton
Properties, each of the Winton Properties has been assigned a deemed value that,
subject to certain adjustments, represents the acquisition price of each Winton
Property to the Company.
EXCHANGE VALUES
Each of the Winton Partnerships has been assigned a deemed value that,
subject to certain adjustments and reduction for debts assumed (after such
adjustments, the "Exchange Value"), will determine the number of LP Units,
shares of Common Stock, or the amount of cash to be received by the Winton
Partners of such Winton Partnership in the Asset Transfer or the Exchange Offer.
The Exchange Values for each Winton Partnership will be equal to the Deemed
Value allocated to such Winton Partnership (a) minus, as of the Closing Date,
(i) the Mortgage Debt applicable to such Winton Partnership, (ii) the monetary
liens applicable to such Winton Partnership, and (iii) closing costs applicable
to such Winton Partnership and (b) plus or minus, as appropriate, the Prorations
applicable to such Winton Partnership. See "The Transactions -- The Asset
Transfer -- Mortgage Debt" and "The Transactions -- The Asset Transfer --
Prorations."
The total Exchange Values assigned to the Winton Partnerships were determined
by arms-length negotiations between Mr. Winton and ASR based on the agreed fair
market values of the properties owned by the Winton Partnerships and the debt
thereon to be assumed or repaid by Heritage LP, and the Exchange Values
allocated to each Winton Partnership were determined by such negotiations,
subject to the input of Mr. Winton, which was agreed to by ASR. Throughout the
course of such negotiations, the Company reviewed and considered various factors
relating to each Winton Property including (1) historical, current, and future
income potential of each Winton Property, (2) each Winton Property's
demonstrated ability to achieve current rental rates in its marketplace, (3)
reports from unaffiliated parties relating to the potential capital improvement
needs of the Winton Properties, (4) discussions with brokers and others involved
in marketplaces of the Winton Properties relating to capitalization rates for
similar properties in each marketplace, and (5) the consistency of each Winton
Property's operating expenses and the relationship of such operating expenses to
the operating expenses for properties owned by the Company.
Mr. Winton was subject to conflicts of interests with respect to the
allocation of Exchange Values to each Winton Partnership. No person was retained
to negotiate on behalf of the limited partners of the Winton Partnerships, and
no fairness opinion, appraisal, or other third-party evaluation of the terms of
the Transactions to the limited partners of the Winton Partnerships was
acquired. In connection with his approval of the Transactions, Mr. Winton
reviewed the terms of four other offers to acquire the assets of
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<PAGE>
the Winton Partnerships. There can be no assurance that the Deemed Values and
the Exchange Values of the assets of the Winton Partnerships reflect the
value of the Winton Properties. See "Risk Factors -- Exchange Values May Not
Reflect Value of Assets."
An estimate of the Exchange Values for each Winton Partnership is set forth
below.
<TABLE>
<CAPTION>
ESTIMATED
CLOSING & ESTIMATED
DEEMED MORTGAGE OTHER EXCHANGE
PROPERTY WINTON PARTNERSHIP VALUE DEBT(1) COSTS VALUE(2)
-------- ------------------ ------ ------- ----- --------
<S> <C> <C> <C> <C> <C>
Initial Closing
Aspen Court Apartments ....... First Aspen Court Associates, L.P. $ 4,400,000 $ 2,051,401 $ 110,000 $ 2,238,599
Briar Park First Briar Park Associates, a
Apartments ................. Washington Limited Partnership 2,200,000 1,400,000 30,000 770,000
Campus Commons North Campus Development Associates
Apartments ................. Limited Partnership 10,900,000 6,719,802 220,000 3,960,198
Campus Commons South Campus Commons Associates --
Apartments ................. Limited Partnership 4,100,000 2,750,000 150,000 1,200,000
Chelsea Park Apartments ...... First Chelsea Park Associates, L.P. 5,600,000 2,887,967 110,000 2,602,033
Highlands of Preston
Apartments ................. First Highlands Associates, L.P. 8,800,000 4,889,390 130,000 3,780,610
14400 Montfort
Townhouses ................. First Montfort Associates, L.P. 5,650,000 4,120,010 60,000 1,469,990
Marymont Apartments .......... First Marymont Associates, L.P. 4,350,000 2,546,076 70,000 1,733,924
Riverway Apartments .......... First Riverway Associates, L.P. 1,900,000 1,186,061 40,000 673,939
Timbercreek Landings First Timbercreek Landing
Apartments ................. Associates, L.P. 5,500,000 3,390,933 90,000 2,019,067
Pacific South Center First Pacific South Center
Office Building ............. Associates, L.P. 5,400,000 3,225,000 330,000 1,845,000
----------- ----------- ----------- -----------
58,800,000 35,166,640 1,340,000 22,293,360
----------- ----------- ----------- -----------
Subsequent Closing
Country Club Place
Apartments ................. First Appian Way Associates, L.P. $ 5,350,000 $ 3,580,819 $ 50,000 $ 1,719,181
Greenwood Creek
Apartments ................. First Greenwood Creek Associates, L.P. 7,700,000 5,052,311 80,000 2,567,689
Springfield Apartments ....... First Springfield Associates, L.P. 8,420,000 5,510,673 130,000 2,779,327
----------- ----------- ----------- -----------
21,470,000 14,143,803 260,000 7,066,197
----------- ----------- ----------- -----------
$80,270,000 $49,310,443 $ 1,600,000 $29,359,557
=========== =========== =========== ===========
</TABLE>
- -------------
(1) As of September 30, 1996.
(2) The Exchange Values for each Winton Partnership will be equal to the Deemed
Value allocated to such partnership (a) minus, as of the Closing Date, (i)
the Mortgage Debt applicable to such partnership, (ii) the monetary liens
applicable to such partnership, and (iii) closing costs applicable to such
partnership and (b) plus or minus, as appropriate, the Prorations
applicable to such partnership. See "Risk Factors -- Risks Relating to the
Transactions -- Exchange Values May Not Reflect Value of Assets," "The
Transactions -- Asset Transfer -- Mortgage Debt," and "The Transactions --
Asset Transfer -- Prorations."
DESCRIPTION OF WINTON PROPERTIES
Properties Subject to the Initial Closing
Aspen Court Apartments. The Aspen Court Apartments are located in Arlington,
Texas, a suburb of Dallas, Texas and consist of 140 units built in 1985. The
Aspen Court Apartments were completely repainted in December 1996. As of
September 30, 1996, the Aspen Court Apartments had an average monthly rent of
$543, or $.73 per square foot per month, and an average occupancy rate of 93%.
The deemed value of the property under the Combination Agreement is $4,400,000.
The Company expects to
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<PAGE>
assume the existing first mortgage debt of approximately $2.0 million secured by
the property and bearing interest at 7.5% per annum and maturing in 2008. The
property's main competition for tenants comes primarily from existing
multifamily apartment projects in the surrounding North Arlington area of East
Forth Worth. Although several new apartment communities have been developed in
the area surrounding the Aspen Court Apartments in the last few years, such
apartment communities generally contain larger, more costly, units with
additional amenities, and as a result, are not in direct competition with the
Aspen Court Apartments. There are 114 competing apartment projects in the area
consisting of over 19,000 apartment units. The average occupancy for the area at
September 30, 1996 was approximately 94% and the average monthly rental rate was
$528, or $.66 per square foot per month. The Company plans no immediate major
capital expenditures for the Aspen Court Apartments as a result of the
consistent upkeep of the property and the recently completed repaint of the
entire property.
Highlands of Preston Apartments. The Highlands of Preston Apartments are
located in Plano, Texas, a suburb of Dallas, Texas and consist of 220 units
built in 1985. As of September 30, 1996, the Highlands of Preston Apartments had
an average monthly rent of $610, or $.78 per square foot per month, and an
average occupancy rate of 96%. The deemed value of the property under the
Combination Agreement is $8,800,000. The Company expects to assume the existing
first mortgage debt of approximately $4.9 million secured by the property and
bearing interest at 8.00% per annum and maturing in 2000. The property's primary
competition for tenants comes from existing multifamily apartment projects in
the surrounding West Plano area of North Dallas. Numerous new apartment projects
have been developed in the greater West Plano area in recent years, which may
attract tenants temporarily to these new projects as these projects offer
concessions to maximize occupancy rates. However, due to the typically larger
size and more expensive stabilized leasing rates, these new projects will not
act as direct, long-term competition for the Highlands of Preston Apartments.
Additional competition comes from the abundant, but more expensive, single
family home market in this upscale area. There are 58 competing apartment
projects in the area consisting of over 13,000 apartment units. The average
occupancy for the area at September 30, 1996 was approximately 95% and the
average monthly rental rate was $700, or $.80 per square foot per month. The
Company plans no immediate major capital expenditures for the Highlands of
Preston Apartments as a result of the consistent upkeep of the property.
14400 Montfort Townhomes. The Montfort Townhomes are located in Dallas, Texas
and consist of 83 units built in 1986. As of September 30, 1996, the Montfort
Townhomes had an average monthly rent of $982, or $.88 per square foot per
month, and an average occupancy rate of 92%. The deemed value of the property
under the Combination Agreement is $5,650,000. The Company expects to assume the
existing first mortgage debt of approximately $4.1 million secured by the
property and bearing interest at a floating rate of 2.25% above the 11th
district cost of funds index, which was approximately 4.8% at September 30,
1996, subject to an interest rate floor and cap of 1.31% and 11.31%,
respectively, per annum and maturing in 2006. The property's primary competition
for tenants comes from new and existing luxury multifamily apartment projects in
the surrounding North Dallas area. There are 111 apartment projects in the area
consisting of over 21,000 apartment units. The average occupancy for the area at
September 30, 1996 was approximately 93% and the average monthly rental rate was
$625, or $.76 per square foot per month. These occupancy and rental statistics
reflect all of the 111 apartment projects in the area, whereas the property
competes only with the newest and highest quality properties, which generally
have higher rental rates and square footage per unit than the averages for all
of the apartment properties in the area reflect. The Company plans no immediate
major capital expenditures, for the Montfort Townhomes as a result of the
consistent upkeep of the property and the recently completed repaint of the
entire property.
Briar Park Apartments. The Briar Park Apartments are located in Houston,
Texas and consist of 80 units built in 1983. A total replacement of the roofs of
the Briar Park Apartments was completed in October 1996. As of September 30,
1996, the Briar Park Apartments had an average monthly rent of $515, or $.56 per
square foot per month, and an average occupancy rate of 89%. The deemed value of
the property under the Combination Agreement is $2,200,000. The Company expects
to assume the existing first mortgage debt of approximately $1.4 million secured
by the property and bearing interest at 8.42% per annum and maturing in 2006,
with the remainder of the equity paid in shares of the Company's
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<PAGE>
Common Stock, LP Units, or cash. The property's primary competition for tenants
comes from existing multifamily apartment projects in the surrounding Inwood
area of Northwest Houston. There are 27 competing apartment projects in the area
with the majority of projects completed in the early 1980s. There have been no
new projects built since 1984 in the area surrounding the property, although a
number of older projects have been renovated in recent years. The average
occupancy for the area at September 30, 1996 was approximately 92% and the
average montly rental rate was $404, or $.50 per square foot per month. The
Company plans no immediate major capital expenditures for the Briar Park
Apartments as a result of the consistent upkeep of the property and the
aforementioned roof replacement.
Chelsea Park Apartments. The Chelsea Park Apartments are located in Houston,
Texas and consist of 204 units built in 1983. The Chelsea Park Apartments were
completely repainted in November 1996. As of September 30, 1996, the Chelsea
Park Apartments had an average monthly rent of $518, or $.62 per square foot per
month, and an average occupancy rate of 95%. The deemed value of the property
under the Combination Agreement is $5,600,000. The Company may secure new
financing or may assume the existing first mortgage debt of approximately $2.9
million secured by the property and bearing interest at 8.50% per annum and
maturing in 1999. The property's primary competition for tenants comes from
existing multifamily apartment projects in the surrounding Steeplechase area of
Northwest Houston. There are 30 competing apartment projects in the area with
the majority of projects completed in the early 1980s, and several additional
projects built in the last several years. Apartment units built in the area in
the 1990s are generally larger, more expensive and have more amenities than
older units, and as a result, are not in direct competition with Chelsea Park.
The average occupancy for the area at September 30, 1996 was approximately 90%
and the average rental rate was $558, or $.65 per square foot per month. The
Company plans no immediate major capital expenditures for the Chelsea Park
Apartments as a result of the consistent upkeep of the property and the recently
completed repainting of the property.
Marymont Apartments. The Marymont Apartments are located in Tomball, Texas, a
suburb of Houston, Texas and consist of 128 units built in 1983. As of September
30, 1996, the Marymont Apartments had an average monthly rent of $567, or $.65
per square foot per month, and an average occupancy rate of 98%. The deemed
value of the property under the Combination Agreement is $4,350,000. The Company
expects to assume the existing first mortgage debt of approximately $2.5 million
secured by the property and bearing interest at 8.50% per annum and maturing in
2015. The property's primary competition for tenants comes from existing
multifamily apartment projects in the surrounding Tomball area of Northwest
Houston. There are 12 competing apartment projects in the area with the majority
of projects completed in the mid-1980s. No new construction has occurred in the
area since 1986. The average occupancy for the area at September 30, 1996 was
approximately 93% and the average monthly rental rate was $505, or $.60 per
square foot per month. The Company plans no immediate major capital expenditures
for the Marymont Apartments as a result of the consistent upkeep of the
property.
Riverway Apartments. The Riverway Apartments are located in Bay City, Texas,
approximately 60 miles southwest of Houston and consist of 152 units built in
1985. As of September 30, 1996, the Riverway Apartments had an average monthly
rent of $359, or $.48 per square foot per month, and an average occupancy rate
of 73%. The deemed value of the property under the Combination Agreement is
$1,900,000. The Company expects to assume the existing first mortgage debt of
approximately $1.2 million secured by the property and bearing interest at 8.75%
per annum and maturing in 2005. The property's main competition for tenants
comes from several existing multifamily apartment projects in the surrounding,
primarily rural, area. A substantial portion of the tenant population consists
of temporary workers in the nuclear power industry, the surrounding chemical
manufacturing plants and construction jobs. The Company believes that the
project competes for tenants with two other projects of similar quality in the
area. No third-party statistical research relating to the apartment communities
in the area is available, and, as a result, the Company is relying upon its
review of rental rate structures of competing apartment properties and
historical financial and leasing data available for the Riverway Apartments to
evaluate the performance of the property. The Company's own surveys suggest that
the rental rates compete favorably with the few other projects in which it
competes directly, with rental rates of between $275 and $425, and average
occupancy of approximately 85%. The Company plans no immediate major capital
expenditures for the Riverway Apartments as a result of the consistent upkeep of
the property.
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<PAGE>
Timbercreek Landing Apartments. The Timbercreek Landing Apartments are
located in Houston, Texas and consist of 204 units built in 1984. As of
September 30, 1996, the Timbercreek Landing Apartments had an average monthly
rent of $482, or $.62 per square foot per month, and an average occupancy rate
of 94%. The deemed value of the property under the Combination Agreement is
$5,500,000. The Company expects to assume the existing first mortgage debt of
approximately $3.4 million secured by the property and bearing interest at 9.00%
per annum and maturing in 2015. The property's primary competition for tenants
comes from existing multifamily apartment communities in the surrounding Bear
Creek area of Northwest Houston. There are 32 competing apartment communities in
the area with the majority of projects completed in the early 1980s. Only one
new project has been constructed in the area since 1984. The average occupancy
for the area at September 30, 1996 was approximately 92% and the average monthly
rental rate was $494, or $.62 per square foot per month. The Company plans no
immediate major capital expenditures for Timberweek Landing Apartments as a
result of the consistent upkeep of the property.
Campus Commons North Apartments. The Campus Commons North Apartments are
located in Pullman, Washington and consist of 234 units built in 1985. As of
September 30, 1996, the Campus Commons North Apartments had an average monthly
rent per unit of $754, or $.83 per square foot per month, and an average
occupancy rate of 96%. The units on the property are primarily leased to
students attending Washington State University. The Campus Commons North
Apartments experiences high occupancy for 10 months out of the year and
substantial vacancy during June and July of each year. Average rental rates for
June and July averages approximately $150. The deemed value of the property
under the Combination Agreement is $10,900,000. The Company expects to assume
the existing first mortgage debt of approximately $6.7 million secured by the
property and bearing interest at 7.90% per annum and maturing in 2017. The
property's primary competition for tenants comes from existing multifamily
apartment communities in the surrounding area. The project relies on the
consistent or growing enrollment at Washington State University to maintain its
desired occupancy. The property's four- bedroom units compete primarily with two
and three- bedroom units in other apartment communities in the area. No
third-party statistical research relating to the apartment communities in the
area is available, and, as a result, the Company is relying upon its review of
rental rate structures of competing apartment properties and historical
financial and leasing data available for the Campus Commons North Apartments to
evaluate the performance of the property. The Company's own surveys suggest that
the average monthly rental rates compete favorably with other project rates of
between $.60 to $.80 per square foot, and average occupancy of approximately
93%. The Company plans no immediate major capital expenditures for the Campus
Commons North Apartments as a result of the consistent upkeep of the property.
Campus Commons South Apartments. The Campus Commons South Apartments are
located in Pullman, Washington and consist of 100 units built in 1971. As of
September 30, 1996, the Campus Commons South Apartments had an average monthly
rent per unit of $723, or $.68 per square foot per month, and an average
occupancy rate of 94%. The property is located in close proximity to Campus
Commons North and experiences the same rental trends. The deemed value of the
property under the Combination Agreement is $4,100,000. The Company expects to
assume the existing first mortgage debt of approximately $2.7 million secured by
the property and bearing interest at 8.75% per annum and maturing in 2006. The
property's primary competition for tenants comes from existing multifamily
apartment communities in the surrounding area. The project relies on the
consistent or growing enrollment at Washington State University to maintain its
desired occupancy. The property's two-bedroom, two-bath units compete with
similar large units at comparatively aged projects, and smaller units at newer
projects. No third-party statistical research relating to the apartment
communities in the area is available, and, as a result, the Company is relying
upon its review of rental rate structures of competing apartment properties and
historical financial and leasing data available for the Campus Commons South
Apartments to evaluate the performance of the property. The Company's own
surveys suggest that the average monthly rental rates compete favorably with
other project rates of between $.56 to $.83 per square foot, and average
occupancy of approximately 93%. The Company plans no immediate major capital
expenditures for the Campus Commons South Apartments as a result of the
consistent upkeep of the property.
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<PAGE>
Pacific South Center Office Building. The Pacific South Center Office
Building is located in Seattle, Washington and consists of 73,232 square feet of
mixed-use office space built in 1975. As of September 30, 1996, the Pacific
South Center Office Building was 100% leased to various tenants. The current
leases under which the property is leased are scheduled to expire during the
period of 1997-2004 with an average lease maturity date of approximately 2002,
and average rental rates per square foot of approximately $10 per annum. Major
tenants include TCI Cable, a sports bar (whose owners have maintained occupancy
in this building site for the past 15 years), and a health club. The deemed
value of the property under the Combination Agreement is $5,400,000. The Company
expects to assume the existing first mortgage debt of approximately $3.2 million
secured by the property and bearing interest at 9.125% per annum and maturing in
2006. The office complex competes for tenants with other similarly sized,
mixed-use office complexes in the Seattle-Tacoma ("Sea-Tac") airport area. The
Sea-Tac office market is comprised of numerous high-class office buildings, but
few mixed-use office complexes of similar size, with easy access to major
freeways. The Company plans no immediate major capital expenditures for the
Pacific South Center Office Building as a result of the consistent upkeep of the
property.
Properties Subject to the Subsequent Closing
The Company has the right to purchase Greenwood Creek Apartments, Springfield
Apartments, and Country Club Place Apartments at any time after March 1, 1997
and prior to May 1, 1997 and the obligation to acquire the subsequent closing
properties individually after the property achieves certain income targets for
three successive months. Each of the properties subject to the Subsequent
Closing have undergone substantial capital improvements in the past year as
described more fully below. The Company believes that the prior historical
performance of the properties understates the potential performance of the
properties following these substantial improvements.
Greenwood Creek Apartments. The Greenwood Creek Apartments are located in
Fort Worth, Texas and consist of 328 units built in 1984. Substantial capital
improvements were completed on the property in 1996, including remodeling of the
leasing office, installation of access gates and perimeter fencing, and
repainting of the entire property. As of September 30, 1996, the Greenwood Creek
Apartments had an average monthly rent of $429, or $.60 per square foot per
month, and an average occupancy rate of 92%. The deemed value of the property
under the Combination Agreement is $7,700,000. The Company expects to assume the
existing first mortgage debt of approximately $5.0 million secured by the
property and bearing interest at 7.48% per annum and maturing the 2006. The
property's primary competition for tenants comes from existing multifamily
apartment communities in the surrounding area of Southwest Fort Worth. There are
64 competing apartment communities in the area consisting of over 11,000
apartment units. The average occupancy for the area at September 30, 1996 was
approximately 95% and the average monthly rental rate was $460, or $.62 per
square foot. The Company plans no immediate major capital expenditures for the
Greenwood Creek Apartments as a result of the substantial capital improvements
recently completed.
Springfield Apartments. The Springfield Apartments are located in Dallas,
Texas and consist of 218 units built in 1986. Substantial capital improvements
were completed on the property in late 1996, including the repair of the parking
lot, the installation of access gates and perimeter fencing, and the repainting
of the entire property. As of September 30, 1996, the Springfield Apartments had
an average monthly rent of $609, or $.72 per square foot per month, and an
average occupancy rate of 89%. The deemed value of the property under the
Combination Agreement is $8,420,000. The Company expects to assume the existing
first mortgage debt of approximately $5.5 million secured by the property and
bearing interest at 7.375% per annum and maturing in 2016. The property's
primary competition for tenants comes from new and existing multifamily
apartment communities in the surrounding Carrollton area of North Dallas.
Numerous new apartment communities have been developed in the greater area in
recent years, which may attract tenants temporarily as these projects offer
concessions to maximize occupancy rates. However, due to the typically larger
size and more expensive stabilized leasing rates, these new projects will not
act as direct long-term competition for the project. There are 100 competing
apartment communities in the area consisting of over 17,000 apartment units. The
average occupancy for the area at September 30, 1996 was approximately 94% and
the average monthly rental rate was $611, or $.71 per
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<PAGE>
square foot per month. The Company plans no immediate major capital expenditures
for the Springfield Apartments as a result of the substantial capital
improvements recently completed.
Country Club Place Apartments. The Country Club Place Apartments are located
in Richmond, Texas, a suburb of Houston, Texas and consist of 169 units built in
1986. Substantial capital improvements were completed on the property in late
1996, including the remodeling of the leasing office, complete roof replacement
for a substantial portion of the property, installation of access gates and
perimeter fencing, and the repainting of the entire property. As of September
30, 1996, the Country Club Place Apartments had an average monthly rent of $530,
or $.65 per square foot per month, and an average occupancy rate of 88%. The
deemed value of the property under the Combination Agreement is $5,350,000. The
Company expects to assume the existing first mortgage debt of approximately $3.5
million secured by the property and bearing interest at 8.00% per annum and
maturing in 2006. The property's primary competition for tenants comes from
existing multifamily apartment communities in the surrounding Richmond area of
Southwest Houston, and from affordable single family housing in the area. There
are 18 competing apartment communities in the area with the majority of projects
completed between 1976 and 1984. No new construction has occurred since
development of the property was completed in 1986. The average occupancy for the
area at September 30, 1996 was approximately 87% and the average monthly rental
rate was $431, or $.56 per square foot per month. The Company plans no immediate
major capital expenditures for Country Club Place Apartments as a result of the
substantial capital improvements recently completed.
The Company considered a number of factors in its determination of the
current and projected demand for and supply of rental housing in markets in
which the Winton Properties compete including a review of the current supply,
occupancy and rental rate statistics of existing rental housing, the age and
composition of rental housing, the interest rate environment, population and job
growth projections by metropolitan areas and submarkets. In addition, the
Company reviewed pricing considerations including the comparative cost of
competing rental housing, by size and unit type, age, quality, and location, the
affordability of for sale housing, and the amenities offered by competing
apartment communities and housing types. For this analysis the Company relied on
various third party statistical studies of the markets in question, private and
governmental economic projections, field studies of the competition, and
historical property information.
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The following tables set forth certain additional information regarding
each of the Winton Properties.
<TABLE>
<CAPTION>
Apartment Amenities
-----------------------------------------------------------------------------------------------------
Washer/Dryer Large
Connections Upper Unit Storage
Number And/Or Patio or Vaulted Or Walk-in Microwave Other
Of Units Equipment Fireplaces Balcony Ceilings Cable TV Closets Ovens Icemakers Miniblinds Features
-------- --------- ---------- ------- -------- -------- ------- ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACQUISITION PROPERTIES
Apartments
----------
Houston, Texas
Briar Park ........... 80 All 95% All All All All -- All All
Country Club ......... 169 All 67% All All All All -- All All
Chelsea Park ......... 204 All 80% All All All -- -- All All
Marymont ............. 128 All -- All -- All 75% All All All
Riverway ............. 152 All 53% All All All 45% All All All
Timbercreek .......... 204 All 57% All All All All -- All All Covered
parking
----- (some)
937
-----
Dallas, Texas
Aspen Court .......... 140 94% 57% All All All 91% All All All Intrusion
alarms
Greenwood Creek ...... 328 All 73% All -- All All -- All All
Highlands of
Preston ............. 220 All All All All All All -- All All
Montfort
Townhomes .......... 83 All All All All All All All All All Garages,
intrusion
alarms,
Springfield .......... 218 All All All -- All All -- All All covered
parking
-----
989
-----
Pullman, Washington
Campus Commons
North .............. 234 -- -- All All All -- -- -- All
Campus Commons
South .............. 100 All -- All All All -- -- -- All
-----
334
-----
Total acquisition
apartments ........... 2,260
-----
Office Building
---------------
Seattle, Washington
Pacific South Center
(73,232 square
feet)
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
Community Features
----------------------------------------------------------------------
Number Swimming Fitness
Of Units Clubhouse Pool Center Spa Other Features
-------- --------- ---- ------ --- ---------------
<S> <C> <C> <C> <C> <C> <C>
ACQUISITION PROPERTIES
Apartments
----------
Houston, Texas
Briar Park .................. 80 Yes Yes Yes Yes Sauna, playground
Country Club ................ 169 Yes Yes -- Yes Golf course frontage
Chelsea Park ................ 204 Yes Yes Yes Yes Playground
Marymont .................... 128 -- Yes -- -- Volleyball court
Riverway .................... 152 Yes Yes Yes Yes Tennis & volleyball courts,
playground
Timbercreek ................. 204 -- Yes -- Yes
-----
937
-----
Dallas, Texas
Aspen Court ................. 140 Yes Yes Yes -- Tanning bed, sport court
Greenwood Creek ............. 328 Yes Yes Yes Yes Volley court
Highlands of Preston ........ 220 Yes Yes Yes Yes
Montfort Townhomes .......... 83 -- Yes -- Yes
Springfield ................. 218 Yes Yes Yes Yes Sauna
-----
989
-----
Pullman, Washington
Campus Commons North ........ 234 Yes Yes Yes Yes Tanning beds
Campus Commons South ........ 100 Yes Yes Yes -- Sauna
-----
334
-----
Total acquisition
apartments ................. 2,260
-----
Office Building
---------------
Seattle, Washington
Pacific South Center
(73,232 square feet)
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
-------------------------------------
Average Occupancy
Monthly Rent --------------------
---------------- 9 Months 12 Months
Year No. of Avg. 9/30 12/31 Ending Ending
built units size Amount Unit Sq. ft. 1996 1995 30 Sep 96 31 Dec 95
----- ----- ---- ------ ---- ------- ---- ---- --------- ---------
(Sq. Ft.) (000s) (000s)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Winton Properties
Dallas, Texas
Aspen Court ............ 1986 140 742 $ 4,400 $ 31.4 $42.36 $562 $557 89% 94%
Greenwood Creek ........ 1984 328 720 7,700 23.5 32.61 433 443 88% 89%
Highlands of Preston .. 1985 220 786 8,800 40.0 50.89 612 584 97% 93%
Montfort Townhomes .... 1986 83 1,112 5,650 68.1 61.22 966 959 93% 93%
Springfield ............ 1985 218 844 8,420 38.6 45.76 609 598 98% 96%
----- ------ ------- ------ ------ ---- ---- --- ---
Total Dallas ......... 989 798 34,970 36.4 44.31 576 566 90% 93%
----- ------ ------- ------ ------ ---- ---- --- ---
Houston, Texas ..........
Briar Park ............. 1983 80 915 2,200 27.6 30.05 513 507 93% 91%
Country Club Place .... 1985 169 814 5,350 31.7 38.89 536 544 86% 94%
Chelsea Park ........... 1983 204 829 5,600 27.5 33.11 513 510 93% 93%
Marymont ............... 1983 128 875 4,350 34.0 38.79 589 558 93% 95%
Riverway ............... 1985 152 740 1,900 12.5 16.89 381 360 79% 88%
Timbercreek Landing ... 1984 204 775 5,500 27.0 34.79 481 476 92% 94%
----- ------ ------- ------ ------ ---- ---- --- ---
Total Houston ........ 937 814 24,900 26.6 32.85 494 491 90% 93%
----- ------ ------- ------ ------ ---- ---- --- ---
Pullman, Washington ....
Campus Commons North ... 1985 234 913 10,900 46.6 51.02 756 740 96% 99%
Campus Commons South ... 1972 100 1,066 4,100 41.0 38.46 725 702 94% 98%
----- ------ ------- ------ ------ ---- ---- --- ---
Total Pullman ........ 334 959 15,000 44.9 48.84 748 730 95% 98%
----- ------ ------- ------ ------ ---- ---- --- ---
Total Winton Apartments . 2,260 828 $74,870 33.1 39.99 $566 $560 91% 94%
----- ------ ------- ------ ------ ---- ---- --- ---
Pacific South Center .... 1975 73,232 $ 5,400 73.74
------ ------- ------
Total Winton Properties $80,270
=======
</TABLE>
102
<PAGE>
INFORMATION REGARDING WINTON & ASSOCIATES, INC.
Winton & Associates engages in the business of providing customary property
management services for the 13 apartment communities and one office building
owned and operated by the Winton Partnerships. Winton & Associates currently
manages approximately 2,900 apartment, condominium, and townhome units and
nearly 85,000 square feet of office space. In its 16 years of operation, Winton
& Associates has managed in excess of 68,000 apartment, condominium, and
townhome units on 51 properties in Washington, Oregon, California, and Texas.
Winton & Associates maintains offices in Houston, Texas (corporate
headquarters) and Seattle, Washington and its sole stockholder is Don W. Winton.
SUMMARY OF THE HERITAGE LP PARTNERSHIP AGREEMENT
The following is a summary of some of the more significant provisions of the
Partnership Agreement to be entered into among the Company, Heritage SGP, and
the Approving Winton Partnerships. A form of the Partnership Agreement is
included as Appendix B to this Proxy Statement and should be referred to for a
complete statement of the rights and obligations of its partners.
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 shareholders of the Company had they exchanged their interest in a
Winton Partnership for shares of the Company's Common Stock in the Exchange
Offer. To the extent that Heritage LP's Available Cash Flow is insufficient to
pay such amount, accounts for the holders of LP Units will be credited for the
unpaid distribution and with interest on the unpaid distribution (the "Unpaid
Balances"). Any Unpaid Balances will be given priority for future distributions
of Available Cash Flow. In addition, until the tenth anniversary of the
Partnership Agreement, proceeds from the Heritage LP's capital transactions
("Capital Transaction Proceeds"), if any, will also be applied to reduce any
Unpaid Balances in the distribution accounts of the holders of LP Units. To the
extent that Heritage LP's Available Cash Flow and Capital Transaction Proceeds
exceed the Unpaid Balances and the current distributions to holders of LP Units,
all additional amounts will be distributed to Heritage LP's general partners. In
addition, following the tenth anniversary of the Partnership Agreement, all
Capital Transaction Proceeds will be distributed to Heritage LP's general
partners. Consequently, regardless of the amount of Heritage LP's Available Cash
Flow and Capital Transaction Proceeds, the maximum amount of distributions
payable to a holder of an LP Unit (excluding interest on unpaid distributions)
will not exceed the dividends paid with respect to a share of the Company's
Common Stock.
ALLOCATION OF PROFITS AND LOSSES
Heritage LP will maintain 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.
103
<PAGE>
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 will have 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 will grant to the
Company broad authority in the exercise of the management and control of
Heritage LP. The general partners will 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 will 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, will have the right to receive tax reports and certain
other financial information, the most recent annual, quarterly, and current
reports and proxy statements as provided to the Company's stockholders and, upon
request, copies of documents as filed by the Company with the Commission under
the Securities Exchange Act of 1934. Holders of LP Units also will 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
The Company and Heritage SGP will receive an opinion of counsel that Heritage
LP will be a validly existing limited partnership under the laws of the state of
Delaware upon the proper execution and filing of record of a Certificate of
Limited Partnership. 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
104
<PAGE>
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 will require 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 will require 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 will require 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 will irrevocably designate the Company and Heritage SGP
as such limited partner's agent, with full power of substitution, to execute,
acknowledge, and file of record the Partnership Agreement, certificates of
limited partnership, and any and all other instruments that the general partners
deem necessary or appropriate to qualify and continue Heritage LP as a limited
partnership and also all conveyances and other instruments as the general
partners deem necessary or appropriate to reflect the dissolution and
termination of Heritage LP. In addition, the general partners will be 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.
105
<PAGE>
PROPOSED AMENDMENT TO AND RESTATEMENT OF
THE ARTICLES OF INCORPORATION
The Company's Board of Directors has unanimously approved and recommends
stockholder approval of a proposal to amend and restate the Company's Articles
of Incorporation to provide for certain restrictions and limitations on the
Company's Common Stock that are intended to preserve the Company's status as a
REIT for federal income tax purposes. The Amended and Restated Articles of
Incorporation are attached hereto as Appendix J.
The Articles of Incorporation provide that any acquisition of shares of
capital stock of the Company that would result in the disqualification of the
Company as a real estate investment trust shall be void ab initio to the fullest
extent permitted under applicable law. In addition, the Articles of
Incorporation provide that if a person or persons acting as a group own more
than 9.8% of the outstanding shares of the capital stock of the Company, such
shares shall be deemed "excess shares." The Board of Directors of the Company
has the discretion to redeem all excess shares upon written notice of redemption
to the holder.
The amendment to and restatement of the Company's Articles of Incorporation
provides that if any transfer of shares would result in (i) ownership by any
person of 9.8% or more of the Company's outstanding shares; (ii) ownership of
the Company's stock by fewer than 100 persons; (iii) ownership of 50% or more of
the Company's stock by five or fewer persons; (iv) ownership by the Company of
10% or more of the ownership interests of any tenant of the Company; or (v) any
transfer that would result in the disqualification of the Company as a real
estate investment trust under the Code, then such transfer shall be void ab
initio to the extent of the number of shares causing such a violation, and the
purported transferee will acquire no rights or interest in such shares. Rather,
such shares will be designated shares- in-trust and will be transferred to a
share trust (the "Share Trust"). The trustee of the Share Trust will designate a
beneficiary for whose benefit the shares will be held. Dividends, liquidation
proceeds, and voting rights with respect to shares-in-trust will be received by
or exercised by the trustee on behalf of the beneficiary. The trustee may
transfer the shares-in-trust to a permitted transferee provided that
compensation, determined according to the Articles of Incorporation, is paid to
the stockholder or transferee who would have owned such shares absent the
ownership restrictions.
The Board of Directors believes that this proposed amendment to and
restatement of the Company's Articles of Incorporation will enhance the
Company's ability to preserve the Company's status as a real estate investment
trust.
No rights of appraisal or similar rights of dissenters exists with respect to
this matter.
The Board of Directors has unanimously approved the proposed amendment to and
restatement of the Articles of Incorporation. The affirmative vote of two-thirds
of the votes entitled to be cast by the stockholders is required for approval of
the amendment to and restatement of the Articles of Incorporation. The Board of
Directors recommends a vote "FOR" the proposed amendment to and restatement of
the Articles of Incorporation.
OTHER MATTERS
The Company knows of no other matters to be submitted to the Special Meeting.
If any other matters properly come before the Special Meeting, it is the
intention of the persons named in the enclosed proxy card to vote the shares
they represent as the Board of Directors may recommend.
Dated March 27, 1997
106
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
ASR INVESTMENTS CORPORATION
Independent Auditors' Report ............................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 ............ F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 ....................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 ....................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 ....................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
Unaudited Consolidated Balance Sheet as of September 30, 1996 ........... F-16
Unaudited Consolidated Statements of Operations for the nine months
ended September 30, 1996 and September 30, 1995 ........................ F-17
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and September 30, 1995 .............................. F-18
Unaudited Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1996 ....................................... F-19
Notes to Consolidated Financial Statements .............................. F-20
ACQUISITION COMMUNITIES
Report of Independent Public Accountants ................................ F-22
Combined Historical Summary of Revenues and Certain Operating
Expenses for the year ended December 31, 1995 .......................... F-23
Unaudited Combined Historical Summary of Revenues and Certain Operating Expenses
for the nine months ended September 30, 1996 ........................... F-24
Notes to Combined Historical Summary of Revenues and
Certain Operating Expenses ............................................. F-25
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ASR Investments Corporation.
We have audited the accompanying consolidated balance sheets of ASR
Investments Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and 1994, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 19, 1996
F-2
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
-----------------------
1995 1994
---- ----
Assets
Real estate investments (Notes 2 and 4)
Apartments, net of depreciation ..................... $ 71,338 $ 66,506
Investments in joint ventures ....................... 3,043 1,364
Land held for development ........................... 3,928
Other real estate ................................... 1,201 5,186
--------- ---------
Total real estate investments ..................... 79,510 73,056
Mortgage assets (Notes 3 and 4) ..................... 11,877 18,965
Cash ................................................ 2,421 4,129
Other assets ........................................ 361 595
--------- ---------
Total assets ................................... $ 94,169 $ 96,745
========= =========
Liabilities
Real estate notes payable (Note 4)
Secured ........................................... $ 49,633 $ 45,825
Unsecured ......................................... 4,868
Notes payable secured by mortgage assets,
net of funds held by trustee of $21,583 (Note 4) .. 6,422
Short-term borrowing (Note 4) ....................... 4,495
Other liabilities ................................... 2,646 2,530
--------- ---------
Total liabilities .............................. 56,774 59,645
--------- ---------
Stockholders' Equity
Common Stock -- 40,000,000 shares of par
value $.01 per share authorized;
3,303,226 and 3,248,729 shares issued
and outstanding ................................... 33 32
Additional paid-in capital .......................... 155,822 155,126
Deficit ............................................. (115,497) (115,747)
Stock note receivable ............................... (652)
Treasury stock -- 148,731 shares .................... (2,311) (2,311)
--------- ---------
Total stockholders' equity ..................... 37,395 37,100
--------- ---------
Total liabilities and stockholders' equity ........ $ 94,169 $ 96,745
========= =========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Real Estate Operations
Rental and other income ................................................. $ 14,034 $ 12,528
-------- --------
Operating and maintenance expenses ...................................... 5,259 4,255
Real estate taxes and insurance ......................................... 1,460 1,242
Depreciation and amortization ........................................... 2,692 1,995
Interest expense on real estate mortgages ............................... 4,387 3,941
-------- --------
Total operating expenses ............................................ 13,798 11,433
-------- --------
Income from real estate ................................................. 236 1,095
-------- --------
Mortgage Assets (Notes 1 and 3)
Prospective yield income ................................................ 3,884 6,433 $ 7,264
Income from redemptions and sales ....................................... 5,302 4,263
Interest expense ........................................................ (347) (2,596) (4,794)
Provision for reserves .................................................. (20,286)
-------- -------- --------
Income (loss) from mortgage assets ...................................... 8,839 8,100 (17,816)
-------- -------- --------
Income (Loss) Before Administrative Expenses and
Other Income ............................................................. 9,075 9,195 (17,816)
Administrative Expenses (Note 7) ......................................... (2,983) (2,216) (1,949)
Other income, net ........................................................ 462 723 286
-------- -------- --------
Income (Loss) before cumulative effect of accounting change ............... 6,554 7,702 (19,479)
Cumulative effect of accounting change (Note 1) ........................... (21,091)
-------- -------- --------
Net Income (Loss) ......................................................... $ 6,554 $ 7,702 ($40,570)
======== ======== ========
Per Share Amounts
Income (Loss) before cumulative effect of
accounting change ..................................................... $ 2.09 $ 2.48 ($ 6.27)
Cumulative effect of accounting change .................................. (6.79)
-------- -------- --------
Net Income (Loss) Per Share of Common Stock and Common
Stock Equivalents ........................................................ $ 2.09 $ 2.48 ($ 13.07)
======== ======== ========
Average Shares of Common Stock and
Common Stock Equivalents.................................................. 3,141 3,100 3,104
======== ======== ========
Dividends Declared Per Share .............................................. $ 2.00 $ 0.50 $ 1.15
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK IN
NUMBER OF PAR PAID-IN NOTES TREASURY
SHARES VALUE CAPITAL DEFICIT RECEIVABLE AT COST TOTAL
------ ----- ------- ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 ........... 3,249 $ 32 $ 155,126 $ (77,764) $ (2,110) $ 75,284
Stock (repurchase) ................. (201) (201)
Net (loss) ......................... (40,570) (40,570)
Dividends declared ................. (3,565) (3,565)
--------- --------- --------- --------- --------- --------- --------
Balance, December 31, 1993 ......... 3,249 32 155,126 (121,899) (2,311) 30,948
Net Income ......................... 7,702 7,702
Dividends declared ................. (1,550) (1,550)
--------- --------- --------- --------- --------- --------- --------
Balance, December 31, 1994 ......... 3,249 32 155,126 (115,747) (2,311) 37,100
Stock issuance (Note 5) ............ 54 1 696 $ (652) 45
Net income ......................... 6,554 6,554
Dividends declared ................. (6,304) (6,304)
--------- --------- --------- --------- --------- --------- --------
Balance, December 31, 1995 ......... 3,303 $ 33 $ 155,822 $(115,497) $ (652) $ (2,311) $ 37,395
========= ========= ========= ========= ========= ========= ========
</TABLE>
All of the above amounts have been adjusted to reflect the one for five reverse
stock split effected in July 1995.
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................... $ 6,554 $ 7,702 $(40,570)
Principal noncash charges (credits)
Depreciation and amortization ..................................... 3,028 2,083
Income from redemption of mortgage assets ......................... (2,420)
Provision for reserves ............................................ 20,286
Cumulative effect of accounting changes ........................... 21,091
Increase in accrual ............................................... 705 324 1,961
-------- -------- --------
Cash Provided By Operations ......................................... 7,867 10,109 2,768
-------- -------- --------
INVESTING ACTIVITIES
Investment in apartments ............................................ (7,644) (67,247)
Investment in joint ventures ........................................ (1,895) (1,364)
Purchase of land for development .................................... (3,928)
Other real estate assets ............................................ 3,985 (1,331) (3,855)
Purchases of mortgage assets ........................................ (4,447)
Reduction in mortgage assets ........................................ 7,088 18,916 35,520
Decrease in other assets ............................................ 234 1,330 912
-------- -------- --------
Cash (Used in) Provided By Investing Activities ..................... (2,160) (49,696) 28,130
-------- -------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable ............................... 6,895 52,178
Payment of loan costs ............................................... (1,342)
Repayment of notes payable
Real estate notes ................................................. (7,955) (1,485)
Notes secured by mortgage assets .................................. (4,002) (15,640) (21,124)
Short-term borrowing ................................................ 4,495
Stock repurchases ................................................... (201)
Exercise of stock options ........................................... 45
Payment of dividends ................................................ (6,304) (1,550) (3,565)
(Decrease) Increase in other liabilities ............................ (589) 1,148 (730)
-------- -------- --------
Cash (Used in) Provided By Financing Activities ..................... (7,415) 33,309 (25,620)
-------- -------- --------
Cash
(Decrease) Increase during the period ............................. (1,708) (6,278) 5,278
Balance -- beginning of period .................................... 4,129 10,407 5,129
-------- -------- --------
Balance -- end of period .......................................... $ 2,421 $ 4,129 $ 10,407
======== ======== ========
Supplemental Disclosure of Cash Flow Information
Interest Paid ....................................................... $ 5,033 $ 7,367 $ 5,121
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years
Ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- ASR Investments Corporation (the "Company") is a real estate
investment trust engaged in the acquisition and operation of apartment
communities in the southwestern United States. At December 31, 1995, the Company
owned 24 apartment communities (including six owned through joint ventures)
located in Arizona, Texas and New Mexico. In addition, the Company continues to
hold mortgage assets and use the cash flows for apartment acquisitions,
operations, payment of dividends and other corporate purposes.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. Investments in joint ventures are accounted on the equity method
as the Company does not own a controlling interest. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
Common Stock -- On July 7, 1995, the Company effected a reverse stock split
under which one new share of common stock was issued in exchange for five shares
of outstanding stock. Accordingly, the consolidated financial statements reflect
the reverse stock split and the number of common stock issued and the per share
amounts have been adjusted for the reverse stock split for all years.
Real Estate -- Real estate is recorded at cost. Depreciation is computed on a
declining balance basis over the estimated useful lives of the assets, which are
27 1/2 years for buildings and improvements and 7 years for furniture, fixture
and equipment. Expenditures for ordinary maintenance and repairs are charged to
operations as incurred, and significant renovations and improvements that
improve or extend the useful life of the asset are capitalized. Rental income is
recorded on a straight-line basis when due from tenants.
Deferred Loan Costs -- Deferred loan costs are amortized using the interest
method over the terms of the related debt.
Mortgage Assets -- The Company owns mortgage assets which entitle it to
receive the excess of the cash flows on pools of mortgage instruments over the
required payments on a series of structured financings which they secure. The
Company also has the right to cause the early redemption of the structured
financings under specified limited conditions; in such event, the mortgage
instruments are sold and the net proceeds after the redemption of the structured
financings are remitted to the Company. Redemption transactions occur from time
to time as specified conditions are met rather than on a monthly or quarterly
basis; therefore, the amount of net proceeds and the income from the redemption
transactions fluctuates significantly between periods.
Presentation and Income Recognition -- Mortgage assets are stated at their
net investment amounts. Income is recognized using the prospective yield method
prescribed by EITF 89-4. Under this method, an effective yield is calculated at
the beginning of an accounting period using the then net carrying value of the
asset and the estimated future net cash flow assuming no early redemption. The
estimated future net cash flow is calculated using variable interest rates and
current projected mortgage prepayment rates for the underlying mortgages. The
calculated yield is used to accrue income for the accounting period. Actual cash
flow received is first applied to the accrued income and any remaining amount is
used to reduce the carrying value of the asset. Income from early redemption is
recognized when the transaction occurs.
Write-down or reserves for impairment -- Prior to December 1993, the Company
followed the practice of writing down the carrying value of a mortgage asset
(including an allocated portion of the deferred hedging cost) to its estimated
future cash flows. In December 1993, the Company adopted SFAS No. 115 which
requires that the carrying value of a mortgage asset be written down to its
estimated fair
F-7
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
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.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets -- The
Company has adopted SFAS No. 121, 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 recognized for the difference between the carrying
amount and fair value. SFAS No. 121 had no impact on the Company's financial
statements.
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.
Earnings Per Share -- Earnings per share are computed using the weighted
average number of shares of common stock and common stock equivalents (if
dilutive) outstanding during the year.
New Accounting Standards -- In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement encourages, but does not require, companies to adopt a new
accounting method for stock-based compensation awards. Beginning with 1996
financial statements, companies that do not adopt the new accounting method will
be required to provide the disclosures required by the Statement for any awards
made in 1995 and after. The Company, which currently follows APB Opinion No. 25,
does not plan to adopt the new accounting method, and will provide the required
disclosures in the 1996 financial statements.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect some of the amounts reported in the
consolidated financial statements. Actual results could differ from those
estimates.
Reclassifications -- Certain reclassifications have been made to conform the
prior years with the current year presentation.
2. REAL ESTATE INVESTMENTS
Wholly Owned Apartments
In January 1994, the Company acquired its initial portfolio of seventeen
apartment communities (2,461 units) located in Tucson, Arizona, Houston, Texas,
and Albuquerque, New Mexico. In February 1995, the Company acquired a 222-unit
apartment community in Mesa, Arizona. At December 31, 1995 and 1994, investment
in apartments consisted of the following (in thousands):
1995 1994
-------- --------
Land ....................................... $ 15,514 $ 13,681
Building and Improvements .................. 57,214 50,583
Accumulated Depreciation ................... (4,687) (1,995)
Restricted Cash and Deferred Loan fees ..... 3,297 4,237
-------- --------
Apartments, net ............................ $ 71,338 $ 66,506
======== ========
F-8
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
Investments in Joint Ventures
The Company has acquired six apartment communities (1,441 units) in Phoenix
and Tucson, Arizona through joint ventures with a pension plan affiliate of
Citicorp. The Company is a 15% equity partner and the managing partner or
managing member of the joint ventures. The Company is entitled to receive
between 15% and 51% of the total profits and cash flows depending on the
financial performance of the joint ventures. The condensed combined financial
statements for the joint ventures are as follows (in thousands):
Condensed Combined Balance Sheets
DECEMBER 31,
-------------------
1995 1994
------- -------
Real estate, at cost net of depreciation ..... $54,489 $23,778
Cash and other assets ........................ 2,133 1,424
------- -------
Total Assets ............................... $56,622 $25,202
======= =======
Notes payable ................................ $35,754 $15,644
Other liabilities ............................ 575 424
------- -------
Total Liabilities .......................... 36,329 16,068
------- -------
Equity
The Company ................................. 3,043 1,364
Joint venture partner ....................... 17,250 7,770
------- -------
Total Equity ................................ 20,293 9,134
------- -------
Total Liabilities and Equity ................ $56,622 $25,202
======= =======
Condensed Combined Statement of Operations
YEARS ENDED DECEMBER 31,
-----------------------
1995 1994
------- -------
Revenues ............................. $ 7,014 $ 1,263
Operating expenses ................... (3,110) (551)
Depreciation ......................... (1,437) (283)
Interest expense ..................... (2,338) (373)
------- -------
Net Income ........................... $ 129 $ 56
------- -------
Allocation of Net Income
The Company ........................ $ 19 $ 9
Joint Venture Partner ................ $ 110 $ 47
In December 1994, the Company entered into a joint venture to develop and
construct the Finisterra Apartments community in Tempe, Arizona. In April 1995,
the Company acquired the land from the joint venture for $2,670,000 and
terminated the joint venture. As of December 31, 1995, the investment in the
Finisterra Apartments land was $2,732,000. The Company expects to begin
construction in March 1996.
Operating income from apartments is affected primarily by rental rates,
occupancy rates and operating expenses. Rental rates and occupancy rates are
affected by the strength of the local economy, the local housing market and the
supply of and demand for apartment communities.
3. MORTGAGE ASSETS
Income For 1995 and 1994, the average carrying value of the mortgage assets
was $14,827,000 and $26,691,000, respectively, and the average prospective yield
was 28% and 24%, respectively. At December
F-9
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
31, 1995, the prospective yield was 29%. As discussed in Note 1, in 1993, a
majority of the mortgage assets were not accounted for under the prospective
yield method and the Company recorded substantial amount of reserves for write
down.
During 1995, the Company exercised its redemption rights on five mortgage
assets for net proceeds of $6,438,000 and income of $2,882,000. Using proceeds
from one of the redemptions, the Company prepaid its Secured Notes (see Note 4)
and recorded income of $2,420,000 for the excess accrual of the yield
maintenance payment on the Notes. The income has been included in income from
redemptions of mortgage assets. During 1994, the Company exercised its
redemption rights on four mortgage assets for net proceeds of $11,227,000 and
income of $4,263,000.
The cash flows and prospective yield income are affected primarily by
mortgage prepayment rates and short-term interest rates. Higher mortgage
prepayment rates or higher short-term rates reduce the income and total cash
flows over the life of the mortgage assets. Income from mortgage asset
redemptions is affected by the timing of meeting the specified conditions for
redemptions and the value of the underlying mortgage instruments. As a result,
mortgage asset redemptions do not occur on a regular basis and the income can
fluctuate significantly between periods. In addition, redemption of mortgage
assets reduces the prospective yield income in future periods.
Hedging transactions
In 1992, the Company purchased "Cap Agreements" to protect against the
negative effect on mortgage asset cash flows of increases in interest rates in
1994. The "Cap Agreements," purchased for $2,459,000, called for payments to the
Company equal to the excess of one-month LIBOR over 5.5% on specified dates
during 1994 (generally monthly) times $240,000,000. The effect of the Cap
Agreements was to provide that the interest paid on structured financing during
1994 did not exceed 5.5%. Also in 1992, the Company executed short sales of
Eurodollar Futures Contracts on the International Monetary Market exchange. The
effect of the Futures Contracts was to "fix" the interest rate on $190,000,000
of the structured financings at approximately 6.75% for 1995. In 1993, the
Company recorded losses of $4,168,000 on the Future Contracts. In 1994, the
Company closed out its Futures Contract position and realized a gain of
$1,152,000 which was recorded as set forth below.
Both the Cap Agreements and Futures Contracts transactions were entered into
as hedges against the interest rate impact on mortgage asset cash flows in 1994
and 1995. The cost of the Cap Agreements ($2,459,000) and the losses incurred on
the Futures Contracts during 1993 ($4,168,000) were accounted for as additional
costs of the mortgage assets and were written off in connection with the
adoption of SFAS No. 115 in December 1993. Such amounts are included in the
"cumulative effect of accounting change" in the accompanying consolidated
statements of operations. The 1994 gain on the Futures Contracts ($1,152,000)
was recorded as a reduction in the carrying value of the mortgage assets.
Because of (1) the decline in importance of mortgage assets as a result of
the Company's emphasis on investments in apartments and (2) the decline in the
amount of variable rate structured financing underlying the mortgage assets, the
Company no longer plans to invest in similar hedging transactions and had no
such investments at December 31, 1995 and 1994.
4. NOTES PAYABLE
Real Estate Notes Payable
The apartment communities acquired in January 1994 were financed by first
mortgage loans totaling $45,700,000 and seller carryback notes of $6,500,000.
The first mortgage loans are nonrecourse and non-cross collateralized. They
generally have a ten year term and bear fixed interest rates ranging from
F-10
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
8.5% to 10.1%, with a weighted average fixed rate of 8.6% at December 31, 1995
and 1994. The wholly owned 222-unit community in Mesa, Arizona, which was
purchased in February 1995, was financed by a $3,770,000 first mortgage loan
bearing interest at 225 basis points over three-month LIBOR. Amortization of
deferred loan fees was $120,000 and $88,000 for 1995 and 1994
The seller carryback notes were unsecured, bore a fixed interest rate of 7.5%
and were to be amortized over a three-year period ending February 1, 1997 with
monthly principal and interest payments of $202,000. As provided for by the note
agreements, the Company repaid the notes in 1995 at a discount of $311,000 which
was recorded as a credit to income.
The scheduled maturities of the real estate notes payable are as follows (in
thousands):
1996 ............................................. $ 773
1997 ............................................. 2,317
1998 ............................................. 440
1999 ............................................. 4,227
2000 ............................................. 552
2001-2004......................................... 41,324
-------
Total .......................................... $49,633
=======
Mortgage assets notes payable
In 1992, the Company issued $80,000,000 of Secured Notes ("Notes") at an
interest rate of 9.02% per year. The Notes were collateralized by a majority of
the Company's mortgage assets and funds held by the trustee (restricted cash).
The Company was required to use the net proceeds from the redemptions of the
mortgage interest to prepay the Notes at a premium. During 1994, the Company
made prepayments of $10,355,000.
In February 1995, the Company used the proceeds from a mortgage asset
redemption of $2,800,000, $393,000 of its cash and the funds held by the trustee
to prepay the entire balance of the Notes. Accordingly, the funds held by the
trustee ($21,583,000 at December 31, 1994) were presented as a reduction of the
Notes balance in the consolidated balance sheets. Amortization of deferred loan
cost was $549,000 for 1993.
Short-term Borrowing
At December 31, 1995, the Company had borrowings under reverse repurchase
agreements of $2,170,000 secured by five mortgage assets with a total carrying
value of $2,645,000. The Company also had short-term borrowings of $2,325,000
secured by two mortgage assets with a total carrying value of $4,994,000. The
interest rate averaged 6.55% during 1995 and 6.69% at December 31, 1995.
5. STOCK OPTIONS
The Company has two stock option plans which are administered by the Board of
Directors. The purpose of the plans is to provide a means of performance-based
compensation to attract and retain directors and key personnel.
Under the plans, options to acquire a maximum of 140,000 shares of the
Company's common stock may be granted at an exercise price not less than the
fair market value of the stock. The options expire ten years after the date of
grant. Upon exercise of the options, the Company can elect to distribute cash in
lieu of shares.
F-11
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
In addition, in connection with the renewal of the management agreement for
1994, the Company and the Manager agreed to eliminate the incentive management
fee provision and the Company granted to the partners of the Manager
non-qualified options to purchase 309,800 shares of common stock and 90,200
shares of stock appreciation rights ("SARs") with an exercise price of $8.60 per
share. The exercise price was 10% above the closing market price of the common
stock on the grant date. The holders will also receive payments equal to the
product of the per share dividend amount times the number of options and SARs
outstanding. The options and SARs will expire in December 1998. As of December
31, 1995, all of the options and SARs are exercisable and none of them have been
exercised. Upon exercise of the options, the Company can elect to distribute
cash in lieu of shares.
In 1995, certain holders exercised options to purchase 50,496 shares by
giving full recourse notes totaling $653,000 to the Company. The notes are
secured by the shares of common stock issued and bear interest at the prime rate
plus 1%. The notes are due on December 31, 1996 and can be repaid by giving the
Company shares of common stock owned by the optionholders based on the then
market price of the common stock.
Information on all stock options granted is summarized below:
NUMBER OPTION
OF PRICE
SHARES PER SHARE
------ ---------
Outstanding at December 31, 1993 ...... 403,141 $ 8.13-$20.90
Options and DERs canceled ............. (4,901) $11.19-$20.00
Options granted ....................... 14,000 $11.25
-------
Outstanding at December 31, 1994 ...... 412,240 $ 8.13-$20.90
Options exercised ..................... (54,496) $11.25-13.13
-------
Outstanding at December 31, 1995 ...... 357,744 $ 8.13-$20.90
=======
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No.107, "Disclosures about
Fair Values of Financial Instruments." Although management uses its best
judgement in estimating the fair value of these instruments, there are inherent
limitations in any estimation technique and the estimates are thus not
necessarily indicative of the amounts which the Company could realize in a
current transaction.
Basis of Estimates
Mortgage Assets. The fair value of mortgage assets is generally dependent on
interest rate and other economic factors, including (1) the characteristics of
the asset, (2) estimates of future cash flows and (3) the discount rate used to
calculate the present value of the cash flows. The market for the Company's
mortgage assets is very illiquid and traded prices are determined on a privately
negotiated basis. Thus, except for one mortgage asset which the Company has
agreed to redeem in the second quarter of 1996 for total income of $4.9 million,
the Company uses the carrying values as the estimated values.
Management believes, however, that it is meaningful to provide the following
present value of the estimated cash flows using the interest rates and mortgage
prepayment rates as of December 31, 1995. The estimates without redemptions
assume that the mortgage assets are held until the stated maturity (with the
exception of one mortgage asset which the Company has agreed to redeem in April
1996 for estimated
F-12
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
net proceeds of $6,000,000). The estimates with redemptions assume that the
Company would exercise the redemption rights at the earliest dates and sell the
mortgage instruments at the estimated market prices as of December 31, 1995.
(Dollars in thousands.)
DISCOUNT WITH WITHOUT
RATE REDEMPTIONS REDEMPTIONS
---- ----------- ------------
10% ............................ $41,442 $22,967
20% ............................ $34,032 $18,484
30% ............................ $28,595 $15,890
40% ............................ $24,505 $14,048
50% ............................ $21,354 $12,635
Real Estate Notes Payable. The Company has used the carrying value of real
estate notes payable as their fair value. At December 31, 1995, the interest
rates on the Company's notes payable approximated the market rates for debt
instruments with similar terms and maturities. Short-term borrowing.
The Company has used the carrying value of short-term borrowing as its fair
value as the interest rates are adjusted monthly and the maturity terms are less
than one year. Estimated Fair Values (in thousands):
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------ ----------
Mortgage assets ........................ $11,877 $16,777
Real estate notes payable .............. 49,633 49,633
Short-term borrowing ................... 4,495 4,495
7. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors, Pima Mortgage
Limited Partnership (the "Manager") manages the day-to-day operations of the
Company pursuant to a management agreement which has a current term through
December 31, 1996. Pursuant to the agreement, the Manager receives a base
management fee of 3/8 of 1% per annum of the Company's average invested assets
before deduction for reserves and depreciation. The management fees for 1995,
1994 and 1993 were $374,000, $544,000, and $625,000, respectively.
Under the agreement, the Manager must reimburse the Company for any
management fees received for the year to the extent that the operating expenses
(as defined) for the year exceed the greater of 2% of the Company's average
invested assets or 25% of its net income (as defined), unless the unaffiliated
directors determine that a higher level of expenses is justified for such year.
There were no such excess operating expenses in 1995, 1994 or 1993.
Additionally, if the agreement is terminated without cause (as defined) or not
renewed on terms as favorable to the Manager, the Manager will be entitled to
receive the management fees relating to the invested assets purchased prior to
the termination date, for a three-year period as if the agreement had remained
in effect. Under the agreement, the Manager also performs certain analyses and
other services in connection with the administration of structured financing
related to the Company's mortgage assets. For such services, the Company paid
the Manager $216,000 for 1995, $247,500 for 1994, and $260,000 for 1993.
As discussed in Note 5, the Company and the Manager agreed to eliminate the
incentive fee provision in the management agreement beginning with 1994. The
Company granted to the owners of the Manager options and stock appreciation
rights ("SARs") that provide for dividend equivalent payments
F-13
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
based on the per share amounts of dividends paid on the common stock. In 1995
and 1994, the dividend equivalent payments were $800,000 and $200,000 which are
included in operating expenses. As a result of the increase in the common stock
price, the Company recorded an accrual for the SARs of $705,000 in 1995 and
$324,000 in 1994, which amounts are included in operating expenses.
The Company has entered into a property management agreement with Pima Realty
Advisors, Inc. the "Property Manager"), an affiliate of the Manager, for each of
its apartment properties. Under the property management agreements, the Property
Manager provides the customary property management services at its cost without
profit or distributions to its owners, subject to the limitation of the
prevailing management fee rates for similar properties in the market. The costs
are allocated to the Company monthly based on the ratio of the number of units
owned by the Company relative to the total apartment units managed by the
Property Manager. The costs allocated to the Company for 1995 and 1994 were
$417,000 and $184,000 respectively (net of an allocated credit of $246,000
applicable only in 1994), which were equal to approximately 3% and 1.4% of the
real estate operating income.
8. TAXABLE INCOME (LOSS)
As of December 31, 1995, the Company had an estimated net operating loss
("NOL") carryforward of $75,000,000 which can be used to offset taxable income
other than excess inclusion income through 2009 (1999 for state taxes).
Substantially all of the dividends for 1994 and 1993 constitute ordinary income.
Approximately 14.5% of the 1995 dividend is ordinary income and 85.5% is a
return of capital for income tax purposes. During 1995, 1994, and 1993, the
Company had excess inclusion income from the residual interest in certain real
estate mortgage investment conduits ("REMICs") which cannot be used to offset
operating losses (including NOL carryforward) and deductions from other sources.
Under the current tax law for REITs, excess inclusion income is required to be
distributed as dividends. The estimated taxable income of $900,000 for 1995
represents excess inclusion income.
Net income reported in the accompanying consolidated financial statements is
different than the taxable income due to the reporting of some income and
expense items in different periods for income tax purposes. The difference
consists primarily of (1) reserves taken on mortgage assets in prior years which
were not allowed for income taxes, (2) differences in income recognition methods
on mortgage assets and (3) excess inclusion income for tax purposes. These
timing differences will reverse in future years.
Taxable income for 1995 is subject to change when the Company prepares and
files its income tax returns. The taxable income amounts also are subject to
adjustments, if any, resulting from audits of the Company's tax returns by the
Internal Revenue Service.
F-14
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993--(Continued)
(Dollars in thousands)
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NET INCOME
------------------------ DIVIDEND
TOTAL PER
INCOME AMOUNT PER SHARE SHARE
------ ------ --------- -----
1995
First ......... $ 7,983 $ 3,359 $ 1.10 $ 0.50
Second ........ 6,410 2,015 0.65 0.50
Third ......... 4,798 570 0.18 0.50
Fourth ........ 5,008 610 0.19 0.50
1994
First ......... $ 5,263 $ 1,218 $ 0.56 $ --
Second ........ 7,369 2,698 0.85 --
Third ......... 6,228 2,074 0.65 --
Fourth ........ 5,087 1,712 0.55 0.50
1993
First ......... $ (9,069) $(11,174) $(3.60) $ --
Second ........ (1,126) (2,877) (0.95) --
Third ......... 530 (1,320) (0.45) 0.25
Fourth ........ (2,288) (25,199) (8.10) 0.90
F-15
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1996
----
UNAUDITED
Assets
Real estate investments
Apartments, net of depreciation ............................. $ 70,857
Investments in joint ventures ............................... 2,853
Construction in progress .................................... 9,968
Land held for development ................................... 1,047
Other real estate ........................................... 932
---------
Total real estate investments ............................. 85,657
Mortgage assets ............................................... 5,527
Cash .......................................................... 5,917
Other assets .................................................. 543
---------
Total assets .............................................. $ 97,644
=========
Liabilities
Real estate notes payable ..................................... $ 49,564
Short-term borrowing .......................................... 1,954
Other liabilities ............................................. 5,595
---------
Total liabilities ......................................... 57,113
=========
Stockholders' Equity
Common Stock -- 40,000,000 shares of par value $.01 per
share authorized; 3,303,226 and 3,248,729 shares issued
and outstanding ............................................. 33
Additional paid-in capital .................................... 155,964
Deficit ....................................................... (112,473)
Stock note receivable ......................................... (682)
Treasury stock -- 148,733 shares .............................. (2,311)
---------
Total stockholders' equity ................................ 40,531
---------
Total liabilities and stockholders' equity .................... $ 97,644
=========
See Notes to Consolidated Financial Statements.
F-16
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS
-----------------------
1996 1995
---- ----
Real Estate Operations
Rental and other income .......................... $ 10,941 $ 10,493
-------- --------
Operating and maintenance expenses ............... 4,007 3,827
Real estate taxes and insurance .................. 1,069 1,116
Depreciation and amortization .................... 2,074 1,959
Interest expense on real estate mortgages ........ 3,269 3,373
-------- --------
Total operating expenses ....................... 10,419 10,275
-------- --------
Income (loss) from real estate ................... 522 218
-------- --------
Mortgage Assets
Prospective yield income ......................... 2,174 3,063
Income from redemptions and sales ................ 7,725 4,927
Interest expense ................................. (152) (170)
-------- --------
Income from mortgage assets ...................... 9,747 7,820
-------- --------
Income Before Administrative Expenses and ........ 10,269 8,038
Other Income
Administrative Expenses ....................... (2,759) (2,802)
Interest and other income ..................... 248 708
-------- --------
Net Income ......................................... $ 7,758 $ 5,944
======== ========
Net Income Per Share of Common Stock and
Common Stock Equivalents .......................... $ 2.46 $ 1.90
======== ========
Common Stock Equivalents ........................... 3,155 3,137
======== ========
Dividends Declared Per Share ....................... $ 1.50 $ 1.50
======== ========
See Notes to Consolidated Financial Statements.
F-17
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
(UNAUDITED)
1996 1995
---- ----
OPERATING ACTIVITIES
Net income ......................................... $ 7,758 $ 5,944
Principal noncash charges (credits)
Depreciation and amortization .................... 2,415 2,048
Reversal of yield maintenance accrual ............ (2,420)
Increase in accrual .............................. 507 705
-------- --------
Cash Provided By Operations ........................ 10,680 6,277
-------- --------
INVESTING ACTIVITIES
Investment in apartments ........................... (1,716) (7,858)
Investment in joint ventures ....................... (28) (1,751)
Construction expenditures .......................... (7,027)
Purchase of land for development ................... (60) (3,879)
Sale of other real estate .......................... 1,252
Other real estate assets ........................... 269 2,343
Reduction in mortgage assets ....................... 6,350 6,161
(Increase) decrease in other assets ................ (182) 140
-------- --------
Cash Used In Investing Activities .................. (2,394) (3,592)
-------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable .............. 6,895
Proceeds from construction loan .................... 247
Repayment of notes payable
Real estate notes ................................ (316) (7,824)
Notes secured by mortgage assets ................. (4,002)
Short-term borrowing ............................... (2,541) 4,495
Construction cost payable .......................... 1,384
Increase in other liabilities ...................... 1,147 594
Exercise of stock options .......................... 23 45
Payment of dividends ............................... (4,734) (4,727)
-------- --------
Cash Used In Financing Activities .................. (4,790) (4,524)
-------- --------
Cash
Increase (decrease) during the period ............ 3,496 (1,839)
Balance -- beginning of period ................... 2,421 4,129
-------- --------
Balance -- end of period ......................... $ 5,917 $ 2,290
======== ========
Supplemental Disclosure of Cash Flow
Information Interest Paid ......................... $ 3,424 $ 4,105
======== ========
See Notes to Consolidated Financial Statements
F-18
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(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, 1995 ........ 3,303 $ 33 $ 155,822 ($115,497) ($ 652) ($2,311) $37,395
Net income ........................ 7,758 7,758
Dividends declared ................ (4,734) (4,734)
Stock issuance .................... 5 53 (30) 23
Other ............................. 89 89
--------- --------- --------- --------- ------ ------- -------
Balance, September 30, 1996 ....... 3,308 $ 33 $ 155,964 ($112,473) ($ 682) ($2,311) $40,531
========= ========= ========= ========= ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-19
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
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, 1995 audited consolidated financial statements and notes thereto.
2. REAL ESTATE INVESTMENTS
As of September 30, 1996, the Company owned directly eighteen apartment
communities (2,683 units) located in Arizona, Texas, and New Mexico which
consisted of the following (in thousands):
Land ................................................ $ 15,514
Building and improvements ........................... 58,067
Accumulated depreciation ............................ (6,759)
Restricted cash and deferred loan fees .............. 4,035
--------
Apartments, net ..................................... $ 70,857
========
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 million. The Company has obtained a $15,350,000
construction loan of which $247,000 was outstanding at September 30, 1996. As of
September 30, 1996, the Company had invested $9,968,000 in construction in
progress.
In addition, 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 partner and the managing partner or
managing member of the joint ventures. The Company is entitled to receive 15%-
51% of the total profits and cash flows depending on the financial performance
of the joint ventures. The condensed combined financial statements of the joint
ventures are as follows (in thousands):
CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
Real estate, at cost net of depreciation .............. $53,734
Cash and other assets ................................. 2,019
-------
Total Assets ........................................ $55,753
=======
Notes payable ......................................... $35,938
Other liabilities ..................................... 787
-------
Total Liabilities ................................... 36,725
-------
Equity
The Company ......................................... 2,853
Joint venture partner ............................... 16,175
-------
Total Equity ........................................ 19,028
-------
Total Liabilities and Equity .......................... $55,753
=======
F-20
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 -- (CONTINUED)
(DOLLARS IN THOUSANDS)
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------- -------
Rental and other income .............. $ 6,872 $ 4,798
Operating expenses ................... (2,803) (2,152)
Depreciation ......................... (1,453) (975)
Interest expense ..................... (2,157) (1,547)
------- -------
Net Income (Loss) .................... $ 459 $ 124
======= =======
Allocation of net income
The Company ........................ $ 69 $ 19
Joint venture partner .............. 390 105
3. MORTGAGE ASSETS
During the third quarter of 1996, the Company sold six mortgage assets and
realized redemption income of $2,738,000 and total proceeds of $5,750,000. For
the nine months ended September 30, 1996, the Company realized redemption income
of $7,725,000 and received proceeds of $11,750,000 from the sale and redemption
of seven mortgage assets. In October 1996, the Company sold or redeemed two
mortgage assets for total proceeds of $1,825,000 and estimated income of
$1,700,000 which will be recorded in the fourth quarter of 1996. At September
30, 1996, the prospective yield on mortgage assets (excluding the mortgage
assets sold in October) was 38%.
4. NOTES PAYABLE
At September 30, 1996, the Company's short-term borrowing was secured by
mortgage assets with a total carrying value of $3,340,000.
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. At September 30,
1996, the amount outstanding was $247,000.
5. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors, Pima Mortgage
L.P. (the "Manager"), manages the day-to-day operations of the Company pursuant
to a management agreement that has a current term through December 31, 1996. For
the nine months ended September 30, 1996 and 1995, the management fees were as
follows (in thousands):
1996 1995
------ ------
Base management fee ...................... $279 $283
Administrative fee ....................... 151 167
The Company has 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 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 the nine months ended
September 30, 1996 and 1995 were $329,800 and $304,200, respectively, which were
equal to approximately 3.0% and 2.9%, respectively, of rental and other income.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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 Acquisition Communities (as
described in Note 2), for the year ended December 31, 1995 The Summary is the
responsiblity of the management of the Acquisition Communities Management. 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 Proxy Statement for Special Meeting of
Stockholders as described in Note 1 to the Summary and is not intended to be a
complete presentation of the Acquisition Communities' 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
Acquisition Communities for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Tucson, Arizona
November 21, 1996
F-22
<PAGE>
ACQUISITION COMMUNITIES
COMBINED HISTORICAL SUMMARY OF REVENUES AND
CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Rental income ........................................... $14,177
Other apartment operating income ........................ 330
-------
Total revenue ........................................... 14,507
-------
Certain Operating Expenses
Operating and maintenance expenses .................... 4,850
Real estate taxes and insurance ....................... 1,812
-------
Total certain operating expenses ........................ 6,662
-------
Excess of revenue over certain operating expenses ....... $ 7,845
=======
See accompanying notes to the historical summary of revenues and
certain operating expenses.
F-23
<PAGE>
ACQUISITION COMMUNITIES
COMBINED HISTORICAL SUMMARY OF REVENUES AND
CERTAIN OPERATING EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Rental income ........................................... $10,593
Other apartment operating income ........................ 186
-------
Total revenue ........................................... 10,779
-------
Certain Operating Expenses
Operating and maintenance expenses .................... 3,829
Real estate taxes and insurance ....................... 1,414
-------
Total certain operating expenses ........................ 5,243
-------
Excess of revenue over certain operating expenses ....... $ 5,536
=======
See accompanying notes to the historical summary of revenues and
certain operating expenses.
F-24
<PAGE>
ACQUISITION COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF REVENUES
AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
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 "Acquisition
Communities") for the year ended December 31, 1995. ASR Investments Corporation
("ASR") has entered into agreements to acquire the Acquisition Communities 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 Aquisition
Communities 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 September 30, 1996. Rental income is recognized as
earned.
2. ACQUISITION COMMUNITIES
Below is certain information relating to the Acquisition Communities:
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-25
<PAGE>
MASTER COMBINATION AND CONTRIBUTION AGREEMENT
AMONG THE WINTON PARTIES,
THE REIT PARTIES AND THE
MANAGEMENT PARTIES
THIS MASTER COMBINATION AND CONTRIBUTION AGREEMENT ("Combination
Agreement") is made as of the 8th day of November, 1996, as amended, among each
of the limited partnerships set forth in Schedule I attached hereto
(individually referred to as a "Transferor" and collectively as "Transferors");
Don W. Winton ("Winton" and, together with the Transferors, the "Winton
Parties"); ASR Investments Corporation, a Maryland corporation (the "REIT");
Winton & Associates, Inc., a Washington corporation ("Associates"); Heritage
Communities L.P., a Delaware limited partnership ("Heritage LP"); Heritage
Residential Group, Inc., an Arizona corporation wholly owned by the REIT
("Heritage Residential"); Heritage SGP Corporation, an Arizona corporation
wholly owned by the REIT ("Heritage SGP" and, collectively with the REIT,
Heritage LP and Heritage Residential, the "REIT Parties"); Pima Mortgage Limited
Partnership, an Arizona limited partnership ("Pima Mortgage"); Pima Realty
Advisors, Inc., an Arizona corporation ("Pima Realty" and, collectively with
Associates and Pima Mortgage, the "Management Parties"), Jon A. Grove ("Grove"),
Frank S. Parise, Jr. ("Parise"), and Joseph C. Chan ("Chan"). Winton, Grove,
Parise and Chan are executing this Combination Agreement solely with respect to
certain mergers of entities owned by them, with respect to employment agreements
to be entered into by each of them individually, and to provide information
necessary to prepare certain offering materials and proxy statements as
described herein.
A. Each Transferor is the owner of the respective project listed
adjacent to its name in Schedule II attached hereto (the "Properties").
B. Winton is the general partner of each of the Transferors. Winton
also is the sole shareholder of Associates which acts as the property management
company for each of the Transferors pursuant to property management agreements
between Associates and each Transferor.
C. The REIT is a real estate investment trust that owns apartment
communities and other assets. The REIT's assets currently are managed by Pima
Mortgage pursuant to a management agreement and Pima Realty pursuant to various
property management agreements with respect to each of the REIT's apartment
properties.
D. The REIT and Heritage SGP are the sole general partners and Grove is
the sole limited partner of Heritage LP.
E. The REIT, Heritage LP and the Transferors desire to combine their
assets and to thereafter operate as a self-administered and self-managed REIT
rather than being externally managed. To accomplish the foregoing, the parties
hereto agree to enter into all, but not less than all, of the transactions
described below on the terms and conditions herein provided:
1. The REIT shall make a tender offer (the "Exchange Offer")
to each owner of limited partnership interests in a Transferor (the "Transferor
Partners") that is an Accredited Investor to tender limited partner interests in
the Transferors (the "Transferor Partnership Interests") in exchange for shares
of common stock in the REIT (the "REIT Stock") pursuant to the terms and
conditions of this Combination Agreement and a Letter of Transmittal in the form
of Exhibit A hereto (the "Letter of Transmittal") to be executed by each
Transferor Partner desiring to tender their Limited Partnership Interests in the
Exchange Offer. The REIT will enter into a Registration Agreement in the form of
Exhibit B covering resales of the REIT Stock received in the Exchange Offer
("Registration Agreement").
2. Upon the terms and subject to the conditions set forth in
this Combination Agreement, on the Closing Date, the REIT, Heritage SGP and the
Approving Transferors (as hereinafter defined) shall enter
APPENDIX A
<PAGE>
into an amended and restated partnership agreement of Heritage LP in the form of
Exhibit C attached hereto (the "Amended Partnership Agreement") with such
changes thereto as Winton and the REIT shall agree to prior to the Commitment
Date pursuant to which the REIT and Heritage SGP will make certain cash
contributions (the "REIT Initial Capital Contribution") to Heritage LP in
exchange for general partnership interests in Heritage LP ("GP Units"), and each
Approving Transferor will contribute the Property owned by the respective
Transferor in exchange for limited partnership interests in Heritage LP ("LP
Units") and cash. The GP Units and the LP Units shall be exchangeable for REIT
Stock on the first anniversary of the Closing Date. The Transferors, the REIT
and Heritage LP shall enter into a registration agreement in the form of Exhibit
D attached hereto (the "Exchange Registration Agreement") pursuant to which the
REIT shall agree to register under federal securities laws the shares of REIT
Stock to be issued in exchange for the LP Units. The contributions of the REIT
Initial Capital Contribution and the Properties in exchange for GP Units and LP
Units, respectively, are collectively referred to herein as the "Asset
Transfer."
3. The REIT, Heritage Residential, Pima Realty and certain
other parties shall enter into an agreement in the form of Exhibit E attached
hereto (the "Pima Realty/Pima Mortgage Merger Agreement") pursuant to which Pima
Realty shall merge with and into Heritage Residential (the "Pima Realty
Merger"). Each of JG Mortgage Advisors, Inc., JC Mortgage Advisors, Inc., and FP
Mortgage Advisors, Inc. (collectively, the "Pima Mortgage Partners"), the three
corporate partners of Pima Mortgage, shall also enter into the Pima Realty/Pima
Mortgage Merger Agreement pursuant to which each of the Pima Mortgage Partners
shall merge with and into Heritage Residential (the "Pima Mortgage Merger").
Heritage Residential, the REIT, Winton, and Associates shall enter into an
agreement in the form of Exhibit F attached hereto (the "Associates Merger
Agreement") pursuant to which, if such agreement is approved by Winton as the
sole stockholder of Associates on or prior to the Commitment Date (as defined in
the Letter of Transmittal), Associates shall merge with and into Heritage
Residential (the "Associates Merger"). The Pima Realty/Pima Mortgage Merger
Agreement and the Associates Merger Agreement are collectively referred to
herein as the "Management Merger Agreements." Pursuant to the Associates Merger
Agreement, Heritage Residential shall become the manager of the Transferors,
including those Transferors that are not Approving Partnerships.
4. The REIT shall enter into employment agreements with each
of Winton, Grove, Parise, and Chan, each in the form to be agreed upon by the
parties thereto (the "Employment Agreements").
The Amended Partnership Agreement, the Registration Agreement, the
Exchange Registration Agreement, the Management Merger Agreements and the
Employment Agreements are sometimes hereinafter collectively referred to as the
"Related Agreements".
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Combination Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1
EXCHANGE OFFER
--------------
1.1 The Exchange Offer.
(a) Offer to Purchase. Provided that nothing shall have
occurred that would result in a failure to satisfy any of the terms or
conditions set forth in Article 7 of this Combination Agreement, as promptly as
practicable following the execution of this Combination Agreement, the REIT
shall commence the Exchange Offer by delivering the Exchange Offer Documents (as
defined below) to each Transferor Partner. Each Transferor Partner that is an
Accredited Investor shall have the right to tender all or any part of the
Transferor Partnership Interests owned by such Transferor Partner by delivering
a validly executed Letter of Transmittal to ASR prior to the Commitment Date (as
defined in the Letter of Transmittal). Each Transferor Partner desiring to
tender a Transferor Partnership Interest shall execute and deliver to Winton, as
custodian, a custody agreement and Power
2
<PAGE>
of Attorney in the form of Exhibit H attached hereto (the "Custody Agreement")
pursuant to which Winton will make and accept deliveries by and on behalf of the
Transferor Partners as provided in the Custody Agreement. The obligations of the
REIT to accept for purchase and to purchase any Transferor Partnership Interests
tendered by the Transferor Partners of a particular Transferor shall be subject
only to the conditions set forth in this Combination Agreement (including the
Minimum Condition). The REIT shall not be entitled to accept for purchase or
purchase the Transferor Partnership Interests tendered unless all of the
conditions to the consummation of the transactions contemplated in this
Combination Agreement are satisfied or waived as provided herein.
(b) Purchase Price. Subject to the conditions set forth in
Article 7 of this Combination Agreement, on the Closing Date, the Custodian
shall deliver the Letters of Transmittal to the REIT, and the REIT shall deliver
to the Custodian, as agent for each Transferor Partner of an Approving
Partnership on whose behalf the Custodian delivered a Letter of Transmittal, a
certificate registered in such Transferor Partner's name for the number of
shares of REIT Stock equal to (i) the Exchange Value of all of the Transferor
Partnership Interests tendered and accepted for purchase divided by (ii) the
REIT Stock Price. No fractional shares of REIT Stock shall be issued in the
Exchange Offer. Each Transferor Partner will be issued a whole share of REIT
Stock in lieu of any fractional share interest to which such Transferor Partner
would otherwise be entitled. For purposes of determining the number of shares of
REIT Stock to be issued in the Exchange Offer, Transferor Partnership Interests
held by one person in multiple accounts shall be aggregated.
(c) Exchange Offer Documents. As soon as practicable after the
Execution Date, the REIT shall prepare a Private Offering Memorandum as
described in Section 4.5 hereof covering the REIT Stock to be offered in the
Exchange Offer, which will comply in all material respects with the provisions
of applicable federal and state securities laws, and will contain Letters of
Transmittal and a Custody Agreement appointing Winton the Transferor Partners'
Custodian to make deliveries for the Transferor Partners at the Closing (the
Private Offering Memorandum, the Letters of Transmittal and the Custody
Agreement, together with any supplements or amendments thereto, are referred to
herein collectively as the "Exchange Offer Documents"). The REIT shall prepare
and make all filings under applicable state Blue Sky Laws to qualify or exempt
from qualification the REIT Stock offered pursuant to the Exchange Offer.
(d) Election to Tender Transferor Partnership Interests. The
election of a Transferor Partner to tender all or a part of the Transferor
Partnership Interests owned by the Transferor Partner shall be made by such
Transferor Partner's execution of a Letter of Transmittal and the return of the
Letter of Transmittal to the Custodian for delivery to the REIT pursuant to the
Custody Agreement. Following the Commitment Date the tender of Transferor
Partnership Interests shall be irrevocable.
(e) Consent to Admission of REIT as Partner. The Letter of
Transmittal shall provide that the Transferor Partner tendering a Transferor
Partnership Interest in a Transferor (i) consents to the admission of the REIT
as a substituted limited partner upon the purchase of such Transfer Partnership
Interest and (ii) waives any right of first refusal granted under the
Transferor's partnership agreement to the Transferor Partner or the Transferor
in connection with the Exchange Offer. Winton, as general partner of the
Transferor, consents to the admission of the REIT as a substituted limited
partner of each Approving Transferor as of the Closing Date. Promptly following
the Closing Date, each Approving Transferor shall file any certificates
necessary to reflect the admission of the REIT as a substituted limited partner.
(f) Term. The Exchange Offer shall remain open until the
Commitment Date, which shall be 5:00 p.m., Houston, Texas time on February
27,1997. The Exchange Offer shall expire on April 30, 1997 (the "Expiration
Date"). If the Exchange Offer is not consummated prior to the Expiration Date,
the REIT and the Custodian shall promptly return to the Transferor Partner the
Letter of Transmittal and all other materials delivered to the REIT and the
Custodian by the Transferor Partner pursuant to this Combination Agreement.
Prior to the Commitment Date, the REIT shall not amend or modify the terms of
the Exchange Offer without the prior consent of Winton. After the Commitment
Date, the Exchange Offer shall not be amended or modified.
3
<PAGE>
1.2 Tender of Winton's Transferor Partnership Interests. Upon the terms
and subject to the conditions set forth in this Combination Agreement, on the
Commitment Date, in addition to Winton's right to tender all or any part of his
Transferor Partnership Interests pursuant to Section 1.1 hereof, Winton shall
have the right to tender all or any part of his right to receive distributions
as a general partner in one or more Transferors to the REIT in exchange for
shares of REIT Stock pursuant to the Exchange Offer on the same terms and
subject to the same conditions as set forth in Section 1.1 above. At the
Closing, the REIT shall accept for payment all assignments of the right to
receive distributions as a general partner tendered by Winton in Approving
Partnerships and shall not accept for payment assignments of the right to
receive distributions as a general partner in all other Transferors. If the
tender of the right to receive general partner distributions is accepted, the
REIT shall acquire all right, title and interest to all distributions made by
the Transferor with respect to the interest acquired, but the REIT shall not be
substituted as a general partner. Winton shall remain as the general partner of
the applicable Transferor.
1.3 Internal Revenue Code Section 754 Election. Unless a Transferor has
a valid election in place pursuant to Internal Revenue Code Section 754, each
Transferor hereby agrees to make such an election effective for such
Transferor's taxable year in which the Exchange Offer is consummated.
ARTICLE 2
ASSET TRANSFER
--------------
2.1 The Asset Transfer. Provided that nothing shall have occurred that
would result in a failure to satisfy any of the terms or conditions set forth in
this Combination Agreement, immediately following the transactions set forth in
Article 1 hereof, the REIT and each Approving Transferor shall consummate the
Asset Transfer. The REIT and Heritage SGP shall make a cash capital contribution
to Heritage LP in accordance with Section 2.2(b) hereof and will continue to be
general partners of Heritage LP. Each of the Approving Transferors shall
contribute and convey the Property owned by each such Approving Transferor to
Heritage LP in exchange for LP Units and cash as set forth in Section 2.2(c)
hereof. Promptly following the issuance of LP Units and the delivery of cash to
the Approving Transferors, each of the Approving Transferors shall dissolve and
distribute the LP Units as a liquidating distribution to each partner of the
Approving Transferors that is an "accredited investor" and shall deliver cash as
a liquidating distribution to each partner of the Approving Transferors that is
not an accredited investor in accordance with Section 2.2(d) hereof. Pursuant to
the terms of the Amended Partnership Agreement, the GP Units and the LP Units
shall be exchangeable for REIT Stock on the first anniversary of the Closing
Date. Pursuant to the Exchange Registration Agreement, the REIT shall agree to
register under federal securities laws the shares of REIT Stock to be issued
upon conversion of the GP Units and LP Units.
2.2 Contribution of Property to Heritage LP.
(a) Amendment to Heritage Partnership Agreement. Upon the
terms and subject to the conditions set forth in this Combination Agreement, on
the Closing Date and immediately following the Exchange Offer and the admission
of the REIT as a limited partner of the Approving Partnerships, the Approving
Transferors, the REIT and Heritage SGP shall amend the Heritage Partnership
Agreement by executing and delivering the Amended Partnership Agreement
admitting the Approving Transferors as limited partners and providing for the
capital contributions in accordance with this Article 2.
(b) Capital Contributions. On the Closing Date, the REIT,
Heritage SGP and each Approving Transferor shall make the following capital
contributions to Heritage LP:
(i) The REIT and Heritage SGP shall make a cash
capital contribution equal on an aggregate basis to the REIT Initial Capital
Contribution which shall be the sum of:
4
<PAGE>
(A) that portion of the Mortgage Debts to be
repaid or assumed and cancelled by Heritage LP in accordance with Section 2.3
hereof including, without limitation, any prepayment fees or premiums,
assumption fees and other costs associated therewith), plus
(B) the amount required to satisfy any
monetary liens which the REIT elects to satisfy pursuant to Section 2.4(e), plus
(C) the Properties Closing Costs paid and to
be paid by Heritage LP or the REIT (on behalf of Heritage LP or on behalf of the
Approving Transferor) pursuant to Section 8.11, plus or minus, as appropriate
(D) the Prorations, plus
(E) all costs and expenses incurred and to
be incurred by Heritage LP, the REIT or Heritage SGP (on behalf of Heritage LP)
in the performance of its due diligence hereunder, and plus
(F) any cash required to be distributed to
non-Accredited Investors pursuant to Section 2.2(d) hereof.
(ii) Each Approving Transferor shall contribute and
convey the Property owned by such Approving Transferor to Heritage LP as
hereinafter provided subject only to the Transferred Debt as described in
Section 2.3 hereof.
(iii) Notwithstanding the foregoing, if, taking into
consideration the proposed contributions to the capital of Heritage LP by the
REIT, Heritage SGP, and each of the Approving Transferors in accordance with
Section 2.2(b) hereof, Heritage LP would not be consolidated with the REIT for
financial accounting and reporting purposes because the respective Partnership
Interests of the REIT or Heritage SGP in Heritage LP is insufficient, then at
the Closing the REIT or Heritage SGP may contribute cash to Heritage LP in
exchange for additional GP Units in Heritage LP at the rate of one GP Unit for
each $18.10 contributed in the minimum amount sufficient to permit Heritage LP
to be consolidated with the REIT for financial accounting and reporting
purposes.
(c) Issuance of Partnership Units. In exchange for the capital
contributions provided in Section 2.2(b) hereof, Heritage LP shall issue on the
Closing Date (i) to each Approving Transferor a number of LP Units equal to the
number of LP Units or the amount of cash to be distributed by the Approving
Transferor under Section 2.2(d); and (ii) to the REIT and Heritage SGP a number
of GP Units (rounded to a whole unit) equal to the REIT Initial Capital
Contribution divided by the REIT Stock Price allocated between them on a pro
rata basis based upon their respective contributions. At the Closing, each
Approving Transferor shall deliver to Heritage LP a certificate setting forth
the number of LP Units and the amount of cash to be distributed by the Approving
Transferor to the partners of such Approving Transferor.
(d) Distribution of LP Units. Each Approving Transferor
intends to dissolve and liquidate promptly following the Closing Date. In
connection with such liquidation, each Approving Transferor shall distribute to
each of its partners (i) who Heritage LP reasonably determines to be an
Accredited Investor a number of LP Units equal to the Exchange Value
attributable to such partner's interest in the Approving Transferor divided by
the REIT Stock Price and (ii) who Heritage LP reasonably determines is not an
Accredited Investor, an amount of cash equal to the number of shares of REIT
Stock that the partner would have been entitled to if such partner were an
Accredited Investor multiplied by the average closing price of a share of REIT
stock in the American Stock Exchange Composite Transactions as reported in the
Wall Street Journal for the 90 trading days immediately prior to the Closing
Date. Heritage LP shall deliver to Winton at the Closing a list of the limited
partners of the Transferor that Heritage LP has determined not to be Accredited
Investors. The REIT, as general partner of Heritage LP, consents to the transfer
of the LP Units to the partners of the Transferors determined by Winton to
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be Accredited Investors pursuant to the distribution and liquidation of the
Approving Transferor. If a partner of an Approving Transferor transfers an
interest in the Approving Transferor prior to the distribution of the LP Units
to such partner, distribution of the LP Units to the partner of the Approving
Transferor shall be subject to satisfaction by the partner of the Approving
Transferor and the transferee of the requirements of Section 11.3.1 of the
Amended Partnership Agreement.
2.3 Indebtedness.
(a) Mortgage Debt. The REIT, Heritage LP and the Transferors
acknowledge and agree that the Properties are subject to the Mortgage Debt from
the lenders ("Lenders") described on Schedule III attached hereto. The
Properties shall be acquired by Heritage LP subject to the Mortgage Debt,
provided that the Lender of such Mortgage Debt shall execute a consent, estoppel
letter, transfer agreement, and modification with respect to such Mortgage Debt
as shall be acceptable to Heritage LP, acting reasonably.
(b) Lender Consent. From and after the date hereof, the
parties shall proceed in good faith and with due diligence to attempt to secure
any lender consent and estoppel letter from the Lenders and to negotiate any
transfer agreement or modifications to the Loan Documents in order for Heritage
LP to acquire the Properties subject to such Mortgage Debt. Heritage LP agrees
that it shall accept each Property subject to the Mortgage Debt, provided that
the Lender agrees that such Mortgage Debt shall be non-recourse to Heritage LP
on the same terms that such Mortgage Debt is currently non-recourse to the
Transferor and the Lender executes the agreements contemplated by Section
2.3(a). Heritage LP shall not acquire any Property subject to a Mortgage Debt
unless the relevant Approving Transferor and Winton are released from any
liability with respect to such Mortgage Debt, unless otherwise agreed to by
Winton or the Approving Transferor, as applicable. Any Mortgage Debt to which a
Property is subject upon transfer to Heritage LP is herein referred to as
"Transferred Debt".
(c) Refinancing of Mortgage Debt. In the event that a Lender
does not agree to the transfer of a Mortgage Debt as contemplated by Sections
2.3(a) and (b), or if for any reason Heritage LP is unable to acquire a Property
subject to a Mortgage Debt, Heritage LP shall have the right to (i) refinance
all or a portion of such Mortgage Debt on terms it determines to be acceptable
to it in its discretion; (ii) pay all or any portion of such Mortgage Debt from
the proceeds of the Initial REIT Capital Contribution; or (iii) exclude such
Property from the transactions contemplated hereby in accordance with Section
7.1(i) hereof.
2.4 Inspection.
(a) Due Diligence Period. The REIT shall have until November
11, 1996, unless earlier terminated by agreement of the REIT (the "Due Diligence
Period"), to perform its due diligence review and examination of the Properties,
the Title Reports, the Surveys, the UCC Searches, the Loan Documents and all
information to be provided or made available by Transferors, as set forth below,
and to determine, in its sole and absolute discretion, whether to proceed with
the transactions contemplated under this Combination Agreement.
(b) Access. During the Due Diligence Period, and at all times
prior to the Closing Date, Transferors and Winton shall provide the REIT and
Pima Realty as well as their respective employees, contractors, consultants,
agents and representatives, with complete access to all files, books, records
and other materials in the possession or control of Transferors or Winton and
relating to the Properties and the right to examine, inspect and make copies of
such materials as they may deem appropriate. Transferors shall also provide for
such parties to have reasonable access to the Real Properties (including the
Improvements thereon) for the purpose of conducting surveys, architectural,
drainage, soils, mechanical systems, engineering, geotechnical and environmental
inspections and tests (including sampling and invasive testing for the presence
of Hazardous Materials performed in connection with Phase I and Phase II
environmental audits, feasibility studies and any other inspections, studies or
tests reasonably required by them. The REIT shall also have the right to conduct
a "walk-through" of each of the Properties prior to the Closing Date upon
appropriate notice, subject to the rights of all tenants under their Leases.
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(c) Information. The information to be made available by
Transferors and Winton with respect to the Properties shall include, but not be
limited to, the following (to the extent that such information is in the
possession or control of Transferors or Winton): construction plans,
specifications, certificates of completion and all files related to any
contemplated developments on any of the properties; correspondence; documents,
contracts and agreements; copies of all development agreements, approvals,
permits, site plans, licenses, entitlements, subdivision maps, environmental
reports, and all studies, reports or investigations performed in connection with
the securing of any governmental or quasi-governmental approval for the
development of any of such properties or construction of improvements thereon;
all permits, licenses and approvals relating to the ownership, operation or
occupancy of any improvements; plans and specifications for any on- or off-site
infrastructure to be installed, including all contracts, costs estimates and
contribution agreements relating thereto; all leases, lease guaranties and lease
files; utility bills; all management, marketing, service, supply, material,
equipment lease or maintenance contracts which pertain to the furnishing of
services, materials, leasehold equipment, or maintenance to the Properties and
similar agreements (the "Service Contracts"); maintenance work orders and
service requests for the prior two years (including, but not limited to, those
pertaining to boiler or other heating, ventilation or air conditioning systems)
; information relative to the payment history of each tenant; copies of
operating and financial statements (balance sheets, income, proformas, expense
and capital improvements) detailing the operating history of the properties for
the last three years including year-to-date information (the "Operating and
Financial Statements"); the Loan Documents; notices, citations, correspondence
or memoranda from any government or quasi-government authority or agency; and
all other materials relating to the Properties in the possession or control of
any Transferor or Winton, it being the intention of the parties that Transferors
and Winton will disclose to the REIT and the other parties performing the due
diligence review herein provided for any and all information in the possession
or control of such parties, their property managers, and any other affiliated
entity to the extent it relates to the Properties. In the course of its
investigations, the REIT may make inquiries to third parties including, without
limitation, tenants, the Lenders, contractors, property managers, parties to
other contracts and municipal, local and other government officials and
representatives, and the Transferors consent to such inquiries.
Each Transferor and Winton shall also make available
to the REIT all the books and records, financial statements, income tax returns,
contracts, employee records and other information with respect to the respective
Transferor as may be reasonably required by the REIT in order to perform its due
diligence review of the respective Transferor.
(d) Transferors' Deliveries. Transferors shall deliver to the
REIT within ten (10) days after the Execution Date: (i) a current rent roll and
delinquency report (a "Rent Roll") for each Real Property; (ii) a list of all
material permits, approvals and entitlements required for the Real Properties
known to Transferors; (iii) a schedule of Service Contracts (a "Schedule of
Service Contracts") for each Real Property; (iv) plans and specifications, in
the possession or control of Transferors for any major capital expenditures
relating to any Real Property; (v) to the extent in the possession or control of
Transferors, a full set of construction documents, including all plans and
specifications for all tenant improvements; (vi) a schedule of all actions and
lawsuits or other litigation or proceedings pending or outstanding within the
past four years in which any Transferor is a party; (vii) all title information
for the Real Properties in the possession or control of Transferors or their
attorneys; (viii) surveys for the Real Properties in the possession or control
of Transferors or their attorneys; (ix) a schedule of all insurance carried and
the costs thereof (a "Schedule of Insurance") with respect to each Real
Property; (x) a schedule of all warranties covering any roof, any improvements
on Tangible Personal Property on or pertaining to any Real Property; (xi) a
schedule of all environmental reports in Transferors' possession or control (a
"Schedule of Environmental Reports") for each Real Property, copies of all
environmental reports in Transferors' possession or control for each Real
Property and a list of any Hazardous Materials reported by any tenant to any
Transferor as being in use on any Real Properties; (xii) copies of all Loan
Documents; (xiii) a schedule of Tenant Options (a "Schedule of Tenant Options")
for each Real Property and copies of all Tenant Options; (xiv) property tax
notices and real and personal property tax returns filed, relating to the
Properties, for the two years prior to the year of execution of this Combination
Agreement, and the current year to date; (xv) copies of all governmental notices
of
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code or other violations pertaining to any Property, if any, whether or not now
corrected, received by Transferors during the past four years; and (xvi) a
schedule of Loan Documents (a "Schedule of Loan Documents") for each Real
Property.
(e) Title and Survey.
(i) Within 10 days after the Execution Date,
Transferors shall deliver to the REIT (A) Title Reports for the Real Properties
together with legible copies of all documents underlying exceptions to title
(including those in the "Requirements" section); (B) Surveys for the Real
Properties; and (C) UCC Searches for Transferors and for each Real Property and
for such other parties as the REIT may reasonably request. The REIT shall be
entitled to approve or object to any matters disclosed by the Title Reports,
Surveys or UCC Searches by delivering written notice of such approval or
objection to Transferors and the Title Company on or before fifteen (15) days
after delivery to the REIT of the Title Report, Surveys or UCC Searches, said
notice to specify in reasonable detail any matter to which the REIT objects. If
any party subsequently issues any amendment to the Title Report, Surveys or UCC
Searches disclosing any additional matters or changes in the legal description
or additional requirements of the REIT, the REIT shall be entitled to approve or
object to any such matter not disclosed by the Title Report, Surveys or UCC
Searches or any previous amendment thereto by delivering written notice of such
approval or objection to Transferors and the Title Company on or before five (5)
days after the Title Company has delivered to the REIT the amendment to the
Title Report, Surveys or UCC Searches said notice to specify in reasonable
detail any matter to which the REIT objects.
(ii) If the REIT delivers any notice of objection to
any matter, within five (5) days in writing after receipt of such objection,
Transferors shall notify the REIT and the Title Company whether Transferors are
unable or unwilling to remove or satisfy such matter objected to by the REIT on
or before Closing. If any Transferor does not give such notice, such Transferor
shall be deemed to be unable or unwilling to remove or satisfy such matter. If
any Transferor so indicates its inability or unwillingness to remove any matter
objected to by the REIT on or before Closing, the REIT may, within five (5) days
after receipt of such written notice from such Transferor (or ten (10) days from
the date of the REIT's objection if such Transferor does not respond in writing
to the REIT's objection), notify Transferors and the Title Company in writing of
the REIT's election to (A) proceed under this Combination Agreement with respect
to such Property and waive the REIT's objections, or (B) exclude the Property
and the Transferor subject to objection from the transactions contemplated in
this Combination Agreement. If the REIT does not give such notice, then this
Combination Agreement shall automatically terminate with respect to the
Transferor and the Property subject to objection.
(iii) Notwithstanding anything contained to the
contrary herein, if the REIT fails to timely notify Transferors and the Title
Company of any objections to, or its unequivocal approval of the Title Report,
Surveys or UCC Searches or any amendment or modification thereto, or if the REIT
fails to timely notify Transferors and the Title Company of its election to
either terminate or proceed with this transaction after delivery by Transferors
to the REIT of notice of its inability or unwillingness to remove any matter
objected to by the REIT, then the REIT shall be deemed to not object to any
matter in the Title Report, or any modification thereto.
(iv) Notwithstanding anything to the contrary in this
Section 2.4(e), regardless of any other objection from the REIT, Transferors
shall satisfy all pecuniary encumbrances (other than the Mortgage Debt) or
otherwise have all such encumbrances removed as liens against the Properties on
or before the Closing at their own expense. Transferors shall not place any
consensual lien, encumbrance or easement against the Properties following the
date of this Combination Agreement without the prior written consent of the
REIT. If Transferors fail to satisfy or remove any monetary lien on or prior to
Closing, the REIT may apply a portion of the REIT Initial Capital Contribution
to satisfy the monetary lien and reduce the Deemed Value of the related
Property. Transferors shall be required to deposit any additional funds at
Closing to satisfy any remaining monetary liens against the Properties.
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(v) Transferors shall comply with all requirements to
the issuance of the Title Policies (as defined herein) to be delivered at the
Closing. If the REIT has not received all Title Reports and Surveys at least
thirty (30) days before the expiration of the Due Diligence Period, then such
period shall be extended as it relates to survey and title matters only, on a
day-for-day basis, until all Title Reports and Surveys have been received by the
REIT.
(vi) The term "Permitted Exceptions" shall mean
Transferred Debt and all exceptions to title to the Real Properties (other than
monetary liens and those other matters which Transferors have agreed to cure in
accordance with Section 2.4(e)(iv) hereof), which have not been cured and which
the Title Insurer has not agreed to insure over or waive during the Due
Diligence Period and which the REIT shall be deemed to have approved by failing
to exclude the Property and the Transferor of such Property from this
Combination Agreement as provided in Section 2.4(e)(ii) hereof.
(f) Indemnity. Prior to the Closing, the REIT shall not place
any liens on the Properties and will indemnify, defend and hold Transferors
harmless from all claims and liabilities (including reasonable attorneys' fees
and expenses actually incurred) asserted against Transferors or the respective
owners as a result of any entry by or on behalf of the REIT. If any inspection
or test disturbs any of the Properties, the REIT will cause the damaged
properties to be restored to the same condition as existed prior to any such
inspections or tests.
2.5 Actions With Respect to Properties Prior to Closing.
(a) Operations.
(i) Transferors agree that prior to the Closing they
shall continue to operate and manage the Real Properties in the ordinary course
of business in accordance with past practice (which includes the construction,
development and management of properties and the making of tenant improvements
thereon) and shall perform regular maintenance, maintain existing insurance
coverage, perform their respective obligations under all leases with tenants,
Service Contracts and Loan Documents applicable to the Real Properties owned by
them, commit no waste to the Properties and pay and discharge, in the ordinary
course of business, liabilities and obligations relating to the Real Properties.
Transferors shall not, without the prior consent of the REIT, which consent
shall not be unreasonably withheld or delayed, incur, create or assume any new
indebtedness, other than accounts payable, taxes and similar amounts incurred in
the ordinary course of business, nor grant any new lien, mortgage, security
interest or pledge of any kind on any of the Real Properties prior to the
Closing.
(ii) Transferors agree that prior to the Closing they
shall consult with the REIT prior to terminating any Lease or Service Contract
(except in the ordinary course of business) or entering into or modifying any
contract or agreements relating to the Real Properties which would be binding on
Heritage LP or the REIT after the Closing. The REIT shall have the right to
approve, such approval not to be unreasonably withheld or delayed, any material
new contracts or contract modifications which are proposed by Transferors.
(iii) Transferors may enter into new Leases and
modify existing Leases relating to Real Properties without the REIT's consent so
long as such leases comply with the leasing standards existing on the date
hereof with respect to the applicable property with such exceptions as are
typically made in the ordinary course of business and are on Transferor's
standard form, subject to customary modifications thereto. Transferors shall,
however, consult with the REIT concerning all proposed Leases or Lease
modifications relating to Real Properties, and shall secure the REIT's prior
approval, such approval not to be unreasonably withheld or delayed, for any
Lease or tenant not meeting the foregoing requirements or any Lease modification
that would shorten the term, reduce the rent or otherwise relieve the tenant of,
or impose upon the landlord, any material obligation not set forth in the
current Lease.
(iv) Transferors shall notify the REIT of any matters
that may arise prior to the Closing that could have a material effect on any of
the Properties, such as pending or threatened litigation, notices
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of violations from governmental or quasi-governmental authorities or agencies,
tenant defaults, bankruptcies or insolvencies and asserted landlord defaults.
(v) Except with the prior written consent of the REIT
(which consent shall not to be unreasonably withheld or delayed), Transferors
shall not accept rents or occupancy payments from any tenant at any Real
Property for more than one month in advance except in the ordinary course of
business.
(b) Tenant Estoppels. For Real Properties that are not
apartment complexes, Transferors shall endeavor in good faith to secure tenant
estoppels in the form of Exhibit I attached hereto ("Estoppel Certificates")
from all tenants of all of the Real Properties prior to the Closing. The REIT
acknowledges that certain Major Tenants may not sign the form tenant estoppel
attached as Exhibit I, and in such event, an alternative tenant estoppel from
such Major Tenants may be delivered in satisfaction of Transferors' obligations
under the preceding sentence if such alternative form is satisfactory to the
REIT in the exercise of the REIT's reasonable commercial judgment. Transferors
shall be responsible for filling in the required information in each Estoppel
Certificate, for delivering the forms to the tenants and for following up with
tenants as necessary to secure such estoppels. The REIT will use reasonable
efforts to assist Transferors in securing such estoppels.
2.6 Damage. The risk of loss of or damage to a Real Property by reason
of any insured or uninsured casualty during the period up to and including the
Closing Date shall be borne by the applicable Transferor. In the event of any
material damage to or destruction of any Real Property or any portion thereof
(notice of which shall promptly be given to the REIT by the applicable
Transferor), the REIT may, at its option by notice to such Transferor given
within ten (10) days after the REIT is notified of such damage or destruction
(and the Closing shall be extended, if necessary to give the REIT such 10-day
period to respond to such notice) (i) elect to proceed under this Combination
Agreement with respect to such Property, in which event the Transferor shall, at
the Closing, assign to Heritage LP all insurance proceeds (including rent loss
insurance to the period from and after the Closing Date) for the damage,
Heritage LP shall assume responsibility for the repair of the Real Property, and
Heritage LP shall receive a credit at the Closing for any uninsured portion of
the damage and any deductible under the insurance policy; or (ii) exclude such
Property and Transferor from the transactions contemplated in this Combination
Agreement.
"Material damage" and "materially damaged" means, with respect
to the applicable Real Property, damage for which the cost to repair reasonably
exceeds one percent (1%) of such Property's Deemed Value or which would permit
any Major Tenant to terminate its Lease (if such Real Property is not an
apartment complex).
2.7 Condemnation. In the event of any threatened, commenced or
consummated proceedings in eminent domain, including, without limitation, any
conveyance in lieu thereof (notice of which shall promptly be given to the REIT
by the applicable Transferor) (a "Condemnation Proceeding"), which would
constitute a material condemnation respecting Real Property, the REIT may, at
its option, by notice to the applicable Transferor given within ten (10) days
after the REIT is notified of such actual or possible proceedings (and the
Closing shall be extended, if necessary, to give the REIT such 10-day period to
respond to such notice) (i) elect to proceed under this Combination Agreement
with respect to such Property, in which event the Transferor shall, at the
Closing, assign to Heritage LP its entire right, title and interest in and to
any condemnation award, and Heritage LP shall have the sole right prior to
Closing (subject to the applicable Transferor's approval which shall not be
unreasonably withheld or delayed) and after the Closing to negotiate and
otherwise deal with the condemning authorities in respect of such matters; or
(ii) exclude such Property and Transferor from the transactions contemplated in
this Combination Agreement.
"Material condemnation" means with respect to a Real Property,
a taking of (i) more than ten percent (10%) of the land constituting the Real
Property, (ii) more than ten percent (10%) of the parking for the buildings on
the Real Property (unless the same can, on the remaining Real Property so
affected, be replaced), (iii) any part of the buildings on the Real Property,
(iv) a means of access to the Real Property unless alternative
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means of access exist which in the REIT's judgment are adequate to serve the
Real Property, or (v) materially adversely affect the use or value of the Real
Property.
2.8 Prorations. The items in this Section 2.8 with respect to each of
the Real Properties shall be apportioned or prorated between the respective
Approving Transferor and Heritage LP as of the end of the day preceding the
Closing Date in order to determine the amount of the Proration with respect to
such Property. The parties shall compute or estimate all prorations prior to the
Closing Date, and Approving Transferors shall supply Heritage LP before the
Closing satisfactory supporting evidence for all such adjustments:
(a) Taxes and Assessments. General real estate taxes and
assessments imposed by governmental authority ("Taxes") and any assessments by
private covenant constituting a lien or charge on each Real Property for the
then-current calendar year or other current tax period not yet due and payable,
together with, if applicable, state and local taxes thereon. If the Closing
occurs prior to the receipt of the tax bill for any Real Property for the
calendar year or other applicable tax period for such Real Property in which the
Closing occurs, Taxes for such calendar year or other applicable tax period for
such Real Property shall be prorated based upon the most recent ascertainable
assessed values and tax rates. All prorations shall be based upon a fraction
determined by dividing the number of days elapsed through the date of the
Closing by 365.
(b) Collected Rent. All collected rent and other income (and
any applicable state or local tax on rent) under Leases in effect at the Closing
but excluding payments that may constitute rent but are provided for in other
subparagraphs of this Section 2.8. Each Approving Transferor shall be charged
with any rentals collected by such Approving Transferor before the Closing, but
applicable to any period of time after such Closing. Any rent and other income
delinquent as of the Closing shall not be prorated. Heritage LP shall use
reasonable efforts (which efforts shall not require Heritage LP or the REIT to
initiate any lawsuit) to collect any rent delinquent as of the Closing, and any
rent delinquent as of the Closing but collected after the Closing shall be
applied first to current rent obligations then to delinquent rent in inverse
order of incurrence, with any amounts applied to any period prior to the Closing
remitted to the respective Approving Transferor. Heritage LP may treat any rent
received after the 27th of any month as rent for the next month. Once the
Closing has occurred, no Approving Transferor shall have any right to seek by
legal action or otherwise collection of any rents delinquent for any period
prior to the Closing, unless the tenant has vacated the premises under the Lease
before the Closing and the Lease is not assigned to Heritage LP.
(c) Utilities. To the extent such expenses are the obligation
of an Approving Transferor and not tenants under Leases, utilities, including
water, sewer, electric, and gas, based upon the last reading of meters prior to
the Closing. If the utility company will not issue separate bills, such
Approving Transferor's portion will be charged against such Approving Transferor
and Heritage LP will pay the entire bill after the Closing. If any Approving
Transferor has paid any utilities in advance in the ordinary course of business,
then the Approving Transferor shall be credited for Heritage LP's portion of
such payment at the Closing. The amount of deposits, if any, with utility
companies that are transferrable and that are assigned by any Approving
Transferor to Heritage LP at the Closing shall be credited to such Approving
Transferor. The amount of any deposits with utility companies that are not
transferable and that are not assigned by any Approving Transferor to Heritage
LP at the Closing shall remain the property of such Approving Transferor.
(d) Fees and Charges Under Service Contracts. To the extent
such expenses are the obligations of any Approving Transferor and not of
tenant's under the Lease, fees and charges under any Service Contracts relating
to the Real Properties that are being assigned to and assumed by Heritage LP at
the Closing on the basis of the periods to which such Service Contracts relate.
(e) CAM Charges. Common area maintenance charges and other
operating expenses paid by tenants under Lease ("CAM Charges") and actually
received by any Approving Transferor. At the Closing, the Transferor shall be
charged for CAM Charges received by such Approving Transferor that relate to
periods after the Closing and any portion of CAM Charges not actually paid by
any tenants for the year of Closing or other
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applicable period (but only as to the portion of the year or such other period
during which such Approving Transferor owned the Real Property and such amounts
that have not previously been paid by such Approving Transferor).
(f) Transferred Debt. Interest accrued through the day prior
to the Closing Date and not yet due and payable and any principal, interest and
other amounts due and payable at the Closing Date pursuant to the Transferred
Debt; provided, however, transfer fees due and payable to holders of Transferred
Debt shall be paid in accordance with Section 8.11 hereof.
(g) Insurance. Premiums or other fees payable in connection
with any insurance policies that are being assigned to and assumed by Heritage
LP at the Closing.
(h) Other Expenses. All other liabilities related to the
ownership or operation of the Properties that Heritage LP may agree to assume or
take subject to in writing.
(i) Contractors and Suppliers. Amounts payable to contractors,
subcontractors, designers, suppliers, architects, engineers and others who have
performed services or labor or supplied material in connection with any of the
Properties.
(j) Leasing Commissions. Leasing or other fees or commissions
payable in connection with any Lease or any renewal or extension of any Lease,
but only to the extent that such fees or commissions have been disclosed to
Heritage LP and the REIT on the Rent Roll. For the avoidance of doubt, the
parties acknowledge that with respect to the majority of Leases, all commissions
due to brokers for the initial term of such Leases have been previously paid by
the Transferors on a "cash out" basis and there will be no proration of those
commissions at Closing; however, Heritage LP acknowledges that, as described on
the Rent Rolls, commissions for renewals and extensions of such Leases may be
due and payable in the future on a "cash out" basis at the time of the
applicable tenant's exercise of a renewal or option to extend or may be payable,
for such extension or renewal, on a monthly basis.
2.9 Tenant Deposits. All tenant deposits, including without limitation,
refundable security deposits, refundable pet deposits and key deposits, and
advance rental deposits (and interest thereon if required by law or contract to
be earned thereon) shall be transferred to Heritage LP at the Closing, and
Heritage LP shall assume the obligations to refund such deposits to such tenants
in accordance with their respective Leases after Closing, but only to the extent
the obligation to refund such deposits arises after Closing.
2.10 Income and Sales Taxes. All income, sales, gross receipts or
compensation taxes and similar taxes and fees imposed upon any Approving
Transferor under applicable local or state law shall be paid by the respective
Approving Transferor at the Closing.
2.11 Permit Fees. Customary fees payable with respect to the transfer
of permits and licenses assigned by any Approving Transferor to Heritage LP at
the Closing with the consent or approval, if required, of the issuer thereof
shall be paid by Heritage LP.
2.12 Wages. Approving Transferors shall pay the wages, employment taxes
and fringe benefits applicable thereto payable to employees, if any, of such
Approving Transferors as of their discharge on the Closing Date.
2.13 Escrow Accounts. The parties acknowledge that the Transferred
Debts to be assumed have Escrow Accounts. Upon the Closing (a) if requested by
an Approving Transfer, Heritage LP shall reimburse such Approving Transferor for
the amount such Approving Transferor has deposited into the Escrow Account with
respect to each Real Property, whereupon such Approving Transferor shall assign
to Heritage LP, and Heritage LP shall have sole right and ownership of, all
funds in such Escrow Account; or (b) each Approving Transferor shall
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withdraw all funds that it has deposited in each Escrow Account, whereupon
Heritage LP shall make the appropriate deposits into the Escrow Account.
ARTICLE 3
PROPERTY MANAGEMENT COMPANY MERGERS;
------------------------------------
INTERNALIZATION OF PROPERTY MANAGEMENT
--------------------------------------
3.1 Pima Realty Merger. Immediately following the execution of this
Combination Agreement, Pima Realty, Pima Mortgage, Heritage Residential, Grove,
Parise and Chan shall enter into the Pima Realty/Pima Mortgage Merger Agreement
that shall provide for Pima Realty to be merged with and into Heritage
Residential (the "Pima Realty Merger") on the Closing Date with Heritage
Residential continuing its corporate existence as the surviving corporation. The
Pima Realty/Pima Mortgage Merger Agreement shall provide for the conversion of
Pima Realty's shares of common stock into the right to receive 26,560 shares of
REIT Stock, and such other terms and conditions as shall be set forth in the
Pima Realty/Pima Mortgage Merger Agreement. By their execution of this
Combination Agreement, each of Grove, Parise and Chan, in their capacities as
the sole stockholders of Pima Realty, vote for, adopt, consent to and approve
the Pima Realty Merger. Subject to the Fairness Opinion not being withdrawn or
modified, the REIT, as the sole shareholder of Heritage Residential, hereby
votes for, adopts, consents to and approves the Pima Realty Merger and the Pima
Realty/Pima Mortgage Merger Agreement.
3.2 Pima Mortgage Merger. Immediately following the execution of this
Combination Agreement, each of Grove, Parise and Chan, each as the sole
stockholder of JG Mortgage Advisors, Inc., JC Mortgage Advisors, Inc. and FP
Mortgage Advisors, Inc., respectively, the three corporate partners of Pima
Mortgage (the "Pima Mortgage Partners"), shall cause each of the Pima Mortgage
Partners to enter into the Pima Realty/Pima Mortgage Merger Agreement that shall
provide for each of the Pima Mortgage Partners to be merged with and into
Heritage Residential (the "Pima Mortgage Merger") on the Closing Date with
Heritage Residential continuing its corporate existence as the surviving
corporation. The Pima Realty/Pima Mortgage Merger Agreement shall provide for
the conversion of all issued and outstanding shares of common stock of each of
the Pima Mortgage Partners into the right to receive 235,440 shares of REIT
Stock, and such other terms and conditions as shall be set forth in the Pima
Realty/Pima Mortgage Merger Agreement. By their execution of this Combination
Agreement, each of Grove, Parise and Chan, each as the sole stockholder of JG
Mortgage Advisors, Inc., JC Mortgage Advisors, Inc. and FP Mortgage Advisors,
Inc., respectively, vote for, adopt, consent to and agree to the Pima Mortgage
Merger. Subject to receipt of a favorable fairness opinion, the REIT, as the
sole shareholder of Heritage Residential, hereby votes for, adopts, consents to
and approves the Pima Mortgage Merger and the Pima Realty/Pima Mortgage Merger
Agreement.
3.3 Associates Merger. Immediately following the execution of this
Combination Agreement, Associates and Heritage Residential shall enter into the
Associates Merger Agreement that shall provide for Associates to be merged with
and into Heritage Residential (the "Associates Merger") on the Closing Date with
Heritage Residential continuing its corporate existence as the surviving
corporation. The Associates Merger Agreement shall provide for the conversion of
Associates' shares of common stock into the right to receive 70,284 shares of
REIT Stock and such other terms and conditions as shall be set forth in the
Associates Merger Agreement. The REIT, as the sole shareholder of Heritage
Residential, hereby votes for, adopts, consents to and approves the Associates
Merger and the Associates Merger Agreement.
3.4 Employment Agreements. On the Closing Date, the REIT and each of
Winton, Grove, Parise and Chan shall enter into the Employment Agreements.
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3.5 Appointment of Winton as Director. Prior to the Closing Date, the
REIT shall take all necessary action to increase the number of directors by one
and to appoint Winton as a director effective as of the Closing Date to serve
until the next annual election of directors.
3.6 Fairness Opinion; All Documents Delivered. The REIT Parties have
received an opinion, dated November 8, 1996, from Oppenheimer & Co., Inc. to the
effect that the consideration to be received by the REIT in the Pima Mortgage
Merger and Pima Realty Merger is fair to the REIT, from a financial point of
view (the "Fairness Opinion"). A copy of the Fairness Opinion has been provided
to the Transferors. The REIT has provided copies of all documents regarding the
Pima Realty Merger and the Pima Realty Merger to the Transferors, and there are
no other agreements, understandings or arrangements with respect to such
mergers.
ARTICLE 4
PARTNER AND STOCKHOLDER APPROVALS;
----------------------------------
PROXY AND REGISTRATION FILINGS;
-------------------------------
OFFERING MEMORANDUM
-------------------
4.1 Approval by Winton, as General Partner. Winton hereby approves and
consents to the Exchange Offer and Asset Transfer and represents and warrants
that he has (i) determined that this Combination Agreement and the transactions
contemplated hereby, including the Exchange Offer and Asset Transfer, taken
together, are in the best interests of the Transferor Partners, (ii) approved
this Combination Agreement and the transactions contemplated hereby, including
the Exchange Offer and Asset Transfer, and (iii) will recommend that the
Transferor Partners accept the Exchange Offer or approve and adopt this
Combination Agreement and the Asset Transfer; provided, however, that such
recommendation may be withdrawn, modified or amended by Winton if he determines
in good faith to do so in the exercise of his fiduciary duties, based upon
written advice of counsel. Winton hereby agrees to cooperate with the REIT in
preparing the Private Offering Memorandum and the REIT Proxy Statement and to
provide such information about Winton and the Transferors as the REIT shall
reasonably request.
4.2 REIT Stockholder Approval. As soon as practicable after the
Execution Date, the REIT shall prepare and file with the Securities and Exchange
Commission (the "SEC"), a proxy statement and related proxy materials (the "REIT
Proxy Statement") prepared in accordance with Section 14(a) under the Exchange
Act and the rules and regulations promulgated thereunder in order to solicit the
approval of the REIT's stockholders of the issuance of the REIT Stock in the
Exchange Offer, upon exchange of LP Units, and pursuant to the Pima Mortgage
Merger, the Pima Realty Merger, and the Associates Merger. The REIT shall use
its best efforts to respond to any comments by the SEC regarding the REIT Proxy
Statement, and to receive notification or confirmation, from staff of the SEC
that they have no comments or no further comments on the REIT Proxy Statement.
The REIT will use its best efforts to mail the REIT Proxy Statement to its
stockholders as soon as practicable following the later of (i) notification (or
confirmation) by the SEC that it will have no comments or no further comments on
the REIT Proxy Statement and (ii) the Commitment Date. Such meeting of the
stockholders of the REIT shall be held in accordance with the laws of the State
of Maryland on or before the Expiration Date or as soon thereafter as is
practicable. The REIT, acting through its Board of Directors, shall recommend to
its stockholders approval of the issuance of REIT Stock as contemplated by this
Combination Agreement and the Amended Partnership Agreement, and shall solicit
proxies in favor of such approval and shall vote all proxies in accordance with
the instructions thereon at the meeting of the REIT's stockholders; provided,
however, that such recommendation and solicitation may be withdrawn, modified,
or amended by the Board of Directors if it determines in good faith to do so in
the exercise of the directors' fiduciary duties, based upon the written advice
of counsel.
4.3 REIT Proxy Statement. The REIT shall deliver the preliminary and
definitive REIT Proxy Statement to Winton and each amendment thereto filed or
proposed to be filed. The REIT shall advise Winton in writing (a) when the REIT
Proxy Statement shall have been cleared by the SEC and when any amendment of or
supplement to the preliminary REIT Proxy Statement is filed with the SEC, and
(b) when the SEC shall make a request or suggestion for any amendment to the
preliminary REIT Proxy Statement and the nature and substance
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thereof. The REIT represents and warrants to each Transferor and Winton that the
REIT Proxy Statement, when mailed to the REIT stockholders and at the date of
the REIT stockholder meeting, will conform in all material respects to the
requirements of the Exchange Act and the rules and regulations thereunder, and
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances under which they were made, not
misleading; provided, however, that the REIT makes no representation or warranty
as to any of the information supplied in writing by Winton or the Transferors.
4.4 Transferor Proxy Statement. As soon as practicable after the
Execution Date, the Transferors shall take all action necessary in accordance
with applicable law and each Transferor's governing instruments to obtain
approval of the Transferor Partners of the Asset Transfer. As soon as
practicable after the Execution Date, each Transferor shall prepare a proxy
statement ("Transferor Proxy Statement") for use by Transferor Partners in
connection with obtaining the approvals referred to in the preceding sentence
which shall comply in all material respects with the federal and state
securities laws. Winton and each Transferor represent and warrant that the
Transferor Proxy Statement and any amendments or supplements thereto shall not
when sent to the Transferor Partners and at the Commitment Date contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, in light of the circumstances under which it was made, not
misleading. Each Transferor agrees to use its best efforts to send to its
limited partners a copy of the Transferor Proxy Statement, a related form of
proxy, together with the Private Offering Memorandum and the Letter of
Transmittal, promptly after the Private Offering Memorandum is provided to it.
The Letter of Transmittal shall provide that the election of a Transferor
Partner to tender a Transferor Partnership Interest in the Exchange Offer made
by such Transferor Partner shall constitute such Transferor Partner's vote for,
approval, consent to, and adoption of the Asset Transfer, and the approval of
the substitution of the REIT as a substitute limited partner as contemplated by
the Exchange Offer. If a Transferor has not received the consent of its partners
to the Asset Transfer on or prior to the Commitment Date as contemplated by
Section 1.1, such Transferor shall not be an Approving Transferor, and shall no
longer be bound by the terms of this Agreement and the Exchange Offer shall
automatically terminate as to the partners of such Transferor.
4.5 Preparation of Private Offering Memorandum. The REIT shall prepare
the Private Offering Memorandum describing the Exchange Offer and the REIT Stock
covered thereby and the Asset Transfer and the LP Units covered thereby. The
REIT shall prepare and make all filings under applicable state Blue Sky Laws to
qualify or exempt from qualification the securities offered pursuant to such
Exchange Offer and such Asset Transfer. The REIT shall deliver to Winton copies
of the Private Offering Memorandum. The REIT represents and warrants to Winton
and the Transferors that, with respect to the REIT and its subsidiaries, the
Private Offering Memorandum and any amendments or supplements thereto shall not
when first sent or given to the Transferor Partners and at the Commitment Date
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that the REIT makes no representation or warranty as to any of the
information supplied in writing by Winton or the Transferors.
4.6 Registration Agreements. In connection with the Exchange Offer, the
REIT shall enter into the Registration Agreement pursuant to which the REIT
shall agree to file, promptly following the Closing Date, a registration
statement for resale, including a form of prospectus, and one or more amendments
thereto, on Form S-3 or other appropriate form covering the shares of REIT Stock
to be issued pursuant to the Exchange Offer as set forth in Section 1.1 hereof.
In connection with the conversion of the LP Units, the REIT shall enter into the
Exchange Registration Agreement pursuant to which the REIT shall agree to file
and use its best efforts to have declared effective on the date the LP Units are
first convertible into REIT Stock, a registration statement, including a form of
prospectus, and one or more amendments thereto, on Form S-3 or other appropriate
form, covering such shares of REIT Stock to be issued upon conversion of the LP
Units issued pursuant to the Asset Transfer as set forth in Section 2.2 hereof.
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4.7 Information Respecting Transferors, Winton and Associates. Each
Approving Transferor shall furnish in writing for inclusion in the REIT Proxy
Statement and each Transferor shall furnish for inclusion in the Private
Offering Memorandum such information about such Transferors, Winton and
Associates that may be requested by the REIT Parties in writing. Each Transferor
represents and warrants that the information so supplied, as it may be revised
from time to time in writing by the respective Transferor, shall not, when sent
to the Transferor Partners or REIT stockholders and (with respect to the Private
Offering Memorandum) at the Commitment Date and (with respect to the REIT Proxy
Statement) at the Closing Date, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
4.8 Information Respecting the REIT. The REIT shall furnish in writing
for inclusion in the Transferor Proxy Statement such information about the REIT
Parties, the REIT's subsidiaries, Grove, Parise and Chan as may be requested by
Winton. The REIT represents and warrants that the information so supplied, as it
may be revised from time to time in writing by the REIT, shall not when sent to
the Transferor Partners and at the Commitment Date contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein, or necessary to make the statements therein, in the light of the
circumstances under which they were made, shall not be misleading.
4.9 Amendments to the Proxy Statement and Private Offering Memorandum.
If, at any time prior to the meeting of the REIT's stockholders or the
Commitment Date, it shall be necessary to amend or supplement the REIT Proxy
Statement, the Transferor Proxy Statement or the Private Offering Memorandum to
correct any statement or omission with respect to the REIT, Winton, the
Transferors or their subsidiaries or assets, or in order to comply with any
applicable legal requirements, the REIT or the Transferors, as the case may be,
shall supply the necessary information to the other. To the extent necessary to
comply with applicable legal requirements, the REIT shall amend or supplement
the REIT Proxy Statement or the Private Offering Memorandum or the applicable
Transferor shall amend or supplement its Transferor Proxy Statement, as the case
may be, and take all steps necessary to cause documents as so corrected to be
disseminated to the REIT stockholders or the Transferor Partners, as
appropriate, as and to the extent required to comply with applicable federal and
state laws.
4.10 Transferor Partner Information. In connection with the Exchange
Offer and Asset Transfer, Winton shall furnish the REIT with a list of the names
and addresses of the limited partners of the Transferors. Winton shall cooperate
with the REIT to establish to the reasonable satisfaction of the REIT which of
the Transferor Partners are Accredited Investors and otherwise qualify under
applicable Blue Sky laws to receive REIT Stock or the LP Units in a private
placement. Subject to the requirements of law, and except for such steps as are
necessary to disseminate the Private Offering Memorandum and the Exchange Offer
Documents and any other documents necessary to consummate the Exchange Offer and
Asset Transfer, the REIT shall, and shall cause each of its Affiliates to, hold
the names and addresses of the limited partners in confidence, use such
information only in connection with the Exchange Offer and the Asset Transfer,
and, if this Combination Agreement is terminated, deliver to Winton all copies
of such information or extracts therefrom then in its possession or under its
control.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
------------------------------
5.1 Transferors' Representations and Warranties. As a material
inducement to the REIT Parties to execute this Combination Agreement and to the
REIT Parties to consummate the transactions contemplated hereunder, each
Transferor severally represents and warrants to the REIT Parties with respect to
itself and each of its Properties, that as of the date hereof and as of the
Closing Date:
(a) Transferors' Organizational Representations and
Warranties.
(i) Organization and Authority. Such Transferor has
been duly organized and is validly existing and in good standing under the laws
of its jurisdiction of organization and, if different, is qualified
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to do business and in good standing in the state in which the Property that such
Transferor owns is located. Such Transferor has the full right and authority to
enter into this Combination Agreement. Subject to the receipt of consent by
Transferor Partners satisfying the Required Partner Approval, such Transferor
will have the full and right authority to transfer the Property to be conveyed
by such Transferor and to consummate or cause to be consummated the transactions
contemplated herein to be made by such Transferor. This Combination Agreement
has been duly authorized and properly executed by the Transferor and, assuming
the due authorization, execution and delivery hereof by the other parties
hereto, constitutes the valid and binding obligation of such Transferor,
enforceable against such Transferor in accordance with its terms.
(ii) Conflicts. The execution of and performance by
such Transferor of its obligations under this Combination Agreement does not and
will not conflict with the terms of such Transferor's constituent documents and
does not breach or violate any applicable law, rule or regulation of any
governmental authority. Subject to obtaining the required consents and approvals
by the Lender, there is no agreement to which such Transferor is a party or
binding on such Transferor, which will be breached by or which is in conflict
with the execution of or performance by such Transferor of its obligations under
this Combination Agreement or with the rights granted to such Transferor
hereunder.
(iii) Pending Actions. There is no action, suit or
proceeding pending, or to such Transferor's knowledge, threatened against such
Transferors or its Properties which would, if adversely determined, have a
material adverse effect on the financial condition or results of operations of
such Transferor. There is no action or proceeding pending, or to the
Transferor's knowledge, threatened against such Transferor which challenges or
impairs such Transferor's ability to execute, deliver or perform under this
Combination Agreement, to transfer all of the Property to be conveyed by such
Transferor hereunder or to consummate the transactions contemplated herein.
(b) Transferors' Property Representations and Warranties.
(i) Contractors and Suppliers. All contractors,
subcontractors, suppliers, architects, engineers and others that have performed
services or labor or supplied material in connection with such Transferor's
acquisition, development, ownership or management of its Properties have been,
or will be in the ordinary course of business, paid in full prior to Closing and
all liens arising therefrom (or claims which with the passage of time or notice
or both, could mature into liens) have been, or will be in the ordinary course
of business, satisfied and released prior to Closing.
(ii) Leases and Rent Roll. Each Rent Roll delivered
by such Transferor hereunder for each of its Real Properties is true, accurate
and complete in all material respects. Except as set forth in the Rent Rolls or
applicable Permitted Exceptions, there are no leases or occupancy agreements or
rights of possession affecting the Real Properties of such Transferor. Except as
otherwise specifically and expressly set forth in the Rent Rolls for each of the
Real Properties of such Transferor: no presently effective rent concessions have
been given to any tenants; no rent has been paid in advance by any tenants
respecting a period subsequent to the Closing (except for the month in which the
Closing occurs); no tenants have any claim against such Transferor for any
deposits, other than pursuant to the terms of its Lease with respect to sums
specified as deposits in the Rent Roll; no tenants have any options or rights of
first refusal to extend or renew their Leases or to rent additional space or to
purchase any of its Properties; there are no tenant improvements which are
incomplete or which have not been fully paid for by such Transferor except as
otherwise specified in this Combination Agreement; and there are no leasing or
fees or commissions due, nor will any become due, in connection with any Lease
or any renewal or extension of any Lease. Except as set forth in the Rent Rolls,
no understanding or agreement with any party exists as to payment of any leasing
or other fees or commissions regarding future leases or as to procuring of
tenants for any of the Real Properties. To such Transferor's knowledge, no
default or breach exists on the part of any tenant. Such Transferor has not
received any notice of any material default or breach on the part of the
landlord under any Lease, nor does there exist any such material default or
breach on the part of the landlord.
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(iii) Operating and Financial Statements. Each
Operating and Financial Statement for each of its Real Properties shows all
material items of income and expense (operating and capital) incurred in
connection with such Transferor's ownership, operation and management of such
Real Property for the periods indicated and are true, correct and complete in
all material respects.
(iv) Notice of Violations. To the Transferor's actual
knowledge, such Transferor has not received written notice that any of its
Properties or the use thereof violates any laws, rules and regulations of any
federal, state, city or county government or any agency, body or subdivision
thereof having any jurisdiction over any of its Properties that have not been
resolved to the satisfaction of the issuer of the notice.
(v) Zoning, Applicable Laws Governing Operation and
Restrictions. None of such Transferor's Properties or their current use or
operation fail to comply or are in violation, in any material respect, with
current applicable laws, regulations, ordinances, building codes and rules of
all applicable municipal, local, state and federal jurisdictions, including,
without limitation, zoning ordinances, parking requirements, building codes and
laws governing access for handicapped persons, and with restrictions, covenants
or similar agreements affecting such Properties. Any and all variances and other
exceptions granted by any governmental official, agency or body regarding the
compliance by such Transferor's Properties with all such laws, ordinances,
regulations, codes, restrictions, covenants or agreements have been validly
issued and shall inure to the benefit of Heritage LP after the Closing Date.
(vi) Utilities. All water, sewer, gas (to the extent
utilized), electric, telephone, drainage facilities and all other utilities
required by law for the operation of each of such Transferor's Real Properties
are installed to the boundaries of each of such Real Properties.
(vii) Taxes and Assessments. All taxes for the
current year and all prior years for each of the Properties of such Transferor
which are due and payable have been paid, except for installments due and not
yet delinquent and supplemental taxes not yet assessed, and no taxes are
delinquent. All impact fees or other assessments, fees or charges, however
denominated, which may constitute a lien or charge on any of the Properties of
such Transferor or which have been assessed or charged as a result of any
permit, license or approval obtained for any of the Properties of such
Transferor have been paid in full, and there is not presently pending any such
assessment, fees or charges of any nature with respect to any of the Properties
of such Transferor or any part thereof, nor has such Transferor received any
notice of any such assessments, fees or charges being contemplated. No areas
within any Real Property of such Transferor are subject to any existing
improvement districts, except as may be disclosed by the applicable Title Report
and any amendments thereto. All taxes with respect to such Transferor and the
ownership and operation of its Properties, including, without limitation,
income, gross receipts, net proceeds, ad valorem, turnover, personal property
(tangible and intangible), sales, use, franchise, excise, value added, stamp,
leasing, lease, user, transfer, fuel, excess profits, occupational and interest
equalization, windfall profits, severance and employees' income withholding and
Social Security taxes imposed by the United States or any foreign country or
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by any state, municipality, subdivision or instrumentality of the United States
or of any foreign country or by any other tax authority, including all
applicable penalties and interest (the "Other Taxes"), have been properly
determined in accordance with applicable rules and regulations and have been
paid in full when due. Such Transferor has duly and timely filed all tax returns
of every nature required to be filed by it with respect to the Other Taxes, in
every jurisdiction in which the same may have been so required, and has paid all
Other Taxes disclosed on such returns to the extent due. All Other Taxes of
which notice has been received or which shall accrue on or prior to the Closing
Date have been paid to the extent due.
(viii) Hazardous Materials. The environmental reports
for the Properties of such Transferor delivered to the REIT by such Transferor
constitute true, accurate and complete copies of all of the environmental
reports prepared for Transferors for each of the Properties. To Transferor's
actual knowledge, none of the Real Properties of such Transferor are in
noncompliance or in violation of Environmental Laws nor does there exist or has
there been released, in either case, in violation of applicable Environmental
Laws, Hazardous
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Materials on or from any of the Real Properties of such Transferor, except as
disclosed in any environmental reports in such Transferor's possession which
have been delivered to the REIT pursuant to Section 2.4(d) hereof.
(ix) Withholding Obligation. The conveyance to
Heritage LP of any of the Properties of such Transferor is not subject to any
Federal, state or local withholding obligation of Heritage LP under the tax laws
applicable to such Transferor or such of the Properties, including without
limitation, any "bulk sales" or other similar laws.
(x) Condemnation. No condemnation, claims, actions,
suits or proceedings relating to any of the Real Properties of such Transferor
are pending or, to Transferor's knowledge, threatened.
(xi) Insurance. Each Schedule of Insurance provided
by such Transferor is true, accurate and complete. Such Transferor has not
received any notice from any insurance company or board of fire underwriters of
any defects or inadequacies in, on or about any of the Real Properties of such
Transferor or any part of component thereof that would adversely affect the
insurability of any of such Real Properties or cause an increase in the premiums
for any of such Properties that have not been cured or repaired to the
satisfaction of the party issuing the notice. All insurance policies insuring
the Real Properties of such Transferor are in full force and effect.
(xii) Ownership. Such Transferor is the owner and has
title to its Real Properties free and clear of any and all claims, taxes,
assessments, reservations in patents, easements, rights-of-way, encumbrances,
liens, covenants, conditions, restrictions, obligations and liabilities other
than those specifically set forth herein or in its respective Title Report or
approved in writing as set forth above.
(xiii) Flood Area. Except as may be disclosed on the
survey respecting a Real Property of such Transferor, to Transferor's actual
knowledge, no portion of the Real Properties is within any flood plain area as
designated by the maps of the Federal Emergency Management Agency (FEMA maps) or
any other governmental or quasi-governmental flood control agency.
(xiv) Future Transfer Obligations. Except as
disclosed in the Title Reports for the Real Properties of such Transferor, there
are no agreements, commitments or understandings by or between such Transferor
and any third party pursuant to which such Transferor or its
successors-in-interest are required to dedicate any part of any Real Property or
to grant any easement, water rights, rights-of-way, road or license for ingress
and egress or other use in respect to any part of any Real Property of such
Transferor.
(xv) Creditors. There are no attachments, levies,
executions, assignments for the benefit of creditors, receiverships,
conservatorships or voluntary or involuntary proceedings in bankruptcy or
pursuant to any other debtor or relief laws contemplated by such Transferor or
pending in any current judicial or administrative proceedings against such
Transferor.
(xvi) Loan Documents. The Loan Documents delivered by
such Transferor to the REIT constitute true, accurate and complete copies of all
of the documents and instruments in effect with respect to the Mortgage Debts
applicable to such Transferors. The Schedule of Loan Documents delivered to the
REIT by such Transferor is true, accurate and complete. Such Transferor has not
received any notice that such Transferor is in default under such Loan
Documents, nor does any default or breach exist, nor any event or circumstance
which, with the giving of notice, or passage of time, or both, would constitute
a default or breach under such Loan Documents. The unpaid principal balance
under the Loan Documents delivered to the REIT by such Transferor as of
September 30, 1996 applicable to each Property of such Transferor is set forth
in Schedule III attached hereto.
(xvii) Solvency. Such Transferor is, and at all times
during the period beginning on the date hereof and ending on and including the
Closing Date will be, solvent. As used herein, solvent means with respect to an
entity that such entity (i) does not have debts greater than the fair value of
such entity's
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assets; (ii) is paying and anticipates that it will continue to pay such
entity's debts as they become due; and (iii) has sufficient capital to run such
entity's business.
(xviii) Brokers' Fees. No real estate broker,
salesperson or finder has engaged by such Transferor in connection with the
transactions contemplated hereby that may result in claims for commissions or
fees in connection therewith except Winton shall receive the real estate
commissions set forth in Schedule IV hereto.
(xix) Full Disclosure. Such Transferor has made
available to the REIT all material documents, files, written information, books
and records in such Transferor's possession or control and relating to the
Properties of such Transferor.
(xx) Tenant Options. The Schedule of Tenant Options
furnished by such Transferor to the REIT is true, accurate and complete and the
Tenant Options delivered by such Transferor to the REIT constitute true,
accurate and complete copies of all Tenant Options. Such Transferor has not
received any notice that such Transferor is in default under any of such Tenant
Options, nor does any default or breach exist, nor any event or circumstance
which, with the giving of notice, or passage of time, or both, would constitute
a default or breach under Tenant Options.
(c) Transferors' Securities Representations.
(i) Each Approving Transferor will acquire the LP
Units for the purpose of transferring such LP Units to its partners in
connection with the liquidation of the Transferor as contemplated by Section
2.2(d) and not with a view to or for sale in connection with any public
distribution thereof within the meaning of the Securities Act.
(ii) Each Approving Transferor has sufficient
knowledge and experience in financial and business matters to enable it to
evaluate the merits and risks of investment in the LP Units. Each Approving
Transferor has the ability to bear the economic risk of acquiring the LP Units.
(iii) Each Approving Transferor has been supplied
with, or had access to, information to which a reasonable investor would attach
significance in making investment decisions, including, but not limited to the
Private Offering Memorandum, all publicly available filings by the REIT under
the Securities Act and the Exchange Act, and the REIT's annual and quarterly
reports to stockholders, any information with respect to Heritage LP's financial
condition, business and prospects, and any other information such Approving
Transferor has requested, to answer all of its inquiries about Heritage LP and
the REIT, and to enable it to make its decision to acquire the LP Units.
(iv) Each Approving Transferor hereby acknowledges
that neither the LP Units nor the REIT Stock for which LP Units may be exchanged
are registered under the Securities Act or any state securities laws and cannot
be resold without registration thereunder or exemption therefrom. Each Approving
Transferor agrees that, other than the transfers contemplated by Section 2.2(d),
it will not transfer all or any portion of the LP Units or the underlying Shares
unless such transfer has been registered or is exempt from registration under
the Securities Act and any applicable state securities laws. The LP Units
contain a prominent legend with respect to the restrictions on transfer under
the Securities Act and under applicable state securities laws.
(d) Other Representations and Warranties.
(i) ERISA. Such Transferor holds no "plan assets,"
within the meaning of Department of Labor regulations at 29 C.F.R. section
2510.3-101, of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and the transactions
contemplated by
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this Combination Agreement are not part of an agreement, arrangement or
understanding designed to benefit a party in interest with respect to any
employee benefit plan subject to ERISA that invests in such Transferor.
The term "to Transferors' knowledge" as it is used in this
Section 5.1 shall mean the actual knowledge of the applicable Transferor, after
making inquiry in accordance with the Transferors' general internal reporting
requirements. A breach of a representation set forth in this Section 5 by a
Transferor shall constitute a failure of the condition set forth in Section
6.1(a) hereof only as to such Transferor.
5.2 The REIT's Representations and Warranties. As a material inducement
to Transferors to execute this Combination Agreement and consummate the
transactions contemplated hereunder, the REIT represents and warrants to the
Approving Transferors that as of the date hereof and as of the Closing Date:
(a) REIT Organizational Representations and Warranties.
(i) Organization and Authority. The REIT has been
duly organized, is validly existing as a corporation under the laws of its state
of incorporation and is in good standing in such state and, if different, is
qualified to do business and in good standing in the jurisdictions in which the
property owned by the REIT or the business conducted by the REIT requires such
qualification. Each of the REIT's subsidiaries has been duly organized and is
validly existing under the laws of its organization and, if different, is
qualified to do business in the jurisdictions in which the property owned by
such subsidiary or the business conducted by such subsidiary requires such
qualification. The REIT has the full corporate right and authority and has
obtained any and all consents required therefor to enter into this Combination
Agreement and, upon the approval by a majority of the votes cast by the
stockholders of the REIT in person or by proxy to list the REIT Stock issued
pursuant to this Combination Agreement, the exchange of the LP Units for REIT
Stock under the Amended Partnership Agreement, the Pima Mortgage Merger, the
Pima Realty Merger and the Associates Merger, as contemplated by Section 712 of
the Rules and Policies of the American Stock Exchange, Inc. The persons signing
this Combination Agreement on behalf of the REIT are authorized to do so. This
Combination Agreement and all of the documents to be delivered by the REIT at
the Closing have been or will be authorized and properly executed and do or will
constitute the valid and binding obligations of the REIT, enforceable against
the REIT in accordance with their terms.
(ii) Conflicts. The execution of and performance by
the REIT under this Combination Agreement does not and will not conflict with
the Amended and Restated Articles of Incorporation or By-Laws of the REIT and
does not breach or violate any applicable law, rule or regulation of any
governmental authority. There is no agreement to which the REIT is a party or,
to the REIT's knowledge, binding on the REIT which will be breached by or which
is in conflict with its execution of or performance of its obligations under
this Combination Agreement or with the rights granted to the REIT hereunder.
(iii) Pending Actions. There is no action, suit or
proceeding pending or, to the REIT's knowledge, threatened against the REIT or
any of its properties, which would, if adversely determined, have a material
adverse effect on the financial condition or results of operations of the REIT.
There is no action or proceeding pending or, to the REIT's knowledge, threatened
against the REIT which challenges or impairs the REIT's ability to execute,
deliver and perform under this Combination Agreement.
(b) REIT Property Representations and Warranties.
(i) Notice of Violations. To the REIT's actual
knowledge, the REIT has not received written notice that any of its Properties
or the use thereof violates any laws, rules and regulations of any federal,
state, city or county government or any agency, body or subdivision thereof
having any jurisdiction over any of the REIT Properties that have not been
resolved to the satisfaction of the issuer of the notice.
(ii) Zoning, Applicable Laws Governing Operation and
Restrictions. None of the Properties of the REIT or its current use or operation
fail to comply or are in violation, in any material respect,
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with current applicable laws, regulations, ordinances, building codes and rules
of all applicable municipal, local, state and federal jurisdictions, including,
without limitation, zoning ordinances, parking requirements, building codes and
laws governing access for handicapped persons and with restrictions, covenants
or similar agreements affecting such Properties. Any and all variances and other
exceptions granted by any governmental official, agency or body regarding the
Property's compliance with all such laws, ordinances, regulations, codes,
restrictions, covenants or agreements have been validly issued.
(iii) Utilities. All water, sewer, gas (to the extent
utilized), electric, telephone, drainage facilities and all other utilities
required by law for the operation of each of the Real Properties of the REIT are
installed to the boundaries of each of the Real Properties of the REIT.
(iv) Taxes and Assessments. All taxes for the current
year and all prior years for each of the Properties of the REIT which are due
and payable have been paid, except for installments due and not yet delinquent
and supplemental taxes not yet assessed, and no taxes are delinquent. All impact
fees or other assessments, fees or charges, however denominated, which may
constitute a lien or charge on any of the Properties of the REIT or which have
been assessed or charged as a result of any permit, license or approval obtained
for any of the Properties of the REIT have been paid in full, and there is not
presently pending any such assessment, fees or charges of any nature with
respect to any of the Properties of the REIT or any part thereof, nor has the
REIT received any notice of any such assessments, fees or charges being
contemplated. No areas within any Real Property of the REIT are subject to any
existing improvement districts, except as may be disclosed by the applicable
Title Report and any amendments thereto. All taxes with respect to the REIT and
the ownership and operation of its Properties, including, without limitation,
income, gross receipts, net proceeds, ad valorem, turnover, personal property
(tangible and intangible), sales, use, franchise, excise, value added, stamp,
leasing, lease, user, transfer, fuel, excess profits, occupational and interest
equalization, windfall profits, severance and employees' income withholding and
Social Security taxes imposed by the United States or any foreign country or by
any state, municipality, subdivision or instrumentality of the United States or
of any foreign country or by any other tax authority, including all applicable
penalties and interest (the "Other Taxes"), have been properly determined in
accordance with applicable rules and regulations and have been paid in full when
due. The REIT has duly and timely filed all tax returns of every nature required
to be filed by it with respect to the Other Taxes, in every jurisdiction in
which the same may have been so required, and has paid all Other Taxes disclosed
on such returns to the extent due. All Other Taxes of which notice has been
received or which shall accrue on or prior to the Closing Date have been paid to
the extent due.
(v) Hazardous Materials. To the REIT's actual
knowledge, none of the Real Properties of the REIT are in noncompliance or in
violation of Environmental Laws nor does there exist or has there been released,
in either case, in violation of applicable Environmental Laws, Hazardous
Materials on or from any of the Real Properties of the REIT.
(vi) Condemnation. No condemnation, claims, actions,
suits or proceedings relating to any of the Real Properties of the REIT are
pending or, to the REIT's knowledge, threatened.
(vii) Creditors. There are no attachments, levies,
executions, assignments for the benefit of creditors, receiverships,
conservatorships or voluntary or involuntary proceedings in bankruptcy or
pursuant to any other debtor or relief laws contemplated by the REIT or pending
in any current judicial or administrative proceedings against the REIT.
(viii) Solvency. The REIT is, and at all times during
the period beginning on the date hereof and ending on and including the Closing
Date will be, solvent. As used herein, solvent means with respect to an entity
that such entity (i) does not have debts greater than the fair value of such
entity's assets; (ii) is paying and anticipates that it will continue to pay
such entity's debts as they become due; and (iii) has sufficient capital to run
such entity's business.
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(c) REIT Securities Representations and Warranties.
(i) Reserved Shares. From the authorized capital
stock of the REIT, a sufficient number of shares of REIT Stock shall have been
reserved by the REIT at Closing for issuance to Transferor Partners in the
Exchange Offer and to the Transferors upon exchange of the LP Units therefor in
accordance with the terms of the Amended Partnership Agreement.
(ii) REIT Common Stock. The REIT Stock to be issued
in accordance with the Exchange Offer and the exchange of LP Units to REIT Stock
will be duly authorized, validly issued, fully paid and nonassessable and will
not be subject to any preemptive or similar right and, subject to compliance
with the Securities Act and the Exchange Act, will be eligible for listing on
the American Stock Exchange.
The term "to the REIT's knowledge" as used in this Section 5.2
shall mean the actual knowledge of the REIT, after making inquiry in accordance
with the REIT's general internal reporting requirements.
5.3 Heritage LP's Representations and Warranties. As a material
inducement to the Winton Parties to execute this Combination Agreement and
consummate the transactions contemplated hereunder, Heritage LP represents and
warrants to the Winton Parties that as of the date hereof and as of the Closing
Date:
(a) Heritage LP's Organizational Representations and
Warranties.
(i) Partnership Organization and Authority. Heritage
LP has been, and at the Closing, each Subsidiary Partnership will be, duly
organized under the Delaware Revised Uniform Limited Partnership Act, is or will
be validly existing as a Delaware limited partnership, and is or will be in good
standing in the State of Delaware. Heritage LP is and, at the Closing each
Subsidiary Partnership will be, qualified to do business and in good standing
under the laws of each jurisdiction in which the Property owned or to be owned
by Heritage LP or such Subsidiary Partnership or the business conducted or to be
conducted by Heritage LP or such Subsidiary Partnership requires such
qualification. The REIT and Heritage SGP are the sole general partners of
Heritage LP and will be the sole general partners of each Subsidiary
Partnership, Grove is the sole limited partner of Heritage LP, and Heritage LP
will be the sole limited partner of each Subsidiary Partnership. Heritage LP has
the full right and authority and has obtained any and all consents required
therefor to enter into this Combination Agreement and to consummate or cause to
be consummated the transactions contemplated herein. The persons signing this
Combination Agreement on behalf of Heritage LP at the Closing has been
authorized to do so. This Combination Agreement and all of the documents to be
delivered by Heritage LP at the Closing have been or will be authorized and
properly executed and do or will constitute the valid and binding obligations of
Heritage LP, enforceable against Heritage LP in accordance with their terms.
(ii) Conflicts. The execution of and performance of
this Combination Agreement does not and will not conflict with the Amended
Partnership Agreement or the Certificate of Limited Partnership of Heritage LP.
There is no agreement to which Heritage LP is a party or, to Heritage LP's
knowledge, binding on Heritage LP which will be breached by or is in conflict
with its execution of or performance under this Combination Agreement.
(iii) Pending Actions. There is no action or
proceeding pending or, to Heritage LP's knowledge, threatened against Heritage
LP or any of Heritage LP's properties, which would, if adversely determined,
have a material adverse effect on the financial condition or results of
operations of Heritage LP. There is no action or proceeding pending or, to
Heritage LP's knowledge, threatened against Heritage LP which challenge or
impair Heritage LP's ability to execute, deliver and perform under this
Combination Agreement.
(iv) No Business. Prior to the Closing, none of
Heritage LP nor any Subsidiary Partnership shall engage in any business or other
activities, except for the formation of the Partnership and (in the case of
Heritage LP) the execution of this Combination Agreement.
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The term "to Heritage LP's knowledge" as used in this Section
5.3 shall mean the actual knowledge of Heritage LP, after making inquiry in
accordance with Heritage LP's general internal reporting requirements.
(b) Heritage LP's Securities Representations and Warranties.
(i) Heritage LP Units. The Heritage LP Units to be
issued will be duly authorized, validly issued, fully paid and non-assessable
and will represent valid limited partnership interests in Heritage LP.
5.4 Heritage SGP's Representations and Warranties. As a material
inducement to Winton Parties to execute this Combination Agreement and
consummate the transactions contemplated hereunder, Heritage SGP represents and
warrants to the Winton Parties that as of the date hereof and as of the Closing
Date:
(a) Organization and Authority. Heritage SGP has been duly
organized, is validly existing as an Arizona corporation, and is in good
standing in the State of Arizona and each other jurisdiction in which the assets
owned or the business conducted by it requires such qualification. Heritage SGP
has the full right and authority and has obtained any and all consents required
to enter into this Combination Agreement and to consummate or cause to be
consummated the transactions contemplated herein. The persons signing this
Combination Agreement on behalf of Heritage SGP are authorized to do so. This
Combination Agreement and all of the documents to be delivered by Heritage SGP
at the Closing have been or will be authorized and properly executed and do or
will constitute the valid and binding obligations of Heritage SGP, enforceable
against Heritage SGP in accordance with their terms.
(b) Conflicts. The execution of and performance by Heritage
SGP under this Combination Agreement does not and will not conflict with the
Articles of Incorporation or ByLaws of Heritage SGP. There is no agreement to
which Heritage SGP is a party or, to Heritage SGP's knowledge, binding on
Heritage SGP which will be breached by or which is in conflict with its
execution of performance under this Combination Agreement.
(c) Pending Actions. There is no action or proceeding pending
or, to Heritage SGP's knowledge, threatened against Heritage SGP or any of its
properties, which would, if adversely determined, have a material adverse effect
on the financial condition or results of operations of Heritage SGP. There is no
action or proceeding pending or, to Heritage SGP's knowledge, threatened against
Heritage SGP which challenges or impairs Heritage SGP's ability to execute,
deliver and perform under this Combination Agreement.
The term "to Heritage SGP's knowledge" as it is used in this
Section 5.4 shall mean the actual knowledge of Heritage SGP, after making
inquiry in accordance with Heritage SGP's general internal reporting
requirements.
ARTICLE 6
COVENANTS
---------
6.1 Covenants of Winton Parties. The Winton Parties agree that, unless
the REIT otherwise agrees in writing, at all times prior to the Closing Date:
(a) Preservation of Business. The Winton Parties shall,
consistent with the provisions of Section 2.4 hereof, use their best efforts to
(i) preserve intact the present business organization of each Transferor; (ii)
preserve the present goodwill and advantageous relationships of each Transferor
with all persons having business dealings with such Transferor; and (iii)
preserve and maintain in force all licenses, registrations, franchises, patents,
trademarks, copyrights, bonds and other similar rights of each Transferor. The
Winton Parties and its subsidiaries
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shall maintain in force all property, casualty, crime, directors, and officers
and other forms of insurance which they are presently carrying.
(b) Books and Records. The Transferors shall maintain their
books, accounts and records in the usual, regular and ordinary manner, and on a
basis consistent with prior years, and shall comply with all laws applicable to
them or to the conduct of their business.
(c) No Organic Change. The Transferors shall not (i) amend
their partnership agreements or management agreements; or (ii) make any change
in their capital or otherwise.
(d) Compensation. The Transferors shall not (i) increase the
compensation payable to any employee or partner or the fees payable pursuant to
any management or consulting agreement from the amount payable as of the
Execution Date, or (ii) introduce or change any pension or profit sharing plan,
or any other employee benefit arrangement.
(e) Distributions. Except as provided in this Contribution
Agreement, the Transferors shall not declare, make or pay any distribution with
respect to its partnership interests.
(f) Consents and Approvals. The Winton Parties shall use their
best efforts to obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by the Winton Parties of the
transactions contemplated by this Combination Agreement. The Winton Parties
shall make or cause to be made all filings, applications, statements and reports
to all federal and state government agencies or entities which are required to
be made prior to the Closing Date by or on behalf of the Winton Parties pursuant
to any statute, rule or regulation in connection with the transactions
contemplated by this Combination Agreement.
(g) Truth of Representations and Warranties. None of the
Winton Parties shall take any of the foregoing actions or any action which would
make any representation or warranty contained in Section 5.1 hereof to be untrue
or incorrect in any material respect.
6.2 Covenants of the REIT Parties. The REIT Parties agree that unless
Winton otherwise agrees in writing, at all times prior to the Closing Date:
(a) Preservation of Business. The REIT Parties shall use their
best efforts to (i) preserve intact the present business organization of the
REIT Parties; (ii) preserve the present goodwill and advantageous relationships
of the REIT Parties with all persons having business dealings with the REIT
Parties; and (iii) preserve and maintain in force all licenses, registrations,
franchises, patents, trademarks, copyrights, bonds and other similar rights of
the REIT Parties. The REIT Parties and their subsidiaries shall maintain in
force all property, casualty, crime, directors, and officers and other forms of
insurance which they are presently carrying.
(b) Ordinary Course. The REIT Parties shall operate their
business only in the usual, regular and ordinary course and manner.
(c) Books and Records. The REIT Parties shall maintain their
books, accounts and records in the usual, regular and ordinary manner, and on a
basis consistent with prior years, and shall comply with all laws applicable to
them or to the conduct of their business.
(d) No Organic Change. The REIT Parties shall not (i) amend
their Articles of Incorporation or bylaws, except for those amendments set
forth in the REIT Proxy Statement; (ii) make any change in their capital stock
by reclassification, subdivision, reorganization or otherwise; or (iii) change
the character of their business.
(e) Consents and Approvals. The REIT Parties shall use their
best efforts to obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by them of the
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transactions contemplated by this Combination Agreement. The REIT Parties shall
make or cause to be made all filings, applications, statements and reports to
all federal and state government agencies or entities which are required to be
made prior to the Closing Date by or on behalf of the REIT Parties pursuant to
any statute, rule or regulation in connection with the transactions contemplated
by this Combination Agreement.
(f) Truth of Representations and Warranties. None of the REIT
Parties shall take any of the foregoing actions or any action which would make
any representation or warranty contained in Section 5.2 hereof to be untrue or
incorrect in any material respect.
(g) Dividends. Without the prior written consent of Winton,
which consent shall not be unreasonably withheld, the REIT shall not, on or
after the Execution Date declare or pay any cash dividends or property dividends
with respect to REIT Stock, with the exception of customary periodic cash
dividends paid by the REIT to holders of REIT Stock at such intervals and in
such amounts as are in every case consistent with the amounts and intervals
characteristic of the REIT or such as may be required to comply with the
applicable REIT dividend requirements.
6.3 Acquisition Proposals. From and after the date hereof, no Winton
Party, without the prior written consent of the REIT, will, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing
information) or take any other action to facilitate knowingly any inquiries or
the making of any proposals which constitute or may reasonably be expected to
result in an Acquisition Proposal from any person, or engage in any discussions
or negotiations relating thereto or accept any Acquisition Proposal; provided
however, that notwithstanding any other provision hereof, a Transferor or other
Winton Party may (i) at any time prior to the Commencement Date engage in
discussions or negotiations with a third party who (without any solicitation,
initiation, encouragement, discussion or negotiation, directly or indirectly, by
or with the Winton Parties after the date hereof) seeks to initiate such
discussions or negotiations and may furnish such third party information
concerning the Winton Parties and its business, properties, and assets if, and
only to the extent that, the general partner of the Transferor determines based
on the advice of outside counsel, that such action is necessary for the general
partner of the Transferor to act in a manner consistent with his fiduciary
duties and/or (ii) provided the Transferor(s) terminate this Combination
Agreement under Section 9.3(h) hereof, accept an Acquisition Proposal from a
third party. In the event any of the Winton Parties shall receive any
Acquisition Proposal or inquiry of the type referred to in this Section 6.3,
such Winton Party shall promptly communicate to the REIT the terms of any such
offer or inquiry.
6.4 Best Efforts. Subject to the terms and conditions of this
Combination Agreement, and subject to fiduciary duties under applicable law, as
advised by counsel, each of the parties hereto agrees to use its best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Combination Agreement, including, without
limitation, using its best efforts to make all necessary, proper or advisable
registrations and filings and obtain all necessary, proper or advisable permits,
consents, authorizations, requests and approvals of third parties and
governmental authorities. It at any time after the Closing Date, any further
action is necessary or desirable to carry out the purposes of this Combination
Agreement (including providing any information in any way related to the assets
to be purchased pursuant to this Combination Agreement), the proper partners,
officers and directors of each party to this Combination Agreement shall take
all such action.
6.5 Distribution of Net Working Capital. Immediately prior to the
Closing Date, each Approving Transferor shall distribute to its partners an
amount in cash equal to the Net Working Capital (less any payments of principal
made during such quarter) of such Approving Transferor as of the first day of
the full calendar quarter immediately preceding the Closing Date. As used
herein, the Net Working Capital of an Approving Transferor shall mean the
current assets minus the current liabilities (less any payments of principal
made during such quarter) of such Approving Transferor as of the date of
calculation, calculated in accordance with generally accepted accounting
principles as modified for tax basis accounting. Each Transferor shall deliver a
certificate to the REIT and Heritage LP setting forth the calculation of the Net
Working Capital of such Approving Transferor.
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ARTICLE 7
CONDITIONS PRECEDENT
--------------------
7.1 Approving Transferor. Notwithstanding any other provision in this
Combination Agreement, the REIT shall not be required to accept for payment or
pay for any Transferor Partnership Interests tendered by a Partner of a
Transferor and Heritage LP shall not be required to consummate the Asset
Transfer with respect to such Transferor unless (i) all of the conditions to the
parties' obligations to close the transactions contemplated by this Combination
Agreement set forth in Section 7.3 have been satisfied or waived by the REIT
Parties and (ii) such Transferor is an Approving Transferor. As used herein, a
Transferor shall be deemed an Approving Transferor if each of the following
conditions with respect to the Transferor has been satisfied by such Transferor
at the Closing or waived by the REIT (with respect to the Exchange Offer) and
Heritage LP (with respect to the Asset Transfer) in their sole and absolute
discretion:
(a) The representations and warranties of such Transferor
contained herein shall be true and correct in all material respects at
Closing as if made as of the Closing Date (however, if a particular
representation or warranty shall be made only to a Transferor's
knowledge, then the condition under this Section 7.1(a) shall not be
deemed to be fulfilled with respect to such items unless the same would
be fulfilled if such limitation did not exist);
(b) Each of the obligations of the REIT or Heritage LP
required to be satisfied in Section 7.2 with respect to such Transferor
shall have been met with respect to the Transferor as of the Closing;
(c) No action or proceeding by any governmental agency shall
have been instituted or threatened which would enjoin, restrain or
prohibit, or which could reasonably be expected to result in
substantial damages in respect of the Property owned by such Transferor
which in the reasonable judgment of the REIT Parties make it
inadvisable to consummate such transaction, and no court order shall
have been issued in any action or proceeding instituted by any person
which enjoins, restrains or prohibits the consummation of the
transactions contemplated by this Combination Agreement with respect to
the Transferor and no proceeding for such an order shall have been
instituted which in the reasonable judgment of the REIT or Heritage LP
is likely to result in the issuance of such an order;
(d) Such Transferor shall have delivered, or caused to be
delivered, each of the items specified in Section 8.3 hereof which such
Transferor is required to deliver and such Transferor shall have
performed in all material respects each of the other obligations
required to be performed by it under this Combination Agreement;
(e) The aggregate percent interests of all Transferor Partners
executing written consents approving the Asset Transfer plus the
aggregate percent interests of all Transferor Partners who validly
tendered Transferor Partnership Interests in the Exchange Offer, shall
equal or exceed the percent interest in such Transfer or which is
required to approve the Asset Transfer, which percent interest is set
forth on Schedule V (the "Required Partner Approval");
(f) The Custodian shall have delivered, or caused to be
delivered to the REIT, a properly completed and executed Letter of
Transmittal for each Transferor Partner of such Transferor
participating in the Exchange Offer;
(g) No material default (other than a default in payment of
rent that is not more than 15 days past due) shall exist under any of
the Leases with any of the Major Tenants for such Transferor's Real
Property that was not disclosed in the Rent Roll for the respective
Real Property delivered to the REIT pursuant to Section 2.4(d) hereof,
and no Major Tenant or Required Additional Tenant shall have initiated
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or had initiated against it any insolvency, bankruptcy, receivership,
or other comparable proceeding that was not disclosed in the Rent Roll
for such Transferor's Real Property delivered to the REIT pursuant to
Section 2.4(d) hereof;
(h) At the Closing, as a condition to the REIT Parties
obligation to close, the Title Company shall deliver to the REIT (i)
Owner Policies of Title Insurance (collectively "Texas Title Policies")
issued by the Title Company, covering each of the properties situated
within the State of Texas, in the form prescribed by the State Board of
Insurance for use in Texas, each of the Texas Title Policies to be
dated the date of the recording of the applicable deed covering the
Real Property covered thereby and to be in the amount of the Deemed
Value of the respective Real Property covered thereby (which allocation
shall be provided by the related Transferor), insuring Heritage LP as
owner of good and indefeasible title to the Survey legal description of
the Real Property covered thereby and subject only to the Permitted
Exceptions that are applicable to such Real Property and such
exceptions as are required by applicable Texas law to be included in
Schedule B to each such policy of title insurance, (ii) ALTA Owner's
Policies of Title Insurance (collectively the "Washington Title
Policies") issued by the Title Company with (to the extent permitted by
Washington law and insurance regulations) extended coverage providing
for deletion of general exceptions 1 through 5, access endorsements to
specified streets, contiguity endorsements as to Properties comprised
of multiple adjoining parcels and easement parcels, restriction
endorsements, endorsements deleting item number 4 (or the creditor's
right exception) of the "Exclusions From Coverage," dated the date and
time of the recording of the applicable deed and in the amount of the
Deemed Value of the respective Real Property covered thereby (which
allocation shall be provided by the related Transferor), insuring
Heritage LP as owner of good and indefeasible fee simple title to the
Survey legal description of the Real Property covered thereby, and
subject only to the Permitted Exceptions as are applicable to such Real
Property and required under applicable Washington law and containing
such other endorsements as may be reasonably required by the REIT; and
(iii) undated UCC searches from the State of Texas and the State of
Washington disclosing no security interests or liens affecting any of
the Properties other than those to be released at the Closing and other
than those created pursuant to the Transferred Debt. Each Transferor
shall execute at Closing such affidavits and indemnities as may be
appropriate under applicable facts and as reasonably required by the
Title Company in order for it to issue such above-referenced Texas
Title Policies and Washington Title Policies;
(i) The Lender of the Mortgage Debt of such Transferor shall
have consented to the transfer of the Property owned by such Transferor
subject to the Transferred Debt as contemplated by Section 2.3, or
Heritage LP shall have agreed to refinance or pay off such Mortgage
Debt; and
(j) There shall be no material adverse change in the business,
properties, net income or financial condition of such Transferor.
7.2 Conditions to Approving Transferors' Obligations to Close.
Notwithstanding anything to the contrary herein, an Approving Transferor's
obligations at the Closing to consummate the transactions contemplated hereunder
shall be contingent upon the following:
(a) The REIT's representations and warranties contained herein
shall be true and correct in all material respects at Closing as if made as of
the Closing Date; and
(b) The REIT shall have delivered, or caused to be delivered,
each of the items specified in Section 8.5 hereof and shall have performed each
of the other obligations required to be performed hereunder.
7.3 Conditions Applicable to All Parties. Notwithstanding anything to
the contrary herein, the obligation of each party to this Combination Agreement
at the Closing to consummate the transactions contemplated by this Combination
Agreement shall be contingent on the satisfaction of each of the following
conditions:
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(a) The stockholders of the REIT shall have voted to approve
the listing of the REIT Stock to be issued in the Exchange Offer, upon
conversion of the LP Units, in the Associates Merger, in the Pima Realty Merger,
and in the Pima Mortgage Merger, as contemplated by Section 4.2;
(b) All of the conditions for the closing and consummation of
the transactions contemplated by the Management Merger Agreements shall have
been satisfied or waived prior to the Closing, and the mergers contemplated by
the Management Merger Agreements shall close at the same time as the other
transactions contemplated hereby;
(c) The REIT Fairness Opinion has not been withdrawn as of the
Closing Date;
(d) The Minimum Condition shall have been satisfied;
(e) No action or proceeding by any governmental agency shall
have been instituted or threatened which would enjoin, restrain or prohibit, or
might result in substantial damages in respect of this Combination Agreement or
the consummation of the transactions contemplated by this Combination Agreement,
and would in the reasonable judgment of the REIT Parties make it inadvisable to
consummate such transactions, and no court order shall have been entered in any
action or proceeding instituted by any other party which enjoins, restrains or
prohibits this Combination Agreement or consummation of the transactions
contemplated by this Combination Agreement; and
(f) Heritage LP shall not be required to pay more than $1.5
million in cash to the Transferors under Section 2.2(d).
ARTICLE 8
CLOSING
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8.1 Closing Date. The consummation of the transactions contemplated
hereby with respect to all Properties, Approving Transferors and Selling
Transferor Partners except First Appian Way Associates, L.P. ("First Appian
Way"), First Greenwood Creek Associates, L.P. ("Greenwood Creek") and First
Springfield Associates, L.P. ("Springfield") (the "Initial Closing") shall occur
at the offices of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.
("O'Connor Cavanagh") in Phoenix, Arizona or such other place to which the
parties may agree on the date (the "Initial Closing Date") that shall be the
date selected by the REIT prior to thirty (30) days after the vote by the
stockholders of the REIT contemplated by Section 4.2. A pre-closing conference
shall commence at least three (3) business days prior to the Initial Closing
Date, during which all deliveries (other than the REIT Initial Capital
Contribution and other than deliveries by or respecting Greenwood Creek,
Springfield and First Appian Way) shall be made into an escrow between the
parties. All deliveries made during this pre-closing period shall be deemed
deliveries made at the Initial Closing. Notwithstanding the foregoing, the
consummation of the transactions contemplated hereby respecting Greenwood Creek,
Springfield and First Appian Way (the "Subsequent Closings") shall occur at the
offices of O'Connor Cavanagh in Phoenix, Arizona or such other place to which
the parties may agree on the date which is mutually agreed upon by Winton and
the REIT but in no event earlier than March 1, 1997 (the "Subsequent Closing
Date"); provided, however, that in the event that the Initial Closing shall not
have occurred prior to the Subsequent Closing, then such Subsequent Closing
shall occur simultaneously with the Initial Closing. All references in this
Combination Agreement to "Closing" or "Closing Date" shall refer to the Initial
Closing if pertaining to any Property other than Greenwood Creek, Springfield or
First Appian Way and shall refer to the Subsequent Closing if pertaining to
Greenwood Creek, Springfield or First Appian Way. The REIT's obligation to
consummate the transactions contemplated with respect to each of Greenwood
Creek, Springfield and First Appian Way are contingent upon each of Greenwood
Creek, Springfield and First Appian Way realizing net operating income of
$192,000, $203,500 and $132,500, respectively, for the three months prior to the
Subsequent Closing Date.
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8.2 Sequence of Closings. Deliveries of all documents to effect each of
the transactions contemplated by this Combination Agreement shall be deemed to
be made simultaneously and in escrow except with respect to the Properties and
the related Transferors subject to the Subsequent Closing. The Closing of each
of the transactions contemplated by this Combination Agreement shall be
contingent on the satisfaction of conditions for each other transaction
contemplated by this Combination Agreement except that the Initial Closing shall
not be contingent upon the satisfaction of conditions with respect to First
Appian Way, Greenwood Creek or Springfield. The transactions shall be deemed to
occur in the following order:
first, the Exchange Offer shall be deemed to close with
respect to all Approving Transferors transferring Properties in the Initial
Closing, and the REIT shall be substituted as a limited partner of such
Approving Transferors;
second, the Asset Transfer shall be deemed to close with
respect to each Property transferred in the Initial Closing, and each such
Property owned by an Approving Transferor shall be sold to Heritage LP in
exchange for LP Units;
third, the Pima Realty Merger shall be closed as contemplated
by the Pima Realty/Pima Mortgage Merger Agreement;
fourth, the Pima Mortgage Merger shall be closed as
contemplated by the Pima Realty/Pima Mortgage Merger Agreement;
fifth, the Associates Merger Agreement shall be closed as
contemplated by the Associates Merger Agreement;
sixth, each of Winton, Grove, Parise, and Chan shall enter
into the Employment Agreements;
seventh, the Exchange Offer shall be deemed to close with
respect to all Approving Transferors transferring Properties in the Subsequent
Closing (in the event such Subsequent Closing does not occur simultaneous with
the Initial Closing), and the REIT shall be substituted as a limited partner of
such Approving Transferors; and
eighth, the Asset Transfer shall be deemed to close with
respect to each Property transferred in the Subsequent Closing, and each such
Property owned by an Approving Transferor shall be sold to Heritage LP in
exchange for LP Units.
8.3 Transferor Partners' Deliveries to Close the Exchange Offer. At the
Closing, each Transferor Partner who has tendered a Transferor Partner Interest
in an Approving Transferor pursuant to the Exchange Offer shall cause the
Custodian to deliver to the REIT the following pursuant to the Custody
Agreement:
(a) A Letter of Transmittal, completed and duly executed by
such Transferor Partner, in the form of Exhibit A hereto;
(b) All right, title and interest in and to the Transferor
Partner Interests owned by Transferor Partner;
(c) A duly executed counterpart of the Registration Agreement;
and
(d) Any other documents called for by the Letter of
Transmittal.
8.4 Custodian's Deliveries to Close the Exchange Offer. At the Closing,
the Custodian shall deliver to the REIT a copy of the Custody Agreement, which
was executed by the Custodian and each Transferor Partner
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of an Approving Transferor who tendered Transferor Partner Interests in the
Exchange Offer and which were accepted for purchase by the REIT.
8.5 REIT's Deliveries to Close the Exchange Offer. At the Closing, the
REIT shall deliver to each Transferor Partner of an Approving Transferor who
tendered Transferor Partner Interests in the Exchange Offer by delivery to the
Custodian pursuant to the Custody Agreement, the following:
(a) A certificate representing the number of validly issued,
fully paid, and non-assessable shares of REIT Stock equal to the Exchange Value
attributable to all Transferor Partner Interests in Approving Transferors
tendered by such Transferor Partner divided by the REIT Stock Price, registered
in the name of each Transferor Partner;
(b) A certificate executed by a duly authorized officer of the
REIT setting forth the calculation of the Exchange Value attributable to the
Transferor Partnership Interests in Approving Transferors tendered by such
Transferor Partner and accepted for purchase by the REIT;
(c) A counterpart of the Registration Agreement duly executed
by the REIT;
(d) A certificate signed by a duly authorized officer of the
REIT stating that the REIT's representations and warranties contained herein are
true and correct on and as of the Closing Date with the same force and effect as
if made on the Closing Date and that all covenants and agreements required to be
performed by the REIT under this Combination Agreement prior to the Closing have
been performed in accordance with the terms of this Combination Agreement;
(e) A copy of the opinion of counsel addressed to such
Transferor Partner as to the matters set forth in Exhibit J attached hereto,
subject to customary qualifications.
8.6 Approving Transferors' Deliveries to Close the Asset Transfer. At
the Closing, each Approving Transferor shall deliver or cause to be delivered to
Heritage LP the following:
(a) Amended Partnership Agreement. The Amended Partnership
Agreement, executed by such Approving Transferor;
(b) Deeds. Special Warranty Deeds for each of the Real
Properties situated in the State of Texas, executed and acknowledged by each of
the respective Approving Transferors, conveying to Heritage LP indefeasible, fee
simple title to the Real Properties owned by each such Approving Transferor with
appropriate provisions reflecting that the conveyance made by each such Special
Warranty Deed is made and accepted subject to the Permitted Exceptions
applicable to the Real Property covered thereby and any title exceptions insured
over by the Title Company, containing provisions reflecting that the conveyance
made by each of such Special Warranty Deeds is made and accepted on an "As Is,
Where Is" basis in its present condition and subject to all defects or
deficiencies, known or unknown, without any express or implied warranty or
representation of any kind or nature with respect to any aspect of the physical
condition of the Real Property conveyed thereby, and otherwise in such form and
containing such terms and provisions as shall be satisfactory to and approved by
the parties to each of such Special Warranty Deeds. With respect to the Real
Properties situated in the State of Washington, Grant Deeds in statutory form
for each of the Real Properties situated in the State of Washington, executed
and acknowledged by each such Approving Transferors conveying to Heritage LP
indefeasible, fee simple title to each of the Real Properties of such Approving
Transferor and containing a limited or special warranty of title (warranting
title by, through or under grantor) and a warranty by each such Approving
Transferor that the Real Property covered by such Deed is free and clear of all
liens other than the Permitted Exceptions and expressly providing that each such
Grant Deed is made and accepted on an "As Is, Where Is" basis in its present
condition and subject to all defects or deficiencies, known or unknown, without
any express or implied warranty or representation of any kind or nature with
respect to any aspect of the physical condition of the Real Property conveyed
thereby;
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(c) Assignment of Leases. Assignments and Assumptions of
Leases, executed and acknowledged by such Transferor and Heritage LP, vesting in
Heritage LP all right, title and interest of the landlord under the Leases,
containing a warranty by such Transferor that the right, title and interest
assigned by it is free and clear of liens and charges and is not subject to any
other assignment, transfer or hypothecation, other than those existing pursuant
to the Transferred Debt, if applicable, and containing an assumption by Heritage
LP of all obligations of Transferors, as lessors, under the Leases arising after
Closing;
(d) Bills of Sale. Bills of sale, executed and acknowledged by
such Approving Transferor, transferring and assigning to Heritage LP all of the
Tangible Personal Property and containing a limited or special warranty of title
and a warranty by each Transferor that such property conveyed by it is free and
clear of liens and charges and is not subject to any other assignment, transfer
or hypothecation, other than those existing pursuant to the Transferred Debt, if
applicable, and containing provisions reflecting that the assignment and
transfer made thereby is made and accepted on an "As Is, Where Is" basis, in its
present condition and subject to all defects and deficiencies, known or unknown,
without any express or implied warranty or representation as to the fitness or
merchantability of any of the property transferred thereby or as to any other
matters, and otherwise in such form and containing such terms and provisions as
shall be satisfactory to and approved by the parties to each of such Bills of
Sale;
(e) Assignment of Intangible Personal Property. Assignments of
Intangible Personal Property, executed and acknowledged by the respective
Transferors, transferring and assigning, without recourse, warranty or
representation except as otherwise expressly provided herein, to Heritage LP
each Transferor's right, title and interest in and to all of the Intangible
Personal Property and containing a warranty by such Transferor that such right,
title and interest is free and clear of liens or charges and is not subject to
any other assignment, transfer or hypothecation, other than those existing
pursuant to the Transferred Debt, if applicable;
(f) FIRPTA. A Foreign Investment in Real Property Tax Act
affidavit executed by each Transferor;
(g) Tenant Notification and Estoppel Letters. Notification
letters to be delivered to all tenants at the Real Properties, executed by the
respective Transferors, providing notice that the interest of Transferor in
Lease has been assigned to Heritage LP, and providing notice of the address for
the future payment of rents and other charges and fees; and a Tenant Estoppel is
required with respect to any Real Property, the Transferor of such Real Property
shall have caused to have been delivered to the REIT the appropriate Estoppel
Certificates dated no earlier than 20 days prior to the Closing Date (or the
Subsequent Closing Date, if applicable) from each tenant listed on Schedule VI
attached hereto (the "Major Tenants") and tenants (the "Required Additional
Tenants") occupying at least the percentage of the balance of the square footage
in the buildings on all such Real Properties as such percentage is set forth in
Schedule VI attached hereto, disclosing no material inconsistencies with the
Rent Roll for the respective Real Property delivered pursuant to Section 2.5
hereof and, in the event there are any material changes in such estoppel
certificates, Transferors shall deliver an update of such estoppel certificates
reflecting such material changes to the REIT prior to Closing;
(h) Updated Rent Roll, Schedule of Service Contracts, Schedule
of Tenant Improvement Agreements and Operating Statements. For each of the Real
Properties, an updated Rent Roll, Schedule of Service Contracts, Schedule of
Tenant Improvement Agreements and Operating Statement, certified by the
respective Transferors as true, accurate and complete as of the Closing Date;
(i) Title Policies and UCC Searches. For each of the Related
Properties, the Title Policies delivered within a reasonable time after the
Closing if that is the custom for the locality, provided that the Title Company
at the Closing issues duly executed "marked-up" Title Commitments, effective the
time and date of the recording of the deeds of the Real Properties into Heritage
LP and irrevocably commits in writing to issue each of the Title Policies in the
form of the respective "marked-up" Title Commitments within no more than sixty
(60) days after the Closing Date, together with updated UCC Searches;
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(j) Certificate. A certificate signed by the general partner
of each Approving Transferor on behalf of each Approving Transferor, stating
that Transferors' representations and warranties contained herein are true and
correct on and as of the Closing Date with the same force and effect as if made
on the Closing Date;
(k) Authority. Evidence of organization, existence and
authority of each Approving Transferor and the authority of the person executing
documents on behalf of each Transferor reasonably satisfactory to the REIT;
(l) Opinions. An opinion of counsel of each Transferor in the
form attached hereto as Exhibit K and subject to such customary qualifications
as may be reasonably acceptable to the REIT;
(m) Tax Reporting Documents. Any and all document stamps,
transfer taxes, affidavits of property value, and other documents required by
states in connection with the transfer of real property;
(n) Exchange Registration Agreement. The Exchange Registration
Agreement, executed by the Approving Transferor;
(o) State Law Disclosures. Such disclosures and reports,
including any applicable certificate of residence or exemption with respect to
withholding requirements required by applicable state and local law in
connection with the conveyance of real property;
(p) Loan Documents. All instruments and agreements required by
the Lenders in connection with the transfer of the Transferred Debt to Heritage
LP; including (i) the consents and estoppels of the applicable Lenders ("Lender
Consents") to the transfer of the Properties subject to the Transferred Debt, on
such terms as are acceptable to the REIT, without change in any of the material
terms of the Loan Documents governing the Transferred Debt, including, without
limitation, amortization, interest rate and maturity date provisions;
(q) Quitclaim Deeds. To the extent the beneficial title owners
(all of whom are Transferors hereunder) of any of the Real Properties differ
from the record title owners (all of whom are Transferors hereunder) of such
Real Properties, quitclaim deeds in statutory form for each of such Real
Properties, executed and acknowledged by the Transferors holding such beneficial
title and conveying to Heritage LP all of such Transferors' right, title and
interest in and to such Real Property; provided however, the parties agree not
to record such quitclaim deeds unless required by the Title Company; and
(r) Additional Documents. Any additional documents that the
Lenders or the Title Company may reasonably require for the proper consummation
of the transactions contemplated by this Combination Agreement.
8.7 The REIT's and Heritage SGP's Deliveries to Close the Asset
Transfer. At the Closing, the REIT and Heritage SGP shall deliver to Heritage
LP, or cause to be delivered, the following:
(a) Amended Partnership Agreement. The Amended Partnership
Agreement, executed by the REIT and Heritage SGP, together with all filings with
any governmental authority or agency required to be made by or on behalf of
Heritage LP;
(b) REIT Initial Capital Contribution. Payment of the REIT
Initial Capital Contribution by the REIT and Heritage SGP to Heritage LP in
immediately available funds;
(c) Officers' Certificate. A certificate of the Chairman and
Chief Financial Officer of the REIT stating that the REIT's representations and
warranties contained herein are true and correct on and as of the Closing Date
with the same force and effect as if made on the Closing Date;
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(d) Authority. Evidence of organization, existence and
authority of the REIT and the authority of any person executing documents on
behalf of the REIT; and
(e) Additional Documents. Any additional documents that the
Lenders or the Title Company may reasonable require for the proper consummation
of the transactions contemplated by this Combination Agreement.
8.8 Heritage LP's Delivery to Close the Asset Transfer. At the Closing,
Heritage LP shall deliver, or cause to be delivered, to each Approving
Transferor, the following:
(a) GP and LP Units. That number of GP and LP Units calculated
in accordance with Section 2.2(c);
(b) Conveyance Documents. All acceptances and assumptions set
forth in the conveyance and assignment documents for the Properties, executed
and acknowledged by Heritage LP;
(c) Loan Documents. All instruments and agreements reasonably
required by the Lenders in connection with the transfer of the Transferred Debt
to Heritage LP, executed Heritage LP, if required; and the disbursements by
Heritage LP of the REIT Initial Capital Contribution to the Lenders on behalf of
Heritage LP in accordance with Section 2.3 hereof in order to repay in full such
portion of the Mortgage Debt that is not Transferred Debt;
(d) Opinion. An opinion of counsel of O'Connor Cavanagh as to
the matters set forth in Exhibit K attached hereto and subject to such customary
qualifications as may be reasonably acceptable to the general partner of the
Approving Transferors;
(e) Exchange Registration Agreement. The Exchange Registration
Agreement duly executed by the REIT;
(f) State Law Disclosures. Such disclosures and reports
required by applicable state and local law in connection with the conveyance of
real property; and
(g) General Partner's Certificate. A certificate of an
authorized officer of the REIT, as general partner of Heritage LP, stating that
the representations and warranties of Heritage LP set forth herein are true and
correct as of the Closing Date with the same force and effect as if made at the
Closing Date.
8.9 Mergers. At the Closing, the parties to the Pima Realty Mortgage,
Pima Mortgage Merger, and Associates Merger shall make all deliveries to each
other required by the Pima Realty/Mortgage Merger Agreement and Associates
Merger Agreement. At the Closing, the parties to the Pima Realty/Mortgage
Agreement shall deliver to Winton, individually, and as Custodian for each
Transferor Partner in an Approving Transferor that participates in the Exchange
Offer, and as general partner of each Transferor, a certificate stating that the
Pima Mortgage Merger and Pima Realty Merger were consummated in accordance with
the terms of the Pima Realty/Pima Mortgage Merger Agreement without any material
condition to such merger being waived by the parties thereto, which certificate
shall certify as to the accuracy of copies of each document executed in
connection with the closing of the Pima Realty Merger and Pima Mortgage Merger
which shall be attached thereto.
8.10 Deliveries of Winton, Grove, Parise and Chan. At the Closing, each
of Winton, Grove, Parise and Chan shall deliver, or cause to be delivered the
Employment Agreements for each of Winton, Grove, Parise and Chan, executed by
Winton, Grove, Parise and Chan, respectively.
8.11 Properties Closing Costs. All transfer fees or stamp taxes and
recording fees required to be paid to record the deeds and any loan assignment
documents with respect to the Properties together with any commissions
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set forth in Schedule IV shall be paid by the Approving Transferor that owned
such Property. The costs of the Title Reports, the Surveys and the UCC Searches
and the costs of recording any documents required to satisfy or release Title
Objections shall be paid one-half by the REIT on behalf of Heritage LP and
one-half by the Transferor owned the Property subject to the Title Report,
Survey, or UCC search; provided however, in the event the Closing fails to
occur, the REIT shall promptly pay all costs and expenses of the Surveys, the
Title Reports and the UCC Searches. The premiums for the standard Title Policies
shall be paid one hundred percent (100%) by the Transferors that owned the
Property insured by the Title Policy immediately prior to the Closing. The cost
of any additional endorsement or upgrades to the Title Policies shall be paid
one hundred percent (100%) by the REIT. Any prepayment fees or premiums or
assumption fees or costs in connection with the assumption or repayment of any
Mortgage Debt by Heritage LP shall be paid by the REIT. All costs and expenses
described in this Section 8.11 are herein called the "Properties Closing Costs."
All Properties Closing Costs will be paid by Heritage LP through the REIT
Initial Capital Contribution. Properties Closing Costs required by this Section
8.11 to be paid by the Transferors shall be paid by Heritage LP (in proportion
to the relative Values of the Properties transferred to Heritage LP) and the
amount of such Properties Closing Costs so paid by Heritage LP shall be deducted
from the Deemed Value of each Property; provided however, that the amount of
Properties Closing Costs paid by Heritage LP and deducted from the Deemed Value
of the applicable Property, as provided in this sentence, shall not exceed the
amount set forth for such Property in Schedule VI. The parties acknowledge that
certain Properties Closing Costs may not be paid at Closing but will be paid in
ordinary course following the Closing.
ARTICLE 9
WAIVER; MODIFICATION; TERMINATION; REMEDIES
-------------------------------------------
9.1 Waivers. The failure of the Winton Parties to comply with any of
their respective obligations, agreements or conditions as set forth herein may
be waived expressly in writing by the REIT, by action of its Board of Directors.
The failure of the REIT Parties to comply with any of its obligations,
agreements or conditions as set forth herein may be waived expressly in writing
by the Winton Parties by action of Winton as general partner.
9.2 Modification. This Combination Agreement may be modified at any
time in any respect by the mutual consent of all of the parties, notwithstanding
prior approval by the Transferor Partners or the stockholders of the REIT. Any
such modification may be approved for the REIT by its Board of Directors or for
a Transferor by its general partner.
9.3 Termination. This Combination Agreement may be terminated at any
time before the Closing Date, by the Board of Directors of the REIT or by the
Transferors (by action of their respective general partner or partners), before
or after approval of the REIT stockholders and the partners of the Transferors
as follows:
(a) by either the Transferors or the REIT if the Commitment
Date shall not have occurred on or before February 27, 1997;
(b) By either the Transferors or the REIT if the Closing Date
shall not have occurred on or before April 30, 1997 ("Expiration Date");
provided, however, that the Transferor's right to terminate this Combination
Agreement under this Section 9.3(b) shall not be available if one of the Winton
Parties' failure to fulfill any obligation under this Combination Agreement has
been the cause of, or resulted in, the failure of the Closing Date to occur
before the Expiration Date and the REIT's right to terminate this Combination
Agreement under this Section 9.3(b) shall not be available if one of the REIT
Parties' failure to fulfill any obligation under this Combination Agreement has
been the cause of, or resulted in, the failure of the Closing Date to occur
prior to the Expiration Date;
(c) By either the Transferors or the REIT if a court of
competent jurisdiction or governmental regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling the parties shall use their commercially
reasonably efforts to lift), in each case
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permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Combination Agreement, and such order, decree, ruling or
other action shall have become final and non-appealable; provided, however, that
if such order, decree, ruling or other action shall restrain, enjoin or
otherwise prohibit the transactions contemplated by this Combination Agreement
by Transferors owning Properties constituting less than 30% of the Exchange
Value, then the termination right pursuant to this provision shall only pertain
with respect to such Transferors and such Properties;
(d) By the Transferors if a REIT Party shall have breached, or
failed to comply with, in any material respect any of its obligations under this
Combination Agreement or any Related Agreement, and such breach or failure is
not cured within 30 days following written notice thereof by Transferors;
(e) By the REIT if a Winton Party shall have breached, or
failed to comply with, in any material respect any of the obligations under this
Combination Agreement or any Related Agreement, and such breach or failure is
not cured within 30 days following written notice thereof by the REIT;
(f) By the Transferors if a representation or warranty of a
REIT Party made in this Combination Agreement or a Related Agreement is not true
and correct in any material respect;
(g) By the REIT if a representation or warranty of a Winton
Party made in this Combination Agreement or a Related Agreement is not true and
correct in any material respect;
(h) By the Transferors prior to the Commitment Date, if as a
result of an Acquisition Proposal received by some or all of the Transferors,
the general partner of the Transferors determines in good faith and based upon
written advise of counsel, that his or its fiduciary obligations under
applicable law require that such Acquisition Proposal be accepted;
(i) By the REIT or the Transferors if the REIT stockholders do
not vote to approve the matters described in Section 4.2;
(j) By the REIT in its sole and absolute discretion prior to
the expiration of the Due Diligence Period, by delivery to the Transferors of
notice of termination pursuant to this Section 9.3(j); or
(k) By mutual written consent of the Transferors and the REIT.
9.4 Effect of Termination. In the event of termination of this
Combination Agreement as provided in Section 9.3 hereof, this Combination
Agreement shall forthwith become void and there shall be no liability on the
parties hereto, except as provided in this Section 9.4, and except for Sections
12.12:
(a) Breach by REIT Parties. If this Combination Agreement is
terminated by the Transferors under Section 9.3(d), the Winton Parties shall be
entitled to the prompt reimbursement from the REIT of all out-of-pocket costs
(including, without limitation, attorney's fees and disbursements) incurred by
the Winton Parties in connection with the transactions contemplated by this
Combination Agreement and the Winton Parties, jointly and severally, shall have
all rights and remedies to which they may be entitled by law, in equity and
under this Combination Agreement, including, without limitation, specific
performance.
(b) Breach by Winton Parties. If this Combination Agreement is
terminated by the REIT under Section 9.3(e), the REIT Parties shall be entitled
to the prompt reimbursement from the Transferors of all out-of-pocket costs
(including, without limitation, attorney's fees and disbursements) incurred by
the REIT Parties in connection with the transactions contemplated by this
Combination Agreement and the REIT Parties, jointly and severally, shall have
all rights and remedies to which they may be entitled by law, in equity and
under this Combination Agreement, including, without limitation, specific
performance.
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(c) Termination Following Acquisition Proposal. If either
(i) The REIT or the Transferors shall terminate this
Combination Agreement pursuant to Section 9.3(a) and prior to such termination
an Acquisition Proposal shall have been made, or
(ii) Some or all of the Transferors shall terminate
this Combination Agreement pursuant to Section 9.3(h),
and, in either case, a definitive agreement to effect an Acquisition Proposal is
entered into by any of the Transferors within 18 months following the date of
termination, the Transferors party to the Acquisition Proposal shall pay (pro
rata based on the Exchange Values attributed to such Transferors or as otherwise
agreed among themselves) to the REIT on the date and only if such Acquisition
Proposal is consummated, $1,000,000 in cash plus the reimbursement of all
out-of- pocket fees and expenses incurred by the REIT Parties in connection with
the transactions contemplated by this Combination Agreement up to a maximum of
$1,000,000.
(d) Termination Following REIT Change in Control. If, prior to
the earlier of the Closing Date or the termination of this Combination Agreement
pursuant to Section 9.3, either
(i) a person, alone or together with its affiliates
and associates, becomes the beneficial owner of 50% or more of the REIT Stock,
the REIT enters into or publicly approves of a definitive agreement pursuant to
which a person, alone or together with its affiliates and associates proposes to
acquire 50% or more of the outstanding REIT Stock, or the REIT enters into or
publicly approves of an agreement to merge or consolidate with another person or
transfer all or substantially all of the REIT's assets to another person;
(ii) a person, alone or together with its affiliates
and associates, makes a tender offer or other offer to purchase shares of REIT
Stock pursuant to which the person (and its affiliates and associates) may
become the beneficial owner of 50% or more of the outstanding REIT Stock, or
(iii) any person shall propose a merger,
consolidation, purchase of all or substantially all of the assets of the REIT or
similar transaction;
and the REIT stockholders do not vote to approve the matters described in
Section 4.2, then in the event of (i) above promptly following vote of the REIT
stockholders the REIT shall pay to the Transferors the REIT Termination Payment
and in the event of (ii) or (iii) if within 18 months following the termination
of this Combination Agreement any person and its affiliates and associates
becomes the beneficial owner of 50% or more of the outstanding REIT Stock,
acquires all or substantially all of the assets of the REIT, or merger or
consolidates with the REIT then upon the consummation of such transaction, the
REIT shall pay the REIT Termination Payment to the Transferors. As used herein,
the REIT Termination Payment shall equal $1,000,000 plus the amount of the
Winton Parties' out of pocket expenses in connection with the transactions
contemplated by this Combination Agreement up to a maximum of $1,000,000. For
purposes of this Section, beneficial ownership shall have the meaning set forth
in the regulations promulgated by the Securities and Exchange Commission under
Section 13(d) of the Exchange Act, and affiliate and associate shall have the
meaning set forth in Rule 12b-2 under the Exchange Act.
ARTICLE 10
INDEMNIFICATION
---------------
10.1 Obligations to Indemnify. Heritage LP shall defend and hold
harmless Winton in the event that the Indemnified Party becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim (as hereinafter defined) by reason of
or arising out of the Indemnified
37
<PAGE>
Party having been the general partner of an Approving Transferor as soon as
practicable but in any event no later than 30 days after written demand is
presented to Heritage LP against any and all Expenses (as hereinafter defined),
judgments, fines, penalties and amounts paid in settlement (including any
interest, assessments and other charges paid or payable in connection with or in
respect of such Expenses, judgments, fines, penalties and amounts paid in
settlement) of such Claim. If so requested by the Indemnified Party, Heritage LP
shall advance, within 10 business days of such request, any and all reasonable
Expenses to the Indemnified Party.
10.2 Amount of Indemnification. The maximum amount of the
indemnification provided for in Section 10.1 above shall be equal to the
aggregate value of the Properties transferred pursuant to the Asset Transfer on
the Closing Date.
10.3 Defined Terms. For purposes of this Section 10, the following
terms shall have the meanings set forth below:
(a) "Claim" shall mean any threatened, pending or completed
action, suit, investigation or proceeding, and any appeal thereof, whether
civil, criminal, administrative or investigative and/or an inquiry or
investigation.
(b) "Expenses" shall mean all costs, expenses and obligations
(including attorneys' fees) paid or incurred in connection with investigating
defending, being a witness in or participating in, including an appeal, or
preparing to defend, be a witness in or participate in any Claim relating to an
Indemnifiable Event.
ARTICLE 11
DEFINITIONS
-----------
"Acquisition Proposal" shall mean a bona fide offer by a person or group of
related persons (other than the REIT Parties and their Affiliates) to acquire
the Properties owned by all or any number of the Transferors in a transaction or
series of related transactions in which the Properties proposed to be purchased
constitute more than 70% of the Deemed Value of all the Properties owned by the
Transferors.
"Accredited Investor" shall mean an accredited investor as defined under
Regulation D of the Securities Act.
"Amended Partnership Agreement" has the meaning set forth in the recitals
hereof.
"Approving Transferor" shall have the meaning set forth in Section 7.1.
"Asset Transfer" has the meaning set forth in the preamble hereof.
"Associates" has the meaning set forth in the preamble hereof.
"CAM Charges" has the meaning set forth in Section 2.8 hereof.
"CERCLA" has the meaning set forth in the definition of Environmental Laws
hereof.
"Chan" has the meaning set forth in the preamble hereof.
"Closing Date" has the meaning set forth in Section 8.1 hereof.
"Commitment Date" has the meaning set forth in Section 1.1(f) hereof.
"Condemnation Proceeding" has the meaning set forth in Section 2.7 hereof.
38
<PAGE>
"Custodian" has the meaning set forth in Section 1.1 hereof.
"Deemed Value" with respect to a Property shall be equal to the value allocated
to such Property in Schedule VIII attached hereto.
"Distributees" has the meaning set forth in Section 2.2(d) hereof.
"Due Diligence Period" has the meaning set forth in Section 2.2 hereof.
"Employment Agreements" has the meaning set forth in the recitals hereof.
"Environmental Laws" shall include, without limitation, the Clean Air Act; the
Clean Water Act and the Water Quality Act of 1987; the Federal Insecticide
Fungicide, and Rodenticide Act; the Marine Protection, Research, and Sanctuaries
Act; the National Environmental Policy Act; the Noise Control Act; the
Occupational Safety and Health Act; the Resource Conservation and Recovery Act,
as amended by the Hazardous and Solid Waste Amendments of 1984, the Safe
Drinking Water Act; the Comprehensive Environmental Response, Compensation and
Liability Act, as amended by the Superfund Amendments and Reauthorization Act,
and the Emergency Planning and Community Right-to-Know Act; the Toxic Substance
Control Act ("TSCA"); and the Atomic Energy Act, all as may have been amended as
of the date of this Combination Agreement, together with their implementing
regulations and guidelines as of the date of this Combination Agreement.
"Environmental Laws" shall also include all state, regional, county, municipal
and other local laws, regulations, and ordinances that are equivalent or similar
to the federal laws recited above or that purport to regulate Hazardous
Materials.
"Estoppel Certificate" has the meaning set forth in Section 2.5(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934.
"Exchange Value" shall mean with respect to each Transferor, the Value of the
Property; and with respect to any partner of a Transferor shall mean the
Exchange Value of such Transferor multiplied times the percentage interest of
such partner in such Transferor.
"Exchange Registration Agreement" shall have the meaning set forth in the
recitals hereof.
"Execution Date" shall mean the date of execution of this Combination Agreement.
"Expiration Date" has the meaning set forth in Section 9.3(b) hereof.
"FIFRA" has the meaning set forth in the definition of Environmental Laws
hereof.
"GP Unit" has the meaning set forth in the recitals hereof.
"Grove" has the meaning set forth in the preamble hereof.
"Hazardous Materials" shall include, without limitation: any hazardous
substance, pollutant, or contaminant regulated under CERCLA; oil and petroleum
products and natural gas, natural gas liquids, liquefied natural gas, and
synthetic gas usable for fuel; pesticides regulated under FIFRA; asbestos,
polychlorinated biphenyls, and other substances regulated under TSCA; source
material, special nuclear material, and by-product materials regulated under the
Atomic Energy Act; and industrial process and pollution control wastes to the
extent regulated under applicable Environmental Laws.
"Heritage LP" has the meaning set forth in the preamble hereof.
39
<PAGE>
"Heritage SGP" has the meaning set forth in the preamble hereof.
"Improvements" shall mean with respect to a Real Property, all improvements
located thereon, including, without limitation, all heating, ventilation,
electrical, plumbing and other mechanical or operational systems.
"Initial Closing Date" has the meaning set forth in Section 8.1 hereof.
"Intangible Personal Property" shall be a collective reference to all intangible
personal property related to the Real Properties, including, without limitation:
all trade names and trade marks associated with each of the Real Properties,
together with the goodwill related thereto, including each Transferor's rights
and interests in the respective names of each of the Properties set forth in
Schedule II attached hereto and the names (unless the same include proper names)
of the Transferors; all rights to the plans and specifications and other
architectural and engineering drawings for the Improvements; contract rights
related to the construction, operation, ownership or management of each of the
Real Properties (but excluding the obligations of any of Transferors thereunder,
except those expressly assumed pursuant to this Combination Agreement);
warranties, zoning approvals, building permits and licenses (to the extent
assignable); tenant lists, correspondence with tenants and records (including,
but not limited to, those relating to taxes, insurance, maintenance, repairs,
capital improvements and services), booklets, manuals, advertising and
promotional materials, including, without limitation, photographs and negatives,
correspondence with suppliers, and telephone exchange numbers (if available);
excluding, however, cash or accounts receivable, except to the extent
specifically provided herein with respect to prorations and adjustments and
Rehabilitation Reserves (when the term "Intangible Personal Property" is used in
connection with a single Real Property, such term shall only be a collective
reference to the Intangible Personal Property applicable to such Real Property).
"Leases" shall be a collective reference to all leases of space within the
Improvements, including leases that may be made by Transferors after the date
hereof and prior to the Closing (as defined herein); provided, however, when
such term is used in connection with a single Real Property, the term "Leases"
shall only be a collective reference to the Leases applicable to the
Improvements located on such Real Property.
"Lenders" shall mean the holders of the Notes as set forth in Schedule III
hereof.
"Loan Documents" shall mean a collective reference to the mortgages, bonds,
deeds of trusts and other security instruments that create liens on the
respective Real Properties to secure the payment of the respective loans and
related Notes.
"LP Units" shall mean the limited partnership units of Heritage LP.
"Management Merger Agreements" has the meaning set forth in the recitals hereof.
"Management Parties" has the meaning set forth in the preamble hereof.
"Material Condemnation" has the meaning set forth in Section 2.7 hereof.
"Material Damage" has the meaning set forth in Section 8.1 hereof.
"Minimum Condition" shall be deemed satisfied if the aggregate Value
attributable to the Properties of Approving Transferors that have not been
excluded from the transactions contemplated by this Combination Agreement by
Sections 2.3(b), 2.4(e), 2.6, 2.7, or 9.3(c) hereof is greater than or equal to
70% of the Value of all Properties; provided that for purposes of this
definition, Greenwood Creek, Springfield and First Appian Way shall be
considered Approving Transferors.
40
<PAGE>
"Mortgage Debt" shall mean the debt evidenced by a Note secured by a lien on
such Real Property, the Mortgage Debt evidenced by such Note and the Lender
which is the holder of such Note.
"Net Working Capital" has the meaning set forth in Section 6.6 hereof.
"Notes" and "Note" shall mean the promissory notes and bonds evidencing the
Mortgage Debt.
"Other Taxes" has the meaning set forth in Section 5.1(b)(viii) hereof.
"Operating and Financial Statements" has the meaning set forth in Section 2.4(c)
hereof.
"Parise" has the meaning set forth in the preamble hereof.
"Permitted Exceptions" has the meaning set forth in Section 2.4(e)(vi) hereof.
"Pima Mortgage" has the meaning set forth in the preamble hereof.
"Pima Realty" has the meaning set forth in the preamble hereof.
"Properties" and "Property" shall mean, respectively, a collective reference to
all of the Real Properties, the Tangible Personal Property and the interests in
the Leases and the Intangible Personal Property, and an individual reference to
a single Real Property and the Tangible Personal Property and the applicable
Transferor's interests in the Leases and the Intangible Personal Property
associated with such Real Property.
"Properties Closing Costs" has the meaning set forth in Section 8.11 hereof.
"Prorations" has the meaning set forth in Section 2.8 hereof.
"Real Properties" shall be a collective reference to the real properties
described in Schedule II attached hereto, together with (i) all Improvements
located thereon, (ii) all the rights, benefits, privileges, easements,
tenements, hereditaments and appurtenances thereon or in any way appertaining to
such real properties, and (iii) all right, title and interest of Transferors in
and to all strips and gores and any land lying in the bed of any street, road or
alley, open or proposed, adjoining any of such real properties. When the Surveys
are issued, the descriptions in the respective Surveys shall be accepted by the
parties as the correct descriptions of the Real Properties, even if they should
differ from Schedule II.
"Registration Agreement" has the meaning set forth in the recitals hereof.
"REIT" has the meaning set forth in the preamble hereof.
"REIT Initial Capital Contribution" has the meaning set forth in the recitals
hereof.
"REIT Parties" has the meaning set forth in the preamble hereof.
"REIT Stock Price" shall mean $18.10.
"Related Agreements" has the meaning set forth in the recitals hereof.
"Rent Roll" has the meaning set forth in Section 2.4(d) hereof.
"Required Partner Approval" has the meaning set forth in Section 7.1(e) hereof.
41
<PAGE>
"Resale" has the meaning set forth in Section 8.3(c) hereof.
"Schedule of Environmental Reports" has the meaning set forth in Section 2.4(d)
hereof.
"Schedule of Insurance" has the meaning set forth in Section 2.4(d) hereof.
"Schedule of Loan Documents" has the meaning set forth in Section 2.4(d) hereof.
"Schedule of Tenant Options" has the meaning set forth in Section 2.4(d) hereof.
"Schedule of Service Contracts" has the meaning set forth in Section 2.4(d)
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service Contracts" has the meaning set forth in Section 2.4(c) hereof.
"Subsequent Closings" has the meaning set forth in Section 7.1 hereof.
"Subsidiary Partnership" shall mean each of the wholly owned subsidiaries of
Heritage LP [and Heritage SGP] formed for the purpose of acquiring one or more
Properties.
"Surveys" shall mean surveys (including field notes) made by survey civil
engineers approved by the REIT and duly licensed in the States where the Real
Properties are located in accordance with and containing the certification set
forth in Exhibit L attached hereto and addressed to such parties as the REIT may
designate.
"Tangible Personal Property" shall be a collective reference to all equipment,
machinery, furniture, furnishings, supplies and other tangible personal property
owned by Transferors and any interest of Transferors in any such property leased
by Transferors, now or hereafter located in and used in connection with the
operation, ownership or management of any of the Real Properties; provided,
however, when such term is used in connection with a single Real Property, the
term "Tangible Personal Property" shall only be a collective reference to the
Tangible Personal Property applicable to such Real Property.
"Taxes" has the meaning set forth in Section 2.8(a) hereof.
"Tenant Options" has the meaning set forth in Section 5.1(b)(xxiii) hereof.
"Title Company" shall mean Stewart Title.
"Title Policies" has the meaning set forth in Section 6.1(e) hereof.
"Title Reports" shall mean currently dated preliminary title commitments issued
by the Title Company for the Real Properties.
"Transferred Debt" has the meaning set forth in Section 2.3(b) hereof.
"Transferor" has the meaning set forth in the preamble hereof.
"Transferor Partnership Interest" has the meaning set forth in the recitals
hereof.
"TSCA" has the meaning set forth in the definition of Environmental Laws hereof.
42
<PAGE>
"UCC Searches" shall mean copies of current Uniform Commercial Code searches
issued by the Title Company or a search company acceptable to the REIT.
"Value" of each Property shall be equal to (i) the Deemed Value allocated to
such Property minus (ii) the Mortgage Debt applicable to such Property as of the
Closing Date and immediately prior to any repayment, purchase, refinancing,
replacement or reduction thereof by Heritage LP or the REIT in accordance with
Section 2.3 (without taking into consideration any discount of such Mortgage
Debt), minus (iii) the monetary liens applicable to such Property as of the
Closing Date and immediately prior to the satisfaction thereof by the
application of a portion of the REIT Initial Capital Contribution as permitted
by Section 2.6(d), minus (iv) Properties Closing Costs payable on behalf of the
Transferor of the Property allocated to each of the Properties pro rata based
upon their respective Deemed Values, and, plus or minus, as appropriate, (v) the
Prorations relating to such Property determined in accordance with Section 2.8.
"Winton" has the meaning set forth in the preamble hereof.
"Winton Parties" has the meaning set forth in the preamble hereof.
ARTICLE 12
MISCELLANEOUS
-------------
12.1 Subsidiaries. The parties acknowledge and agree that, if required
by any Lender as a condition to its consent to the transfer of a Property
subject to the related Mortgage Debt as contemplated hereby, such Property may
be transferred to a limited purpose entity owned by Heritage LP and any
reference herein to Heritage LP shall mean, with respect to such Property, such
limited purpose entity.
12.2 Parties Bound. Prior to the Closing, except as provided in Section
12.1 hereof, no party may assign its rights or obligations under this
Combination Agreement without the prior written consent of the other parties
hereto, and any such prohibited assignment shall be void. This Combination
Agreement and all provisions hereof, including, without limitation, all
representations and warranties made hereunder, shall inure to the benefit of and
be binding upon the respective heirs, devisees, legal representatives,
successors, assigns and beneficiaries of the parties hereto; provided, however,
that no assignment shall relieve the assignor of any obligation under this
Combination Agreement whether arising before or after such assignment.
12.3 Headings. The article and paragraph headings of this Combination
Agreement are for convenience only and shall in no way limit or enlarge the
scope or meaning of the language hereof.
12.4 Invalidity. If any portion of this Combination Agreement is held
invalid or inoperative, then so far as is reasonable and possible the remainder
of this Combination Agreement shall be deemed valid and operative and effect
shall be given to the intent manifested by the portion held invalid or
inoperative. The failure by either party to enforce against the other any term
or provision of this Combination Agreement shall be deemed not to be a waiver of
such party's right to enforce against the other party the same or any other such
term or provision.
12.5 Governing Law. Except where the laws of another jurisdiction are
mandatorily applicable, this Combination Agreement shall, in all respects, be
governed, construed, applied and enforced in accordance with the internal laws
(and not the choice of law rules) of the State of Arizona.
12.6 Independent Review. Each Transferor acknowledges and agrees that
neither the REIT nor Heritage LP has made any representation or warranty with
respect to the tax or accounting consequences of the transactions contemplated
by this Combination Agreement except as set forth in the Private Offering
Memorandum, and that such Transferor has been represented by counsel or received
advice in connection with entering into this Combination
43
<PAGE>
Agreement and has received such tax and accounting information as such
Transferor deems necessary to knowledgeably consummate the transactions
contemplated by this Combination Agreement.
12.7 No Third Party Beneficiary. This Combination Agreement is not
intended to give or confer any benefits, rights, privileges, claims, actions or
remedies to any person or entity as a third party beneficiary, including without
limitation, any Lender.
12.8 Entirety and Amendments. This Combination Agreement embodies the
entire agreement between the parties and supersedes all prior agreements and
understandings relating to the Properties. This Combination Agreement may be
amended or supplemented only by an instrument in writing executed by the party
against whom enforcement is sought.
12.9 Execution in Counterparts. This Combination Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of such counterparts shall constitute one Agreement. To
facilitate execution and delivery of this Combination Agreement, the parties may
execute and exchange counterparts of the signature pages by telefax. The
signature of any party to any counterparts may be appended to any other
counterpart. The Title Company shall be entitled to accept and treat such fax
signatures as original signatures.
12.10 Further Assurances. To the extent that any Schedule to be
attached to this Combination Agreement or to any of the Exhibits attached hereto
is not completed or prepared on the date hereof, the party responsible for
completing or preparing such Schedule shall deliver such Schedule to the other
parties hereto as soon as possible after the date hereof and, in any event,
prior to the Closing. In addition to the acts and deeds recited herein and
contemplated to be performed, executed and/or delivered by Transferors at the
Closing, Transferors agree to perform, execute and/or deliver or cause to be
executed and/or delivered, on or after the Closing, any and all further acts,
deeds and assurances as may be reasonably necessary to consummate the
transactions contemplated hereby and/or to further perfect and deliver to
Heritage LP the conveyance, transfer and assignment of the Properties and all
rights related thereto.
12.11 Time. Time is of the essence in the performance of each and every
term, condition and covenant contained in this Combination Agreement.
12.12 Confidentiality. The REIT and Transferors, for the benefit of
each other, hereby agree that until the Closing Date, they will not release or
cause or permit to be released, any press notices, publicity (oral or written)
or advertising promotion relating to, or otherwise announce or disclose or cause
or permit to be announced or disclosed, in any manner whatsoever, the terms,
conditions or substance of this Combination Agreement or any of the Related
Agreements, or the transactions contemplated herein or therein, without first
obtaining the written consent of the other parties hereto. It is understood that
the foregoing shall not preclude either party from discussing the substance or
any relevant details of such transactions with any of its attorneys,
accountants, professional consultants or potential lenders, as the case may be,
or prevent either party hereto from seeking to obtain any and all approvals or
consents necessary in connection with the transactions contemplated hereby,
making all filings with governmental authorities required in connection with the
transactions contemplated hereby and complying with laws, rules, regulations and
court orders, including without limitation, governmental regulatory, disclosure,
tax and reporting requirements. After the Closing Date, Transferors agree that
the REIT may release any press notices, publicity (oral or written) or
advertising promotion relating to, or otherwise announce or disclose, in any
manner whatsoever, the terms, conditions and substances of this Combination
Agreement or any of the Related Agreements, or the transactions contemplated
herein or therein, without first obtaining the written consent of the other
parties hereto.
12.13 Attorneys' Fees. Should either party employ attorneys to enforce
any of the provisions hereof, the party losing in any final judgment agrees to
pay the prevailing party all reasonable costs, charges and expenses,
44
<PAGE>
including attorneys' fees and disbursements, expended or incurred in connection
therewith whether at trial, on appeal or on petition for review.
12.14 Use of Pronouns. The use of the neuter singular pronoun to refer
to a party shall be deemed a proper reference, even though such party may be an
individual, partnership or a group of two or more individuals. The necessary
grammatical changes required to make the provisions of this Combination
Agreement apply in the plural sense where there is more than one seller or
purchaser and to either partnerships or individuals (male or female) shall in
all instances be assumed as though in each case fully expressed.
12.15 Notices. All notices required or permitted hereunder shall be in
writing and shall be served on the parties at the following address:
If to Transferors, c/o Winton & Associates, Inc.
Winton or Associates: 3845 FM 1960 West, Suite 450
Houston, Texas 77068
Telephone: (713) 580-1990
Telefax: (713) 580-1412
Attn: Don W. Winton
With a copy to: Butler & Binion, L.L.P
1000 Louisiana Street, Suite 1600
Houston, Texas 77002-5093
Telephone: (713) 327-3111
Telefax: (713) 237-3201
Attn: Guy Young, Esq.
If to the REIT, Heritage SGP, Heritage c/o ASR Investments Corporation
LP, Pima Mortgage, Grove, Parise or 335 North Wilmot, Suite 250
Chan: Tucson, Arizona 85711
Telephone: (520) 748-2111
Telefax: (520) 750-8865
Attn: Jon A. Grove
With a copy to: O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback, Suite 1100
Phoenix, Arizona 85012
Telephone: (602) 263-2606
Telefax: (602) 263-2900
Attn: Robert S. Kant, Esq.
45
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If to Pima Realty: c/o Pima Realty Advisors, Inc.
6300 East El Dorado Place, Suite 200
Tucson, Arizona 85715
Telephone: (520) 290-1500
Telefax: (520) 290-0328
Attn: Frank S. Parise, Jr.
With a copy to: O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback, Suite 1100
Phoenix, Arizona 85012
Telephone: (602) 263-2606
Telefax: (602) 263-2900
Attn: Robert S. Kant, Esq.
Any such notices shall be either (a) sent by certified mail, return
receipt requested in which case notice shall be deemed delivered three (3)
business days after deposit, postage prepaid in the U.S. Mail, (b) sent by
overnight delivery using a nationally recognized overnight courier, in which
case it shall be deemed delivered one business day after deposit with such
courier, (c) sent by telefax, in which case notice shall be deemed delivered
upon confirmed transmission of such notice, or (d) sent by personal delivery.
The above addresses may be changed by written notice to the other party;
provided, however, that no notice of a change of address shall be effective
until actual receipt of such notice. Copies of notices are for informational
purposes only, and a failure to give or receive copies of any notice shall not
be deemed a failure to give notice.
12.16 Construction. The parties acknowledge that the parties and their
counsel have reviewed and revised this Combination Agreement and that the normal
rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of this
Combination Agreement or any exhibits or amendments hereto.
12.17 Calculation of Time Periods. Unless otherwise specified, in
computing any period of time described herein, the day of the act or event after
which the designed period of time begins to run is not to be included and the
last day of the period so computed is to be included, unless such last day is a
Saturday, Sunday or legal holiday, in which event the period shall run until the
end of the next day which is neither a Saturday, Sunday, or legal holiday.
12.18 Information and Audit Cooperation. Each Transferor agrees to
provide to Heritage LP's designated independent auditor (a) access to the books
and records of such Transferor's Properties and all related information
regarding the period for which Heritage LP is required to have such Properties
audited under the regulations of the Securities and Exchange Commission, and (b)
any representation letters regarding the books and records of such Transferor's
Properties as such auditor shall reasonably request in connection with the
normal course of auditing such Properties in accordance with generally accepted
auditing standards.
12.19 No Assumption. Except as otherwise expressly assumed by Heritage
LP or the REIT pursuant to the terms of this Combination Agreement, neither
Heritage LP nor the REIT shall assume or be deemed to have assumed any
obligations or liabilities whatsoever of the Transferors with respect to the
Properties or otherwise.
12.20 Survival. The representations and warranties contained in this
Combination Agreement shall not survive the Closing and shall be deemed to be
merged into and waived by the instruments of such Closing. The provisions of
this Combination Agreement that contemplate performance after Closing shall
survive the Closing and shall not be deemed to be merged into or waived by the
instruments of Closing.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Combination Agreement on the day and year first above written.
WINTON:
/s/ Don W. Winton
-------------------------------------------------
Don W. Winton
THE REIT:
ASR INVESTMENTS CORPORATION, a
Maryland corporation
By: /s/ Jon A. Grove
---------------------------------------------
Jon A. Grove, Chairman of the Board and
President
PIMA MORTGAGE:
PIMA MORTGAGE LIMITED PARTNERSHIP,
an Arizona limited partnership
By: /s/ Jon A. Grove
---------------------------------------------
Its: Authorized Representative
--------------------------------------------
PIMA REALTY:
PIMA REALTY ADVISORS, INC., an Arizona
corporation
By: /s/ Jon A. Grove
---------------------------------------------
Its: Authorized Representative
--------------------------------------------
ASSOCIATES:
WINTON & ASSOCIATES, INC., a Washington
corporation
By: /s/ Don W. Winton
--------------------------------------------
Don W. Winton, President
HERITAGE LP:
HERITAGE COMMUNITIES, L.P., a Delaware
limited partnership
By: /s/ Jon A. Grove
---------------------------------------------
Its: Authorized Representative
--------------------------------------------
<PAGE>
HERITAGE SGP:
HERITAGE SGP CORPORATION, an Arizona
corporation wholly owned by the REIT
By: /s/ Jon A. Grove
---------------------------------------------
Its: President
--------------------------------------------
HERITAGE RESIDENTIAL:
HERITAGE RESIDENTIAL GROUP, INC., an
Arizona corporation wholly owned by the REIT
By: /s/ Jon A. Grove
---------------------------------------------
Its: President
--------------------------------------------
GROVE:
By: /s/ Jon A. Grove
--------------------------------------------
Jon A. Grove
PARISE:
By: /s/ Frank S. Parise Jr.
--------------------------------------------
Frank S. Parise, Jr.
CHAN:
By: /s/ Joseph C. Chan
--------------------------------------------
Joseph C. Chan
<PAGE>
TRANSFERORS:
FIRST ASPEN COURT ASSOCIATES, L.P.
FIRST BRIAR PARK ASSOCIATES
FIRST CHELSEA PARK ASSOCIATES, L.P.
FIRST APPIAN WAY ASSOCIATES, L.P.
FIRST GREENWOOD CREEK ASSOCIATES, L.P.
FIRST HIGHLANDS ASSOCIATES, L.P.
FIRST MARYMONT ASSOCIATES, L.P.
FIRST MONTFORT ASSOCIATES, L.P.
FIRST RIVERWAY ASSOCIATES, L.P.
FIRST SPRINGFIELD ASSOCIATES, L.P.
FIRST TIMBERCREEK LANDING ASSOCIATES, L.P.
CAMPUS DEVELOPMENT ASSOCIATES LIMITED PARTNERSHIP
CAMPUS COMMONS ASSOCIATES - LIMITED PARTNERSHIP
FIRST PACIFIC SOUTH CENTER ASSOCIATES, L.P.
By: /s/ Don W. Winton
--------------------------------------------
Don W. Winton, general partner
of each of the Transferors listed
above
<PAGE>
SCHEDULE I
TRANSFEROR
First Aspen Court Associates, L.P.
First Briar Park Associates, a Washington Limited Partnership
First Chelsea Park Associates, L.P.
First Appian Way Associates, L.P.
First Greenwood Creek Associates, L.P.
First Highlands Associates, L.P.
First Marymont Associates, L.P.
First Montfort Associates, L.P.
First Riverway Associates, L.P.
First Springfield Associates, L.P.
First Timbercreek Landing Associates, L.P.
Campus Development Associates Limited Partnership
Campus Commons Associates - Limited Partnership
First Pacific South Center Associates, L.P.
<PAGE>
SCHEDULE II
PROPERTIES
PROPERTY PARTNERSHIP
-------- -----------
Texas Apartments
----------------
Aspen Court Apartment First Aspen Court Associates, L.P.
Briar Park Apartments First Briar Park Associates, a Washington
Limited Partnership
Chelsea Park Apartments First Chelsea Park Associates, L.P.
Country Club Apartments First Appian Way Associates, L.P.
Greenwood Creek Apartments First Greenwood Creek Associates, L.P.
Highlands of Preston First Highlands Associates, L.P.
Marymont Apartments First Marymont Associates, L.P.
14400 Montfort Townhomes First Montfort Associates, L.P.
Riverway Apartments First Riverway Associates, L.P.
Springfield Apartments First Springfield Associates, L.P.
Timbercreek Landing Apartments First Timbercreek Landing Associates, L.P.
Washington Apartments
---------------------
Campus Commons North Apartments Campus Development Associates Limited
Partnership
Campus Commons South Apartments Campus Commons Associates - Limited
Partnership
Washington Office Building
--------------------------
First Pacific South Center First Pacific South Center
Associates, L.P.
<PAGE>
SCHEDULE III
MORTGAGE DEBT
LENDERS AND PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Mortgage
Project Transferor Lenders Debt (A)
------- ---------- ------- --------
<S> <C> <C>
Initial Closings
- ----------------
Aspen Court Apartments First Aspen Court Associates, L.P. $2,051,401
Briar Park Apartments First Briar Park Associates, a Washington Limited Partnership 1,400,000
Campus Commons North Apartments Campus Development Associates Limited Partnership 6,719,802
Campus Commons South Apartments Campus Commons Associates - Limited Partnership 2,750,000
Chelsea Park Apartments First Chelsea Park Associates, L.P. 2,887,967
Highlands of Preston Apartments First Highlands Associates, L.P. 4,889,390
14400 Montfort Townhomes First Montfort Associates, L.P. 4,120,010
Marymont Apartments First Marymont Associates, L.P. 2,546,076
Riverway Apartments First Riverway Associates, L.P. 1,186,061
Timbercreek Landings Apartments First Timbercreek Landing Associates, L.P. 3,390,933
Pacific South Center Office Building First Pacific South Center Associates, L.P. 3,225,000
----------
35,166,640
----------
Subsequent Closings
- -------------------
Country Club Place Apartments First Appian Way Associates, L.P. 3,580,819
Greenwood Creek Apartments First Greenwood Creek Associates, L.P. 5,052,311
Springfield Apartments First Springfield Associates, L.P. 5,510,673
----------
14,143,803
----------
49,310,443
==========
</TABLE>
(A) Principal balances as of September 30, 1996
<PAGE>
SCHEDULE IV
REAL ESTATE COMMISSIONS
<TABLE>
<CAPTION>
Commissions Payable to
Affiliated Entities
--------------------------
Winton Winton &
Project Transferor Realty, Inc. Associates, Inc.
------- ---------- ------------ ----------------
<S> <C> <C> <C>
Initial Closings
- ----------------
Aspen Court Apartments First Aspen Court Associates, L.P. $ 66,000
Briar Park Apartments First Briar Park Associates, a Washington
Limited Partnership
Campus Commons North Apartments Campus Development Associates Limited
Partnership 272,500
Campus Commons South Apartments Campus Commons Associates - Limited
Partnership 61,500
Chelsea Park Apartments First Chelsea Park Associates, L.P. 57,000
Highlands of Preston Apartments First Highlands Associates, L.P. 88,300
14400 Montfort Townhomes First Montfort Associates, L.P.
Marymont Apartments First Marymont Associates, L.P. 21,750
Riverway Apartments First Riverway Associates, L.P.
Timbercreek Landings Apartments First Timbercreek Landing Associates, L.P.
Pacific South Center Office Building First Pacific South Center Associates, L.P. 67,500 160,000
-------- --------
634,550 160,000
-------- --------
Subsequent Closings
- -------------------
Country Club Place Apartments First Appian Way Associates, L.P.
Greenwood Creek Apartments First Greenwood Creek Associates, L.P. 38,500
Springfield Apartments First Springfield Associates, L.P. 84,200
-------- --------
122,700 0
-------- --------
$757,250 $160,000
======== ========
</TABLE>
<PAGE>
SCHEDULE V
REQUIRED PARTNER APPROVAL
<TABLE>
<CAPTION>
Required Partner Approval
Project Transferor Percentage
------- ---------- ---------------------
<S> <C> <C>
Initial Closings
- ----------------
Aspen Court Apartments First Aspen Court Associates, L.P. 51%
Briar Park Apartments First Briar Park Associates, a Washington
Limited Partnership 51%
Campus Commons North Apartments Campus Development Associates Limited
Partnership 51%
Campus Commons South Apartments Campus Commons Associates - Limited
Partnership 51%
Chelsea Park Apartments First Chelsea Park Associates, L.P. 51%
Highlands of Preston Apartments First Highlands Associates, L.P. 51%
14400 Montfort Townhomes First Montfort Associates, L.P. 51%
Marymont Apartments First Marymont Associates, L.P. 51%
Riverway Apartments First Riverway Associates, L.P. 51%
Timbercreek Landings Apartments First Timbercreek Landing Associates, L.P. 51%
Pacific South Center Office Building First Pacific South Center Associates, L.P. 51%
Subsequent Closings
- -------------------
Country Club Place Apartments First Appian Way Associates, L.P. 51%
Greenwood Creek Apartments First Greenwood Creek Associates, L.P. 51%
Springfield Apartments First Springfield Associates, L.P. 51%
</TABLE>
<PAGE>
SCHEDULE VI
MAJOR TENANTS
1. TCI
2. C.T. Mac's Sports Bar
REQUIRED ADDITIONAL TENANTS
None
<PAGE>
SCHEDULE VII
MAXIMUM PROPERTIES CLOSING COSTS
<TABLE>
<CAPTION>
Maximum
Properties
Closing
Project Transferor Costs
------- ---------- -----
<S> <C> <C>
Initial Closings
- ----------------
Aspen Court Apartments First Aspen Court Associates, L.P. $ 110,000
Briar Park Apartments First Briar Park Associates, a Washington
Limited Partnership 30,000
Campus Commons North Apartments Campus Development Associates Limited Partnership 220,000
Campus Commons South Apartments Campus Commons Associates - Limited Partnership 150,000
Chelsea Park Apartments First Chelsea Park Associates, L.P. 110,000
Highlands of Preston Apartments First Highlands Associates, L.P. 130,000
14400 Montfort Townhomes First Montfort Associates, L.P. 60,000
Marymont Apartments First Marymont Associates, L.P. 70,000
Riverway Apartments First Riverway Associates, L.P. 40,000
Timbercreek Landings Apartments First Timbercreek Landing Associates, L.P. 90,000
Pacific South Center Office Building First Pacific South Center Associates, L.P. 330,000
----------
1,340,000
----------
Subsequent Closings
- -------------------
Country Club Place Apartments First Appian Way Associates, L.P. 50,000
Greenwood Creek Apartments First Greenwood Creek Associates, L.P. 80,000
Springfield Apartments First Springfield Associates, L.P. 130,000
----------
260,000
----------
$1,600,000
==========
</TABLE>
<PAGE>
SCHEDULE VIII
DEEMED VALUE
<TABLE>
<CAPTION>
Deemed
Project Transferor Value
------- ---------- ---------
<S> <C> <C>
Initial Closings
- ----------------
Aspen Court Apartments First Aspen Court Associates, L.P. $ 4,400,000
Briar Park Apartments First Briar Park Associates, a Washington
Limited Partnership 2,200,000
Campus Commons North Apartments Campus Development Associates Limited Partnership 10,900,000
Campus Commons South Apartments Campus Commons Associates - Limited Partnership 4,100,000
Chelsea Park Apartments First Chelsea Park Associates, L.P. 5,600,000
Highlands of Preston Apartments First Highlands Associates, L.P. 8,800,000
14400 Montfort Townhomes First Montfort Associates, L.P. 5,650,000
Marymont Apartments First Marymont Associates, L.P. 4,350,000
Riverway Apartments First Riverway Associates, L.P. 1,900,000
Timbercreek Landings Apartments First Timbercreek Landing Associates, L.P. 5,500,000
Pacific South Center Office Building First Pacific South Center Associates, L.P. 5,400,000
-----------
58,800,000
-----------
Subsequent Closings
- -------------------
Country Club Place Apartments First Appian Way Associates, L.P. 5,350,000
Greenwood Creek Apartments First Greenwood Creek Associates, L.P. 7,700,000
Springfield Apartments First Springfield Associates, L.P. 8,420,000
-----------
21,470,000
-----------
$80,270,000
===========
</TABLE>
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERITAGE COMMUNITIES L.P.
dated as of April _____, 1997
by and among
ASR INVESTMENTS CORPORATION,
a Maryland corporation,
as General Partner,
HERITAGE SGP CORPORATION,
an Arizona corporation,
as Special General Partner,
and
The Persons listed on Exhibit A hereto,
as Limited Partners
________________________________________________________________________________
THE PARTNERSHIP INTERESTS AND UNITS IN HERITAGE COMMUNITIES L.P. (THE "UNITS")
ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER AND OTHER TERMS AND CONDITIONS SET
FORTH IN ARTICLE XI OF THIS AGREEMENT AND MAY NOT BE OFFERED FOR SALE, PLEDGED,
HYPOTHECATED, SOLD, ASSIGNED OR TRANSFERRED AT ANY TIME EXCEPT IN COMPLIANCE
WITH THE TERMS AND CONDITIONS THEREOF. THEREFORE, PURCHASERS OF THE UNITS WILL
BE REQUIRED TO BEAR THE RISK OF THEIR INVESTMENTS FOR AN INDEFINITE PERIOD OF
TIME. THE UNITS HAVE NOT BEEN REGISTERED (i) UNDER ANY STATE SECURITIES LAWS
(THE "STATE ACTS"), OR (ii) UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "FEDERAL ACT"), IN RELIANCE UPON EXEMPTIONS PROVIDED THEREIN, AND
NEITHER THE UNITS NOR ANY PART THEREOF MAY BE OFFERED FOR SALE, PLEDGED,
HYPOTHECATED, SOLD, ASSIGNED, OR TRANSFERRED AT ANY TIME EXCEPT IN COMPLIANCE
WITH THE TERMS AND CONDITIONS OF ARTICLE XI OF THIS AGREEMENT AND (A) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER ANY APPLICABLE STATE ACTS OR IN A
TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER SUCH STATE ACTS OR WHICH IS
OTHERWISE IN COMPLIANCE WITH SUCH STATE ACTS, AND (B) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE FEDERAL ACT OR IN A TRANSACTION WHICH IS EXEMPT
FROM REGISTRATION UNDER THE FEDERAL ACT OR WHICH IS OTHERWISE IN COMPLIANCE WITH
THE FEDERAL ACT. IN ADDITION, ANY UNITS ACQUIRED BY NON-U.S. PERSONS MAY NOT,
DIRECTLY OR INDIRECTLY, BE OFFERED FOR SALE, PLEDGED, HYPOTHECATED, SOLD,
ASSIGNED, OR TRANSFERRED IN THE UNITED STATES OR TO OR FOR THE ACCOUNT OF A U.S.
PERSON EXCEPT IN COMPLIANCE WITH THIS AGREEMENT AND THE FEDERAL ACT AND ALL
APPLICABLE STATE ACTS. AS USED HEREIN, "UNITED STATES" MEANS THE UNITED STATES
OF AMERICA, ITS TERRITORIES AND POSSESSIONS, AND ALL AREAS SUBJECT TO ITS
JURISDICTION, AND A "U.S. PERSON" MEANS A CITIZEN OR RESIDENT OF THE UNITED
STATES (INCLUDING THE ESTATE OF ANY SUCH PERSON). A CORPORATION, PARTNERSHIP, OR
OTHER PERSON CREATED OR ORGANIZED UNDER THE LAWS OF THE UNITED STATES OR ANY
POLITICAL SUBDIVISION THEREOF OR THEREIN, AND AN ESTATE OR TRUST THE INCOME OF
WHICH IS SUBJECT TO UNITED STATES FEDERAL INCOME TAXATION REGARDLESS OF ITS
SOURCE.
APPENDIX B
<PAGE>
TABLE OF CONTENTS
Page No.
--------
ARTICLE I
DEFINITIONS
1.1 Definitions...................................................... 1
1.1.1 Accrual Account........................................ 1
1.1.2 Act.................................................... 2
1.1.3 Additional Limited Partner............................. 2
1.1.4 Adjusted Capital Account............................... 2
1.1.5 Adjusted Capital Account Deficit....................... 2
1.1.6 Adjusted Property...................................... 2
1.1.7 Affiliate.............................................. 2
1.1.8 Agreed Value........................................... 2
1.1.9 Agreement.............................................. 2
1.1.10 Articles of Incorporation.............................. 3
1.1.11 Assignee............................................... 3
1.1.12 Available Cash......................................... 3
1.1.13 Book-Tax Disparities................................... 3
1.1.14 Business Day........................................... 4
1.1.15 Capital Account........................................ 4
1.1.16 Capital Contribution................................... 4
1.1.17 Capital Transaction.................................... 4
1.1.18 Capital Transaction Proceeds........................... 4
1.1.19 Capital Transaction Record Date........................ 4
1.1.20 Carrying Value......................................... 4
1.1.21 Certificate............................................ 4
1.1.22 Code................................................... 4
1.1.23 Code Section 704(c) Value.............................. 5
1.1.24 Contributed Property................................... 5
1.1.25 Contribution Agreement................................. 5
1.1.26 Conversion Right....................................... 5
1.1.27 Converting Partner..................................... 5
1.1.28 Depreciation........................................... 5
1.1.29 Dissolution Event...................................... 5
1.1.30 Formation Limited Partner.............................. 5
1.1.31 Funds from Operations.................................. 5
1.1.32 General Partner........................................ 6
1.1.33 General Partners....................................... 6
1.1.34 General Partnership Interest........................... 6
1.1.35 Immediate Family....................................... 6
1.1.36 Incapacity or Incapacitated............................ 6
1.1.37 Indemnitee............................................. 6
1.1.38 IRS.................................................... 6
1.1.39 Limited Partner........................................ 7
1.1.40 Limited Partner Consent................................ 7
1.1.41 Limited Partnership Interest........................... 7
i
<PAGE>
TABLE OF CONTENTS
(continued)
Page No.
--------
1.1.42 Liquidating Transaction................................ 7
1.1.43 Liquidator............................................. 7
1.1.44 Net Income............................................. 7
1.1.45 Net Loss............................................... 7
1.1.46 Nonrecourse Built-in Gain.............................. 7
1.1.47 Nonrecourse Deductions................................. 7
1.1.48 Nonrecourse Liability.................................. 8
1.1.49 Notice of Conversion................................... 8
1.1.50 Original Agreement..................................... 8
1.1.51 Original Limited Partner............................... 8
1.1.52 Original Limited Partnership Unit...................... 8
1.1.53 Partner................................................ 8
1.1.54 Partner Minimum Gain................................... 8
1.1.55 Partner Nonrecourse Debt............................... 8
1.1.56 Partner Nonrecourse Deductions......................... 8
1.1.57 Partnership............................................ 8
1.1.58 Partnership Interest................................... 8
1.1.59 Partnership Minimum Gain............................... 9
1.1.60 Partnership Record Date................................ 9
1.1.61 Partnership Unit or Unit............................... 9
1.1.62 Partnership Year....................................... 9
1.1.63 Percentage Interest.................................... 9
1.1.64 Person................................................. 9
1.1.65 Prime Rate............................................. 9
1.1.66 Recapture Income....................................... 9
1.1.67 Recourse Liabilities................................... 9
1.1.68 Redemption Amount...................................... 9
1.1.69 REIT................................................... 10
1.1.70 Residual Gain or Residual Loss......................... 10
1.1.71 Securities Act......................................... 10
1.1.72 Shares................................................. 10
1.1.73 Special General Partner................................ 10
1.1.74 Specified Conversion Date.............................. 10
1.1.75 Subsidiary............................................. 10
1.1.76 Subsidiary Partnership................................. 10
1.1.77 Substituted Limited Partner............................ 10
1.1.78 Transaction............................................ 10
1.1.79 Treasury Regulation.................................... 10
1.1.80 Unit Adjustment Factor................................. 10
1.1.81 Unpaid Distribution Account............................ 10
1.1.82 Unrealized Gain........................................ 11
1.1.83 Unrealized Loss........................................ 11
1.1.83 Valuation Date......................................... 11
1.1.84 Value.................................................. 11
1.2 Currency......................................................... 11
1.3 Schedules and Exhibits........................................... 11
ii
<PAGE>
TABLE OF CONTENTS
(continued)
Page No.
--------
1.4 Construction of Term Including................................... 11
1.5 Certain Accounts................................................. 12
1.6 Interest Calculations............................................ 12
1.7 Other Terms...................................................... 12
ARTICLE II
ORGANIZATIONAL MATTERS
2.1 Organization and Continuation; Application of Act................ 12
2.1.1 Organization and Continuation of Partnership............ 12
2.1.2 Application of Act...................................... 12
2.2 Name............................................................. 12
2.3 Registered Office and Agent; Principal Office.................... 13
2.4 Term............................................................. 13
ARTICLE III
PURPOSE
3.1 Purpose and Business............................................. 13
3.2 Powers........................................................... 13
ARTICLE IV
CAPITAL CONTRIBUTIONS; ISSUANCE OF UNITS;
CAPITAL ACCOUNTS
4.1 Capital Contributions of the Partners............................ 13
4.1.1 Initial Capital Contributions........................... 13
4.1.2 Additional Capital Contributions or Assessments......... 14
4.1.3 Return of Capital Contributions. ....................... 14
4.1.4 Liability of Limited Partners........................... 14
4.1.5 Negative Capital Account................................ 15
4.1.6 Minimum Capital Contribution by General Partners........ 15
4.2 Issuances of Additional Partnership Interests.................... 15
4.2.1 General................................................. 15
4.2.2 Conversion of Units..................................... 15
4.3 No Preemptive Rights............................................. 16
4.4 Capital Accounts of the Partners................................. 16
4.4.1 General................................................. 16
4.4.2 Income, Gains, Deductions, and Losses. ................. 17
4.4.3 Transfers of Partnership Units.......................... 17
4.4.4 Unrealized Gains and Losses............................. 18
4.4.5 Modification by General Partner......................... 18
4.4.6 General Partner's Minimum Capital Account Balance....... 19
4.5 Waiver and Recontribution........................................ 19
iii
<PAGE>
TABLE OF CONTENTS
(continued)
Page No.
--------
ARTICLE V
DISTRIBUTIONS
5.1 Requirement and Characterization of Distributions................ 19
5.2 Amounts Withheld................................................. 20
5.3 Distribution Upon Liquidation.................................... 20
ARTICLE VI
ALLOCATIONS
6.1 Allocations for Capital Account Purposes......................... 20
6.1.1 Net Income.............................................. 20
6.1.2 Net Losses.............................................. 21
6.1.3 Nonrecourse Liabilities................................. 21
6.1.4 Gains................................................... 21
6.2 Special Allocation Rules......................................... 21
6.2.1 Minimum Gain Chargeback................................. 21
6.2.2 Partner Minimum Gain Chargeback......................... 21
6.2.3 Qualified Income Offset................................. 22
6.2.4 Nonrecourse Deductions.................................. 22
6.2.5 Partner Nonrecourse Deductions.......................... 22
6.2.6 Code Section 754 Adjustments............................ 22
6.3 Allocations for Tax Purposes..................................... 23
6.3.1 General................................................. 23
6.3.2 To Eliminate Book-Tax Disparities....................... 23
6.3.3 Power of General Partner to Elect Method................ 23
ARTICLE VII
MANAGEMENT AND OPERATIONS OF BUSINESS
7.1 Management....................................................... 23
7.1.1 Powers of General Partner............................... 23
7.1.2 No Approval Required for Above Powers................... 26
7.1.3 Insurance............................................... 26
7.1.4 Working Capital Reserves................................ 26
7.2 Certificate of Limited Partnership............................... 26
7.3 Restrictions on General Partner's Authority...................... 27
7.4 Responsibility for Expenses...................................... 27
7.4.1 No Compensation......................................... 27
7.4.2 Responsibility for Ownership and Operation Expenses..... 27
7.5 Outside Activities of the General Partner........................ 28
7.6 Contracts with Affiliates........................................ 28
7.7 Indemnification.................................................. 28
7.7.1 General................................................. 28
7.7.2 In Advance of Final Disposition. ....................... 28
7.7.3 Other Than by This Section.............................. 29
iv
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
7.7.4 Insurance................................................................ 29
7.7.5 No Personal Liability for Limited Partners............................... 29
7.7.6 Interested Transactions.................................................. 29
7.7.7 Binding Effect........................................................... 29
7.8 Liability of the General Partners................................................. 29
7.8.1 General.................................................................. 29
7.8.2 No Obligation to Consider Interests of Limited Partners.................. 29
7.8.3 Acts of Agents........................................................... 30
7.8.4 Effect of Amendment...................................................... 30
7.9 Other Matters Concerning the General Partners..................................... 30
7.9.1 Reliance on Documents.................................................... 30
7.9.2 Reliance on Consultants and Advisers..................................... 30
7.9.3 Action Through Officers and Attorneys.................................... 30
7.9.4 Actions to Maintain REIT Status or Avoid Taxation of the General
Partner........................................................................... 30
7.10 Title to Partnership Assets....................................................... 31
7.11 Reliance by Third Parties......................................................... 31
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
8.1 Limitation of Liability........................................................... 31
8.2 Management of Business............................................................ 31
8.3 Outside Activities of Limited Partners............................................ 32
8.4 Priority Among Limited Partners................................................... 32
8.5 Rights of Limited Partners Relating to the Partnership............................ 32
8.5.1 Copies of Business Records............................................... 32
8.5.2 Notification of Changes in Unit Adjustment Factor. ..................... 33
8.5.3 Confidential Information................................................. 33
8.6 Redemption Right.................................................................. 33
ARTICLE IX
BOOKS, RECORDS, ACCOUNTING AND REPORTS
9.1 Records and Accounting............................................................. 34
9.2 Fiscal Year........................................................................ 34
9.3 Reports............................................................................ 34
9.3.1 Annual Reports............................................................ 34
9.3.2 Quarterly Reports......................................................... 34
ARTICLE X
TAX MATTERS
10.1 Preparation of Tax Returns......................................................... 34
10.2 Tax Elections...................................................................... 34
10.3 Tax Matters Partner................................................................ 35
10.3.1 General................................................................... 35
</TABLE>
v
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
10.3.2 Powers.................................................................... 35
10.3.3 Reimbursement............................................................. 36
10.4 Organizational Expenses............................................................ 36
10.5 Withholding........................................................................ 36
ARTICLE XI
TRANSFERS AND WITHDRAWALS
11.1 Transfer........................................................................... 37
11.1.1 Definition................................................................ 37
11.1.2 Requirements.............................................................. 37
11.2 Transfer of General Partner's or Special General Partner's Partnership Interest.... 37
11.2.1 General................................................................... 37
11.2.2 Transfer in Connection With Reclassification, Recapitalization, or
Business Combination Involving General Partner..................................... 37
11.3 Limited Partners' Rights to Transfer............................................... 38
11.3.1 General................................................................... 38
11.3.2 Incapacitated Limited Partners............................................ 38
11.3.3 Transfers Resulting in Corporation Status; Transfer Through Established
Securities or Secondary Markets.................................................... 38
11.3.4 Transfers to Holders of Nonrecourse Liabilities........................... 39
11.3.5 Transfers Causing Termination............................................. 39
11.4 Substituted Limited Partners....................................................... 39
11.4.1 Consent of General Partner Required....................................... 39
11.4.2 Rights and Duties of Substituted Limited Partners......................... 39
11.4.3 Amendment of Exhibit A.................................................... 39
11.5 Assignees......................................................................... 39
11.6 General Provisions................................................................ 40
11.6.1 Withdrawal of Limited Partner............................................ 40
11.6.2 Transfer of All Limited Partner Units by Limited Partner................. 40
11.6.3 Timing of Transfers...................................................... 40
11.6.4 Allocation When Transfer Occurs.......................................... 40
ARTICLE XII
ADMISSION OF PARTNERS
12.1 Admission of Successor General Partner............................................ 40
12.2 Admission of Additional Limited Partners.......................................... 41
12.2.1 General.................................................................. 41
12.2.2 Consent of General Partner Required...................................... 41
12.3 Amendment of Agreement and Certificate............................................ 41
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
13.1 Dissolution....................................................................... 41
</TABLE>
vi
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
13.2 Winding Up........................................................................ 42
13.2.1 General.................................................................. 42
13.2.2 Where Immediate Sale of Partnership's Assets Impractical................. 43
13.3 Compliance with Timing Requirements of Regulations; Allowance for Contingent
or Unforeseen Liabilities or Obligations........................................ 43
13.4 Rights of Limited Partners........................................................ 44
13.5 Notice of Dissolution............................................................. 44
13.6 Cancellation of Certificate of Limited Partnership................................ 44
13.7 Reasonable Time for Winding-Up.................................................... 44
ARTICLE XIV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
14.1 Amendments Generally.............................................................. 44
14.2 General Partner's Power to Amend.................................................. 44
14.3 Consent of Adversely Affected Partner Required.................................... 45
14.4 When Consent of Limited Partnership Interests Required............................ 45
</TABLE>
ARTICLE XV
GENERAL PROVISIONS
15.1 Addresses and Notice............................................. 45
15.2 Titles and Captions.............................................. 46
15.3 Pronouns and Plurals............................................. 46
15.4 Further Action................................................... 46
15.5 Binding Effect................................................... 46
15.6 Waiver of Partition.............................................. 46
15.7 Entire Agreement................................................. 46
15.8 Securities Law Provisions........................................ 46
15.9 Remedies Not Exclusive........................................... 46
15.10 Time............................................................. 46
15.11 Creditors........................................................ 47
15.12 Waiver........................................................... 47
15.13 Execution Counterparts........................................... 47
15.14 Applicable Law................................................... 47
15.15 Severability..................................................... 47
15.16 Limitation of Liability.......................................... 47
ARTICLE XVI
POWER OF ATTORNEY
16.1 Scope............................................................ 47
16.2 Irrevocability................................................... 48
vii
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERITAGE COMMUNITIES L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HERITAGE
COMMUNITIES L.P., is made as of the _____ day of April, 1997, by and among ASR
Investments Corporation, a Maryland corporation, as the General Partner,
Heritage SGP Corporation, an Arizona corporation, as the Special General
Partner, Jon A. Grove, as Formation Limited Partner and the Persons whose names
are set forth on Exhibit A attached hereto, as the Limited Partners, together
with any other Persons who become Partners in the Partnership as provided
herein.
RECITALS
A. Pursuant to the Original Agreement, the General Partner, the Special
General Partner and the Formation Limited Partner formed the Partnership.
B. The General Partner, the Special General Partner and the Limited
Partners have entered into the Master Combination and Contribution Agreement
pursuant to which, among other things, they agreed to admit the Limited Partners
as limited partners in the Partnership continued hereby.
C. The General Partner, the Special General Partner and the Formation
Limited Partner desire to admit the Limited Partners as limited partners in the
Partnership.
D. The Formation Limited Partner desires to withdraw as a limited
partner in the Partnership in exchange for the return of his Capital
Contribution.
E. The General Partner, the Special General Partner and the Limited
Partners, being all of the Partners in the Partnership, desire to continue the
Partnership as a limited partnership under the Revised Uniform Limited
Partnership Act of the State of Delaware, and make this Agreement to amend and
restate the Original Agreement to reflect and conform the foregoing admissions
and withdrawal and to amend and restate and supersede in its entirety the
Original Agreement, as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, the mutual promises
and agreements herein made, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the General Partner,
the Special General Partner, the Formation Limited Partner, and the Limited
Partners, intending to be legally bound, have agreed and do hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. Unless otherwise clearly indicated to the contrary,
the following terms shall have the following meanings:
1.1.1 "Accrual Account" means an account maintained with
respect to each Limited Partner Unit to which shall be credited (except as
otherwise provided in the last sentence of this paragraph) on a monthly basis an
amount, calculated as if interest at a per annum rate equal to the Prime Rate
(as said rate may change from time to time), plus one percentage point, on the
average daily balance of such Limited Partner Unit's Unpaid Distribution
Account, and from which shall be debited the amount of any distributions of
available Cash or Capital Transaction Proceeds with respect to such Accrual
Account pursuant to clause (i) of Section 5.1.1 or clause (i) of Section 5.1.2
hereof. The amount to be credited to each Accrual Account shall be cumulative
and shall compound annually, if unpaid.
1.1.2 "Act" means the Delaware Revised Uniform Limited
Partnership Act as it may be amended from time to time, and any successor to
such statute.
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1.1.3 "Additional Limited Partner" means a Person admitted to
the Partnership as a Limited Partner pursuant to Section 4.2.1 hereof and who is
shown as such on the books and records of the Partnership.
1.1.4 "Adjusted Capital Account" means the Capital Account
maintained for each Partner as of the end of each Partnership Year (a) increased
by any amounts which such Partner is obligated to restore pursuant to any
provisions of this Agreement or is deemed to be obligated to restore pursuant to
the penultimate sentences of Treasury Regulation sections 1.704-2(g)(1) and
1.704-2(i)(5) and (b) decreased by the items described in paragraphs (4), (5)
and (6) of Treasury Regulation section 1.704- 1(b)(2)(ii)(d). This definition of
Adjusted Capital Account is intended to comply with the provisions of Treasury
Regulation section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.
1.1.5 "Adjusted Capital Account Deficit" means, with respect
to any Partner, the deficit balance, if any, in such Partner's Adjusted Capital
Account as of the end of the relevant Partnership Year.
1.1.6 "Adjusted Property" means any property the Carrying
Value of which has been adjusted pursuant to Section 4.4 hereof.
1.1.7 "Affiliate" means, with respect to any Person, (a) any
Person directly or indirectly controlling, controlled by or under common control
with such Person, (b) any Person owning or controlling 10 percent or more of the
outstanding voting interests of such Person, (c) any Person of which such Person
owns or controls 10 percent or more of the voting interests, or (d) any officer,
director, general partner or trustee of such Person or any Person referred to in
clauses (a), (b), and (c) above.
1.1.8 "Agreed Value" means (a) in the case of any Contributed
Property set forth in Exhibit B and, as of the time of its contribution to the
Partnership, the Agreed Value of such property as set forth in Exhibit B, and
(b) in the case of any property distributed to a Partner by the Partnership, the
Partnership's Carrying Value of such property at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner upon
such distribution or to which such property is subject at the time of
distribution as determined under Code section 752 and the regulations
thereunder.
1.1.9 "Agreement" means this Agreement of Limited Partnership,
as it may be amended, supplemented or restated from time to time.
1.1.10 "Articles of Incorporation" means the Articles of
Incorporation of ASR Investments Corporation, as filed with the Secretary of
State of the State of Maryland, as further amended or restated from time to
time.
1.1.11 "Assignee" means a Person to whom one or more
Partnership Units have been transferred in a manner permitted under this
Agreement, but who has not become a Substituted Limited Partner, and who has
only the rights set forth in Section 11.5.
1.1.12 "Available Cash" means with respect to any period for
which such calculation is being made:
(a) all cash revenues and funds received by the
Partnership from whatever source, excluding, however, Capital Transaction
Proceeds, plus the amount of any reduction (including, without limitation, a
reduction resulting because the General Partner determines such amounts are no
longer necessary) in reserves of the Partnership, which reserves are referred to
in clause (b)(iv) and Section 1.1.18 below:
(b) less the sum of the following (except to the
extent taken into account in determining Capital Transaction Proceeds):
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(i) all interest, principal and other debt
payments made during such period by the Partnership,
(ii) all reasonable cash expenditures
(including capital expenditures) made by the Partnership during such period,
(iii) investments in any entity (including
loans made thereto) to the extent that such investments are permitted under this
Agreement and are not otherwise described in clauses (b)(i) or (ii), and
(iv) the amount of any increase in reserves
(including reserves to make capital expenditures) established during such period
which the General Partner or the Special General Partner determines is necessary
or appropriate in its sole and absolute discretion.
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.
1.1.13 "Book-Tax Disparities" means, with respect to any item
of Contributed Property or Adjusted Property, as of the date of any
determination, the difference between the Carrying Value of such Contributed
Property or Adjusted Property and the adjusted basis thereof for federal income
tax purposes as of such date. A Partner's share of the Partnership's Book-Tax
Disparities in all of its Contributed Property and Adjusted Property will be
reflected by the difference between such Partner's Capital Account balance as
maintained pursuant to Section 4.4 and the hypothetical balance of such
Partner's Capital Account computed as if it had been maintained strictly in
accordance with federal income tax account principles.
1.1.14 "Business Day" means any day except a Saturday, Sunday
or other day on which commercial banks in New York, New York, are authorized or
required by law to close.
1.1.15 "Capital Account" means the Capital Account maintained
for a Partner pursuant to Section 4.4 hereof.
1.1.16 "Capital Contribution" means with respect to any
Partner, any cash, cash equivalents or the Agreed Value of Contributed Property
which such Partner contributes or is deemed to contribute to the Partnership
pursuant to Section 4.1 or 4.2 hereof and which shall be treated as a
contribution to the Partnership pursuant to Code section 721(a).
1.1.17 "Capital Transaction" means a sale, exchange or other
disposition (other than in liquidation of the Partnership or any Subsidiary
Partnership) or a financing or refinancing by the Partnership or any Subsidiary
Partnership (which shall not include any loan or financing to the General
Partner as permitted by Section 7.1.1(c)) of a Partnership or Subsidiary
Partnership asset or any portion thereof, that under generally accepted
accounting principles the proceeds of which are deemed attributable to capital.
1.1.18 "Capital Transaction Proceeds" means the net cash
proceeds of a Capital Transaction received by the Partnership, after deducting
all reasonable expenses incurred in connection therewith and after application
of any proceeds, at the sole discretion of the General Partner or the Special
General Partner, toward the payment of any indebtedness of the Partnership or
any Subsidiary Partnership secured by the property that is the subject of that
Capital Transaction, the purchase or financing of any improvements or an
expansion of Partnership or Subsidiary Partnership property, the distribution of
proceeds to the general partner of any Subsidiary Partnership, or the
establishment of any reserves that the General Partner determines are necessary
or appropriate in its sole and absolute discretion; provided, however, that if
the Partnership or any Subsidiary Partnership obtains financing for
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their respective properties for which no permanent financing has previously
existed, the proceeds of such financing shall not be deemed to be Capital
Transaction Proceeds if and to the extent that the General Partner or the
Special General Partner determines to reinvest such proceeds in additional and
existing real property investments of the Partnership or any Subsidiary
Partnership.
1.1.19 "Capital Transaction Record Date" has the meaning set
forth in Section 5.1.2.
1.1.20 "Carrying Value" means (a) with respect to a
Contributed Property or Adjusted Property, the Code section 704(c) value of such
property (or in the case of an Adjusted Property, the fair market value of such
property at the time of its latest adjustment under Section 4.4.4) reduced (but
not below zero) by all Depreciation with respect to such property charged to the
Partners' Capital Accounts and (b) with respect to any other Partnership
property, the adjusted basis of such property for federal income tax purposes,
all as of the time of determination. The Carrying Value of any property shall be
adjusted from time to time in accordance with Section 4.4 hereof and to reflect
changes, additions or other adjustments to the Carrying Value for dispositions
and acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
1.1.21 "Certificate" means the Certificate of Limited
Partnership relating to the Partnership filed in the office of the Secretary of
State of the State of Delaware, as amended from time to time in accordance with
the terms hereof and the Act.
1.1.22 "Code" means the Internal Revenue Code of 1986, as
amended. Any reference herein to a specific Code section or sections shall be
deemed to include a reference to any corresponding provision of future law.
1.1.23 "Code Section 704(c) Value" of any Contributed Property
means the Agreed Value of such property as set forth in Exhibit B. Subject to
Section 4.4 hereof, the General Partner shall use such method as it deems
reasonable and appropriate to allocate the aggregate of the Code Section 704(c)
Value of Contributed Properties among each separate property on a basis
proportional to its fair market value.
1.1.24 "Contributed Property" means each property or other
asset (but excluding cash), in such form as may be permitted by the Act
contributed or deemed contributed to the Partnership. Once the Carrying Value of
a Contributed Property is adjusted pursuant to Section 4.4.4 hereof, such
property shall no longer constitute a Contributed Property for purposes of
Section 4.4.4 hereof, but shall be deemed an Adjusted Property for such
purposes.
1.1.25 "Contribution Agreement" means that certain Master
Combination and Contribution Agreement, dated as of November 8, 1996, among the
General Partner, the Special General Partner, the Limited Partners, the
Partnership, and certain other parties identified therein, which provides for
the issuance of Partnership Units in the Partnership in exchange for the
contribution of those properties listed in Exhibit B.
1.1.26 "Conversion Right" shall have the meaning set forth in
Section 4.2.2 hereof.
1.1.27 "Converting Partner" has the meaning set forth in
Section 4.2.2 hereof.
1.1.28 "Depreciation" means for each fiscal year or other
period, an amount equal to the federal income tax depreciation, amortization, or
other cost recovery deduction allowable with respect to an asset for such year
or other period, except that if the Carrying Value of an asset differs from its
adjusted basis for federal income tax purposes at the beginning of such year or
other period, Depreciation shall be an amount which bears the same ratio to such
beginning Carrying Value as the federal income tax depreciation, amortization,
or other cost recovery deduction for such year bears to such beginning adjusted
tax basis; provided, however, that if the federal income tax depreciation,
amortization, or other cost recovery deduction for such year is zero,
Depreciation shall be
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determined with reference to such beginning Carrying Value using any reasonable
method selected by the General Partner, provided that the General Partner shall
determine Depreciation consistently with the method used in respect of real
property owned directly by the General Partner.
1.1.29 "Dissolution Event" has the meaning set forth in
Section 13.1.
1.1.30 "Formation Limited Partner" means Jon A. Grove.
1.1.31 "Funds from Operations" means, with respect to any
period for which such calculation is being made, the net income of the General
Partner (computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect Funds from Operations on a
consistent basis.
1.1.32 "General Partner" means ASR Investments Corporation, a
Maryland corporation operating as a real estate investment trust, or its
permitted successors as a general partner in the Partnership.
1.1.33 "General Partners" means the General Partner and the
Special General Partner.
1.1.34 "General Partnership Interest" means a Partnership
Interest held by the General Partner or the Special General Partner that is a
general partnership interest. A General Partnership Interest may be expressed as
a number of General Partner Units determined by dividing such Partner's Capital
Contributions by $18.10.
1.1.35 "Immediate Family" means, with respect to any natural
Person, such natural Person's spouse, parents, descendants, nephews, nieces,
brothers and sisters and trusts for the benefit of any of the foregoing.
1.1.36 "Incapacity" or "Incapacitated" means (a) as to any
individual Partner, death, total physical disability or entry by a court of
competent jurisdiction adjudicating him incompetent to manage his Person or his
estate; (b) as to any corporation which is a partner, the filing of a
certificate of dissolution, or its equivalent, for the corporation or the
revocation of its charter; (c) as to any partnership which is a Partner, the
dissolution and commencement of winding up of the partnership; (d) as to any
estate which is a Partner, the distribution by the fiduciary of the estate's
entire interest in the Partnership; (e) as to any trust which is a Partner, the
termination of the trust (but not the substitution of a new trustee); or (f) as
to any Partner, the bankruptcy of such Partner. For purposes of this definition,
bankruptcy of a Partner shall be deemed to have occurred when the Partner (i)
makes an assignment for the benefit of creditors, (ii) files a voluntary
petition in bankruptcy, (iii) is adjudged a bankrupt or insolvent, or has
entered against him an order of relief in any bankruptcy or insolvency
proceeding, (iv) files a petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law of regulation, (v) files an answer or
other pleading admitting or failing to contest the material allegations of a
petition filed against him in any proceeding of this nature, (vi) seeks,
consents to or acquiesces in the appointment of a trustee, receiver or
liquidator of the Partner or of all or any substantial part of his properties,
(vii) the Partner is the debtor in any proceeding seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, which has not been dismissed within
120 days after the commencement thereof, (viii) the appointment, without the
partner's consent or acquiescence, of a trustee, receiver or liquidator has not
been vacated or stayed within 90 days after the appointment, or such appointment
is not vacated within 90 days after the expiration of any such stay.
1.1.37 "Indemnitee" means (a) any Person made a party to a
proceeding by reason of his status as (i) the General Partner, (ii) the Special
General Partner, (iii) a Limited Partner or (iv) a director, officer, trustee
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or shareholder of the Partnership or a Partner, and (b) such other Persons
(including Affiliates of the General Partner, the Special General Partner or the
Partnership) acting in good faith on behalf of the Partnership as determined by
the General Partner in its good faith judgment, other than for any action taken
by any such Person (described in clause (a) or (b) of this sentence) involving
fraud, willful misconduct or gross negligence.
1.1.38 "IRS" means the Internal Revenue Service, which
administers the internal revenue laws of the United States.
1.1.39 "Limited Partner" means any Partner named as a Limited
Partner in Exhibit A attached hereto, as such exhibit may be amended from time
to time, or any Substituted Limited Partner or Additional Limited Partner, in
such Person's capacity as a Limited Partner in the Partnership.
1.1.40 "Limited Partner Consent" means the written consent of
Limited Partners owning more than 50 percent of the Limited Partner Interests at
the time in question.
1.1.41 "Limited Partnership Interest" means a Partnership
Interest of a Limited Partner in the Partnership representing a fractional part
of the Partnership Interests of all Limited Partners and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. A Limited Partnership
Interest may be expressed as a number of Limited Partner Units.
1.1.42 "Liquidating Transaction" means any sale or other
disposition of all or substantially all of the assets of the Partnership or a
related series of transactions that, taken together, results in the sale or
other disposition of all or substantially all of the assets of the Partnership.
1.1.43 "Liquidator" has the meaning set forth in Section 13.2.
1.1.44 "Net Income" means for any taxable period, the excess,
if any, of the Partnership's items of income and gain for such taxable period
over the Partnership's items of loss and deduction for such taxable period. The
items included in the calculation of Net Income shall be determined in
accordance with Section 4.4.2. Once an item of income, gain, loss or deduction
that has been included in the initial computation of Net Income is subjected to
the special allocation rules in Section 6.2 and 6.3, Net Income or the resulting
Net Loss, whichever the case may be, shall be recomputed without regard to such
item.
1.1.45 "Net Loss" means for any taxable period, the excess, if
any, of the Partnership's items of loss and deduction for such taxable period
over the Partnership's items of income and gain for such taxable period. The
items included in the calculation of Net Loss shall be determined in accordance
with Section 4.4.2. Once an item of income, gain, loss or deduction that has
been included in the initial computation of Net Loss is subjected to the special
allocation rules in Sections 6.2 and 6.3, Net Loss or the resulting Net Income,
whichever the case may be, shall be recomputed without regard to such item.
1.1.46 "Nonrecourse Built-in Gain" means, with respect to any
Contributed Properties or Adjusted Properties that are subject to a mortgage or
negative pledge securing a Nonrecourse Liability, the amount of taxable gain
that would be allocated to the Partners pursuant to Section 6.3.2 if such
properties were disposed of in a taxable transaction in full satisfaction of
such liabilities and for no other consideration.
1.1.47 "Nonrecourse Deductions" has the meaning set forth in
Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for
a Partnership Year shall be determined in accordance with the rules of Treasury
Regulation section 1.704-2(c).
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1.1.48 "Nonrecourse Liability" has the meaning set forth in
Treasury Regulation section 1.752-1(a)(2).
1.1.49 "Notice of Conversion" means the Notice of Conversion
substantially in the form of Exhibit C attached to this Agreement.
1.1.50 "Original Agreement" means that certain Agreement of
Limited Partnership of Heritage Communities L.P., dated as of November 25, 1996
and effective as of December 6, 1996, by and among the General Partner, the
Special General Partner and the Formation Limited Partner.
1.1.51 "Original Limited Partner" means a Limited Partner who
is a Partner at the effective date of this Agreement and who owns one or more
Original Limited Partner Units on the date action is called for under Section
13.1. The term "Original Limited Partner" shall also include any permitted
transferee of an Original Limited Partner pursuant to Section 11.3.
1.1.52 "Original Limited Partner Unit" means a Partnership
Unit held by an Original Limited Partner.
1.1.53 "Partner" means a General Partner, a Special General
Partner or a Limited Partner, and "Partners" means the General Partner, the
Special General Partner and the Limited Partners.
1.1.54 "Partner Minimum Gain" means an amount with respect to
each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would
result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Treasury Regulation section 1.704-2(i)(3).
1.1.55 "Partner Nonrecourse Debt" has the meaning set forth in
Treasury Regulation section 1.704-2(b)(4).
1.1.56 "Partner Nonrecourse Deductions" has the meaning set
forth in Treasury Regulation section 1.704-(i)(2), and the amount of Partner
Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a
Partnership Year shall be determined in accordance with the rules of Treasury
Regulation section 1.704-2(i)(2).
1.1.57 "Partnership" means the limited partnership formed
under the Act and continued pursuant to this Agreement, and any successor
thereto.
1.1.58 "Partnership Interest" means an ownership interest in
the Partnership representing a Capital Contribution by either a Limited Partner,
the Special General Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. A Partnership Interest
may be expressed as a number of Partnership Units.
1.1.59 "Partnership Minimum Gain" has the meaning set forth in
Treasury Regulation section 1.704-2(b)(2), and the amount of Partnership Minimum
Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a
Partnership Year shall be determined in accordance with the rules of Treasury
Regulation section 1.704-2(d).
1.1.60 "Partnership Record Date" means the record date
established by the General Partner for the distribution of Available Cash
pursuant to Section 5.1 hereof, which record date shall be the same as the
record date established by the General Partner for a dividend to its
shareholders.
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1.1.61 "Partnership Unit" or "Unit" means a fractional,
undivided share of the Partnership Interests of all Partners issued pursuant to
Sections 4.1 and 4.2, in such number as set forth in Exhibit A attached hereto,
as such exhibit may be amended from time to time in accordance with the terms of
this Agreement.
1.1.62 "Partnership Year" means the fiscal year of the
Partnership, which shall be the calendar year.
1.1.63 "Percentage Interest" means, as to a Partner, its
interest in the Partnership as determined by dividing the Partnership Units
owned by such Partner by the total number of Partnership Units then outstanding
and as specified in Exhibit A attached hereto, as such exhibit may be amended
from time to time.
1.1.64 "Person" means an individual or a corporation,
partnership, trust, unincorporated organization, association or other entity.
1.1.65 "Prime Rate" means, on any date, a fluctuating rate of
interest per annum equal to the "prime rate" published in the "Money Rates" or
equivalent section of the Western Edition of The Wall Street Journal, provided
that if a "prime rate" range is published by The Wall Street Journal, then the
highest rate of such range will be used, or if The Wall Street Journal ceases
publishing a prime rate or a prime rate range, then the General Partner will
select a prime rate, prime rate range or another substitute interest rate index
that is based upon comparable information.
1.1.66 "Recapture Income" means any gain recognized by the
Partnership (computed without regard to any adjustment required by Code section
734 or Code section 743) upon the disposition of any property or asset of the
Partnership, which gain is characterized as ordinary income for federal income
tax purposes because it represents the recapture of deductions previously taken
with respect to such property or asset.
1.1.67 "Recourse Liabilities" has the meaning set forth in
Treasury Regulation section 1.752-1(a)(1).
1.1.68 "Redemption Amount" means an amount of cash equal to
the number of Limited Partner Units, multiplied by the Unit Adjustment Factor,
that are the subject of a Notice of Conversion multiplied by the Value on the
Valuation Date of the Shares that the Partner delivering the Notice of
Conversion would have been entitled to receive under Section 4.2.2 plus, except
as otherwise provided in Section 4.2.2(d), the unreturned balances in the
Accrual Accounts and Unpaid Distribution Accounts maintained for the Limited
Partner Units that are the subject of such Notice of Conversion.
1.1.69 "REIT" means a real estate investment trust under Code
section 856.
1.1.70 "Residual Gain" or "Residual Loss" means any item of
gain or loss, as the case may be, of the Partnership recognized for federal
income tax purposes resulting from a sale, exchange of other disposition of
Contributed Property or Adjusted Property, to the extent such item of gain or
loss is not allocated pursuant to Section 6.3.2(a)(i) or Section 6.3.2(b)(i) to
eliminate Book-Tax Disparities.
1.1.71 "Securities Act" means the Securities Act of 1933, as
amended.
1.1.72 "Shares" means the shares of common stock, $0.01 par
value, of ASR Investments Corporation, a Maryland corporation.
1.1.73 "Special General Partner" means Heritage SGP
Corporation, an Arizona corporation operating as a qualified REIT subsidiary
under Code section 856(i), or its permitted successors as a general partner in
the Partnership.
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1.1.74 "Specified Conversion Date" means the tenth Business
Day after receipt by the General Partner of a Notice of Conversion.
1.1.75 "Subsidiary" means, with respect to any Person, any
corporation or other entity of which a majority of (a) the voting power of the
voting equity securities or (b) the outstanding equity interests is owned,
directly or indirectly, by such Person.
1.1.76 "Subsidiary Partnership" means a limited partnership
formed under the laws of any state in the United States, the sole limited
partner of which is the Partnership and the sole general partner or general
partners of which are the General Partner and/or the Special General Partner in
which the interest of the General Partner and the Special General Partner in all
items of income, gain, loss, deduction, credit and distributions shall not
exceed, in the aggregate, one percent.
1.1.77 "Substituted Limited Partner" means a Person who is
admitted as a Limited Partner to the Partnership pursuant to Section 11.4.
1.1.78 "Transaction" has the meaning set forth in Section
11.2.2.
1.1.79 "Treasury Regulation" means the Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
1.1.80 "Unit Adjustment Factor" means initially 1.0; provided
that in the event that the General Partner (i) declares or pays a dividend on
its outstanding Shares in Shares or makes a distribution to all holders of its
outstanding Shares in Shares, (ii) subdivides its outstanding Shares, or (iii)
combines its outstanding Shares into a smaller number of Shares, the Unit
Adjustment Factor shall be adjusted by multiplying the Unit Adjustment Factor by
a fraction, the numerator of which shall be the number of Shares issued and
outstanding on the record date (assuming for such purposes that such dividend,
distribution, subdivision or combination has occurred as of such time), and the
denominator of which shall be the actual number of Shares (determined without
the above assumption) issued and outstanding on the record date for such
dividend, distribution, subdivision or combination.
1.1.81 "Unpaid Distribution Account" means an account
maintained with respect to each Limited Partner Unit to which shall be credited
on a quarterly basis, but only to the extent not distributed currently in
accordance with clause (iii) of Section 5.1.1 hereof, an amount per Limited
Partner Unit (multiplied by the Unit Adjustment Factor) equal to the dividend
per Share paid by the General Partner for such quarter, and from which shall be
debited the amount of any distributions of Available Cash or Capital Transaction
Proceeds with respect of such Unpaid Distribution Account pursuant to clause
(ii) of Section 5.1.1 or clause (ii) of Section 5.1.2 hereof.
1.1.82 "Unrealized Gain" attributable to any item of
Partnership property means, as of any date of determination, the excess, if any,
of (a) the fair market value of such property (as determined under Section 4.4
hereof) as of such date, over (b) the Carrying Value of such property (prior to
any adjustment to be made pursuant to Section 4.4 hereof) as of such date.
1.1.83 "Unrealized Loss" attributable to any item of
Partnership property means, as of any date of determination, the excess, if any,
of (a) the Carrying Value of such property (prior to any adjustment to be made
pursuant to Section 4.4 hereof) as of such date, over (b) the fair market value
of such property (as determined under Section 4.4 hereof) as of such date.
1.1.84 "Valuation Date" means the date of receipt by the
General Partner of a Notice of Conversion or, if such date is not a Business
Day, the first Business Day thereafter.
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1.1.85 "Value" means, with respect to a Share, the average of
the daily market price for the 10 consecutive trading days immediately preceding
the Valuation Date. The market price for each such trading day shall be: (a) if
the Shares are listed or admitted to trading on any securities exchange or the
NASDAQ-National Market System, the closing price, regular way, on such day, or
if no such sale takes place on such day, the average of the closing bid and
asked prices on such day, (b) if the Shares are not listed or admitted to
trading on any securities exchange or the NASDAQ-National Market System, the
last reported sale price on such day or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as reported by a
reliable quotation source designated by the General Partner, or (c) if the
Shares are not listed or admitted to trading on any securities exchange or the
NASDAQ-National Market System and no such last reported sale price or closing
bid and asked prices are available, the average of the reported high bid and low
asked prices on such day, as reported by a reliable quotation source designated
by the General Partner, or if there shall be no bid and asked prices on such
day, the average of the high bid and low asked prices, as so reported, on the
most recent day (not more than 10 days prior to the date in question) for which
prices have been so reported; provided, that if there are no bid and asked
prices reported during the 10 days prior the date in question, the Value of the
Shares shall be determined by the board of directors of the General Partner
acting in good faith on the basis of such quotations and other information as it
considers, in its reasonable judgment appropriate.
1.2 Currency. All payments, advances and cash contributions of capital
to be made by a Partner to or on behalf of the Partnership and all cash
distributions and other payments made by the Partnership to a Partner shall be
made in lawful money of the United States of America, which shall at the time of
payment be legal tender in payment of all debts and dues, public and private.
All references in this Agreement to "dollars" shall mean United States of
America dollars.
1.3 Schedules and Exhibits. All schedules and exhibits annexed or
attached hereto are expressly incorporated into and made a part of this
Agreement.
1.4 Construction of Term "Including". The terms "include" and
"including" shall be construed as if followed by the phrase "without
limitation".
1.5 Certain Accounts. The Accrual Accounts and the Unpaid Distribution
Accounts do not constitute capital accounts, but are established and maintained
solely for the purpose of computing various distributions to be made hereunder.
1.6 Interest Calculations. Any interest (or other amounts calculated
like interest under this Agreement) which is to be calculated under this
Agreement shall be computed on the daily outstanding balance of the amount on
which interest accrues hereunder. All interest calculations under this
Agreement, including the determination of accruals on the various accounts,
shall be made monthly (but compounding, if any, would occur only on an annual
basis) and shall be computed on the basis of a fraction the denominator of which
is the actual number of days in the particular calendar year and the numerator
of which is the actual number of days in the month for which interest is being
calculated.
1.7 Other Terms. Any term used in this Agreement which is not defined
in this Article I shall have the meaning set forth elsewhere in this Agreement.
ARTICLE II
ORGANIZATIONAL MATTERS
2.1 Organization and Continuation; Application of Act.
2.1.1 Organization and Continuation of Partnership. The
General Partner, the Special General Partner and the Limited Partners do hereby
continue the Partnership as a limited partnership according to
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all of the terms and provision of this Agreement and otherwise in accordance
with the Act. The General Partner and the Special General Partner are the only
general partners and the Limited Partners are the only limited partners in the
Partnership. All Partnership profits, losses, and distributive shares of tax
items accruing prior to the effectiveness of this Agreement shall be allocated
in accordance with, and the respective rights and obligations of partners with
respect to the period prior to the effectiveness of this Agreement shall be
governed by, the Original Agreement. The Formation Limited Partner hereby
withdraws from the Partnership in exchange for a return of his original capital
contribution.
2.1.2 Application of Act. The Partnership is a limited
partnership pursuant to the provisions of the Act and upon the terms and
conditions set forth in this Agreement. Except as expressly provided herein to
the contrary, the rights and obligations of the Partners and the administration
and termination of the Partnership shall be governed by the Act. No Partner has
any interest in any Partnership property, and the Partnership Interest of each
Partner shall be personal property for all purposes.
2.2 Name. The name of the Partnership is Heritage Communities L.P. The
Partnership's business may be conducted under any other name or names deemed
advisable by the General Partner, including the name of the General Partner or
any Affiliate thereof. The words "Limited Partnership," "L.P." "Ltd." or similar
words or letters shall be included in the Partnership's name where necessary for
the purposes of complying with the laws of any jurisdiction that so requires.
The General Partner in its sole and absolute discretion may change the name of
the Partnership at any time and from time to time and shall promptly notify the
Limited Partners of such change, provided, that the name of the Partnership may
not be changed to include the name, or any variant thereof, of any Limited
Partner without the written consent of that Limited Partner.
2.3 Registered Office and Agent; Principal Office. The address of the
registered office of the Partnership in the State of Delaware is located at 1029
Orange Street, Wilmington, New Castle County, Delaware 19801, and the registered
agent for service of process on the Partnership in the State of Delaware at such
registered office is The Corporation Trust Company. The principal office of the
Partnership is 335 North Wilmot, Suite 250, Tucson, Arizona 85711, or such other
place in the United States as the General Partner may from time to time
designate by notice to the Limited Partners. The Partnership may maintain
offices at such other place or places within or outside the State of Delaware as
the General Partner deems advisable.
2.4 Term. The term of the Partnership shall commence on the
date hereof and shall continue until December 31, 2086, unless it is dissolved
sooner pursuant to the provisions of Article XIII or as otherwise provided by
law.
ARTICLE III
PURPOSE
3.1 Purpose and Business. The purpose and nature of the business to be
conducted by the Partnership is (a) to conduct any business that may be lawfully
conducted by a limited partnership organized pursuant to the Act and in
connection therewith to sell or otherwise dispose of Partnership assets, (b) to
enter into any partnership, joint venture or other similar arrangement to engage
in any of the foregoing or the ownership of interests in any entity engaged in
any of the foregoing, and (c) to do anything necessary or incidental to the
foregoing which, in each case, is not in breach of this Agreement; provided,
however, that each of the foregoing clauses (a), (b), and (c) shall be limited
and conducted in such a manner as to permit the General Partner at all times to
be classified as a REIT, unless the General Partner provides notice to the
Partnership that it intends to cease or has ceased to qualify as a REIT.
3.2 Powers. The Partnership is empowered to do any and all acts and
things necessary, appropriate, proper, advisable, incidental to or convenient
for the furtherance and accomplishment of the purposes and business described
herein and for the protection and benefit of the Partnership; provided, the
Partnership shall not take any
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action which, in the reasonable business judgment of the General Partner, (a)
could adversely affect the ability of the General Partner to continue to qualify
as a REIT, (b) could subject the General Partner to any additional taxes under
Code section 857 or Code section 4981, or (c) could violate any law or
regulation of any governmental body or agency having jurisdiction over the
General Partner or its securities, unless such action (or inaction) shall have
been specifically consented to by the General Partner in writing.
ARTICLE IV
CAPITAL CONTRIBUTIONS; ISSUANCE OF UNITS;
CAPITAL ACCOUNTS
4.1 Capital Contributions of the Partners.
4.1.1 Initial Capital Contributions.
(a) The General Partner, the Special General Partner
and the Formation Limited Partner each previously contributed $100.00 to the
Partnership's capital. As of the date of this Agreement, the Formation Limited
Partner has withdrawn and his Capital Contribution has been returned.
(b) At the time of the execution of this Agreement,
the Partners shall make or shall have made their respective Capital
Contributions as required or permitted by the Contribution Agreement and as set
forth in Exhibit A to this Agreement. The General Partner's Capital Contribution
may include all or any part of the Partnership's costs associated with the
contribution and acquisition of the properties contributed by the Limited
Partners, including due diligence costs, transfer fees and other closing costs,
as determined in the General Partner's sole discretion. The Limited Partners'
contributions shall be contributions of property to the Partnership in
accordance with Code section 721(a) as set forth in the Contribution Agreement
and Exhibit B attached hereto. The Partners shall own Partnership Units in the
amounts set forth in Exhibit A and shall have a Percentage Interest in the
Partnership as set forth in Exhibit A, which Percentage Interest shall be
adjusted in Exhibit A from time to time by the General Partner in accordance
with Section 1.1.63 to the extent necessary to reflect accurately redemptions,
conversions, Capital Contributions, the issuance of additional Partnership
Units, or similar events having an effect on a Partner's Percentage Interest.
Partnership Units acquired by the General Partner or the Special General Partner
in exchange for Capital Contributions shall be deemed to be the General
Partnership Interest.
4.1.2 Additional Capital Contributions or Assessments. No
Partner shall be assessed or, except for any such amounts which a Limited
Partner may be obligated to repay under Section 10.5, be required to contribute
additional funds, except as provided in Sections 4.1.5 and 7.1.1(c), or other
property to the Partnership. Any additional funds required by the Partnership,
as determined by the General Partner in its reasonable business judgment, may,
at the option of the General Partner and without an obligation to do so, be
contributed by the General Partner, the Special General Partner, or both as
additional Capital Contributions; provided, however, that the General Partner,
separately or together with the Special General Partner, shall contribute to the
Partnership an additional $400,000 as a Capital Contribution during each Fiscal
Year in exchange for General Partner Units which shall be added to the General
Partnership Interest. If and as the General Partner or any other Partner makes
additional Capital Contributions to the Partnership, each such Partner shall
receive additional General Partner Units, but only as provided for in this
Section 4.1.2 or Section 4.2.
4.1.3 Return of Capital Contributions. Except as otherwise
expressly provided herein, the Capital Contribution of each Partner will be
returned to that Partner only in the manner and to the extent provided in
Article V and Article XIII hereof, and no Partner may withdraw from the
Partnership or otherwise have any right to demand or receive the return of its
Capital Contribution to the Partnership (as such), except as specifically
provided herein. Under circumstances requiring a return of any Capital
Contribution, no Partner shall have the right to receive property other than
cash, except as specifically provided herein. No Partner shall be entitled to
interest
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on any Capital Contribution or Capital Account notwithstanding any disproportion
therein as between the Partners. Except as specifically provided herein, neither
the General Partner nor the Special General Partner shall be liable for the
return of any portion of the Capital Contribution of any Limited Partner, and
the return of such Capital Contributions shall be made solely from Partnership
assets.
4.1.4 Liability of Limited Partners. No Limited Partner shall
have any further personal liability to contribute money to, or in respect of,
the liabilities or the obligations of the Partnership, nor shall any Limited
Partner be personally liable for any obligations of the Partnership, except as
otherwise provided in Section 4.1.2 or in the Act. No Limited Partner shall be
required to make any contributions to the capital of the Partnership other than
its Capital Contribution.
4.1.5 Negative Capital Account. If the General Partner or the
Special General Partner, on the date of "liquidation" of its respective interest
in the Partnership (within the meaning of Treasury Regulation section
1.704-1(b)(2)(ii)(g)), has a negative balance in its Capital Account, then such
Partner shall contribute in cash to the capital of the Partnership the amount
required to increase its Capital Account as of such date to zero. Any such
contribution required of the General Partner or the Special General Partner
under this Section 4.1.5 shall be made by such Partner on or before the later of
(i) the end of the Partnership Year in which such Partner's interest in the
Partnership is liquidated, or (ii) the ninetieth calendar day following the date
of such liquidation. Notwithstanding any provision of this Agreement to the
contrary, all amounts so contributed by the General Partner or the Special
General Partner to the capital of the Partnership in accordance with this
Section 4.1.5 shall, upon liquidation of the Partnership under Article XIII
hereof, be distributed in accordance with Section 13.2.1 hereof.
4.1.6 Minimum Capital Contribution by General Partners.
Notwithstanding anything contained herein to the contrary, the minimum aggregate
Capital Contribution by the General Partner and the Special General Partner
shall be an amount equal to at least 1.01 percent of aggregate Capital
Contributions of the Limited Partners. In the event that such required minimum
Capital Contribution is increased as a result of the admission of any Additional
Limited Partners and the General Partner and the Special General Partner have
not contributed the required minimum amount to the Partnership, the amount
necessary to satisfy such required minimum Capital Contribution shall be payable
by the General Partner or the Special General Partner upon admission of such
Additional Limited Partner.
4.2 Issuances of Additional Partnership Interests.
4.2.1 General. The General Partner is hereby authorized to
cause the Partnership to issue such additional Partnership Interests in the form
of Limited Partner Units for any Partnership purpose at any time or from time to
time, to the Partners or to other Persons for such consideration and on such
terms and conditions as shall be established by the General Partner in its sole
and absolute discretion; provided, however, if the General Partner issues
additional Limited Partnership Interests in exchange for the contribution of
additional properties, the General Partners' obligation to make additional
Capital Contributions under Section 4.1.2 shall increase by an amount equal to
$400,000 multiplied by the fraction whose numerator is the number of Limited
Partner Units to be issued in exchange for the additional property and whose
denominator is the total number of outstanding Limited Partner Units as of the
date of this Agreement.
4.2.2 Conversion of Units.
(a) Subject to the further provisions of this Section
4.2.2 and subject to Section 8.6, each Limited Partner shall have the right (the
"Conversion Right") to exchange any or all of the Limited Partner Units held by
that Partner for Shares, with one Limited Partner Unit (as adjusted pursuant to
4.2.2 (b)) being exchangeable for one fully paid, non-assessable Share. The
Conversion Right may be exercised by a Limited Partner (a "Converting Partner")
at any time after the first anniversary date of the date of this Agreement and
from time to time thereafter by delivering a Notice of Conversion in the form of
Exhibit C to the General Partner. Upon
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receipt by the General Partner of a Notice of Conversion, on the Specified
Conversion Date the General Partner shall issue to the Converting Partner the
number of Shares equal to the number of Limited Partner Units to be exchanged.
The General Partner shall at all times reserve and keep available out of its
authorized but unissued Shares, solely for the purpose of effecting the exchange
of Limited Partner Units for Shares, such number of Shares as shall from time to
time be sufficient to effect the conversion of all outstanding Limited Partner
Units. No Limited Partner shall, solely by virtue of being the holder of one or
more Limited Partner Units, be deemed to be a shareholder of or have any other
interest in the General Partner.
(b) For purposes of this Section 4.2.2, the number of
Limited Partner Units exchanged by any Limited Partner shall be proportionately
adjusted by multiplying the number of Limited Partner Units being exchanged by
such Limited Partner by the Unit Adjustment Factor; the intent of this provision
is that one Limited Partner Unit (as adjusted) remains exchangeable for one
Share without dilution. In the event the General Partner issues any Shares in
exchange for Limited Partner Units pursuant to this Section 4.2.2, any such
Limited Partner Units so acquired by the General Partner shall thereafter be
owned by the General Partner as Limited Partner Units for all purposes of this
Agreement, except for those actions requiring the vote of the Limited Partners
or Limited Partner Consent. Each Converting Partner agrees to execute such
documents as the General Partner may reasonably require in connection with the
issuance of Shares upon exercise of the Conversion Right.
(c) On any Specified Conversion Date occurring on or
prior to the tenth anniversary of the date hereof, the Partnership shall pay in
cash to any Converting Partner the then unreturned balances in the Accrual
Accounts and Unpaid Distribution Accounts maintained for the Limited Partner
Units that are the subject of the Notice of Conversion.
(d) On any Specified Conversion Date occurring after
the tenth anniversary of the date hereof, the Partnership shall pay in cash to
any Converting Partner the then unreturned balances in the Accrual Accounts and
Unpaid Distribution Accounts maintained for the Limited Partner Units that are
the subject of the Notice of Conversion; provided, however, that no such payment
of the then unreturned balances in such Accrual Accounts and Unpaid Distribution
Accounts shall be required if the Value of a Share for which a Limited Partner
Unit is exchangeable pursuant to a Limited Partner's Conversion Right is at
least 110 percent of the sum of (i) the quotient obtained by dividing the
Converting Partner's Capital Contribution as set forth on Exhibit A by the
number of Limited Partner Units (multiplied by the Unit Adjustment Factor)
originally held by such Partner and (ii) the then unreturned balances per
Limited Partner Unit (as adjusted by the Unit Adjustment Factor) in the Accrual
Accounts and Unpaid Distribution Accounts maintained for the Partnership Units
that are the subject of the Notice of Conversion.
4.3 No Preemptive Rights. Except as specifically provided in this
Agreement, no Person shall have any preemptive, preferential or other similar
right with respect to (a) additional Capital Contributions or loans to the
Partnership or (b) issuance or sale of any Partnership Units.
4.4 Capital Accounts of the Partners.
4.4.1 General. The Partnership shall maintain for each partner
a separate Capital Account in accordance with the rules of Treasury Regulation
section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (a) the
amount of all Capital Contributions made by such Partner to the Partnership
pursuant to this Agreement and (b) all items of Partnership income and gain
(including income and gain exempt from tax) computed in accordance with Section
4.4.2 hereof and allocated to such Partner pursuant to Sections 6.1 and 6.2 of
this Agreement, and decreased by (i) the amount of cash or Agreed Value of all
actual and deemed distributions of cash or property made to such Partner
pursuant to this Agreement and (ii) all items of Partnership deduction and loss
computed in accordance with Section 4.4.2 hereof and allocated to such Partner
pursuant to Sections 6.1 and 6.2 of this Agreement.
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4.4.2 Income, Gains, Deductions, and Losses. For purposes of
computing the amount of any item of income, gain, loss or deduction to be
reflected in the Partner's Capital Accounts, unless otherwise specified in this
Agreement, the determination, recognition and classification of any such item
shall be the same as its determination, recognition and classification for
federal income tax purposes determined in accordance with Code section 703(a)
(for this purpose all items of income, gain, loss or deduction required to be
stated separately pursuant to Code section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
(a) Except as otherwise provided in Treasury
Regulation section 1.704- 1(b)(2)(iv)(m), the computation of all items of
income, gain, loss and deduction shall be made without regard to any election
under Code section 754 which may be made by the Partnership; provided, the
amounts of any adjustments to the adjusted bases of the assets of the
Partnership made pursuant to Code section 734 as a result of the distribution of
property by the Partnership to a Partner (to the extent that such adjustments
have not previously been reflected in the Partners' Capital Accounts) shall be
reflected in the Capital Accounts of the Partners in the manner and subject to
the limitations prescribed in Treasury Regulation section 1.704-1(b)(2)(iv)(m).
(b) The computation of all items of income, gain,
loss and deduction shall be made without regard to the fact that items described
in Code sections 705(a)(1)(b) or 705(a)(2)(b) are not includable in gross income
or are neither currently deductible nor capitalized for federal income tax
purposes.
(c) Any income, gain or loss attributable to the
taxable disposition of any Partnership property shall be determined as if the
adjusted basis of such property as of such date of disposition were equal in
amount to the Partnership's Carrying Value with respect to such property as of
such date.
(d) In lieu of the depreciation, amortization, and
other cost recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for such fiscal
year.
(e) In the event the Carrying Value of any
Partnership asset is adjusted pursuant to Section 4.4.4 hereof, the amount of
any such adjustment shall be taken into account as gain or loss from the
disposition of such asset.
(f) Any items specifically allocated under Section
6.3 hereof shall not be taken into account.
4.4.3 Transfers of Partnership Units. A transferee of a
Partnership Unit shall succeed to a pro rata portion of the Capital Account of
the transferor.
4.4.4 Unrealized Gains and Losses.
(a) Consistent with the provisions of Treasury
Regulation section 1.704- 1(b)(2)(iv)(f), and as provided in Section 4.4.4(b),
the Carrying Values of all Partnership assets shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable to such
Partnership property, as of the times of the adjustments provided in Section
4.4.4(b) hereof, as if such Unrealized Gain or Unrealized Loss has been
recognized on an actual sale of each such property and allocated pursuant to
Section 6.1 of the Agreement.
(b) Such adjustments shall be made as of the
following times: (i) immediately prior to the acquisition of an additional
interest in the Partnership by any new or existing Partner in exchange for more
than a de minimis Capital Contribution; (ii) immediately prior to the
distribution by the Partnership to a Partner of more than a de minimis amount of
Property as consideration for an interest in the Partnership; and (iii)
immediately prior to the liquidation of the Partnership or the General Partner's
interest in the Partnership within the meaning of Treasury Regulation section
1.704- 1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses
(i) and
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(ii) above shall be made only if such adjustments are necessary or appropriate
to reflect the relative economic interests of the Partners in the Partnership.
(c) In accordance with Treasury Regulation section
1.704-1(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in
kind shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as of the time any
such asset is distributed.
(d) In determining such Unrealized Gain or Unrealized
Loss the aggregate cash amount and fair market value of all Partnership assets
(including cash or cash equivalents) shall be determined by the General Partner
using such reasonable method of valuation as it may adopt, or in the case of a
liquidating distribution pursuant to Article XIII of this Agreement, be
determined and allocated by the Liquidator using such reasonable methods of
valuation as it may adopt.
4.4.5 Modification by General Partner. The provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Treasury Regulation section 1.704- 1(b), and shall be interpreted and
applied in a manner consistent with such Regulations. In the event the General
Partner shall determine that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed property or which are assumed by the Partnership, the
General Partner, or any Limited Partners) are computed to comply with such
Regulations, the General Partner shall give prompt written notice to each of the
Limited Partners. In the event that the General Partner does not receive a
written objection to such proposed modification within 20 Business Days after
the date on which the General Partner first sent such notice, the General
Partner may make such modification. In the event that the General Partner
receives one or more written objections within such 20 Business Day period, the
General Partner and the objecting Limited Partners shall attempt to resolve such
matter within 10 Business Days from the expiration of such 20 Business Day
period. In the event that the General Partner and the objecting Limited Partners
cannot resolve such matter, the Partners select Deloitte & Touche to decide such
matter and such determination shall be final. Notwithstanding the foregoing, no
modification hereunder shall be made by the General Partner where such
modification would have a material effect on the amounts distributable to any
Person pursuant to Article XIII of this Agreement upon the liquidation of the
Partnership. The General Partner also shall (a) make any adjustments that are
necessary or appropriate to maintain equality between the Capital Accounts of
the Partners and the amount of Partnership capital reflected on the
Partnership's balance sheet, as computed for book purposes, in accordance with
Treasury Regulation section 1.704-1(b)(2)(iv)(q), and (b) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Treasury Regulation section 1.704-1(b).
4.4.6 General Partner's Minimum Capital Account Balance.
Notwithstanding anything contained herein to the contrary, the General Partner
and the Special General Partner shall at all times maintain an aggregate Capital
Account balance of at least the lesser of (i) one percent of the positive
aggregate Capital Account balances of all Partners (including the General
Partner and the Special General Partner), or (ii) $500,000.
4.5 Waiver and Recontribution. Each Limited Partner understands that
(a) the offer and sale of the Units has not been registered under the Securities
Act, and (b) the failure to register the Units could result in the Limited
Partner being granted certain rights under federal securities law to rescind the
Limited Partner's contribution to the Partnership. Each Limited Partner (i)
hereby waives any and all rights it now has or may hereafter be granted under
federal or applicable state securities laws to rescind its contribution to the
Partnership on the basis that the offer and sale of the Units was not registered
under the Securities Act (the "Waiver") and (ii) agrees that if the Waiver is
deemed void or unenforceable for any reason, including, without limitation,
Section 14 of the Securities Act, the entire beneficial interest in all property
and amounts received by the Limited Partner in payment of any such rescission
(regardless of whether such action was initiated by the Limited Partner) or
otherwise received by the Limited Partner as damages solely for failure to
register the offer and sale of the Units under the Securities Act, will be
promptly paid over and contributed by the Limited Partner to the Partnership,
for no additional
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consideration from the General Partner or the Partnership and the Limited
Partner will retain its Units and remain a Limited Partner of the Partnership.
Each Limited Partner hereby consents to the disclosure of the agreements
contained in this Section 4.5 in any prospectus forming a part of any
registration statement of the General Partner filed with the Securities and
Exchange Commission pursuant to the Securities Act.
ARTICLE V
DISTRIBUTIONS
5.1 Requirement and Characterization of Distributions.
5.1.1 Distributions of Available Cash Flow. Subject to
Sections 5.2 and 5.4 hereof, the General Partner shall distribute quarterly an
amount equal to 100 percent of Available Cash generated by the Partnership
during such quarter to the Partners who are Partners at the close of business on
the Partnership Record Date with respect to such quarter in the following order
of priority and to the extent of such Available Cash: (a) first, to each Limited
Partner to the extent of and in proportion to the then unreturned balance of the
Accrual Account maintained with respect to each Limited Partner Unit held by
such Limited Partner; (b) second, to each Limited Partner to the extent of and
in proportion to the then unreturned balance of the Unpaid Distribution Account
maintained with respect to each Limited Partner Unit held by such Limited
Partner; (c) third, to each Limited Partner to the extent of and in proportion
to an amount per Limited Partner Unit (multiplied by the Unit Adjustment Factor)
held by such Limited Partner equal to the dividend per Share paid by the General
Partner for such quarter; and (d) fourth, the balance, if any, of the Available
Cash for such quarter shall be distributed to the General Partners, pro rata,
based upon their respective General Partner Units. No distribution (other than
to a Converting Partner as provided in Section 4.4.2(c) and 4.2.2(d)) shall be
made for any distribution period in respect of General Partner Units held by the
General Partners unless all distributions due the Limited Partners in accordance
with clauses (a), (b) and (c) of this Section 5.1.1 shall have been paid for all
prior periods. Notwithstanding anything to the contrary contained herein, in no
event may a Partner receive a distribution of Available Cash attributable to any
period with respect to a Unit if such Partner is entitled to receive a dividend
out of Funds from Operations attributable to such period with respect to a Share
for which such Unit has been redeemed or exchanged.
5.1.2 Distributions of Capital Transaction Proceeds. Subject
to Sections 5.2 and 5.4 hereof, until the tenth anniversary of the date hereof,
the General Partner shall distribute Capital Transaction Proceeds received by
the Partnership within 30 days after the date on which said Capital Transaction
occurs (the "Capital Transaction Record Date") to the Partners who are Partners
at the close of business on the Capital Transaction Record Date in the following
order of priority and to the extent of such Capital Transaction Proceeds: (a)
first, to each Limited Partner to the extent of and in proportion to the then
unreturned balance of the Accrual Account maintained with respect to each
Limited Partner Unit held by such Limited Partner, (b) second, to each Limited
Partner to the extent of and in proportion to the then unreturned balance of the
Unpaid Distribution Account maintained with respect to each Limited Partner Unit
held by such Limited Partner, and (c) third, the balances, if any, of the
Capital Transaction Proceeds shall be distributed to the General Partners, pro
rata, based upon their General Partnership Interests. After the tenth
anniversary of the date of this Agreement, the General Partner shall distribute
Capital Transaction Proceeds received by the Partnership within 30 days after
the Capital Transaction Record Date to the General Partners, pro rata, based
upon their General Partnership Interests, and no other Partner shall have a
right to share in such distribution; provided that the General Partner shall
give the Limited Partners 10 days prior written notice of any such distribution.
5.2 Amounts Withheld. All amounts withheld pursuant to the Code or any
provisions of any state or local tax law and Section 10.5 hereof with respect to
any allocation, payment or distribution to the General Partner, the Special
General Partner or any Limited Partners or Assignees shall be promptly paid
solely out of funds of the Partnership by the General Partner to the appropriate
taxing authority and treated as amounts distributed to the General Partner or
such Limited Partners or Assignees pursuant to Section 5.1 for all purposes
under this Agreement.
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5.3 Distribution Upon Liquidation. Proceeds from a Liquidating
Transaction shall be distributed to the Partners in accordance with Section
13.2.
ARTICLE VI
ALLOCATIONS
6.1 Allocations for Capital Account Purposes. For purposes of
maintaining the Capital Accounts and in determining the rights of the Partners
among themselves, the Partnership's items of income, gain, loss and deduction
(computed in accordance with Section 4.4 hereof) shall be allocated among the
Partners for each taxable year (or portion thereof) as provided herein below.
6.1.1 Net Income. After giving effect to the special
allocations set forth in Section 6.2 below, Net Income shall be allocated (a)
first, to each Limited Partner to the extent that, on a cumulative basis, Net
Losses previously allocated to the Limited Partners pursuant to Section 6.1.2
exceed Net Income previously allocated to the Limited Partners pursuant to this
clause (a) of this Section 6.1.1, (b) second, to each Limited Partner until each
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 Limited Partner Units held by such Limited Partner, and (c)
thereafter, to the General Partners, pro rata, based upon their respective
General Partner Units. Notwithstanding the foregoing, the General Partners shall
be allocated on a combined basis not less than one percent of each item of
Partnership gain, loss, income and deduction for each year.
6.1.2 Net Losses. After giving effect to the special
allocations set forth in Section 6.2 below, Net Losses shall be allocated to the
Partners in accordance with their respective Percentage Interests; provided that
Net Losses shall not be allocated to any Limited Partner pursuant to this
Section 6.1.2 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 (or increase any existing Adjusted Capital Account Deficit). All Net Losses
in excess of the limitations set forth in the preceding sentence of this Section
6.1.2 shall be allocated to the General Partners, pro rata, based upon their
respective General Partner Units.
6.1.3 Nonrecourse Liabilities. For purposes of Treasury
Regulation section 1.752- 3(a), the Partners agree that Nonrecourse Liabilities
of the Partnership in excess of the sum of (a) the amount of Partnership Minimum
Gain and (b) the total amount of Nonrecourse Built-in Gain shall be allocated
among the Partners in accordance with their respective Percentage Interests.
6.1.4 Gains. Any gain allocated to the Partners upon the sale
or other taxable disposition of any Partnership asset shall to the extent
possible, after taking into account other required allocations of gain pursuant
to Section 6.2 below, be characterized as Recapture Income in the same
proportions and to the same extent as such Partners have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
6.2 Special Allocation Rules. Notwithstanding any other provision of
the Agreement, the following special allocations shall be made in the following
order:
6.2.1 Minimum Gain Chargeback. Notwithstanding any other
provisions of Article VI, if there is a net decrease in Partnership Minimum Gain
during any Partnership Year, each Partner shall be specially allocated items of
Partnership income and gain for such year (and, if necessary, subsequent years)
in an amount equal to such Partner's share of the net decrease in Partnership
Minimum Gain, as determined under Treasury Regulation section 1.704-2(g).
Allocations pursuant to the previous sentence shall be made in proportion to the
respective amounts required to be allocated to each Partner pursuant thereto.
The items to be so allocated shall be determined in accordance with Treasury
Regulation section 1.704-2(f)(6). This Section 6.2.1 is intended to comply
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with the minimum gain chargeback requirements in Treasury Regulation section
1.704-2(f), and, for purposes of this Section 6.2.1 only, each Partner's
Adjusted Capital Account Deficit shall be determined prior to any other
allocations pursuant to Section 6.1 of the Agreement with respect to such fiscal
year and without regard to any decrease in Partner Minimum Gain during such
fiscal year.
6.2.2 Partner Minimum Gain Chargeback. Notwithstanding any
other provision of Article VI (except Section 6.2.1 hereof), if there is a net
decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt
during any Partnership fiscal year, each Partner who has a share of the Partner
Minimum Gain attributable to such Partner Nonrecourse Debt, determined in
accordance with Treasury Regulation section 1.704-2(i)(5), shall be specially
allocated items of Partnership income and gain for such year (and, if necessary,
subsequent years) in an amount equal to such Partner's share of the net decrease
in Partner Minimum Gain attributable to such Partner Nonrecourse Debt,
determined in accordance with Treasury Regulation section 1.704-2(i)(5).
Allocations pursuant to the previous sentence shall be made in proportion to the
respective amounts required to be allocated to each Partner pursuant thereto.
The items to be so allocated shall be determined in accordance with Treasury
Regulation section 1.704-2(i)(4). This Section 6.2.2 is intended to comply with
the minimum gain chargeback requirement in Treasury Regulation section
1.704-2(i)(4) and shall be interpreted consistently therewith. Solely for
purposes of this Section 6.2.2, each Partner's Adjusted Capital Account Deficit
shall be determined prior to any other allocations pursuant to Article VI of
this Agreement with respect to such fiscal year, other than allocations pursuant
to Section 6.2.1 hereof.
6.2.3 Qualified Income Offset. In the event any Partner
unexpectedly receives any adjustments, allocations or distributions described in
paragraphs (4), (5) or (6) of Treasury Regulation section 1.704-1(b)(2)(ii)(d),
and after giving effect to the allocations required under Section 6.2.1 and
6.2.2 hereof, such Partner has an Adjusted Capital Account Deficit, items of
Partnership income and gain shall be specially allocated to such Partner in an
amount and manner sufficient to eliminate, to the extent required by the
Treasury Regulations, its Adjusted Capital Account Deficit created by such
adjustments, allocations or distributions as quickly as possible.
6.2.4 Nonrecourse Deductions. Nonrecourse Deductions for any
taxable period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its good
faith discretion that the Partnership's Nonrecourse Deductions must be allocated
in a different ratio to satisfy the safe harbor requirements of the Treasury
Regulations promulgated under Code section 704(b), the General Partner is
authorized, upon notice to the Limited Partners in accordance with Section 4.4.5
hereof, to revise the prescribed ratio to the numerically closest ratio which
does satisfy such requirements.
6.2.5 Partner Nonrecourse Deductions. Any Partner Nonrecourse
Deductions for any fiscal year shall be specially allocated to the Partner who
bears the economic risk of loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulation section 1.704-2(i)(2).
6.2.6 Code Section 754 Adjustments. To the extent an
adjustment to the adjusted tax basis of any Partnership asset pursuant to Code
section 734(b) or Code section 743(b) is required pursuant to Treasury
Regulation section 1.704-1(b)(2)(iv)(m) to be taken into account in determining
Capital Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis), and such item of gain or loss
shall be specially allocated to the Partners in a manner consistent with the
manner in which their Capital Accounts are required to be adjusted pursuant to
such section of the Treasury Regulations.
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6.3 Allocations for Tax Purposes.
6.3.1 General. Except as otherwise provided in this Section
6.3, for federal income tax purposes, each item of income, gain, loss and
deduction shall be allocated among the Partners in the same manner as its
correlative item of "book" income, gain, loss or deduction is allocated pursuant
to Sections 6.1 and 6.2 of this Agreement.
6.3.2 To Eliminate Book-Tax Disparities. In an attempt to
eliminate Book-Tax Disparities attributable to a Contributed Property or
Adjusted Property, items of income, gain, loss, and deduction shall be allocated
for federal income tax purposes among the Partners as follows:
(a) (i) In the case of a Contributed Property, such
items attributable thereto shall be allocated among the Partners consistent with
the principles of Code section 704(c) that takes into account the variation
between the Code section 704(c) Value of such property and its adjusted basis at
the time of contribution; and (ii) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the Partners in
the same manner as its correlative item of "book" gain or loss is allocated
pursuant to Sections 6.1 and 6.2 of this Agreement.
(b) (i) In the case of an Adjusted Property, such
items shall (A) first, be allocated among the Partners in a manner consistent
with the principles of Code section 704(c) to take into account the Unrealized
Gain or Unrealized Loss attributable to such property and the allocations
thereof pursuant to Section 4.4, and (B) second, in the event such property was
originally a Contributed Property, be allocated among the Partners in a manner
consistent with Section 6.3.2(a)(i); and (ii) any item of Residual Gain or
Residual Loss attributable to an Adjusted Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Sections 6.1 and 6.2 of this Agreement.
(c) All other items of income, gain, loss and
deduction shall be allocated among the Partners in the same manner as their
correlative item of "book" gain or loss is allocated pursuant to Sections 6.1
and 6.2 of this Agreement.
6.3.3 Power of General Partner to Elect Method. To the extent
Treasury Regulations promulgated pursuant to Code section 704(c) permit a
partnership to utilize alternative methods to eliminate the disparities between
the agreed value of property and its adjusted basis, the General Partner shall
elect the traditional method without curative allocations to be used by the
Partnership and such election shall be binding on all Partners.
ARTICLE VII
MANAGEMENT AND OPERATIONS OF BUSINESS
7.1 Management.
7.1.1 Powers of General Partner. Except as otherwise expressly
provided in this Agreement, all management powers over the business and affairs
of the Partnership are vested exclusively in the General Partner, provided that
the Special General Partner is a direct or indirect wholly owned subsidiary of
the General Partner and no other Partner shall have any right to participate in
or exercise control or management power over the business and affairs of the
Partnership; provided, however, that the General Partner may delegate any of its
powers set forth in this Agreement or under applicable law to the Special
General Partner, provided that the Special General Partner is a direct or
indirect wholly owned subsidiary of the General Partner. Notwithstanding
anything to the contrary in this Agreement, neither the General Partner nor the
Special General Partner may be removed by the Limited Partners with or without
cause; provided, however, that if the Special General Partner is not a direct or
indirect wholly owned subsidiary of the General Partner, the Special General
Partner may be removed with or without cause by Limited Partner Consent. In
addition to the powers now or hereafter granted a general partner of a limited
partnership under applicable law or which are granted to the General Partner (or
delegated to the Special
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General Partner) under any other provision of this Agreement, the General
Partner, subject to Section 7.3 hereof, shall have full power and authority to
do all things deemed necessary or desirable by it to conduct the business of the
Partnership, to exercise all powers set forth in Section 3.2 hereof and to
effect the purposes set forth in Section 3.1 hereof, including, without
limitation:
(a) the making of any expenditures, the lending or
borrowing of money (including, without limitation, making prepayments on loans
and borrowing money to permit the Partnership to make distributions to its
Partners in such amounts as will permit the General Partner (so long as the
General Partner desires to qualify as a REIT) to avoid the payment of any
federal income tax (including, for this purpose, any excise tax pursuant to Code
section 4981) and to make distributions to its shareholders sufficient to permit
the General Partner to maintain REIT status), the assumption or guarantee of, or
other contracting for, indebtedness and other liabilities, the issuance of
evidences of indebtedness (including the securing of same by mortgage, deed of
trust or other lien or encumbrance on the Partnership's assets) and the
incurring of any obligations it deems necessary for the conduct of the
activities of the Partnership;
(b) the making of tax, regulatory and other filings,
or rendering of periodic or other reports to governmental or other agencies
having jurisdiction over the business or assets of the Partnership;
(c) the acquisition, disposition, conveyance,
mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the
Partnership, which powers shall include, without limitation, the power to pledge
any or all of the assets of the Partnership to secure a loan or other financing
to the General Partner (the proceeds of which are not required to be contributed
or loaned to this Partnership); provided, however, that to the extent that any
payment of debt service on and closing costs in connection with any such
mortgage, pledge, encumbrance or hypothecation shall result in the Partnership
being unable to pay the maximum amount payable with respect to any quarterly
distributions to Limited Partners pursuant to Section 5.1, then the General
Partner shall make additional Capital Contributions as are necessary to enable
the Partnership to pay the maximum amount payable with respect to any quarterly
distributions to Limited Partners pursuant to Section 5.1 (provided that the
General Partner shall have no obligation to make such additional Capital
Contributions in an amount exceeding the amount of debt service and closing
costs actually paid), and provided, further, that the General Partner shall and
does hereby indemnify the Limited Partners to the extent any foreclosure on any
such mortgage, pledge, encumbrance or hypothecation results in a loss in the
value of the Limited Partnership Interests;
(d) the use of the assets of the Partnership
(including, without limitation, cash on hand) for any purpose consistent with
the terms of this Agreement and on any terms it sees fit, including, without
limitation, the financing of the conduct of the operations of the General
Partner (to the extent necessary to maintain its REIT status) the Partnership,
any Subsidiary Partnership, or any of the Partnership's Subsidiaries, the
lending of funds to other Persons (including any Subsidiary Partnership and the
Partnership's Subsidiaries) and the repayment of obligations of the Partnership,
its Subsidiaries, the Subsidiary Partnerships, and any other Person in which it
has an equity investment and the making of capital contributions to the
Subsidiary Partnerships and its Subsidiaries, the creation, by grant or
otherwise, of easements or servitudes, and the performance of any and all acts
necessary or appropriate to the operation of the Partnership assets, including
applications for rezoning, objections to rezoning, constructing, altering,
improving, repairing, renovating, rehabilitating, razing, demolishing or
condemning any improvements or property of the Partnership;
(e) the negotiation, execution, and performance of
(i) any contracts, conveyances or other instruments (including with Affiliates
of the Partnership to the extent provided in Section 7.6) that the General
Partner considers useful or necessary to the conduct of the Partnership's
operations or the implementation of the General Partner's powers under this
Agreement, including, without limitation, the execution and delivery of leases
on behalf of or in the name of the Partnership or any Subsidiary Partnership
(including the lease of Partnership property for any purpose and without limit
as to the term thereof, whether or not such term (including renewal terms) shall
extend beyond the date of termination of the Partnership and whether or not the
portion so leased is to be occupied by the lessee or, in turn, subleased in
whole or in part to others), (ii) a management
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agreement with ASR Investments Corporation on behalf of the Partnership
providing for the day-to-day management of the Partnership on terms
substantially similar to the management agreements currently existing between
the General Partner and its Affiliates, and (iii) property management agreements
with a REIT subsidiary or Affiliate providing for the day-to-day management of
the Partnership and Subsidiary Partnership properties on terms substantially
similar to the property management agreements currently existing for such
properties;
(f) the contribution, transfer or conveyance of any
Partnership properties to any Subsidiary Partnership in a transaction qualifying
for nonrecognition treatment under Code section 721 for the purpose of holding
Partnership property in a single purpose entity;
(g) the opening and closing of bank accounts, the
investment of Partnership funds in securities, certificates of deposit and other
instruments, and the distribution of Partnership cash or other Partnership
assets in accordance with this Agreement;
(h) the selection and dismissal of employees of the
Partnership, any Subsidiary Partnership, the General Partner or the Special
General Partner (including, without limitation, employees having titles such as
"president," "vice president," "secretary" and "treasurer"), and the engagement
and dismissal of agents, outside attorneys, accountants, engineers, appraisers,
consultants, contractors and other professionals on behalf of the General
Partner, the Special General Partner, Partnership or any Subsidiary Partnership
and the determination of their compensation and other terms of employment or
hiring;
(i) the maintenance of such insurance for the benefit
of the Partnership and the Partners as it deems necessary or appropriate;
(j) the control of any matters affecting the rights
and obligations of the Partnership, including the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation, and the
indemnification of any Person against liabilities and contingencies to the
extent permitted by law;
(k) the determination of the fair market value of any
Partnership property distributed in kind using such reasonable method of
valuation as it may adopt and as is consistent with Section 4.4 hereof; and
(l) the execution, acknowledgment and delivery of any
and all documents and instruments to effect any or all of the foregoing.
7.1.2 No Approval Required for Above Powers. Each of the
Limited Partners agrees that either the General Partner or the Special General
Partner are authorized to execute, deliver and perform the above-mentioned
agreements and transactions on behalf of the Partnership without any further
act, approval or vote of the Partners, notwithstanding any other provision of
this Agreement (except as provided in Section 7.3 and except where Limited
Partner Consent is expressly required herein), the Act or any applicable law,
rule or regulation. The execution, delivery or performance by the General
Partner, the Special General Partner or the Partnership of any agreement
authorized or permitted under this Agreement shall not constitute a breach by
the General Partner or by the Special General Partner of any duty that the
General Partner or the Special General Partner may owe the Partnership or the
Limited Partners or any other Persons under this Agreement or of any duty stated
or implied by law or equity.
7.1.3 Insurance. At all times from and after the date hereof,
the General Partner shall cause the Partnership to obtain and maintain casualty,
liability and other insurance on the properties of the Partnership and each
Subsidiary Partnership and liability insurance for the Indemnitees hereunder;
provided, that in maintaining liability insurance for the Indemnitees hereunder,
the Partnership shall be allocated the cost thereof on a fair and equitable
basis as determined by the General Partner.
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7.1.4 Working Capital Reserves. At all times from and after
the date hereof, the General Partner may cause the Partnership to establish and
maintain reserves for any purpose, including the purchase of capital assets and
working capital, and in such amounts as the General Partner, in its sole and
absolute discretion, deems appropriate and reasonable from time to time.
7.1.5 No Obligation to Consider Tax Consequences to Limited
Partners. In exercising their authority under this Agreement, the General
Partner and the Special General Partner may, but shall be under no obligation
to, take into account the tax consequences to any Partner of any action taken by
it. The General Partner, the Special General Partner and the Partnership shall
not have liability to a Limited Partner under any circumstances as a result of
an income tax liability incurred by such Limited Partner as a result of an
action (or inaction) by the General Partner or the Special General Partner
pursuant to their authority under this Agreement. The General Partner shall use
its reasonable efforts to effect the disposition of assets through means of
exchanges which defer federal income taxation; however, except as provided in
Section 7.3.5, the General Partner shall have the sole discretion to determine
whether to consummate an asset disposition through a tax deferred exchange and
shall have no liability to the Limited Partners, or any of them, if such
disposition is effected through a taxable transaction.
7.2 Certificate of Limited Partnership. To the extent that such action
is determined by the General Partner to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate and do all the things to maintain the Partnership as a limited
partnership (or a partnership in which the limited partners have limited
liability) under the laws of the State of Delaware and each other jurisdiction
in which the Partnership may elect to do business or own property. Within 15
Business Days after filing, the General Partner will deliver or mail a copy of
the Certificate, as it may be amended or restated from time to time, to any
Limited Partner. The General Partner shall use all reasonable efforts to cause
to be filed such other certificates or documents as may reasonable and necessary
or appropriate for the formation, continuation, qualification and operation of a
limited partnership (or a partnership in which the Limited Partners have limited
liability) in the State of Delaware and any other jurisdiction in which the
Partnership may elect to do business or own property.
7.3 Restrictions on General Partner's Authority. Neither the General
Partner nor the Special General Partner may take any action in contravention of
this Agreement or the partnership agreement of any Subsidiary Partnership.
Without the written consent of all of the Limited Partners, the General Partner
and the Special General Partner shall not cause or permit the Partnership or any
Subsidiary Partnership to do any of the following:
7.3.1 Take any action that would make it impossible to carry
on the ordinary business of the Partnership or any Subsidiary Partnership,
except as otherwise provided in this Agreement;
7.3.2 Possess property of the Partnership or any Subsidiary
Partnership, or assign any rights in specific Partnership or Subsidiary
Partnership property, for other than a Partnership purpose except as otherwise
provided in this Agreement;
7.3.3 Admit a Person as a Partner, except as otherwise
provided in this Agreement;
7.3.4 Perform any act that would subject a Limited Partner to
liability as a general partner in any jurisdiction or any other liability except
as expressly provided herein or under the Act;
7.3.5 Until the earlier to occur of (a) the date on which 75
percent of the Limited Partner Units outstanding on the date hereof shall have
been exchanged pursuant to Limited Partners' Conversion Rights, or (b) the tenth
anniversary of the date hereof, dispose of any interest in real property of the
Partnership or any Subsidiary Partnership other than (i) in transactions that
qualify as tax deferred exchanges under Code section 1031, (ii) transfers by the
Partnership to any Subsidiary Partnership, by any Subsidiary Partnership to the
Partnership, or (iii) a pledge of any assets of the Partnership to secure a loan
or other financing to the General Partner as provided in
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Section 7.1.1(c); for purposes of this Section 7.3.5, the General Partner shall
have sole discretion to consummate any such transaction based upon its good
faith determination of the values of the assets so exchanged; or
7.3.6 Cause the Partnership to merge or consolidate, or engage
in any forced share exchange, with any other Person.
7.4 Responsibility for Expenses.
7.4.1 No Compensation. Except as provided in this Section 7.4
and elsewhere in this Agreement (including the provisions of Articles V and VI
regarding distributions, payments, and allocations to which it may be entitled),
neither the General Partner nor the Special General Partner shall be compensated
for their services as general partners of the Partnership.
7.4.2 Responsibility for Ownership and Operation Expenses. The
Partnership shall be responsible for and shall pay all expenses relating to the
Partnership's ownership of its assets, and the operation of, or for the benefit
of, the Partnership, and the General Partners shall be reimbursed on a monthly
basis, for all reasonable and customary expenses incurred relating to the
Partnership's ownership of its assets and the operation of, or for the benefit
of, the Partnership; provided, that the amount of any such reimbursement shall
be reduced by any interest earned by the General Partners with respect to bank
accounts or other instruments held by them as permitted in Section 7.10. Such
reimbursements shall be in addition to any reimbursement to the General Partners
as a result of indemnification pursuant to Section 7.7 hereof.
7.5 Outside Activities of the General Partner. Nothing herein contained
shall prevent or prohibit the General Partner, the Special General Partner or
any employee or other Affiliate of the General Partner or the Special General
Partner from entering into, engaging in or conducting any other activity or
performing for a fee any service, including engaging in any business dealing
with real property of any type or location; owning, managing, leasing or
disposing of any real property of any type or location; acting as a director,
officer or employee of any corporation, as a trustee of any trust, as a general
partner of any partnership, or as an administrative official of any other
business entity, or receiving compensation for services to, or participating in
profits derived from, the investments of any such business, property,
corporation, trust, partnership or other entity, regardless of whether such
activities are competitive with the Partnership; and nothing herein shall
require the General Partner or any employee or Affiliate thereof to offer any
interest in such activities to the Partnership or any Partner.
7.6 Contracts with Affiliates. Except as otherwise expressly
contemplated pursuant to Section 7.1, neither the General Partners nor any of
their Affiliates shall (a) sell, transfer or convey any property to, or purchase
any property from, the Partnership, directly or indirectly, or (b) enter into
any agreement for the provision of services to the Partnership, except, in both
such cases, pursuant to transactions or agreements that are on terms that are
fair and reasonable and no less favorable to the Partnership than would be
obtained from an unaffiliated third party in connection therewith. In entering
into such transactions with Affiliates, the General Partners shall not allocate
expenses and similar items disproportionately between the General Partners and
the Partnership.
7.7 Indemnification.
7.7.1 General. The Partnership shall indemnify an Indemnitee
for, from and against any and all losses, claims, damages, liabilities, joint or
several, expenses (including legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative, or
investigative, that relate to the operations of the Partnership as set forth in
this Agreement in which any Indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, unless it is established that: (a) the act or
omission of the Indemnitee was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active and
deliberate dishonesty, willful misconduct or gross negligence; (b) the
Indemnitee actually received an improper personal benefit in money,
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property or services; or (c) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful. The termination of any proceeding by judgment, order or settlement
does not create a presumption that the Indemnitee did not meet the requisite
standard of conduct set forth in this Section 7.7.1. The termination of any
proceeding by conviction or 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 Indemnitee acted in a manner contrary to that specified in
this Section 7.7.1. Any indemnification pursuant to this Section 7.7 shall be
made only out of the assets of the Partnership.
7.7.2 In Advance of Final Disposition. Reasonable expenses
incurred by an Indemnitee who is a party to a proceeding may be paid or
reimburse by the Partnership in advance of the final disposition of the
proceeding upon receipt by the Partnership of (a) a written affirmation by the
Indemnitee of the Indemnitee's good faith belief that the standard of conduct
necessary for indemnification by the Partnership as authorized in this Section
7.7 has been met and (b) a written undertaking by or on behalf of the Indemnitee
to repay the amount if it shall ultimately be determined that the standard of
conduct has not been met.
7.7.3 Other Than by This Section. The indemnification provided
by this Section 7.7 shall be in addition to any other rights to which an
Indemnitee or any other Person may be entitled under any agreement, pursuant to
any vote of the Partners, as a matter of law or otherwise, and shall continue as
to an Indemnitee who has ceased to serve in such capacity.
7.7.4 Insurance. The Partnership may purchase and maintain
insurance on behalf of the Indemnitees and such other Persons as the General
Partner shall determine, against any liability that may be asserted against or
expenses that may be incurred by such Person in connection with the
Partnership's activities, regardless of whether the Partnership would have the
power to indemnify such Person against such liability under the provisions of
this Agreement; provided, that in maintaining such insurance, the Partnership
shall be allocated the cost thereof on a fair and equitable basis as determined
by the General Partner.
7.7.5 No Personal Liability for Limited Partners. In no event
may an Indemnitee subject the Limited Partners to personal liability by reason
of the indemnification provisions set forth in this Agreement.
7.7.6 Interested Transactions. An Indemnitee shall not be
denied indemnification in whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise expressly permitted by
the terms of this Agreement.
7.7.7 Binding Effect. The provisions of this Section 7.7 are
for the benefit of the Indemnitees, their heirs, successors, assigns and
administrators and shall not be deemed to create any rights for the benefit of
any other Persons.
7.8 Liability of the General Partners.
7.8.1 General. Notwithstanding anything to the contrary set
forth in this Agreement, neither the General Partner nor the Special General
Partner shall be liable for monetary damages to the Partnership, any Partners or
any Assignees for losses sustained or liabilities incurred as a result of errors
in judgment or of any act or omission by the General Partner or the Special
General Partner, except that the General Partners shall be liable to the
Partnership and Partners for losses sustained or liabilities incurred in whole
or in part by a general partner's fraud, wilful misconduct or gross negligence.
7.8.2 No Obligation to Consider Interests of Limited Partners.
The Limited Partners expressly acknowledge (a) that the General Partner and the
Special General Partner are acting on behalf of the Partnership, in a manner
consistent with their roles as general partners; (b) that, except to the limited
extent provided in Section 7.1.5 hereof, neither the General Partner nor the
Special General Partner are under any
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obligation to consider the separate interests of the Limited Partners
(including, without limitation, the tax consequences to Limited Partners or
Assignees) in deciding whether to cause the Partnership to take (or decline to
take) any actions which the General Partner or the Special General Partner has
undertaken in good faith on behalf of the Partnership; and (c) that neither the
General Partner nor the Special General Partner shall be liable for monetary
damages for losses sustained, liabilities incurred, or benefits not derived by
Limited Partners in connection with such decisions, provided that the General
Partner or the Special General Partner has acted in good faith.
7.8.3 Acts of Agents. Subject to the obligations and duties
set forth in Section 7.1.1 hereof, the General Partner of the Special General
Partner may exercise any of the powers granted to them by this Agreement and
perform any of the duties imposed upon them hereunder either directly or by or
through their agents. Neither the General Partner nor the Special General
Partner shall be responsible for any misconduct or negligence on the part of any
such agent appointed in good faith.
7.8.4 Effect of Amendment. Any amendment, modification or
repeal of this Section 7.8 or any provision hereof shall be prospective only and
shall not in any way affect the limitations on the General Partner's or the
Special General Partner's liability to the Partnership and the Limited Partners
under this Section 7.8 as in effect immediately prior to such amendment,
modification or repeal with respect to claims arising from or relating to
matters occurring, in whole or in part, prior to such amendment, modification or
repeal, regardless of when such claims may arise or be asserted.
7.9 Other Matters Concerning the General Partners.
7.9.1 Reliance on Documents. The General Partners may rely and
shall be protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
order, bond, debenture, or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties.
7.9.2 Reliance on Consultants and Advisers. The General
Partners may consult with legal counsel, accountants, appraisers, management
consultants, investment bankers and other consultants and advisers selected by
it, and any act taken or omitted to be taken in reliance upon and in accordance
with the opinion of such Persons as to matters which the General Partners
reasonably believe to be within such Person's professional or expert competence
shall be prima facie evidence that such act was done or omitted in good faith
and in accordance with such opinion.
7.9.3 Action Through Officers and Attorneys. The General
Partners shall have the right, in respect of any of their powers or obligations
hereunder, to act through any duly authorized officers and a duly appointed
attorney or attorneys-in-fact. Each such attorney shall, to the extent provided
by the General Partner or the Special General Partner in a power of attorney,
have full power and authority to do and perform all and every act and duty which
is permitted or required to be done by the General Partner or the Special
General Partner hereunder.
7.9.4 Actions to Maintain REIT Status or Avoid Taxation of the
General Partner. Notwithstanding any other provisions of this Agreement or the
Act, any action of the General Partner on behalf of the Partnership or any
decisions of the General Partner to refrain from acting on behalf of the
Partnership, undertaken in good faith belief that such action or omission is
necessary or advisable in order (a) to protect the ability of the General
Partner to continue to qualify as a REIT or (b) to avoid the General Partner
incurring any taxes under Code section 857 or Code section 4981, is expressly
authorized under this Agreement and is deemed approved by all of the Limited
Partners.
7.10 Title to Partnership Assets. Title to Partnership assets, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to
be owned by the Partnership as an entity, and no Partner,
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individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets shall be held in the name of the Partnership. All Partnership
assets shall be recorded as the property of the Partnership in its books and
records.
7.11 Reliance by Third Parties. Notwithstanding anything to the
contrary in this Agreement, any Person dealing with the Partnership shall be
entitled to assume that the General Partner and the Special General Partner each
have full power and authority to encumber, sell or otherwise use in any manner
any and all assets of the Partnership (including, without limitation, in
connection with any pledge of Partnership assets to secure a loan or other
financing to the General Partner as provided by Section 7.1.1(c)) and to enter
into any contracts on behalf of the Partnership, and such Person shall be
entitled to deal with the General Partner or the Special General Partner as if
it were the Partnership's sole party in interest, both legally and beneficially.
Each Limited Partner hereby waives any and all defenses or other remedies which
may be available against such Person to contest, negate or disaffirm any action
of the General Partner or the Special General Partner in connection with any
such dealing. In no event shall any Person dealing with the General Partner, the
Special General Partner or their representatives be obligated to ascertain that
the terms of this Agreement have been complied with or to inquire into the
necessity or expedience of any act or action of the General Partner, the Special
General Partner or their representatives. Each and every certificate, document
or other instrument executed on behalf of the Partnership by the General
Partner, the Special General Partner or their representatives shall be
conclusive evidence in favor of any and every Person relying thereon or claiming
thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
8.1 Limitation of Liability. The Limited Partners shall have no
liability under this Agreement except as expressly provided in Section 10.5
hereof.
8.2 Management of Business. No Limited Partner or Assignee (other than
the General Partner, the Special General Partner, or any of their Affiliates or
any officer, director, employee, partner, agent or trustee of the General
Partner, the Special General Partner, the Partnership or any of their
Affiliates, in their capacities as such) shall take part in the operation,
management or control (within the meaning of the Act) of the Partnership's
business, transact any business in the Partnership's name or have the power to
sign documents for or otherwise bind the Partnership. The transaction of any
such business by the General Partner, the Special General Partner, any of their
Affiliates or any officer, director, employee, partner, agent or trustee of the
General Partner, the Special General Partner, the Partnership or any of their
Affiliates, in their capacities as such, shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners or Assignees under this
Agreement.
8.3 Outside Activities of Limited Partners. The following rights shall
govern outside activities of Limited Partners: (a) any Partner and any officer,
director, employee, agent, trustee, Affiliate, partner, beneficiary or
shareholder of any such Partner shall be entitled to and may have business
interests and engage in business activities in addition to those relating to the
Partnership, including business interests and activities in direct competition
with the Partnership, the General Partner or their Affiliates; (b) neither the
Partnership nor any Partners shall have any rights by virtue of this Agreement
in any business ventures of any Partner or Assignee; (c) none of the Partners
nor any other Person shall have any rights by virtue of this Agreement or the
partnership relationship established hereby in any business ventures of any
other Person, other than the General Partner, and such Person shall have no
obligation pursuant to this Agreement to offer any interest in any such business
ventures to the Partnership, any Partner or any such other Person, even if such
opportunity is of a character which, if presented to the Partnership, any
Partner or such other Person, could be taken by such Person; (d) the fact that a
Partner may
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encounter opportunities to purchase, otherwise acquire, lease, sell or otherwise
dispose of real or personal property and may take advantage of such
opportunities himself or introduce such opportunities to entities in which he
has or has not any interest, shall not subject such Partner to liability to the
Partnership or any of the other Partners on accounts of the lost opportunity;
and (e) except as otherwise specifically provided herein, nothing contained in
this Agreement shall be deemed to prohibit a Partner or any Affiliate of a
Partner from dealing, or otherwise engaging in business, with Persons
transacting business or operation of real or personal property (including real
estate brokerage services) and receiving compensation therefor, from any Persons
who have transacted business with the Partnership or other third parties.
8.4 Priority Among Limited Partners. No Partner (Limited or General) or
Assignee shall have priority over any other Partner (Limited or General) or
Assignee either as to the return of Capital Contributions or, except to the
extent provided by Sections 5.1, 6.2 or 6.3 hereof, or otherwise expressly
provided in this Agreement, as to profits, losses or distributions.
8.5 Rights of Limited Partners Relating to the Partnership.
8.5.1 Copies of Business Records. In addition to other rights
provided by this Agreement or by the Act, and except as limited by Section 8.5.3
hereof, each Limited Partner shall be provided the following without demand,
except as otherwise provided below, at the Partnership's expense:
(a) promptly after becoming available, a copy of the
most recent annual, quarterly and current reports and proxy statements provided
to shareholders of the General Partner and, upon specific written request,
copies of such documents as filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, if any;
(b) promptly after becoming available, a copy of the
Partnership's federal, state and local income tax returns for each Partnership
Year;
(c) upon demand and for a purpose reasonably related
to such Limited Partner's interest as a Limited Partner in the Partnership, a
current list of the name and last known business, residence or mailing address
of each Partner;
(d) a copy of this Agreement and the Certificate and
all amendments hereto and thereto, together with executed copies of all powers
of attorney pursuant to which this Agreement, the Certificate and all amendments
hereto and thereto have been executed; and
(e) true and full information regarding the amount of
cash and a description and statement of any other property or services
contributed by each Partner and which each Partner has agreed to contribute in
the future, and the date on which each became a partner.
8.5.2 Notification of Changes in Unit Adjustment Factor. The
Partnership shall notify each Limited Partner in writing of any change made to
the Unit Adjustment Factor within 10 Business Days of the date such change
becomes effective.
8.5.3 Confidential Information. Notwithstanding any other
provision of this Section 8.5, the General Partners may keep confidential from
the Limited Partners, for such period of time as the General Partners determine
to be reasonable, any information relating to the General Partner, the Special
General Partner or the conduct of the General Partner's business that the
General Partner believes, in its good faith judgment, the disclosure of which
information would adversely affect a material financing, acquisition,
disposition of assets or securities to which the General Partner is a party.
Nothing contained in this Section 8.5.3 shall permit the General Partner to keep
confidential from the Limited Partners any information relating to the
Partnership or its business.
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8.6 Redemption Right. Notwithstanding the provisions of Section 4.4.2,
the General Partner may, in the event it receives an opinion of its legal
counsel that such action is necessary to maintain and preserve its
classification as a REIT, or upon a determination by the General Partner that
the delivery of Shares on the Specified Conversion Date would be prohibited by
the Articles of Incorporation, satisfy the Conversion Right exercised by a
Converting Partner set forth in a Notice of Conversion by paying to such
Converting Partner the Redemption Amount on the Specified Conversion Date. In
the event the General Partner acquires Limited Partner Units by satisfying the
Conversion Right by paying the Redemption Amount, any such Limited Partner Units
so acquired by the General Partner shall thereafter be owned by the General
Partner as Limited Partner Units for all purposes of this Agreement, except for
those actions requiring the vote of the Limited Partners or Limited Partner
Consent. The General Partner may elect to pay the Redemption Amount for Limited
Partner Units only upon receipt of a Notice of Conversion and only to the extent
of the Units to be exchanged. In the event the General Partner shall exercise
its right to satisfy the Conversion Right in the manner described in this
Section 8.6, the Partnership shall have no obligation to pay any amount to the
Converting Partner with respect to such Converting Partner's exercise of the
Conversion Right, and each of the Converting Partner, the Partnership, and the
General Partner shall treat the transaction between the General Partner and the
Converting Partner as a sale of the Converting Partner's Limited Partner Units
to the General Partner for federal income tax purposes; each Converting Partner
that the General Partner has elected to pay the Redemption Amount agrees to
execute such documents as the General Partner may reasonably require in
connection with the payment of the Redemption Amount.
ARTICLE IX
BOOKS, RECORDS, ACCOUNTING AND REPORTS
9.1 Records and Accounting. The General Partner shall keep or cause to
be kept at the principal office of the Partnership appropriate books and records
with respect to the Partnership's business, including all books and records
necessary to provide to the Limited Partners any information, lists and copies
of documents required to be provided pursuant to Section 8.5 or 9.3 hereof. Any
records maintained by or on behalf of the Partnership in the regular course of
its business may be kept on, or be in the form of, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the
records so maintained are convertible into clearly legible written form within a
reasonable period of time. The books of the Partnership shall be maintained for
financial purposes on an accrual basis in accordance with general accepted
accounting principles and for tax reporting purposes on the accrual basis.
9.2 Fiscal Year. The fiscal year of the Partnership shall be the
calendar year.
9.3 Reports.
9.3.1 Annual Reports. As soon as practicable, but in no event
later than the date when mailed to the shareholders of the General Partner, the
General Partner shall cause to be mailed to each Limited Partner an annual
report, as of the close of the Partnership Year, containing unaudited financial
statements of the Partnership, or audited financial statements of the General
Partner if such statements are prepared solely on a consolidated basis with the
General Partner for such Partnership Year, presented in accordance with
generally accepted accounting principles. Any audited financial statements of
the General Partner shall be prepared by a nationally recognized firm of
independent public accountants selected by the General Partner.
9.3.2 Quarterly Reports. As soon as practicable, but in no
event later than the date when mailed to the shareholders of the General
Partner, the General Partner shall cause to be mailed to each Limited Partner,
as of the last day of the calendar quarter (except the last calendar quarter of
each year), unaudited financial statements of the Partnership, a report
containing information in a form similar to that supplied to the General
Partner's shareholders on a quarterly basis, and such other information as may
be required by applicable law or regulation, or as the General Partner
determines to be appropriate.
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ARTICLE X
TAX MATTERS
10.1 Preparation of Tax Returns. The General Partner shall arrange for
the preparation and timely filing of all returns of Partnership income, gains,
deductions, losses and other items required of the Partnership for federal and
state income tax purposes, and shall use all reasonable efforts to furnish,
within 90 days of the close of each taxable year, the tax information reasonably
required by Limited Partners for federal and state income tax reporting
purposes.
10.2 Tax Elections. Except as otherwise provided herein, the General
Partner shall in its reasonable discretion, determine whether to make any
available election pursuant to the Code; provided, however, that the General
Partner shall make the election under Code section 754 in accordance with
applicable regulations thereunder and shall do so effective for the
Partnership's first taxable year. The General Partner shall have the right,
after the first taxable year, to seek to revoke any such election (including the
election under Code section 754) upon the General Partner's determination in its
reasonable discretion that such revocations is in the best interests of the
Partners.
10.3 Tax Matters Partner.
10.3.1 General. The General Partner shall be the "tax matters
partner" of the Partnership for federal income tax purposes. Pursuant to Code
section 6223(c), upon receipt of notice from the IRS of the beginning of an
administrative proceeding with respect to the Partnership, the tax matters
partner shall furnish the IRS with the name, address and profit interest of each
of the Limited Partners; provided, however, that such information is provided to
the Partnership by the Limited Partners.
10.3.2 Powers. The tax matters partner is authorized but not
required:
(a) to enter into any settlement with the IRS with
respect to any administrative or judicial proceedings for the adjustment of
Partnership items required to be taken into account by a Partner for income tax
purposes (such administrative proceedings being referred to as a "tax audit" and
such judicial proceedings being referred to as "judicial review"), and in the
settlement agreement the tax matters partner may expressly state that such
agreement shall bind all Partners, except that such settlement agreement shall
not bind any Partner (i) who (within the time prescribed pursuant to the Code
and Regulations) files a statement with the IRS providing that the tax matters
partner shall not have the authority to enter into a settlement agreement on
behalf of such Partner or (ii) who is a "notice partner" (as defined in Code
section 6231) or a member of a "notice group" (as defined in Code section
6223(b)(2)), and, to the extent provided by law, the General Partner shall cause
each Limited Partnership to be designated a notice partner;
(b) in the event that a notice of a final
administrative adjustment at the Partnership level of any item required to be
taken into account by a Partner for tax purposes (a "final adjustment") is
mailed or otherwise given to the tax matters partner, to seek judicial review of
such final adjustment, including the filing of a petition for readjustment with
the Tax Court or the United States Court of Federal Claims, or the filing of a
complaint for refund with the District Court of the United States for the
district in which the Partnership's principal place of business is located;
(c) to intervene in any action brought by any other
Partner for judicial review of a final adjustment;
(d) to file a request for an administrative
adjustment with the IRS at any time and, if any part of such request is not
allowed by the IRS, to file an appropriate pleading (petition, complaint or
other document) for judicial review with respect to such request;
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(e) to enter into an agreement, with the IRS to
extend the period for assessing any tax which is attributable to any item
required to be taken into account by a Partner for tax purposes, or an item
affected by such item; and
(f) to take any other action on behalf of the
Partners or the Partnership in connection with any tax audit or judicial review
proceeding to the extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the tax
matters partner in connection with any such proceeding, except to the extent
required by law, is a matter in the reasonable discretion of the tax matters
partner, and the provisions relating to indemnification of the General Partner
set forth in Section 7.7 of this Agreement shall be fully applicable to the tax
matters partner in its capacity as such.
10.3.3 Reimbursement. The tax matters partner shall receive no
compensation for its services. All third-party costs and expenses incurred by
the tax matters partner in performing its duties as such (including legal and
accounting fees) shall be borne by the Partnership. Nothing herein shall be
construed to restrict the Partnership from engaging an accounting firm and a law
firm to assist the tax matters partner in discharging his duties hereunder, so
long as the compensation paid by the Partnership for such services is
reasonable.
10.4 Organizational Expenses. The Partnership shall elect to deduct
expenses, if any, incurred by it in organizing the Partnership ratably over a
60-month period as provided in Code section 709.
10.5 Withholding. Each Limited Partner hereby authorizes the
Partnership to withhold from or pay on behalf of or with respect to such Limited
Partner any amount of federal, state, local, or foreign taxes that the General
Partner determines that the Partnership is required to withhold or pay with
respect to any amount distributable or allocable to such Limited Partner
pursuant to this Agreement, including any taxes required to be withheld or paid
by the Partnership pursuant to Code sections 1441, 1442, 1445, or 1446. The
General Partner shall give prompt notice to any Limited Partner with respect to
which withholding is effected in accordance with this Section 10.5. Any amount
paid on behalf of or with respect to a Limited Partner shall constitute a loan
by the Partnership to such Limited Partner, which loan shall be repaid by such
Limited Partner within 15 days after notice from the General Partner that such
payment must be made unless (a) the Partnership withholds such payment from a
distribution which would otherwise be made to the Limited Partner or (b) the
General Partner determines, in its sole and absolute discretion, that such
payment may be satisfied out of the available funds of the Partnership which
would, but for such payment, be distributed to the Limited Partner. Any amounts
withheld pursuant to the foregoing clauses (a) or (b) shall be treated as having
been distributed to such Limited Partner and shall be promptly paid, solely out
of funds of the Partnership, by the General Partner to the appropriate taxing
authority. Each Limited Partner hereby unconditionally and irrevocably grants to
the Partnership a security interest in such Limited Partner's Partnership
Interest to secure such Limited Partner's obligation to pay to the Partnership
any amounts required to be paid pursuant to this Section 10.5. In the event that
a Limited Partner fails to pay any amounts owed to the Partnership pursuant to
this Section 10.5 when due, the General Partner may, in its sole and absolute
discretion, elect to make the payment to the Partnership on behalf of such
defaulting Limited Partner, and in such event shall be deemed to have loaned
such amount to such defaulting Limited Partner and shall succeed to all rights
and remedies of the Partnership as against such defaulting Limited Partner
(including, without limitation, the right to receive distributions which would
otherwise be made to such Limited Partner until such loan, with interest, has
been paid in full). Any amounts payable by a Limited Partner hereunder shall
bear interest at a per annum rate of interest equal to the Prime Rate, plus two
percentage points (but not higher than the maximum lawful rate) from the date
such amount is due (i.e., 15 days after demand) until such amount is paid in
full. Each Limited Partner shall take such actions as the Partnership or the
General Partner shall request in order to perfect or enforce the security
interest created hereunder. For the avoidance of doubt, any distributions which
would have otherwise been distributed to a Limited Partner, but are retained by
the Partnership or received by the General Partner in accordance with this
Section 10.5 shall, for all other purposes under this Agreement, be deemed to
have been distributed to such Limited Partner.
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ARTICLE XI
TRANSFERS AND WITHDRAWALS
11.1 Transfer.
11.1.1 Definition. The term "transfer," when used in this
Article XI with respect to a Partnership Unit, shall be deemed to refer to a
transaction by which the General Partner or the Special General Partner purports
to assign all or any portion of its General Partner Units to another Person or
by which a Limited Partner purports to assign all or any portion of its Limited
Partner Units to another Person, and includes a direct or indirect sale,
assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any
other disposition by law or otherwise. The term "transfer" when used in Article
XI does not include any exchange of Limited Partner Units by a Limited Partner
pursuant to Section 4.2.2 or acquisition of Limited Partner Units from a Limited
Partner by the General Partner pursuant to Section 8.6.
11.1.2 Requirements. No Limited Partnership Interest shall be
transferred, in whole or in part, except in accordance with the terms and
conditions set forth in this Article XI. Any transfer or purported transfer of a
Limited Partnership Interest not made in accordance with this Article XI shall
be null and void.
11.2 Transfer of General Partner's or Special General Partner's
Partnership Interest.
11.2.1 General. Neither the General Partner nor the Special
General Partner may transfer any of its General Partnership Interest (other than
any transfer to an Affiliate) or withdraw as General Partner or Special General
Partner (other than pursuant to a permitted transfer), other than in connection
with a transaction described in Section 11.2.2. Any transfer or purported
transfer of the such a Partner's Partnership Interest not made in accordance
with this Section 11.2 shall be null and void. Notwithstanding any permitted
transfer of its General Partnership Interest or withdrawal as General Partner
hereunder (other than in connection with a transaction described in Section
11.2.2), the General Partner shall remain subject to Sections 4.2.2, 7.1.1(c),
7.8 and 8.6 of this Agreement unless such transferee General Partner provides
substantially similar rights to the Limited Partners and the Limited Partners
owning more than 50 percent of the Limited Partner Interests at such time
expressly approve such rights in writing. Nothing contained in this Section
11.2.1 shall entitle the General Partner or the Special General Partner to
withdraw as General Partners unless a successor General Partner or Special
General Partner has been appointed and approved by the Limited Partners owning
more than 50 percent of the Limited Partner Interests at such time.
11.2.2 Transfer in Connection With Reclassification,
Recapitalization, or Business Combination Involving General Partner. The General
Partner shall not engage in any merger, consolidation or other business
combination with or into another Person, sale of all or substantially all of its
assets, any reclassification, or recapitalization or change of outstanding
Shares (other than a change in par value, or from par value to no par value, or
as a result of a subdivision or combination as described in the definition of
Unit Adjustment Factor) ("Transaction"), unless appropriate provision shall be
made as part of the terms of such Transaction such that each Limited Partner
thereafter remains entitled to exchange each Limited Partner Unit owned by such
Limited Partner (after application of the Unit Adjustment Factor) for an amount
of cash, securities, or other property equal to the greatest amount of cash,
securities or other property which such Limited Partner would have received from
such Transaction, if such Limited Partner had exercised its Conversion Right
immediately prior to the Transaction, provided that if, in connection with the
Transaction, a purchase, tender or exchange offer shall have been made to and
accepted by the holders of more than 50 percent of the outstanding Shares, the
holders of Partnership Units shall receive the greatest amount of cash,
securities, or other property which a Limited Partner would have received had it
exercised the Conversion Right and received Shares in exchange for its Limited
Partner Units immediately prior to the expiration of such purchase, tender or
exchange offer.
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11.3 Limited Partners' Rights to Transfer.
11.3.1 General. No transfer of a Limited Partnership Interest
by a Limited Partner is permitted without the prior written consent of the
General Partner and the Special General Partner, which consent may be withheld
in such Partner's sole discretion; provided that a Limited Partner may transfer
Units: (a) to members of the Limited Partner's Immediate Family pursuant to
applicable laws of descent and distribution or otherwise; (b) among its
Affiliates; (c) to a lender where such Units are pledged to secure a bona fide
obligation of the Limited Partner and any transfer in accordance with the rights
of such lender under the instruments evidencing such obligation (provided that
the General Partner received 10 days prior written notice of any transfer under
this clause (c)); (d) if the Limited Partner is a trust, to the beneficiaries of
the Limited Partner or to another trust (i) that is either established by the
same grantor as the Limited Partner or (ii) whose beneficiaries include members
of the Immediate Family of the grantor of the Limited Partner; and (e) if the
Limited Partner is an entity, to the equity holders of the Limited Partner
(including distributions of Limited Partnership Interests to the partners of any
limited partnership). To effect any transfer under this Section 11.3, the
Limited Partner must deliver to the General Partner a duly executed copy of the
instrument making such transfer and such instrument must evidence the written
acceptance by the assignee of all of the terms and conditions of this Agreement
and represent that such assignment was made in accordance with all applicable
laws and regulations.
11.3.2 Incapacitated Limited Partners. If a Limited Partner is
subject to Incapacity, the executor, administrator, trustee, committee,
guardian, conservator or receiver of such Limited Partner's estate shall have
all the rights of a Limited Partner, but not more rights than those enjoyed by
other Limited Partners for the purpose of settling or managing the estate and
such power as the Incapacitated Limited Partner possessed to transfer all or any
part of his or its interest in the Partnership. The Incapacity of a Limited
Partner, in and of itself, shall not dissolve or terminate the Partnership.
11.3.3 Transfers Resulting in Corporation Status; Transfer
Through Established Securities or Secondary Markets. Regardless of whether the
General Partner or the Special General Partner is required to provide or has
provided its consent under Section 11.3.1, no transfer by a Limited Partner of
its Limited Partner Units (or any economic or other interest, right or attribute
therein) may be made to any Person if (a) legal counsel for the Partnership
renders an opinion letter that it would result in the Partnership being treated
as an association taxable as a corporation or (b) such transfer is effectuated
through an "established securities market" or a "secondary market (or the
substantial equivalent thereof)" within the meaning of Code section 7704.
Notwithstanding anything to the contrary in this Agreement, (i) no interests in
the Partnership shall be issued in a transaction that is (or transactions that
are) registered or required to be registered under the Securities Act of 1933;
(ii) no Person shall be admitted as or shall otherwise constitute a Partner
unless such Partner or its predecessor made an initial capital contribution to
the Partnership of at least $20,000; and (iii) no Partnership Interest (or
interest or unit of interest in the Partnership) shall be subdivided for resale
into interests or units thereof smaller than an interest or unit for which the
initial capital contribution to the Partnership would have been at least
$20,000.
11.3.4 Transfers to Holders of Nonrecourse Liabilities.
Regardless of whether the General Partner or the Special General Partner is
required to provide or has provided its consent under Section 11.3.1, no
transfer of any Limited Partner Units may be made to a lender to the Partnership
or any Subsidiary Partnership or any Person who is related (within the meaning
of Treasury Regulation section 1.752-4(b)) to any lender to the Partnership or
any Subsidiary Partnership whose loan constitutes a Nonrecourse Liability
without the consent of the General Partner, in its sole and absolute discretion;
provided, that as a condition to such consent the lender will be required to
enter into an arrangement with the Partnership or any Subsidiary Partnership and
the General Partner to exchange or redeem for the Redemption Amount any Limited
Partner Units in which a security interest is held simultaneously with the time
at which such lender would be deemed to be a partner in the Partnership for
purposes of allocating liabilities to such lender under Code section 752.
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11.3.5 Transfers Causing Termination. Regardless of whether
the General Partner or the Special General Partner is required to provide or has
provided its consent under Section 11.3.1, no transfer of any Limited Partner
Units shall be effective if such transfer would, in the opinion of counsel for
the Partnership, result in the termination of the Partnership for federal income
tax purposes, in which event such transfer shall be made effective as of the
first fiscal quarter in which such termination would not occur, if the Limited
Partner making such transfer continues to desire to effect the transfer.
11.4 Substituted Limited Partners.
11.4.1 Consent of General Partner Required. Notwithstanding
any other provision of this Agreement, the General Partner and the Special
General Partner shall have the right to consent to the admission of a transferee
of the interest of a Limited Partner pursuant to this Section 11.4 as a
Substituted Limited Partner, which consent may be given or withheld by the
General Partner and the Special General Partner in their sole and absolute
discretion.
11.4.2 Rights and Duties of Substituted Limited Partners. A
transferee who has been admitted as a Substituted Limited Partner in accordance
with this Article XI shall have all the rights and powers and be subject to all
the restrictions and liabilities of a Limited Partner under this Agreement.
11.4.3 Amendment of Exhibit A. Upon the admission of a
Substituted Limited Partner, the General Partner shall amend Exhibit A to
reflect the name, address, number of Limited Partner Units, and Percentage
Interest of such Substituted Limited Partner and to eliminate or adjust, if
necessary, the name, address and interest of the predecessor of such Substituted
Limited Partner.
11.5 Assignees. If a transferee under Section 11.4.1 is not a
Substituted Limited Partner, such transferee shall be considered an Assignee for
purposes of this Agreement. An Assignee shall be entitled to all the rights of
an assignee of a limited partnership interest under the Act, including the right
to exchange Units for Shares under Section 4.2.2, the right to receive
distributions from the Partnership and the share of Net Income, Net Losses,
gain, loss and Recapture Income attributable to the Limited Partner Units
assigned to such transferee, but shall not be deemed to be a holder of Limited
Partner Units for any other purpose under this Agreement, and shall not be
entitled to vote such Limited Partner Units in any matter presented to the
Limited Partners for a vote (such Limited Partner Units being deemed to have
been voted on such matter in the same proportion as all Limited Partner Units
held by Limited Partners are voted). In the event any such transferee desires to
make a further assignment of any such Limited Partner Units, such transferee
shall be subject to all the provisions of this Article XI to the same extent and
in the same manner as any Limited Partner desiring to make an assignment of
Limited Partner Units.
11.6 General Provisions.
11.6.1 Withdrawal of Limited Partner. No Limited Partner may
withdraw from the Partnership other than as a result of a permitted transfer of
all of such Partner's Limited Partner Units in accordance with this Article XI
or pursuant to the exchange of all of its Limited Partner Units under Section
4.2.2 or the purchase of its Limited Partner Units under the Section 8.6.
11.6.2 Transfer of All Limited Partner Units by Limited
Partner. Any Limited Partner who shall transfer all of its Limited Partner Units
in a transfer permitted pursuant to this Article XI or pursuant to the exchange
of all of its Limited Partner Units under Section 4.2.2 or pursuant to the
purchase of all of its Limited Partner Units under Section 8.6 shall cease to be
a Limited Partner.
11.6.3 Timing of Transfers. Transfers pursuant to this Article
XI may only be made on the first day of a calendar month, unless the General
Partner otherwise agrees.
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11.6.4 Allocation When Transfer Occurs. If any Partnership
Interest is transferred during any quarterly segment of the Partnership's fiscal
year in compliance with the provisions of this Article XI or converted pursuant
to Section 4.2.2 or purchased pursuant to Section 8.6, Net Income, Net Losses,
each item thereof and all other items attributable to such interest for such
fiscal year shall be divided and allocated between the transferor Partner and
the transferee Partner by taking into account their varying interests during the
fiscal year in accordance with Code section 706(d), using the interim closing of
the books method (other than Net Income attributable to a Capital Transaction,
which shall be allocated as of the Capital Transaction Record Date). Solely for
the purposes of making such allocations, each of such items for the calendar
month in which the transfer or redemption occurs shall be allocated to the
Person who is a Partner as of midnight on the last day of said month. All
distributions of Available Cash or Capital Transaction Proceeds with respect to
which the Partnership Record Date or the Capital Transaction Record Date is
before the date of such transfer or redemption shall be made to the transferor
Partner, and all distributions of Available Cash or Capital Transaction Proceeds
thereafter shall be made to the transferee Partner.
ARTICLE XII
ADMISSION OF PARTNERS
12.1 Admission of Successor General Partner. A successor to all of the
General Partner's or the Special General Partner's General Partnership Interest
pursuant to Section 11.2 hereof who is proposed to be admitted as a successor
General Partner or Special General Partner shall be admitted to the Partnership
as the General Partner or Special General Partner, effective upon such transfer.
Any such transferee shall carry on the business of the Partnership without
dissolution. In each case, the admission shall be subject to the successor
General Partner or Special General Partner executing and delivering to the
Partnership an acceptance of all of the terms and conditions of this Agreement
and such other documents or instruments as may be required to effect the
admission.
12.2 Admission of Additional Limited Partners.
12.2.1 General. After the admission to the Partnership of the
Original Limited Partners on the date hereof and except as otherwise provided in
Section 4.2.1 and in Article XI hereof, a Person who makes a Capital
Contribution to the Partnership in accordance with this Agreement shall be
admitted to the Partnership as an Additional Limited Partner upon furnishing to
the General Partner (a) evidence of acceptance in form satisfactory to the
General Partner of all of the terms and conditions of this Agreement, including,
without limitation, the power of attorney granted in Article XVI hereof and (b)
such other documents or instruments as may be required in the discretion of the
General Partner to effect such Person's admission as an Additional Limited
Partner.
12.2.2 Consent of General Partner Required. Notwithstanding
anything to the contrary in this Section 12.2, no Person shall be admitted as an
Additional Limited Partner without the consent of the General Partner, which
consent may be given or withheld in the General Partner's sole and absolute
discretion. The admission of any Person as an Additional Limited Partner shall
become effective on the date upon which the name of such Person is recorded on
the books and records of the Partnership, following the consent of the General
Partner to such admission.
12.3 Amendment of Agreement and Certificate. For the admission to the
Partnership of any Partner, the General Partner shall take all steps necessary
and appropriate under the Act to amend the records of the Partnership and, if
necessary, to prepare as soon as practical an amendment of this Agreement
(including an amendment of Exhibit A) and, if required by law, shall prepare and
file an amendment to the Certificate and may for this purpose exercise the power
of attorney granted pursuant to Article XVI hereof.
35
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ARTICLE XIII
DISSOLUTION AND LIQUIDATION
13.1 Dissolution. The Partnership shall not be dissolved by the
admission of Substituted Limited Partners or Additional Limited Partners or by
the admission of a successor General Partner or Special General Partner in
accordance with the terms of this Agreement. The Partnership shall dissolve, and
its affairs shall be wound up, upon the first to occur of any of the following
(each a "Dissolution Event"):
(a) the expiration of its term as provided in Section 2.4
hereof;
(b) an event of withdrawal of the last remaining General
Partner (including the Special General Partner), as defined in the Act (other
than an event of bankruptcy), unless, within 90 days after the withdrawal all
the remaining Partners agree in writing to continue the business of the
Partnership and to the appointment, effective as of the date of withdrawal, of a
substitute general partner;
(c) from and after the date of this Agreement through December
31, 2086, an election to dissolve the Partnership made by the General Partner,
unless any Original Limited Partner who holds one or more Original Limited
Partner Units objects in writing to such dissolution within 30 days after
receiving prior written notice of such election from the General Partner;
(d) entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Act;
(e) the sale, exchange or other disposition of all or
substantially all of the Partnership's assets, unless such sale or other
disposition involves the acquisition of any additional property or any deferred
payment of the consideration for such sale or disposition, in which latter event
the Partnership shall dissolve on the last day of the calendar month during
which the balance of such deferred payment is received by the Partnership;
(f) the last remaining General Partner (including the Special
General Partner) (i) makes an assignment for the benefit of creditors; (ii)
files a voluntary petition in bankruptcy; (iii) is adjudged a bankrupt or
insolvent, or has entered against him an order of relief in any bankruptcy or
insolvency proceeding; (iv) files a petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation; (v) files an answer or
other pleading admitting or failing to contest the material allegations of a
petition filed against him in any proceeding of this nature; or (vi) seeks
consents to or acquiesces in the appointment of a trustee, receiver or
liquidator of the General Partner or of all or any substantial part of his
properties, unless, in each case, within 90 days after the occurrence of any
event enumerated in clauses (i) through (vi), all remaining Partners agree in
writing to continue the business of the Partnership and to the appointment,
effective as of the occurrence of such event, of a substitute general partner;
or
(g) 120 days after the commencement of any proceeding against
the last remaining General Partner (including the Special General Partner)
seeking reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation, the
proceeding has not been dismissed, or if within 90 days after the appointment
without its consent or acquiescence of a trustee, receiver or liquidator of the
General Partner or of all or any substantial part of its properties, the
appointment is not vacated, unless, in any such case, within 90 days after the
occurrence of any such event, all remaining Partners agree in writing to
continue the business of the Partnership and to the appointment, effective as of
the occurrence of such event, of a substitute general partner.
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13.2 Winding Up.
13.2.1 General. Upon the occurrence of a Dissolution Event,
the Partnership shall continue solely for the purposes of winding up its affairs
in an orderly manner, liquidating its assets, and satisfying the claims of its
creditors and Partners. No Partner shall take any action that is inconsistent
with, or not necessary to or appropriate for, the winding up of the
Partnership's business and affairs. The General Partner or the Special General
Partner (or, in the event there is no remaining General Partner, any Person
elected by a majority in interest of the Limited Partners (the "Liquidator"))
shall be responsible for overseeing the winding up and dissolution of the
Partnership and shall take full account of the Partnership's liabilities and
property and the Partnership property shall be liquidated as promptly as is
consistent with obtaining the fair value thereof, and the proceeds therefrom
shall be applied and distributed in the following order:
(a) First, to the payment and discharge of all of the
Partnership's debts and liabilities to creditors other than the Partners;
(b) Second, to the payment and discharge of all of
the Partnership's debts and liabilities to the Partners, pro rata in accordance
with amounts owed to each such Partner; and
(c) The balance, if any, to the General Partner, the
Special General Partner and Limited Partners in accordance with their Capital
Accounts, after giving effect to all contributions, distributions, and
allocations for all period.
Neither the General Partner nor the Special General Partner shall
receive any additional compensation for any services performed pursuant to this
Article XIII.
13.2.2 Where Immediate Sale of Partnership's Assets
Impractical. Notwithstanding the provisions of Section 13.2.1 hereof, which
require liquidation of the assets of the Partnership, but subject to the order
of priorities set forth therein, if prior to or upon dissolution of the
Partnership the Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause undue loss to the
Partners, the Liquidator may, in its sole and absolute discretion, defer for a
reasonable time the liquidation of any assets except those necessary to satisfy
liabilities of the Partnership (including to those Partners as creditors) or,
with the consent of all Limited Partners, distribute to the Partners, in lieu of
cash, as tenants in common and in accordance with the provisions of Section
13.2.1 hereof, undivided interests in such Partnership assets as the Liquidator
deems not suitable for liquidation. Any such distributions in kind shall be made
only if, in the good faith judgment of the Liquidator, such distributions in
kind are in the best interest of the Partners, and shall be subject to such
conditions relating to the disposition and management of such properties as the
Liquidator deems reasonable and equitable and to any agreements governing the
operation of such properties at such time. The Liquidator shall determine the
fair market value of any property distributed in kind using such reasonable
method of valuation as it may adopt.
13.3 Compliance with Timing Requirements of Regulations; Allowance for
Contingent or Unforeseen Liabilities or Obligations. Notwithstanding anything to
the contrary in this Agreement, in the event the Partnership is "liquidated"
within the meaning of Treasury Regulation section 1.704- 1(b)(2)(ii)(g),
distributions shall be made pursuant to this Article XIII to the General
Partner, the Special General Partner and the Limited Partners who have positive
Capital Accounts in compliance with Treasury Regulation section
1.704-1(b)(2)(ii)(b)(2) (including any timing requirements therein). In the
discretion of the General Partner, a pro rata portion of the distributions that
would otherwise be made to the General Partner, the Special General Partner and
Limited Partners pursuant to this Article XIII may be: (a) distributed to a
liquidating trust established for the benefit of the General Partner, the
Special General Partner and the Limited Partners for the purposes of liquidating
the Partnership assets, collecting amounts owed to the Partnership, and paying
any contingent or unforeseen liabilities or obligations of the Partnership or of
the General Partners arising out of or in connection with the Partnership (the
assets of any such
37
<PAGE>
trust shall be distributed to the General Partner, the Special General Partner
and Limited Partners from time to time, in the reasonable discretion of the
General Partner, in the same proportions as the amount distributed to such trust
by the Partnership would otherwise have been distributed to the General Partner,
the Special General Partner and Limited Partners pursuant to this Agreement); or
(b) withheld to provide a reasonable reserve for Partnership liabilities
(contingent or otherwise) and to reflect the unrealized portion of any
installment obligations owed to the Partnership; provided, that such withheld
amounts shall be distributed to the General Partner, the Special General Partner
and Limited Partners as soon as practicable.
13.4 Rights of Limited Partners. Except as specifically provided in
this Agreement, each Limited Partner shall look solely to the assets of the
Partnership for the return of his Capital Contribution and shall have no right
or power to demand or receive property other than cash from the Partnership.
Except as specifically provided in this Agreement, no Limited Partner shall have
priority over any other Limited Partner as to the return of his Capital
Contributions, distributions, or allocations.
13.5 Notice of Dissolution. In the event a Dissolution Event or an
event occurs that would, but for provisions of Section 13.1, result in a
dissolution of the Partnership, the General Partner shall, within 10 days
thereafter, provide written notice thereof to each of the Partners and to all
other parties with whom the Partnership regularly conducts business (as
determined in the discretion of the General Partner) and shall publish notice
thereof in a newspaper of general circulation in each place in which the
Partnership regularly conducts business (as determined in the discretion of the
General Partner).
13.6 Cancellation of Certificate of Limited Partnership. Upon the
completion of the liquidation of the Partnership as provided in Section 13.2
hereof, the Partnership shall be terminated and the Certificate and all
qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
13.7 Reasonable Time for Winding-Up. A reasonable time shall be allowed
for the orderly winding-up of the business and affairs of the Partnership and
the liquidation of its assets pursuant to Section 13.2 hereof, to minimize any
losses otherwise attendant upon such winding-up, and the provisions of this
Agreement shall remain in effect between the Partners during the period of
liquidation.
ARTICLE XIV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
14.1 Amendments Generally. Amendments to this Agreement may be proposed
by the General Partner, the Special General Partner or by any Limited Partners
holding 25 percent or more of the Percentage Interests. Following such proposal,
the General Partner shall submit any proposed amendment to the Partners. The
General Partner shall seek the written vote of the Partners on the proposed
amendment or shall call a meeting to vote thereon and to transact any other
business that it may deem appropriate. For purposes of obtaining a written vote,
the General Partner may require a response within a reasonable specified time,
but not less than 15 days, and failure to respond in such time period shall
constitute a vote which is consistent with the General Partner's recommendation
with respect to the proposal. Except as provided in Section 14.2, 14.3 or 14.4,
a proposed amendment shall be adopted and be effective as an amendment hereto if
it is approved by the General Partner and the Special General Partner and it
receives Limited Partner Consent.
14.2 General Partner's Power to Amend. Notwithstanding Section 14.1,
the General Partner shall have the power, without the consent of the Limited
Partners, to amend this Agreement as may be required to facilitate or implement
any of the following purposes:
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<PAGE>
(a) to add to the obligations of the General Partner or the
Special General Partner or surrender any right or power granted to the General
Partner, the Special General Partner or any Affiliate of the General Partners
for the benefit of the Limited Partners;
(b) to reflect the admission, substitution, termination or
withdrawal of Partners in accordance with this Agreement;
(c) to reflect a change that is of an inconsequential nature
and does not adversely affect the Limited Partners in any material respect, or
to cure any ambiguity, correct or supplement any provision in this Agreement not
inconsistent with law or with other provisions, or make other changes with
respect to matters arising under this Agreement that will not be inconsistent
with law or with the provisions of this Agreement;
(d) to satisfy any requirements, conditions or guidelines
contained in any order, directive, opinion, ruling or regulation of a federal or
state agency or contained in federal or state law; and
(e) to reflect adjustments in the respective Percentage
Interests of the Partners in accordance with Section 4.1.1(c) hereof.
The General Partner will provide a 10-day prior written notice to the
Limited Partners when any action under this Section 14.2 is taken.
14.3 Consent of Adversely Affected Partner Required. Notwithstanding
Section 14.1 hereof, this Agreement shall not be amended without the consent of
each Partner adversely affected if such amendment would (a) convert a Limited
Partner's Interest in the Partnership into a general partner's interest; (b)
modify the limited liability of a Limited Partner; (c) alter rights of the
Partner to receive distributions pursuant to Articles V or XIII, the allocations
specified in Article VI (except as permitted pursuant to Section 4.2 hereof), or
the General Partner's or Special General Partner's obligation to make additional
Capital Contributions pursuant to Sections 4.1.5 and 7.1.1(c); (d) alter or
modify the Conversion Right or the Redemption Amount as set forth in Sections
4.2.2 and 8.6, and related definitions hereof; (e) cause the termination of the
Partnership prior to the time set forth in Sections 2.4 or 13.1; or (f) amend
this Section 14.3. Further, no amendment may alter the restrictions on the
General Partner's and Special General Partner's authority set forth in Section
7.3 without the consent specified in that Section.
14.4 When Consent of Limited Partnership Interests Required.
Notwithstanding Section 14.1 hereof, the General Partner shall not amend
Sections 7.6 or 11.2 without Limited Partner Consent, and the General Partner
shall not amend Sections 4.1.5, 7.1.1(c), 7.3 or 14.3 or this Section 14.4
without the unanimous consent of the Limited Partners.
ARTICLE XV
GENERAL PROVISIONS
15.1 Addresses and Notice. All notices and demands under this Agreement
shall be in writing and may be either delivered by U.S. Mail or a nationally
recognized overnight courier, by telefax, telex or other wire transmission (with
request for assurance of receipt in a manner appropriate with respect to
communications of that type; provided, that a confirmation copy is concurrently
sent by a nationally recognized express courier for next Business Day delivery)
or mailed, postage prepaid, by certified or registered mail, return receipt
requested, directed to the parties at their respective addresses set forth on
Exhibit A attached hereto, as it may be amended for time to time, and, if to the
Partnership, such notices and demands sent in the aforesaid manner must be
delivered at its principal place of business set forth above. Unless delivered
personally or by telefax, telex or other wire transmission as above (which shall
be effective on the date of such delivery or transmission), any notice shall be
deemed to have been made upon receipt. Any party hereto may designate a
different address to which notices and
39
<PAGE>
demands shall thereafter be directed by written notice given in the same manner
and directed to the Partnership at its office hereinabove set forth.
15.2 Titles and Captions. All article or section titles or captions in
this Agreement are for convenience only. They shall not be deemed part of this
Agreement and in no way define, limit, extend or describe the scope or intent of
any provisions hereof. Except as specifically provided otherwise, references to
"Articles" and "Sections" are to Articles and Sections of this Agreement.
15.3 Pronouns and Plurals. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
15.4 Further Action. The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action as may
be necessary or appropriate to achieve the purposes of this Agreement.
15.5 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
15.6 Waiver of Partition. The Partners hereby agree that the
Partnership properties are not and will not be suitable for partition.
Accordingly, each of the Partners hereby irrevocably waives any and all rights
(if any) that it may have to maintain any action for partition of any of the
Partnership properties.
15.7 Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the matters contained herein; it supersedes
any prior agreements or understandings among them with respect to the matters
contained herein and it may not be modified or amended in any manner other than
pursuant to Article XIV.
15.8 Securities Law Provisions. The Partnership Units have not been
registered under the federal or state securities laws of any state and,
therefore, may not be resold unless appropriate federal and state securities
laws, as well as the provisions of Article XI hereof, have been complied with.
15.9 Remedies Not Exclusive. Any remedies herein contained for breaches
of obligations hereunder shall not be deemed to be exclusive and shall not
impair the right of any party to exercise any other right or remedy, whether for
damages, injunction or otherwise.
15.10 Time. Time is of the essence of this Agreement.
15.11 Creditors. None of the provisions of this Agreement shall be for
the benefit of, or shall be enforceable by, any creditor of the Partnership.
15.12 Waiver. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.
15.13 Execution Counterparts. This Agreement may be executed in
counterparts, all of which together shall constitute one agreement binding on
all the parties hereto, notwithstanding that all such parties are not
signatories to the original or the same counterpart.
15.14 Applicable Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
40
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15.15 Severability. If any provision of this Agreement is or becomes
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not be
affected thereby.
15.16 Limitation of Liability. Any obligation or liability whatsoever
of the General Partner or the Special General Partner which may arise at any
time under this Agreement or any obligation or liability which may be incurred
pursuant to any other instrument, transaction or undertaking contemplated hereby
shall be satisfied, if at all, out of the General Partner's or the Special
General Partner's assets only. No such obligation or liability shall be
personally binding upon nor shall resort for the enforcement thereof be had to,
the property of any of its shareholders, trustees, officers, employees or
agents, regardless of whether such obligation or liability is in the nature of
contract, tort or otherwise. Except as otherwise provided in Section 4.1.5
hereof, any obligation or liability whatsoever of the Partnership to any Partner
or Partners which may arise at any time under this Agreement shall be satisfied,
if at all, out of the Partnership's assets only and no such obligation or
liability shall be personally binding upon, nor shall resort for the enforcement
thereof be had to, the property of any of its Partners, including the General
Partner and the Special General Partner, regardless of whether such obligation
or liability is in the nature of contract, tort or otherwise.
ARTICLE XVI
POWER OF ATTORNEY
16.1 Scope. Each Limited Partner and each Assignee constitutes and
appoints the General Partner, the Special General Partner, any Liquidator, and
authorized officers and attorneys-in-fact of each, and each of those acting
singly, in each case with full power of substitution, as its true and lawful
agent and attorney-in-fact, with full power and authority in its name, place and
stead to:
(a) execute, swear to, acknowledge, deliver, file and record
in the appropriate public offices (i) all certificates, documents and other
instruments (including, without limitation, this Agreement and the Certificate
and all amendments or restatements thereof) that the General Partner, the
Special General Partner or the Liquidator deems appropriate or necessary to
form, qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware and in all other jurisdictions in which the
Partnership may conduct business or own property; (ii) all instruments that the
General Partner or the Special General Partner reasonably deems appropriate or
necessary to reflect any amendment, change, modification or restatement of this
Agreement in accordance with its terms; (iii) all conveyances and other
instruments or documents that the General Partner or the Special General Partner
deems appropriate or necessary to reflect the dissolution and liquidation of the
Partnership pursuant to the terms of this Agreement, including, without
limitation, a certificate of cancellation; (iv) all instruments or documents and
all certificates and acknowledgements relating to any mortgage, pledge, or other
form of encumbrance in connection with any loan or other financing to the
General Partner as provided by Section 7.1.1(c); (v) all instruments relating to
the admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in Article XI, XII or XIII hereof or the Capital
Contribution of any Partner; and (vi) all certificates, documents and other
instruments relating to the determination of the rights, preferences and
privileges of Partnership Interests; and
(b) execute, swear to, acknowledge and file all ballots,
consents, approvals, waivers, certificates and other instruments appropriate or
necessary, in the reasonable discretion of the General Partner or the Special
General Partner, to make, evidence, give, confirm or ratify any vote, consent,
approval, agreement or other action which is made or given by the Partners
hereunder or is consistent with the terms of this Agreement or appropriate or
necessary, in the reasonable discretion of the General Partner or the Special
General Partner to effectuate the terms or intent of this Agreement.
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Nothing contained herein shall be construed as authorizing the General
Partner or the Special General Partner to amend this Agreement except in
accordance with Article XIV hereof, or as may be otherwise expressly provided
for in this Agreement.
16.2 Irrevocability. The foregoing power of attorney is hereby declared
to be irrevocable and a power coupled with an interest, in recognition of the
fact that each of the Partners will be relying upon the power of the General
Partner or the Special General Partner to act as contemplated by this Agreement
in any filing or other action by it on behalf of the Partnership, and it shall
survive and not be affected by the subsequent Incapacity of any Limited Partner
or Assignee and the transfer of all or any portion of such Limited Partner's or
Assignee's Limited Partner Units and shall extend to such Limited Partner's or
Assignee's heirs, successors, assigns and personal representatives. Each such
Limited Partner or Assignee hereby agrees to be bound by any representation made
by the General Partner or the Special General Partner, acting in good faith
pursuant to such power of attorney, and each such Limited Partner or Assignee
hereby waives any and all defenses which may be available to contest, negate or
disaffirm the action of the General Partner, taken in good faith under such
power of attorney.
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SIGNATURE PAGE
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERITAGE COMMUNITIES L.P.
Dated April _____, 1997
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GENERAL PARTNER:
ASR INVESTMENTS CORPORATION, a
Maryland corporation
By:_______________________________________
Its:______________________________________
SPECIAL GENERAL PARTNER:
HERITAGE SGP CORPORATION, an Arizona
corporation
By:_______________________________________
Its:______________________________________
43
<PAGE>
SIGNATURE PAGE
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERITAGE COMMUNITIES L.P.
Dated April _____, 1997
LIMITED PARTNERS:
FIRST ASPEN COURT ASSOCIATES, L.P.
FIRST BRIAR PARK ASSOCIATES, A WASHINGTON LIMITED PARTNERSHIP
FIRST CHELSEA PARK ASSOCIATES, L.P.
FIRST APPIAN WAY ASSOCIATES, L.P.
FIRST GREENWOOD CREEK ASSOCIATES, L.P.
FIRST HIGHLANDS ASSOCIATES, L.P.
FIRST MARYMONT ASSOCIATES, L.P.
FIRST MONTFORT ASSOCIATES, L.P.
FIRST RIVERWAY ASSOCIATES, L.P.
FIRST SPRINGFIELD ASSOCIATES, L.P.
FIRST TIMBERCREEK LANDING ASSOCIATES, L.P.
CAMPUS DEVELOPMENT ASSOCIATES LIMITED PARTNERSHIP
FIRST PACIFIC SOUTH CENTER ASSOCIATES, L.P.
By:________________________________________
Don W. Winton, general partner
of each of the Limited Partners
listed above
44
<PAGE>
SIGNATURE PAGE
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERITAGE COMMUNITIES L.P.
Dated April _____, 1997
The undersigned hereby executes this Agreement solely for the purpose
of evidencing and acknowledging his withdrawal from the Partnership.
FORMATION LIMITED PARTNER
__________________________________
Jon A. Grove
45
<PAGE>
EXHIBIT A
HERITAGE COMMUNITIES L.P.
(as of September 30, 1996)
<TABLE>
<CAPTION>
Initial Capital Percentage Limited Partner
Partner Contribution Interest Units Address
<S> <C> <C> <C> <C>
ASR Investments Corporation (General Partner) 335 North Wilmot
Suite 250
First Aspen Court Associates, L.P. $2,348,599 129,757 Tucson, Arizona 85711
Briar Park Joint Venture $ 800,000 44,199
First Chelsea Park Associates, L.P. $2,712,033 149,836
First Appian Way Associates, L.P. $1,769,181 97,745
First Greenwood Creek Associates, L.P. $2,647,689 146,281
First Highlands Associates, L.P. $3,910,610 216,056
First Marymont Associates, L.P. $1,803,924 99,664
First Montfort Associates, L.P. $1,529,990 84,530
First Riverway Associates, L.P. $ 713,939 39,444
First Springfield Associates, L.P. $2,909,327 160,736
First Timbercreek Associates, L.P. $2,109,067 116,523
Campus Development Associates $4,180,198 230,950
Limited Partnership
Campus Commons Associates $1,350,000 74,586
- - Limited Partnership
First Pacific South Center Associates $2,175,000 120,166
</TABLE>
<PAGE>
EXHIBIT B
HERITAGE COMMUNITIES L.P.
<TABLE>
<CAPTION>
Facility Name City County State Grantor Agreed Value
<S> <C> <C> <C> <C> <C>
Aspen Court Apartment Texas First Aspen Court Associates, L.P. $4,400,000
Briar Park Apartments Texas First Briar Park Associates, a $2,200,000
Washington Limited Partnership
Chelsea Park Apartments Texas First Chelsea Park Associates, L.P. $5,600,000
Country Club Place Apartments Texas First Appian Way Associates, L.P. $5,350,000
Greenwood Creek Apartments Texas First Greenwood Creek Associates, L.P. $7,700,000
Highlands of Preston Texas First Highlands Associates, L.P. $8,800,000
Marymont Apartments Texas First Marymont Associates, L.P. $4,350,000
14400 Montfort Townhomes Texas First Montfort Associates, L.P. $5,650,000
Riverway Apartments Texas First Riverway Associates, L.P. $1,900,000
Springfield Apartments Texas First Springfield Associates, L.P. $8,420,000
Timbercreek Landing Apartments Texas First Timbercreek Landing Associates, L.P. $5,500,000
Campus Commons North Apartments Washington Campus Development Associates $10,900,000
Limited Partnership
Campus Commons South Apartments Washington Campus Commons Associates $4,100,000
- Limited Partnership
Pacific South Center Office Building Washington Pacific South Center Associates $5,400,000
</TABLE>
<PAGE>
EXHIBIT C
NOTICE OF CONVERSION
The undersigned, being the record owner of _________________ Limited
Partner Units (not giving effect to the application of the Unit Adjustment
Factor) in Heritage Communities L.P., in accordance with the terms of the
Agreement of Limited Partnership of Heritage Communities L.P. (the "Agreement"),
hereby irrevocably (a) exercises the option to exchange ________________ Limited
Partner Units (after giving effect to the application of the Unit Adjustment
Factor) for Shares of the General Partner or into such other cash, securities or
other property as shall be authorized under the terms of the Agreement, (b)
surrenders such Limited Partner Units and all right, title and interest therein
and (c) directs that the Shares issuable or other consideration deliverable upon
exercise of the Conversion Right be delivered to, and registered or placed in,
the name and at the address specified below, and, if applicable, that a new
certificate representing ownership of Units not so exchanged be issued and
delivered to the undersigned.
Dated: ___________________________
__________________________________________________
Name of Limited Partner
__________________________________________________
Signature of Limited Partner
__________________________________________________
Street Address
__________________________________________________
City State Zip Code
__________________________________________________
Social Security or Taxpayer Identification Number
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF NOVEMBER 8, 1996
AMONG
ASR INVESTMENTS CORPORATION,
HERITAGE RESIDENTIAL GROUP, INC.,
WINTON & ASSOCIATES, INC.,
AND
DON W. WINTON
APPENDIX C
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TABLE OF CONTENTS
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I. MERGER OF ASSOCIATES INTO HERITAGE..................................................................... 2
1.1 Merger........................................................................................ 2
1.2 Effect of the Associates Merger............................................................... 2
1.3 Name of Heritage.............................................................................. 3
1.4 Articles of Incorporation and Bylaws.......................................................... 3
1.5 Status and Conversion of Securities.................................................. 3
(a) Conversion of Associates Stock into ASR Stock........................................ 3
(b) Common Stock of Heritage............................................................. 3
1.6 ASR to Make Shares Available.................................................................. 3
1.7 Information Respecting Associates............................................................. 4
1.8 Further Documents............................................................................. 5
1.9 Effective Date. ............................................................................. 5
II. SHAREHOLDER APPROVALS; PROXY AND REGISTRATION FILINGS.................................................. 6
2.1 Shareholder Approvals......................................................................... 6
2.2 Proxy and Registration Statements............................................................. 6
(a) Preparation of Private Offering Memorandum........................................... 6
(b) Preparation of Proxy Statement....................................................... 6
(c) Preparation of Registration Statement................................................ 7
(d) Amendments to Private Offering Memorandum, Proxy Statement,
and Registration Statement........................................................... 8
III. REPRESENTATIONS AND WARRANTIES......................................................................... 8
3.1 Representations and Warranties of Associates and Winton....................................... 8
(a) Due Incorporation, Good Standing, and Qualification.................................. 8
(b) Corporate Authority.................................................................. 9
(c) Capital Stock........................................................................ 9
(d) Options, Warrants and Rights......................................................... 9
(e) Subsidiaries......................................................................... 9
(f) Financial Statements................................................................. 9
(g) No Material Change................................................................... 10
(h) Title to Properties.................................................................. 10
(i) Litigation........................................................................... 11
(j) Rights and Licenses.................................................................. 12
(k) No Violation......................................................................... 12
(l) Taxes................................................................................ 12
(m) Accounts Receivable.................................................................. 12
(n) Contracts............................................................................ 13
(o) Compliance with Law and Other Regulations............................................ 14
(p) Insurance............................................................................ 14
(q) Minute Books......................................................................... 14
(r) Certain Claims by Winton............................................................. 14
(s) All Business Assets Transferred...................................................... 14
(t) Accuracy of Statements............................................................... 15
3.2 Winton's Securities Representations and Warranties................................... 15
(a) Acquisition of ASR Common Stock for Winton's Account. ............................... 15
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(b) Knowledge and Experience in Financial and Business Matters. ......................... 15
(c) Available Information. ............................................................. 15
(d) Accredited Investor Status........................................................... 16
3.3 Representations and Warranties of ASR and Heritage. ................................ 16
(a) Due Incorporation, Good Standing, and Qualification.................................. 16
(b) Corporate Authority.................................................................. 17
(c) Capital Stock........................................................................ 17
(d) Options, Warrants and Rights......................................................... 17
(e) Subsidiaries......................................................................... 17
(f) Financial Statements................................................................. 18
(g) No Material Change................................................................... 18
(h) Title to Properties.................................................................. 19
(i) Litigation........................................................................... 20
(j) Rights and Licenses.................................................................. 20
(k) No Violation......................................................................... 20
(l) Taxes................................................................................ 20
(m) Accounts Receivable.................................................................. 21
(n) Contracts............................................................................ 21
(o) Compliance with Law and Other Regulations............................................ 22
(p) Insurance............................................................................ 22
(q) Minute Books......................................................................... 23
(r) SEC Reports.......................................................................... 23
(s) Accuracy of Statements............................................................... 23
(t) Status of ASR Common Stock to be Issued.............................................. 23
IV. COVENANTS.............................................................................................. 24
4.1 Covenants of Associates and Winton............................................................ 24
(a) Preservation of Business............................................................. 24
(b) Ordinary Course...................................................................... 24
(c) Books and Records.................................................................... 25
(d) No Organic Change.................................................................... 25
(e) No Issuance by Associates of Shares, Options, or Other Securities.................... 25
(f) Compensation......................................................................... 25
(g) Dividends............................................................................ 25
(h) Consents and Approvals............................................................... 26
4.2 Covenants of ASR.............................................................................. 26
(a) Preservation of Business............................................................. 26
(b) Ordinary Course...................................................................... 27
(c) Books and Records.................................................................... 27
(d) No Organic Change.................................................................... 27
(e) No Issuance by ASR of Shares, Options, or Other Securities.......................... 27
(f) Compensation......................................................................... 28
(g) Dividends............................................................................ 28
(h) Consents and Approvals............................................................... 28
V. CONDITIONS PRECEDENT TO OBLIGATIONS.................................................................... 29
5.1 Conditions Precedent to the Obligations of ASR and Heritage................................... 29
(a) Accuracy of Representations and Warranties........................................... 29
(b) Performance of Agreements............................................................ 29
(c) Corporate Approvals.................................................................. 29
(d) Opinion of Counsel for Associates.................................................... 30
(e) No Material Adverse Change........................................................... 31
(f) Litigation........................................................................... 31
(g) Listing on Stock Exchange............................................................ 31
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(h) Proceedings Satisfactory to Counsel.................................................. 31
(i) Employment Agreement................................................................. 32
(j) Approval of ASR Stockholders......................................................... 32
(k) Execution of Master Combination and Contribution Agreement........................... 32
5.2 Conditions Precedent to the Obligations of Associates and Winton.............................. 32
(a) Accuracy of Representations and Warranties........................................... 32
(b) Performance of Agreements............................................................ 32
(c) Corporate Approval................................................................... 33
(d) Opinion of Counsel for ASR........................................................... 33
(e) No Material Adverse Change........................................................... 34
(f) Litigation........................................................................... 35
(g) Listing on Stock Exchange............................................................ 35
(h) Proceedings Satisfactory to Counsel.................................................. 35
VI. WAIVER, MODIFICATION, ABANDONMENT...................................................................... 35
6.1 Waivers....................................................................................... 35
6.2 Modification.................................................................................. 36
6.3 Abandonment................................................................................... 36
6.4 Effect of Abandonment......................................................................... 37
6.5 Closing....................................................................................... 38
(a) Deliveries by ASR and Heritage....................................................... 38
(b) Deliveries by Winton................................................................. 38
7.1 Indemnity Against Finders..................................................................... 39
7.2 Controlling Law............................................................................... 39
7.3 Notices....................................................................................... 39
7.4 Binding Nature of Agreement; No Assignment.................................................... 40
7.5 Entire Agreement.............................................................................. 40
7.6 Execution in Counterparts..................................................................... 40
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is dated as of
November 8, 1996, among Winton & Associates, Inc., a Washington corporation
("Associates"); ASR Investments Corporation, a Maryland corporation ("ASR");
Heritage Residential Group, Inc., an Arizona corporation, which is a wholly
owned subsidiary of ASR ("Heritage"); and Don W. Winton ("Winton").
Winton owns all of the outstanding shares of Common Stock of
Associates, constituting all of the outstanding capital stock of Associates.
ASR, Pima Realty Advisors, Inc. ("Pima Realty"), Pima Mortgage
Advisors, LP ("Pima Mortgage"), and Associates have engaged in extensive
discussions regarding the combination of their respective businesses in the
following manner: (i) a merger of Pima Realty with and into Heritage (the "Pima
Realty Merger") pursuant to that certain Agreement and Plan of Reorganization of
even date by and among Pima Realty, Pima Mortgage, ASR, the Pima Shareholders
(as defined therein), the Pima Mortgage Partners (as defined therein), and
Heritage (the "Pima Realty/Pima Mortgage Merger Agreement"); (ii) immediately
following the consummation of the Pima Realty Merger, Pima Mortgage shall
effectively be merged with and into Heritage through the mergers of each of the
Pima Mortgage Partners with and into Heritage (collectively referred to as the
"Pima Mortgage Merger") pursuant to in the Pima Realty/Pima Mortgage Merger
Agreement; and (iii) immediately following the consummation of the Pima Mortgage
Merger, Associates shall be merged with and into Heritage pursuant to this
Agreement (the "Associates Merger"). The Pima Realty Merger, the Pima Mortgage
Merger, and the Associates Merger are collectively referred to herein as the
"Property Management Mergers."
For federal income tax purposes, it is intended that the
Associates Merger shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Specifically, it is intended that the Associates Merger qualify as a forward
triangular reorganization under Sections 368(a)(1)(A) and 368(a)(2)(D) of the
Code.
NOW, THEREFORE, the parties hereto hereby approve and adopt
this Agreement as a Plan of Reorganization and do mutually covenant and agree as
follows:
I. MERGER OF ASSOCIATES INTO HERITAGE
1.1 Merger. On the Effective Date (as defined in Section 1.9
hereof), Associates shall be merged with and into Heritage, which shall be the
surviving corporation, pursuant to the Agreement and Plan of Merger attached as
Exhibit "1" hereto (the "Associates Plan of Merger"). On or before the Closing
Date (as defined in Section 8.1 of that certain Master Combination and
Contribution Agreement among the Winton Parties, the REIT Parties, and the
Management Parties, which is attached as Exhibit "2" hereto and referred to
herein as the "Master Combination and Contribution Agreement"), ASR shall cause
the Associates Plan of Merger to be filed with the Arizona Corporation
Commission and the Washington Secretary of State.
1.2 Effect of the Associates Merger. Upon the Associates
Merger becoming effective, the separate existence of Associates shall cease, and
Heritage shall succeed to and possess all the properties, rights, privileges,
powers, franchises, and immunities, of a public as well as of a private nature,
and be subject to all the debts, liabilities, obligations, restrictions,
disabilities, and duties of Associates, all without further act or deed, as
provided by law.
1.3 Name of Heritage. On the Effective Date, the name of
Heritage shall remain "Heritage Residential Group, Inc."
<PAGE>
1.4 Articles of Incorporation and Bylaws. The Articles of
Incorporation and the Bylaws of Heritage as in effect on the Effective Date
shall be, from and after the Effective Date, the Articles of Incorporation and
Bylaws of Heritage until they are amended.
1.5 Status and Conversion of Securities.
(a) Conversion of Associates Stock into ASR Stock.
Upon the Associates Merger becoming effective, all of the outstanding shares of
Common Stock, par value $1.00 per share, of Associates ("Associates Common
Stock") issued and outstanding on the Effective Date, by reason of the
Associates Merger and without any action on the part of the holders thereof,
shall be converted into an aggregate of 70,284 shares of ASR Common Stock, par
value $.01 per share ("ASR Common Stock"). Any shares of Associates Common Stock
held in the treasury of Associates shall be cancelled and all rights with
respect thereto shall cease to exist and no cash or securities or other property
shall be issued in respect thereof.
(b) Common Stock of Heritage. All authorized shares
of Heritage Common Stock, par value $.01 per share ("Heritage Common Stock"),
whether issued or unissued, outstanding or reacquired, shall continue unchanged
as shares of Common Stock of Heritage.
1.6 ASR to Make Shares Available. At the Closing (as defined
in the Master Combination and Contribution Agreement), ASR shall deliver to
Winton a certificate, registered in Winton's name, for 70,284 duly authorized,
validly issued, and non-assessable shares of ASR Common Stock and Winton shall
deliver to ASR certificates representing all of the issued and outstanding
shares of Associates duly endorsed for transfer to ASR. Such certificate shall
bear a legend to the effect that the shares of ASR Common Stock have not been
registered under the Securities Act or state securities laws, and that transfers
may be made only in accordance with such laws.
1.7 Information Respecting Associates. Associates shall
furnish to ASR for inclusion in (a) the proxy statement to be filed by ASR in
connection with soliciting the approval by its stockholders of the transactions
contemplated by the Master Combination and Contribution Agreement, including the
Property Management Mergers (the "Proxy Statement"), (b) the private offering
memorandum (the "Private Offering Memorandum") to be prepared by ASR for shares
of ASR Common Stock to be offered in the Property Management Mergers and the
exchange offer (the "Exchange Offer") for limited partnership interests in
various limited partnerships in which Winton is the general partner (the
"Transferors"), and the offer of limited partnership interests ("LP Units") in
Heritage Communities LP, a Delaware limited partnership for the assets of the
Transferors (the "Asset Transfer"), as contemplated by the Master Combination
and Contribution Agreement, and (c) the registration statement (the
"Registration Statement") to be filed by ASR for the resale of the ASR Stock to
be issued in the Property Management Mergers and the Exchange Offer or upon the
conversion of the LP Units, as contemplated by the Master Combination and
Contribution Agreement, such information about Associates as ASR may reasonably
request to enable ASR to prepare the Private Offering Memorandum and to prepare
and file the Proxy Statement and the Registration Statement or amendments
thereto with the Securities and Exchange Commission (the "SEC") and to cause the
Registration Statement to be declared effective and the Proxy Statement to be
cleared by the SEC. Associates and Winton jointly and severally represent and
warrant that the information so supplied, as it may be revised from time to time
by Associates, will not contain any statement which, as of the time of the Proxy
Statement or Registration Statement is filed with the SEC, the Private Offering
Memorandum is distributed, or the Registration Statement is declared effective
and the Proxy Statement is cleared by the SEC, and which is in the light of the
circumstances under which it is made, is false or misleading with respect to any
material fact, or which omits to state any material fact required to be stated
therein or necessary in order to make the statements therein not false or
misleading.
1.8 Further Documents. From time to time, on and after the
Effective Date, Heritage, ASR, and their respective successors or assigns, and
their officers and directors shall have the right, for and on behalf
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and in the name of Associates or otherwise, to execute and deliver all such
deeds, bills of sale, assignments, and other instruments and to take or cause to
be taken such further or other actions as Heritage, ASR, or their respective
successors or assigns may deem necessary or desirable in order to confirm of
record or otherwise to Heritage title to and possession of all of the
properties, rights, privileges, powers, franchises, and immunities of Associates
and otherwise to carry out fully the provisions and purposes of this Agreement.
1.9 Effective Date. The Associates Merger shall become
effective when the Associates Plan of Merger has been filed with and approved as
required by the Arizona Corporation Commission and the Washington Secretary of
State, which the parties contemplated to be the Closing Date as defined in the
Master Combination and Contribution Agreement.
II. SHAREHOLDER APPROVALS; PROXY AND REGISTRATION FILINGS
2.1 Shareholder Approvals. A meeting of the shareholders, of
Associates shall be held in accordance with the laws of its state of
incorporation, on or before the Commitment Date (as defined in the Master
Combination and Contribution Agreement) in connection with the transactions
contemplated by the Master Combination and Contribution Agreement in the case of
Associates to consider and act upon the adoption of this Agreement (except, in
all cases in lieu of meetings, the adoption of this Agreement may be consented
to in writing by the shareholder of Associates on or before those dates). ASR,
as the sole stockholder of Heritage, votes for, adopts, and consents to the
Merger Agreement and the Merger. A meeting of the stockholders of ASR shall be
held to, among other things, approve the issuance of stock of ASR in the Merger.
ASR shall not be obligated to consummate the Merger unless the stockholders of
ASR approve the issuance of stock in the Merger.
2.2 Proxy and Registration Statements.
(a) Preparation of Private Offering Memorandum. ASR shall
prepare the Private Offering Memorandum to be used in connection with the
Property Management Mergers, the Exchange Offer, and the Asset Transfer as
contemplated by the Master Combination and Contribution Agreement.
(b) Preparation of Proxy Statement. ASR shall prepare and file
with the SEC the Proxy Statement and related proxy material to be used in
connection with the meeting of the ASR Stockholders referred to in Section 2.1
as contemplated by the Master Combination and Contribution Agreement.
(c) Preparation of Registration Statement. ASR shall prepare
the Registration Statement, including a form of prospectus, and one or more
amendments thereto, on Form S-3 or other appropriate form covering the resale of
shares of ASR Common Stock into which the outstanding shares of the Associates
Common Stock are to be converted as set forth in Section 1.5 of this Agreement
and shall use its best efforts to cause the Registration Statement to become
effective or as soon as practicable after the Effective Date and to remain
effective during the period and subject to the limitations set forth in the
Registration Agreement applicable to the Exchange Offer. ASR shall deliver to
Associates copies of the Registration Statement and each amendment thereto filed
or proposed to be filed (and of each related preliminary prospectus). ASR shall
advise Associates and shall confirm in writing (i) when the Registration
Statement or any post-effective amendment thereto shall have become effective
and when any amendment of or supplement to the Prospectus is filed with the
Commission, (ii) when the SEC shall make a request or suggestion for any
amendment or supplement to the Registration Statement or the Prospectus or for
additional information and the nature and substance thereof, and (iii) of the
issuance by the SEC of a stop order suspending the effectiveness of the
Registration Statement, and shall use its best efforts to prevent the issuance
of a stop order and, if such order shall be issued, to obtain the withdrawal
thereof at the earliest possible time. ASR represents and warrants to Associates
that the Registration Statement and the Prospectus and any other amendments and
supplements thereto will, when they become effective or are first used, conform
in all material respects to the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations thereunder, and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated
3
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therein or necessary to make the statements therein not misleading; provided,
however, that ASR makes no representation or warranty as to statements or
omissions therein relating to Associates or the Winton Parties. Notwithstanding
the foregoing, ASR may utilize for the purposes of this Section 2.2(c) a
Registration Statement including other shares or securities as long as all of
the shares of ASR Common Stock into which the outstanding shares of Associates
Common Stock are to be converted may be included in such Registration Statement
without any restriction or cutbacks.
(d) Amendments to Private Offering Memorandum, Proxy
Statement, and Registration Statement. If it shall be necessary at any time to
amend or supplement the Private Offering Memorandum, the Proxy Statement, or the
Registration Statement to correct any statement or omission with respect to any
party to the Associates Merger in order to comply with any applicable legal
requirements, the party to which the change applies shall supply the necessary
information to the others. To the extent necessary to comply with applicable
legal requirements, ASR shall amend or supplement the Private Offering
Memorandum, the Proxy Statement, and the Registration Statement.
III. REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Associates and Winton.
Except as otherwise set forth in the Disclosure Schedule heretofore delivered to
ASR by Associates (the "Associates Disclosure Schedule"), Associates and Winton
jointly and severally represent and warrant to ASR and Heritage as follows:
(a) Due Incorporation, Good Standing, and
Qualification. Associates is a corporation duly organized, validly existing, and
in good standing under the laws
of its jurisdiction of incorporation with the requisite corporate power and
authority to own, operate, and lease its property and to carry on its business
as now being conducted. Associates is not subject to any material disability by
reason of the failure to be duly qualified as a foreign corporation for the
transaction of business or to be in good standing under the laws of any
jurisdiction. Associates has heretofore delivered to Heritage a list setting
forth, as of the date of this Agreement, each jurisdiction in which Associates
is qualified to do business.
(b) Corporate Authority. Associates has the corporate
power and authority to enter into this Agreement and (subject to the requisite
approval of Winton with respect to Associates) to carry out the transactions
contemplated hereby. The Board of Directors of Associates has duly authorized
the execution, delivery, and performance of this Agreement.
(c) Capital Stock. As of the date hereof, Associates
has an authorized capital stock consisting of 50,000 shares of Associates Common
Stock, $1.00 par value, of which 500 shares are issued and outstanding. As of
such date, no shares of Associates Common Stock are held in treasury. All of the
issued and outstanding shares of capital stock of Associates have been validly
authorized and issued and are fully paid and nonassessable.
(d) Options, Warrants and Rights. Associates does not
have outstanding any options, warrants, or other rights to purchase, or convert
any obligation into, any shares of its capital stock,
(e) Subsidiaries. Associates does not have any
subsidiaries.
(f) Financial Statements. The Balance Sheets of
Associates as of December 31, 1994 and December 31, 1995, and the Statements of
Income, Shareholders' Equity, and Cash Flows of Associates for the two years
ended December 31, 1995, and all related schedules and notes to the foregoing,
have been prepared in accordance with generally accepted accounting principles,
as modified for tax basis accounting, that were applied on a consistent basis,
are correct and complete, and fairly and accurately present the financial
position, results of operations, and changes in financial position of Associates
as of their respective dates and for the periods
4
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indicated. Associates does not have any material liabilities or obligations of a
type that would be included in a balance sheet prepared in accordance with
generally accepted accounting principles, whether related to tax or non-tax
matters, accrued or contingent, due or not yet due, liquidated or unliquidated,
or otherwise except as and to the extent disclosed or reflected in the Balance
Sheet of Associates as of December 31, 1995, or incurred since December 31, 1995
in the ordinary course of business.
(g) No Material Change. Since December 31, 1995,
there has not been and there is not threatened (i) any material change in the
financial condition, business, properties, assets, or results of operations of
Associates; (ii) any loss or damage (whether or not covered by insurance) to any
of the assets or properties of Associates that materially affects or impairs its
ability to conduct its business, (iii) any event or condition of any character
that has materially and adversely affected the business or prospects (financial
or otherwise) of Associates, or (iv) any mortgage or pledge of any material
amount of the assets or properties of Associates or any indebtedness incurred by
Associates other than indebtedness, not material in the aggregate, incurred in
the ordinary course of business.
(h) Title to Properties. Associates has good and
marketable title to all of its real and personal properties, including all
properties reflected in its most recent Balance Sheet or acquired subsequent to
its most recent Balance Sheet (except properties disposed of subsequent to that
date in the ordinary course of business or properties relating to discontinued
operations). Such assets and properties are not subject to any mortgage, pledge,
lien, claim, encumbrance, charge, security interest, or title retention or other
security arrangement, except for liens for the payment of federal, state, and
other taxes, the payment of which is neither delinquent nor subject to
penalties, and except for other liens and encumbrances incidental to the conduct
of the business of Associates or the ownership of its assets or properties,
which were not incurred in connection with the borrowing of money or the
obtaining of advances and which do not in the aggregate materially detract from
the value of the assets or properties of Associates or materially impair the use
thereof in the operation of its business, except in each case as disclosed in
the Balance Sheet as of December 31, 1995. All leases pursuant to which
Associates leases any substantial amount of real or personal property are valid
and effective in accordance with their respective terms.
(i) Litigation. There are no actions, suits,
proceedings, or other litigation pending or, to the knowledge of Associates,
threatened against or affecting Associates at law or in equity, or before or by
any federal, state, municipal, or other governmental department, commission,
board, bureau, agency, or instrumentality which, if determined adversely to
Associates, would individually or in the aggregate have a material adverse
effect on the business, assets, properties, operations or prospects or on the
condition, financial or otherwise, of Associates, except for those actions,
suits, proceedings, or other pending litigation that are covered in full by
insurance held by Associates.
(j) Rights and Licenses. Associates is not subject to
any material disability or liability by reason of its failure to possess any
trademark, trademark right, trade name, trade name right, or license.
(k) No Violation. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
violate or result in a breach by Associates of, or constitute a default under,
or conflict with, or cause any acceleration of any obligation with respect to
(i) any provision or restriction of any charter, bylaw, loan, indenture, or
mortgage of Associates, or (ii) any provision or restriction of any lien, lease
agreement, contract, instrument, order, judgment, award, decree, ordinance, or
regulation or any other restriction of any kind or character to which any assets
or properties of Associates are subject or by which Associates is bound.
(l) Taxes. Associates has filed all federal, state,
foreign, local, and any other applicable tax returns and reports required to be
filed and has paid in full all taxes and assessments shown due
5
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thereon (together with all interest, penalties, assessments, and deficiencies
assessed in connection therewith due through the date hereof). Such tax returns
and reports are correct in all material respects.
(m) Accounts Receivable. The accounts receivable of
Associates have been acquired in the ordinary course of business, are valid and
enforceable, and are fully collectible, subject to no known defenses, set-offs,
or counterclaims, except to the extent of the reserve reflected in the books of
Associates or in such other amount that is not material in the aggregate.
(n) Contracts. Associates is not a party to (i) any
plan or contract providing for bonuses, pensions, options, stock purchases,
deferred compensation, retirement payments, or profit sharing, (ii) any
collective bargaining or other contract or agreement with any labor union, (iii)
any lease, installment purchase agreement, or other contract with respect to any
real or personal property used or proposed to be used in its operations except,
in each case, items included within aggregate amounts disclosed in the December
31, 1995 Balance Sheet of Associates, (iv) any employment agreement or other
similar arrangement not terminable by it upon 90 days or less notice without
penalty to it, (v) any contract or agreement for the purchase of any commodity,
material, fixed asset, or equipment in excess of $100,000, (vi) any contract or
agreement creating an obligation of $100,000 or more, (vii) any contract or
agreement that by its terms does not terminate or is not terminable by it
without penalty to it within one year after the date hereof, (viii) any loan
agreement, indenture, promissory note, conditional sales agreement, or other
similar type of arrangement except, in each case, as disclosed in the December
31, 1995 Balance Sheet of Associates, (ix) any material license agreement, or
(x) any contract that may result in a material loss or obligation to it. Each
contract, agreement, and other arrangement to which Associates is a party is
valid and enforceable in accordance with its terms; Associates and, to the best
of Associates' knowledge, all other parties to each of the foregoing have
performed all obligations required to be performed to date; neither Associates
nor, to the best of Associates' knowledge, any such other party is in default or
in arrears under the terms of any of the foregoing; and no condition exists or
event has occurred which, with the giving of notice or lapse of time or both,
would constitute a default under any of them.
(o) Compliance with Law and Other Regulations.
Associates is not subject to and has not been threatened with any material fine,
penalty, liability, or disability as the result of its failure to comply with
any requirement of any federal, state, local, or foreign law or regulation
(including those relating to the employment of labor or to environmental
matters) or any requirement of any governmental body or agency having
jurisdiction over it, the conduct of its business, the use of its assets and
properties, or any premises occupied by it.
(p) Insurance. Associates maintains in full force and
effect insurance coverage on its assets, properties, premises, operations, and
personnel in such amounts and against such risks and losses as are adequate for
the business engaged in by it.
(q) Minute Books. The minute books of Associates
accurately records all actions taken by its stockholders and directors.
(r) Certain Claims by Winton. Winton agrees that he
will not make any claim for indemnification against ASR or Heritage (whether
such claim for indemnification arises out of Winton's status as an officer,
director, employee, or agent of Associates or otherwise) with respect to any
cost, judgment, or other damage incurred by Winton as a result of a proceeding
brought by ASR or Heritage (collectively "Damages") to the extent such Damages
are finally adjudicated by a court of competent jurisdiction to have resulted
from a breach of this Agreement by Winton.
(s) All Business Assets Transferred. The assets of
Associates constitute all of the assets necessary to conduct the business as it
has been conducted by Associates prior to the date of this Agreement.
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(t) Accuracy of Statements. Neither this Agreement
nor any statement, list, certificate, or other information furnished or to be
furnished by Associates to ASR or Heritage in connection with this Agreement or
any of the transactions contemplated hereby contains or will contain an untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, in light of
circumstances in which they are made, not misleading.
3.2 Winton's Securities Representations and Warranties.
Winton, as the sole shareholder of Associates, represents and warrants to ASR
and Heritage as follows:
(a) Acquisition of ASR Common Stock for Winton's
Account. Winton will acquire ASR Common Stock for his own account and not with
an intent to distribute the ASR Common Stock in violation of the Securities Act.
(b) Knowledge and Experience in Financial and
Business Matters. Winton has sufficient knowledge and experience in financial
and business matters that Winton is capable of evaluating the merits and risks
of the acquisition of ASR Common Stock, and Winton has the ability to bear the
economic risk of acquiring ASR Common Stock.
(c) Available Information. Winton has been supplied
with, or had access to, information to which a reasonable investor would attach
significance in making investment decisions, including, but not limited to, the
Private Offering Memorandum, all publicly available filings by ASR under the
Securities Exchange Act of 1934, and ASR's annual and quarterly reports to
stockholders, any information with respect to ASR's financial condition,
business, and prospects, and any other information Winton has requested to
enable Winton to make the decision to acquire ASR Common Stock.
(d) Accredited Investor Status. Winton is an
"accredited investor," as such term is defined in Regulation D promulgated under
the Securities Act.
3.3 Representations and Warranties of ASR and Heritage. Except
as otherwise set forth in the ASR Disclosure Schedule heretofore delivered by
ASR to Associates, except as disclosed in any document heretofore filed by ASR
with the SEC, and except for intercompany transactions or matters among ASR
and/or its subsidiaries, ASR and Heritage jointly and severally represent and
warrant to Associates and Winton as follows:
(a) Due Incorporation, Good Standing, and
Qualification. ASR and each of its subsidiaries are corporations duly organized,
validly existing, and in good standing under the laws of the jurisdictions of
their incorporation with all requisite corporate power and authority to own,
operate, and lease their properties and to carry on their businesses as now
being conducted. Neither ASR nor any of its subsidiaries is subject to any
material disability by reason of the failure to be duly qualified as a foreign
corporation for the transaction of business or to be in good standing under the
laws of any jurisdiction. ASR has heretofore delivered to Associates a list
setting forth, as of the date of this Agreement, each jurisdiction in which ASR
and its subsidiaries is qualified to do business. Heritage is a wholly owned
subsidiary of ASR and, apart from matters arising under this Agreement, has no
significant assets, liabilities, or business, except for its right under this
Agreement to obtain from ASR the shares of ASR Common Stock to be delivered on
its behalf to Winton under this Agreement. (As used in this Agreement with
reference to ASR, the term "subsidiaries" shall include Heritage and all other
direct or indirect subsidiaries of ASR other than Associates. No warranty
relating to ASR or the consolidated financial position of ASR and its
subsidiaries taken as a whole shall be deemed to be breached as a result of any
circumstances that would constitute a breach of warranty by Associates hereunder
or by any of the Winton Parties under the Master Combination and Contribution
Agreement.)
(b) Corporate Authority. ASR and Heritage have the
corporate power and authority (subject to requisite approval of the ASR
Stockholders) to carry out the transactions contemplated hereby. The
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Boards of Directors of ASR and Heritage have duly authorized the execution,
delivery, and performance of this Agreement.
(c) Capital Stock. As of the date hereof, ASR has an
authorized capital stock consisting of 40,000,000 shares, all of which currently
are classified as Common Stock but may be reclassified as to unissued shares as
new classes or series of stock. As of the date hereof, 3,147,150 shares of
Common Stock are issued and outstanding (exclusive of 160,742 treasury shares).
As of such date, 353,078 shares of ASR Common Stock are reserved for issuance
upon the exercise of outstanding ASR stock options. All of the issued and
outstanding shares of capital stock of ASR and each of its subsidiaries have
been validly authorized and issued and are fully paid and nonassessable.
(d) Options, Warrants and Rights. Neither ASR nor any
of its subsidiaries has outstanding any options, warrants, or other rights to
purchase, or convert any obligation into, any shares of its capital stock, other
than those referred to in Section 3.3(c).
(e) Subsidiaries. ASR has delivered to Associates a
list setting forth as of the date of this Agreement (i) the name, jurisdiction
of incorporation, and list of shareholders of each subsidiary of ASR, and (ii)
the name and description of every other person, corporation, partnership, joint
venture, or other business association in which ASR directly or indirectly owns
a material interest. The outstanding shares of capital stock of the subsidiaries
of ASR owned by ASR or any of its subsidiaries are owned free and clear of all
claims, liens, charges, and encumbrances.
(f) Financial Statements. The Consolidated Balance
Sheets of ASR and subsidiaries as of December 31, 1994 and December 31, 1995 and
the Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows
of ASR and subsidiaries for the three years ended December 31, 1995, and all
related schedules and notes to the foregoing, have been certified by Deloitte &
Touche LLP, independent public accountants. All of the foregoing financial
statements have been prepared in accordance with generally accepted accounting
principles, which were applied on a consistent basis, are correct and complete,
and fairly and accurately present the financial position, results of operations,
and changes of financial position of ASR and its consolidated subsidiaries as of
their respective dates and for the periods indicated. Neither ASR nor any of its
subsidiaries have any material liabilities or obligations of a type that would
be included in a balance sheet prepared in accordance with generally accepted
accounting principles, whether related to tax or non-tax matters, accrued or
contingent, due or not yet due, liquidated or unliquidated or otherwise, except
as and to the extent disclosed or reflected in the Consolidated Balance Sheet of
ASR and its consolidated subsidiaries as of June 30, 1996 or incurred since June
30, 1996 in the ordinary course of business.
(g) No Material Change. Since June 30, 1996, there
has not been and there is not threatened (i) any material change in the
financial condition, business, properties, assets, or results of operations of
ASR and its subsidiaries taken as a whole, (ii) any loss or damage (whether or
not covered by insurance) to any of the assets or properties of ASR or its
subsidiaries that materially affects or impairs their ability to conduct their
respective businesses, (iii) any event or condition of any character that has
materially and adversely affected the business or prospects (financial or
otherwise) of ASR and its subsidiaries taken as a whole, or (iv) any mortgage or
pledge of any material amount of the assets or properties of ASR or any of its
subsidiaries, or any indebtedness incurred by ASR or any of its subsidiaries,
other than indebtedness, not material in the aggregate, incurred in the ordinary
course of business.
(h) Title to Properties. ASR and its subsidiaries
have good and marketable title to all of their respective real and personal
properties, including all properties reflected in ASR's Consolidated Balance
Sheet as of June 30, 1996, or acquired subsequent to June 30, 1996 (except
property disposed of subsequent to that date in the ordinary course of business
or property related to discontinued operations). Such assets and properties are
not subject to any mortgage, pledge, lien, claim, encumbrance, charge, security
interest or title retention, or
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other security arrangement, except for liens for the payment of federal, state,
and other taxes, the payment of which is neither delinquent nor subject to
penalties, and except for other liens and encumbrances incidental to the conduct
of the business of ASR and its subsidiaries or the ownership of their assets or
properties, which were not incurred in connection with the borrowing of money or
the obtaining of advances and which do not in the aggregate materially detract
from the value of the assets or properties of ASR and its subsidiaries taken as
a whole or materially impair the use thereof in the operation of their
respective businesses, except in each case as disclosed in ASR's Consolidated
Balance Sheet as of June 30, 1996. All leases pursuant to which ASR or any of
its subsidiaries leases any substantial amount of real or personal property are
valid and effective in accordance with their respective terms.
(i) Litigation. There are no actions, suits,
proceedings, or other litigation pending or, to the knowledge of ASR, threatened
against or affecting ASR or any of its subsidiaries, at law or in equity, or
before or by any federal, state, municipal, or other governmental department,
commission, board, bureau, agency, or instrumentality which, if determined
adversely to ASR or its subsidiaries, would individually or in the aggregate
have a materially adverse effect on the business, assets, properties,
operations, or prospects or on the condition, financial or otherwise, of ASR and
its subsidiaries, taken as a whole.
(j) Rights and Licenses. Neither ASR nor any of its
subsidiaries is subject to any material disability or liability by reason of its
failure to possess any trademark, trademark right, trade name, trade name right,
or license.
(k) No Violation. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
violate or result in a breach by ASR or any of its subsidiaries of, or
constitute a default under, or conflict with, or cause any acceleration of any
obligation with respect to (i) any provision or restriction of any charter,
bylaw, loan, indenture, or mortgage of ASR or any of its subsidiaries, or (ii)
any provision or restriction of any lien, lease agreement, contract, instrument,
order, judgment, award, decree, ordinance, or regulation or any other
restriction of any kind or character to which any assets or properties of ASR or
any of its subsidiaries is subject or by which ASR or any of its subsidiaries is
bound.
(l) Taxes. ASR and its subsidiaries have filed all
federal, state, foreign, local, and any other applicable tax returns and reports
required to be filed and have paid in full or adequately reserved for all taxes
shown due thereon (together with all interest, penalties, assessments, and
deficiencies assessed in connection therewith due through the date hereof). Such
tax returns and reports are correct in all material respects. Federal tax
returns of ASR and its subsidiaries have been audited by the Internal Revenue
Service through the year ended December 31, 1991, and the results of such audits
are duly reflected in the financial statements described in Section 3.3(f)
above.
(m) Accounts Receivable. The accounts receivable of
ASR and its subsidiaries have been acquired in the ordinary course of business,
are valid and enforceable, and are fully collectible, subject to no known
defenses, setoffs, or counterclaims, except to the extent of the reserve
reflected in the books of ASR and its subsidiaries or in such other amount that
is not material in the aggregate.
(n) Contracts. Neither ASR nor any of its
subsidiaries is a party to (i) any plan or contract providing for bonuses,
pensions, options, stock purchases, deferred compensation, retirement payments,
or profit sharing (other than profit sharing or bonus arrangements with officers
and key personnel of subsidiaries), (ii) any collective bargaining or other
contract or agreement with any labor union, (iii) any lease, installment
purchase agreement, or other contract with respect to any real or personal
property used or proposed to be used in its operations except, in each case,
items included within aggregate amounts disclosed in ASR's June 30, 1996
Consolidated Balance Sheet, (iv) any employment agreement or other similar
arrangement not terminable by it upon 90 days or less notice without penalty to
it, (v) any contract or agreement for the purchase of any commodity, material,
fixed asset, or equipment in excess of $500,000, (vi) any contract or agreement
creating an obligation of
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$500,000 or more, (vii) any contract or agreement that by its terms does not
terminate or is not terminable by it without penalty to it within one year after
the date hereof, (viii) any loan agreement, indenture, promissory note,
conditional sales agreement, or other similar type of arrangement, (ix) any
material license agreement, or (x) any contract that may result in a material
loss or obligation to it. All contracts, agreements, and other arrangements to
which ASR or any of its subsidiaries is a party are valid and enforceable in
accordance with their terms; ASR, its subsidiaries, and all other parties to
each of the foregoing have performed all obligations required to be performed to
date; neither ASR, nor any of its subsidiaries, nor any such other party is in
default or in arrears under the terms of any of the foregoing; and no condition
exists or event has occurred which, with the giving of notice or lapse of time
or both, would constitute a default under any of them.
(o) Compliance with Law and Other Regulations.
Neither ASR nor any of its subsidiaries is subject to or has been threatened
with any material fine, penalty, or disability as the result of its failure to
comply with any requirements of any federal, state, local, or foreign law or
regulation (including those relating to the employment of labor and to
environmental matters) or any requirement of any governmental body or agency
having jurisdiction over it, the conduct of its business, the use of its assets
and properties, or any premises occupied by it.
(p) Insurance. ASR and each of its subsidiaries
maintains in full force and effect insurance coverage on their assets,
properties, premises, operations, and personnel in such amounts and against such
risks and losses as are adequate and customary for the respective businesses
engaged in by ASR and its subsidiaries.
(q) Minute Books. The minute books of ASR and each of
its subsidiaries accurately record all actions taken by their respective
stockholders and directors.
(r) SEC Reports. ASR's report on Form 10-K for the
year ended December 31, 1995 filed with the SEC and all subsequent reports and
proxy statements filed by ASR thereafter pursuant to Section 13(a) or 14(a) of
the Securities Exchange Act of 1934 do not contain a misstatement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading as of the time the document was
filed. Since the filing of such report on Form 10-K, no other report, proxy
statement, or other document has been required to be filed by ASR pursuant to
Section 13(a) or 14(a) of the Securities Exchange Act of 1934 that has not been
filed.
(s) Accuracy of Statements. Neither this Agreement
nor any statement, list, certificate, or other information furnished or to be
furnished by ASR or Heritage to Associates in connection with this Agreement or
any of the transactions contemplated hereby contains or will contain an untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.
(t) Status of ASR Common Stock to be Issued. The
shares of ASR Common Stock into which the shares of Associates will be converted
pursuant to this Agreement will be when issued validly authorized and issued,
fully paid, and nonassessable, and listed for trading on the American Stock
Exchange.
IV. COVENANTS
4.1 Covenants of Associates and Winton. Each of Associates and
Winton agrees that, unless ASR otherwise agrees in writing and except as set
forth in the Associates Disclosure Schedule, prior to the Effective Date:
(a) Preservation of Business. Associates shall use
its best efforts to (i) preserve intact its present business organization, (ii)
preserve its present goodwill and advantageous relationships with investors and
all other persons having business dealings with it, and (iii) preserve and
maintain in force all its
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licenses, registrations, franchises, patents, trademarks, copyrights, bonds, and
other similar rights. Associates shall not enter into any employment agreements
with any of its officers or management personnel, which may not be cancelled by
it without penalty upon notice not exceeding 90 days. Associates shall maintain
in force all property, casualty, fiduciary, directors and officers, and other
forms of insurance that it is presently carrying.
(b) Ordinary Course. Associates shall operate its
business only in the usual, regular, and ordinary course and manner. Without
limiting the foregoing, Associates shall not (i) encumber or mortgage any
property or assets, (ii) incur any obligation (contingent or otherwise) or
purchase or acquire, or transfer or convey, any material assets or properties,
or enter into any transaction or make or enter into any contract or commitment,
except in the ordinary course of business, or (iii) acquire any stock or other
equity interest in any corporation, trust, or other entity.
(c) Books and Records. Associates shall maintain its
books, accounts, and records in the usual, regular, and ordinary manner and on a
basis consistent with prior years, and shall comply with all laws applicable to
it or to the conduct of its business.
(d) No Organic Change. Except as contemplated by this
Agreement or the Master Combination and Contribution Agreement, Associates shall
not (i) amend its Articles of Incorporation or Bylaws, (ii) make any change in
its capital stock by reclassification, subdivision, reorganization, or
otherwise, or (iii) merge or consolidate with any other corporation, trust, or
entity or change the character of its business.
(e) No Issuance by Associates of Shares, Options, or
Other Securities. Associates shall not (i) issue any shares of capital stock, or
(ii) grant any option, warrant, or other right to purchase or to convert any
obligation into shares of its capital stock.
(f) Compensation. Associates shall not (i) increase
the compensation payable to any officer or to other management personnel from
the amount payable as of June 30, 1996, except in accordance with normal and
customary practice, or (ii) introduce or change any pension or profit sharing
plan, or any other employee benefit arrangement, except as a result of
collective bargaining negotiations, except for insubstantial changes necessary
to comply with the minimum requirements of the Internal Revenue Code of 1986 or
the Employee Retirement Income Security Act of 1974, or except as disclosed in
the Associates Disclosure Schedule.
(g) Dividends. Associates shall not declare, make, or
pay any dividend or other distribution with respect to its Common Stock or
otherwise or purchase, redeem, or otherwise acquire any shares of its Common
Stock, except that distributions may be made to Winton of (i) all cash held by
Associates in excess of the difference between the total current assets of
Associates and the total current liabilities of Associates on the Effective Date
and (ii) all securities held by Associates on the Effective Date.
(h) Consents and Approvals. Associates shall use its
best efforts to obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by it of the transactions
contemplated by this Agreement. Associates shall make all filings, applications,
statements, and reports to all federal and state government agencies or
entities, which are required to be made prior to the Effective Date by it or on
its behalf pursuant to any statute, rule, or regulation in connection with the
transactions contemplated by this Agreement.
4.2 Covenants of ASR. ASR agrees that, unless Associates
otherwise agrees in writing and except as set forth in the ASR Disclosure
Schedule, prior to the Effective Date:
(a) Preservation of Business. ASR shall use its best
efforts to (i) preserve intact the present business organization of ASR and its
subsidiaries, (ii) preserve the present goodwill and advantageous relationships
of ASR and its subsidiaries with investors and all other persons having business
dealings with ASR and its subsidiaries, and (iii) preserve and maintain in force
all licenses, registrations, franchises, patents,
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trademarks, copyrights, bonds, and other similar rights of ASR and its
subsidiaries. ASR and its subsidiaries shall not enter into any employment
agreements with any of their officers or management personnel, which may not be
cancelled by them without penalty upon notice not exceeding 90 days. ASR and its
subsidiaries shall maintain in force all property, casualty, fidelity, directors
and officers, and other forms of insurance which they are presently carrying.
(b) Ordinary Course. ASR and its subsidiaries shall
operate their business only in the usual, regular, and ordinary course and
manner. Without limiting the foregoing, neither ASR nor any subsidiary of ASR
shall (i) encumber or mortgage any property or assets, (ii) incur any obligation
(contingent or otherwise) or purchase or acquire, or transfer or convey, any
material assets or properties or enter into any transaction or make or enter
into any contract or commitment, except in the ordinary course of business, or
(iii) acquire any stock or other equity interest in any corporation, trust, or
other entity. Notwithstanding anything herein to the contrary, ASR shall not be
precluded from disposing of any business, including the related assets,
previously identified as being discontinued.
(c) Books and Records. ASR and its subsidiaries shall
maintain their books, accounts, and records in the usual, regular, and ordinary
manner and on a basis consistent with prior years, and shall comply with all
laws applicable to them or to the conduct of their business.
(d) No Organic Change. Except as contemplated by this
Agreement or the Master Combination and Contribution Agreement, neither ASR nor
its subsidiaries shall (i) amend their Articles of Incorporation or Bylaws,
except for those amendments set forth in the Proxy Statement, (ii) make any
change in their capital stock by reclassification, subdivision, reorganization,
or otherwise, or (iii) merge or consolidate with any other corporation, trust,
or entity or change the character of their business.
(e) No Issuance by ASR of Shares, Options, or Other
Securities. Except as contemplated hereby or by the Master Combination and
Contribution Agreement, neither ASR nor its subsidiaries shall (i) issue any
shares of capital stock (except for the issuance of shares of ASR Common Stock
upon the exercise of outstanding stock options), or (ii) grant any option,
warrant, or other right to purchase or to convert any obligation into shares of
capital stock other than the grant of options covering a maximum of 5,901 shares
under ASR's Stock Option Plan.
(f) Compensation. Except for the payment by ASR of
the greater of one percent (1%) of the purchase price of the Properties (as
defined in the Master Combination and Contribution Agreement) or $800,000 in
cash, deferred compensation, or ASR Common Stock that may be issued to officers
of ASR in connection with their efforts relating to the transactions
contemplated by the Master Combination and Contribution Agreement, neither ASR
nor its subsidiaries shall (i) increase the compensation payable to any elected
officer or to other management personnel from the amount payable as of June 30,
1996 or pay any bonuses to any of such persons or their affiliates, except in
accordance with normal and customary practice, (ii) introduce or change any
pension or profit sharing plan, or any other employee benefit arrangement,
except as a result of collective bargaining negotiations, except for
insubstantial changes necessary to comply with the minimum requirements of the
Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of
1974, or except as disclosed in the ASR Disclosure Schedule, or (iii) increase
the amounts payable under contracts with Pima Realty or Pima Mortgage.
(g) Dividends. ASR shall not declare, make, or pay
any dividend or other distribution with respect to ASR Common Stock or
otherwise, other than regular quarterly cash dividends of $.50 per share or
purchase, redeem, or otherwise acquire any shares of ASR Common Stock.
(h) Consents and Approvals. ASR shall use its best
efforts to obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by ASR of the transactions
contemplated by this Agreement. ASR shall make all filings, applications,
statements, and reports to all federal and
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state government agencies and entities that are required to be made prior to the
Effective Date by or on behalf of ASR or its subsidiaries pursuant to any
statute, rule, or regulation in connection with the transactions contemplated by
this Agreement.
V. CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 Conditions Precedent to the Obligations of ASR and
Heritage. The obligations of ASR and Heritage under this Agreement are, at the
option of ASR and Heritage, subject to the satisfaction of the following
conditions on or before the Effective Date:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Associates and Winton herein contained shall
have been true and correct in all material respects when made and, in addition,
shall be true and correct in all material respects on and as of the Effective
Date with the same force and effect as though made on and as of the Effective
Date, except as affected by transactions contemplated hereby.
(b) Performance of Agreements. Associates and Winton
shall have in all material respects performed all obligations and agreements and
complied with all covenants and conditions contained in this Agreement to be
performed and complied with by them on or prior to the Effective Date.
(c) Corporate Approvals. All necessary action on the
part of the shareholders of Associates adopting this Agreement and approving the
transactions contemplated hereby shall have been taken no later than the
Commitment Date in connection with the transactions contemplated by the Master
Combination and Contribution Agreement.
(d) Opinion of Counsel for Associates. ASR shall have
received an opinion of Butler & Binion, L.L.P., dated the Effective Date, in
form and substance satisfactory to ASR and its counsel to the effect that:
(i) Associates is a corporation validly
existing, and in good standing under the laws of the state of Washington and has
the requisite corporate power and authority under the laws of such state to own,
lease, and operate its properties, to carry on its business as then being
conducted, and to consummate the transactions contemplated hereby;
(ii) all necessary corporate proceedings of
the Board of Directors and the shareholders of Associates to approve and adopt
this Agreement and to authorize the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly and
validly taken;
(iii) Associates has the corporate power and
authority to execute and deliver this Agreement, and this Agreement has been
duly authorized, executed, and delivered by it and constitutes its legal, valid,
and binding obligation;
(iv) such counsel knows of no actions,
suits, or proceedings pending or threatened against Associates or Winton at law
or in equity, or before or by any federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or instrumentality
that would result in a breach of the representation and warranty set forth in
Section 3.1(i) of this Agreement; and
(v) the consummation of the transactions
contemplated hereby will not violate or result in a breach of or constitute a
default by Associates under any provision of any indenture, mortgage, lien,
lease, agreement, contract, instrument, order, judgment, decree, award,
ordinance, regulation or any other
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restriction of any kind or character known to such counsel, to which Associates
or Winton is a party or by which either of them is bound.
With respect to the opinions expressed pursuant to clauses
(iv) and (v) above, such opinion may be based upon a certificate or certificates
of an officer or officers of Associates and such counsel may rely on opinions of
other counsel satisfactory to ASR and its counsel, which opinions are delivered
in connection with this Agreement.
(e) No Material Adverse Change. There shall be no
material adverse change in the business, property, or financial condition of
Associates.
(f) Litigation. No action or proceeding by any
governmental agency shall have been instituted or threatened that would enjoin,
restrain, or prohibit, or might result in substantial damages in respect of,
this Agreement or the consummation of the transactions contemplated by this
Agreement and would, in the reasonable judgment of ASR and Heritage, make it
inadvisable to consummate such transactions, and no court order shall have been
entered in any action or proceeding instituted by any other party that enjoins,
restrains, or prohibits this Agreement or consummation of the transactions
contemplated by this Agreement.
(g) Listing on Stock Exchange. All of the shares of
ASR Common Stock to be issued hereunder shall have been authorized for listing,
subject to official notice of issuance, on the American Stock Exchange.
(h) Proceedings Satisfactory to Counsel. All
proceedings taken by Associates and Winton and all instruments executed and
delivered by such parties on or prior to the Effective Date in connection with
the transactions herein contemplated shall be satisfactory in form and substance
to counsel for ASR and Heritage.
(i) Employment Agreement. Winton shall have executed
an Employment Agreement as contemplated by the Master Combination and
Contribution Agreement.
(j) Approval of ASR Stockholders. The stockholders of
ASR shall have approved the transactions as contemplated by the Master
Combination and Contribution Agreement (which includes the Associates Merger as
set forth herein).
(k) Execution of Master Combination and Contribution
Agreement. The transactions contemplated by the Master Combination and
Contribution Agreement shall be consummated (or closed) contemporaneously with
the transactions contemplated by this Agreement.
5.2 Conditions Precedent to the Obligations of Associates and
Winton. The obligations of Associates and Winton under this Agreement are, at
the option of Associates and Winton, subject to the satisfaction of the
following conditions on or before the Effective Date:
(a) Accuracy of Representations and Warranties. The
representations and warranties of ASR and Heritage herein contained shall have
been true and correct in all material respects when made and, in addition, shall
be true and correct in all material respects on and as of the Effective Date
with the same force and effect as though made on and as of the Effective Date,
except as affected by transactions contemplated hereby.
(b) Performance of Agreements. ASR and Heritage shall
have in all material respects performed all obligations and agreements and
complied with all covenants and conditions contained in this Agreement to be
performed and complied with by them on or prior to the Effective Date.
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(c) Corporate Approval. The transactions contemplated
by the Master Combination and Contribution Agreement shall be consummated (or
closed) contemporaneously with the transactions contemplated by this Agreement.
(d) Opinion of Counsel for ASR. Associates shall have
received an opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a
professional association, dated the Effective Date, satisfactory in form and
substance to Associates and its counsel, to the effect that:
(i) ASR and Heritage are corporations duly
organized, validly existing, and in good standing under the laws of the state of
Maryland and the state of Arizona, respectively, and have the corporate power
and authority under the law of the applicable state to own, lease, and operate
their properties, to carry on their businesses as then being conducted, and to
consummate the transactions contemplated hereby;
(ii) all necessary corporate proceedings of
the Boards of Directors and stockholders of ASR and Heritage to authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and validly taken;
(iii) ASR and Heritage have corporate power
and authority to execute and deliver this Agreement, and this Agreement has been
duly authorized, executed, and delivered by them, and constitutes their legal,
valid, and binding obligations;
(iv) such counsel knows of no actions,
suits, or proceedings pending or threatened against ASR or any of its
subsidiaries, including Heritage, at law or in equity, or before or by any
federal, state, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality that would result in a breach of the
representation and warranty set forth in Section 3.3(i) of this Agreement;
(v) the consummation of the transactions
provided for in this Agreement will not violate or result in a breach of or
constitute a default under any provision of any indenture, mortgage, lien,
lease, agreement, contract, instrument, order, judgment, decree, award,
ordinance, regulation, or any other restriction of any kind or character known
to such counsel, to which ASR or Heritage is a party or by which either is
bound;
(vi) the shares of ASR Common Stock to be
issued in accordance with this Agreement are duly authorized and will be, upon
the effectiveness of the merger provided for in this Agreement, validly issued,
fully paid, non-assessable, and listed for trading on the American Stock
Exchange; and
(vii) the shares of ASR Common Stock
issuable upon exercise of the stock options issued to Winton, when so issued,
will be duly and validly authorized and issued, fully paid, non-assessable and
listed for trading, subject to official notice of issuance on the American Stock
Exchange.
With respect to the opinions expressed pursuant to clauses
(iv) and (v) of this subparagraph, such opinion may be based upon a certificate
or certificates of an officer or officers of ASR or its subsidiaries, including
Heritage, and such counsel may rely on opinions of other counsel satisfactory to
Associates and its counsel, which opinions are delivered in connection with this
Agreement.
(e) No Material Adverse Change. There shall be no
material adverse change in the business, properties, or financial condition of
ASR or Heritage.
(f) Litigation. No action or proceeding by any
governmental agency shall have been instituted or threatened that would enjoin,
restrain, or prohibit, or might result in substantial damages in respect of,
this Agreement or the consummation of the transactions contemplated by this
Agreement and would, in the
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reasonable judgment of Associates and Winton make it inadvisable to consummate
such transactions, and no court order shall have been entered in any action or
proceeding instituted by any other party that enjoins, restrains, or prohibits
this Agreement or consummation of the transactions contemplated by this
Agreement.
(g) Listing on Stock Exchange. All of the shares of
ASR Common Stock to be issued hereunder shall have been authorized for listing,
subject to official notice of issuance, on the American Stock Exchange.
(h) Proceedings Satisfactory to Counsel. All
proceedings taken by ASR and Heritage and all instruments executed and delivered
by ASR and Heritage on or prior to the Effective Date in connection with the
transactions herein contemplated shall be satisfactory in form and substance to
counsel for Associates and Winton.
VI. WAIVER, MODIFICATION, ABANDONMENT
6.1 Waivers. The failure of either Associates or Winton to
comply with any of its or his obligations, agreements, or conditions as set
forth herein may be waived expressly in writing by ASR and Heritage, by action
of their respective Boards of Directors without the requirement for a vote of
their stockholders. The failure of ASR and Heritage to comply with any of their
obligations, agreements, or conditions as set forth herein may be waived
expressly in writing by Associates without the vote of its shareholders. 6.2
Modification. This Agreement may be modified at any time in any respect by the
mutual consent of all of the parties, notwithstanding prior approval by the
shareholders. Any such modification may be approved for any party by its Board
of Directors, without further shareholder approval, except that the number of
shares of ASR Common Stock to be issued in exchange for the shares of Associates
Common Stock may not be increased without the consent of ASR's stockholders and
may not be decreased without the consent of Associates given, in each case, by
the same vote as is required under applicable state law for approval of this
Agreement.
6.3 Abandonment. The Associates Merger may be abandoned on or
before the Effective Date, notwithstanding adoption of this Agreement by the
shareholders of the parties hereto:
(a) By the mutual agreement of the Boards of
Directors of ASR, Heritage, and Associates;
(b) By the Boards of Directors of ASR or Heritage, if
any of the conditions provided in Section 5.1 shall not have been satisfied,
complied with, or performed in any material respect, and ASR and Heritage shall
not have waived such failure of satisfaction, noncompliance, or nonperformance;
(c) By Associates, if any of the conditions provided
in Section 5.2 shall not have been satisfied, complied with, or performed in any
material respect, and Associates shall not have waived such failure of
satisfaction, noncompliance, or nonperformance; or
(d) By Associates or ASR if the Combination Agreement
is not closed on or before April 30, 1997;
(e) By Associates or ASR if Winton, as the sole
stockholder of Associates, has not adopted this Agreement on or prior to the
Commitment Date;
(f) By Associates or ASR, if the stockholders of ASR
do not vote to approve the matters set forth in Section 4.2 of the Master
Combination and Contribution Agreement;
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(g) At the option of ASR, Heritage, and Associates,
if there shall have been instituted and be pending or threatened any legal
proceeding before any court or governmental agency seeking to restrain or
prohibit or to obtain damages in respect of this Agreement or the consummation
of the transactions contemplated by this Agreement, or if any order restraining
or prohibiting the Associates Merger shall have been issued by any court or
governmental agency and shall be in effect.
In the event of any termination pursuant to this Section 6.3
(other than pursuant to subparagraph (a) hereof) written notice setting forth
the reasons thereof shall forthwith be given by the terminating party to all
other parties. This Agreement shall terminate automatically if the Effective
Date shall not have occurred on or before the Closing Date as specified in the
Master Combination and Contribution Agreement, or such later date as shall have
been agreed to by the parties hereto under Section 6.2.
6.4 Effect of Abandonment. If the Associates Merger is
abandoned as provided for in this Section, (a) this Agreement shall forthwith
become wholly void and of no effect without liability to any party to this
Agreement or to the directors, officers, stockholders, representatives, and
agents of any such party, and (b) ASR and Associates shall each pay their own
fees and expenses incident to the negotiation, preparation, and execution of
this Agreement and the obtaining of the necessary approvals thereof, including
fees and expenses of its counsel, accountants, investment bankers, and other
experts.
6.5 Closing. The consummation of the transactions contemplated
hereby shall occur at the same place and at the same time as the closing of the
Master Combination and Contribution Agreement. At the Closing, Heritage shall
file the certificate of merger under the laws of Washington and Arizona. In
addition, the following deliveries shall be made:
(a) Deliveries by ASR and Heritage. At the Closing, ASR and
Heritage shall deliver the following to Winton, as the sole stockholder of
Associates:
(i) A certificate registered in the name of Winton
for the shares of ASR Common Stock as contemplated by Section 1.6 hereof;
(ii) A copy of the certificates of Merger as filed
with the Secretaries of the States of Washington and Arizona;
(iii) A certificate executed by a duly authorized
officer of Heritage stating that Heritage's representations and warranties
contained herein are true and correct on and as of the Closing Date with the
same force and effect as if made on the Closing Date and that all covenants and
agreements required to be performed by Heritage under this Agreement prior to
the Closing have been performed in accordance with the terms of this Agreement.
(b) Deliveries by Winton. At the Closing, Winton shall deliver
the following to ASR and Heritage:
(i) A certificate for all the outstanding shares of
Associates, duly endorsed for transfer to Heritage, as contemplated by Section
1.6 hereof;
(ii) A certificate executed by Winton stating that
Winton's representations and warranties contained herein are true and correct on
and as of the Closing Date with the same force and effect as if made on the
Closing Date and that all covenants and agreements required to be performed by
Winton under this Agreement prior to the Closing have been performed in
accordance with the terms of this Agreement.
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VII. GENERAL
7.1 Indemnity Against Finders. Each party hereto shall
indemnify and hold the other parties harmless against any claim for finders'
fees based on alleged retention of a finder by it.
7.2 Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the state of Arizona,
notwithstanding any Arizona or other conflict-of-law provisions to the contrary.
7.3 Notices. All notices, requests, demands, and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made, and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below: If to ASR or Heritage:
335 North Wilmot
Suite 250
Tucson, Arizona 85711
Attention: President
If to Associates or Winton:
3845 FM 1960 West
Suite 450
Houston, Texas 77068
Attention: Don W. Winton
Any party may alter the address to which communications or
copies are to be sent by giving notice to such of change of address in
conformity with the provisions of this paragraph for the giving of notice.
7.4 Binding Nature of Agreement; No Assignment. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that no party may assign or transfer
its rights or obligations under this Agreement without the prior written consent
of the other parties hereto.
7.5 Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
7.6 Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when
18
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one or more counterparts hereof, individually or taken together, shall bear the
signatures of the parties reflected hereon as the signatories.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
WINTON & ASSOCIATES, INC. ASR INVESTMENTS CORPORATION
By:/s/ Don W. Winton By:/s/ Jon A. Grove
------------------------------------ ------------------------------------
Its: President Its: President
----------------------------------- -----------------------------------
By:____________________________________ By:____________________________________
Its:___________________________________ Its:___________________________________
DON W. WINTON HERITAGE RESIDENTIAL GROUP, INC.
/s/ Don W. Winton By:/s/ Jon A. Grove
- --------------------------------------- ------------------------------------
Don W. Winton Its: President
-----------------------------------
By:____________________________________
Its:___________________________________
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AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF NOVEMBER 8, 1996
AMONG
ASR INVESTMENTS CORPORATION,
PIMA REALTY ADVISORS, INC.,
PIMA MORTGAGE LIMITED PARTNERSHIP,
HERITAGE RESIDENTIAL GROUP, INC.,
JON A. GROVE,
FRANK S. PARISE, JR.,
JOSEPH C. CHAN,
JC MORTGAGE ADVISORS, INC.,
JG MORTGAGE ADVISORS, INC.,
AND
FP MORTGAGE ADVISORS, INC.
APPENDIX D
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
I. MERGERS................................................................................................ 3
1.1 Pima Realty Merger............................................................................ 3
(a) Effect of the Pima Realty Merger..................................................... 3
(b) Name of Heritage. .................................................................. 3
(c) Articles of Incorporation and Bylaws. .............................................. 3
(d) Status and Conversion of Securities.................................................. 4
(e) ASR to Make Shares Available. ...................................................... 4
(f) Information Respecting Pima Realty. ................................................ 5
(g) Further Documents.................................................................... 6
1.2 Pima Mortgage Merger.......................................................................... 6
(a) Effect of the Pima Mortgage Merger. ................................................ 7
(b) Name of Heritage. .................................................................. 7
(c) Articles of Incorporation and Bylaws................................................. 7
(d) Status and Conversion of Securities.................................................. 7
(e) ASR to Make Shares Available. ...................................................... 8
(f) Information Respecting the Pima Mortgage Partners and Pima Mortgage.................. 8
(g) Further Documents. ................................................................. 9
1.3 Effective Date. ............................................................................. 9
II. SHAREHOLDER APPROVALS; PROXY AND REGISTRATION FILINGS.................................................. 10
2.1 Shareholder/Partner Approvals................................................................. 10
2.2 Proxy and Registration Statements............................................................. 10
(a) Preparation of Private Offering Memorandum........................................... 10
(b) Preparation of Proxy Statement....................................................... 10
(c) Preparation of Registration Statement................................................ 11
(d) Amendments to Private Offering Memorandum, Proxy Statement, and
Registration Statement............................................................... 12
III. REPRESENTATIONS AND WARRANTIES......................................................................... 13
3.1 Representations and Warranties of Pima Realty, Pima Mortgage, the Pima
Mortgage Partners, and the Pima Shareholders.................................................. 13
(a) Due Incorporation, Good Standing, and Qualification.................................. 13
(b) Corporate Authority.................................................................. 14
(c) Capital Stock........................................................................ 14
(d) Options, Warrants and Rights......................................................... 15
(e) Subsidiaries......................................................................... 16
(f) Financial Statements................................................................. 16
(g) No Material Change................................................................... 17
(h) Title to Properties.................................................................. 17
(i) Litigation........................................................................... 18
(j) Rights and Licenses.................................................................. 19
(k) No Violation......................................................................... 19
(l) Taxes................................................................................ 19
(m) Accounts Receivable.................................................................. 20
(n) Contracts............................................................................ 20
(o) Compliance with Law and Other Regulations............................................ 21
(p) Insurance............................................................................ 21
(q) Minute Books......................................................................... 22
</TABLE>
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<S> <C>
(r) Certain Claims by the Pima Shareholders.............................................. 22
(s) All Business Assets Transferred...................................................... 22
(t) Accuracy of Statements............................................................... 22
3.2 Pima Shareholders' Securities Representations and Warranties.................................. 23
(a) Acquisition of ASR Common Stock for Grove's, Parise's, and Chan's
Account. ............................................................................ 23
(b) Knowledge and Experience in Financial and Business Matters. ......................... 23
(c) Available Information. ............................................................. 23
(d) Accredited Investor Status........................................................... 24
3.3 Representations and Warranties of ASR and Heritage............................................ 24
(a) Due Incorporation, Good Standing, and Qualification.................................. 24
(b) Corporate Authority.................................................................. 25
(c) Capital Stock........................................................................ 25
(d) Options, Warrants and Rights......................................................... 26
(e) Subsidiaries......................................................................... 26
(f) Financial Statements................................................................. 26
(g) No Material Change................................................................... 27
(h) Title to Properties.................................................................. 27
(i) Litigation........................................................................... 28
(j) Rights and Licenses.................................................................. 28
(k) No Violation......................................................................... 28
(l) Taxes................................................................................ 29
(m) Accounts Receivable.................................................................. 29
(n) Contracts............................................................................ 29
(o) Compliance with Law and Other Regulations............................................ 30
(p) Insurance............................................................................ 31
(q) Minute Books......................................................................... 31
(r) SEC Reports.......................................................................... 31
(s) Accuracy of Statements............................................................... 31
(t) Status of ASR Common Stock to be Issued.............................................. 32
IV. COVENANTS.............................................................................................. 32
4.1 Covenants of Pima Realty, Pima Mortgage, the Pima Mortgage Partners, and the
Pima Shareholders............................................................................. 32
(a) Preservation of Business............................................................. 32
(b) Ordinary Course...................................................................... 33
(c) Books and Records.................................................................... 33
(d) No Organic Change.................................................................... 33
(e) No Issuance by Pima Realty, Pima Mortgage or the Pima Mortgage
Partners of Shares, Options, Partnership Units, or Other Securities.................. 33
(f) Compensation......................................................................... 34
(g) Dividends............................................................................ 34
(h) Consents and Approvals............................................................... 35
4.2 Covenants of ASR.............................................................................. 35
(a) Preservation of Business............................................................. 35
(b) Ordinary Course...................................................................... 36
(c) Books and Records.................................................................... 36
(d) No Organic Change.................................................................... 36
(e) No Issuance by ASR of Shares, Option, or Other Securities........................... 37
(f) Compensation......................................................................... 37
(g) Dividends............................................................................ 38
(h) Consents and Approvals............................................................... 38
</TABLE>
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<TABLE>
<S> <C>
V. CONDITIONS PRECEDENT TO OBLIGATIONS.................................................................... 38
5.1 Conditions Precedent to the Obligations of ASR and Heritage................................... 38
(a) Accuracy of Representations and Warranties........................................... 38
(b) Performance of Agreements............................................................ 39
(c) Corporate Approvals.................................................................. 39
(d) Opinion of Counsel for Pima Realty................................................... 39
(e) No Material Adverse Change........................................................... 41
(f) Litigation........................................................................... 41
(g) Listing on Stock Exchange............................................................ 41
(h) Proceedings Satisfactory to Counsel.................................................. 41
(i) Employment Agreements................................................................ 42
(j) Receipt of Fairness Opinion; Approval of Special Committee and ASR
Stockholders......................................................................... 42
(k) Execution of Master Combination and Contribution Agreement........................... 42
(l) Approval of ASR Stockholders......................................................... 42
5.2 Conditions Precedent to the Obligations of Pima Realty, Pima Mortgage, Each
of the Pima Mortgage Partners, and the Pima Shareholders. .................................... 42
(a) Accuracy of Representations and Warranties........................................... 43
(b) Performance of Agreements............................................................ 43
(c) Corporate Approval................................................................... 43
(d) Opinion of Counsel for ASR........................................................... 43
(e) No Material Adverse Change........................................................... 45
(f) Litigation........................................................................... 45
(g) Listing on Stock Exchange............................................................ 46
(h) Proceedings Satisfactory to Counsel.................................................. 46
VI. WAIVER, MODIFICATION, ABANDONMENT...................................................................... 46
6.1 Waivers....................................................................................... 46
6.2 Modification.................................................................................. 46
6.3 Abandonment................................................................................... 47
6.4 Effect of Abandonment......................................................................... 48
6.5 Closing....................................................................................... 49
VII. GENERAL................................................................................................ 50
7.1 Indemnity Against Finders..................................................................... 50
7.2 Controlling Law............................................................................... 50
7.3 Notices....................................................................................... 50
7.4 Binding Nature of Agreement; No Assignment.................................................... 51
7.5 Entire Agreement.............................................................................. 51
7.6 Execution in Counterparts..................................................................... 52
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is dated as of
November 8, 1996, among Pima Realty Advisors, Inc., an Arizona corporation
("Pima Realty"); Pima Mortgage Limited Partnership, an Arizona limited
partnership ("Pima Mortgage"); ASR Investments Corporation, a Maryland
corporation ("ASR"); Heritage Residential Group, Inc., an Arizona corporation,
which is a wholly owned subsidiary of ASR ("Heritage"); Jon A. Grove ("Grove"),
Frank S. Parise, Jr. ("Parise"), and Joseph C. Chan ("Chan") (collectively
referred to as the "Pima Shareholders"); and JG Mortgage Advisors, Inc., an
Arizona corporation ("JG Mortgage"), JC Mortgage Advisors, Inc., an Arizona
corporation ("JC Mortgage"), and FP Mortgage Advisors, Inc. ("FP Mortgage"), an
Arizona corporation (collectively referred to as the "Pima Mortgage Partners").
The Pima Shareholders own all of the outstanding shares of
Common Stock of Pima Realty, constituting all of the outstanding capital stock
of Pima Realty. Grove is the sole shareholder of JG Mortgage; Parise is the sole
shareholder of FP Mortgage; and Chan is the sole shareholder of JC Mortgage. The
Pima Mortgage Partners own all of the outstanding general partnership interests
and limited partnership interests in Pima Mortgage.
ASR, Pima Realty, Pima Mortgage, and Winton & Associates,
Inc., a Washington corporation ("Associates"), have engaged in extensive
discussions regarding the combination of their respective businesses in the
following manner: (i) a merger of Pima Realty with and into Heritage (the "Pima
Realty Merger"), pursuant to this Agreement; (ii) immediately following the
consummation of the Pima Realty Merger, Pima Mortgage shall effectively be
merged with and into Heritage through the mergers of each of the Pima Mortgage
Partners with and into Heritage (collectively referred to as the "Pima Mortgage
Merger"), pursuant to this Agreement; and (iii) immediately following the
consummation of the Pima Mortgage Merger, Associates shall be merged with and
into Heritage (the "Associates Merger"), pursuant to that certain Agreement and
Plan of Reorganization of even date by and among Associates, Don W. Winton
("Winton"), Heritage, and ASR (the "Associates Merger Agreement"). The Pima
Realty Merger, the Pima Mortgage Merger, and the Associates Merger are
collectively referred to herein as the "Property Management Mergers."
For federal income tax purposes, it is intended that the Pima
Realty Merger and the Pima Mortgage Merger shall qualify as reorganizations
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). Specifically, it is intended that the Pima Realty Merger
and the Pima Mortgage Merger qualify as forward triangular reorganizations under
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
Because Pima Realty and Pima Mortgage are both wholly owned by
affiliates of ASR, a Special Committee of the independent directors of the ASR
Board of Directors (the "Special Committee") has been established to determine
the fairness of the Pima Realty Merger and Pima Mortgage Merger to ASR. The
Special Committee has obtained independent legal representation and has retained
Oppenheimer & Co., Inc. to render a fairness opinion. As a condition precedent
to the consummation of the Pima Realty Merger and the Pima Mortgage Merger, the
Special Committee and the stockholders of ASR must approve the Pima Realty
Merger and the Pima Mortgage Merger.
NOW, THEREFORE, the parties hereto hereby approve and adopt
this Agreement as a Plan of Reorganization and do mutually covenant and agree as
follows:
I. MERGERS
1.1 Pima Realty Merger. On the Effective Date (as defined in
Section 1.3 hereof), Pima Realty shall be merged with and into Heritage, which
shall be the surviving corporation, pursuant to the Agreement and Plan of Merger
attached as Exhibit "1" hereto (the "Pima Realty Plan of Merger"). On or before
the Closing Date (as defined in Section 8.1 of that certain Master Combination
and Contribution Agreement among the Winton Parties, the REIT Parties, and the
Management Parties to which this Merger Agreement is attached as Exhibit "2"
<PAGE>
hereto and referred to herein as the "Master Combination and Contribution
Agreement"), ASR shall cause the Pima Realty Plan of Merger to be filed with the
Arizona Corporation Commission.
(a) Effect of the Pima Realty Merger. Upon the Pima
Realty Merger becoming effective, the separate existence of Pima Realty shall
cease, and Heritage shall succeed to and possess all the properties, rights,
privileges, powers, franchises, and immunities, of a public as well as of a
private nature, and be subject to all the debts, liabilities, obligations,
restrictions, disabilities, and duties of Pima Realty, all without further act
or deed, as provided by law.
(b) Name of Heritage. On the Effective Date, the name
of Heritage shall remain "Heritage Residential Group, Inc."
(c) Articles of Incorporation and Bylaws. The
Articles of Incorporation and the Bylaws of Heritage as in effect on the
Effective Date shall be, from and after the Effective Date, the Articles of
Incorporation and Bylaws of Heritage until they are amended.
(d) Status and Conversion of Securities.
(i) Conversion of Pima Realty Stock into ASR
Stock. Upon the Pima Realty Merger becoming effective, all of the outstanding
shares of Pima Realty Common Stock, par value $.01 per share ("Pima Realty
Common Stock"), issued and outstanding on the Effective Date, by reason of the
Pima Realty Merger and without any action on the part of the holders thereof,
shall be converted into an aggregate of $26,560 in shares of ASR Common Stock,
par value $.01 per share ("ASR Common Stock"). Any shares of Pima Realty Common
Stock held in the treasury of Pima Realty shall be cancelled and all rights with
respect thereto shall cease to exist and no cash or securities or other property
shall be issued in respect thereof. As used herein, the term "Exchange Ratio"
shall mean the average of the closing price of ASR Common Stock on the American
Stock Exchange for the 10 trading days immediately preceding the announcement of
the transactions contemplated by the Master Combination and Contribution
Agreement.
(ii) Common Stock of Heritage. All
authorized shares of Heritage Common Stock, par value $.01 per share ("Heritage
Common Stock"), whether issued or unissued, outstanding or reacquired, shall
continue unchanged as shares of Common Stock of Heritage.
(e) ASR to Make Shares Available. At the Closing (as
defined in the Combination Agreement), ASR shall deliver to each of Grove,
Parise, and Chan a certificate, registered in the name of each of Grove, Parise,
and Chan, respectively, for $532,000 in duly authorized, validly issued, and
non-assessable shares of ASR Common Stock and Grove, Chan, and Parise shall
deliver to ASR certificates representing all of the issued and outstanding
shares of Pima Realty duly endorsed for transfer to ASR. Such certificates shall
bear a legend to the effect that the shares of ASR Common Stock have not been
registered under the Securities Act or state securities laws, and that transfers
may be made only in accordance with such laws.
(f) Information Respecting Pima Realty. Pima Realty
shall furnish to ASR for inclusion in (a) the proxy statement to be filed by ASR
in connection with soliciting the approval by its stockholders of the
transactions contemplated by the Master Combination and Contribution Agreement,
including, the Property Management Mergers (the "Proxy Statement"), (b) the
private offering memorandum (the "Private Offering Memorandum") to be prepared
by ASR for shares of ASR Common Stock to be offered in the Property Management
Mergers and the exchange offer (the "Exchange Offer") for limited partnership
interests in various limited partnerships in which Winton is the general partner
(the "Transferors"), and the offer of limited partnership interests ("LP Units")
in Heritage Communities LP, a Delaware limited partnership, for the assets of
the Transferors (the "Asset Transfer"), as contemplated by the Master
Combination and Contribution Agreement, and (c) the registration statement (the
"Registration Statement") to be filed by ASR for the resale of the ASR stock to
be issued
2
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in the Property Management Mergers and the Exchange Offer or upon the conversion
of the LP Units, as contemplated by the Master Combination and Contribution
Agreement, such information about Pima Realty as ASR may reasonably request to
enable ASR to prepare the Private Offering Memorandum and to prepare and file
the Proxy Statement and the Registration Statement or amendments thereto with
the Securities and Exchange Commission (the "SEC") and to cause the Registration
Statement to be declared effective and the Proxy Statement to be cleared by the
SEC. Pima Realty and the Pima Shareholders jointly and severally represent and
warrant that the information so supplied, as it may be revised from time to time
by Pima Realty, will not contain any statement which, as of the time of the
Proxy Statement or Registration Statement is filed with the SEC, the Private
Offering Memorandum is distributed, or the Registration Statement is declared
effective and the Proxy Statement is cleared by the SEC, and which in the light
of the circumstances under which it is made, is false or misleading with respect
to any material fact, or which omits to state any material fact required to be
stated therein or necessary in order to make the statement therein not false or
misleading.
(g) Further Documents. From time to time, on and
after the Effective Date, Heritage, ASR, and their respective successors or
assigns, and their officers and directors shall have the right, for and on
behalf and in the name of Pima Realty or otherwise, to execute and deliver all
such deeds, bills of sale, assignments, and other instruments and to take or
cause to be taken such further or other actions as Heritage, ASR, or their
respective successors or assigns may deem necessary or desirable in order to
confirm of record or otherwise to Heritage title to and possession of all of the
properties, rights, privileges, powers, franchises, and immunities of Pima
Realty and otherwise to carry out fully the provisions and purposes of this
Agreement.
1.2 Pima Mortgage Merger. On the Effective Date (as defined in
Section 1.3 hereof), each of the Pima Mortgage Partners shall be merged with and
into Heritage, which shall be the surviving corporation, pursuant to the
Agreement and Plan of Merger attached as Exhibit "3" hereto (the "Pima Mortgage
Plan of Merger"). On or before the Closing Date (as defined in Section 8.1 of
the Master Combination and Contribution Agreement), ASR shall cause the Pima
Mortgage Plan of Merger to be filed with the Arizona Corporation Commission.
(a) Effect of the Pima Mortgage Merger. Upon the Pima
Mortgage Merger becoming effective, the separate existences of each of the Pima
Mortgage Partners shall cease, and Heritage shall succeed to and possess all the
properties, rights, privileges, powers, franchises, and immunities, of a public
as well as of a private nature, and be subject to all the debts, liabilities,
obligations, restrictions, disabilities, and duties of each of the Pima Mortgage
Partners, all without further act or deed.
(b) Name of Heritage. On the Effective Date, the name
of Heritage shall remain "Heritage Residential Group, Inc."
(c) Articles of Incorporation and Bylaws. The
Articles of Incorporation and the Bylaws of Heritage as in effect on the
Effective Date shall be, from and after the Effective Date, the Articles of
Incorporation and Bylaws of Heritage until they are amended.
(d) Status and Conversion of Securities.
(i) Conversion of Stock of the Pima Mortgage
Partners into ASR Stock. Upon the Pima Mortgage Merger becoming effective, all
of the outstanding shares of Common Stock of each of the Pima Mortgage Partners
(collectively referred to as the "Pima Mortgage Partners Common Stock") issued
and outstanding on the Effective Date, by reason of the Pima Mortgage Merger and
without any action on the part of the holders thereof, shall be converted into
an aggregate of 235,440 shares of ASR Common Stock. Any shares of each of the
Pima Mortgage Partners Common Stock owned by ASR or held in the respective
treasuries of each of the Pima Mortgage Partners shall be cancelled and all
rights in respect thereof shall cease to exist and no cash or securities or
other property shall be issued in respect thereof.
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(ii) Common Stock of Heritage. All
authorized shares of Heritage Common Stock, whether issued or unissued,
outstanding or reacquired, shall continue unchanged as shares of Common Stock of
Heritage.
(e) ASR to Make Shares Available. At the Closing (as
defined in the Master Combination and Contribution Agreement), ASR shall deliver
to each of Grove, Parise, and Chan, registered in the name of each of Grove,
Parise, and Chan, respectively, for $4,718,000 in duly authorized, validly
issued, and non-assessable shares of ASR Common Stock and Grove, Parise, and
Chan shall deliver to ASR certificates representing all of the issued and
outstanding shares of each of the Pima Mortgage Partners duly endorsed for
transfer to ASR. Such certificates shall bear a legend to the effect that the
shares of ASR Common Stock have not been registered under the Securities Act or
state securities laws, and that transfers may be made only in accordance with
such laws.
(f) Information Respecting the Pima Mortgage Partners
and Pima Mortgage. Each of the Pima Mortgage Partners and Pima Mortgage shall
furnish to ASR for inclusion in the Proxy Statement, the Private Offering
Memorandum, and the Registration Statement or amendments thereto such
information about the Pima Mortgage Partners and Pima Mortgage as ASR may
reasonably request to enable ASR to prepare the Private Offering Memorandum and
to prepare and file the Proxy Statement and the Registration Statement or
amendments thereto with the SEC and to cause the Registration Statement to be
declared effective and the Proxy Statement to be cleared by the SEC. The Pima
Shareholders, the Pima Mortgage Partners, and Pima Mortgage jointly and
severally represent and warrant that the information so supplied, as it may be
revised from time to time by the Pima Shareholders, the Pima Mortgage Partners,
and Pima Mortgage, will not contain any statement which, as of the time the
Proxy Statement or Registration Statement is filed with the SEC, the Private
Offering Memorandum is distributed, or the Registration Statement is declared
effective and the Proxy Statement is cleared by the SEC, and which in the light
of the circumstances under which it is made, is false or misleading with respect
to any material fact, or which omits to state any material fact required to be
stated therein or necessary in order to make the statements therein not false or
misleading.
(g) Further Documents. From time to time, on and
after the Effective Date, Heritage, ASR, and their respective successors or
assigns, and their officers and directors shall have the right, for and on
behalf and in the name of each Pima Mortgage Partner or Pima Mortgage or
otherwise, to execute and deliver all such deeds, bills of sale, assignments,
and other instruments and to take or cause to be taken such further or other
actions as Heritage, ASR, or their respective successors or assigns may deem
necessary or desirable in order to confirm of record or otherwise to Heritage
title to and possession of all of the properties, rights, privileges, powers,
franchises, and immunities of each of the Pima Mortgage Partners and Pima
Mortgage and otherwise to carry out fully the provisions and purposes of this
Agreement.
1.3 Effective Date. The Pima Realty Merger and the Pima
Mortgage Merger shall become effective when the Pima Realty Plan of Merger and
the Pima Mortgage Plan of Merger have been filed with and approved as required
by the Arizona Corporation Commission, which the parties contemplated to be the
Closing Date (as defined in the Master Combination and Contribution Agreement).
II. SHAREHOLDER APPROVALS; PROXY AND REGISTRATION FILINGS
2.1 Shareholder/Partner Approvals. Meetings of the
shareholders of each of the Pima Mortgage Partners, ASR, and Pima Realty shall
be held in accordance with the laws of their respective states of incorporation,
on or before the Closing Date as specified in the Master Combination and
Contribution Agreement in the case of ASR and on the Commitment Date (as defined
in the Master Combination and Contribution Agreement) in connection with the
transactions contemplated by the Master Combination and Contribution Agreement
in the case of each of the Pima Mortgage Partners and Pima Realty, in each case,
among other things, to consider and act upon the adoption of this Agreement
(except, in all cases in lieu of meetings, the adoption of
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this Agreement may be consented to in writing by the shareholders of each of the
Pima Mortgage Partners, Heritage, and Pima Realty on or before those dates).
ASR, as the sole stockholder of Heritage, votes for, adopts, and consents to the
Merger Agreement and each of the Mergers.
2.2 Proxy and Registration Statements.
(a) Preparation of Private Offering Memorandum. ASR
shall prepare the Private Offering Memorandum to be used in connection with the
Property Management Mergers, the Exchange Offer, and the Asset Transfer as
contemplated by the Master Combination and Contribution Agreement.
(b) Preparation of Proxy Statement. ASR shall prepare
and file with the SEC the Proxy Statement and related proxy material to be used
in connection with the meeting of the stockholders of ASR referred to in Section
2.1 as contemplated by the Master Combination and Contribution Agreement.
(c) Preparation of Registration Statement. ASR shall
prepare the Registration Statement, including a form of prospectus, and one or
more amendments thereto, on Form S-3 or other appropriate form covering the
resale of shares of ASR Common Stock into which the outstanding shares of the
Pima Realty Common Stock and each of the Pima Mortgage Partners Common Stock are
to be converted as set forth in Sections 1.1(d) and 1.2(d) of this Agreement and
shall use its best efforts to cause the Registration Statement to become
effective, or as soon as practicable after the Effective Date and to remain
effective during the period and subject to the limitations set forth in the
Registration Agreement applicable to the Exchange Offer. ASR shall deliver to
Pima Realty and each of the Pima Mortgage Partners copies of the Registration
Statement and each amendment thereto filed or proposed to be filed (and of each
related preliminary prospectus). ASR shall advise Pima Realty and each of the
Pima Mortgage Partners and shall confirm in writing (i) when the Registration
Statement or any post-effective amendment thereto shall have become effective
and when any amendment of or supplement to the Prospectus is filed with the
Commission, (ii) when the SEC shall make a request or suggestion for any
amendment or supplement to the Registration Statement or the Prospectus or for
additional information and the nature and substance thereof, and (iii) of the
issuance by the SEC of a stop order suspending the effectiveness of the
Registration Statement, and shall use its best efforts to prevent the issuance
of a stop order and, if such order shall be issued, to obtain the withdrawal
thereof at the earliest possible time. ASR represents and warrants to Pima
Realty and each of the Pima Mortgage Partners that the Registration Statement
and the Prospectus and any other amendments and supplements thereto, will, when
they become effective or are first used, conform in all material respects to the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations thereunder, and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that ASR makes no representation or warranty as to statements
or omissions therein relating to Pima Realty, Pima Mortgage, or any of the Pima
Mortgage Partners. Notwithstanding the foregoing, ASR may utilize for purposes
of this Section a Registration Statement including other shares or securities of
ASR as long as the shares of ASR Common Stock to be registered as provided in
this Section may be included in such Registration Statement without any
restrictions or cutbacks.
(d) Amendments to Private Offering Memorandum, Proxy
Statement, and Registration Statement. If it shall be necessary at any time to
amend or supplement the Private Offering Memorandum, the Proxy Statement, or the
Registration Statement to correct any statement or omission with respect to any
party to the Pima Realty Merger or Pima Mortgage Merger in order to comply with
any applicable legal requirements, the party to which the change applies shall
supply the necessary information to the others. To the extent necessary to
comply with applicable legal requirements, ASR shall amend or supplement the
Private Offering Memorandum, the Proxy Statement, and the Registration
Statement.
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III. REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Pima Realty, Pima
Mortgage, the Pima Mortgage Partners, and the Pima Shareholders. Except as
otherwise set forth in the Disclosure Schedule heretofore delivered to ASR by
Pima Realty (the "Pima Realty Disclosure Schedule"); the Disclosure Schedule
heretofore delivered to ASR by JG Mortgage (the "JG Mortgage Disclosure
Schedule"); the Disclosure Schedule heretofore delivered to ASR by JC Mortgage
(the "JC Mortgage Disclosure Schedule"); or the Disclosure Schedule heretofore
delivered to ASR by FP Mortgage (the "FP Mortgage Disclosure Schedule"); (i)
each of the Pima Shareholders, the Pima Mortgage Partners, and Pima Mortgage
jointly and severally represents and warrants to ASR and Heritage with respect
to Pima Mortgage; (ii) each Pima Shareholder represents and warrants to ASR and
Heritage with respect only to that Pima Mortgage Partner of which such Pima
Shareholder owns shares, and (iii) each of the Pima Shareholders and Pima Realty
jointly and severally represents and warrants to ASR and Heritage with respect
to Pima Realty as follows:
(a) Due Incorporation, Good Standing, and
Qualification. Each of Pima Realty and the Pima Mortgage Partners is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation with the requisite corporate power and
authority to own, operate, and lease its property and to carry on its business
as now being conducted. Neither Pima Realty nor any of the Pima Mortgage
Partners is subject to any material disability by reason of the failure to be
duly qualified as a foreign corporation for the transaction of business or to be
in good standing under the laws of any jurisdiction. Each of Pima Realty and the
Pima Mortgage Partners has heretofore delivered to Heritage a list setting
forth, as of the date of this Agreement, each jurisdiction in which each of Pima
Realty and the Pima Mortgage Partners is qualified to do business. Pima Mortgage
is a limited partnership duly organized, validly existing, and in good standing
under the laws of the state of Arizona with all requisite power and authority to
own, operate, and lease its property and to carry on its business as now being
conducted.
(b) Corporate Authority. Each of Pima Realty and the
Pima Mortgage Partners has the corporate power and authority to enter into this
Agreement and (subject to the requisite approval of the Pima Shareholders with
respect to Pima Realty and each Pima Shareholder with respect to the Pima
Mortgage Partner of which such Pima Shareholder is the sole shareholder) to
carry out the transactions contemplated hereby. The Boards of Directors of Pima
Realty and each of the Pima Mortgage Partners have duly authorized the
execution, delivery, and performance of this Agreement.
(c) Capital Stock.
(i) Pima Realty. As of the date hereof, Pima
Realty has an authorized capital stock consisting of 1,000,000 shares of Serial
Preferred Stock, $0.01 par value, of which none has been issued and outstanding,
and 1,000,000 shares of Pima Realty Common Stock of which 3,000 shares are
issued and outstanding. As of such date, no shares of Pima Realty Common Stock
are held in treasury. All of the issued and outstanding shares of capital stock
of Pima Realty have been validly authorized and issued and are fully paid and
nonassessable.
(ii) JG Mortgage. As of the date hereof, JG
Mortgage has an authorized capital stock consisting of 100,000 shares of Common
Stock, $.01 par value, of which 1,000 shares are issued and outstanding. As of
such date, no shares of JG Mortgage Common Stock are reserved for issuance upon
the exercise of outstanding JG Mortgage Stock Options. All of the issued and
outstanding shares of capital stock of JG Mortgage have been validly authorized
and issued and are fully paid and nonassessable.
(iii) JC Mortgage. As of the date hereof, JC
Mortgage has an authorized capital stock consisting of 1,000 shares of Common
Stock, $.01 par value, of which 1,000 shares are issued and outstanding. As of
such date, no shares of JC Mortgage Common Stock are reserved for issuance upon
the exercise
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of outstanding JC Mortgage Stock Options. All of the issued and outstanding
shares of capital stock of JC Mortgage have been validly authorized and issued
and are fully paid and nonassessable.
(iv) FP Mortgage. As of the date hereof, FP
Mortgage has an authorized capital stock consisting of 100,000 shares of Common
Stock, $.01 par value, of which 1,000 shares are issued and outstanding. As of
such date, no shares of FP Mortgage Common Stock are reserved for issuance upon
the exercise of outstanding FP Mortgage Stock Options. All of the issued and
outstanding shares of capital stock of FP Mortgage have been validly authorized
and issued and are fully paid and nonassessable.
(d) Options, Warrants and Rights. Neither Pima Realty
nor any of the Pima Mortgage Partners has outstanding any options, warrants, or
other rights to purchase, or convert any obligation into, any shares of its
capital stock, other than those referred to in Section 3.1(c).
(e) Subsidiaries. Pima Realty does not have any
subsidiaries. None of the Pima Mortgage Partners has subsidiaries other than
each Pima Mortgage Partner's general partner interest and limited partner
interest in Pima Mortgage.
(f) Financial Statements.
(i) Pima Realty. The Balance Sheet of Pima
Realty as of September 30, 1996, and the Statement of Income of Pima Realty for
the nine months ended September 30, 1996, have been prepared in accordance with
generally accepted accounting principles that were applied on a consistent
basis, are correct and complete, and fairly and accurately present the financial
position and results of operations of Pima Realty as of their respective date
and for the period indicated. Pima Realty does not have any material liabilities
or obligations of a type that would be included in a balance sheet prepared in
accordance with generally accepted accounting principles, whether related to tax
or non-tax matters, accrued or contingent, due or not yet due, liquidated or
unliquidated, or otherwise except as and to the extent disclosed or reflected in
the Balance Sheet of Pima Realty as of September 30, 1996, or incurred since
September 30, 1996 in the ordinary course of business.
(ii) Pima Mortgage. The Balance Sheet of
Pima Mortgage as of September 30, 1996, and the Statement of Income of Pima
Mortgage for the nine months ended September 30, 1996 have been prepared in
accordance with generally accepted accounting principles that were applied on a
consistent basis, are correct and complete and fairly and accurately present the
financial position and results of operations of Pima Mortgage as of their
respective date and for the period indicated. Pima Mortgage does not have any
material liabilities or obligations of a type that would be included in a
balance sheet prepared in accordance with generally accepted accounting
principles, whether related to tax or non-tax matters, accrued or contingent,
due or not yet due, liquidated or unliquidated, or otherwise except as and to
the extent disclosed or reflected in the Balance Sheet of Pima Mortgage as of
September 30, 1996, or incurred since September 30, 1996 in the ordinary course
of business.
(g) No Material Change. Except for distribution of
assets to owners, there has not been and there is not threatened (i) any
material change in the financial condition, business, properties, assets, or
results of operations of Pima Realty, Pima Mortgage, or any of the Pima Mortgage
Partners, (ii) any loss or damage (whether or not covered by insurance) to any
of the assets or properties of Pima Realty, Pima Mortgage, or any of the Pima
Mortgage Partners that materially affects or impairs their ability to conduct
their respective businesses, (iii) any event or condition of any character that
has materially and adversely affected the business or prospects (financial or
otherwise) of Pima Realty, Pima Mortgage, or any of the Pima Mortgage Partners,
or (iv) any mortgage or pledge of any material amount of the assets or
properties of Pima Realty, Pima Mortgage, or any of the Pima Mortgage Partners
or any indebtedness incurred by Pima Realty, Pima Mortgage, or any of the Pima
Mortgage Partners other than indebtedness, not material in the aggregate,
incurred in the ordinary course of business.
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(h) Title to Properties. Each of Pima Realty, Pima
Mortgage, and the Pima Mortgage Partners has good and marketable title to all of
its real and personal properties, including all properties reflected in its most
recent Balance Sheet or acquired subsequent to its most recent Balance Sheet
(except properties disposed of subsequent to that date in the ordinary course of
business or properties relating to discontinued operations). Such assets and
properties are not subject to any mortgage, pledge, lien, claim, encumbrance,
charge, security interest, or title retention or other security arrangement,
except for liens for the payment of federal, state, and other taxes, the payment
of which is neither delinquent nor subject to penalties, and except for other
liens and encumbrances incidental to the conduct of the business of Pima Realty,
Pima Mortgage, or the Pima Mortgage Partners or the ownership of their
respective assets or properties, which were not incurred in connection with the
borrowing of money or the obtaining of advances and which do not in the
aggregate materially detract from the value of the assets or properties of Pima
Realty, Pima Mortgage, or the Pima Mortgage Partners or materially impair the
use thereof in the operation of their respective businesses. All leases pursuant
to which any of Pima Realty, Pima Mortgage, or the Pima Mortgage Partners lease
any substantial amount of real or personal property are valid and effective in
accordance with their respective terms.
(i) Litigation. There are no actions, suits,
proceedings, or other litigation pending or, to the knowledge of Pima Realty,
Pima Mortgage, or the Pima Mortgage Partners, threatened against or affecting
any of Pima Realty, Pima Mortgage, or the Pima Mortgage Partners at law or in
equity, or before or by any federal, state, municipal, or other governmental
department, commission, board, bureau, agency, or instrumentality which, if
determined adversely to any of Pima Realty, Pima Mortgage, or the Pima Mortgage
Partners, would individually or in the aggregate have a material adverse effect
on the business, assets, properties, operations, or prospects or on the
condition, financial or otherwise, of any of Pima Realty, Pima Mortgage, or the
Pima Mortgage Partners, except for those actions, suits, proceedings, or other
pending litigation that are covered in full by insurance held by Pima Realty,
Pima Mortgage, or the Pima Mortgage Partners.
(j) Rights and Licenses. None of Pima Realty, Pima
Mortgage, or the Pima Mortgage Partners is subject to any material disability or
liability by reason of its failure to possess any trademark, trademark right,
trade name, trade name right, or license.
(k) No Violation. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
violate or result in a breach by any of Pima Realty, Pima Mortgage, or the Pima
Mortgage Partners of, or constitute a default under, or conflict with, or cause
any acceleration of any obligation with respect to (i) any provision or
restriction of any charter, bylaw, loan, indenture, or mortgage of any of Pima
Realty, Pima Mortgage, or the Pima Mortgage Partners, or (ii) any provision or
restriction of any lien, lease agreement, contract, instrument, order, judgment,
award, decree, ordinance, or regulation or any other restriction of any kind or
character to which any assets or properties of any of Pima Realty, Pima
Mortgage, or the Pima Mortgage Partners are subject or by which any of Pima
Realty, Pima Mortgage, or the Pima Mortgage Partners are bound.
(l) Taxes. Each of Pima Realty, Pima Mortgage, and
the Pima Mortgage Partners has filed all federal, state, foreign, local, and any
other applicable tax returns and reports required to be filed and has paid in
full all taxes and assessments shown due thereon (together with all interest,
penalties, assessments, and deficiencies assessed in connection therewith due
through the date hereof). Such tax returns and reports are correct in all
material respects. Federal tax returns of Pima Realty, Pima Mortgage, and each
of the Pima Mortgage Partners have not been audited by the Internal Revenue
Service.
(m) Accounts Receivable. The accounts receivable of
each of Pima Realty, Pima Mortgage, and the Pima Mortgage Partners have been
acquired in the ordinary course of business, are valid and enforceable, and are
fully collectible, subject to no known defenses, set-offs, or counterclaims,
except to the extent of the reserve reflected in the books of Pima Realty, Pima
Mortgage, or any of the Pima Mortgage Partners or in such other amount that is
not material in the aggregate.
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(n) Contracts. Except as set forth in the Pima Realty
Disclosure Schedule, the JG Mortgage Disclosure Schedule, the JC Mortgage
Disclosure Schedule, and the FP Disclosure Schedule, none of Pima Realty, Pima
Mortgage, or the Pima Mortgage Partners is a party to (i) any plan or contract
providing for bonuses, pensions, options, stock purchases, deferred
compensation, retirement payments, or profit sharing, (ii) any collective
bargaining or other contract or agreement with any labor union, (iii) any lease,
installment purchase agreement, or other contract with respect to any real or
personal property used or proposed to be used in its operations, except, in each
case, items included within aggregate amounts disclosed in the September 30,
1996 Balance Sheet of Pima Realty or Pima Mortgage, (iv) any employment
agreement or other similar arrangement not terminable by it upon 90 days or less
notice without penalty to it, (v) any contract or agreement for the purchase of
any commodity, material, fixed asset, or equipment in excess of $100,000, (vi)
any contract or agreement creating an obligation of $100,000 or more, (vii) any
contract or agreement that by its terms does not terminate or is not terminable
by it without penalty to it within one year after the date hereof, (viii) any
loan agreement, indenture, promissory note, conditional sales agreement, or
other similar type of arrangement, (ix) any material license agreement, or (x)
any contract which may result in a material loss or obligation to it. Each
contract, agreement, and other arrangement to which any of Pima Realty, Pima
Mortgage, or the Pima Mortgage Partners is a party is valid and enforceable in
accordance with its terms; each of Pima Realty, Pima Mortgage, and the Pima
Mortgage Partners and, to the best knowledge of each of Pima Realty, Pima
Mortgage, and the Pima Mortgage Partners, all other parties to each of the
foregoing have performed all obligations required to be performed to date; none
of Pima Realty, Pima Mortgage, or the Pima Mortgage Partners, or, to the best
knowledge of each of Pima Realty, Pima Mortgage, and the Pima Mortgage Partners,
any such other party is in default or in arrears under the terms of any of the
foregoing; and no condition exists or event has occurred which, with the giving
of notice or lapse of time or both, would constitute a default under any of
them.
(o) Compliance with Law and Other Regulations. None
of Pima Realty, Pima Mortgage, or the Pima Mortgage Partners is subject to or
has been threatened with any material fine, penalty, liability, or disability as
the result of its failure to comply with any requirement of any federal, state,
local, or foreign law or regulation (including those relating to the employment
of labor or to environmental matters) or any requirement of any governmental
body or agency having jurisdiction over it, the conduct of its business, the use
of its assets and properties, or any premises occupied by it.
(p) Insurance. Each of Pima Realty, Pima Mortgage,
and the Pima Mortgage Partners maintains in full force and effect insurance
coverage on its assets, properties, premises, operations, and personnel in such
amounts and against such risks and losses as are adequate for the business
engaged in by it.
(q) Minute Books. The minute books of Pima Realty and
each of the Pima Mortgage Partners accurately record all actions taken by their
respective shareholders and directors.
(r) Certain Claims by the Pima Shareholders. Each of
the Pima Shareholders agree that he will not make any claim for indemnification
against ASR or Heritage (whether such claim for indemnification arises out of
the status of each of the Pima Shareholders as an officer, director, employee,
or agent of Pima Realty, any of the Pima Mortgage Partners, or Pima Mortgage or
otherwise) with respect to any cost, judgment, or other damage incurred by any
of the Pima Shareholders as a result of a proceeding brought by ASR or Heritage
(collectively "Damages") to the extent such Damages are finally adjudicated by a
court of competent jurisdiction to have resulted from a breach of this Agreement
by any of the Pima Shareholders.
(s) All Business Assets Transferred. The assets of
Pima Realty, Pima Mortgage, and each of the Pima Mortgage Partners constitute
all of the assets necessary to conduct the business as it has been conducted by
Pima Realty, Pima Mortgage, and each of the Pima Mortgage Partners prior to the
date of this Agreement.
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(t) Accuracy of Statements. Neither this Agreement
nor any statement, list, certificate, or other information furnished or to be
furnished by any of Pima Realty, Pima Mortgage, or the Pima Mortgage Partners to
ASR or Heritage in connection with this Agreement or any of the transactions
contemplated hereby contains or will contain an untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statements contained herein or therein, in light of circumstances in which they
are made, not misleading.
3.2 Pima Shareholders' Securities Representations and
Warranties. Grove, as the sole shareholder of JG Mortgage, Parise, as the sole
shareholder of FP Mortgage, and Chan, as the sole shareholder of JC Mortgage,
represent and warrant to ASR and Heritage as follows:
(a) Acquisition of ASR Common Stock for Grove's,
Parise's, and Chan's Account. Grove, Parise, and Chan will acquire ASR Common
Stock for their own accounts and not with an intent to distribute the ASR Common
Stock in violation of the Securities Act.
(b) Knowledge and Experience in Financial and
Business Matters. Each of Grove, Parise, and Chan has sufficient knowledge and
experience in financial and business matters that each of Grove, Parise, and
Chan is capable of evaluating the merits and risks of the acquisition of ASR
Common Stock, and each of Grove, Parise, and Chan has the ability to bear the
economic risk of acquiring ASR Common Stock.
(c) Available Information. Grove, Parise, and Chan
have been supplied with, or had access to, information to which a reasonable
investor would attach significance in making investment decisions, including,
but not limited to, the Private Offering Memorandum, all publicly available
filings by ASR under the Securities Exchange Act of 1934, and ASR's annual and
quarterly reports to stockholders, any information with respect to ASR's
financial condition, business, and prospects, and any other information Grove,
Parise, or Chan have requested to enable Grove, Parise, or Chan to make the
decision to acquire ASR Common Stock.
(d) Accredited Investor Status. Each of Grove,
Parise, and Chan is an "accredited investor," as such term is defined in
Regulation D promulgated under the Securities Act.
3.3 Representations and Warranties of ASR and Hertage. Except
as otherwise set forth in the ASR Disclosure Schedule heretofore delivered by
ASR to Pima Realty, Pima Mortgage, and each of the Pima Mortgage Partners,
except as disclosed in any document heretofore filed by ASR with the SEC, and
except for intercompany transactions or matters among ASR and/or its
subsidiaries, ASR and Heritage jointly and severally represent and warrant to
Pima Realty, Pima Mortgage, and each of the Pima Mortgage Partners as follows:
(a) Due Incorporation, Good Standing, and
Qualification. ASR and each of its subsidiaries are corporations duly organized,
validly existing, and in good standing under the laws of the jurisdictions of
their incorporation with all requisite corporate power and authority to own,
operate, and lease their properties and to carry on their businesses as now
being conducted. Neither ASR nor any of its subsidiaries is subject to any
material disability by reason of the failure to be duly qualified as a foreign
corporation for the transaction of business or to be in good standing under the
laws of any jurisdiction. ASR has heretofore delivered to Pima Realty, Pima
Mortgage, and each of the Pima Mortgage Partners a list setting forth, as of the
date of this Agreement, each jurisdiction in which ASR and its subsidiaries is
qualified to do business. Heritage is a wholly owned subsidiary of ASR and,
apart from matters arising under this Agreement, has no significant assets,
liabilities, or business, except for its right under this Agreement to obtain
from ASR the shares of ASR Common Stock to be delivered on its behalf to the
Pima Shareholders under this Agreement. (As used in this Agreement with
reference to ASR, the term "subsidiaries" shall include Heritage and all other
direct or indirect subsidiaries of ASR other than Pima Realty, Pima Mortgage, or
the Pima Mortgage Partners. No warranty relating to ASR or the consolidated
financial position of ASR and its subsidiaries taken as a whole shall be deemed
to be breached as a result of any
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circumstances that would constitute a breach of warranty by Pima Realty, Pima
Mortgage, or any of the Pima Mortgage Partners.)
(b) Corporate Authority. ASR and Heritage have the
corporate power and authority (subject to requisite approval of the ASR
Stockholders) to carry out the transactions contemplated hereby. The Special
Committee and the Board of Directors of Heritage have duly authorized the
execution, delivery, and performance of this Agreement.
(c) Capital Stock. As of the date hereof, ASR has an
authorized capital stock consisting of 40,000,000 shares, all of which currently
are classified as Common Stock but may be reclassified as to unissued shares as
new classes or series of stock. As of the date hereof, 3,147,150 shares of
Common Stock are issued and outstanding (exclusive of 160,742 treasury shares).
As of such date, 353,078 shares of ASR Common Stock are reserved for issuance
upon the exercise of outstanding ASR stock options. All of the issued and
outstanding shares of capital stock of ASR and each of its subsidiaries have
been validly authorized and issued and are fully paid and nonassessable.
(d) Options, Warrants and Rights. Neither ASR nor any
of its subsidiaries has outstanding any options, warrants, or other rights to
purchase, or convert any obligation into, any shares of its capital stock, other
than those referred to in Section 3.3(c).
(e) Subsidiaries. ASR has delivered to Pima Realty,
Pima Mortgage, and each of the Pima Mortgage Partners a list setting forth as of
the date of this Agreement (i) the name, jurisdiction of incorporation, and list
of shareholders of each subsidiary of ASR, and (ii) the name and description of
every other person, corporation, partnership, joint venture, or other business
association in which ASR directly or indirectly owns a material interest. The
outstanding shares of capital stock of the subsidiaries of ASR owned by ASR or
any of its subsidiaries are owned free and clear of all claims, liens, charges,
and encumbrances.
(f) Financial Statements. The Consolidated Balance
Sheets of ASR and subsidiaries as of December 31, 1994 and December 31, 1995 and
the Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows
of ASR and subsidiaries for the three years ended December 31, 1995, and all
related schedules and notes to the foregoing, have been certified by Deloitte &
Touche LLP, independent public accountants. All of the foregoing financial
statements have been prepared in accordance with generally accepted accounting
principles, which were applied on a consistent basis, are correct and complete,
and fairly and accurately present the financial position, results of operations,
and changes of financial position of ASR and its consolidated subsidiaries as of
their respective dates and for the periods indicated. Neither ASR nor any of its
subsidiaries have any material liabilities or obligations of a type that would
be included in a balance sheet prepared in accordance with generally accepted
accounting principles, whether related to tax or non-tax matters, accrued or
contingent, due or not yet due, liquidated or unliquidated or otherwise, except
as and to the extent disclosed or reflected in the Consolidated Balance Sheet of
ASR and its consolidated subsidiaries as of June 30, 1996 or incurred since June
30, 1996 in the ordinary course of business.
(g) No Material Change. Since June 30, 1996, there
has not been and there is not threatened (i) any material change in the
financial condition, business, properties, assets, or results of operations of
ASR and its subsidiaries taken as a whole, (ii) any loss or damage (whether or
not covered by insurance) to any of the assets or properties of ASR or its
subsidiaries that materially affects or impairs their ability to conduct their
respective businesses, (iii) any event or condition of any character that has
materially and adversely affected the business or prospects (financial or
otherwise) of ASR and its subsidiaries taken as a whole, or (iv) any mortgage or
pledge of any material amount of the assets or properties of ASR or any of its
subsidiaries, or any indebtedness incurred by ASR or any of its subsidiaries,
other than indebtedness, not material in the aggregate, incurred in the ordinary
course of business.
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(h) Title to Properties. ASR and its subsidiaries
have good and marketable title to all of their respective real and personal
properties, including all properties reflected in ASR's Consolidated Balance
Sheet as of June 30, 1996, or acquired subsequent to June 30, 1996 (except
property disposed of subsequent to that date in the ordinary course of business
or property related to discontinued operations). Such assets and properties are
not subject to any mortgage, pledge, lien, claim, encumbrance, charge, security
interest or title retention, or other security arrangement, except for liens for
the payment of federal, state, and other taxes, the payment of which is neither
delinquent nor subject to penalties, and except for other liens and encumbrances
incidental to the conduct of the business of ASR and its subsidiaries or the
ownership of their assets or properties, which were not incurred in connection
with the borrowing of money or the obtaining of advances and which do not in the
aggregate materially detract from the value of the assets or properties of ASR
and its subsidiaries taken as a whole or materially impair the use thereof in
the operation of their respective businesses, except in each case as disclosed
in ASR's Consolidated Balance Sheet as of June 30, 1996. All leases pursuant to
which ASR or any of its subsidiaries leases any substantial amount of real or
personal property are valid and effective in accordance with their respective
terms.
(i) Litigation. There are no actions, suits,
proceedings, or other litigation pending or, to the knowledge of ASR, threatened
against or affecting ASR or any of its subsidiaries, at law or in equity, or
before or by any federal, state, municipal, or other governmental department,
commission, board, bureau, agency, or instrumentality which, if determined
adversely to ASR or its subsidiaries, would individually or in the aggregate
have a materially adverse effect on the business, assets, properties,
operations, or prospects or on the condition, financial or otherwise, of ASR and
its subsidiaries, taken as a whole.
(j) Rights and Licenses. Neither ASR nor any of its
subsidiaries is subject to any material disability or liability by reason of its
failure to possess any trademark, trademark right, trade name, trade name right,
or license.
(k) No Violation. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
violate or result in a breach by ASR or any of its subsidiaries of, or
constitute a default under, or conflict with, or cause any acceleration of any
obligation with respect to (i) any provision or restriction of any charter,
bylaw, loan, indenture, or mortgage of ASR or any of its subsidiaries, or (ii)
any provision or restriction of any lien, lease agreement, contract, instrument,
order, judgment, award, decree, ordinance, or regulation or any other
restriction of any kind or character to which any assets or properties of ASR or
any of its subsidiaries is subject or by which ASR or any of its subsidiaries is
bound.
(l) Taxes. ASR and its subsidiaries have filed all
federal, state, foreign, local, and any other applicable tax returns and reports
required to be filed and have paid in full or adequately reserved for all taxes
shown due thereon (together with all interest, penalties, assessments, and
deficiencies assessed in connection therewith due through the date hereof). Such
tax returns and reports are correct in all material respects. Federal tax
returns of ASR and its subsidiaries have been audited by the Internal Revenue
Service through the year ended December, 31, 1991, and the results of such
audits are duly reflected in the financial statements described in Section
3.3(f) above.
(m) Accounts Receivable. The accounts receivable of
ASR and its subsidiaries have been acquired in the ordinary course of business,
are valid and enforceable, and are fully collectible, subject to no known
defenses, setoffs, or counterclaims, except to the extent of the reserve
reflected in the books of ASR and its subsidiaries or in such other amount that
is not material in the aggregate.
(n) Contracts. Neither ASR nor any of its
subsidiaries is a party to (i) any plan or contract providing for bonuses,
pensions, options, stock purchases, deferred compensation, retirement payments,
or profit sharing (other than profit sharing or bonus arrangements with officers
and key personnel of subsidiaries), (ii) any collective bargaining or other
contract or agreement with any labor union, (iii) any lease, installment
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purchase agreement, or other contract with respect to any real or personal
property used or proposed to be used in its operations except, in each case,
items included within aggregate amounts disclosed in ASR's June 30, 1996
Consolidated Balance Sheet, (iv) any employment agreement or other similar
arrangement not terminable by it upon 90 days or less notice without penalty to
it, (v) any contract or agreement for the purchase of any commodity, material,
fixed asset, or equipment in excess of $500,000, (vi) any contract or agreement
creating an obligation of $500,000 or more, (vii) any contract or agreement that
by its terms does not terminate or is not terminable by it without penalty to it
within one year after the date hereof, (viii) any loan agreement, indenture,
promissory note, conditional sales agreement, or other similar type of
arrangement, (ix) any material license agreement, or (x) any contract that may
result in a material loss or obligation to it. All contracts, agreements, and
other arrangements to which ASR or any of its subsidiaries is a party are valid
and enforceable in accordance with their terms; ASR, its subsidiaries, and all
other parties to each of the foregoing have performed all obligations required
to be performed to date; neither ASR, nor any of its subsidiaries, nor any such
other party is in default or in arrears under the terms of any of the foregoing;
and no condition exists or event has occurred which, with the giving of notice
or lapse of time or both, would constitute a default under any of them.
(o) Compliance with Law and Other Regulations.
Neither ASR nor any of its subsidiaries is subject to or has been threatened
with any material fine, penalty, or disability as the result of its failure to
comply with any requirements of any federal, state, local, or foreign law or
regulation (including those relating to the employment of labor and to
environmental matters) or any requirement of any governmental body or agency
having jurisdiction over it, the conduct of its business, the use of its assets
and properties, or any premises occupied by it.
(p) Insurance. ASR and each of its subsidiaries
maintains in full force and effect insurance coverage on their assets,
properties, premises, operations, and personnel in such amounts and against such
risks and losses as are adequate and customary for the respective businesses
engaged in by ASR and its subsidiaries.
(q) Minute Books. The minute books of ASR and each of
its subsidiaries accurately record all actions taken by their respective
stockholders and directors.
(r) SEC Reports. ASR's report on Form 10-K for the
year ended December 31, 1995 filed with the SEC and all subsequent reports and
proxy statements filed by ASR thereafter pursuant to Section 13(a) or 14(a) of
the Securities Exchange Act of 1934 do not contain a misstatement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading as of the time the document was
filed. Since the filing of such report on Form 10-K, no other report, proxy
statement, or other document has been required to be filed by ASR pursuant to
Section 13(a) or 14(a) of the Securities Exchange Act of 1934 that has not been
filed.
(s) Accuracy of Statements. Neither this Agreement
nor any statement, list, certificate, or other information furnished or to be
furnished by ASR or Heritage to Pima Realty, Pima Mortgage, or any of the Pima
Mortgage Partners in connection with this Agreement or any of the transactions
contemplated hereby contains or will contain an untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statements contained herein or therein, in light of the circumstances in which
they are made, not misleading.
(t) Status of ASR Common Stock to be Issued. The
shares of ASR Common Stock into which the shares of Pima Realty and the Pima
Mortgage Partners Common Stock will be converted pursuant to this Agreement will
be when issued validly authorized and issued, fully paid, and nonassessable, and
listed for trading on the American Stock Exchange.
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IV. COVENANTS
4.1 Covenants of Pima Realty, Pima Mortgage, the Pima Mortgage
Partners, and the Pima Shareholders. Each of Pima Realty, Pima Mortgage, the
Pima Mortgage Partners, and the Pima Shareholders agrees that, unless ASR
otherwise agrees in writing and except as set forth in the Pima Realty
Disclosure Schedule, the JG Mortgage Disclosure Schedule, the JC Mortgage
Disclosure Schedule, the FP Mortgage Disclosure Schedule, or the Pima Mortgage
Disclosure Schedule, prior to the Effective Date:
(a) Preservation of Business. Each of Pima Realty,
Pima Mortgage, and the Pima Mortgage Partners shall use its best efforts to (i)
preserve intact its present business organization, (ii) preserve its present
goodwill and advantageous relationships with investors and all other persons
having business dealings with it, and (iii) preserve and maintain in force all
its licenses, registrations, franchises, patents, trademarks, copyrights, bonds,
and other similar rights. None of Pima Realty, Pima Mortgage, and the Pima
Mortgage Partners shall enter into any employment agreements with any of its
officers or management personnel, which may not be cancelled by it without
penalty upon notice not exceeding 90 days. Each of Pima Realty, Pima Mortgage,
and the Pima Mortgage Partners shall maintain in force all property, casualty,
fiduciary, directors and officers, and other forms of insurance that it is
presently carrying.
(b) Ordinary Course. Each of Pima Realty, Pima
Mortgage, and the Pima Mortgage Partners shall operate its business only in the
usual, regular, and ordinary course and manner. Without limiting the foregoing,
none of Pima Realty, Pima Mortgage, and the Pima Mortgage Partners shall (i)
encumber or mortgage any property or assets, (ii) incur any obligation
(contingent or otherwise) or purchase or acquire, or transfer or convey, any
material assets or properties, or enter into any transaction or make or enter
into any contract or commitment, except in the ordinary course of business, or
(iii) acquire any stock or other equity interest in any corporation, trust, or
other entity.
(c) Books and Records. Each of Pima Realty, Pima
Mortgage, and the Pima Mortgage Partners shall maintain its books, accounts, and
records in the usual, regular, and ordinary manner and on a basis consistent
with prior years, and shall comply with all laws applicable to it or to the
conduct of its business.
(d) No Organic Change. Except as contemplated in this
Agreement or the Master Combination and Contribution Agreement, neither Pima
Realty nor Pima Mortgage, nor any of the Pima Mortgage Partners shall (i) amend
its Articles of Incorporation or Bylaws, (ii) make any change in its capital
stock by reclassification, subdivision, reorganization, or otherwise, or (iii)
merge or consolidate with any other corporation, trust, or entity or change the
character of its business.
(e) No Issuance by Pima Realty, Pima Mortgage or the
Pima Mortgage Partners of Shares, Options, Partnership Units, or Other
Securities. Neither Pima Realty nor any of the Pima Mortgage Partners shall (i)
issue any shares of capital stock, or (ii) grant any option, warrant, or other
right to purchase or to convert any obligation into shares of its capital stock.
Pima Mortgage shall not issue any general partnership interests or limited
partnership interests.
(f) Compensation. None of Pima Realty, Pima Mortgage,
or the Pima Mortgage Partners shall (i) increase the compensation payable to any
officer or to other management personnel from the amount payable as of June 30,
1996, except in accordance with normal and customary practice, or (ii) introduce
or change any pension or profit sharing plan, or any other employee benefit
arrangement, except as a result of collective bargaining negotiations, except
for insubstantial changes necessary to comply with the minimum requirements of
the Internal Revenue Code of 1986 or the Employee Retirement Income Security Act
of 1974, or except as disclosed in the Pima Realty Disclosure Schedule, the JG
Advisors Disclosure Schedule, the JC Advisors Disclosure Schedule, the FP
Advisors Disclosure Schedule, or the Pima Mortgage Disclosure Schedule.
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(g) Dividends. Neither Pima Realty nor any of the
Pima Mortgage Partners shall declare, make, or pay any dividend or other
distribution with respect to its Common Stock or otherwise or purchase, redeem,
or otherwise acquire any shares of its Common Stock, except that (i)
distributions may be made to Grove of (A) all cash held by JG Mortgage in excess
of the difference between the total current assets of JG Mortgage and the total
current liabilities of JG Mortgage on the Effective Date and (B) all securities
held by the JG Mortgage on the Effective Date, (ii) distributions may be made to
Parise of (A) all cash held by FP Mortgage in excess of the difference between
the total current assets of FP Mortgage and the total current liabilities of FP
Mortgage on the Effective Date and (B) all of the securities held by FP Mortgage
on the Effective Date, (iii) distributions may be made to Chan of (A) all cash
held by JC Mortgage in excess of the difference between the total current assets
of FP Mortgage and the total current liabilities of JC Mortgage on the Effective
Date and (B) all of the securities held by JC Mortgage on the Effective Date,
and (iv) distributions may be made to the Pima Shareholders of (A) all cash held
by Pima Realty in excess of the difference between the total current assets of
Pima Realty and total current liabilities of Pima Realty on the Effective Date
and (B) all of the securities held by Pima Realty on the Effective Date.
(h) Consents and Approvals. Each of Pima Realty, Pima
Mortgage, and the Pima Mortgage Partners shall use its best efforts to obtain
all necessary consents and approvals of other persons and governmental
authorities to the performance by it of the transactions contemplated by this
Agreement. Each of Pima Realty, Pima Mortgage, and the Pima Mortgage Partners
shall make all filings, applications, statements, and reports to all federal and
state government agencies or entities, which are required to be made prior to
the Effective Date by it or on its behalf pursuant to any statute, rule, or
regulation in connection with the transactions contemplated by this Agreement.
4.2 Covenants of ASR. ASR agrees that, unless Pima Realty,
Pima Mortgage and each of the Pima Mortgage Partners otherwise agree in writing
and except as set forth in the ASR Disclosure Schedule, prior to the Effective
Date:
(a) Preservation of Business. ASR shall use its best
efforts to (i) preserve intact the present business organization of ASR and its
subsidiaries, (ii) preserve the present goodwill and advantageous relationships
of ASR and its subsidiaries with investors and all other persons having business
dealings with ASR and its subsidiaries, and (iii) preserve and maintain in force
all licenses, registrations, franchises, patents, trademarks, copyrights, bonds,
and other similar rights of ASR and its subsidiaries. ASR and its subsidiaries
shall not enter into any employment agreements with any of their officers or
management personnel, which may not be cancelled by them without penalty upon
notice not exceeding 90 days. ASR and its subsidiaries shall maintain in force
all property, casualty, fidelity, directors and officers, and other forms of
insurance which they are presently carrying.
(b) Ordinary Course. ASR and its subsidiaries shall
operate their business only in the usual, regular, and ordinary course and
manner. Without limiting the foregoing, neither ASR nor any subsidiary of ASR
shall (i) encumber or mortgage any property or assets, (ii) incur any obligation
(contingent or otherwise) or purchase or acquire, or transfer or convey, any
material assets or properties or enter into any transaction or make or enter
into any contract or commitment, except in the ordinary course of business, or
(iii) acquire any stock or other equity interest in any corporation, trust, or
other entity. Notwithstanding anything herein to the contrary, ASR shall not be
precluded from disposing of any business, including the related assets,
previously identified as being discontinued.
(c) Books and Records. ASR and its subsidiaries shall
maintain their books, accounts, and records in the usual, regular, and ordinary
manner and on a basis consistent with prior years, and shall comply with all
laws applicable to them or to the conduct of their business.
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(d) No Organic Change. Except as contemplated by this
Agreement or the Master Combination and Contribution agreement, neither ASR nor
its subsidiaries shall (i) amend their Articles of Incorporation or Bylaws,
except for those amendments set forth in the Proxy Statement, (ii) make any
change in their capital stock by reclassification, subdivision, reorganization,
or otherwise, or (iii) merge or consolidate with any other corporation, trust,
or entity, or change the character of their business.
(e) No Issuance by ASR of Shares, Option, or Other
Securities. Except as contemplated hereby or by the Master Combination and
Contribution Agreement, neither ASR nor its subsidiaries shall (i) issue any
shares of capital stock (except for the issuance of shares of ASR Common Stock
upon the exercise of outstanding stock options), or (ii) grant any option,
warrant, or other right to purchase or to convert any obligation into shares of
capital stock other than the grant of options covering a maximum of 5,901 shares
under ASR's Stock Option Plan.
(f) Compensation. Except for the payment by ASR of
the greater of one percent (1%) of the purchase price of the Properties (as
defined in the Master Combination and Contribution Agreement) or $800,000 in
cash, deferred compensation, or ASR Common Stock that may be issued to officers
of ASR in connection with their efforts relating to the transactions
contemplated by the Master Combination and Contribution Agreement, neither ASR
nor its subsidiaries shall (i) increase the compensation payable to any elected
officer or to other management personnel from the amount payable as of June 30,
1996 or pay any bonuses to any of such persons or their affiliates, except in
accordance with normal and customary practice, (ii) introduce or change any
pension or profit sharing plan, or any other employee benefit arrangement,
except as a result of collective bargaining negotiations, except for
insubstantial changes necessary to comply with the minimum requirements of the
Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of
1974, or except as disclosed in the ASR Disclosure Schedule, or (iii) increase
the amounts payable under contracts with Pima Realty or Pima Mortgage.
(g) Dividends. ASR shall not declare, make, or pay
any dividend or other distribution with respect to ASR Common Stock or
otherwise, other than regular quarterly cash dividends of $.50 per share, or
purchase, redeem, or otherwise acquire any shares of ASR Common Stock.
(h) Consents and Approvals. ASR shall use its best
efforts to obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by ASR of the transactions
contemplated by this Agreement. ASR shall make all filings, applications,
statements, and reports to all federal and state government agencies and
entities that are required to be made prior to the Effective Date by or on
behalf of ASR or its subsidiaries pursuant to any statute, rule, or regulation
in connection with the transactions contemplated by this Agreement.
V. CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 Conditions Precedent to the Obligations of ASR and
Heritage. The obligations of ASR and Heritage under this Agreement are, at the
option of ASR and Heritage, subject to the satisfaction of the following
conditions on or before the Effective Date:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Pima Realty, Pima Mortgage, each of the Pima
Mortgage Partners, and each of the Pima Shareholders herein contained shall have
been true and correct in all material respects when made and, in addition, shall
be true and correct in all material respects on and as of the Effective Date
with the same force and effect as though made on and as of the Effective Date,
except as affected by transactions contemplated hereby.
(b) Performance of Agreements. Pima Realty, Pima
Mortgage, each of the Pima Mortgage Partners, and each of the Pima Shareholders
shall have in all material respects performed all obligations
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and agreements and complied with all covenants and conditions contained in this
Agreement to be performed and complied with by them on or prior to the Effective
Date.
(c) Corporate Approvals. All necessary action on the
part of the shareholders of Pima Realty and each of the Pima Mortgage Partners
and the general partners of Pima Mortgage adopting this Agreement and approving
the transactions contemplated hereby shall have been taken no later than the
Commitment Date in connection with the transactions contemplated by the Master
Combination and Contribution Agreement.
(d) Opinion of Counsel for Pima Realty and the Pima
Mortgage Partners. ASR shall have received an opinion of O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears, a professional association, dated the
Effective Date, in form and substance satisfactory to ASR, the Special
Committee, and their counsel, to the effect that:
(i) each of Pima Realty and the Pima
Mortgage Partners is a corporation validly existing and in good standing under
the laws of the state of Arizona and has the requisite corporate power and
authority under the laws of such state to own, lease, and operate its
properties, to carry on its business as then being conducted, and to consummate
the transactions contemplated hereby;
(ii) all necessary corporate proceedings of
the Board of Directors and the shareholders of each of Pima Realty and the Pima
Mortgage Partners to approve and adopt this Agreement and to authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly taken;
(iii) each of Pima Realty and the Pima
Mortgage Partners has the corporate power and authority to execute and deliver
this Agreement, and this Agreement has been duly authorized, executed, and
delivered by it and constitutes its legal, valid, and binding obligation;
(iv) such counsel knows of no actions,
suits, or proceedings pending or threatened against Pima Realty, Pima Mortgage,
the Pima Mortgage Partners, or the Pima Shareholders at law or in equity, or
before or by any federal, state, municipal, or other governmental department,
commission, board, bureau, agency, or instrumentality that would result in a
breach of the representation and warranty set forth in Section 3.1(i) of this
Agreement; and
(v) the consummation of the transactions
contemplated hereby will not violate or result in a breach of or constitute a
default by any of Pima Realty, Pima Mortgage, or the Pima Mortgage Partners
under any provision of any indenture, mortgage, lien, lease, agreement,
contract, instrument, order, judgment, decree, award, ordinance, regulation or
any other restriction of any kind or character known to such counsel, to which
any of Pima Realty, Pima Mortgage, the Pima Mortgage Partners, or the Pima
Shareholders is a party or by which any of them is bound.
With respect to the opinions expressed pursuant to clauses
(iv) and (v) above, such opinion may be based upon a certificate or certificates
of an officer or officers of Pima Realty, Pima Mortgage, or the Pima Mortgage
Partners, and such counsel may rely on opinions of other counsel satisfactory to
ASR and its counsel, which opinions are delivered in connection with this
Agreement.
(e) No Material Adverse Change. There shall be no
material adverse change in the business, property, or financial condition of any
of Pima Realty, Pima Mortgage, or the Pima Mortgage Partners.
(f) Litigation. No action or proceeding by any
governmental agency shall have been instituted or threatened that would enjoin,
restrain, or prohibit, or might result in substantial damages in respect of,
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this Agreement or the consummation of the transactions contemplated by this
Agreement and would, in the reasonable judgment of ASR and Heritage, make it
inadvisable to consummate such transactions, and no court order shall have been
entered in any action or proceeding instituted by any other party that enjoins,
restrains, or prohibits this Agreement or consummation of the transactions
contemplated by this Agreement.
(g) Listing on Stock Exchange. All of the shares of
ASR Common Stock to be issued hereunder shall have been authorized for listing,
subject to official notice of issuance, on the American Stock Exchange.
(h) Proceedings Satisfactory to Counsel. All
proceedings taken by Pima Realty, Pima Mortgage, each of the Pima Mortgage
Partners, and the Pima Shareholders and all instruments executed and delivered
by such parties on or prior to the Effective Date in connection with the
transactions herein contemplated shall be satisfactory in form and substance to
counsel for the Special Committee.
(i) Employment Agreements. Each of Grove, Parise, and
Chan shall have each executed an Employment Agreement in substantially the form
of Exhibit 4 hereto.
(j) Receipt of Fairness Opinion; Approval of Special
Committee and ASR Stockholders. The Special Committee shall have received a
favorable fairness opinion from Oppenheimer & Co., Inc. respecting the Pima
Realty Merger and the Pima Mortgage Merger. The Special Committee shall have
approved the Pima Realty Merger and the Pima Mortgage Merger as set forth herein
and the stockholders of ASR shall have approved the transactions contemplated by
the Master Combination and Contribution Agreement (which includes the Pima
Realty Merger and the Pima Mortgage Merger as set forth herein) in accordance
with applicable state law and ASR's Articles of Incorporation and Bylaws.
(k) Approval of ASR Stockholders. The stockholders of
ASR shall have approved the (i) issuance of up to 1,980,000 shares of ASR Common
Stock in connection with the transactions contemplated by the Master Combination
and Contribution Agreement or (ii) the issuance of 262,000 shares of ASR Common
Stock in connection with the Pima Realty Merger and the Pima Mortgage Merger and
the amendment of ASR's Bylaws to exclude the Pima Realty Merger and Pima
Mortgage Merger from the ASR Bylaw provision requiring an appraisal of property
being purchased from an affiliated or related party.
5.2 Conditions Precedent to the Obligations of Pima Realty,
Pima Mortgage, Each of the Pima Mortgage Partners, and the Pima Shareholders.
The obligations of Pima Realty, Pima Mortgage, each of the Pima Mortgage
Partners, and the Pima Shareholders under this Agreement are, at the option of
Pima Realty, Pima Mortgage, each of the Pima Mortgage Partners, and the Pima
Shareholders, subject to the satisfaction of the following conditions on or
before the Effective Date:
(a) Accuracy of Representations and Warranties. The
representations and warranties of ASR and Heritage herein contained shall have
been true and correct in all material respects when made and, in addition, shall
be true and correct in all material respects on and as of the Effective Date
with the same force and effect as though made on and as of the Effective Date,
except as affected by transactions contemplated hereby.
(b) Performance of Agreements. ASR and Heritage shall
have in all material respects performed all obligations and agreements and
complied with all covenants and conditions contained in this Agreement to be
performed and complied with by them on or prior to the Effective Date.
(c) Corporate Approval. All necessary corporation
action on the part of the stockholders of ASR and Heritage to approve the Master
Combination and Contribution Agreement (which includes
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the Pima Realty Merger and the Pima Mortgage Merger as set forth herein) shall
have been taken by the Effective Date.
(d) Opinion of Counsel for ASR. Each of Pima Realty
and the Pima Mortgage Partners shall have received an opinion of O'Connor,
Cavanagh, Anderson, Killingsworth & Beshears, a professional association, dated
the Effective Date, satisfactory in form and substance to each of them, to the
effect that:
(i) ASR and Heritage are corporations duly
organized, validly existing, and in good standing under the laws of the state of
Maryland and the state of Arizona, respectively, and have the corporate power
and authority under the law of the applicable state to own, lease, and operate
their properties, to carry on their businesses as then being conducted, and to
consummate the transactions contemplated hereby;
(ii) all necessary corporate proceedings of
the Boards of Directors and stockholders of ASR and Heritage to authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and validly taken;
(iii) ASR and Heritage have corporate power
and authority to execute and deliver this Agreement, and this Agreement has been
duly authorized, executed, and delivered by them, and constitutes their legal,
valid, and binding obligations;
(iv) such counsel knows of no actions,
suits, or proceedings pending or threatened against ASR or any of its
subsidiaries, including Heritage, at law or in equity, or before or by any
federal, state, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality that would result in a breach of the
representation and warranty set forth in Section 3.3(i) of this Agreement;
(v) the consummation of the transactions
provided for in this Agreement will not violate or result in a breach of or
constitute a default under any provision of any indenture, mortgage, lien,
lease, agreement, contract, instrument, order, judgment, decree, award,
ordinance, regulation, or any other restriction of any kind or character known
to such counsel, to which ASR or Heritage is a party or by which either is
bound;
(vi) the shares of ASR Common Stock to be
issued in accordance with this Agreement are duly authorized and will be, upon
the effectiveness of the mergers provided for in this Agreement, validly issued,
fully paid, non-assessable, and listed for trading on the American Stock
Exchange; and
(vii) the shares of ASR Common Stock
issuable upon exercise of the stock options issued to the Pima Shareholders,
when so issued, will be duly and validly authorized and issued, fully paid,
non-assessable and listed for trading, subject to official notice of issuance on
the American Stock Exchange.
With respect to the opinions expressed pursuant to clauses
(iv) and (v) of this subparagraph, such opinion may be based upon a certificate
or certificates of an officer or officers of ASR or its subsidiaries, including
Heritage, and such counsel may rely on opinions of other counsel satisfactory to
Pima Realty and Pima Mortgage, which opinions are delivered in connection with
this Agreement.
(e) No Material Adverse Change. There shall be no
material adverse change in the business, properties, or financial condition of
ASR or Heritage.
(f) Litigation. No action or proceeding by any
governmental agency shall have been instituted or threatened that would enjoin,
restrain, or prohibit, or might result in substantial damages in respect of,
this Agreement or the consummation of the transactions contemplated by this
Agreement and would, in the
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reasonable judgment of Pima Realty, the Pima Mortgage Partners, or the Pima
Shareholders make it inadvisable to consummate such transactions, and no court
order shall have been entered in any action or proceeding instituted by any
other party that enjoins, restrains, or prohibits this Agreement or consummation
of the transactions contemplated by this Agreement.
(g) Listing on Stock Exchange. All of the shares of
ASR Common Stock to be issued hereunder shall have been authorized for listing,
subject to official notice of issuance, on the American Stock Exchange.
(h) Proceedings Satisfactory to Counsel. All
proceedings taken by ASR and Heritage and all instruments executed and delivered
by ASR and Heritage on or prior to the Effective Date in connection with the
transactions herein contemplated shall be satisfactory in form and substance to
counsel for Pima Realty and the Pima Mortgage Partners.
VI. WAIVER, MODIFICATION, ABANDONMENT
6.1 Waivers. The failure of any of Pima Realty, Pima Mortgage,
the Pima Mortgage Partners, or the Pima Shareholders to comply with any of its
or their obligations, agreements, or conditions as set forth herein may be
waived expressly in writing by ASR and Heritage, by action of their respective
Boards of Directors without the requirement for a vote of their stockholders.
The failure of ASR and Heritage to comply with any of their obligations,
agreements, or conditions as set forth herein may be waived expressly in writing
by either Pima Realty or the Pima Mortgage Partners without the vote of their
shareholders.
6.2 Modification. This Agreement may be modified at any time
in any respect by the mutual consent of all of the parties, notwithstanding
prior approval by the shareholders. Any such modification may be approved for
any party by its Board of Directors, without further shareholder approval,
except that the number of shares of ASR Common Stock to be issued in exchange
for the shares of Pima Realty and the Pima Mortgage Partners Common Stock may
not be increased without the consent of ASR's stockholders and may not be
decreased without the consent of the Pima Shareholders given, in each case, by
the same vote as is required under applicable state law for approval of this
Agreement.
6.3 Abandonment. The Pima Realty Merger and the Pima Mortgage
Merger may be abandoned on or before the Effective Date, notwithstanding
adoption of this Agreement by the shareholders of the parties hereto:
(a) By the mutual agreement of the Boards of
Directors of ASR, Heritage, Pima Realty, and the Pima Mortgage Partners;
(b) By the Boards of Directors of ASR or Heritage, if
any of the conditions provided in Section 5.1 shall not have been satisfied,
complied with, or performed in any material respect, and ASR and Heritage shall
not have waived such failure of satisfaction, noncompliance, or nonperformance;
(c) By the Pima Shareholders, if any of the
conditions provided in Section 5.2 shall not have been satisfied, complied with,
or performed in any material respect, and the Pima Shareholders shall not have
waived such failure of satisfaction, noncompliance, or nonperformance;
(d) By Pima Realty, the Pima Mortgage Partners, or
ASR if any of (i) the Pima Shareholders, as the sole shareholders of Pima
Realty, (ii) Grove, as the sole shareholder of JG Mortgage, (iii) Chan, as the
sole shareholder of JC Mortgage, or (iv) Parise, as the sole shareholder of FP
Mortgage, has not adopted this Agreement on or prior to the Commitment Date;
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(e) By Pima Realty, the Pima Mortgage Partners, or
ASR if the stockholders of ASR do not vote to approve the (i) issuance of up to
1,980,000 shares of ASR Common Stock in connection with the transactions
contemplated by the Master Combination and Contribution Agreement or (ii) the
issuance of 262,000 shares of ASR Common Stock in connection with the Pima
Realty Merger and the Pima Mortgage Merger and the amendment of ASR's Bylaws to
exclude the Pima Realty Merger and the Pima Mortgage Merger from the ASR Bylaw
provision requiring an appraisal of property being purchased from an affiliated
or related party; or
(f) At the option of ASR, Heritage, and the Pima
Shareholders, if there shall have been instituted and be pending or threatened
any legal proceeding before any court or governmental agency seeking to restrain
or prohibit or to obtain damages in respect of this Agreement or the
consummation of any of the transactions contemplated by this Agreement, or if
any order restraining or prohibiting any of the transactions shall have been
issued by any court or governmental agency and shall be in effect.
In the event of any termination pursuant to this Section 6.3
(other than pursuant to subparagraph (a) hereof) written notice setting forth
the reasons thereof shall forthwith be given by the terminating party to all
other parties. This Agreement shall terminate automatically if the Effective
Date shall not have occurred on or before the Closing Date as specified in the
Master Combination and Contribution Agreement, or such later date as shall have
been agreed to by the parties hereto under Section 6.2.
6.4 Effect of Abandonment. If the Pima Realty Merger or the
Pima Mortgage Merger is abandoned as provided for in this Section, (a) this
Agreement shall forthwith become wholly void and of no effect without liability
to any party to this Agreement or to the directors, officers, stockholders,
representatives, and agents of any such party, and (b) ASR, Pima Realty, and the
Pima Mortgage Partners shall each pay their own fees and expenses incident to
the negotiation, preparation, and execution of this Agreement and the obtaining
of the necessary approvals thereof, including fees and expenses of its counsel,
accountants, investment bankers, and other experts.
6.5 Closing. The consummation of the transactions contemplated
hereby shall occur at the same place and at the same time as the closing of the
Master Combination and Contribution Agreement; provided, however, if the
issuance of shares of ASR Common Stock in connection with the transactions
contemplated by the Master Combination and Contribution Agreement other than the
Pima Realty Merger and the Pima Mortgage Merger does not receive the approval of
the ASR stockholders, the consummation of the transactions contemplated hereby
shall occur as soon as practicable following the date upon which the issuance of
shares of ASR Common Stock in connection with the Pima Realty Merger and the
Pima Mortgage Merger and the amendment of ASR's Bylaws to exclude the Pima
Realty Merger and the Pima Mortgage Merger from the ASR Bylaw provision
requiring an appraisal of propoerty being purchased from an affiliated or
related party is approved by the ASR stockholders. At the Closing, Heritage
shall file the certificates of mergers under the laws of Arizona. In addition,
the following deliveries shall be made:
(a) Deliveries by ASR and Heritage. At the Closing,
ASR and Heritage shall deliver the following to each of Grove, Chan, and Parise,
collectively as the Pima Shareholders and individually as the sole stockholders
of each of JG Mortgage, JC Mortgage, and FP Mortgage, respectively:
(i) Certificates registered in the name of
each of Grove, Chan, and Parise for the shares of ASR Common Stock as
contemplated by Section 1.1(e) and 1.2(e) hereof;
(ii) A copy of each of the certificates of
Merger as filed with the Secretary of State of Arizona;
(iii) A certificate executed by a duly
authorized officer of Heritage stating that Heritage's representation and
warranties contained herein are true and correct on and as of the Closing Date
with the same force and effect as if made on the Closing Date and that all
covenants and agreements required to be performed by Heritage under this
Agreement prior to the Closing have been performed in accordance with the terms
of this Agreement.
(b) Deliveries by the Pima Shareholders. At the
Closing, the Pima Shareholders shall deliver the following to ASR and Heritage:
(i) Certificates for all of the outstanding
shares of Pima Realty and each of the Pima Mortgage Partners, duly endorsed for
transfer to Heritage, as contemplated in Sections 1.1(e) and 1.2(e) hereof;
(ii) Certificates executed by each of Grove,
Chan, and Parise stating that each of Grove's, Chan's, and Parise's
representations and warranties contained herein are true and correct on and as
of the Closing Date with the same force and effect as if made on the Closing
Date and that all covenants and agreements required to be performed by each of
Grove, Chan, and Parise under this Agreement prior to the Closing have been
performed in accordance with the terms of this Agreement.
VII. GENERAL
7.1 Indemnity Against Finders. Each party hereto shall
indemnify and hold the other parties harmless against any claim for finders'
fees based on alleged retention of a finder by it.
7.2 Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the state of Arizona,
notwithstanding any Arizona or other conflict-of-law provisions to the contrary.
7.3 Notices. All notices, requests, demands, and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made, and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below: If to ASR or Heritage:
335 North Wilmot
Suite 250
Tucson, Arizona 85711
Attention: President
If to the Pima Mortgage Partners or Pima Realty:
6300 East El Dorado Plaza
Suite 200
Tucson, Arizona 85715
Attention: Frank S. Parise, Jr.
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If to Grove, Parise, or Chan:
6300 East El Dorado Plaza
Suite 200
Tucson, Arizona 85715
Any party may alter the address to which communications or
copies are to be sent by giving notice to such of change of address in
conformity with the provisions of this paragraph for the giving of notice.
7.4 Binding Nature of Agreement; No Assignment. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that no party may assign or transfer
its rights or obligations under this Agreement without the prior written consent
of the other parties hereto.
7.5 Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
7.6 Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall be binding
when one or more counterparts hereof, individually or together, shall bear the
signatures of the parties affected hereon as the signatories.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
JC MORTGAGE ADVISORS, INC. ASR INVESTMENTS CORPORATION
By:/s/ Joseph C. Chan By:/s/ Jon A. Grove
---------------------------------- ----------------------------------
Its: President Its: President
--------------------------------- ---------------------------------
By: By:
---------------------------------- ----------------------------------
Its: Its:
--------------------------------- ---------------------------------
JG MORTGAGE ADVISORS, INC. HERITAGE RESIDENTIAL GROUP, INC.
By:/s/ Jon A. Grove By:/s/ Jon A. Grove
---------------------------------- ----------------------------------
Its: President Its: President
--------------------------------- ---------------------------------
By: By:
---------------------------------- ----------------------------------
Its: Its:
--------------------------------- ---------------------------------
FP MORTGAGE ADVISORS, INC. PIMA REALTY ADVISORS, INC.
By:/s/ Frank S. Parise, Jr. By:/s/ Jon A. Grove
---------------------------------- ----------------------------------
Its: President Its: Authorized Representitive
--------------------------------- ---------------------------------
By: By:
---------------------------------- ----------------------------------
Its: Its:
--------------------------------- ---------------------------------
JON A. GROVE PIMA MORTGAGE LIMITED
PARTNERSHIP
/s/ Jon A. Grove
- -------------------------------------
FRANK S. PARISE, JR. By:/s/ Jon A. Grove
----------------------------------
Its: Authorized Representative
---------------------------------
/s/ Frank S. Parise, Jr.
- -------------------------------------
JOSEPH C. CHAN
/s/ Joseph C. Chan
-------------------------------------
24
<PAGE>
EMPLOYMENT AGREEMENT
DATED AS OF _________________
BETWEEN
ASR INVESTMENTS CORPORATION
AND
_________________
APPENDIX E
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment...................................................... 1
2. Full Time ...................................................... 1
3. Compensation and other Benefits................................. 1
(a) Salary................................................. 1
(b) Bonus.................................................. 1
(c) Fringe Benefits........................................ 1
(d) Reimbursement.......................................... 2
4. Term of Employment.............................................. 2
(a) Employment Term........................................ 2
(b) Termination Under Certain Circumstances................ 2
(c) Result of Termination.................................. 3
5. Competition and Confidential Information........................ 3
(a) Interests to be Protected.............................. 3
(b) Non-Competition........................................ 4
(c) Non-Solicitation of Employees.......................... 4
(d) Confidential Information............................... 4
(e) Return of Books and Papers............................. 5
(f) Disclosure of Information.............................. 5
(g) Assignment............................................. 5
(h) Equitable Relief....................................... 5
(i) Restrictions Separable................................. 5
6. Miscellaneous................................................... 6
(a) Notices................................................ 6
(b) Indulgences............................................ 6
(c) Controlling Law........................................ 6
(d) Binding Nature of Agreement............................ 7
(e) Execution in Counterpart............................... 7
(f) Provisions Separable................................... 7
(g) Entire Agreement....................................... 7
(h) Paragraph Headings..................................... 7
(i) Gender................................................. 7
(j) Number of Days......................................... 7
7. Successors And Assigns.......................................... 7
i
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of the ___ day of _____________,
by and between ASR INVESTMENTS CORPORATION, a Maryland corporation ("Employer"),
and _________________ ("Employee").
WHEREAS, Employer desires to employ Employee, and Employee
desires to accept such employment, upon the terms and conditions contained
herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants set forth in this Agreement, the parties hereto agree as
follows:
1. Employment.
Employer hereby employs Employee, and Employee hereby accepts
such employment, as _______________________ and in such other capacities and for
such other duties and services as shall from time to time be mutually agreed
upon by Employer and Employee.
2. Full Time Occupation.
Employee shall devote such of Employee's business time,
attention, and efforts to the performance of Employee's duties under this
Agreement as may be necessary or required for the effective conduct and
operations of Employer's business, shall serve Employer faithfully and
diligently, and shall not engage in any other employment while employed by
Employer.
3. Compensation and other Benefits.
(a) Salary. Employer shall pay to Employee, as full
compensation for the services rendered by Employee during Employee's employment
under this Agreement, a salary at a rate of $100,000 per annum to be paid in
equal monthly installments, or in such other periodic installments upon which
Employer and Employee shall mutually agree.
(b) Bonus. Employee shall be eligible to receive an
annual bonus in such an amount, if any, to be determined by a committee composed
of the non-management directors of Employer based upon such factors as may be
deemed relevant by the committee, including the performance of Employee.
(c) Fringe Benefits. Employee shall be entitled to
participate in any group insurance, pension, retirement, vacation, expense
reimbursement or other plans, programs, or benefits approved by the Board of
Directors and made available from time to time to employees of Employer
generally during the term of Employee's employment hereunder. The foregoing
shall not obligate Employer to adopt or maintain any particular plan, program,
or benefit.
(d) Reimbursement. Employer shall reimburse Employee
for all travel and entertainment expenses and other ordinary and necessary
business expenses incurred by Employee in connection with the business of
Employer and Employee's duties under this Agreement. The term "business
expenses" shall not include any item not deductible in whole or in part by
Employer for federal income tax purposes. To obtain reimbursement, Employee
shall submit to Employer receipts, bills or sales slips for the expenses
incurred. Reimbursements shall be made by Employer monthly within 10 days of
presentation by Employee of evidence of the expenses incurred.
<PAGE>
4. Term of Employment.
(a) Employment Term. The term of this Agreement shall
be for a period of five years commencing as of the date hereof and from year to
year thereafter, unless and until terminated by either party giving written
notice to the other not less than 60 days prior to the end of the then-current
term.
(b) Termination Under Certain Circumstances.
Notwithstanding anything to the contrary herein contained:
(i) Death. Employee's employment shall be
automatically terminated, without notice, effective upon the date of Employee's
death.
(ii) Disability. If Employee shall fail, for
a period of more than 90 consecutive days, or for 90 days within any 180 day
period, to perform any of Employee's duties under this Agreement as the result
of illness or other incapacity, Employer may, at its option and upon notice to
Employee, terminate Employee's employment affective on the date of that notice.
(iii) Unilateral Decision of Employer.
Employer may, at its option, upon notice to Employee, terminate Employee's
employment effective on the date of that notice.
(iv) Unilateral Decision by Employee.
Employee may, at his option and upon notice to Employer, terminate Employee's
employment effective on the date of that notice.
(v) Certain Acts. If Employee engages in an
act or acts involving a crime, moral turpitude, fraud or dishonesty, Employer
may, at its option and upon notice to Employee, terminate Employee's employment
effective on the date of that notice.
(vi) Change in Control. Employee may, at his
option and upon notice to Employer, terminate Employee's employment effective on
the date of the notice in the event of a "Change of Control" of Employer, as
defined below.
(c) Result of Termination. In the event of the
termination of Employee's employment pursuant to Sections 4(b)(i) or (ii) above,
Employee's estate or Employee, as the case may be, shall be entitled to receive
an amount equal to Employee's fixed salary as provided in Section 3(a) above for
a period of one year after such termination. In the event of the termination of
Employee's employment pursuant to Section 4(b)(iii) or Section 4(b)(vi) above,
Employee shall continue to receive Employee's fixed compensation for the
remainder of the term of this Agreement. In the event of the termination of
Employee pursuant to Section 4(b)(iv) or (v) above, Employee shall receive no
further compensation under this Agreement.
(d) Change in Control. The term "Change in Control"
of Employer shall mean a change in control of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934 as in effect on the date
of this Agreement or, if Item 6(e) is no longer in effect, any regulations
issued by the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 which serve similar purposes; provided that, without
limitation, such a Change in Control shall be deemed to have occurred if and
when (i) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) directly or indirectly of
equity securities of Employer representing 20 percent or more of the combined
voting power of Employer's then-outstanding equity securities, except that this
provision shall not apply to an acquisition which has been approved by at least
75 percent of the members of the Board of Directors who are not affiliates or
associates of such person and by at least 80 percent of the issued and
outstanding shares of Employer's Common Stock beneficially owned by
non-affiliates of such person; (ii) during the period of this Agreement,
individuals who, at the beginning of such period, constituted the Board of
Directors of Employer (the "Original Directors"), cease for any reason to
constitute at least a majority thereof unless the
2
<PAGE>
election or nomination for election of each new director was approved (an
"Approved Director") by the unanimous vote of a Board of Directors constituted
entirely of Existing Directors and/or Approved Directors; (iii) a tender offer
or exchange offer is made whereby the effect of such offer is to take over and
control Employer, and such offer is consummated for the equity securities of
Employer representing 20 percent or more of the combined voting power of
Employer's then-outstanding voting securities; (iv) Employer is merged,
consolidated, or enters into a reorganization transaction with another person
and, as the result of such merger, consolidation, or reorganization, less than
75 percent of the outstanding equity securities of the surviving or resulting
person shall then be owned in the aggregate by the former stockholders of
Employer; or (v) Employer transfers substantially all of its assets to another
person or entity which is not a wholly owned subsidiary of Employer. Sales of
Employer's Common Stock beneficially owned or controlled by Employee shall not
be considered in determining whether a Change in Control has occurred.
5. Competition and Confidential Information.
(a) Interests to be Protected. The parties
acknowledge that during the term of Employee's employment with Employer,
Employee will perform essential services for Employer, its employees, and
stockholders. Employee will be exposed to, have access to, and be required to
work with, a considerable amount of Confidential Information (as defined below).
The parties also expressly recognize and acknowledge that the personnel of
Employer have been trained by, and are valuable to Employer and that if Employer
must hire new personnel or retrain existing personnel to fill vacancies it will
incur substantial expense in recruiting and training such personnel. The parties
expressly recognize that should Employee compete with Employer in any manner
whatsoever, it could seriously impair the goodwill and diminish the value of
Employer's business. The parties acknowledge that this covenant has an extended
duration; however, they agree that this covenant is reasonable and it is
necessary for the protection of Employer, its stockholders, and employees. For
these and other reasons, and the fact that there are many other employment
opportunities available to Employee if he should terminate his employment, the
parties are in full and complete agreement that the following restrictive
covenants are fair and reasonable and are freely, voluntarily, and knowingly
entered into. Furthermore, each party was given the opportunity to consult with
independent legal counsel before entering into this Agreement.
(b) Non-Competition. During the term of Employee's
employment with Employer and for the period ending 12 months after the
termination of Employee's employment with Employer, regardless of the reason
therefor, Employee shall not (whether directly or indirectly, as owner,
principal, agent, stockholder, director, officer, manager, employee, partner,
participant, or in any other capacity) engage or become financially interested
in any competitive business conducted within the Restricted Territory (as
defined below). As used herein, the term "competitive business" shall mean any
business engaged in the purchase, sale, management, ownership or operation of
apartment units or apartment communities and any other type of real estate owned
by Employer during Employee's employment hereunder and the term "Restricted
Territory" shall mean any state in which Employer owns, invests in, or manages
apartment units or apartment communities or other types of real estate during
Employee's employment hereunder. Notwithstanding the foregoing, this Section
5(b) shall not restrict Employee from owing not more than 5% of the outstanding
security of any class listed on a national securities exchange or the Nasdaq
Stock Market or require Employee to dispose of any interest in a competitive
business conducted within the Restricted Territory if the competitive business
was not a competitive business at the time Employee acquired his interest.
(c) Non-Solicitation of Employees. During the term of
Employee's employment and for a period of 12 months after the termination of
Employee's employment with Employee, regardless of the reason therefor, Employee
shall not directly or indirectly, for himself, or on behalf of, or in
conjunction with, any other person(s), company, partnership, corporation, or
governmental entity, seek to hire, and/or hire any of Employer's personnel or
employees for the purpose of having such employee engage in services that are
the same, similar or related to the services that such employee provided for
Employer.
(d) Confidential Information. Employee shall maintain
in strict secrecy all confidential or trade secret information relating to the
business of Employer (the "Confidential Information")
3
<PAGE>
obtained by Employee in the course of Employee's employment, and Employee shall
not, unless first authorized in writing by Employer, disclose to, or use for
Employee's benefit or for the benefit of any person, firm or entity at any time
either during or subsequent to the term of Employee's employment, any
Confidential Information, except as required in the performance of Employee's
duties on behalf of Employer. For purposes hereof, Confidential Information
shall include without limitation any materials, trade secrets, knowledge, or
information with respect to management, operational, or investment policies and
practices of Employer; any business methods or forms; any names or addresses of
customers or data on customers or suppliers; and any business policies or other
information relating to or dealing with the management, operational, or
investment policies or practices of Employer.
(e) Return of Books and Papers. Upon the termination
of Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all files, lists, books, records, manuals, memoranda,
drawings, and specifications; all cost, pricing, and other financial data; all
other written or printed materials which are the property of Employer (and any
copies of them); and all other materials which may contain Confidential
Information relating to the business of Employer, which Employee may then have
in Employee's possession whether prepared by Employee or not.
(f) Disclosure of Information. Employee shall
disclose promptly to Employer, or its nominee, any and all ideas, designs,
processes and improvements of any kind relating to the business of Employer,
whether patentable or not, conceived or made by Employee, either alone or
jointly with others, during working hours or otherwise, during the entire period
of Employee's employment with Employer, or within six months thereafter.
(g) Assignment. Employee hereby assigns to Employer
or its nominee, the entire right, title and interest in and to all inventions,
discoveries and improvements, whether patentable or not, which Employee may
conceive or make during Employee's employment with Employer, or within six
months thereafter, and which relate to the business of Employer.
(h) Equitable Relief. In the event a violation of any
of the restrictions contained in this paragraph is established, Employer shall
be entitled to preliminary and permanent injunctive relief as well as damages
and an equitable accounting of all earnings, profits and other benefits arising
from such violation, which right shall be cumulative and in addition to any
other rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subsection (b), (c), (f) or (g) of this Section,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
(i) Restrictions Separable. If the scope of any
provision of this Agreement (whether in this Section 5 or otherwise) is found by
a Court to be too broad to permit enforcement to its full extent, then such
provision shall be enforced to the maximum extent permitted by law. The parties
agree that the scope of any provision of this Agreement may be modified by a
judge in any proceeding to enforce this Agreement, so that such provision can be
enforced to the maximum extent permitted by law. Each and every restriction set
forth in this Section 5 is independent and severable from the others, and no
such restriction shall be rendered unenforceable by virtue of the fact that, for
any reason, any other or others of them may be unenforceable in whole or in
part.
6. Miscellaneous.
(a) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received (i) if personally
delivered, on the date of delivery, (ii) if mailed, three days after deposit in
the United States mail, registered or certified, return receipt requested,
postage prepaid and addressed as provided below, or (iii) if by a courier
delivery service providing overnight or "next-day" delivery, on the next
business day after deposit with such service addressed as follows:
4
<PAGE>
(i) If to Employer:
335 North Wilmot
Suite 250
Tucson, Arizona 85711
Attention:____________________
(ii) If to Employee:
6300 East El Dorado Plaza
Suite 200
Tucson, Arizona 85715
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(b) Indulgences; Waivers. Neither any failure nor any
delay on the part of either party to exercise any right, remedy, power or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, remedy, power or privilege preclude any
other or further exercise of the same or of any other right, remedy, power or
privilege, nor shall any waiver of any right, remedy, power or privilege with
respect to any occurrence be construed as a waiver of such right, remedy, power
or privilege with respect to any other occurrence. No waiver shall be binding
unless executed in writing by the party making the waiver.
(c) Controlling Law. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement, shall be
governed by and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict-of-interest provisions to the
contrary.
(d) Binding Nature of Agreement. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns except that
no party may assign or transfer such party's rights or obligations under this
Agreement without the prior written consent of the other party.
(e) Execution in Counterpart. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original as against any party whose signature appears thereon, and all of which
shall together constitute one and the same instrument. This Agreement shall
become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of the parties reflected hereon as the
signatories.
(f) Provisions Separable. The provisions of this
Agreement are independent of and separable from each other, and no provision
shall be affected or rendered invalid or unenforceable by virtue of the fact
that for any reason any other or others of them may be invalid or unenforceable
in whole or in part.
(g) Entire Agreement. This Agreement contains the
entire understanding between the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
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(h) Paragraph Headings. The paragraph headings in
this Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) Gender. Words used herein, regardless of the
number and gender specifically used, shall be deemed and construed to include
any other number, singular or plural, and any other gender, masculine, feminine
or neuter, as the context requires.
(j) Number of Days. In computing the number of days
for purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
7. Successors And Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the parties hereto;
provided that because the obligations of Employee hereunder involve the
performance of personal services, such obligations shall not be delegated by
Employee. For purposes of this Agreement successors and assigns shall include,
but not be limited to, any individual, corporation, trust, partnership, or other
entity which acquires a majority of the stock or assets of Employer by sale,
merger, consolidation, liquidation, or other form of transfer. Employer will
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of Employer to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that Employer would be required to
perform it if no such succession had taken place.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
ASR INVESTMENTS CORPORATION
By:_______________________________________
Name:_____________________________________
Its:______________________________________
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REGISTRATION AGREEMENT
REGISTRATION AGREEMENT dated as of _____________________, among ASR
Investments Corporation, a Maryland corporation (the "Company"), and each of the
Transferor Partners (as defined below) who is an accredited investor as defined
in Regulation D promulgated under the Act and who validly executes and delivers
a Letter of Transmittal and Assignment (a form of which is attached as Exhibit A
hereto) and thereby accepts the Exchange Offer (as defined below).
WITNESSETH
WHEREAS, the Company, the Transferors (as defined below), and other
persons are parties to that certain Master Combination and Contribution
Agreement dated as of November 8, 1996, as amended (the "Combination
Agreement"), under which the Company agreed to offer shares of the Company's
Common Stock, par value $.01 per share (the "Shares"), to the partners of the
Transferors (the "Transferor Partners") in exchange for partnership interests
(the "Partnership Interests") in the Transferors (the "Exchange Offer");
WHEREAS, certain Transferor Partners (the "Participating Transferor
Partners") have validly executed and delivered a Letter of Transmittal and have
thereby tendered all or a part of their Partnership Interests to the Company for
Shares pursuant to the Exchange Offer;
WHEREAS, the Company will distribute Shares to the Participating
Transferor Partners who are deemed to be accredited investors as defined in
Regulation D under the Act if all conditions to the consummation of transactions
described in the Combination Agreement are satisfied or waived as set forth in
the Combination Agreement; and
WHEREAS, the Company agreed to execute and deliver this Agreement for
the benefit of the Participating Transferor Partners at the Closing as specified
in Section 8.1 of the Combination Agreement.
NOW THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt, adequacy, and sufficiency of which are
hereby acknowledged by the parties, the parties hereby agree as follows:
1. REGISTRATION
1.1 Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(a) The term "Act" means the Securities Act of 1933, as
amended.
(b) The term "Blackout Period" means any period (A) beginning
on the date on which the Company notifies the Holders (as defined below) that
(i) the Board of Directors of the Company, in its good faith judgment, has
determined that such Distributees' sales of Shares pursuant to the Registration
Statement (or the use of the Registration Statement or related prospectus) would
interfere with any pending material acquisition, material corporate
reorganization, or any other material corporate transaction involving the
Company (a "Transaction Blackout"); or (ii) based upon the advice of outside
counsel to the Company, such Distributees' sale of Shares pursuant to the
Registration Statement (or the use of the Registration Statement or related
prospectus) would require disclosure of material information and the Company's
Board of Directors, in its reasonable judgment and in good faith, resolves that
the Company has a bona fide business purpose for preserving such information
confidential (an "Information Blackout"); and (B) ending on the date (1) in the
case of a Transaction Blackout, the earliest of (x) one month after the
completion of such acquisition, corporate reorganization, or other similar
transaction, (y) promptly after abandonment of such acquisition, corporate
reorganization, or other similar transaction and (z) 90 days after the date of
the Company's written notice of such Transaction Blackout; and (2) in the case
of an Information Blackout, the earlier of (x) the date upon which such material
information is disclosed to the public or
APPENDIX F
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ceases to be material and (y) 90 days after the Company makes such good faith
determination. Notwithstanding anything contained herein, a Blackout Period or
Periods shall not be in effect for more than four months during any 12-month
period; provided, however, the holders of a majority of the Registrable
Securities may agree with ASR as to any change in the definition of Blackout
Period or its application, which shall be binding on all holders of Registrable
Securities.
(c) The term "Holders" means those persons owning or having
the right to acquire Registrable Securities (as defined below).
(d) The term "Maximum Includable Securities" shall mean the
maximum number of shares of each type or class of the Company's securities that
a managing or principal underwriter, in its good faith judgment, deems
practicable to offer and sell at that time in a firm commitment underwritten
offering without materially and adversely affecting the marketability or price
of the securities of the Company to be offered. Where more than one type or
class of the Company's securities are to be included in a registration, the
managing or principal underwriter of the offering shall designate the maximum
number of each such type or class of securities that is included in the Maximum
Includable Securities.
(e) The term "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act in a form suitable for
the public distribution of Registrable Securities for cash in a manner commonly
utilized by holders of such securities, and the declaration or ordering of
effectiveness of such registration statement or document.
(f) The term "Registrable Security" shall refer to (i) any
Shares issued or issuable to a Participating Transferor Partner upon exchange of
Partnership Interests pursuant to the Exchange Offer and (ii) any Shares or
other securities that may subsequently be issued or issuable with respect to the
Shares as a result of a stock split or dividend or any sale, transfer,
assignment, or other transaction by the Company or a Holder involving the Shares
and any securities into which the Shares may thereafter be changed as a result
of merger, consolidation, recapitalization, or otherwise. As to any particular
Registrable Securities, such securities will cease to be Registrable Securities
when they have been distributed to the public pursuant to an offering registered
under the Act or sold to the public through a broker, dealer, or market-maker in
compliance with Rule 144 under the Act.
(g) "SEC" means the Securities and Exchange Commission.
(h) The term "Subsequent Financing" means the Company's
offering of the Company's Common Stock or other securities convertible or
exercisable into shares of the Company's Common Stock within 36 months after the
Closing as specified in Section 8.1 of the Combination Agreement, for the
purpose (among others) of raising debt or equity capital.
(i) The term "Transferor" means each of the limited
partnerships set forth in Schedule I attached hereto.
1.2 Mandatory Registration.
(a) Immediately following the Closing, the Company shall file
a registration statement (the "Registration Statement") under the Act with the
SEC and under any applicable state securities laws covering the Shares and shall
use its best efforts to cause the Registration Statement to become effective as
soon as practicable, but in no event later than May 31, 1997 and to remain
effective for a period of three years thereafter (the "Registration Period").
(b) The Company shall have the right to include additional
shares ("Additional Shares") of its Common Stock to be sold by the Company
and/or by other holders of its Common Stock in the Registration Statement to be
filed pursuant to this Section 1.2.
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(c) Notwithstanding the foregoing, during the Registration
Period, if the Company shall furnish to Holders a certificate signed by the
President of the Company stating that a Blackout Period is in effect, the
Holders may not utilize the Registration Statement to sell the Shares during the
term of such Blackout Periods; provided, however, a Blackout Period or Periods
shall not be in effect for more than four months during any 12-month period, and
the Registration Period shall be extended by a period equal to any Blackout
Periods that may be in effect. Upon the second anniversary of this Agreement,
the Company may no longer effect a Blackout Period under this Section 1.2(c).
1.3 Demand Registration Rights.
(a) If the Company shall receive at any time after the Closing
as specified in Section 8.1 of the Combination Agreement a written request from
the Holders (the "Initiating Holders") of Shares requesting the registration of
Registrable Securities with a value in excess of $10,000,000 in a firm
underwriting by one or more designated underwriters of national reputation, then
the Company shall, within 10 days of the receipt thereof, give written notice of
such request to all Holders and shall, subject to the limitations of Section
1.3(b), effect as soon as practicable the registration under the Act of all
Registrable Securities that the Holders request to be registered within 60 days
of the mailing of such notice by the Company in accordance with the notice
provisions of Section 2.3 hereof.
(b) The selection of such managing or principal underwriter(s)
shall be subject to the approval of the Company, such approval not to be
unreasonably withheld. The Company shall include information regarding the
identity of the managing or principal underwriter and the proposed terms of the
underwriting in the written notice to all Holders referred to in Section 1.3(a).
The right of any Holder to include the Holder's Registrable Securities in such
underwritten registration shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable Securities
in the underwriting (unless otherwise mutually agreed by a majority in interest
of the Initiating Holders and such Holder) to the extent provided herein. The
Company and all Holders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders and reasonably acceptable to the Company.
(c) Notwithstanding any other provision of this Section 1.3,
if the underwriter advises the Company in writing that marketing factors require
a limitation of the number of shares or other securities to be underwritten,
then the Company shall furnish all Holders of Registrable Securities, which
would otherwise be underwritten pursuant hereto, with a written statement of the
managing or principal underwriter as to the Maximum Includable Securities, and
the number of Registrable Securities that may be included in the underwriting
shall be allocated among all Holders requesting registration on a pro rata
basis, with the number of Registrable Securities of each Holder thereof included
in the registration to be that number determined by multiplying the total number
of Registrable Securities included in the Maximum Includable Securities by a
fraction, the numerator of which will be the total number of Registrable
Securities that such Holder owns, and the denominator of which will be the total
number of Registrable Securities owned by all Holders that have requested
inclusion of Registrable Securities in the registration. Any reduction of more
than 50% of the Registrable Securities sought to be registered will not be
considered a registration under this Section 1.3 for the purposes of Section
1.3(d).
(d) The Company shall be obligated to effect only one such
registration pursuant to this Section 1.3.
(e) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.3 a certificate signed by the President of the Company stating that a Blackout
Period is in effect, the Company shall have the right to defer such filing
during the term of such Blackout Period; provided, however, that a Blackout
Period or Periods shall not be in effect for more than four months during any
12-month period.
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(f) If the Holders give written notice requesting registration
of their Registrable Securities pursuant to this Section 1.3, and if the Company
at that time is not eligible to register its securities on Form S-3, the Company
shall prepare and file a registration statement on Form S-1 or S-2 (or other
appropriate form for the general registration of securities) as may be
appropriate in accordance with the terms and conditions set forth in this
Section 1.3.
(g) The Company may propose to include Additional Shares of
Common Stock or other securities to be sold by the Company and/or by other
holders of Common Stock or other securities in any registration statement to be
filed pursuant to this Section 1.3. The Holders shall have the right to reduce
the number of Additional Shares requested to be registered by the Company
pursuant to this Section 1.3(g) (including, if necessary, to zero) if, in the
good faith opinion of the underwriter or underwriters of such offering, the
inclusion of such Additional Shares would materially and adversely affect the
marketability or price of the Registrable Securities to be offered by the
Holders in such registration.
1.4 Piggy-Back Registration Rights.
(a) Except as provided in Section 1.4(e), if at any time the
Company proposes to file on its behalf and/or on behalf of any of its
securityholders a registration statement under the Act on Form S-1, S-2 or S-3
(or any other appropriate form for the general registration of securities) with
respect to any of its capital stock or other securities, the Company shall give
each Holder written notice at least 20 days before the filing with the SEC of
such registration statement. If any Holder desires to have Registrable
Securities registered pursuant to this Section 1.4, such Holder shall so advise
the Company in writing within 15 days after the date of mailing of such notice
from the Company. The Company shall thereupon include in such filing the number
of Registrable Securities for which registration is so requested, subject to its
right to reduce the number of Registrable Securities as hereinafter provided,
and shall use its best efforts to effect registration under the Act of such
Registrable Securities. Notwithstanding the foregoing, the Company shall not be
required to provide notice of filing of a registration statement and to include
therein any Registrable Securities if the proposed registration is
(i) a registration of stock options, stock purchases,
or compensation or incentive plans, or of securities issued or issuable pursuant
to any such plan, or a dividend reinvestment plan on Form S-8 or other
comparable form then in effect; or
(ii) a registration of securities proposed to be
issued in exchange for securities or assets of, or in connection with, a merger
or consolidation with another corporation.
(b) In the event the offering in which any Holder's
Registrable Securities are to be included pursuant to this Section 1.4 is to be
underwritten, the Company shall furnish the Holders with a written statement of
the managing or principal underwriter as to the Maximum Includable Securities as
soon as practicable after the expiration of the 15-day period provided for in
Section 1.4(a). If the total number of securities proposed to be included in
such registration statement is in excess of the Maximum Includable Securities,
the number of securities to be included within the coverage of such registration
statement shall be reduced to the Maximum Includable Securities as follows:
(i) no reduction shall be made in the number of
shares of capital stock or other securities to be registered for the account of
the Company; and
(ii) the number of Registrable Securities and other
securities that may be included in the registration, if any, shall be allocated
among the Holders of Registrable Securities and holders of other securities (the
"Other Holders") requesting inclusion on a pro rata basis, with the number of
each type or class of securities of each Holder and Other Holder thereof
included in the registration to be that number determined by multiplying (A) the
total number of such type or class of security included in the Maximum
Includable Securities less (B) the number of such type or class of security to
be registered for the account of the Company, by a fraction, the numerator of
which will be the total number of such type or class of security that such
Holder or Other Holder
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owns, and the denominator of which will be the total number of such type or
class of security owned by all Holders and Other Holders that have requested
inclusion of such type or class of security in the registration.
(c) The Company shall, in its sole discretion, select the
underwriter or underwriters, if any, who are to undertake the sale and
distribution of the Registrable Securities to be included in a registration
statement filed under the provisions of this Section 1.4.
(d) At such time that the Company intends to effect a
Subsequent Financing, it shall notify the Holders of such intent and shall
designate the proposed offering as a Subsequent Financing. Except to the extent
that the Company, in its sole discretion, may otherwise permit, the Holders
shall have no right to have any Registrable Securities registered pursuant to
this Section 1.4 in any Subsequent Financing.
(e) The right to registration provided in this Section 1.4 is
in addition to and not in lieu of the demand registration rights provided in
Section 1.3. The provisions of this Section 1.4 shall not apply, however, to any
Holders requesting registration pursuant to this Section 1.4 that are or may be
free, at the time, to sell within the next 90-day period all of the Registrable
Securities with respect to which such registration was requested in accordance
with Rule 144 (or any similar rule or regulation) under the Act.
1.5 Obligations of the Company. Whenever required under Section 1.3 or
Section 1.4 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement on
such form as the Company deems appropriate with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective. With respect to registration statements filed pursuant to
Section 1.3 or Section 1.4 hereof, upon the request of the Holders of a majority
of the Registrable Securities registered thereunder, the Company shall keep such
registration statement effective for up to 180 days, or such shorter period as
is reasonably required to dispose of all securities covered by such registration
statement.
(b) Notify the Holders promptly after it has received notice
of the time when such registration statement has become effective or any
supplement to any prospectus forming a part of such registration statement has
been filed.
(c) Prepare and file with the SEC, and promptly notify the
Holders of the filing of, such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement
as may be necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(d) Advise each Holder promptly after it has received notice
or obtained knowledge thereof of the issuance of any stop order by the SEC
suspending the effectiveness of any such registration statement or the
initiation or threatening of any proceeding for that purpose and promptly use
its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued.
(e) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(f) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business, to file a general consent
to service of process, or to become subject to tax liability in any such states
or jurisdictions or to agree to any restrictions as to the conduct of its
business in the ordinary course thereof.
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(g) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the underwriters of such offering, together with each
Holder participating in such underwritten offering, as provided in Section
1.6(c).
(h) Prepare and promptly file with the SEC, and promptly
notify such Holders of the filing of, any amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Act, any event has occurred as
the result of which any such prospectus must be amended in order that it does
not make any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
(i) In case any of such Holders or any underwriter for any
such Holders is required to deliver a prospectus at a time when the prospectus
then in effect may no longer be used under the Act, prepare promptly upon
request such amendment or amendments to such registration statement and such
prospectus as may be necessary to permit compliance with the requirements of the
Act.
(j) If any of the Registrable Securities are then listed on
any securities exchange or the Nasdaq Stock Market, the Company will cause all
such Registrable Securities covered by such registration statement to be listed
on such exchange or the Nasdaq Stock Market.
1.6 Obligations of Holders. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Registrable Securities held by them, the intended method of sale
or other disposition of such securities if the registration is pursuant to
Section 1.3, the identity of and compensation to be paid to any underwriters
proposed to be employed in connection with such sale or other disposition if the
registration is pursuant to Section 1.3, and such other information as may
reasonably be required to effect the registration of their Registrable
Securities.
(b) Notify the Company, at any time when a prospectus relating
to Registrable Securities covered by a registration statement is required to be
delivered under the Act, of the happening of any event with respect to such
selling Holder as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
(c) In the event of any underwritten public offering, each
Holder participating in such underwriting shall enter into and perform its
obligations under the underwriting agreement for such offering, and, if
requested to do so by the underwriters managing such offering, each Holder shall
enter into a customary holdback agreement.
1.7 Expenses of Mandatory Registration. The Company shall bear and pay
all expenses incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2 (other than underwriting discounts and
commissions with respect to Registrable Securities included in such registration
and any fees and costs of the Holders' legal counsel or other advisors),
including (without limitation) all registration, filing, and qualification fees,
Blue Sky fees and expenses, printers' and accounting fees, costs of listing on
the American Stock Exchange, costs of furnishing such copies of each preliminary
prospectus, final prospectus, and amendments thereto as each Holder may
reasonably request, fees and disbursements of counsel for the Company.
1.8 Expenses of Demand Registration. The Company shall bear and pay all
expenses incurred in connection with registrations, filings or qualifications
pursuant to Section 1.3 (other than underwriting discounts and commissions with
respect to Registrable Securities included in such registration and any fees and
costs of the Holders' legal counsel or other advisors), including (without
limitation) all registration, filing, and qualification fees, Blue Sky fees and
expenses, printers' and accounting fees, costs of listing on the stock exchange
or exchanges on
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which the Company's Common Stock is traded, costs of furnishing such copies of
each preliminary prospectus, final prospectus, and amendments thereto as each
Holder may reasonably request, fees and disbursements of counsel for the
Company; provided, however, that the Company shall not be required to pay for
any expenses of any registration proceeding begun pursuant to Section 1.3 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered (in which case the
Holders participating in such offering and favoring such withdrawal shall bear
such expenses); provided further, however, that if such registration request has
been withdrawn by virtue of a material adverse change in the condition,
business, or prospects of the Company from that known to the Holders at the time
of their request, then the Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant Section 1.3.
1.9 Expenses of Piggy-Back Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to each of the
registrations pursuant to Section 1.4 (other than underwriting discounts and
commissions with respect to Registrable Securities included in such registration
and any fees and costs of the Holders' legal counsel or other advisors),
including (without limitation) all registration, filing, and qualification fees,
Blue Sky fees and expenses, printers' and accounting fees, costs of listing on
the American Stock Exchange, costs of furnishing such copies of each preliminary
prospectus, final prospectus, and amendments thereto as each Holder may
reasonably request.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Agreement:
(a) The Company will indemnify and hold harmless each Holder,
the officers and directors of each Holder, any underwriter (as defined in the
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Act or the Securities Exchange Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, or
liabilities (joint or several) to which such person or persons may become
subject under the Act, the 1934 Act, or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in any registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or (ii) the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and the Company will reimburse each
such Holder, officer or director, underwriter, or controlling person for any
legal or other expenses reasonably incurred by such person or persons in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 1.10(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company, nor shall the Company be liable in any such
loss, claim, damage, liability, or action to the extent that it arises out of or
is based upon (i) a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by such Holder, underwriter, or controlling person, or (ii) the
failure of such Holder, underwriter, or controlling person to deliver a copy of
the registration statement or the prospectus, or any amendments or supplements
thereto, after the Company has furnished such person with a sufficient number of
copies of the same.
(b) Each selling Holder will indemnify and hold harmless the
Company, each of its officers and directors, and each person, if any, who
controls the Company within the meaning of the Act, any underwriter and any
other Holder selling securities in such registration statement or any of its
directors or officers or any person who controls such Holder, against any
losses, claims, damages, or liabilities (joint or several) to which the Company
or any such officer, director, controlling person, or underwriter or controlling
person may become subject, under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
such officer, director, controlling person, underwriter or controlling person,
other Holder, officer, director, or controlling person in connection with
investigating or
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defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Section 1.10(b) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Holder.
Notwithstanding anything to the contrary herein contained, a Holder's indemnity
obligation, in such person's capacity as a Holder, shall be limited to the net
proceeds received by such Holder from the offering out of which the indemnity
obligation arises.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnified party, except that such fees and expenses shall be paid by
the indemnifying party if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.11, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
1.11.
(d) The indemnification provided by this Section 1.10 shall be
a continuing right to indemnification and shall survive the registration and
sale of any of the Registrable Securities hereunder and the expiration or
termination of this Agreement.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act, the Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, as long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144,
the Act, and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 Amendment and Waiver. Any amendment or waiver of any provision
under this Agreement may be effected only with the written consent of the
Company and the Holders of at least a majority of the Registrable Securities
then outstanding.
1.13 Remedies. The parties hereto acknowledge and agree that the breach
of any part of this Agreement may cause irreparable harm and that monetary
damages alone may be inadequate. The parties hereto therefore agree that either
party shall be entitled to injunctive relief or such other applicable remedy as
a court of competent jurisdiction may provide. Nothing contained herein will be
construed to limit any party's right to any remedies at law, including recovery
of damages for breach of any part of this Agreement.
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2. MISCELLANEOUS
2.1 Holdback Agreement. If during the period commencing 90 days after
the effectiveness of the Registration Statement (i) the Company shall file a
registration statement (other than in connection with the registration of
securities issuable pursuant to an employee stock option, stock purchase, or
other similar plan or pursuant to a merger, exchange offer, or a transaction of
the type specified in Rule 145(a) under the Securities Act) with respect to the
Company's Common Stock and (ii) with reasonable prior notice, the Company (in
the case of a non-underwritten offering by the Company pursuant to such
registration statement) advises the Distributees in writing that a public sale
or distribution of Shares by the Distributees would adversely affect such
offering or the managing underwriter (in the case of an underwritten offering by
the Company pursuant to such registration statement) advises the Company and the
Distributees in writing that a public sale or distribution of Shares by the
Distributees would adversely affect such offering, then each Distributee shall,
to the extent not prohibited by applicable law, (x) refrain from effecting any
public sale or distribution of such Shares commencing on the effectiveness of
such registration statement, (y) be entitled to include such Shares in such
registration statement, subject to customary underwriter cut back, and sell such
Shares pursuant thereto, and (z) sign a customary lock-up agreement with the
managing underwriter (in the case of an underwritten offering) or the Company of
scope and duration identical to the scope of the lock-up agreement signed by the
Company and each director and executive officer of the Company, but in no event
to exceed 90 days. Only one holdback arrangement under this Section shall be
invoked by the Company in any 12-month period.
2.2 Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement, shall be governed by and
construed in accordance with the laws of the State of Arizona, notwithstanding
any Arizona or other conflict-of-law provisions to the contrary.
2.3 Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered against
receipt, upon receipt of a facsimile transmission, or when deposited in the
United States mails, first class postage prepaid, addressed as set forth below:
(a) If to the Company:
ASR Investments Corporation
335 North Wilmot, Suite 250
Tucson, Arizona 85711
Attention: Jon A. Grove, President
with a copy given in the manner
prescribed above, to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road
Phoenix, Arizona 85012
Facsimile: (602) 263-2900
Attention: Robert S. Kant, Esq.
(b) If to any Holder, to the address of such Holder as it
appears in the stock ledger of the Company.
Any party may alter the address to which communications or
copies are to be sent by giving notice of such change to each of the other
parties hereto of address in conformity with the provisions of this paragraph
for the giving of notice.
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2.4 Binding Nature of Agreement. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors, and assigns.
2.5 Entire Agreement. This Agreement contains the entire agreement and
understanding among the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
2.6 Section Headings. The section headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
2.7 Gender. Words used herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
2.8 Indulgences, Not Waivers. Neither the failure nor any delay on the
part of a party to exercise any right, remedy, power, or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power, or privilege preclude any other or further
exercise of the same or any other right, remedy, power, or privilege, nor shall
any waiver of any right, remedy, power, or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power, or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
2.9 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories. Any photographic or xerographic copy of this Agreement, with all
signatures reproduced on one or more sets of signature pages, shall be
considered for all purposes as of it were an executed counterpart of this
Agreement.
2.10 Provisions Separable. The provisions of this Agreement are
independent and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any reason any
other or others of them may be invalid or unenforceable in whole or in part.
2.11 Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or holiday.
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
the date and year first above written.
ASR INVESTMENTS CORPORATION
By:______________________________________
Name: Jon A. Grove
Its: Chairman of the Board, President
and Chief Executive Officer
DON W. WINTON, on behalf of the
Transferor Partners
_________________________________________
Don W. Winton
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SCHEDULE I
First Aspen Court Associates, L.P.
First Briar Park Associates, a Washington Limited Partnership
First Chelsea Park Associates, L.P.
First Appian Way Associates, L.P.
First Greenwood Creek Associates, L.P.
First Highlands Associates, L.P.
First Marymont Associates, L.P.
First Montfort Associates, L.P.
First Riverway Associates, L.P.
First Springfield Associates, L.P.
First Timbercreek Landing Associates, L.P.
Campus Development Associates Limited Partnership
Campus Commons Associates - Limited Partnership
First Pacific South Center Associates, L.P.
<PAGE>
REGISTRATION AGREEMENT
REGISTRATION AGREEMENT dated as of _____________________, among ASR
Investments Corporation, a Maryland corporation (the "Company"); Heritage
Communities LP, a Delaware limited partnership ("Heritage LP"); and the
investors listed on the signature pages hereto (referred to collectively as the
"Transferors" and individually as a "Transferor") for the benefit of all
Distributees (as defined herein).
WITNESSETH
WHEREAS, the Company, the Transferors, and other persons are parties to
that certain Master Combination and Contribution Agreement dated as of November
8, 1996, as amended (the "Combination Agreement"), under which the Transferors
agreed to contribute certain properties and assets to Heritage LP in exchange
for LP Units (as defined herein);
WHEREAS, the LP Units held by the Transferors will be convertible into
shares of the Company's Common Stock, $.01 par value per share, in accordance
with the Amended and Restated Agreement of Limited Partnership of Heritage LP by
and among the Company, the Transferors, and Heritage Communities SGP, Inc., a
wholly owned subsidiary of ASR;
WHEREAS, the Transferors will distribute the LP Units to their
respective partners (the "Distributees"), who are determined to be accredited
investors as defined in Regulation D under the Securities Act, as specified in
Section 2.1(d) of the Combination Agreement; and
WHEREAS, in order to induce the Distributees to consent to the
transactions contemplated by the Combination Agreement and to provide the
Distributees with certain opportunities for liquidity following the consummation
of the transactions contemplated by the Combination Agreement, the Company has
agreed to provide the registration rights set forth in this Agreement.
NOW THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt, adequacy, and sufficiency of which are
hereby acknowledged by the parties, the parties hereby agree as follows:
1. REGISTRATION
1.1 Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(a) The term "Act" means the Securities Act of 1933, as
amended.
(b) The term "Blackout Period" means any period (A) beginning
on the date on which the Company notifies the Holders (as defined below) that
(i) the Board of Directors of the Company, in its good faith judgment, has
determined that such Distributees' sales of Shares pursuant to the Registration
Statement (or the use of the Registration Statement or related prospectus) would
interfere with any pending material acquisition, material corporate
reorganization, or any other material corporate transaction involving the
Company (a "Transaction Blackout"); or (ii) based upon the advice of outside
counsel to the Company, such Distributees' sale of Shares pursuant to the
Registration Statement (or the use of the Registration Statement or related
prospectus) would require disclosure of material information and the Company's
Board of Directors, in its reasonable judgment and in good faith, resolves that
the Company has a bona fide business purpose for preserving such information
confidential (an "Information Blackout"); and (B) ending on the date (1) in the
case of a Transaction Blackout, the earliest of (x) one month after the
completion of such acquisition, corporate reorganization, or other similar
transaction, (y) promptly after abandonment of such acquisition, corporate
reorganization, or other similar transaction and (z) 90 days after the date of
the Company's written notice of such Transaction Blackout; and (2) in the case
of an Information Blackout, the earlier of (x) the date upon which such material
information is disclosed to the public or
APPENDIX G
<PAGE>
ceases to be material and (y) 90 days after the Company makes such good faith
determination. Notwithstanding anything contained herein, a Blackout Period or
Periods shall not be in effect for more than four months during any 12-month
period; provided, however, the holders of a majority of the Registrable
Securities may agree with ASR as to any change in the definition of Blackout
Period or its application, which shall be binding on all holders of Registrable
Securities.
(c) The term "Holders" means those persons owning or having
the right to acquire Registrable Securities (as defined below).
(d) The term "LP Units" means limited partnership interests in
Heritage LP.
(e) The term "Maximum Includable Securities" shall mean the
maximum number of shares of each type or class of the Company's securities that
a managing or principal underwriter, in its good faith judgment, deems
practicable to offer and sell at that time in a firm commitment underwritten
offering without materially and adversely affecting the marketability or price
of the securities of the Company to be offered. Where more than one type or
class of the Company's securities are to be included in a registration, the
managing or principal underwriter of the offering shall designate the maximum
number of each such type or class of securities that is included in the Maximum
Includable Securities.
(f) The term "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act in a form suitable for
the public distribution of Registrable Securities for cash in a manner commonly
utilized by holders of such securities, and the declaration or ordering of
effectiveness of such registration statement or document.
(g) The term "Registrable Security" shall refer to (i) any
Shares issued or issuable to a Transferor or Distributee upon exchange of Units
and (ii) any Shares or other securities that may subsequently be issued or
issuable with respect to the Shares as a result of a stock split or dividend or
any sale, transfer, assignment, or other transaction by the Company or a Holder
involving the Shares and any securities into which the Shares may thereafter be
changed as a result of merger, consolidation, recapitalization, or otherwise. As
to any particular Registrable Securities, such securities will cease to be
Registrable Securities when they have been distributed to the public pursuant to
an offering registered under the Act or sold to the public through a broker,
dealer, or market-maker in compliance with Rule 144 under the Act.
(h) The number of shares of "Registrable Securities then
outstanding" shall be equal to the sum of the number of shares of Common Stock
outstanding which are Registrable Securities plus the number of shares of Common
Stock issuable upon conversion of the outstanding LP Units.
(i) "SEC" means the Securities and Exchange Commission.
(j) The term "Subsequent Financing" means the Company's
offering of the Company's Common Stock or other securities convertible or
exercisable into shares of the Company's Common Stock within 36 months after the
Closing as specified in Section 8.1 of the Contribution Agreement, for the
purpose (among others) of raising debt or equity capital.
1.2 Mandatory Registration.
(a) Not later than nine months after the Closing, the Company
shall file a registration statement (the "Registration Statement") under the Act
with the SEC and under any applicable state securities laws covering the shares
of the Company's Common Stock issuable upon conversion of the LP Units (the
"Shares") and shall use its best efforts to cause the Registration Statement to
become effective by the time the LP Units may be converted into shares of the
Company's Common Stock and to remain effective for a period of 10 years
thereafter (the "Registration Period").
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(b) The Company shall have the right to include additional
shares ("Additional Shares") of its Common Stock to be sold by the Company
and/or by other holders of its Common Stock in the Registration Statement to be
filed pursuant to this Section 1.2.
(c) Notwithstanding the foregoing, during the Registration
Period, if the Company shall furnish to Holders a certificate signed by the
President of the Company stating that a Blackout Period is in effect, the
Holders may not convert LP Units into Shares registered under the Registration
Statement during the term of such Blackout Periods; provided, however, a
Blackout Period or Periods shall not be in effect for more than four months
during any 12- month period, and the Registration Period shall be extended by a
period equal to any Blackout Periods that may be in effect. [Upon the third
anniversary of this Agreement, the Company may no longer effect a Blackout
Period under this Section 1.2(c).]
1.3 Demand Registration Rights.
(a) If the Company shall receive at any time after the Closing
as specified in Section 8.1 of the Combination Agreement a written request from
the Holders (the "Initiating Holders") of Registrable Securities requesting the
registration of Registrable Securities with a value in excess of $5,000,000 in a
firm underwriting by one or more designated underwriters of national reputation,
then the Company shall, within 10 days of the receipt thereof, give written
notice of such request to all Holders and shall, subject to the limitations of
Section 1.3(b), effect as soon as practicable the registration under the Act of
all Registrable Securities that the Holders request to be registered within 60
days of the mailing of such notice by the Company in accordance with the notice
provisions of Section 2.3 hereof.
(b) The selection of such managing or principal underwriter(s)
shall be subject to the approval of the Company, such approval not to be
unreasonably withheld. The Company shall include information regarding the
identity of the managing or principal underwriter and the proposed terms of the
underwriting in the written notice to all Holders referred to in Section 1.3(a).
The right of any Holder to include the Holder's Registrable Securities in such
underwritten registration shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable Securities
in the underwriting (unless otherwise mutually agreed by a majority in interest
of the Initiating Holders and such Holder) to the extent provided herein. The
Company and all Holders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders and reasonably acceptable to the Company.
(c) Notwithstanding any other provision of this Section 1.3,
if the underwriter advises the Company in writing that marketing factors require
a limitation of the number of shares or other securities to be underwritten,
then the Company shall furnish all Holders of Registrable Securities, which
would otherwise be underwritten pursuant hereto, with a written statement of the
managing or principal underwriter as to the Maximum Includable Securities, and
the number of Registrable Securities that may be included in the underwriting
shall be allocated among all Holders requesting registration on a pro rata
basis, with the number of Registrable Securities of each Holder thereof included
in the registration to be that number determined by multiplying the total number
of Registrable Securities included in the Maximum Includable Securities by a
fraction, the numerator of which will be the total number of Registrable
Securities that such Holder owns, and the denominator of which will be the total
number of Registrable Securities owned by all Holders that have requested
inclusion of Registrable Securities in the registration. Any reduction of more
than 50% of the Registrable Securities sought to be registered will not be
considered a registration under this Section 1.3 for the purposes of Section
1.3(d).
(d) The Company shall be obligated to effect only one such
registration pursuant to this Section 1.3.
(e) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.3 a certificate signed by the President of the Company stating that a Blackout
Period is in effect, the Company shall have the right to defer such filing
during the term of such Blackout
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<PAGE>
Period; provided, however, that a Blackout Period or Periods shall not be in
effect for more than four months during any 12-month period.
(f) If the Holders give written notice requesting registration
of their Registrable Securities pursuant to this Section 1.3, and if the Company
at that time is not eligible to register its securities on Form S-3, the Company
shall prepare and file a registration statement on Form S-1 or S-2 (or other
appropriate form for the general registration of securities) as may be
appropriate in accordance with the terms and conditions set forth in this
Section 1.3.
(g) The Company may propose to include Additional Shares of
Common Stock or other securities to be sold by the Company and/or by other
holders of Common Stock or other securities in any registration statement to be
filed pursuant to this Section 1.3. The Holders shall have the right to reduce
the number of Additional Shares requested to be registered by the Company
pursuant to this Section 1.3(g) (including, if necessary, to zero) if, in the
good faith opinion of the underwriter or underwriters of such offering, the
inclusion of such Additional Shares would materially and adversely affect the
marketability or price of the Registrable Securities to be offered by the
Holders in such registration.
1.4 Piggy-Back Registration Rights.
(a) Except as provided in Section 1.4(e), if at any time the
Company proposes to file on its behalf and/or on behalf of any of its
securityholders a registration statement under the Act on Form S-1, S-2 or S-3
(or any other appropriate form for the general registration of securities) with
respect to any of its capital stock or other securities, the Company shall give
each Holder written notice at least 20 days before the filing with the SEC of
such registration statement. If any Holder desires to have Registrable
Securities registered pursuant to this Section 1.4, such Holder shall so advise
the Company in writing within 15 days after the date of mailing of such notice
from the Company. The Company shall thereupon include in such filing the number
of Registrable Securities for which registration is so requested, subject to its
right to reduce the number of Registrable Securities as hereinafter provided,
and shall use its best efforts to effect registration under the Act of such
Registrable Securities. Notwithstanding the foregoing, the Company shall not be
required to provide notice of filing of a registration statement and to include
therein any Registrable Securities if the proposed registration is
(i) a registration of stock options, stock purchases,
or compensation or incentive plans, or of securities issued or issuable pursuant
to any such plan, or a dividend reinvestment plan on Form S-8 or other
comparable form then in effect; or
(ii) a registration of securities proposed to be
issued in exchange for securities or assets of, or in connection with, a merger
or consolidation with another corporation.
(b) In the event the offering in which any Holder's
Registrable Securities are to be included pursuant to this Section 1.4 is to be
underwritten, the Company shall furnish the Holders with a written statement of
the managing or principal underwriter as to the Maximum Includable Securities as
soon as practicable after the expiration of the 15-day period provided for in
Section 1.4(a). If the total number of securities proposed to be included in
such registration statement is in excess of the Maximum Includable Securities,
the number of securities to be included within the coverage of such registration
statement shall be reduced to the Maximum Includable Securities as follows:
(i) no reduction shall be made in the number of
shares of capital stock or other securities to be registered for the account of
the Company; and
(ii) the number of Registrable Securities and other
securities that may be included in the registration, if any, shall be allocated
among the Holders of Registrable Securities and holders of other securities (the
"Other Holders") requesting inclusion on a pro rata basis, with the number of
each type or class of securities of each Holder and Other Holder thereof
included in the registration to be that number determined by
4
<PAGE>
multiplying (A) the total number of such type or class of security included in
the Maximum Includable Securities less (B) the number of such type or class of
security to be registered for the account of the Company, by a fraction, the
numerator of which will be the total number of such type or class of security
that such Holder or Other Holder owns, and the denominator of which will be the
total number of such type or class of security owned by all Holders and Other
Holders that have requested inclusion of such type or class of security in the
registration.
(c) The Company shall, in its sole discretion, select the
underwriter or underwriters, if any, who are to undertake the sale and
distribution of the Registrable Securities to be included in a registration
statement filed under the provisions of this Section 1.4.
(d) At such time that the Company intends to effect a
Subsequent Financing, it shall notify the Holders of such intent and shall
designate the proposed offering as a Subsequent Financing. Except to the extent
that the Company, in its sole discretion, may otherwise permit, the Holders
shall have no right to have any Registrable Securities registered pursuant to
this Section 1.4 in any Subsequent Financing.
(e) The right to registration provided in this Section 1.4 is
in addition to and not in lieu of the demand registration rights provided in
Section 1.3. The provisions of this Section 1.4 shall not apply, however, to any
Holders requesting registration pursuant to this Section 1.4 that are or may be
free, at the time, to sell within the next 90-day period all of the Registrable
Securities with respect to which such registration was requested in accordance
with Rule 144 (or any similar rule or regulation) under the Act.
1.5 Obligations of the Company. Whenever required under Section 1.3 or
Section 1.4 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement on
such form as the Company deems appropriate with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective. With respect to registration statements filed pursuant to
Section 1.3 or Section 1.4 hereof, upon the request of the Holders of a majority
of the Registrable Securities registered thereunder, the Company shall keep such
registration statement effective for up to 180 days, or such shorter period as
is reasonably required to dispose of all securities covered by such registration
statement.
(b) Notify the Holders promptly after it has received notice
of the time when such registration statement has become effective or any
supplement to any prospectus forming a part of such registration statement has
been filed.
(c) Prepare and file with the SEC, and promptly notify the
Holders of the filing of, such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement
as may be necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(d) Advise each Holder promptly after it has received notice
or obtained knowledge thereof of the issuance of any stop order by the SEC
suspending the effectiveness of any such registration statement or the
initiation or threatening of any proceeding for that purpose and promptly use
its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued.
(e) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(f) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify
5
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to do business, to file a general consent to service of process, or to become
subject to tax liability in any such states or jurisdictions or to agree to any
restrictions as to the conduct of its business in the ordinary course thereof.
(g) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the underwriters of such offering, together with each
Holder participating in such underwritten offering, as provided in Section
1.6(c).
(h) Prepare and promptly file with the SEC, and promptly
notify such Holders of the filing of, any amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Act, any event has occurred as
the result of which any such prospectus must be amended in order that it does
not make any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
(i) In case any of such Holders or any underwriter for any
such Holders is required to deliver a prospectus at a time when the prospectus
then in effect may no longer be used under the Act, prepare promptly upon
request such amendment or amendments to such registration statement and such
prospectus as may be necessary to permit compliance with the requirements of the
Act.
(j) If any of the Registrable Securities are then listed on
any securities exchange or the Nasdaq Stock Market, the Company will cause all
such Registrable Securities covered by such registration statement to be listed
on such exchange or the Nasdaq Stock Market.
1.6 Obligations of Holders. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Registrable Securities held by them, the intended method of sale
or other disposition of such securities if the registration is pursuant to
Section 1.3, the identity of and compensation to be paid to any underwriters
proposed to be employed in connection with such sale or other disposition if the
registration is pursuant to Section 1.3, and such other information as may
reasonably be required to effect the registration of their Registrable
Securities.
(b) Notify the Company, at any time when a prospectus relating
to Registrable Securities covered by a registration statement is required to be
delivered under the Act, of the happening of any event with respect to such
selling Holder as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
(c) In the event of any underwritten public offering, each
Holder participating in such underwriting shall enter into and perform its
obligations under the underwriting agreement for such offering, and, if
requested to do so by the underwriters managing such offering, each Holder shall
enter into a customary holdback agreement.
1.7 Expenses of Mandatory Registration. The Company shall bear and pay
all expenses incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2 (other than underwriting discounts and
commissions with respect to Registrable Securities included in such registration
and any fees and costs of the Holders' legal counsel or other advisors),
including (without limitation) all registration, filing, and qualification fees,
Blue Sky fees and expenses, printers' and accounting fees, costs of listing on
the stock exchange or exchanges on which the Company's Common Stock is traded,
costs of furnishing such copies of each preliminary prospectus, final
prospectus, and amendments thereto as each Holder may reasonably request, fees
and disbursements of counsel for the Company.
6
<PAGE>
1.8 Expenses of Demand Registration. The Company shall bear and pay all
expenses incurred in connection with registrations, filings or qualifications
pursuant to Section 1.3 (other than underwriting discounts and commissions with
respect to Registrable Securities included in such registration and any fees and
costs of the Holders' legal counsel or other advisors), including (without
limitation) all registration, filing, and qualification fees, Blue Sky fees and
expenses, printers' and accounting fees, costs of listing on the American Stock
Exchange, costs of furnishing such copies of each preliminary prospectus, final
prospectus, and amendments thereto as each Holder may reasonably request, fees
and disbursements of counsel for the Company; provided, however, that the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 1.3 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case the Holders participating
in such offering and favoring such withdrawal shall bear such expenses);
provided further, however, that if such registration request has been withdrawn
by virtue of a material adverse change in the condition, business, or prospects
of the Company from that known to the Holders at the time of their request, then
the Holders shall not be required to pay any of such expenses and shall retain
their rights pursuant Section 1.3.
1.9 Expenses of Piggy-Back Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to each of the
registrations pursuant to Section 1.4 (other than underwriting discounts and
commissions with respect to Registrable Securities included in such registration
and any fees and costs of the Holders' legal counsel or other advisors),
including (without limitation) all registration, filing, and qualification fees,
Blue Sky fees and expenses, printers' and accounting fees, costs of listing on
the American Stock Exchange, costs of furnishing such copies of each preliminary
prospectus, final prospectus, and amendments thereto as each Holder may
reasonably request.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Agreement:
(a) The Company will indemnify and hold harmless each Holder,
the officers and directors of each Holder, any underwriter (as defined in the
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Act or the Securities Exchange Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, or
liabilities (joint or several) to which such person or persons may become
subject under the Act, the 1934 Act, or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in any registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or (ii) the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and the Company will reimburse each
such Holder, officer or director, underwriter, or controlling person for any
legal or other expenses reasonably incurred by such person or persons in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 1.10(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company, nor shall the Company be liable in any such
loss, claim, damage, liability, or action to the extent that it arises out of or
is based upon (i) a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by such Holder, underwriter, or controlling person, or (ii) the
failure of such Holder, underwriter, or controlling person to deliver a copy of
the registration statement or the prospectus, or any amendments or supplements
thereto, after the Company has furnished such person with a sufficient number of
copies of the same.
(b) Each selling Holder will indemnify and hold harmless the
Company, each of its officers and directors, and each person, if any, who
controls the Company within the meaning of the Act, any underwriter and any
other Holder selling securities in such registration statement or any of its
directors or officers or any person who controls such Holder, against any
losses, claims, damages, or liabilities (joint or several) to which the Company
or any such officer, director, controlling person, or underwriter or controlling
person may become subject, under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions
7
<PAGE>
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Holder
expressly for use in connection with such registration; and each such Holder
will reimburse any legal or other expenses reasonably incurred by the Company or
any such officer, director, controlling person, underwriter or controlling
person, other Holder, officer, director, or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
Section 1.10(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Holder. Notwithstanding anything to the contrary herein
contained, a Holder's indemnity obligation, in such person's capacity as a
Holder, shall be limited to the net proceeds received by such Holder from the
offering out of which the indemnity obligation arises.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnified party, except that such fees and expenses shall be paid by
the indemnifying party if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.11, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
1.11.
(d) The indemnification provided by this Section 1.10 shall be
a continuing right to indemnification and shall survive the registration and
sale of any of the Registrable Securities hereunder and the expiration or
termination of this Agreement.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act, the Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, as long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144,
the Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 Amendment and Waiver. Any amendment or waiver of any provision
under this Agreement may be effected only with the written consent of the
Company and the Holders of at least a majority of the Registrable Securities
then outstanding.
1.13 Remedies. The parties hereto acknowledge and agree that the breach
of any part of this Agreement may cause irreparable harm and that monetary
damages alone may be inadequate. The parties hereto therefore agree that either
party shall be entitled to injunctive relief or such other applicable remedy as
a court of
8
<PAGE>
competent jurisdiction may provide. Nothing contained herein will be construed
to limit any party's right to any remedies at law, including recovery of damages
for breach of any part of this Agreement.
2. MISCELLANEOUS
2.1 Holdback Agreement. If during the period commencing 90 days after
the effectiveness of the Registration Statement (i) the Company shall file a
registration statement (other than in connection with the registration of
securities issuable pursuant to an employee stock option, stock purchase, or
other similar plan or pursuant to a merger, exchange offer, or a transaction of
the type specified in Rule 145(a) under the Securities Act) with respect to the
Company's Common Stock and (ii) with reasonable prior notice, the Company (in
the case of a non-underwritten offering by the Company pursuant to such
registration statement) advises the Distributees in writing that a public sale
or distribution of Shares by the Distributees would adversely affect such
offering or the managing underwriter (in the case of an underwritten offering by
the Company pursuant to such registration statement) advises the Company and the
Distributees in writing that a public sale or distribution of Shares by the
Distributees would adversely affect such offering, then each Distributee shall,
to the extent not prohibited by applicable law, (x) refrain from effecting any
public sale or distribution of such Shares commencing on the effectiveness of
such registration statement, (y) be entitled to include such Shares in such
registration statement, subject to customary underwriter cut back, and sell such
Shares pursuant thereto, and (z) sign a customary lock-up agreement with the
managing underwriter (in the case of an underwritten offering) or the Company of
scope and duration identical to the scope of the lock-up agreement signed by the
Company and each director and executive officer of the Company, but in no event
to exceed 90 days. Only one holdback arrangement under this Section shall be
invoked by the Company in any 12-month period.
2.2 Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement, shall be governed by and
construed in accordance with the laws of the State of Arizona, notwithstanding
any Arizona or other conflict-of-law provisions to the contrary.
2.3 Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered against
receipt, upon receipt of a facsimile transmission, or when deposited in the
United States mails, first class postage prepaid, addressed as set forth below:
(a) If to the Company:
ASR Investments Corporation
335 North Wilmot, Suite 250
Tucson, Arizona 85711
Attention: Jon A. Grove, President
with a copy given in the manner
prescribed above, to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road
Phoenix, Arizona 85012
Facsimile: (602) 263-2900
Attention: Robert S. Kant, Esq.
(b) If to any Holder, to the address of such Holder as it
appears in the records of Heritage LP.
9
<PAGE>
Any party may alter the address to which communications or
copies are to be sent by giving notice of such change to each of the other
parties hereto of address in conformity with the provisions of this paragraph
for the giving of notice.
2.4 Binding Nature of Agreement. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors, and assigns.
2.5 Entire Agreement. This Agreement contains the entire agreement and
understanding among the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
2.6 Section Headings. The section headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
2.7 Gender. Words used herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
2.8 Indulgences, Not Waivers. Neither the failure nor any delay on the
part of a party to exercise any right, remedy, power, or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power, or privilege preclude any other or further
exercise of the same or any other right, remedy, power, or privilege, nor shall
any waiver of any right, remedy, power, or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power, or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
2.9 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories. Any photographic or xerographic copy of this Agreement, with all
signatures reproduced on one or more sets of signature pages, shall be
considered for all purposes as of it were an executed counterpart of this
Agreement.
2.10 Provisions Separable. The provisions of this Agreement are
independent and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any reason any
other or others of them may be invalid or unenforceable in whole or in part.
2.11 Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or holiday.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
the date and year first above written.
ASR INVESTMENTS CORPORATION HERITAGE COMMUNITIES, L.P.
By:________________________________________ By:________________________________
Name: Jon A. Grove Its:_______________________________
Its: Chairman of the Board, President
and Chief Executive Officer
TRANSFERORS:
FIRST ASPEN COURT ASSOCIATES, L.P. FIRST APPIAN WAY ASSOCIATES, L.P.
By:_______________________________________
Its:______________________________________ By:________________________________
Its:_______________________________
FIRST BRIAR PARK ASSOCIATES, A WASHINGTON
LIMITED PARTNERSHIP FIRST GREENWOOD CREEK
ASSOCIATES, L.P.
By:______________________________________
Its:_____________________________________ By:________________________________
Its:_______________________________
FIRST CHELSEA PARK ASSOCIATES, L.P. FIRST HIGHLANDS ASSOCIATES, L.P.
By:______________________________________ By:________________________________
Its:_____________________________________ Its:_______________________________
11
<PAGE>
FIRST MARYMONT ASSOCIATES, L.P. FIRST TIMBERCREEK LANDING
ASSOCIATES, L.P.
By:______________________________________ By:________________________________
Its:_____________________________________ Its:_______________________________
FIRST MONTFORT ASSOCIATES, L.P. CAMPUS DEVELOPMENT ASSOCIATES
LIMITED PARTNERSHIP
By:______________________________________ By:________________________________
Its:_____________________________________ Its:_______________________________
FIRST RIVERWAY ASSOCIATES, L.P. CAMPUS COMMONS ASSOCIATES -
LIMITED PARTNERSHIP
By:______________________________________ By:________________________________
Its:_____________________________________ Its:_______________________________
FIRST SPRINGFIELD ASSOCIATES, L.P. FIRST PACIFIC SOUTH CENTER
ASSOCIATES, L.P.
By:______________________________________ By:________________________________
Its:_____________________________________ Its:_______________________________
12
<PAGE>
[OPPENHEIMER & Co., Inc. LETTERHEAD]
November 11, 1996
The Special Committee of the
Board of Directors of
ASR Investments Corporation
335 North Wilmot, Suite 250
Tucson, Arizona 85711
Gentlemen:
You have requested our opinion as to whether the proposed transaction
involving the acquisition of Pima Mortgage Limited Partnership ("Pima Mortgage")
and Pima Realty Advisors, Inc. ("Pima Realty") by ASR Investments Corporation
(the "Company") in exchange for the issuance of shares of Common Stock of the
Company (the "Pima Mergers") is fair, to the Stockholders of the Company, from a
financial point of view.
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate, estate and
other purposes. We have been retained by the Special Committee of the Board of
Directors (the "Special Committee") for the purpose of, and will receive a fee
for, rendering this Fairness Opinion.
In connection with our Fairness Opinion, we have reviewed: the Pima
Mortgage/Pima Realty Merger Agreement between Pima Mortgage, Pima Realty and the
Company; a draft of the Proxy Statement to be provided to the Stockholders of
the Company; the Company's Form 10-K for the year ended December 31, 1995 and
Form 10-Q for the quarter ended June 30, 1996; the advisory agreement between
the Company and Pima Mortgage; the property management agreements between the
Company and Pima Realty and between Pima Realty and affiliates of Citibank, NA
and a non-affiliated third-party; and certain financial and other information
relating to the Company, Pima Mortgage and Pima Realty that was publicly
available or furnished to Oppenheimer by the Company, Pima Mortgage and Pima
Realty, including certain internal financial analysis, financial and operating
forecasts, reports and other information prepared by their respective
managements or representatives.
In addition, Oppenheimer held discussions with representatives of the
Company, Pima Mortgage and Pima Realty concerning each company's historical and
current operations, financial condition and prospects and conducted such other
investigation, financial analysis and
APPENDIX H
<PAGE>
studies and reviewed such other information and factors as it deemed appropriate
for the purposes of its opinion. Oppenheimer's Fairness Opinion is based upon
analysis of the foregoing factors in light of our assessment of general
economic, financial and market conditions as they exist on the date hereof. In
general, Oppenheimer used historical information through June 30, 1996. Events
occurring after such date could materially affect the assumptions and
conclusions contained in the Fairness Opinion. We have not been requested or
engaged and will not undertake to reaffirm or revise our Fairness Opinion or
otherwise comment upon any events occurring after the date hereof.
In rendering the Fairness Opinion, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness of
all financial and operating data, financial analysis, financial and operating
forecasts, reports and other information that were publicly available, compiled
or approved by or otherwise furnished or communicated to Oppenheimer by or on
behalf of the Company, Pima Mortgage and Pima Realty. With respect to the
financial and operating forecasts prepared by the Company, Pima Mortgage and
Pima Realty and furnished to Oppenheimer, Oppenheimer assumed, with the Special
Committee's approval, that they reflected the best current judgment of
management of the Company, Pima Mortgage and Pima Realty as to future financial
performance, and that there was a reasonable probability that the projections
would prove to be substantially correct. Oppenheimer did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company, Pima Mortgage and Pima Realty nor was Oppenheimer furnished with
any such evaluation or appraisal.
Furthermore, Oppenheimer expressed no opinion as to the price or
trading range at which the Company's Common Stock would trade following the
completion of the Pima Mergers.
It is understood that this Fairness Opinion is not to be quoted,
referred to, excerpted or summarized in whole or in part, or used for any
purpose, without our written consent. Oppenheimer hereby consents to the
inclusion of its opinion in the Company's Proxy Statement relating to the
Acquisition. We have been engaged by the Special Committee for the purpose of
rendering this Fairness Opinion, in connection with which we will receive a fee
payable in installments (i) upon engagement and (ii) upon the rendering of the
Fairness Opinion.
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion that, as of the date hereof,
the consideration to be paid in the Pima Mergers is fair, from a financial point
of view, to the Stockholders of the Company.
Very truly yours,
/s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
<PAGE>
Form of Bylaws Amendment
APPENDIX I
<PAGE>
Amendment to Article III, Section 3.08 of the Bylaws
Section 3.08 currently reads as follows
(portion to be amended in strikeout form)
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 3.08, 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 forgoing
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; and]*
(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.
*Note- lines within [] represents stikeout text.
<PAGE>
Amendment to Article III, Section 3.08 of the Bylaws
Section 3.08 shall be amended to read as follows
(amended portion in italics):
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 3.08, 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 forgoing
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.
*Note- lines within { } represents italics text.
<PAGE>
SECOND AMENDED AND RESTATED
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.
APPENDIX J
<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
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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;
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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
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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,
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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
X, and
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(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
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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.
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(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
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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
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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
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ASR INVESTMENTS CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS
March 27, 1997
The undersigned stockholder of ASR INVESTMENTS CORPORATION, a
Maryland corporation (the "Company"), hereby acknowledges receipt of the Notice
of Special Meeting of Stockholders and Proxy Statement, each dated March 27,
1997, and hereby appoints Jon A. Grove and Joseph C. Chan, and each of them,
proxies and attorneys-in-fact, with full power of substitution, on behalf of and
in the name of the undersigned, to represent the undersigned at a Special
Meeting of Stockholders of the Company, to be held on April 23, 1997, at 9:00
a.m., local time, at the Viscount Suite Hotel, 4855 E. Broadway Boulevard,
Tucson, Arizona, and at any adjournment or adjournments thereof, and to vote all
shares of Common Stock that the undersigned would be entitled to vote if then
and there personally present, on the matters set forth below. All defined terms
have the meaning set forth in the Proxy Statement.
1. APPROVAL OF THE COMBINATION PROPOSAL (Stockholders may vote
with respect to the entire Combination Proposal or the Components of the
Combination Proposal):
(a) Approval of the Combination Proposal providing for the
issuance of up to 1,980,000 shares of the Common Stock of the Company in
connection with the Transactions contemplated by the Master Combination and
Contribution Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(b)(i) Approval of the Winton Components of the Combination
Proposal relating to the Exchange Offer, the Asset Transfer, and the Associates
Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(b)(ii) Approval of the Pima Components of the Combination
Proposal relating to the Pima Mergers (which involve the mergers of companies
that are affiliated with officers of the Company) and the amendment to Section
3.08 of the Bylaws of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE APPROVAL OF PROPOSAL 1(b)(i) IS CONDITIONED ON THE
APPROVAL OF PROPOSAL 1(b)(ii). ACCORDINGLY, A VOTE AGAINST EITHER PROPOSAL
1(b)(i) or PROPOSAL 1(b)(ii) WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
PROPOSAL 1(b)(i). THE APPROVAL OF PROPOSAL 1(b)(ii) IS NOT CONDITIONED ON THE
APPROVAL OF PROPOSAL 1(b)(i).
2. Approval and adoption of the Amendment and Restatement of the Amended and
Restated Articles of Incorporation of the Company to include additional
provisions designed to further protect the Company's status as a real estate
investment trust.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY
DIRECTION IS INDICATED, WILL BE VOTED FOR THE APPROVAL OF THE COMBINATION
PROPOSAL; FOR THE APPROVAL AND ADOPTION OF THE AMENDMENT AND RESTATEMENT OF THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE COMPANY; AND AS SAID
PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
SPECIAL MEETING.
A majority of such attorneys or substitutes as shall be
present and shall act at said meeting or any adjournment or adjournments thereof
(or if only one shall be present and act, then that one) shall have and may
exercise all of the powers of said attorneys-in-fact hereunder.
Dated:__________________, 1997
___________________________________________
Signature
___________________________________________
Signature
(This proxy should be dated, signed by the
stockholder(s) exactly as his or her name
appears hereon, and returned promptly in the
enclosed envelope. Persons signing in a
fiduciary capacity should so indicate. If
shares are held by joint tenants or as
community property, both stockholders
should sign.)
