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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number: 1-9646
ASR INVESTMENTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
335 North Wilmot, Suite 250, Tucson, Arizona
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
86-0587826
(I.R.S. EMPLOYER IDENTIFICATION NO.)
85711
(ZIP CODE)
(520) 748-2111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 17, 1997, 3,147,150 shares of ASR Investments Corporation common
stock were outstanding, and the aggregate market value of the 3,036,160 shares
held by non-affiliates (based upon the closing price of the shares on the
American Stock Exchange) was approximately $67,934,000. Shares of Common Stock
held by each officer and director of the Company and the Manager have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
Item 1. Business ..................................................................... 3
Item 2. Properties ...................................................................26
Item 3. Legal Proceedings ............................................................26
Item 4. Submission of Matters to a Vote of Security Holders ..........................26
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.....27
Item 6. Selected Financial Data ......................................................28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................29
Item 8. Financial Statements and Supplementary Data ..................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ...................................................................33
PART III
Item 10. Directors and Executive Officers of the Registrant ..........................34
Item 11. Executive Compensation ......................................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management .............40
Item 13. Certain Relationships and Related Transactions ..............................40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............42
SIGNATURES ..............................................................................45
FINANCIAL STATEMENTS ...................................................................F-1
</TABLE>
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company is a real estate investment trust engaged in the acquisition and
operation of apartment communities in the southwestern United States. At
December 31, 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 $70.5
million, and the apartments were subject to first mortgage loans totaling $49.1
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 $2.8 million at December
31, 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 December 31,
1996, the Mortgage Assets had a carrying value of $5.0 million, of which $3.1
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 "Business -- Federal Income Tax
Considerations."
The Company was incorporated in the state of Maryland on June 18, 1987 and
commenced its operations on August 26, 1987. The Company's Common Stock is
listed on the 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.
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.
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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 "Business -- 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 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.
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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.
5
<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 onsite
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
Individual property lease programs are structured to respond to local market
conditions. The Company attempts to balance rent increases with high occupancy
and stabilized turnover costs. None of the current properties is currently
subject to rent control or rent stabilization regulations. Standard lease terms
stipulate due dates for rent payments, late charges, no offset or withholding
provisions, security deposits and damage reimbursement clauses and other
provisions considered favorable to the Company.
Development of Properties
In March 1996, the Company commenced the development of a luxury apartment
community located in Tempe, Arizona. The community is being built on 20 acres
and is planned for 356 units with an average size of 919 square feet. The total
estimated cost of the community is approximately $21.0 million, and the Company
has obtained a construction loan for $15,350,000 of which $255,000 was
outstanding at December 31, 1996. Leasing of the project began in December 1996.
As of December 31, 1996, the Company had invested $14.7 million.
The Company has acquired two other parcels of land for future development of
apartment communities. The Company may develop or sell one or more of these
parcels. As of December 31, 1996, the Company had invested $.9 million.
Current Properties
As of December 31, 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 December 31, 1996 was $498 per month, with community averages ranging from
$357 to $833.
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The following table sets forth certain information regarding the Company's
existing apartment communities.
<TABLE>
<CAPTION>
Weighted Average
Asset Carrying ---------------------------------------
Value Per Monthly Rent Average Occupancy
Year No. of Avg. ------------------ ------------- -------------------------
built units size Amount Unit Sq. ft. 1996 1995 31 Dec. 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 $ 1,266 $19.8 $36.63 $437 $ 429 94% 95%
Casa del Norte ............ 1984 84 525 1,757 20.9 39.86 433 429 93% 93%
Desert Springs ............ 1985 248 590 5,515 22.2 37.69 435 424 93% 85%
Landmark .................. 1986 176 641 4,415 25.1 39.14 415 417 93% 85%
Park Terrace .............. 1986 176 579 3,297 18.7 32.35 433 433 92% 89%
Park Village .............. 1985 60 540 739 12.3 22.79 393 409 95% 93%
Posada del Rio ............ 1980 160 621 3,266 20.4 32.87 448 440 95% 91%
South Point ............... 1984 144 626 2,273 15.8 30.00 357 385 91% 90%
----- --- ------ ---- ----- --- --- -- --
Total Tucson ........... 1,112 582 22,528 20.3 34.81 421 421 93% 89%
----- --- ------ ---- ----- --- --- -- --
Phoenix, Arizona
Contempo Heights .......... 1978 222 595 6,143 27.7 46.51 456 451 92% 93%
Finisterra* ............... 1995 356 919
----- --- ------ ---- ----- --- --- -- --
Total Phoenix ............. 578 795 6,143 10.6 13.37 456 451 92% 93%
----- --- ------ ---- ----- --- --- -- --
Houston, Texas
Clear Lake Falls .......... 1980 90 1,169 3,965 44.1 37.68 833 810 95% 95%
The Gallery ............... 1968 101 763 2,481 24.6 32.20 546 535 91% 90%
Memorial Bend ............. 1967 124 939 2,627 21.2 22.56 584 584 89% 89%
Nantucket Square .......... 1983 106 1,428 3,504 33.1 23.15 760 752 90% 90%
Prestonwood ............... 1978 156 957 3,428 22.0 22.96 509 509 91% 91%
Riviera Pines ............. 1979 224 717 4,478 20.0 27.88 491 487 93% 92%
----- --- ------ ---- ----- --- --- -- --
Total Houston ............. 801 949 20,483 25.6 26.95 590 584 92% 91%
----- --- ------ ---- ----- --- --- -- --
Albuquerque, N.M.
Dorado Terrace ............ 1986 216 608 6,845 31.7 52.13 519 519 92% 91%
Villa Serena .............. 1986 104 681 3,386 32.6 47.81 561 561 94% 93%
Whispering Sands .......... 1986 228 808 7,101 31.1 38.54 539 530 91% 94%
----- --- ------ ---- ----- --- --- -- --
Total Albuquerque ......... 548 705 17,332 31.6 44.86 535 531 92% 93%
----- --- ------ ---- ----- --- --- -- --
Restricted cash & deferred
loan fees ................ 4,020
------
Total wholly owned
apartments ............... 3,039 741 $70,506 $26.3 $36.62 $498 $ 495 92% 91%
===== === ======= ===== ====== ==== ===== == ==
</TABLE>
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* Under construction, open for initial occupancy in December 1996. Finisterra
is included in the total number of units and average unit size, but is
excluded in all other totals.
Pending Acquisition
In November 1996, the Company entered into an agreement to acquire up to 13
apartment communities and one office building as well as the related property
management company (the "Transactions"). The apartment communities contain a
total of 2,260 units and the office building totals approximately 73,000 square
feet. The Company would pay up to $3,100,000 in cash, issue approximately
1,623,000 shares of common stock, and assume or refinance existing first
mortgage loans of approximately $49.3 million. The Company would also issue
approximately 70,300 shares of common stock for the property management company,
and the owner of the management company would become an executive officer and
appointed to the Board of Directors of the Company.
Of the 13 apartment communities, six (937 units) are located in Houston,
Texas, five (989 units) are located in Dallas, Texas, and two (334 units) are
located in Pullman, Washington. The office building is located in Seattle,
Washington.
As a part of the above transaction, the Company also concurrently entered
into an agreement to acquire the entire ownership interests of Pima Mortgage
Limited Partnership (the "Manager" or "Pima
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Mortgage") and Pima Realty Advisors, Inc. (the "Property Manager"), which serve
as the manager and property manager, respectively, of the Company's day-to-day
operations and apartment properties, for 262,000 shares of common stock (the
"Pima Mergers"). As a result of the acquisition, the Company would become a
self-administered and self-managed REIT. The owners of the Manager would
continue to be executive officers and members of the Board of Directors of the
Company. See "Business -- Management Agreement" and "Business -- Property
Management Agreement" for information on the current arrangement with the
Manager and the Property Manager.
The sellers have approved the sale subject to the Company obtaining the
approval of its stockholders. The issuance of the Company's common stock in
connection with the Transactions and the Pima Mergers are subject to approval by
the stockholders of the Company. The Company has distributed proxy materials for
a special meeting of its stockholders to be held on April 23, 1997. Assuming the
stockholders approve the issuance of common stock in connection with the
Transactions and the Pima Mergers, closing is anticipated to occur soon
thereafter.
MORTGAGE ASSETS
GENERAL
Each of the Company's Mortgage Assets entitles 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 December 31, 1996, the carrying value of the Company's Mortgage Assets
was $5.0 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
8
<PAGE>
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.
(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.
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 December 31, 1996, the mortgage loans totalled $49.1 million,
which bear fixed interest rates that averaged 8.6%. 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 has obtained a $15,350,000 construction loan for the development
of its Finisterra apartment community. At December 31, 1996, $255,000 was
outstanding on the loan. In February 1997, the Company received funding of
$9,860,000 from the loan.
The Company also had outstanding short-term borrowings of $2.0 million at
December 31, 1996 that were secured by Mortgage Assets with a total carrying
value of $3.1 million. Under the short-term borrowings, if the value of the
<PAGE>
collateral (as estimated by the lender) declines, the Company is required to
provide additional collateral or reduce the borrowed amount.
9
<PAGE>
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 "Special
Considerations -- Future Offerings of Common Stock."
OPERATING RESTRICTIONS
The Company presently may not purchase commodities or commodity futures
contracts (other than interest rate futures when used solely for hedging). The
Company may not invest in unimproved real property or underwrite securities of
other issuers. The foregoing restrictions may not be changed without the
approval of the holders of a majority of the outstanding shares of the Company's
Common Stock.
Except as otherwise restricted, the operating policy of the Company is
controlled by its Board of Directors, which has the power to modify or alter
such policy without the consent of the stockholders. Although the Company has no
present intention of modifying its operating policies described herein, the
Board of Directors in the future may conclude that it would be advantageous for
the Company to do so.
COMPETITION
There are numerous real estate companies, insurance companies, financial
institutions, pension funds and other property owners that compete with the
Company in seeking properties for acquisition and in attracting and retaining
tenants.
EMPLOYEES
The Company currently has five full-time salaried employees.
MANAGEMENT AGREEMENT
GENERAL
Pima Mortgage Limited Partnership (the "Manager" or "Pima Mortgage") is an
Arizona limited partnership. 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
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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; or (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:
(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
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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 8 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.
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
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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.
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.
PROPERTY MANAGEMENT AGREEMENT
The Company has entered into property management agreements with Pima Realty
Advisors, Inc. (the "Property Manager") for each of its current properties. The
Property Manager is an affiliate of the Manager. Each property management
agreement, which has a current term through December 31, 1997, was approved by
the Unaffiliated Directors. Under the agreements, the Property Manager provides
the customary property management services at its cost without profit or
distributions to its owners, subject
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to the 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.
PENDING TRANSACTION
As described in "Business -- Operating Policies and Strategies -- Real
Estate Activities -- Pending Acquisitions," the Company has entered into an
agreement to acquire the entire ownership interests of the Manager and the
Property Manager for 262,000 shares of common stock. As a result of the
acquisition, the Company would become a self-administered and self-managed REIT.
The owners of the Manager would continue to be executive officers and members of
the Board of Directors of the Company. See "Business -- Management Agreement"
and "Business -- Property Management Agreement" for information on the Company's
current arrangement with the Manager and the Property Manager.
SPECIAL CONSIDERATIONS
REAL ESTATE INVESTMENT CONSIDERATIONS
GENERAL
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
earned and capital appreciation generated by the related properties as well as
the expenses incurred. If the 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.
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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 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 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
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governmental authority. The Company has informed the local governmental
authority of the groundwater contamination and asked the authority to expand the
clean-up procedures to include the Company's property. The Company believes that
the environmental liability for its property would not have a material adverse
effect on the Company's business or results of operations.
The Company has determined that there are minor amounts of
asbestos-containing materials ("ACMs") in five of the Company's properties. The
Company maintains an Operations and Maintenance Program that details operating
procedures with respect to ACMs prior to any renovation and that requires
periodic inspection by the Company's employees for any change in condition of
existing ACMs.
In addition, the apartment site under development in Tempe, Arizona was
formerly used for agricultural purposes and a portion of the site was used as
the runway for a pesticide aerial application firm located adjacent to the
apartment site. The site of the pesticide aerial application firm is currently a
subject of remediation by the U.S. Environmental Protection Agency ("EPA") and
the Arizona Department of Environmental Quality ("ADEQ"). Extensive soil tests
on the apartment site revealed that a few samples contained minor amounts of
toxaphene above the regulatory level. The Company engaged an independent
environmental consulting firm to conduct a "site specific risk assessment" to
evaluate the potential threat to human health based on exposures and conditions
unique to the site. The consulting firm's report indicates that the potential
threat is minimal and no further action is necessary prior to the development of
the site as an apartment community. The EPA and ADEQ have not required the
Company to take any remedial actions on the site. The agencies also have not
informed the Company of any regulatory actions on the site.
Except as set forth above, the reports have not revealed any environmental
liability, nor is the Company aware of any environmental liability, that the
Company believes would have a material adverse 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.
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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 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 "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- General" and "Business -- 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
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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 December 31, 1996, $79 million of the $501
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 "Special
Considerations -- 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.
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The Company's Bylaws limit borrowings to no more than 300% of the amount of
its net assets (as described herein) unless borrowings in excess of that amount
are approved by a majority of the Unaffiliated Directors (as defined herein).
See "Business -- Capital Resources." Each of the Company's 19 apartment
communities has been pledged to secure a first mortgage loan; such mortgage
loans totalled $49.1 million at December 31, 1996. In addition, the Company had
short-term borrowings of $2.0 million secured by Mortgage Assets having an
aggregate carrying value of $3.1 million.
No assurance can be given as to the actual effect of borrowings by the
Company.
PLEDGED ASSETS
A substantial portion of the Company's assets currently are and in the
future can be expected to be pledged to secure its borrowings. Therefore, such
assets will not be available to the stockholders in the event of the liquidation
of the Company except to the extent that the market value thereof exceeds the
amounts due to the creditors. However, the market value of the Mortgage Assets
is uncertain because the market for Mortgage Assets of the type owned by the
Company is not well developed and fluctuates rapidly as 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.
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.
MANAGEMENT FEES
The Manager advises the Company with respect to various aspects of the
Company's business and operations, manages the Company's overall business and
operations, and represents the Company in its dealings with third parties
pursuant to the terms of the Management Agreement. In the event that the
Management Agreement is terminated by the Company or is not renewed by the
Company on terms at least as favorable to the Manager as the current Management
Agreement other than as a result of a termination by the Company for cause (as
specified above and defined in the Management Agreement), the Manager will be
entitled to receive from the Company the management fee that would have been
payable by the Company to the Manager pursuant to such Management Agreement
based on the investments made by the Company prior to the date on which the
Management Agreement is so terminated (or not renewed) for the 12 full fiscal
quarters beginning on the date of such termination (or failure to renew) as more
fully described in the Management Agreement.
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<PAGE>
POTENTIAL CONFLICTS OF INTEREST
The Company is subject to potential conflicts of interest arising from its
relationship with the Manager, the Property Manager and ASFS under the
"Subcontract Agreement." The Management Agreement does not limit or restrict the
right of the Manager, the partners of the Manager or any of their directors,
officers or employees from engaging in any business or rendering services of any
kind to any other person except that the Manager (but not its partners or their
directors, officers or employees) are not permitted to provide any such services
to any residential mortgage REIT other than the Company. The Company may
purchase assets from entities which may be affiliates of the Manager. Although
certain agreements and activities must be approved by the Unaffiliated Directors
(as described below), the day-to-day transactions between the Company and the
Manager and the Property Manager are not subject to the specific pre-approval of
the Unaffiliated Directors. See "Business -- Management Agreement -- Terms of
Management Agreement" and "Business -- Property Management Agreement."
The Company's Articles of Incorporation limit the liability of its directors
and officers to the Company and its stockholders to the fullest extent permitted
by Maryland law, and both the Company's Articles and Bylaws provide for
indemnification of the directors and officers to such extent. The Management
Agreement also limits the responsibilities and liabilities of the Manager, the
partners of the Manager and any of their partners, directors, officers,
stockholders and employees and provides for their indemnification against
liabilities except in certain circumstances. See "Business -- Management
Agreement -- Terms of the Management Agreement -- Limits of Responsibility." The
Property Management Agreement also limits the responsibilities and liabilities
of the Property Manager. See "Business -- Property Management Agreement." In
addition, the Subcontract Agreement limits the responsibilities of ASFS and
provides for the indemnification of ASFS, its affiliates and their directors and
officers against various liabilities. See "Business -- Management Agreement --
The Subcontract Agreement."
Counsel to the Company has furnished, and in the future may furnish, legal
services to the Manager, affiliates of the Manager and certain Issuers
(including those affiliated with ASFS). There is a possibility that in the
future the interests of certain of such parties may become adverse, and counsel
may be precluded from representing one or all of such parties. If any situation
arises in which the interests of the Company appear to be in conflict with those
of the Manager, or its affiliates, additional counsel may be retained by one or
more of the parties.
With a view toward protecting the interests of the Company's stockholders,
the Bylaws of the Company provide that a majority of the Board of Directors (and
a majority of each committee of the Board of Directors) must not be
"Affiliates"of the Manager or "Advisors," as these terms are defined in the
Bylaws, and that the investment policies of the Company must be reviewed
annually by these directors (the "Unaffiliated Directors"). Moreover, the annual
renewals of the Management Agreement and the Property Management Agreement
require the affirmative vote of a majority of the Unaffiliated Directors. In
addition, a majority of such Unaffiliated Directors may terminate the Management
Agreement or the Property Management Agreement at any time upon 60 days' notice.
See "Business -- The Management Agreement."
CERTAIN CONSEQUENCES OF AND FAILURE TO MAINTAIN REIT STATUS
In order to maintain its qualification as a 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 "Business -- Federal Income Tax
Considerations -- Qualification of the Company as a REIT." Among other things,
these restrictions may limit the Company's ability to acquire certain types of
assets that it otherwise would consider desirable, limit the ability of the
Company to dispose of assets that it has held for less than four years if the
disposition would result in gains exceeding specified amounts, limit the ability
of the Company to engage in hedging transactions that could result in income
exceeding specified amounts, and require the Company to make distributions to
its stockholders at times that the Company may deem it more advantageous to
utilize the funds available for distribution for other corporate purposes (such
as the purchase of additional assets or the repayment of debt) or at times that
the Company may not have funds readily available for distribution.
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<PAGE>
The Company's operations from time to time generate taxable income in excess
of its net income for financial reporting purposes. The Company also may
experience a situation in which its taxable income is in excess of the actual
cash receipts. See "Business -- Federal Income Tax Considerations." To the
extent that the Company does not otherwise have funds available, either
situation may result in the Company's inability to distribute substantially all
of its taxable income as required to maintain its REIT status. See "Business --
Federal Income Tax Considerations." Alteratively, the Company may be required to
borrow funds to make the required distributions that could have the effect of
reducing the yield to its stockholders, to sell a portion of its assets at times
or for amounts that are not advantageous, or to distribute amounts that
represent a return of capital that would reduce the equity of the Company. In
evaluating assets for purchase, the Company considers the anticipated tax
effects of the purchase including the possibility of any excess of taxable
income over projected cash receipts.
If the Company should not qualify as a REIT in any tax year, it would be
taxed as a regular domestic corporation and, among other consequences,
distributions to the Company's stockholders would not be deductible by the
Company in computing its taxable income. Any such tax liability could be
substantial and would reduce the amount of cash available for distributions to
the Company's stockholders. See "Business." In addition, the unremedied failure
of the Company to be treated as a REIT for any one year would disqualify the
Company from being treated as a REIT for the four subsequent years.
EXCESS INCLUSIONS
A portion of the dividends paid by the Company constitutes unrelated
business taxable income to certain otherwise tax-exempt stockholders which will
constitute a floor for the taxable income of stockholders not exempt from tax,
and will not be eligible for any reduction (by treaty or otherwise) in the rate
of income tax withholding in the case of nonresident alien stockholders. For
1996, the entire ordinary income portion ($0.17 per share) of the dividend was
excess inclusion income. See "Business -- Federal Income Tax Considerations --
Tax Consequences of Common Stock Ownership."
MARKETABILITY OF SHARES OF COMMON STOCK AND RESTRICTION ON OWNERSHIP
The Company's Articles of Incorporation prohibit ownership of its Common
Stock by tax-exempt entities that are not subject to tax on unrelated business
taxable income and by certain other persons (collectively "Disqualified
Organizations"). Such restrictions on ownership exist so as to avoid imposition
of a tax on a portion of the Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are designed to
prevent concentrated ownership of the Company that might jeopardize its
qualification as a REIT under the Code. Among other things, these provisions
provide (i) that any acquisition of shares that would result in the
disqualification of the Company as a REIT under the Code will be void, and (ii)
that in the event any person acquires, owns or is deemed, by operation of
certain attribution rules set out in the Code, to own a number of shares in
excess of 9.8% of the outstanding shares of the Company's Common Stock ("Excess
Shares"), the Board of Directors, at its discretion, may redeem the Excess
Shares. In addition, the Company may refuse to effectuate any transfer of Excess
Shares and certain stockholders, and proposed transferees of shares, may be
required to file an affidavit with the Company setting forth certain information
relating, generally, to their ownership of the Company's Common Stock. These
provisions may inhibit market activity and the resulting opportunity for the
Company's stockholders to receive a premium for their shares that might
otherwise exist if any person were to attempt to assemble a block of shares of
the Company's Common Stock in excess of the number of shares permitted under the
Articles of Incorpo- ration. Such provisions also may make the Company an
unsuitable investment vehicle for any person seeking to obtain (either alone or
with others as a group) ownership of more than 9.8% of the outstanding shares of
Common Stock. Investors seeking to acquire substantial holdings in the Company
should be aware that this ownership limitation may be exceeded by a stockholder
without any action on such stockholder's part in the event of a reduction in the
number of outstanding shares of the Company's Common Stock.
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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 "Special Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
QUALIFICATION OF THE COMPANY AS A REIT
GENERAL
The Company has made an election to be treated as a REIT under the Code.
Thus, if the Company satisfies certain tests in each taxable year with respect
to the nature of its income, assets, share ownership and the amount of its
distributions, among other things, it generally should not be subject to tax at
the corporate level on its income to the extent that it distributes cash in the
amount of such income to its stockholders.
Generally, the unremedied failure of the Company to qualify as a REIT for
any taxable year could materially and adversely affect the stockholders as net
income of the Company would be taxed at ordinary corporate rates, and the
Company would not receive a deduction for any dividends to the stockholders and
thus cause a material reduction of the cash available for distribution to the
stockholders as dividends.
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to the
sources of its income, the nature and diversification of its assets, the amount
of its distributions, and the ownership of the Company. The following is a
summary discussion of those various tests.
Sources of Income
The Company must satisfy three separate income tests for each taxable year
with respect to which it intends to qualify as a REIT: (i) the 75% income test;
(ii) the 95% income test; and (iii) the 30% income limitation.
Under the first test, at least 75% of the Company's gross income for the
taxable year must be derived from certain qualifying real estate related
sources. The 95% income test requires that at least 95% of the Company's gross
income for the taxable year must be derived from the items of income that either
qualify under the 75% test or are from certain other types of passive
investments, such as dividend or interest income or capital gain on the sale of
stocks or securities. Thus, only 5% of a REIT's income each year is
unrestricted. Such non-qualifying income may include third-party management
fees, income from certain services provided to tenants, or rents from personal
property. Finally, the 30% income limitation requires the Company to derive less
than 30% of its gross income for the taxable year from the sale or other
disposition of (1) real property, including interests in real property and
interests in mortgages on real property, held for less than four years, other
than foreclosure property or property involuntarily converted through
destruction, condemnation or similar events, (2) stock or securities or swap
agreements held for less than one year, and (3) property in "prohibited
transactions." A prohibited transaction is a sale or disposition of dealer
property that is not foreclosure property or, under certain circumstances, a
real estate asset held for at least four years.
If the Company inadvertently fails to satisfy either the 75% income test or
the 95% income test, or both, and if the Company's failure to satisfy either or
both tests is due to reasonable cause and not willful neglect, the Company may
avoid loss of REIT status by satisfying certain reporting requirements and
paying a tax equal to 100% of any excess nonqualifying income. See "Business --
Federal Income Tax
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Considerations -- Taxation of the Company." There is no comparable safeguard
that could protect against REIT disqualification as a result of the Company's
failure to satisfy the 30% income limitation.
The Company anticipates that its gross income will continue to consist
principally of income that satisfies the 75% income test. The composition and
sources of the Company income should allow the Company to satisfy the income
tests during each year of its existence. Certain short-term reinvestments,
however, may generate qualifying income for purposes of the 95% income test but
nonqualifying income for purposes of the 75% income test, and certain hedging
transactions could give rise to income that, if excessive, could result in the
Company's disqualification as a REIT for failing to satisfy the 30% income
limitation, the 75% income test, and/or the 95% income test. The Company intends
to monitor its reinvestments and hedging transactions closely to attempt to
avoid disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75% of
the value of the Company's assets must be cash and cash items (including
receivables), federal government securities and qualifying real estate assets.
This requirement is intended to assure that the bulk of REIT investments are
either equity or mortgage interests in real property. Qualifying real estate
assets include interests in real property, and mortgages, equity interests in
other REITs, any stock or debt instrument for so long as the income therefrom is
qualified temporary investment income and, subject to certain limitations,
interests in Real Estate Mortgage Investment Conduits ("REMICs"). The balance of
the Company's assets may be invested without restriction, except that holdings
of the securities of any one non-governmental issuer may not exceed 5% of the
value of the Company's assets or 10% of the outstanding voting securities of
that issuer.
If the Company fails to satisfy the 75% asset test at the end of any quarter
of its taxable year as a result of its acquisition of securities or other
property during that quarter, the failure can be cured by a disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company will take such action as may be required to cure any failure to
satisfy the 75% asset test within 30 days after the close of any quarter. The
Company may not be able to cure any failure to satisfy the 75% asset test,
however, if assets that the Company believes are qualifying assets for purposes
of the 75% asset test are later determined to be nonqualifying assets.
Distributions
Each taxable year the Company must distribute as dividends to its
stockholders an amount at least equal to (i) 95% of its REIT taxable income
(determined before the deduction of dividends paid and excluding any net capital
gain), plus (ii) 95% of the excess of its net income from foreclosure property
over the tax imposed on such income by the Code, less (iii) any excess noncash
income (as determined under the Code). The distribution requirement does not
compel the Company to distribute that portion, if any, of its cash flow that
exceeds the REIT taxable income.
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in the
following year if certain guidelines are followed. Further, if the Company fails
to meet the 95% distribution requirement as a result of an adjustment to the
Company's tax returns by the Internal Revenue Service ("IRS"), the Company may,
if the deficiency is not due to fraud with intent to evade tax or a willful
failure to file a timely tax return, retroactively cure the failure by paying a
deficiency dividend to stockholders and certain interest and penalties to the
IRS. The Company intends to make distributions to its stockholders on a basis
that will allow the Company to satisfy the distribution requirement. In certain
instances, however, the Company's predistribution taxable 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 "Business -- Federal Income Tax Considerations --
Status of the Company as a REIT."
The Company has a net operating loss carryforward for income taxes (the
"NOL") at December 31, 1996 of approximately $76 million. Under REIT tax rules,
the Company is allowed to offset taxable
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income (except for Excess Inclusion Income) by the available NOL and thus, under
most circumstances, is not currently required to make distributions to
stockholders except for Excess Inclusion Income. The NOL expires in 2009 (1999
for state tax purposes).
Ownership of the Company
Shares of the Company's Common Stock must be held by a minimum of 100
persons for at least 335 days in each taxable year after the Company's first
taxable year. Further, at no time during the second half of any taxable year
after the Company's first taxable year may more than 50% of the Company's shares
be owned, actually or constructively, by five or fewer individuals (including
pension funds and certain other types of tax-exempt entities). To evidence
compliance with these requirements, the Company is required to maintain records
that disclose the actual ownership of its outstanding shares. Each year, in
order to satisfy that requirement, the Company will demand written statements
from record holders owning designated percentages of Common Stock disclosing,
among other things, the identities of the actual owners of such shares. The
Company's Articles of Incorporation contain repurchase provisions and transfer
restrictions designed to prevent violation of the latter requirement. Therefore,
the Company believes that its shares of Common Stock currently are owned by a
sufficient number of unrelated persons to allow the Company to satisfy the
ownership requirements for REIT qualification.
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies and elects to be treated
as a REIT under the Code, it generally will not be subject to federal income tax
on that portion of its taxable income that is distributed to its stockholders in
or with respect to that year. Regardless of distributions to stockholders,
however, the Company may become subject to a tax on certain types of income.
The Company uses the calendar year both for tax purposes and for financial
reporting purposes. Due to the differences between tax accounting rules and
generally accepted accounting principles, the Company's REIT Taxable Income will
vary from its net income for financial reporting purposes.
TAX CONSEQUENCES OF COMMON STOCK OWNERSHIP
The federal income tax consequences of ownership in the Company's Common
Stock is a complex matter and may vary depending on the income tax status of the
stockholder. Accordingly, the following discussion is intended to be general in
nature. Stockholders should consult their own tax advisors regarding the income
tax considerations with respect to their investments in the Company.
Dividend Income
Distributions to stockholders out of the Company's current or accumulated
earnings and profits will be taxable as "portfolio income" in the year received
and not as income from a passive activity. Therefore, REIT dividends may not be
used to offset a stockholder's passive losses. With respect to any dividend
payable to stockholders of record as of a specified date prior to the end of the
year, that dividend is deemed to have been received by the stockholder on
December 31 if the dividend is paid in January of the following calendar year.
The Company's dividends are not eligible for the dividends-received
deduction for corporations. If the Company's total distributions for a taxable
year exceed its current and accumulated earnings and profits, a portion of each
distribution will be treated first as a return of capital, reducing a
stockholder's basis in his shares (but not below zero), and then as capital gain
in the event such distributions are in excess of a stockholder's adjusted basis
in his shares.
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.
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The total dividends of $2.00 per share for 1996 consists of ordinary income
of $0.17, return of capital of $0.45 per share and long-term capital gain of
$1.38.
Excess Inclusion Rule
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 1996, the entire ordinary income portion ($0.17 per share)
of the dividend was excess inclusion income.
TAX-EXEMPT ORGANIZATIONS AS STOCKHOLDERS
The Code requires a tax-exempt stockholder of the Company to treat as
unrelated business taxable income its allocable share of the Company's excess
inclusions. 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.
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
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the IRS the amount of dividends paid during each calendar year and the amount of
tax withheld, if any. Stockholders should consult their tax advisors as to the
procedure for insuring that the Company dividends to them will not be subject to
backup withholding.
STATE AND LOCAL TAXES
The discussion herein concerns only the federal income tax treatment likely
to be accorded the Company and its stockholders. No discussion has been provided
regarding the state or local tax treatment of the Company and its stockholders.
The state and local tax treatment may not conform to the federal income tax
treatment described above and each investor should discuss such issues with his
state and local tax advisor.
ITEM 2. PROPERTY
See "Business -- Operating Policies and Strategies -- Real Estate Activities
- -- Current Properties."
The principal executive offices of the Company and the Manager are located
at 335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone (520) 748-2111.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed and principally traded on the 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 3/8 18 7/8 0.50
On March 17, 1997, the closing sales price for shares of the Company's
Common Stock on the Amex Composite Tape was $22 3/8 per share and the
approximate number of holders of record of Common Stock was 2,000.
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ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The selected consolidated financial data presented below were derived from
the audited Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Income from real estate
Rental and other income ......................$14,581 $14,034 $12,528
Operating and maintenance expenses, real estate
taxes and insurance ......................... (6,855) (6,719) (5,497)
Interest expense ............................. (4,348) (4,387) (3,941)
Depreciation and amortization ................ (2,819) (2,692) (1,995)
--------- --------- ---------
Income from real estate ..................... 559 236 1,095
--------- --------- ---------
Income from mortgage assets
Prospective yield income ..................... 2,630 3,884 6,433 $ 7,264 $ 919
Income from redemptions and sales ............ 9,461 5,302 4,263
Interest expense ............................. (181) (347) (2,596) (4,794) (5,841)
Provision for reserves ....................... (20,286) (57,588)
--------- --------- --------- ----------- -----------
Income from mortgage assets ................. 11,910 8,839 8,100 (17,816) (62,510)
--------- --------- --------- ----------- -----------
Income (loss) before administrative
expenses and other income .................... 12,469 9,075 9,195 (17,816) (62,510)
Administrative expenses ........................ (3,203) (2,983) (2,216) (1,949) (3,104)
Other income (expense) net ..................... (425) 462 723 286 739
--------- --------- --------- ----------- -----------
Income (loss) before cumulative effect
of accounting change ......................... 8,841 6,554 7,702 (19,479) (64,875)
Cumulative effect of accounting change ........ (21,091)
--------- --------- --------- ----------- -----------
Net Income .....................................$ 8,841 $ 6,554 $ 7,702 $(40,570) ($64,875)
========= ========= ========= =========== ===========
Per average outstanding share
Net income (loss) before cumulative effect of
accounting change ...........................$ 2.80 $ 2.09 $ 2.48 $ (6.27) $ (20.20)
Cumulative effect of accounting change* ..... (6.79)
--------- --------- --------- ----------- -----------
Net income (loss) per share ..................$ 2.80 $ 2.09 $ 2.48 $ (13.07) $ (20.20)
========= ========= ========= =========== ===========
Dividends per share ............................$ 2.00 $ 2.00 $ 0.50 $ 1.15 $ 2.25
========= ========= ========= =========== ===========
Weighted average shares outstanding ............ 3,153 3,141 3,100 3,104 3,209
========= ========= ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Apartment and other real estate
assets ..............................$89,958 $79,510 $73,056 $3,855
Mortgage assets ...................... 5,039 11,877 18,965 37,881 $108,623
Total assets ......................... 97,796 94,169 96,745 54,068 116,589
Real estate notes payable ............ 49,110 49,212 50,693
Mortgage assets borrowing, net ....... 2,014 4,495 6,422 22,062 39,517
Stockholders' Equity ................. 40,102 37,395 37,100 30,948 75,284
</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.
28
<PAGE>
ITEM 7. 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 the 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 17 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 1996, the
loan was refinanced with a $3,800,000 non-recourse first mortgage loan. In March
1996, the Company began construction of a 356-unit luxury apartment community in
Tempe, Arizona. Total project costs are estimated to be approximately
$21,000,000, and the Company has obtained a construction loan of $15,350,000.
In addition to wholly owned apartments 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 new apartment communities.
The Company continues to own mortgage assets (all 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 rates dropped to their lowest level in 20 years and
prepayment rates reached record levels. In 1994, mortgage 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 and sales 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 and sales reduce the
cash flows and income in future periods.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Real Estate Operations -- Rental and other income increased $547,000 in 1996
primarily as a result of (i) $346,000 from rental rate increases (attributable
primarily to a 3% increase in the Houston communities), (ii) $201,000 from
higher occupancy rates (attributable primarily to the Tucson communities),
29
<PAGE>
(iii) $242,000 from prior rental increases becoming effective as leases are
renewed or the apartment is re-leased, and (iv) $69,000 from communities
acquired through joint ventures. The increases were mitigated by $238,000 from
rental concessions (attributable primarily to the Albuquerque communities).
Operating and maintenance expense increased $145,000 (2.8%) as a result of the
community acquired in February 1995 and to increased payroll expense
(attributable primarily to the Tucson communities). Real estate taxes and
insurance remained flat as there were no increases or decreases in rates.
Depreciation and amortization increased by $127,000 (4.7%) primarily as a result
of the community acquired in February 1995 and capital improvements on the
apartment communities. Interest expense on real estate mortgages decreased due
to lower principal balances resulting from monthly payments.
Mortgage Assets -- As a result of amortization of the investment in and
redemption and sales of mortgage assets in 1995 and 1996, the 1996 prospective
yield income decreased by $1,254,000. The average balance of mortgage assets
decreased from $14,827,000 for 1995 to $8,118,000 for 1996. The decrease in
income was mitigated by an increase in the average prospective yield from 28%
for 1995 to 35% for 1996. Redemptions and sales of nine mortgage assets in 1996
generated total income of $9,461,000. In 1995, redemptions and sales of five
mortgage assets generated total income of $2,882,000. In addition, the Company
recorded income of $2,420,000 in 1995 from the reversal of the excess yield
maintenance payment accrued in 1993 on notes payable secured by mortgage assets
which were paid off in February 1995. Interest expense related to the mortgage
assets decreased due to lower short-term borrowing and the payoff of a note in
April 1995.
Operating Expenses and Other Income -- Administrative expenses increased in
1996 primarily as a result of an increase in expense accruals for stock
appreciation rights of $151,000 as a result of price increases in the Company's
common stock. Other expenses increased in 1996 as a result of $380,000 in
expenses related to future acquisitions and to $380,000 in write offs of
cancelled real estate projects. The income in 1995 included a gain of $311,000
from the early payoff of a note payable and a $180,000 gain from the sale of an
asset. The 1995 income was offset by a $350,000 reserve on a real estate
investment.
1995 Compared to 1994
Real Estate Operations -- Income and expenses from real estate operations
increased in 1995 as a result of the acquisition of an apartment community in
February 1995 as well as new investments in joint ventures. Rental and other
income increased by $1,506,000 as a result of $931,000 in revenues from the
acquired community, a $569,000 increase in revenues from communities owned by
the Company, and a $60,000 increase in joint venture income. Operating expenses
increased as a result of $403,000 in expenses incurred by the Company in
connection with the acquired community as well as higher operating expenses in
the other communities owned by the Company, which resulted from a decrease in
occupancy rates from 94% in 1994 to 91% in 1995 (mostly in Tucson) and the
corresponding turnover, marketing and payroll expenses incurred by the Company
as a result of such decrease in occupancy rates. Depreciation expenses increased
as a result of the Company's acquisition of an apartment community in February
1995 and capital expenditures incurred in 1994 and 1995. Interest expense on
real estate mortgages also increased in 1995 as a result of the Company's
borrowing of additional funds for the acquisition in February 1995.
Mortgage Assets -- As a result of amortization of the investment in and
redemption of mortgage assets 1994 and 1995, the average balance of mortgage
assets decreased from $26,691,000 for 1994 to $14,827,000 for 1995. While the
average prospective yield was 28% for 1995 compared with 24% for 1994, the
prospective yield income decreased by $2,549,000. Income from redemptions in
1995 totaled $5,302,000, consisting of $2,882,000 from redemption of five
mortgage assets and $2,420,000 from the reversal of the yield maintenance
payment accrued in 1993 on notes payable. Income from redemptions of $4,263,000
in 1994 resulted from the redemption of four mortgage assets. Interest expense
related to the mortgage assets decreased as a result of the prepayment of the
notes payable secured by mortgage assets in February 1995 and the prepayment of
a note in April 1995.
Operating Expenses and Other Income -- Administrative expenses increased in
1995 primarily as a result of an increase in expense accruals for stock
appreciation rights of $381,000 caused by higher stock price and dividend
equivalent payments on stock options of $600,000. The higher stock appreciation
rights and dividend equivalent expenses were mitigated by a decrease in
management fees of $170,000 in 1995 compared to 1994.
30
<PAGE>
Other income decreased in 1995 as a result of the use of the cash held by
the trustee to prepay the notes payable secured by mortgage assets in February
1995.
INCOME FROM REDEMPTION AND SALES OF MORTGAGE ASSETS
The Company's income includes income from redemption and sales of mortgage
assets of $9,461,000, $5,302,000, and $4,263,000 for the years ended December
31, 1996, 1995, and 1994, 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 1996 was $12,968,000 compared with
$7,867,000 for the same period in 1995. The increase was primarily a result of a
$4,159,000 increase in income from redemptions and sales of mortgage assets
($9,461,000 for 1996 compared to $5,302,000 for 1995, which included a non-cash
credit of $2,420,000 for the reversal of accrued excess yield maintenance
payment on notes payable) offset by a $1,254,000 decrease in prospective yield
income on the mortgage assets. Cash provided by operations in 1995 was lower
than 1994 as a result of lower net income and a non-cash credit described in the
preceding sentence.
Cash used in investing activities totaled $6,916,000 in 1996 compared to
$2,160,000 and $49,696,000 in 1995 and 1994, respectively. The increase in cash
usage of $4,756,000 in 1996 compared to 1995 primarily reflects the $11,753,000
of construction expenditures for the Company's Finisterra apartment community.
The increase was mitigated by (i) a decrease of $5,502,000 in investments in
apartments as the Company purchased an apartment community in February 1995 and
did not make any purchases in 1996, (ii) a decrease of $1,830,000 in investment
in joint ventures as the Company made investments in new joint ventures in 1995
to acquire two apartment communities and made no investments in new joint
ventures in 1996, (iii) a decrease of $250,000 in the amortization in the
carrying value of the mortgage assets, and (iv) a net decrease of $85,000 in
other real estate investments. Cash used in investing activities in 1995 were
lower than 1994 due to the Company acquiring its initial portfolio of 17
apartment communities in 1994 while acquiring only one apartment community in
1995. The decrease in 1994 cash used for the acquisition apartments was
mitigated by lower mortgage cash flow for 1995 as a result of amortization and
redemptions.
Cash used in financing activities was $6,070,000 in 1996 compared to
$7,415,000 in 1995. The decrease was primarily due to the repayment of real
estate notes of $7,955,000 in 1995, the construction costs payable of $1,581,000
and a net decrease of $1,678,000 from other financing activities. The decrease
was mitigated by real estate borrowing of $6,895,000 to finance real estate
acquisitions in 1995 and a net increase of $2,974,000 (cash used for) in
borrowing secured by mortgage assets. Cash used in financing activities was
$7,415,000 in 1995 compared with cash provided by financing activities of
$33,309,000 in 1994. The decrease of $40,724,000 in the cash provided by
financing activities resulted primarily from (i) a decrease of $43,941,000 in
real estate borrowing related to the acquisition of apartment communities, (ii)
an increase of $6,470,000 in the repayment of real estate notes, (iii) an
increase of $4,754,000 in dividend payment as the Company reinstated the regular
quarterly dividend in 1995, and (iv) a decrease of $1,692,000 from other
financing activities. The decrease in cash provided by financing activities was
mitigated by (a) a decrease of $11,638,000 in the repayment of borrowing secured
by mortgage assets, and (b) an increase of $4,495,000 in short-term borrowing.
The Company continues to realize substantial cash flows from mortgage assets
to fund its apartment acquisitions and development. A majority of the mortgage
cash flows is generated from redemptions. 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
1996, the mortgage assets generated cash flow of $18,929,000, including
$13,625,000 from the redemption and sales of nine mortgage assets The Company
used a portion of the proceeds to reduce short-term borrowing by $2,481,000. In
addition, the Company exercised its redemption rights on three mortgage assets
for total proceeds of $6,800,000 in January 1997.
31
<PAGE>
The Company has prepared the following estimates of future cash flows from
the mortgage assets. Cases 1, 2 and 3 assume that except for the redemptions of
the three mortgage assets in January 1997 as described in the preceding
paragraph, there will be no further early redemptions of mortgage assets. The
assumed interest rate and mortgage prepayment rates in Case 2 are the
approximate interest rate and forecasts of prepayment rates made by market
participants as of December 31, 1996. The estimates in Case 4 have been prepared
using the same interest rate and mortgage prepayment rates as Case 2 except that
each mortgage asset is redeemed at the first available date and the underlying
mortgages are sold at the December 31, 1996 prices. Mortgage prepayment rates
represent the average annual prepayment rate assumed for the underlying mortgage
instruments. (Dollars in thousands.)
<TABLE>
<CAPTION>
CASE 1 CASE 2 CASE 3 CASE 4
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Assumed one month LIBOR .................... 3.5% 5.5% 7.5% 5.5%
Assumed mortgage prepayments ............... 21.18% 13.18% 8.47% 13.18%
Average sale price of mortgages (% of par) 107%
Estimated cash flows
1997 ...............................$ 9,280 $ 8,920 $ 8,565 $ 12,181
1998 ............................... 1,794 1,579 1,298 1,872
1999 ............................... 1,234 1,181 1,061 427
2000 ............................... 843 917 900 17,747
2001 ............................... 531 693 762 834
2002-2010 .......................... 3,130 6,804 12,390 64
--------- --------- --------- ----------
Total ..............................$16,812 $20,094 $24,976 $33,125
========= ========= ========= ==========
</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 percentage of the original balance or a specified date). As an
example, if the average premium assumed for mortgage sales in Case 4 above were
to decrease by almost half (the average mortgage prices decreases to 104%), the
estimated total cash flow in Case 4 would decline by $9,657,000 of which
$1,517,000 would relate to 1997.
Each of the apartment communities is pledged to secure a non-recourse and
non-cross collateralized first mortgage loan. The loans generally bear fixed
interest rates which averaged 8.6% at December 31, 1996. The principal and
interest payments on these loans are approximately $380,000 per month. In
December 1997, one of the loans will mature and the Company expects to refinance
the $1,726,400 loan. In addition, the Company is required to deposit $186,000
per month with the lender to be used for specified capital replacement
expenditures, property taxes and insurance premiums. At December 31, 1996,
$2,930,000 was held by lenders. The Company also plans to invest $915,000 in
capital expenditures for the apartment communities during 1997. Capital
expenditures for the apartment communities were $1,269,000 in 1996.
In March 1996, the Company commenced the development of the Finisterra
Apartments in Tempe, Arizona. Total construction costs are estimated to be
approximately $21,000,000, of which the Company had invested approximately
$14,694,000 at December 31, 1996. The Company has also begun the community's
lease up phase in December 1996. In February 1997, the Company received funding
of $9,860,000 under its $15,350,000 construction loan. The funding, in addition
to the unrestricted cash of $2,403,000 at December 31, 1996, will be used to
fund short-term and long-term liquidity requirements, such as operating
expenses, the pending acquisitions described in the following paragraphs,
capital improvements on existing apartment communities, dividends, and scheduled
mortgage debt maturities. The Company also expects to meet such liquidity
requirements through long-term collateralized and uncollateralized borrowings,
the issuance of equity securities, proceeds received from the disposition of
certain apartment communities, and the proceeds from the redemptions and sales
of mortgage assets.
In November 1996, the Company entered into an agreement to acquire up to 13
apartment communities and one office building as well as a related property
management operation for a combination
32
<PAGE>
of cash, its common stock, and limited partnership units in an operating
partnership formed by the Company for the acquisition. The Company will finance
the acquisition by (i) assuming or refinancing approximately $49,311,000 in
first mortgage debts on the properties, (ii) paying an aggregate of up to
$3,100,000 in cash to the sellers, and (iii) exchanging a combination of
approximately 1,623,000 shares of the Company's common stock and limited
partnership units in an amount equal to $29,359,000 based on the outstanding
loan balance at September 30, 1996. In addition, the Company expects to pay in
cash approximately $2,488,000 of transaction costs and mortgage loan escrow
deposits.
Concurrently with the acquisition described in the preceding paragraph, the
Company entered into an agreement to acquire the entire interests in Pima
Mortgage and Pima Realty (collectively the "Pima Entities") in exchange for
262,000 shares of its common stock. The cost of the acquisition is $5,250,000
and will be assigned to the contracts between the Company and the Pima Entities.
As the contracts will effectively be terminated, the costs will be charged to
contract termination as of the date of the acquisition.
The Company anticipates that the pending acquisitions will result in (i)
significant increases in the Company's gross income and operating expenses, (ii)
an increase in interest expenses on real estate mortgages, and (iii) a decrease
in administrative expenses resulting from the replacement of management fees
previously paid to the Pima Entities by the Company with salaries to be paid to
the owners of the managers who will become employees of the Company. The net
income for 1997, however, will be reduced by the $5,250,000 charge to income for
the cost of the acquisition of the Pima Entities. As this is a non-cash charge,
it will not have any effect on the cash provided by operations. The issuance of
the Company's common stock in connection with the acquisition of the Pima
Entities is subject to approval of the stockholders of the Company. The Company
anticipates the closing to be in April 1997.
The partner in the six joint ventures has initiated the "buy-sell" provision
in the joint venture agreements. The Company elected to acquire the 85% interest
in one joint venture from its partner and to sell to its partner the Company's
15% interest in the other five joint ventures. The purchase would increase the
Company's investment in wholly owned apartments by approximately $25,500,000 and
real estate notes payable by $19,000,000. The sale of the interests in the five
joint ventures would result in net proceeds of approximately $2,000,000, and the
Company does not expect the sale to have a significant impact on income. The
transactions are scheduled to be completed in the second quarter 1997.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the notes
thereto and the supplementary data commencing at page F-1 of this report, which
financial statements, report, notes and data are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 53 Chairman of the Board, President, Chief Executive Officer and Director
Frank S. Parise, Jr. 45 Vice Chairman, Executive Vice President, Chief Administrative Officer,
and Director
Joseph C. Chan 45 Executive Vice President, Chief Operating Officer, Secretary,
Treasurer and Director
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>
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.
34
<PAGE>
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.
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, 1996, the Board of Directors of the
Company held a total of five meetings. No director attended fewer than 75% of
the meetings of the Board of Directors.
The Company's Bylaws authorize the Board of Directors to appoint among its
members an executive committee, an audit committee and other committees. A
majority of the members of any committee so appointed must be Unaffiliated
Directors. The Board of Directors has appointed an Audit Committee and a
Compensation Committee. Messrs. Gisi and Horn serve as the members of the
Company's Audit Committee and Compensation Committee. The Audit Committee
reviews the annual financial statements, any significant accounting issues and
the scope of the audit with the Company's independent auditors and is available
to discuss with the auditors any other accounting and audit related matters
which may arise during the year. The Audit Committee met separately at one
formal meeting during 1996 which was attended by all of the members of the
Committee. The Compensation Committee reviews all transactions with the Manager
and the Property Manager and their affiliates, including the renewal of the
35
<PAGE>
Management Agreement and the Property Management Agreements and the proposed
acquisition of the Manager and the Property Manager (see "Business -- Pending
Transaction"). The Compensation Committee met twice during 1996 to review the
preliminary terms of the proposed acquisition of the Manager and the Property
Manager (see "Business -- Pending Transaction").
COMPLIANCE WITH SECTION (16A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and the American
Stock Exchange. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of all Section
(16a) reports they file.
Based solely on the Company's review of such reports received by it during
the fiscal year ended December 31, 1996, and written representations that no
other reports were required, the Company believes that each person who, at any
time during such fiscal year. was a director, officer or beneficial owner of
more than 10% of the Company's Common Stock complied with all Section 16(a)
filing requirements during such year or prior fiscal years.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid to the Company's
executive officers whose total cash and cash equivalent remuneration exceed
$100,000 for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
AWARDS PAYOUTS
NAME AND PRINCIPAL ANNUAL COMPENSATION ----------------------- ---------
------------------------------- RESTRICTED OPTIONS/ LTIP ALL OTHER
POSITION YEAR SALARY BONUS OTHER STOCK SARS PAYOUT COMPENSATION
- ------------------------ ------ ---------- --------- ---------- ------------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JON A. GROVE (1) 1996 $179,114 -- --
Chairman, President, 1995 180,431 -- --
and Chief Executive 1994 251,747 -- --
Officer
Frank S. Parise, Jr. (1) 1996 $179,114 -- --
Vice Chairman, 1995 180,431 -- --
Executive Vice 1994 251,747 -- --
President,
and Chief
Administrative
Officer
Joseph C. Chan (1) 1996 $179,114 -- --
Director, Executive 1995 180,431 -- --
Vice President, 1994 251,747 -- --
Secretary, and
Chief Operating
Officer
Dale A. Webber 1996 -- -- $141,729 70,000 --
Vice President 1995 $108,447 -- -- -- --
1994 108,147 -- -- 8,000 --
Roger A. Karber 1996 -- -- $117,835 50,000 --
Vice President 1995 $100,000 $15,000 -- -- -- --
</TABLE>
- ----------------------
(1)Messrs. Grove, Parise, and Chan 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.
37
<PAGE>
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>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
% OF TOTAL RATES
OPTIONS/ OPTIONS/SARS OF STOCK PRICE
SARS GRANTED TO EXERCISE APPRECIATION
GRANTED EMPLOYEES IN OR BASE EXPIRATION FOR OPTION TERM
(#) FISCAL YEAR PRICE DATE 5%(1) 10%(1)
---------- -------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jon A. Grove None N/A N/A N/A N/A N/A
Frank S. Parise, Jr. None N/A N/A N/A N/A N/A
Joseph C. Chan None N/A N/A N/A N/A N/A
Dale A. Webber 70,000 42% $16.625 12/16/98 $119,547 $244,563
Roger A. Karber 50,000 30% $16.50 12/16/98 118,738 233,800
</TABLE>
- ----------------------
(1) This amount is the calculated future value of the stock options as of
December 16, 1998 assuming stock price appreciation rates of 5% and 10% per year
as specified in Item 402(c)(2) of Regulation S-K.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- -------------------- ------------- ---------- --------------- ---------------
Jon A. Grove -- -- 138,581 $1,589,234
-- --
Frank S. Parise, Jr. -- -- 140,287 1,653,343
-- --
Joseph C. Chan -- -- 138,581 1,589,234
-- --
Dale A. Webber 2,666 $19,995 47,930 191,194
23,334 90,419
Roger A. Karber -- -- 33,332 133,328
16,668 66,672
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors performs the functions
of making recommendations to the Board concerning the Company's compensation
policies applicable to its executive officers. Messrs. Grove, Parise and Chan
serve as both directors and the principal executive officers of the Company. All
compensation matters relating to the Company's principal executive officers,
however, are decided by the Unaffiliated Directors, consisting of Messrs.
Baldwin, Gisi, Horn and Moor. The principal executive officers make
recommendation to the Board concerning the compensation of other executive
officers of the Company. None of the Unaffiliated Directors are, or have ever
been, officers or employees of the Company or any of its subsidiaries. Messrs.
Grove, Parise and Chan abstain from participating in the deliberations of the
Board of Directors concerning the approval of the Management Agreement, the
Property Management Agreements, the pending acquisition of the Manager and the
Property Manager by the Company (see "Business -- Pending Transaction"), or any
other matters relating to their compensation. In addition, during 1996 none of
the executive officers, including Messrs. Grove, Parise and Chan, served on the
board of directors or the compensation committee of the entities that employed
any of the Unaffiliated Directors.
38
<PAGE>
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 1996, the Company paid an annual
director's fee to each Unaffiliated Director equal to $24,000 and a fee of $500
for each meeting of the Board of Directors attended by each Unaffiliated
Director and reimbursement of costs and expenses of all directors for attending
such meetings. Additionally, each member of the Audit Committee and the
Compensation Committee received a fee of $300 for each meeting attended by the
member. Affiliated Directors do not receive any fees for serving on the Board of
Directors.
STOCK OPTION PLANS
The Company has a nonstatutory stock option plan (the "Nonstatutory Stock
Option Plan") and an incentive stock option plan (the "Incentive Stock Option
Plan") (together the "Stock Option Plans"). The purpose of the Stock Option
Plans is to provide a means of performance-based compensation in order to
attract and retain qualified personnel and to provide incentive to others whose
job performance affects the Company. The Incentive Stock Option Plan provides
for incentive stock options which are intended to meet the requirements of
Section 422A of the Internal Revenue Code, (the "Code") ("ISOs") and which may
be granted to the officers and key personnel of the Company. The Nonstatutory
Stock Option Plan provides for non-qualified stock options which may be granted
to the Company's directors and key personnel of the Manager.
The Stock Option Plans are administered by the Board of Directors, which
determines whether such options will be granted, whether such options will be
ISOs or non-qualified options, which directors, officers and key personnel will
be granted options and the number of options to be granted, subject to the
maximum amount of shares issuable under the Stock Option Plans set forth below.
In making such determinations, the Board of Directors takes into account the
duties and responsibilities of the participants, their present and potential
contribution to the success of the Company and such other factors as the Board
deems relevant in connection with accomplishing the purpose of the Plan. Under
current law, ISOs cannot be granted to directors who are not also employees or
to directors or employees of entities unrelated to the Company.
Under the Stock Option Plans, options to purchase a maximum of 140,000
shares of the Company's Common Stock may be granted to the Company's directors,
officers and key personnel as well as to the directors, officers and key
personnel of the Manager. The exercise price for any option granted may not be
less than 100% of the fair market value of shares of Common Stock at the time
the option is granted. The optionholder may pay the exercise price in cash or by
delivery of previously acquired shares of Common Stock of the Company.
Generally, one-third of the options granted at any one time are immediately
exercisable, one-third are exercisable one year after the date of grant and the
remaining one-third become exercisable two years after the date of grant. The
options expire 10 years after the date of grant. No option may be granted under
the Stock Option Plans to any person who, assuming exercise of all options held
by such person, would own or be deemed to own more than 9.8% of the total
outstanding shares of Common Stock of the Company.
Under each of the Stock Option Plans, an exercising optionholder has the
right to require the Company to purchase some or all of the optionholder's
shares of the Company's Common Stock. That redemption right is exercisable by
the optionholder only with respect to shares that he has acquired by exercise of
an option granted under the Stock Option Plans which are restricted from
transfer by federal securities law as a result of grants or exercise of options
under the Stock Option Plans and such right must be exercised during the six
months immediately following the expiration of any such restriction.
No option granted under the Stock Option Plans is exercisable for a period
in excess of the term of the option as provided in the Stock Option Plans,
subject to earlier termination in the event of termination of employment,
retirement or death of the optionholder. An option may be exercised in full or
in part at any time or from time to time during the term of the option or
provide for its exercise in stated installments at stated times during the
option term.
The Board of Directors may amend the Stock Option Plans at any time, except
that approval by the Company's stockholders is required for any amendment that
increases the aggregate number of shares
39
<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, 1996, options to purchase 43,278 shares of Common Stock
were outstanding and options to purchase 5,901 shares were available for grant
under the Plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 28, 1997, there were outstanding 3,147,150 shares of Common
Stock. The following table sets forth the beneficial ownership of Common Stock
of the Company as of February 28, 1997, by each person known by the Company to
own more than 5% of the outstanding shares of Common Stock of the Company, by
each director of the Company, and by all directors and executive officers of the
Company as a group, which information as to beneficial ownership is based upon
statements furnished to the Company by such persons. The number of shares also
includes (1) any shares of Common Stock owned of record by such person's minor
children and spouse and by other related individuals and entities over whose
shares of Common Stock such person has custody, voting control or the power of
disposition and (2) shares of Common Stock that such persons had the right to
acquire within 60 days by the exercise of stock options (excluding the SARs)
(see "Stock Option Plans"). Each director and executive officer of the Company
may be reached through the Company at 335 North Wilmot, Suite 250, Tucson,
Arizona 85711.
<TABLE>
<CAPTION>
NAME AND NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL(1)
- ------------------------------------------------------------ ----------- ------------
<S> <C> <C>
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%
</TABLE>
- ---------------
(1)In calculating the percentage of ownership, the number of shares of Common
Stock that the identified person or group had the right to acquire within 60
days 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.
ITEM 13. 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 "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
40
<PAGE>
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 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 1996,
the Company paid the Manager management fees of approximately $386,000 and
administration fees of approximately $193,000. The payment of such fees was
unanimously approved by the Unaffiliated Directors.
In connection with the renewal of the Management Agreement beginning with
1994, the Manager and the Company agreed to eliminate the incentive management
fee provision. On December 16, 1993, the Company granted to Messrs. Grove,
Parise and Chan options to purchase 309,800 shares of the Company's Common Stock
and stock appreciation rights ("SARs") covering 90,200 shares of the Company's
Common Stock. The exercise price is $8.60 per share, which was 110% of the
market price of the Common Stock on the grant date. If dividends are declared
during the period the stock options or SARs are outstanding, the holder of the
options and SARs can elect to receive currently or upon exercise cash in an
amount equal to the product of the per share dividend amount times the number of
options or SARs outstanding. In 1996, the Company paid Messrs. Grove, Parise and
Chan $266,667 each based on the total dividends of $2.00 per share paid in 1996.
All of the options and SARs are currently exercisable. The options will expire
on December 16, 1998, if not terminated earlier pursuant to the terms of the
agreements. In February 1997, Messrs. Chan and Parise of the Manager exercised
their share of SARs (30,067 each) and received approximately $440,000 each.
In 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 4,400 apartment
units. In 1996, the Company paid the Property Manager 466,000 which amounted to
3.2% of the total rental and other income of the apartments.
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
41
<PAGE>
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 1996, Mr. Webber exercised options to purchase a total of 2,666 shares of
the Company's Common Stock by executing a full recourse promissory note for
$30,000 to the Company. The note is due on December 31, 1998 and can be repaid
by delivering to the Company shares of Common Stock owned by Mr. Webber based on
the then market price of the Common Stock. During 1996, Messrs. Chan and Webber
paid off notes of $297,000 using 12,011 shares of Common Stock and cash of
$61,842.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules filed as part of
this report:
1.Financial Statements of the Company -- as listed in the "Index to
Financial Statements and Financial Statement Schedule" on page F-1 of
this Annual Report Form 10-K.
2.Financial Statement Schedules -- Schedule III on page F-17. No other
schedules are required because of the absense of conditions under which
they are required or because the information is given in the financial
statements and notes beginning on page F-1 of this Annual Report on
Form 10-K.
42
<PAGE>
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
3(a) First Amended and Restated Articles of Incorporation of the Registrant(1)
3(b) Articles of Amendment to the First Amended and Restated Articles of Incorporation of the
Registrant(3)
3(c) Bylaws of the Registrant(1)
4 Specimen Certificate representing $.01 par value Common Stock(1)
10(a) Management Agreement between the Registrant and ASMA Mortgage Advisors Limited
Partnership(5)
10(b) Subcontract Agreement between ASMA Mortgage Advisors Limited Partnership and American
Southwest Financial Services, Inc.(3)
10(c) Right of First Refusal between the Company and the Manager(3)
10(d) Limited Partnership Agreement of Southwest Capital Mortgage Funding Limited
Partnership(2)
10(e) Amended and Restated Stock Option Plans(4)
10(f) Indemnification and Use of Name Agreement Between the Company and American
Southwest(4)
10(g) Dividend Reinvestment and Stock Purchase Plan(3)
10(h) Agreement for Purchase and Sale of Apartments ("Purchase Agreement") dated July 15, 1993 by
and between Buyer and Seller.(6)
10(i) First Amendment to Purchase Agreement dated August 18, 1993, by and between Buyer and
Seller.(6)
10(j) Second Amendment to Purchase Agreement dated September 21, 1993 by and between Buyer and
Seller.(6)
10(k) Third Amendment to Purchase Agreement dated October 27, 1993 by and between Buyer and
Seller.(6)
10(l) Master Property Management Agreement with Pima Realty Advisors, Inc. for the year ending
December 31, 1994 and the signature page for each of the properties.(6)
10(m) Second Articles of Amendment to the First Amended and Restated Articles of Incorporation of
the Registrant.(7)
10(n) Third Articles of Amendment to the First Amended and Restated Articles of Incorporation of
the Registrant.(7)
10(o) First Amendment to the Bylaws of the Registrant.(7)
10(p) Deed of Trust, Security Agreement, Financing Statement and Assignment of Leases and Rents
dated as of January 11, 1994 made by the following entities for the benefit of
Lexington Mortgage Company(6):
ASV-I Properties, Inc.
ASV-III Properties, Inc.
ASV-IV Properties, Inc.
ASV-V Properties, Inc.
ASV-VI Properties, Inc.
ASV-VII Properties, Inc.
ASV-VIII Properties, Inc.
ASV-IX Properties, Inc.
ASV-X Properties, Inc.
ASV-XI Properties, Inc.
ASV-XII Properties, Inc.
ASV-XIII Properties, Inc.
ASV-XIV Properties, Inc.
ASV-XV Properties, Inc.
ASV-XVI Properties, Inc.
11 Statement re: Computation of Per Share Earnings
22 Subsidiaries of the Registrant
</TABLE>
(Footnotes on next page)
43
<PAGE>
(Footnotes to table on previous page)
- -------------------------------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33- 15232) filed August 19, 1987 and declared effective on
August 19, 1987.
(2) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-20429) filed March 16, 1988 and declared effective on
March 17, 1988.
(3) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1988 as filed with the Commission on or about March 30,
1989.
(4) Incorporated herein by reference to Registrant's Registration Statement on
Form S-3 (33-42923) filed on September 30, 1991 and declared effective on
October 1, 1991.
(5) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1992.
(6) Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about March 29, 1994.
(7) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1995 as filed with the Commission on or about April 1,
1996.
(c) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the
Company during the fourth quarter of 1996.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASR INVESTMENTS CORPORATION
By: /s/ JON A. GROVE
-----------------------------------------
Jon A. Grove
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ----------------------------------------- ------------------
<S> <C> <C>
/s/ JON A. GROVE Director, Chairman of the Board, March 28, 1997
---------------------------- President and Chief Executive Officer
Jon A. Grove (Principal Executive Officer)
/s/ FRANK S. PARISE, JR. Director, Vice Chairman, Chief March 28, 1997
---------------------------- Administrative Officer
Frank S. Parise, Jr.
/s/ JOSEPH C. CHAN Director, Executive Vice President, Chief March 28, 1997
---------------------------- Operating Officer (Principal Financial
Joseph C. Chan and Accounting Officer) and Secretary
/s/ EARL M. BALDWIN Director March 28, 1997
----------------------------
Earl M. Baldwin
/s/ JOHN J. GISI Director March 28, 1997
----------------------------
John J. Gisi
/s/ RAYMOND L. HORN Director March 28, 1997
----------------------------
Raymond L. Horn
/s/ FREDERICK C. MOOR Director March 28, 1997
----------------------------
Frederick C. Moor
</TABLE>
45
<PAGE>
ASR INVESTMENTS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report .............................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 .............................F-3
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994 ...........................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 ...........................................................................F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994 ...........................................................................F-6
Notes to Consolidated Financial Statements ...............................................F-7
Schedule III--Real Estate and Accumulated Depreciation ...................................F-17
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ASR Investments Corporation.
We have audited the accompanying consolidated balance sheets of ASR
Investments Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audit also
included the financial statement schedule listed in the Index at Item 14. The
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1995, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, which considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Tucson, Arizona
March 18, 1997
F-2
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
----------- -----------
ASSETS
Real estate investments
Apartments, net of depreciation .........................$ 70,506 $ 71,338
Investments in joint ventures ........................... 2,811 3,043
Construction in progress ................................ 14,694
Land held for development ............................... 925 3,928
Other real estate ....................................... 1,022 1,201
--------- ---------
Total real estate investments ..................... 89,958 79,510
Mortgage assets ......................................... 5,039 11,877
Cash .................................................... 2,403 2,421
Other assets ............................................ 396 361
---------- ---------
Total assets ......................................$ 97,796 $ 94,169
========== =========
LIABILITIES
Real estate notes payable ...............................$ 49,110 $ 49,212
Short-term borrowing .................................... 2,014 4,495
Construction costs payable .............................. 1,581
Other liabilities ....................................... 4,989 3,067
---------- ---------
Total liabilities ................................. 57,694 56,774
---------- ---------
COMMITTMENTS AND CONTINGENCIES (NOTE 2, 3 AND 4)
STOCKHOLDERS' EQUITY
Common Stock, par value $.01 per share, 40,000,000 33 33
shares authorized; 3,307,892 and 3,303,226 shares
issued .................................................
Additional paid in capital .............................. 155,964 155,822
Deficit ................................................. (112,964) (115,497)
Stock note receivable ................................... (385) (652)
Treasury stock -- 160,742 and 148,731 shares ........... (2,546) (2,311)
---------- ---------
Total stockholders' equity ........................ 40,102 37,395
---------- ---------
Total liabilities and stockholders' equity ........$ 97,796 $ 94,169
========== =========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REAL ESTATE OPERATIONS
Rental and other income .............................$14,581 $14,034 $12,528
--------- --------- ---------
Operating and maintenance expenses .................. 5,404 5,259 4,255
Real estate taxes and insurance ..................... 1,451 1,460 1,242
Interest expense on real estate mortgages ........... 4,348 4,387 3,941
Depreciation and amortization ....................... 2,819 2,692 1,995
--------- --------- ---------
Total operating expenses ................... 14,022 13,798 11,433
--------- --------- ---------
Income from real estate ............................ 559 236 1,095
--------- --------- ---------
MORTGAGE ASSETS (NOTE 4)
Prospective yield income ........................... 2,630 3,884 6,433
Income from redemptions and sales .................. 9,461 5,302 4,263
Interest expense ................................... (181) (347) (2,596)
--------- --------- ---------
Income from mortgage assets ........................ 11,910 8,839 8,100
--------- --------- ---------
INCOME BEFORE ADMINISTRATIVE EXPENSES AND OTHER
INCOME (EXPENSE) .................................... 12,469 9,075 9,195
Administrative expenses (Note 8) ................... (3,203) (2,983) (2,216)
Other income (expense), net ........................ (425) 462 723
--------- --------- ---------
NET INCOME ...........................................$ 8,841 $ 6,554 $ 7,702
========= ========= =========
NET INCOME PER SHARE OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS .........................................$ 2.80 $ 2.09 $ 2.48
========= ========= =========
AVERAGE SHARES OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS ......................................... 3,153 3,141 3,100
========= ========= =========
DIVIDENDS DECLARED PER SHARE .........................$ 2.00 $ 2.00 $ 0.50
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .....................................$ 8,841 $ 6,554 $ 7,702
Principal noncash charges (credits)
Depreciation and amortization ................ 3,271 3,028 2,083
Reversal of yield maintenance accrual ....... (2,420)
Increase in accrual .......................... 856 705 324
---------- --------- ----------
Cash Provided By Operations .................... 12,968 7,867 10,109
---------- --------- ----------
INVESTING ACTIVITIES
Investment in apartments ....................... (2,142) (7,644) (67,247)
Investment in joint ventures ................... (65) (1,895) (1,364)
Construction expenditures ...................... (11,753)
Purchase of land for development ............... (3,928)
Other real estate assets ....................... 179 3,985 (1,331)
Reduction in mortgage assets ................... 6,838 7,088 18,916
Decrease in other assets ....................... 27 234 1,330
---------- --------- ----------
Cash Used In Investing Activities .............. (6,916) (2,160) (49,696)
---------- --------- ----------
FINANCING ACTIVITIES
Issuance of real estate notes payable ......... 6,895 52,178
Payment of loan costs .......................... (1,342)
Proceeds from construction loan ................ 255
Repayment of notes payable
Real estate notes ............................ (357) (7,955) (1,485)
Notes secured by mortgage assets ............. (4,002) (15,640)
Short-term borrowing ........................... (2,481) 4,495
Construction costs payable ..................... 1,581
Stock issuance ................................. 85 45
Payment of dividends ........................... (6,308) (6,304) (1,550)
Increase (decrease) in other liabilities ...... 1,155 (589) 1,148
---------- --------- ----------
Cash (Used In) Provided by Financing Activities (6,070) (7,415) 33,309
---------- --------- ----------
CASH
(Decrease) during the period ................. (18) (1,708) (6,278)
Balance -- beginning of period ............... 2,421 4,129 10,407
---------- --------- ----------
Balance -- end of period .....................$ 2,403 $ 2,421 $ 4,129
========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest Paid ..................................$ 4,525 $ 5,033 $ 7,367
========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK IN
NUMBER OF PAR PAID-IN NOTES TREASURY-
SHARES VALUE CAPITAL DEFICIT RECEIVABLE AT COST TOTAL
----------- ------- ------------ ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 .. 3,249 $32 $155,126 ($121,899) ($ 2,311) $30,948
Net income ................. 7,702 7,702
Dividends declared ......... (1,550) (1,550)
----------- ------- ------------ ------------ ------------ ----------- ---------
Balance, December 31, 1994 3,249 32 155,126 (115,747) (2,311) 37,100
Net income ................. 6,554 6,554
Dividends declared ......... (6,304) (6,304)
Stock issuance ............. 54 1 696 ($ 652) 45
----------- ------- ------------ ------------ ------------ ----------- ---------
Balance, December 31, 1995 3,303 33 155,822 (115,497) (652) (2,311) 37,395
NET INCOME ................. 8,841 8,841
DIVIDENDS DECLARED ......... (6,308) (6,308)
STOCK ISSUANCE (REPURCHASE) 5 53 267 (235) 85
OTHER ...................... 89 89
----------- ------- ------------ ------------ ------------ ----------- ---------
BALANCE, DECEMBER 31, 1996 3,308 $33 $155,964 ($112,964) ($ 385) ($ 2,546) $40,102
=========== ======= ============ ============ ============ =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- ASR Investments Corporation (the Company) is a real estate
investment trust engaged in the acquisition and operation of apartment
communities in the Southwestern United States. At December 31, 1996, the Company
owned 25 apartment communities (including six owned through joint ventures)
located in Arizona, Texas and New Mexico. In addition, the Company continues to
hold mortgage assets and use the cash flows for apartment acquisitions,
operations, payment of dividends and other corporate purposes.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. Investments in joint ventures are accounted on the equity method
as the Company does not own a controlling interest. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
COMMON STOCK -- On July 7, 1995, the Company effected a reverse stock split
under which one new share of common stock was issued in exchange for five shares
of outstanding stock. Accordingly, the consolidated financial statements reflect
the reverse stock split and the number of common stock issued and the per share
amounts have been adjusted for the reverse stock split for all years.
REAL ESTATE ASSETS AND DEPRECIATION -- Real estate is recorded at cost.
Depreciation is computed on a declining balance basis over the estimated
remaining useful lives of the assets, which are 27 1/2 years for buildings and
improvements and 7 years for furniture, fixture and equipment. Expenditures for
ordinary maintenance and repairs are charged to operations as incurred and
significant renovations and improvements that improve or extend the useful life
of the asset are capitalized.
REVENUE RECOGNITION -- Rental income is recorded when due from tenants and is
recognized monthly as it is earned, which is generally on a straight line basis.
DEFERRED LOAN COSTS -- Deferred loan costs are amortized using the interest
method over the terms of the related debt.
MORTGAGE ASSETS -- The Company owns mortgage interests which entitle it to
receive the excess of the cash flows on pools of mortgage instruments over the
required payments on a series of structured financings which they secure. The
Company also has the right to cause the early redemption of the structured
financings under specified limited conditions; in such event, the mortgage
instruments are sold and the net proceeds after the redemption of the structured
financing are remitted to the Company. Redemption transactions occur from time
to time as specified conditions are met rather than on a monthly or quarterly
basis; therefore, the amount of net proceeds and the income from the redemption
transactions fluctuates significantly between periods.
Presentation and Income Recognition. Mortgage assets are stated at their net
investment amounts. Income is recognized using the prospective yield method
prescribed by EITF 89-4. Under this method, an effective yield is calculated at
the beginning of an accounting period using the then net carrying value of the
asset and the estimated future net cash flow assuming no early redemption. The
estimated future net cash flow is calculated using variable interest rates and
current projected mortgage prepayment rates for the underlying mortgages. The
calculated yield is used to accrue income for the accounting period. Actual cash
flow received is first applied to the accrued income and any remaining amount is
used to reduce the carrying value of the asset. Income from early redemption is
recognized when the transaction is completed.
INCOME TAXES -- The Company has elected to be taxed as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended. As
a REIT, the Company must distribute to its stockholders at least 95% of the
higher of (i) its annual taxable income after the use of net operating loss
carryforward or (ii) its annual excess inclusion income. Accordingly, no
provision has been made for income taxes in the accompanying consolidated
financial statements.
F-7
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
EARNINGS PER SHARE -- Earnings per share are computed using the weighted
average number of shares of common stock and common stock equivalents (if
dilutive) outstanding during the year.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect some of the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK COMPENSATION -- In October 1995, the Financial Accounting Standards
Board issued FASB No. 123, "Accounting for Stock-Based Compensation." This
statement encourages, but does not require, companies to adopt a new accounting
method for stock-based compensation awards. Companies that do not adopt the new
accounting method are required to provide the disclosures required by the
Statement for any awards made in 1995 and after. After December 15, 1994, the
Company has not made any awards that would have been treated differently in the
determination of net income under FASB No. 123 and accordingly, pro forma
presentation is not required.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS -- The Company has adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets," which
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoveable. If the sum of the expected future cash flows (undiscounted and
without interest charges) from an asset to be held and used is less than the
carrying amount of the asset, an impairment loss must be recorded for the
difference between the carrying amount and the fair value. SFAS No. 121 had no
impact on the Company's consolidated financial statements.
NEW ACCOUNTING STANDARD -- In June 1996, the Financial Accounting Standards
Board issued FASB No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities", which requires an entity to recognize
the financial and servicing assets it controls and liabilities it has incurred
and to derecognize when controls has been surrendered in accordance with the
criteria provided in the Statements. The new statement is applicable
prospectively to transactions occurring after 1996. Based on current
circumstances, the Company believes the application of the new rules will not
have a material impact on the financial statements.
RECLASSIFICATION -- Certain reclassifications have been made to conform the
prior years with the current year presentation.
2. REAL ESTATE INVESTMENTS
WHOLLY OWNED APARTMENTS
In January 1994, the Company acquired its initial portfolio of seventeen
apartment communities (2,461 units) located in Tucson, Arizona, Houston, Texas,
and Albuquerque, New Mexico. In February 1995, the Company acquired a 222-unit
apartment community in Mesa, Arizona. At December 31, 1996 and 1995, investment
in apartments consisted of the following (in thousands):
1996 1995
--------- ---------
Land ...................................$15,514 $15,514
Building and improvements .............. 58,476 57,214
Accumulated depreciation ............... (7,504) (4,687)
Restricted cash and deferred loan fees 4,020 3,297
--------- ---------
Apartments, net ........................$70,506 $71,338
========= =========
F-8
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
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,
-------------------
1996 1995
--------- ---------
Real estate, at cost net of depreciation $53,590 $54,489
Cash and other assets .................... 1,693 2,133
--------- ---------
Total Assets ...........................$55,283 $56,622
========= =========
Notes payable ............................$35,833 $35,754
Other liabilities ........................ 731 575
--------- ---------
Total Liabilities ...................... 36,564 36,329
--------- ---------
Equity
The Company ............................ 2,811 3,043
Joint Venture Partner .................... 15,908 17,250
--------- ---------
Total Equity ............................. 18,719 20,293
--------- ---------
Total Liabilities and Equity .............$55,283 $56,622
========= =========
CONDENSED COMBINED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
--------- --------- --------
Revenues ................$ 9,138 $ 7,014 $1,263
Operating expenses ...... (3,688) (3,110) (551)
Interest expense ........ (2,879) (2,338) (373)
Depreciation ............ (1,979) (1,437) (283)
--------- --------- --------
Net Income ..............$ 592 $ 129 $ 56
========= ========= ========
Allocation of Net Income
The Company ...........$ 89 $ 19 $ 9
Joint Venture Partner ..$ 503 $ 110 $ 47
In November 1996, the partner in the six joint ventures initiated the
"buy-sell" provision in the joint venture agreements. The Company elected to
acquire the 85% interest in one joint venture from its partner and to sell to
its partner the Company's 15% interest in the other five joint ventures. The
purchase would increase the Company's investment in wholly owned apartments by
approximately $25,500,000 and real estate notes payable by $19,000,000. The sale
of the interests in the five joint ventures would result in net proceeds of
approximately $2,000,000 and would not have a significant impact on income. The
transactions are scheduled to be completed in April 1997.
CONSTRUCTION IN PROGRESS
In March 1996, the Company began construction of a 356-unit apartment
community, Finisterra Apartments in Tempe, Arizona. The total cost is estimated
be approximately $21,000,000. As of December 31, 1996, the Company had invested
$14,694,000 of its own cash and began the lease up phase in
F-9
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
December 1996. The Company has obtained a $15,350,000 construction loan of which
$255,000 was outstanding at December 31, 1996. In February 1997, the Company
received funding of $9,860,000 from the loan.
Operating income from apartments is affected primarily by rental rates,
occupancy rates and operating expenses. Rental rates and occupancy rates are
affected by the strength of the local economy, the local housing market and the
supply of and demand for new apartment communities.
3. PENDING ACQUISITION
In November 1996, the Company entered into an agreement to acquire up to 13
apartment communities and one office building as well as the related property
management company. The apartment communities contain a total of 2,260 units and
the office building totals approximately 73,000 square feet. The Company will
pay up to $3,100,000 in cash, issue approximately 1,623,000 shares of common
stock and assume or refinance existing first mortgage loans of approximately
$49.3 million. The Company will also issue approximately 70,300 shares of common
stock for the property management company and the owner of the management
company will become an executive officer and appointed to the Board of Directors
of the Company.
Of the 13 apartment communities, six (937 units) are located in Houston,
Texas, five (989 units) are located in Dallas, Texas and two (334 units) are
located in Pullman, Washington. The office building is located in Seattle,
Washington.
As a part of the above transaction, the Company also concurrently entered
into an agreement to acquire the entire ownership interests of Pima Mortgage
L.P. (the "Manager") and Pima Realty Advisors, Inc. (the "Property Manager") for
262,000 shares of common stock. As a result of the acquisition, the Company will
become a self-administered and self-managed REIT. The owners of the Manager will
continue to be executive officers and members of the Board of Directors of the
Company. See Note 8 for information on the current arrangement with the Manager
and the Property Manager.
The sellers have approved the sale subject to ASR obtaining the approval of
its stockholders. The issuance of ASR common stock for the transaction and the
acquisition of the Manager and Property Manager are subject to approval by the
stockholders of the Company. The Company has distributed proxy materials for a
special meeting of the stockholders to be held in April 1997. Assuming the
stockholders approve the transaction, closing is anticipated to occur soon
thereafter.
4. MORTGAGE ASSETS
INCOME
For 1996 and 1995, the average carrying value of the mortgage assets was
$8,118,000 and $14,827,000, respectively, and the average prospective yield was
35% and 28%, respectively. At December 31, 1996 and 1995, the prospective yield
was 38% and 29%.
During 1996, the Company sold or exercised its redemption rights on nine
mortgage assets for net proceeds of $13,625,000 and income of $9,461,000. During
1995, the Company exercised its redemption rights on five mortgage assets for
net proceeds of $6,348,000 and income of $2,882,000. Using proceeds from one of
the redemptions, in 1995, the Company prepaid its notes payable secured by
mortgage assets and recorded income of $2,420,000 for the reversal of the excess
yield maintenance accrual on such notes payable. The income was included in the
1995 income from redemptions and sales of mortgage assets. During 1994, the
Company exercised its redemption rights on four mortgage assets for net proceeds
of $11,227,000 and income of $4,263,000. In January 1997, the Company exercised
the redemption rights on three mortgage assets and realized total net proceeds
of $6,800,000 and income of $5,320,000.
The cash flows and prospective yield income are affected primarily by
mortgage prepayment rates and short-term interest rates. Higher mortgage
prepayment rates or higher short-term rates reduce the
F-10
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
income and total cash flows over the life of the mortgage assets. Income from
mortgage asset redemptions is affected by the timing of meeting the specified
conditions for redemptions and the value of the underlying mortgage instruments.
As a result, mortgage asset redemptions do not occur on a regular basis and the
income can fluctuate significantly between periods. In addition, redemption of
mortgage assets reduces the prospective yield income in future periods.
HEDGING TRANSACTIONS
In 1992, the Company executed short sales of Eurodollar Futures Contracts on
the International Monetary Market exchange to hedge against the interest rate
impact on mortgage asset cash flows in 1995. The effect of the Futures Contracts
was to "fix" the interest rate on $190,000,000 of the structured financing at
approximately 6.75% for 1995. In 1994, the Company closed out its Futures
Contract position and realized a gain of $1,152,000 which was recorded as a
reduction in the carrying value of the mortgage assets. Because of (1) the
decline in importance of mortgage assets as a result of the Company's emphasis
on investments in apartments and (2) the decline in the amount of variable rate
structured financing underlying the mortgage assets, the Company no longer plans
to invest in similar hedging transactions and had no such investments at
December 31, 1996 and 1995.
5. NOTES PAYABLE
REAL ESTATE NOTES PAYABLE
The apartment communities acquired in January 1994 were financed by first
mortgage loans totaling $45,700,000 and seller carryback notes of $6,500,000.
The first mortgage loans are nonrecourse and non-cross collateralized. They
generally have a ten year term and bear fixed interest rates ranging from 8.5%
to 10.1%, with a weighted average fixed rate of 8.6% at December 31, 1996 and
1995. The wholly owned 222-unit community in Mesa, Arizona, which was purchased
in February 1995, was financed by a $3,770,000 first mortgage loan bearing
interest at 225 basis points over three-month LIBOR. In July 1996, the loan was
refinanced by a $3,800,000 first mortgage loan bearing 8.05% interest rate and a
ten year term. Amortization of deferred loan costs was $155,000, $120,000 and
$88,000 for 1996, 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):
1997 ........$2,646
1998 ........ 513
1999 ........ 558
2000 ........ 608
2001 ........ 661
2002-2006 .. 44,124
-------
Total ...$49,110
=======
As discussed in Note 2, the Company has obtained a $15,350,000 construction
loan to finance the construction of its Finisterra apartment community. The loan
bears interest at 1% per annum above the bank's prime rate. The interest rate at
December 31, 1996 was 9.25%. At December 31, 1996, the amount outstanding was
$255,000 and is included in the real estate notes payable amount on the
financial statements. In February 1997, the Company received funding of
$9,860,000 from the loan.
F-11
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
SHORT-TERM BORROWING -- At December 31, 1996 and 1995, the Company had
short-term borrowing of $2,014,000 and $4,495,000. These borrowings were secured
by mortgage assets with a total carrying value of $3,084,000 and $6,639,000,
respectively. The interest rate averaged 6.35% and 6.55% during 1995 and 1996
and was at 6.88% and 6.69% at December 31, 1996 and 1995.
6. STOCK OPTIONS
The Company has two stock option plans which are administered by the Board of
Directors. The purpose of the plans is to provide a means of performance-based
compensation to attract and retain directors and key personnel.
Under the plans, options to acquire a maximum of 140,000 shares of the
Company's common stock may be granted at an exercise price not less than the
fair market value of the stock. The options expire ten years after the date of
grant. Upon exercise of the options, the Company can elect to distribute cash in
lieu of shares.
In addition, in connection with the renewal of the management agreement for
1994, the Company and the Manager agreed to eliminate the incentive management
fee provision and the Company granted to the partners of the Manager
non-qualified options to purchase 309,800 shares of common stock and 90,200
shares of stock appreciation rights ("SARs") with an exercise price of $8.60 per
share. The exercise price was 10% above the closing market price of the common
stock on the grant date. The holders will also receive payments equal to the
product of the per share dividend amount times the number of options and SARs
outstanding. Upon exercise of the options, the Company can elect to distribute
cash in lieu of shares. The options and SARs will expire in December 1998. As of
December 31, 1996, all of the options and SARs are exercisable and none of them
have been exercised. In February 1997, two partners of the Manager exercised
their share of SARs (30,067 per partner) and the Company paid approximately
$881,000 in total for the excess of the market price over the exercise price.
In 1995, certain holders exercised options to purchase 50,496 shares by
giving full recourse notes totaling $652,000 to the Company. In 1996, one holder
exercised additional options of 2,667 shares by giving a full recourse note
totaling $30,000 to the Company. The notes are secured by the shares of common
stock issued and bear interest at the prime rate plus 1%. The notes are due on
December 31, 1998 and can be repaid by giving the Company shares of common stock
owned by the optionholders based on the then market price on the common stock.
During 1996, two optionholders paid off their notes of $297,000 using 12,011 of
common stock and cash of $61,842. Notes outstanding at December 31, 1996 totaled
$385,000.
During 1996, the Company granted to three employees 165,000 SARs that expire
December 16, 1998, in lieu of a salary or bonus compensation plan. The employee
receives payments equal to the product of the per share dividend amount times
the number of SARs outstanding. At December 31, 1996, 165,000 stock appreciation
rights were outstanding under this compensation plan. During 1996, as a result
of the increase in the Company's common stock price, the Company recorded an
accrual for the SARs of approximately $750,000 which is included in
administration expenses. In February 1997, the three employees exercised 71,666
shares of the SARs and repaid Company advances of $92,000.
F-12
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
Information on all stock options and stock appreciation rights granted is
summarized below:
WEIGHTED
NUMBER OF OPTION PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
----------- --------------- --------------
Stock Options:
Outstanding at December 31, 1994 .......412,240 $ 8.13-$20.90 $10.02
Options exercised .......................(54,496) $11.25-$13.13 $12.80
-------
Outstanding at December 31, 1995 .......357,744 $ 8.13-$20.90 $ 9.60
Options exercised ....................... (4,666) $11.25 $11.25
-------
Outstanding and exercisable at
December 31, 1996 ......................353,078 $ 8.13-$20.90 $ 9.60
=======
Options at December 31, 1996 consisted
of the following:
1991 options granted .................. 24,420 $20.00-$20.90 $20.07
1990, 1992-1994 options granted ......328,658 $ 8.13-$13.13 $ 8.80
-------
Outstanding at December, 31 1996 .......353,078 $ 8.13-$20.90 $ 9.60
-------
Stock Appreciation Rights:
Outstanding at December 31, 1994 ....... 90,200 $ 8.60 $ 8.60
SARs granted ............................ 0
-------
Outstanding at December 31, 1995 ....... 90,200 $ 8.60 $ 8.60
SARs granted ............................165,000 $16.50-$16.63 $16.55
-------
Outstanding at December 31, 1996 .......255,200 $ 8.60-$16.50 $13.74
=======
SARs exercisable at December 31, 1996 ..200,200 $ 8.60-$16.50 $ 9.91
=======
At December 31, 1996, the weighted average contractual life of the above
stock options and stock appreciation rights was 2.4 and 2.0 years, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No.107, "Disclosures about
Fair Values of Financial Instruments." Although management uses its best
judgement in estimating the fair value of these instruments, there are inherent
limitations in any estimation technique and the estimates are thus not
necessarily indicative of the amounts which the Company could realize on a
current transaction.
BASIS OF ESTIMATES
Mortgage Assets. The fair value of mortgage assets is generally dependent on
interest rate and other economic factors, including (1) the characteristics of
the asset, (2) estimates of future cash flows and (3) the discount rate used to
calculate the present value of the cash flows. The market for the Company's
mortgage assets is very illiquid and traded prices are determined on a privately
negotiated basis. Thus, except for three mortgage assets on which the Company
has exercised the redemption rights in January 1997 for total net gains of
$5,320,000, the Company uses their carrying values as the estimated fair values.
Management believes, however, that it is meaningful to provide the following
present value of the estimated cash flows using the interest rates and mortgage
prepayment rates as of December 31, 1996. The estimates without redemptions
assume that the mortgage assets are held until the stated maturity (with the
exception of the three mortgage assets on which the Company exercised the
redemption rights in
F-13
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
January 1997 for net gains of approximately $5,320,000). The estimates with
redemptions assume that the Company would exercise the redemption rights at the
earliest dates and sell the mortgage instruments at the estimated market prices
as of December 31, 1996. (Dollars in thousands.)
DISCOUNT WITHOUT WITH
RATE REDEMPTIONS REDEMPTIONS
---- ------------- -------------
10% ....... $ 13,657 $ 26,938
20% ....... 10,757 19,151
40% ....... 10,074 16,703
50% ....... 9,558 14,861
Real Estate Notes Payable. The Company has used the carrying value of real
estate notes payable as their fair value. At December 31, 1996, the interest
rates on the Company's notes payable approximated the market rates for debt
instruments with similar terms and maturities.
Short-term borrowing. The Company has used the carrying value of short-term
borrowing as its fair value as the interest rates are adjusted monthly and the
maturity terms are less than one year.
ESTIMATED FAIR VALUES (in thousands):
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ------------
Mortgage assets ...........$ 5,039 $ 10,359
Real estate notes payable 49,110 49,110
Short-term borrowing ..... 2,014 2,014
8. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors, Pima Mortgage
Limited Partnership (the "Manager") manages the day-to-day operations of the
Company pursuant to a management agreement which has a current term through
December 31, 1997. Pursuant to the agreement, the Manager receives a base
management fee of 3/8 of 1% per annum of the Company's average invested assets
before deduction for reserves and depreciation. The management fees for 1996,
1995 and 1994 were $386,000, $374,000 and $544,000, 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 1996, 1995 and 1994.
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 $193,000 for 1996, $216,000 for 1995, and $247,500 for 1994.
As discussed in Note 6, the Company and the Manager agreed to eliminate the
incentive fee provision in the management agreement beginning with 1994. The
Company granted to the owners of the Manager options and stock appreciation
rights ("SARs") that provide for dividend equivalent payments based on the per
share amounts of dividends paid on the common stock. In 1996, 1995 and 1994, the
dividend equivalent payments were $800,000, $800,000 and $200,000 which are
included in administrative
F-14
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
expenses. As a result of the increase in the common stock price, the Company
recorded an accrual for the SARs of $101,000 in 1996, $705,000 in 1995 and
$324,000 in 1994, which amounts are included in administrative expenses.
The Company has entered into a property management agreement with Pima Realty
Advisors, Inc. (the "Property Manager"), an affiliate of the Manager, for each
of its apartment properties. Under the property management agreements, the
Property Manager provides the customary property management services at its cost
without profit or distributions to its owners, subject to the limitation of the
prevailing management fee rates for similar properties in the market. The costs
are allocated to the Company monthly based on the ratio of the number of units
owned by the Company relative to the total apartment units managed by the
Property Manager. The costs allocated to the Company for 1996, 1995 and 1994
were $466,000, $417,000 and $184,000 respectively (net of an allocated credit of
$246,000 applicable only in 1994), which were equal to approximately 3.2%, 3.0%
and 1.4% of rental and other income.
As discussed in Note 3, the Company has entered into an agreement to acquire
the entire ownership interest of the Manager and the Property Manager for
262,000 shares of common stock. As a result of the acquisition, the Company will
become a self-administered and self-managed REIT. The owners of the Manager
would continue to be executive officers and members of the Board of Directors of
the Company.
9. TAXABLE INCOME (LOSS)
As of December 31, 1996, the Company had an estimated net operating loss
("NOL") carryforward of $75,904,000 which can be used to offset taxable income
other than excess inclusion income through 2009 (1999 for state taxes). The
1996, 1995 and 1994 dividends consist of the following:
1996 1995 1994
--------- --------- ---------
Ordinary Income ........... 8.5% 14.5% 90.0%
Long Term Capital Gain ... 69.0% -- --
Return of Capital ......... 22.5% 85.5% 10.0%
In 1996, 1995, and 1994, the Company had excess inclusion income from the
residual interest in certain real estate mortgage investment conduits ("REMICs")
which cannot be used to offset operating losses (including NOL carryforward) and
deductions from other sources. Under the current tax law for REITs, excess
inclusion income is required to be distributed as dividends. Substantially, all
of the ordinary income for these years is excess inclusion income.
Net income reported in the accompanying consolidated financial statements is
different than the taxable income due to the reporting of some income and
expense items in different periods for income tax purposes. The difference
consists primarily of (1) reserves taken on mortgage assets in prior years which
were not allowed for income taxes, (2) differences in income recognition methods
on mortgage assets and (3) excess inclusion income for tax purposes. These
timing differences will reverse in future years.
Taxable income for 1996 is subject to change when the Company prepares and
files its income tax returns. The taxable income amounts also are subject to
adjustments, if any, resulting from audits of the Company's tax returns by the
Internal Revenue Service.
F-15
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands Except Per Share Amounts)
NET INCOME
TOTAL --------------------- DIVIDEND
INCOME AMOUNT PER SHARE PER SHARE
--------- --------- ----------- -----------
1996
- ----
First ..........$6,429 $ 2,340 $ .74 $ 0.50
Second ......... 7,529 3,326 1.05 0.50
Third .......... 7,129 2,092 .66 0.50
Fourth ......... 5,585 1,083 .35 0.50
1995
- ----
First ..........$7,983 $ 3,359 $ 1.08 $ 0.50
Second ......... 6,410 2,015 0.65 0.50
Third .......... 4,798 570 0.18 0.50
Fourth ......... 4,491 610 0.18 0.50
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
F-16
<PAGE>
ASR INVESTMENTS CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TO COMPANY GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1996(A)
----------------------- -----------------------------------------------------
COST
BUILDING CAPITALIZED BUILDING DEPRECIABLE
YEAR AND SUBSEQUENT TO AND ACCUMULATED LIVES
APARTMENT PROPERTY BUILT(B) ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION YEARS(C)
- ------------------ -------- ------------ ---- ----------- ----------- ---- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
ACACIA HILLS ........... 1986 $ 1,018 $ 255 $ 1,089 $ 77 $ 255 $ 1,166 $ 156 27.5
CASA DEL NORTE ......... 1984 1,363 386 1,453 139 386 1,592 220 27.5
DESERT SPRINGS ......... 1985 4,568 1,115 4,754 311 1,115 5,065 665 27.5
LANDMARK ............... 1986 3,015 409 4,138 451 409 4,589 583 27.5
PARK TERRACE ........... 1986 2,675 316 3,191 258 316 3,449 468 27.5
PARK VILLAGE ........... 1985 583 92 672 89 92 761 114 27.5
POSADA DEL RIO ......... 1980 1,588 534 3,022 137 534 3,159 426 27.5
SOUTH POINT ............ 1984 1,845 291 2,135 174 291 2,309 327 27.5
------- ------- ------- ------ ------- ------- ------
TOTAL TUCSON .......... 16,655 3,398 20,454 1,636 3,398 22,090 2,959
------- ------- ------- ------ ------- ------- ------
PHOENIX, ARIZONA
CONTEMPO HEIGHTS ....... 1978 3,805 1,833 4,523 171 1,833 4,694 384 27.5
FINISTERRA .............1996-1997 255(D)
------- ------- ------- ------ ------- ------- ------
TOTAL PHOENIX ......... 4,060 1,833 4,523 171 1,833 4,694 384
------- ------- ------- ------ ------- ------- ------
HOUSTON, TEXAS
CLEAR LAKE FALLS ....... 1980 3,099 867 3,261 292 867 3,553 454 27.5
THE GALLERY ............ 1968 1,627 732 1,196 811 732 2,007 259 27.5
MEMORIAL BEND .......... 1967 1,906 1,187 1,287 405 1,187 1,692 253 27.5
NANTUCKET SQUARE II ... 1983 2,730 686 2,925 308 686 3,233 415 27.5
PRESTONWOOD ............ 1978 2,446 761 2,696 422 761 3,118 450 27.5
RIVIERA PINES .......... 1979 3,239 1,025 3,073 875 1,025 3,948 495 27.5
------- ------- ------- ------ ------- ------- ------
TOTAL HOUSTON ......... 15,047 5,258 14,438 3,113 5,258 17,551 2,326
------- ------- ------- ------ ------- ------- ------
ALBUQUERQUE, NEW MEXICO
DORADO HEIGHTS ......... 1986 5,164 2,700 4,224 484 2,700 4,708 563 27.5
VILLA SERENA ........... 1986 2,656 883 2,647 238 883 2,885 382 27.5
WHISPERING SANDS ....... 1986 5,528 1,442 6,149 399 1,442 6,548 890 27.5
------- ------- ------- ------ ------- ------- ------
TOTAL ALBUQUERQUE ..... 13,348 5,025 13,020 1,121 5,025 14,141 1,835
------- ------- ------- ------ ------- ------- ------
TOTAL ................ $49,110 $15,514 $52,435 $6,041 $15,514 $58,476 $7,504
======= ======= ======= ====== ======= ======= ======
- -----------------
(a) The aggregate cost of real estate investments for federal income tax purposes is approximately $66,483 at December 31, 1996.
(b) Except for Contempo Heights, which was acquired in 1995, and Finisterra, which is currently under construction, all of the above
apartment properties were acquired in 1994.
(c) Building and improvements are depreciated using 27.5 years while furniture and fixtures are depreciated using 7 years.
(d) Encumbrances incurred as of December 31, 1996 on the construction of Finisterra Apartments, which began leasing in December
1996.
</TABLE>
F-17
<PAGE>
ASR INVESTMENTS CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
A summary of activity for real estate investments and accumulated
depreciation is as follows:
1996 1995
--------- ----------
Real Estate Investments:
Balance, beginning of
year ..................... $72,728 $64,264
Acquisitions .............. 0 6,358
Improvements .............. 1,269 2,106
Dispositions and other ... (7) 0
------- -------
Balance, end of year ... $73,990 $72,728
======= =======
Accumulated Depreciation:
Balance, beginning of
year ..................... $ 4,687 $ 1,995
Depreciation .............. 2,819 2,692
Dispositions and other ... (2) 0
------- -------
Balance, end of year ... $ 7,504 $ 4,687
======= =======
F-18
EXHIBIT 11
ASR INVESTMENTS CORPORATION
CALCULATION OF EARNINGS PER SHARE
FOR THE QUARTERS AND YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER YEAR
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Number Average common shares outstanding 3,154,495 3,154,495 3,155,256 3,148,165 3,153,095
============= ============= ============= ============= ============
Net Income ..............................$2,340,000 $3,326,000 $2,092,000 $1,083,000 $8,841,000
Primary Earnings per Share ..............$ 0.74 $ 1.05 $ 0.66 $ 0.35 $ 2.80
============= ============= ============= ============= ============
FULLY DILUTED EARNINGS PER SHARE
Number Average common shares outstanding 3,154,495 3,154,495 3,155,256 3,148,165 3,153,095
------------- ------------- ------------- ------------- ------------
Exercisable, in the money, stock options 147,329 159,398 169,417 184,452 170,492
------------- ------------- ------------- ------------- ------------
Total Shares .......................... 3,301,824 3,313,893 3,324,673 3,333,617 3,323,587
============= ============= ============= ============= ============
Net Income, as adjusted .................$2,494,900 $3,480,900 $2,246,900 $1,237,900 $9,460,600
Fully Diluted Earnings per Share .......$ 0.76 $ 1.05 $ 0.68 $ 0.37 $ 2.85
============= ============= ============= ============= ============
</TABLE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------------------------------ --------------------------
CIMSA Financial Corporation ............... Arizona
ASR Finance Corporation ................... Arizona
ASR Mortgage Acceptance, Inc. ............. Arizona
Residential Mortgage Acceptance, Inc. .... Delaware
ASR Properties, Inc. ...................... Arizona
ASV -- II Properties, Inc. ................ Arizona
ASV -- XVII Properties, Inc. .............. Arizona
RMA Investments Holding, Inc. ............. Arizona
ASC -- I Properties, Inc. ................. Arizona
ASC -- II Properties, Inc. ................ Arizona
ASC -- III Properties, Inc. ............... Arizona
ASC -- IV Properties, Inc. ................ Arizona
ASC -- V Properties, Inc. ................. Arizona
ASC Properties, Inc. ...................... Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,403
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,403
<PP&E> 78,010
<DEPRECIATION> 7,504
<TOTAL-ASSETS> 97,796
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 40,102
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 97,796
<SALES> 0
<TOTAL-REVENUES> 26,672
<CGS> 0
<TOTAL-COSTS> 13,302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,529
<INCOME-PRETAX> 8,841
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,841
<EPS-PRIMARY> 2.80
<EPS-DILUTED> 2.85
