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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, 1997 Commission file number: 1-9646
ASR INVESTMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 86-0587826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 North Wilmot, Suite 250, Tucson, Arizona 85711
(Address of principal executive offices) (Zip Code)
(520) 748-2111
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
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 27, 1998, 4,916,199 shares of ASR Investments Corporation
common stock were outstanding, and the aggregate market value of the 4,555,307
shares held by non-affiliates (based upon the closing price of the shares on
the American Stock Exchange) was approximately $102,494,000. Shares of Common
Stock held by each officer and director of the Company 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>
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Page
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<S> <C>
PART I
Item 1. Business .................................................................... 3
Item 2. Property .................................................................... 10
Item 3. Legal Proceedings ........................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ......................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ... 11
Item 6. Selected Financial Data ..................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................... 13
Item 8. Financial Statements and Supplementary Data ................................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant ......................... 18
Item 11. Executive Compensation ..................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management ............. 24
Item 13. Certain Relationships and Related Transactions ............................. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............ 26
SIGNATURES ............................................................................. 28
FINANCIAL STATEMENTS ................................................................... F-1
</TABLE>
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PART I
ITEM 1. BUSINESS
Introduction
In December 1997, the Company entered into an Agreement and Plan of Merger
dated as of December 19, 1997 (the "Merger Agreement") among the Company, United
Dominion Realty Trust, Inc. ("United Dominion"), and ASR Acquisition Sub, Inc.
(a wholly owned subsidiary of United Dominion) providing for the Company to
become a wholly owned subsidiary of United Dominion (the "Merger"). Under the
Merger Agreement, each share of ASR common stock was convertible into 1.575
shares United Dominion common stock. The Merger Agreement was approved by the
Company's stockholders on March 25, 1998, and the Merger was consummated as of
the close of business on March 27, 1998. As a result, ASR became a wholly
subsidiary of United Dominion and trading of ASR common stock ceased after March
27, 1998. For further information relative to the Merger and the Company,
reference is made to the Company's Proxy Statement dated February 17, 1998.
The Company
Immediately prior to the Merger, the Company owned and operated 39
apartment communities, containing 7,550 apartment units, and one office
building, located in Phoenix and Tucson, Arizona; Houston and Dallas, Texas;
Albuquerque, New Mexico; and Seattle and Pullman, Washington. The apartment
communities are "garden apartments," typically consisting of two- and
three-story buildings in landscaped settings with ground level parking. The
communities are well maintained and targeted to provide attractive lifestyles at
low to moderate rates.
The apartment communities were built between 1967 and 1997 and have a
weighted average age by number of apartment units of approximately 14 years.
The number of units per apartment community ranges from 60 to 356 and averages
182 units. Average size per unit approximates 804 square feet. Average rent at
June 30, 1997 was $552 per month, with community averages ranging from $375 to
$997 per month. The communities had an average occupancy rate of approximately
89%. The apartment communities typically provide residents with attractive
amenities, including a clubhouse, swimming pool, other recreational facilities,
laundry facilities, cable television access, patios or balconies, and
mini-blinds. Certain communities offer additional amenities, such as
fireplaces, storage or walk-in closets, microwave ovens, alarms, and limited
access gates.
The Company acquired 23 of its apartment communities since January 1,
1997. The Company's pursued business objectives designed to increase the cash
flow and value of its existing portfolio of apartment communities and to
continue to expand its portfolio of apartment communities through the
acquisition and development of additional communities. Key elements of the
Company's strategy to achieve its objectives included (i) enhancing the
performance and value of its existing properties by maintaining high occupancy
and favorable rental rates, managing operating expenses, and emphasizing
regular programs of repairs and capital improvements, (ii) acquiring and
developing additional apartment communities that have strong cash flows and
capital appreciation potential, (iii) focusing on middle income properties
located in geographical areas that the Company believes will experience higher
growth rates in population, household formation, and employment that the
national average, and (iv) disposing of investments that no longer satisfy the
Company's objectives.
The Company elected to be taxed as a REIT under sections 856 through 860
of the Internal Revenue Code. A REIT generally will not be subject to tax on
its income to the extent that it distributes its taxable income to its
stockholders and maintains its qualification as a REIT.
The Company owned the apartment communities through wholly owned
subsidiaries or through Heritage Communities L.P., a Delaware limited
partnership ("Heritage LP" or the "Operating Partnership"), or its
subsidiaries. The Company and a wholly owned subsidiary are the sole general
partners of Heritage LP and at December 31, 1997, owned approximately 66% of
the limited partnership interests therein.
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The Company was incorporated in the state of Maryland on June 18, 1987.
The principal executive offices of the Company were located at 335 North
Wilmot, Suite 250, Tucson, Arizona 85711. Unless the context otherwise
requires, the terms "Company" and "ASR" mean ASR Investments Corporation, its
subsidiaries, and the Operating Partnership.
Developments in 1997
In March 1997, the Company acquired a 266-unit apartment community in
Houston, Texas for $4,450,000 and expected to invest $700,000 in capital
improvements. The Company obtained a first mortgage loan of $3,700,000. The
Company issued 86,500 shares of Common Stock for net proceeds of $1,622,000 to
pay for the purchase.
In April 1997, the Company acquired (i) the assets and properties of 15
separate limited partnerships owning 13 apartment communities, located in
Dallas and Houston, Texas and Pullman, Washington, containing a total of 2,260
apartment units, and an office building located in Seattle, Washington (the
"Winton Properties") in which Don W. Winton was the general partner (the
"Winton Partnerships") and (ii) the stock of Winton & Associates, Inc. ("Winton
& Associates"), the property manager of the Winton Properties (together the
"Winton Acquisition"). In connection with the acquisition of the Winton
Properties, the Company (a) issued approximately 682,098 shares of its Common
Stock, (b) issued limited partnership interests ("LP Units") in the Operating
Partnership, which were convertible into 943,701 shares of the Company's Common
Stock after April 30, 1998, (c) assumed or refinanced existing first mortgage
loans of $49,396,000, and (d) paid $1,250,000 of the transaction costs for the
Winton Partnerships. The Company issued 70,284 shares of its Common Stock in
connection with the acquisition of Winton & Associates.
In April 1997, the Company acquired a 257-unit apartment community in
Houston, Texas, for $6,000,000 and obtained a first mortgage loan for
$4,400,000. The Company expected to invest $600,000 in capital improvements. In
May 1997, the Company acquired a 175-unit apartment community in Seattle,
Washington, for $4,059,000 and obtained a first mortgage loan of $2,900,000.
The Company invested $400,000 in capital improvements. The Company issued
187,847 shares of Common Stock for total net proceeds of $3,394,000 to pay for
these two purchases.
In May 1997, the Company acquired for $8,233,000 its joint venture
partner's 85% interest in La Privada Apartments, a 350-unit apartment community
in Scottsdale, Arizona. The Company obtained a $3,000,000 loan to pay for the
aquisition. The Company also sold to its partner the Company's 15% interest in
five other joint ventures for total net proceeds of $2,062,000. As a result of
these transactions, the Company owns all of its apartment communities through
the Operating Partnership or subsidiaries.
In connection with the acquisition of the Winton Properties, the Company
also acquired Pima Mortgage Limited Partnership and Pima Realty Advisors, Inc.,
which were affiliates of officers of the Company and served as the manager and
property manager, respectively, of the Company's day-to-day operations and
apartment communities, in exchange for 262,008 shares of its Common Stock (the
"Pima Mergers"). As a result, the Company became a self-administered and
self-managed REIT.
In September 1997, the Company acquired a portfolio of three apartment
communities in Dallas, Texas for approximately $29,346,000. The Company (i)
obtained or assumed first mortgage loans of approximately $18,511,000, (ii)
issued 374,581 shares of common stock and 27,721 LP Units to the sellers, and
(iii) paid $2,400,000 in cash to the sellers. The Company planned to spend
$1,900,000 on numerous substantive improvements to the communities.
In September 1997, the Company acquired a 202-unit apartment community in
Kennewick, Washington, for $10,650,000. The Company assumed the existing first
mortgage loan of $7,900,000, issued 91,678 shares of common stock, and paid
$650,000 in cash to the seller.
In October 1997, the Company acquired a 276-unit apartment community in
Kitsap County, Washington, for $13,249,000. The Company obtained or assumed
first mortgage loans of $7,825,000, issued 86,184 shares of common stock and
paid $3,100,000 in cash to the seller.
Prior to 1993, the Company invested in mortgage assets ("Mortgage Assets")
entitling it to receive the excess cash flows from a pool of mortgage
instruments over the required payments on the related
4
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structured financing. In early 1993, the Company determined to shift its focus
to the acquisition, development, and operation of apartment communities. In
June, 1997, the Company sold its Mortgage Assets for approximately $13,350,000
with a gain of $10,970,000. Together with earlier redemptions, the Company
received total cash flows of $14,850,000 during the second quarter of 1997 and
a total of $22,350,000 for all of 1997. As a result of the sale, the Company no
longer owns any Mortgage Assets.
Operating Policies and Strategies
The following discussion in this Item 1 relates to the strategies and
operations of the Company prior to the Merger.
Real Estate Activities
Introduction
The Company pursued various business objectives and operating,
acquisition, financing and investment strategies and policies relative to its
real estate activities. These policies and strategies were determined by the
directors of the Company and could be amended or revised from time to time at
the discretion of the directors without a vote of the stockholders of the
Company.
Business Objectives
The Company's current business objectives were to increase the cash flow
and value of its portfolio of apartment communities and to seek continued
growth through the acquisition or development of additional apartment
communities.
Investment Policies
The Company's portfolio consisted of apartment communities in the
southwestern region of the United States. However, future investments were not
limited (as to percentage of assets or otherwise) to any geographic area or any
specific type of property. In this regard, the Company could expand its current
geographic focus and could acquire other types of income-producing properties,
including hotels, motels, shopping centers and office buildings.
Acquisitions
In evaluating acquisitions, the Company considered 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 sought properties
that (a) were available at prices below estimated replacement cost after
initial renovations and improvements, or could be developed at a cost below the
estimated value upon completion, (b) were well-located in their markets, and
(c) were capable of enhanced performance through intensive asset management and
cosmetic improvements.
Operating Strategies
The Company pursued operating strategies designed 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.
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Financing Policies
The Company sought to finance acquisitions with the most appropriate
sources of capital, which could 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. Borrowings by the
Company for acquisitions could be either on a secured or unsecured basis.
Property Management
The Company developed computer, accounting, management, reporting and
control systems to monitor property operations. Detailed annual budgets were
prepared for each property. Monthly, quarterly and annual reports were prepared
addressing occupancy rates, turnover ratios, budget variances, delinquencies
and other operating information. Weekly reports were provided for each property
detailing leasing and occupancy activities. The Company also maintained and
analyzed demographic resident data. Prior to entering into a lease, the Company
generally reviewed the credit of the prospective tenant to attempt to minimize
bad credit risks and identify tenants having a poor rental history. This
information was intended to enable the Company to identify and act quickly on
specific conditions affecting individual properties.
Each property was operated by a staff, including a resident manager and a
maintenance and apartment preparation staff. Policies and procedures utilized
at the property sites followed 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 sought to
experience low rent loss to delinquencies or early lease terminations.
Individual property lease programs were structured to respond to local
market conditions. The Company attempted to balance rent increases with high
occupancy and stabilized turnover costs. None of the properties were subject to
rent control or rent stabilization regulations. Standard lease terms stipulated
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 July 1997, the Company completed the development of a luxury apartment
community located in Tempe, Arizona. The community is built on 20 acres and
consists of 356 units with an average size of 919 square feet. The total cost
of the community was approximately $21.0 million.
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Properties
The following table sets forth certain information regarding the Company's
apartment communities as of December 31, 1997.
<TABLE>
<CAPTION>
Number Percentage Carrying Value
of of --------------------
Apartment Apartment Amount
Homes Homes (000) Per Home
----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Tucson, Arizona
Acacia Hills ............... 64 0.8% $ 1,221 $19,078
Casa Del Norte ............. 84 1.1% 1,700 20,238
Desert Springs ............. 248 3.2% 5,448 21,968
Landmark ................... 176 2.3% 4,275 24,290
Park Terrace ............... 176 2.3% 3,212 18,250
Park Village ............... 60 0.8% 720 12,000
Posado Del Rio ............. 160 2.1% 3,168 19,800
South Point ................ 144 1.9% 2,191 15,215
--- ---- ------- -------
Total Tucson ............... 1,112 14.4% 21,935 19,726
----- ---- ------- -------
Phoenix, Arizona
Contempo Heights ........... 222 2.9% 6,066 27,324
La Privada (5) ............. 350 4.5% 24,751 70,717
Finisterra (1) (5) ......... 356 4.6% 20,417 57,351
----- ---- ------- -------
Total Phoenix .............. 928 12.0% 51,234 55,209
----- ---- ------- -------
Houston, Texas
Clear Lake Falls ........... 90 1.2% 3,895 43,278
The Gallery ................ 101 1.3% 2,431 24,069
Memorial Bend .............. 124 1.6% 2,657 21,427
Nantucket Square ........... 106 1.4% 3,416 32,226
Prestonwood ................ 156 2.0% 3,371 21,609
Riviera Pines .............. 224 2.9% 4,345 19,397
Briar Park (2) ............. 80 1.0% 2,255 28,188
Country Club Place (2) ..... 169 2.2% 5,473 32,385
Chelsea Park (2) ........... 204 2.6% 5,848 28,667
Marymont (2) ............... 128 1.7% 4,496 35,125
Riverway (2) ............... 152 2.0% 2,005 13,191
Timbercreek Landing (2) .... 204 2.6% 5,688 27,882
Ivystone/Woodsedge (5) ..... 266 3.4% 5,119 19,244
London Park (5) ............ 257 3.3% 6,378 24,817
----- ---- ------- -------
Total Houston .............. 2,261 29.3% 57,377 25,377
----- ---- ------- -------
Dallas, Texas
Aspen Court (2) ............ 140 1.8% 4,554 32,529
Greenwood Creek (2) (4) .... 328 4.2% 7,868 23,988
Highlands of Preston (2) ... 220 2.8% 8,977 40,805
Montfort Townhomes (2) ..... 83 1.1% 5,675 68,373
Springfield (2) ............ 218 2.8% 8,588 39,394
Gentry Place (5) ........... 360 4.7% 11,738 32,606
Park on Preston (5) ........ 286 3.7% 9,317 32,577
Smith Summit (5) ........... 254 3.3% 8,946 35,220
----- ---- ------- -------
Total Dallas ............... 1,889 24.5% 65,663 34,761
----- ---- ------- -------
Albuquerque, New Mexico
Dorado Terrace ............. 216 2.8% 6,704 31,037
Villa Serena ............... 104 1.3% 3,299 31,721
Whispering Sands ........... 228 3.0% 6,928 30,386
----- ---- ------- -------
Total Albuquerque .......... 548 7.1% 16,931 30,896
----- ---- ------- -------
Pullman, Washington
Campus Commons-North
(2)(4) .................... 234 3.0% 11,095 47,415
Campus Commons-South
(2)(4) 100 1.3% 4,157 41,570
----- ---- ------- -------
Total Pullman .............. 334 4.3% 15,252 45,665
----- ---- ------- -------
<CAPTION>
Average
Economic Average Average Monthly
Encumbrances Occupancy Monthly Unit Rental Rates
(000) 1997 Rental Rates Size Per Sq. Ft.
-------------- ----------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Tucson, Arizona
Acacia Hills ............... $ 1,008 93% $437 540 0.81
Casa Del Norte ............. 1,350 92% 433 525 0.83
Desert Springs ............. 4,523 94% 435 590 0.74
Landmark ................... 2,986 84% 428 641 0.67
Park Terrace ............... 2,648 85% 433 579 0.75
Park Village ............... 577 89% 393 540 0.73
Posado Del Rio ............. -- 94% 457 621 0.74
South Point ................ 1,826 87% 375 526 0.71
------- -- ---- --- ----
Total Tucson ............... 14,918 90% 427 582 0.73
------- -- ---- --- ----
Phoenix, Arizona
Contempo Heights ........... 3,754 96% 463 595 0.78
La Privada (5) ............. 18,951 93% 890 1,195 0.75
Finisterra (1) (5) ......... 12,837 93% 830 919 0.90
------- -- ---- ----- ----
Total Phoenix .............. 35,542 94% 765 946 0.81
------- -- ---- ----- ----
Houston, Texas
Clear Lake Falls ........... 3,068 94% 851 1,169 0.73
The Gallery ................ 1,611 95% 558 763 0.73
Memorial Bend .............. 1,887 90% 601 939 0.64
Nantucket Square ........... 2,703 94% 769 1,428 0.54
Prestonwood ................ 2,423 96% 529 957 0.55
Riviera Pines .............. 3,207 95% 502 717 0.70
Briar Park (2) ............. 1,387 97% 565 915 0.62
Country Club Place (2) ..... 3,543 92% 558 814 0.69
Chelsea Park (2) ........... 3,399 97% 548 829 0.66
Marymont (2) ............... 2,518 97% 578 876 0.66
Riverway (2) ............... 1,175 84% 362 740 0.49
Timbercreek Landing (2) .... 3,360 96% 512 775 0.66
Ivystone/Woodsedge (5) ..... 3,696 91% 475 771 0.62
London Park (5) ............ 4,401 95% 523 814 0.64
------- -- ---- ----- ----
Total Houston .............. 38,378 94% 544 856 0.64
------- -- ---- ----- ----
Dallas, Texas
Aspen Court (2) ............ 2,016 96% 574 742 0.77
Greenwood Creek (2) (4) .... 4,987 95% 454 720 0.63
Highlands of Preston (2) ... 4,815 91% 630 786 0.80
Montfort Townhomes (2) ..... 3,999 91% 997 1,112 0.90
Springfield (2) ............ 5,439 92% 631 844 0.75
Gentry Place (5) ........... 7,443 95% 591 911 0.65
Park on Preston (5) ........ 5,595 96% 565 633 0.89
Smith Summit (5) ........... 5,536 95% 624 955 0.65
------- -- ---- ----- ----
Total Dallas ............... 39,830 94% 593 816 0.73
------- -- ---- ----- ----
Albuquerque, New Mexico 591
Dorado Terrace ............. 5,114 92% 528 608 0.87
Villa Serena ............... 2,630 89% 561 681 0.82
Whispering Sands ........... 5,478 91% 539 808 0.67
------- -- ---- ----- ----
Total Albuquerque .......... 13,222 91% 539 705 0.76
------- -- ---- ----- ----
Pullman, Washington
Campus Commons-North
(2)(4) .................... 6,602 72% 611 868 0.70
Campus Commons-South
(2)(4) 2,732 90% 584 1,086 0.54
------- -- ---- ----- ----
Total Pullman .............. 9,334 77% 603 933 0.65
------- -- ---- ----- ----
</TABLE>
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<TABLE>
<CAPTION>
Number Percentage Carrying Value
of of ----------------------
Apartment Apartment Amount
Homes Homes (000) Per Home
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Seattle, Washington
Pacific South Center (2) (3) n/a 5,437 n/a
The Court (5) ................... 175 2.3% 4,338 24,789
Arbor Terrace (5) ............... 276 3.6% 13,764 49,870
On The Boulevard (5) ............ 202 2.6% 10,705 52,995
--- ----- ------ ------
Total Seattle ................... 653 8.5% 34,244 52,441
--- ----- ------ ------
Total ............................ 7,725 100.0% $262,636 33,998
===== ===== ======== ======
<CAPTION>
Average
Economic Average Average Monthly
Encumbrances Occupancy Monthly Unit Rental Rates
(000) 1997 Rental Rates Size Per Sq. Ft.
-------------- ----------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Seattle, Washington
Pacific South Center (2) (3) 3,205 n/a n/a n\a n\a
The Court (5) ................... 2,904 93% 490 590 0.83
Arbor Terrace (5) ............... 7,868 83% 634 880 0.72
On The Boulevard (5) ............ 7,952 77% 732 938 0.78
----- --- --- --- ----------
Total Seattle ................... 21,929 89% 626 635 0.98
------ --- --- --- ----------
Total ............................ $173,153 92% 574 791 0.73
======== === === === ==========
</TABLE>
Notes
(1) The Company completed construction in June 1997.
(2) Property acquired April 30, 1997. Averages for monthly rental rates are for
eight months. All other properties are for the 1997 year, unless otherwise
noted.
(3) Pacific South Center, an office building, has been excluded in the
calculation for average rent per unit, occupancy percentage, and rent per
foot.
(4) The two Campus Commons properties are occupied approximately 90-95% by
students for ten months and approximately 50% occupied at much lower rent
for the other two months. Rent in the two summer months is approximately
$150 a month per unit, while rent at December 97 is approximately $765 and
$729 for Campus Commons North and South, respectively.
(5) Average monthly rental rate is rate for December 1997.
8
<PAGE>
Capital Resources
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions and restrictions that may be contained in
the Company's financing arrangements from time to time and other factors as
described herein, the Company could increase the amount of funds available for
its activities with the proceeds of borrowings including mortgage loans,
short-term borrowing and other credit arrangements. A substantial portion of
the assets of the Company from time to time was pledged to secure indebtedness
incurred by the Company. Accordingly, such assets were 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 obtained a first mortgage loan for each of its properties. At
December 31, 1997, the mortgage loans totalled $173,153 million, which bore
interest rates that averaged 8.1%. The mortgage loans generally are
non-recourse to the Company and are not cross-collateralized.
The Company's Bylaws prohibited it from incurring 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 could 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 could result in
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.
Operating Restrictions
The Company could not purchase commodities or commodity futures contracts
(other than interest rate futures when used solely for hedging). The Company
could not invest in unimproved real property or underwrite securities of other
issuers. The foregoing restrictions could 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 was
controlled by its Board of Directors, which had the power to modify or alter
such policy without the consent of the stockholders.
HERITAGE COMMUNITIES L.P.
Heritage Communities L.P. (the "Heritage LP") is a Delaware limited
partnership in which the Company and a wholly owned subsidiary of the Company
are the general partners and at December 31, 1997, owned approximately 66% of
the limited partnership interest. Heritage LP acquired substantially all of the
assets and properties of the Winton Partnerships through a capital contribution
by the Winton Partnerships to Heritage LP of such assets and properties in
exchange for cash and LP Units.
9
<PAGE>
Competition
Numerous real estate companies, insurance companies, financial
institutions, pension funds and other property owners competed with the Company
in seeking properties for acquisition and in attracting and retaining tenants.
Employees
The Company had 248 full-time salaried employees as of March 27, 1998.
Management
Prior to April 30, 1997, the Company had management agreements with Pima
Mortgage L.P. and Pima Realty Advisors, Inc. (the "Pima Entitites") for the
management of the Company and its properties. The Pima Entities were owned by
Jon A. Grove, Joseph C. Chan, and Frank S. Parise, Jr. who were executive
officers of the Company. On April 30, 1997, the Company acquired the entire
interests in the Pima Entities and thus became a self-administered and
self-management REIT.
ITEM 2. PROPERTY
See "Business -- Operating Policies and Strategies -- Real Estate
Activities -- Properties."
The principal executive offices of the Company were located at 335 North
Wilmot, Suite 250, Tucson, Arizona 85711.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock was 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. As a result of the Merger, trading of
ASR Common Stock ceased after March 27, 1998.
<TABLE>
<CAPTION>
Dividend
High Low per share
---- --- ---------
<S> <C> <C> <C>
1995
First quarter .......... $20 $10 15/16 $ 0.50
Second quarter ......... 19 3/8 16 1/4 0.50
Third quarter .......... 20 1/2 17 3/4 0.50
Fourth quarter ......... 18 3/8 15 0.50
1996
First quarter .......... 17 3/4 15 3/8 0.50
Second quarter ......... 18 3/8 16 7/8 0.50
Third quarter .......... 19 3/4 17 1/2 0.50
Fourth quarter ......... 22 3/8 18 7/8 0.50
1997
First quarter .......... 24 3/4 20 1/4 0.50
Second quarter ......... 23 3/4 18 5/8 0.50
Third quarter .......... 24 21 7/8 0.50
Fourth quarter ......... 23 11/16 20 5/8 0.50
</TABLE>
On March 27, 1998, the closing sales price for shares of the Company's
Common Stock on the Amex Composite Tape was $221|M/2 per share and the
approximate number of holders of record of Common Stock was 2,000.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (In thousands)
The selected consolidated financial data presented below were derived from
the audited Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data
Income from real estate
Rental and other income ................................. $ 33,034 $ 14,581 $ 14,034 $ 12,528
Operating and maintenance expenses, real estate
taxes and insurance .................................... (15,077) (6,855) (6,719) (5,497)
Interest expense ........................................ (10,054) (4,348) (4,387) (3,941)
Depreciation and amortization ........................... (6,335) (2,819) (2,692) (1,995)
--------- -------- -------- --------
Income from real estate ................................ 1,568 559 236 1,095
--------- -------- -------- --------
Gain from sale of real estate .......................... 474
--------- -------- -------- --------
Income from mortgage assets
Prospective yield income ................................ 588 2,630 3,884 6,433 $ 7,264
Income from redemptions and sales ....................... 16,650 9,461 5,302 4,263
Interest expense ........................................ (25) (181) (347) (2,596) (4,794)
Provision for reserves .................................. (20,286)
---------
Income from mortgage assets ............................ 17,213 11,910 8,839 8,100 (17,816)
--------- -------- -------- -------- ---------
Income before administrative expenses, acquisition
related expenses, other income (expense) and
allocation to minority unit holders ..................... 19,255 12,469 9,075 9,195 (17,816)
Acquisition related expenses ............................. (6,684) (381)
Administrative expenses .................................. (3,114) (3,203) (2,983) (2,216) (1,949)
Other income (expense) net ............................... 732 (44) 462 723 286
--------- -------- -------- -------- ---------
Income before allocation of minority unit holders ........ 10,189 8,841 6,554 7,702 40,570
Allocation of income to minority holders ................. (355)
--------- -------- -------- -------- ---------
Income (loss) before cumulative effect
of accounting change .................................... 9,834 8,841 6,554 7,702 (19,479)
Cumulative effect of accounting change ................... (21,091)
---------
Net Income ............................................... $ 9,834 $ 8,841 $ 6,554 $ 7,702 $ (40,570)
========= ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Apartment and other real estate assets ......... 264,332 $85,938 $79,510 $73,056 $ 3,855
Mortgage assets ................................ -- 5,039 11,877 18,965 37,881
Total assets ................................... 280,743 97,796 94,169 96,745 54,068
Real estate notes payable ...................... 173,153 49,110 49,212 50,693
Mortgage assets borrowing, net ................. -- 2,014 4,495 6,422 22,062
Stockholders' Equity ........................... 78,535 40,102 37,395 37,100 30,948
</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.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
ASR Investments Corporation (the "Company") is a real estate investment
trust that engaged primarily in the acquisition and operation of apartment
communities in the southwestern United States. Prior to 1994, the Company
invested in mortgage assets. In early 1993, the Company determined to shift its
focus to the acquisition, development and operation of apartment communities.
At December 31, 1996, the Company owned directly 18 apartment communities
(2,683 units) in operation and one community (Finisterra Apartments) under
construction. These communities are located in Arizona, Texas, and New Mexico.
The Company completed the construction of the Finisterra Apartments (356 units)
in July 1997 and made substantial amounts of acquisitions in 1997. See Note 2
to consolidated financial statements for certain detailed information on the
acquisitions. Below is a summary of the 1997 acquisitions (dollars in
thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Number of communities acquired ..... 1 17 4 1 23
Number of units acquired ........... 266 3,042 1,102 276 4,686
Total purchase price ............... $ 4,450 $118,782 $ 39,996 $13,249 $ 176,477
Total mortgage loans ............... $ 3,700 $ 75,696 $ 26,411 $ 7,825 $ 113,632
Number of common stock issued ...... 86,500 869,945 466,259 86,184 1,508,888
Number of convertible
LP Units issued ................... -- 943,701 27,721 -- 971,422
</TABLE>
In May 1997, the Company sold to its partner the Company's entire
interests in five joint ventures for total net proceeds of $2,062,000. The
Company was a 15% equity partner and managing member of the joint ventures. The
Company received between 15% and 51% of the net profits and cash flow depending
on the performance of the joint ventures.
At December 31, 1997, the Company owned 41 apartment communities with a
total of 7,725 units and an office building.
In 1997, the Company received $20,880,000 from the sale or redemption of
all its remaining mortgage assets and realized total redemption income of
$16,650,000. As a result of the sale of all of its mortgage assets, the Company
will not realize any mortgage asset cash flows or income in future periods.
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.
As discussed above, the Company owned mortgage assets (all acquired prior
to 1993). These mortgage assets entitled the Company to receive the excess of
the cash flow on pools of mortgage instruments over the required payments on a
series of structured financings which they secured. Income and cash flows from
mortgage assets were affected primarily by mortgage prepayment rates and
short-term interest rates. Higher mortgage prepayment rates or higher
short-term rates 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.
The Company also had the option to cause the early redemption of the
structured financings at par after specified conditions were met (generally
when the structured financing is below a specified balance or after a specified
date). In such event, the mortgage instruments were sold and the net proceeds
after the redemption of the structured financing were remitted to the Company.
Mortgage asset redemptions had the effect of accelerating the cash flows and
increasing the value. Redemption and sales transactions occurred from time to
time as specified conditions were met rather than on a monthly or quarterly
basis, and the net proceeds were affected by the market price of the mortgage
instruments. Thus, the cash flows
13
<PAGE>
and income from redemption transactions fluctuated significantly between
periods. Mortgage asset redemptions and sales reduced the cash flows and income
in future periods. The Company's income included income from redemption and
sales of mortgage assets of $16,650,000, $9,461,000, and $5,302,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.
Results of Operations
1997 Compared to 1996
Real Estate Operations. Real estate operating income and expenses
increased substantially primarily due to acquisitions made in 1997. Below are
the operating results of the new communities for the period owned by the
Company during 1997 (in thousands):
Rental and other income ........................ $ 18,455
--------
Operating & maintenance expenses ............... 5,985
Property management expenses ................... 107
Real estate taxes & insurance expenses ......... 2,058
Interest expense ............................... 5,481
Depreciation expense ........................... 3,505
--------
Total real estate operating expenses ........... 17,136
--------
Income from real estate ........................ $ 1,319
========
On a "same store" basis (i.e., for properties owned by the Company during
1996), the Company realized a 0.28% decrease in net operating income ("NOI").
Below are the rates of increase or decrease in the components of the NOI:
Oper. & Taxes
Rental Maint. Insurance
Income Expense Expense NOI
------ ------- ------- ---
Total ............... 0.4% 2.5% (4.2)% ( 0.3)%
Tucson .............. (4.1)% (0.4)% (2.1)% ( 7.3)%
Phoenix ............. 7.2% 4.5% 2.5% 9.2%
Houston ............. 6.4% 3.7% (9.0)% 14.4%
Albuquerque ......... (4.3)% 6.0% 9.6% (10.2)%
The gain on sale of real estate of $474,000 resulted from the sale of the
Company's interest in the joint ventures in May of 1997. Income from the joint
ventures for the 1996 year was $89,000.
Mortgage Assets. Decreases in income from mortgage assets and related
interest expense were due to the sale of the entire mortgage asset portfolio in
June 1997.
Administrative Expenses, Acquisition Related Expenses and Other
Income, Administrative expenses decreased by $89,000 for 1997 primarily as a
result of a decrease in payments on dividend equivalents rights as the number
of dividend equivalent rights outstanding was lower in 1997 compared to 1996.
Acquisition related expenses increased by $6,303,000 as a result of the
acquisition of the Company's Manager and Property Manager and the payment of
certain bonuses in connection with the acquisition of the Winton properties
(see Note 9 to the consolidated financial statements). Other income increased
by $776,000 due to interest earned on the proceeds from the sale of the
mortgage assets in 1997 and as the 1996 amount included writeoff of certain
real estate investments.
Minority interests of Unitholders In Operating Partnership. The minority
interest for 1997 represents the allocation of income related to unitholder in
Heritage Communities L.P. See Note 4. The Company had no minority unitholders
in 1996
1996 Compared to 1995
Real Estate Operations. Rental and other income increased $547,000 in 1996
primarily as a result of (i) $346,000 from rental rate increases (attributable
primarily to a 3% increase in the Houston communities), (ii) $201,000 from
higher occupancy rates (attributable primarily to the Tucson communities),
(iii)
14
<PAGE>
$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 to 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 to capital improvements
on the apartment communities. Interest expense on real estate mortgages
decreased due to lower principal balances resulting from monthly payments.
Mortgage Assets. 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. Acquisition related expenses increased in 1996 as a result of
$381,000 in expenses related to future acquisitions. Other income decreased due
primarily 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.
Funds From Operations
Funds from operations ("FFO") is one of the common measures of performance
in the equity REIT industry. FFO is generally defined as net income plus
certain non-cash charges (primarily depreciation and amortization), less gains
from sales of assets and after adjustments for unconsolidated partnerships and
joint ventures. The Company has made the following adjustments in calculating
its FFO, as modified: (i) income from redemptions and sales of mortgage assets
is excluded as the Company considers such income to be similar in nature to
gains from sales of real estate; (ii) certain non-recurring charges are added
back as the charges relate to a defined and limited period; and (iii) while the
stock options that carry dividend equivalent rights ("DERs") are anti-dilutive,
they are included in the FFO per share calculation as the Company believes the
options are likely to be exercised by their expiration date of December 16,
1998 because the exercise price is substantially below the current stock price.
As not all REITs and financial analysts calculate FFO in the same manner,
FFO as reported herein may not be comparable to similarly titled measures as
reported by other REITs. FFO, as modified, should not be considered as an
alternative to net income (determined in accordance with generally accepted
accounting principles) as an indication of Company's financial performance. FFO
also should not be considered as an alternative to cash flow from operating
activities determined in accordance with generally accepted accounting
principles because (i) FFO excludes income from sales and redemptions of
mortgage assets that are included in cash flow through operating activities,
(ii) FFO is adjusted to exclude certain non-recurring charges, and (iii) FFO is
not adjusted for changes in accrual as is cash flow from operating activities.
FFO is not necessarily indicative of available cash flow to fund all of the
Company's needs. The Company believes that in order to facilitate a clear
understanding of the consolidated historical operating results of the Company,
FFO should be considered in conjunction with net income as presented in the
consolidated financial statements.
As described in Note 2 to the consolidated financial statements, the
Company has made numerous acquisitions in 1997. The Company has also presented
the proforma FFO data assuming that all of the
15
<PAGE>
acquisitions were completed as of the beginning of the period. The proforma
data are provided for information purposes only and are not indicative of the
results that would have occurred or which may occur in the future. Actual and
proforma FFO data, as modified, for the year ended December 31, 1997, are as
follows (in thousands):
Actual Pro Forma
------ ---------
Net Income ................................ $ 9,834 $ 10,523
Depreciation and amortization ............. 6,905 9,634
Certain non-recurring charges(*) .......... 7,513 7,513
Dividend equivalent rights ................ 680 680
Income from redemptions and sales of
mortgage assets .......................... (16,650) (16,650)
Gain on sale of real estate ............... (474) (474)
Funds from operations ..................... $ 7,808 $ 11,226
- ------------
(*) Non-recurring charges relate to stock appreciation rights for certain
employees, acquisition-related expenses and contract termination expense.
The Company expects its FFO to increase as (i) the Finisterra Apartments
achieved stabilization (90% occupancy rate) in August, and (ii) it completes
substantial capital improvements to certain communities acquired in 1997. The
above FFO data are not necessarily indicative of the FFO amounts for future
periods as they will depend on the performance of the existing apartment
communities and as well as new communities.
Liquidity, Capital Resources and Commitments
Cash provided by operations for 1997 was $26,864,000 compared with
$14,061,000 in 1996. The increase was primarily a result of (i) higher net
income due primarily to a $7,189,000 increase in income from redemptions and
sales of mortgage assets as the Company sold its remaining mortgage asset
portfolio in June 1997, (ii) higher non-cash charges relating to depreciation
(an increase of $3,634,000) and acquisition related expense ($5,250,000), and
(iii) higher expense accruals. Cash provided by operations for 1996 was higher
than 1995 as a result of an 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).
Cash used in investing activities totaled $40,660,000 in 1997 compared to
$6,872,000 and $2,394,000 in 1996 and 1995, respectively. The increase in cash
usage of $33,788,000 in 1997 compared to 1996 primarily reflects (i) an
increase of $35,771,000 in investments in apartments and an increase of
$5,087,000 in restricted cash as a result of the acquisitions made in 1997,
while making no acquisitions in 1996 and (ii) a decrease of $1,799,000 from the
reduction in mortgage assets as the Company sold its remaining portfolio in
June 1997. The increase in cash usage was mitigated by (i) $3,253,000 from
joint venture distributions and proceeds resulting from the sale of the
Company's interest in such joint ventures, (ii) a decrease of $5,544,000 in
construction expenditures for the Finisterra Apartments community, and (iii) an
increase of $72,000 in cash provided by other real estate assets. Cash used in
investing activities in 1996 was higher by $4,478,000 compared to 1995 due
primarily to the Company's construction of its Finisterra Apartment community
offset partially by a decrease in investments in apartments as the Company did
not make any apartment purchases in 1996 while acquiring one apartment
community in 1995.
Cash provided by financing activities was $14,380,000 in 1997 compared to
cash used in financing activities of $7,207,000 in 1996. The increase of
$21,587,000 reflects (i) an increase in the issuance of real estate notes
payable of $13,540,000 related to the acquisitions made in 1997, with no
similar purchases in 1996, (ii) an increase of $12,340,000 in proceeds from the
Finisterra Apartment's construction loan, (iii) a decrease of $467,000 in
repayments of short-term borrowing, (iv) an increase in stock issuance of
$4,948,000 and (v) an increase of $305,000 from other financing activities. The
increase was mitigated by (i) an increase of repayment of real estate note of
$2,503,000, (ii) an increase in payment of dividends of $2,198,000, (iii)
payment of distributions to minority unit holders of $1,428,000 as there were
no minority
16
<PAGE>
interest holders in 1996, (iv) a decrease of $3,162,000 in construction cost
payable as construction of the Finisterra Apartment community was completed in
July 1997, and (v) an increase of $722,000 in loan costs related to the
financing of the 1997 apartment acquisitions. Cash used in financing activities
was $7,207,000 in 1996 compared with cash used in financing activities of
$6,826,000 in 1995. The increase of $381,000 in cash used in financing
activities resulted primarily from (i) a decrease of $6,895,000 in real estate
borrowing related to the acquisition of apartment communities in 1995 and (ii)
a decrease of $6,976,000 in short-term borrowing, The increase in cash used by
financing activities was mitigated by (i) a decrease of $7,598,000 and
$4,002,000 in the repayment of real estate notes and notes secured by mortgage
assets, respectively, (ii) an increase of $1,581,000 in construction costs
payable related to the construction of the Finisterra Apartment community, and
(iii) a net increase of $309,000 in other financing activities.
During 1997, the Company obtained new mortgage loans or assumed existing
mortgage loans totalling $113,632,000 in connection with its apartment
acquisitions. In addition, as discussed in Note 2 to the consolidated financial
statements, the Company had obtained a $15,350,000 construction loan to finance
the construction of its Finisterra apartment community. The loan bore interest
at 1% per annum above the bank's prime rate. In September 1997, the Company
converted the construction loan ($12,748,000 at December 31, 1997) into a
mini-perm loan that bears interest at 2.5% over the one-month LIBOR. The loan
matures at the end of March 1998 at which time the Company may extend the loan
or refinance it to a permanent loan at a lower interest rate.
Excluding the construction loan, all the Company's mortgage loans are
nonrecourse and non-cross collateralized. They generally have terms from seven
to fifteen years. At December, 31, 1997, the mortgage loans consisted of
$145,364,000 of fixed rate loans and $27,789,000 of variable rate loans which
includes the construction loan. The fixed interest rates range from 7.1% to
10.1%, with a weighted average rate for all the Company's loans of 8.1% at
December 31, 1997. The principal and interest payments on these loans are
approximately $1,330,000 per month. In addition, the Company is required to
deposit $530,000 per month with the lender to be used for specified capital
replacement expenditures, property taxes and insurance premiums. At December
31, 1997, $8,825,000 was held by lenders. Capital expenditures for the
apartment communities were $4,457,000 in 1997.
On February, 27, 1998, the Company obtained a $2,500,000 short-term loan
secured by one its apartment communities. The apartment community's first
mortgage loan had been paid off in December 1997. The loan bears interest at
one-month LIBOR plus 2.75% and matures on August 27, 1998. The loan proceeds,
in addition to the unrestricted cash of $2,987,000 at December 31, 1997, were
used to fund the Company's operating expenses and costs associated with the
merger described in the following
paragraph.
Other Information
Apartment leases generally are for terms of six to 12 months. 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.
17
<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 immediatly prior to the merger.
<TABLE>
<CAPTION>
Name Age Position(s) With The Company
---- --- ----------------------------
<S> <C> <C>
Jon A. Grove 54 Chairman of the Board, President, Chief Executive Officer and Director
Frank S. Parise, Jr. 46 Vice Chairman, Executive Vice President, Chief Administrative Officer,
and Director
Joseph C. Chan 46 Executive Vice President, Chief Operating Officer, Secretary, Treasurer
and Director
Dale A. Webber 37 Vice President
Roger A. Karber 43 Vice President, Property Development
Thomas A. Heeringa 44 Vice President
Mary C. Clements 31 Controller
Earl M. Baldwin 54 Director
Steven G. Davis 47 Director
John J. Gisi 52 Director
Raymond L. Horn 68 Director
Frederick C. Moor 66 Director
</TABLE>
Jon A. Grove served as Chairman of the Board of Directors, President,
Chief Executive Officer and a director of the Company since its organization in
June 1987. Mr. Grove also served as the President of one of the general
partners of the Manager and was a director and principal stockholder of Pima
Realty Advisors, Inc. (the "Property Manager") from their respective
organizations until their acquisition by the Company in April 1997. From 1974
to 1989, Mr. Grove was employed with The Estes Co. (now called GWS), a company
which founded the Company and which develops, constructs, and sells
residential, multi-family, commercial and industrial real estate, most recently
as executive vice president and chief operating officer. Mr. Grove also has
been Chairman of the Board and a Director of American Southwest Holdings, Inc.
and its affiliates since their organization; these companies are Arizona-based
corporations involved in the issuance and administration of
mortgage-collateralized bonds.
Frank S. Parise, Jr. served as Vice Chairman of the Board of Directors,
Executive Vice President, and Chief Administrative Officer of the Company since
December 1988 and a director of the Company since its organization. Mr. Parise
also has served as the President of one of the general partners of the Manager
and was the President, a director and principal stockholder of the Property
Manager from their respective organizations until their acquisition by the
Company in April 1997 since its organization in November 1993. From 1985 to
1989, Mr. Parise was employed by The Estes Co., most recently as President of
its Financial Services Division and Multifamily Development Division. From 1982
to 1985, Mr. Parise was the President of E. Allen Development Corporation, a
company that acquired and managed apartments.
Joseph C. Chan served as a director of the Company since February 1989,
Executive Vice President and Chief Operating Officer since December 1988,
Treasurer since April 1994, and Secretary since March 1996. Mr. Chan served as
the Vice President and Treasurer of the Company from its organization until
December 1988. Mr. Chan also served as the President of one of the general
partners of the Manager since its organization and was a director and principal
stockholder of the Property Manager from their respective organizations until
their acquisition by the Company in April 1997. From 1986 to 1987, Mr. Chan
served as an officer of The Estes Co.
Dale A. Webber served as a Vice President of the Company since September
1987.
Roger A. Karber served as 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
18
<PAGE>
specialty retail centers. From 1979 to 1989, Mr. Karber was employed by The
Estes Co., where he was instrumental in establishing its apartment operations,
which included developing over 1,500 apartment units.
Thomas A. Heeringa served as a Vice President of the Company since March
1996. He has been employed by the Company since December 1988.
Mary C. Clements served as 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 served as a director of the Company since its
organization. Since 1985, Mr. Baldwin has been president of Baldwin Financial
Corp., a risk management consulting service company for mortgage lenders
specializing in hedging and secondary market strategy. From 1973 to 1985, Mr.
Baldwin was employed by Security Pacific Mortgage Corporation ("SPMC"), a
mortgage banking company, serving most recently as its executive vice
president.
Steven G. Davis served as a director of the Company since May 1997. He
currently serves as a director of ROC Communities, Inc., a public REIT that
owns and operates manufactured home communities. Mr. Davis was a founding
shareholder of ROC and served as its Executive Vice President, Chief Financial
Officer, Secretary and Treasurer from 1993-1997. From 1990-1993, Mr. Davis was
President and a director of The Windsor Corporation which was merged with ROC.
From 1985-1990, Mr. Davis was responsible for the real estate investment
banking division of LPL Financial Services.
John J. Gisi served as 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 served as 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 served as 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 were elected at each annual meeting of the Company's
stockholders and held office until their successors are elected and qualified.
All officers served at the discretion of the Board of Directors.
Meetings and Committees
During the year ended December 31, 1997, the Board of Directors of the
Company held a total of five regular meetings and two special meetings in
connection with deliberation of the Merger. No director attended fewer than 75%
of the meetings of the Board of Directors.
The Company's Bylaws authorized 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 were required to be
Unaffiliated Directors. For 1997, the Board of Directors appointed an Audit
Committee and a Compensation Committee. Messrs. Gisi and Horn served as the
members of the Company's Audit Committee and Compensation Committee. The Audit
Committee reviewed the annual financial statements, any significant accounting
issues and the scope of the audit with the Company's independent auditors and
was 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 1997, which was attended by all of the
members of the Committee. The Compensation
19
<PAGE>
Committee reviewed the compensation of the executive officers and all
transactions involving executive officers and their affiliates. The
Compensation Committee did not meet during 1997.
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, 1997, 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.
20
<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
Annual Compensation ------------------------- --------
Name and Principal ------------------------------------- Restricted Options/ LTIP All Other
Position Year Salary Bonus (2) Other Stock SARs Payout Compensation
- -------- ---- ------ --------- ----- ----- ---- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jon A. Grove (1)(2) 1997 $ 66,667 $267,000 $ 69,913 -- --
Chairman, President, 1996 -- -- 179,431 -- --
and Chief Executive 1995 -- -- 180,431 -- --
Officer
Frank S. Parise,
Jr. (1)(2) 1997 $ 66,667 $267,000 $ 69,913 -- --
Vice Chairman, 1996 -- -- 179,114 -- --
Executive Vice 1995 -- -- 180,431 -- --
President,
and Chief
Administrative
Officer
Joseph C. Chan (1)(2) 1997 $ 66,667 $267,000 $ 69,913 -- --
Director, Executive 1996 -- -- 179,114 -- --
Vice President, 1995 -- -- 180,431 -- --
Secretary, and
Chief Operating
Officer
Dale A. Webber 1997 $100,000 -- $194,035 -- --
Vice President 1996 -- -- 141,729 70,000 --
1995 108,447 -- -- -- --
Roger A. Karber 1997 $ 75,000 -- $296,364 -- --
Vice President 1996 -- -- 117,835 50,000 --
1995 100,000 $ 15,000 -- -- -- --
</TABLE>
- ------------
(1) Messrs. Grove, Parise, and Chan became salaried employees of the Company on
May 1, 1997 upon the Company's acquisition of the Pima Entities. Prior to
that date, Messrs. Grove, Parise, and Chan did not receive any cash or
cash equivalent compensation directly from the Company. They received
their compensation from the Manager, the partners of which were
corporations owned by these individuals. See "Certain Relationships and
Related Transactions." The amounts listed under Other Compensation
represent the total cash payments received or receivable from the Manager
by these individuals and the corporations owned by them.
(2) The bonuses for Messers. Grove, Parise and Chan relate to the acquisition
of the Winton Properties. See "Executive Compensation -- Employment
Agreements."
21
<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>
% Of Total Potential Realizable Value
Options/ Options/SARs at Assumed Annual Rates
SARs Granted To Exercise Of Stock Price Appreciation
Granted Employees In Or Base Expiration For Option Term
(#) Fiscal Year Price Date 5% 10%
--- ----------- ----- ---- -- ---
<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 None N/A N/A N/A N/A N/A
Roger A. Karber None N/A N/A N/A N/A N/A
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Jon A. Grove -- -- 138,581 $1,710,505
-- --
Frank S. Parise, Jr. (1) -- $440,447 110,221 1,359,534
-- --
Joseph C. Chan (1) -- 440,447 108,515 1,326,412
-- --
Dale A. Webber -- 160,414 47,930 191,194
-- --
Roger A. Karber -- 306,460 -- --
</TABLE>
- ------------
(1) These officers exchanged the value of the SARs into option agreements
granted under Key Executive Share Option Plan (the "KEYSOP") adopted by
the Company on January 31, 1997. Under the KEYSOP, a participant can elect
to defer the receipt of future compensation and exchange the value of such
deferred compensation into options to purchase designated property from
the Company. The Company is required to purchase the designated property
for options granted. The obligations of the Company to the participants
are unsecured general obligations and the designated properties purchased
by the Company are general assets of the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors performed the
functions of making recommendations to the Board concerning the Company's
compensation policies applicable to its executive officers. Messrs. Grove,
Parise and Chan served both directors and the principal executive officers of
the Company. All compensation matters relating to the Company's principal
executive officers, however, were decided by the Unaffiliated Directors,
consisting of Messrs. Baldwin, Davis, Gisi, Horn, and Moor. The principal
executive officers made recommendation to the Board concerning the compensation
of other executive officers of the Company. None of the Unaffiliated Directors
have ever been officers or employees of the Company or any of its subsidiaries.
Messrs. Grove, Parise, and Chan abstained from participating in the
deliberations of the Board of Directors concerning the approval of the
Management Agreement, the Property Management Agreements, the acquisition of
the Manager and the Property Manager by the Company, or any other matters
relating to their compensation. In addition, during 1997 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.
22
<PAGE>
Compensation of Directors
During the fiscal year ended December 31, 1997, 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.
Employment Agreements
Each of Messrs, Grove, Parise, and Chan was a party to an employment
agreement (collectively, the "Employment Agreements") with the Company. Under
the Employment Agreements, each of Messrs. Grove, Parise, and Chan received
compensation of $100,000 per annum and was eligible to receive an annual bonus
in such amount, if any, as may be determined by the non-management directors of
the Company and fringe benefits generally made available from time to time to
employees of the Company.
Each of Messrs. Grove, Parise, and Chan was employed under the Employment
Agreements for a term of five years commencing May 1, 1997 and from
year-to-year thereafter until terminated by either party. The Company could
terminate the Employment Agreements during the initial five-year term without
penalty only for cause as defined in the agreements. The Employment Agreements
also contained provisions that (i) prohibit Messrs. Grove, Parise, and Chan
from competing with the business of the Company while employed by the Company
and for 12 months after the termination of employment, and (ii) prohibit
Messrs. Grove, Parise, and Chan during the term of employment and for a period
of 12 months after termination of employment, from directly or indirectly, for
themselves or on behalf of any other person, seeking to hire or hiring any of
the Company's personnel or employees. The Employment Agreements also required
Messrs. Grove, Parise, and Chan to take all necessary precautions to prevent
any unauthorized disclosure of any "Confidential Information" of the Company,
as that term is defined in the Employment Agreements.
In connection with the acquisition of the Winton Properties, the Company
paid each of Messrs. Grove, Chan, and Parise a bonus of approximately $267,000.
Winton & Associates received commissions from the sellers of approximately
$927,000, of which approximately $268,000 was paid to employees of Winton &
Associates and $659,000 was paid to Mr. Winton. The bonuses paid to Messrs.
Grove, Chan, and Parise were approved by the Unaffiliated Directors. As a
result of the Merger, the employment agreements were terminated and the Company
paid the compensation amounts for the remaining term of the employments
agreements.
23
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of March 27, 1998, there were outstanding 4,916,199 shares of Common
Stock. The following table sets forth the beneficial ownership of Common Stock
of the Company as of such date, 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").
<TABLE>
<CAPTION>
Name and Number of Percent of
Beneficial Owner Shares Total(1)
- ---------------- ------ --------
<S> <C> <C>
Jon A. Grove ......................................................... 233,527 4.7%
Joseph C. Chan ....................................................... 231,308 4.6
Frank S. Parise, Jr. ................................................. 206,631 4.1
Earl M. Baldwin ...................................................... 3,477 (2)
Steven G. Davis ...................................................... -- (2)
John J. Gisi ......................................................... 2,625 (2)
Raymond L. Horn ...................................................... 5,988 (2)
Frederick C. Moor .................................................... 3,378 (2)
All directors and executive officers as a group (11 persons) ......... 700,586 13.3%
</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
On April 30, 1997, pursuant to the approval of the stockholders of the
Company, the Company acquired the entire interests in Pima Mortgage Limited
Partnership (the "Manager") and Pima Realty Advisors, Inc. (the "Property
Manager"). The owners of the Manager remain as Directors and executive officers
of the Company. The following description relates to the arrangement prior to
May 1, 1997.
The Company was a party to a management agreement (the "Management
Agreement") with the Manager to manage the day-to-day operations of the
Company, subject to the supervision of the Company's Board of Directors. Jon A.
Grove, Frank S. Parise, Jr., and Joseph C. Chan served as directors or officers
of general partners of the Manager since its organization. See "Management --
Directors and Executive Officers of the Company."
The duties of the Manager under the Management Agreement included
formulating operating strategies; arranging for the acquisition of assets for
the Company; monitoring the performance of the Company's assets; and providing
certain administrative and overall managerial services necessary for the
operation of the Company. For performing these services, the Manager received
an annual base management fee in an amount equal to 3|M/8 of 1% per annum of
the Average Invested Assets of the Company (as defined in the Management
Agreement), which was paid monthly with adjustments made quarterly. The Manager
also performed certain analysis and other services in connection with the
administration of mortgage securities with respect to which the Company
acquired mortgage interests. For such services, the Company reimbursed the
Manager for the fees paid under the Subcontract Agreement described
24
<PAGE>
below and paid the Manager an annual administration fee of $10,000 for each
series of mortgage interests acquired prior to 1991, $20,000 for the aggregate
mortgage interests acquired in 1991 and $20,000 for the aggregate mortgage
interests acquired in 1992. In 1997, the Company paid the Manager management
fees and administration fees of approximately $219,000. The payment of such
fees was unanimously approved by the Unaffiliated Directors.
In the event that the Management Agreement was terminated by the Company
or was not renewed by the Company on terms at least as favorable to the Manager
as the current Management Agreement other than as a result of a termination by
the Company for cause (as specified in the Management Agreement), the Manager
would be entitled to receive from the Company the management fee that would
have been payable by the Company to the Manager pursuant to such Management
Agreement based on the investments made by the Company prior to the date of
such termination (or failure to renew) for the 12 full fiscal quarters
beginning on the date of such termination (or failure to renew) as more fully
described in the Management Agreement.
The Manager granted the Company a right of first refusal, for as long as
the Manager or an affiliate of the Manager acted as the Company's manager
pursuant to the Management Agreement or any extension thereof, to purchase any
assets held by the Manager or its affiliates prior to any sale, conveyance or
other transfer, voluntarily or involuntarily, of such assets by the Manager or
its affiliates.
The Company was a party to a property management agreement (collectively
the "Property Management Agreements") with the Property Manager for each of the
apartments acquired by the Company. The Property Manager was an affiliate of
the Manager. Each Property Management Agreement, which had a current term
through December 31, 1997, was approved by the Unaffiliated Directors. Under
the agreement, the Property Manager provided the customary property management
services at its cost without profit or distribution to its owners, subject to
the limitation of the prevailing management fee rates for similar properties in
the market. In 1997, the Company paid the Property Manager $190,000.
Prior to June 1997, the Company owned certain mortgage interests with
respect to structured financing issued by American Southwest Holdings, Inc.
("ASH"). An affiliate of ASH performed the customary administration services
and received fees for such services of $12,500 per year for each series of
structured financing. The Company believed that the fees charged by ASH were
comparable to those charged by other companies performing similar services. Jon
A. Grove, Chairman of the Board, President and Chief Executive Officer of the
Company, is Chairman of the Board of Directors of ASH and its affiliates and
owns 12.5% of the voting stock of ASH. The Company has agreed to indemnify and
hold harmless ASH and certain affiliates from any action or claim brought or
asserted by any party by reason of any allegation that ASH or such affiliates
is an affiliate or is otherwise accountable or liable for the debts or
obligations of the Company or its affiliates.
25
<PAGE>
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-19. 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.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
2 Agreement and Plan of Merger dated as of December 19, 1997 between the Registrant and
a wholly owned subsidiary of United Dominion Realty Trust, Inc.(8)
3(a) First Amended and Restated Articles of Incorporation of the Registrant(1)
3(b) Articles of Amendment to the First Amended and Restated Articles of Incorporation of the
Registrant(3)
3(c) Bylaws of the Registrant(1)
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 Incorpo-
ration 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.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
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.
22 Subsidiaries of the Registrant
</TABLE>
- ------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-15232) filed August 19, 1987 and declared effective on
August 19, 1987.
(2) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-20429) filed March 16, 1988 and declared effective on
March 17, 1988.
(3) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1988 as filed with the Commission on or about March 30,
1989.
(4) Incorporated herein by reference to Registrant's Registration Statement on
Form S-3 (33-42923) filed on September 30, 1991 and declared effective on
October 1, 1991.
(5) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1992.
(6) Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about March 29, 1994.
(7) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1995 as filed with the Commission on or about April 1,
1996.
(8) Incorporated herein by reference to Registrant's and United Dominion Realty
Trust Inc.'s Proxy Statement and Registration Statement on Form S-4 (No.
333-45305) filed February 13, 1998 and declared effective on February 17,
1998
(c) Reports on Form 8-K:
A Report on Form 8-K dated October 27, 1997, was filed on November 6,
1997, announcing the acquisition of a 276 unit apartment community located
in Port Orchard, Washington.
A Report on Form 8-K/A dated October 27, 1997, was filed on January 6,
1998 amending the Form 8-K filed on November 6, 1997 to include (i)
historical summary of revenues and certain expenses for the year ended
December 31, 1996 and the nine months ended September 30, 1997, (ii)
Proforma combined fiancial statements for the year ended December 31, 1996
and the nine months ended September 30, 1997, and (iii) other financial
information and exhibits for the acquisitions described in the 8-K.
27
<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 27, 1998
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 27, 1998
- --------------------------- President and Chief Executive Officer
Jon A. Grove (Principal Executive Officer)
/s/ FRANK S. PARISE, JR. Director, Vice Chairman, Chief March 27, 1998
- --------------------------- Administrative Officer
Frank S. Parise, Jr.
/s/ JOSEPH C. CHAN Director, Executive Vice President, March 27, 1998
- --------------------------- Chief Operating Officer (Principal
Joseph C. Chan Financial and Accounting Officer)
and Secretary
/s/ EARL M. BALDWIN Director March 27, 1998
- ---------------------------
Earl M. Baldwin
/s/ JOHN J. GISI Director March 27, 1998
- ---------------------------
John J. Gisi
/s/ RAYMOND L. HORN Director March 27, 1998
- ---------------------------
Raymond L. Horn
/s/ FREDERICK C. MOOR Director March 27, 1998
- ---------------------------
Frederick C. Moor
/s/ STEVEN G. DAVIS Director March 27, 1998
- ---------------------------
Steven G. Davis
</TABLE>
28
<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, 1997 and 1996 ......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995 ....................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 ....................................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995 ....................................................................... F-6
Notes to Consolidated Financial Statements ........................................... F-7
Schedule III--Real Estate and Accumulated Depreciation ............................... F-18
</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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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,
1997 and 1996, and the results of its operations and cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 27, 1998
(March 27, 1998 as to Note 12)
F-2
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets
Real estate investments:
Land ........................................................... $ 50,855 $ 15,514
Buildings and improvements ..................................... 225,624 58,476
Construction in progress ....................................... 14,694
Land held for development ...................................... 925 925
Investments in joint ventures .................................. 2,811
Other real estate .............................................. 771 1,022
---------- ----------
Total real estate investments ............................... 278,175 93,442
Accumulated depreciation ....................................... (13,843) (7,504)
---------- ----------
Real estate investments, net of depreciation ................ 264,332 85,938
Cash and cash equivalents ........................................ 2,987 2,403
Mortgage assets .................................................. 5,039
Restricted cash .................................................. 8,825 2,930
Deferred loan fees ............................................... 1,461 1,090
Goodwill ......................................................... 1,356
Other assets ..................................................... 1,782 396
---------- ----------
Total assets ................................................ $ 280,743 $ 97,796
========== ==========
Liabilities
Real estate notes payable ........................................ $ 173,153 $ 48,855
Construction loan payable ........................................ 255
Short-term borrowing ............................................. 2,014
Construction costs payable ....................................... 1,581
Security deposits and deferred rental income ..................... 2,271 644
Other liabilities ................................................ 8,330 4,345
---------- ----------
Total liabilities ........................................... 183,754 57,694
---------- ----------
Commitments and Contingencies (Note 2, 3 and 4)
Minority Interest of Unitholders in Operating Partnership ......... 18,454
----------
Stockholders' Equity
Common Stock, par value $.01 per share, 40,000,000 shares
authorized; 5,174,799 and 3,307,892 shares issued .............. 51 33
Additional paid in capital ....................................... 193,415 155,964
Deficit .......................................................... (111,636) (112,964)
Stock note receivable ............................................ (267) (385)
Treasury stock -- 184,742 and 160,742 shares ..................... (3,028) (2,546)
---------- ----------
Total stockholders' equity .................................. 78,535 40,102
---------- ----------
Total liabilities and stockholders' equity ..................... $ 280,743 $ 97,796
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Real Estate Operations
Rental and other income ............................................ $ 33,034 $ 14,581 $ 14,034
-------- -------- --------
Operating and maintenance expenses ................................. 11,629 5,404 5,259
Real estate taxes and insurance .................................... 3,448 1,451 1,460
Interest expense on real estate mortgages .......................... 10,054 4,348 4,387
Depreciation and amortization ...................................... 6,335 2,819 2,692
-------- -------- --------
Total operating expenses ...................................... 31,466 14,022 13,798
-------- -------- --------
Income from real estate ............................................ 1,568 559 236
-------- -------- --------
Gain on sale of real estate ........................................ 474
--------
Mortgage Assets
Prospective yield income ........................................... 588 2,630 3,884
Income from redemptions and sales .................................. 16,650 9,461 5,302
Interest expense ................................................... (25) {181) (347)
-------- -------- --------
Income from mortgage assets ........................................ 17,213 11,910 8,839
-------- -------- --------
Income Before Administrative Expenses, Aquisition Related
Expenses, Other Income (Expense) And Minority Interests Of
Unitholders In Operating Partnership ............................... 19,255 12,469 9,075
Administrative expenses ............................................ (3,114) (3,203) (2,983)
Aquisition related expenses ........................................ (6,684) (381)
Other income (expense), net ........................................ 732 (44) 462
-------- -------- --------
Income Before Minority Interests Of Unitholders In Operating
Partnership ........................................................ $ 10,189 $ 8,841 6,554
Minority interests of unitholders in operating partnership ......... (355)
--------
Net Income .......................................................... $ 9,834 $ 8,841 $ 6,554
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 9,834 $ 8,841 $ 6,554
Principal noncash charges
Depreciation and amortization ............................... 6,905 3,271 3,028
Minority interests of unitholders in operating partnership .. 355
Aquisition related expenses ................................. 5,250
Gain on sale of real estate ................................. (474)
Reversal of yield maintenance accrual ....................... (2,420)
Increase in deferred compensation ........................... 1,439
Increase in stock appreciation rights ....................... 642 856 705
(Increase) decrease in other assets ......................... (1,386) 27 234
Increase (decrease) in other liabilities .................... 4,299 1,066 (589)
--------- --------- --------
Cash Provided By Operations .................................. 26,864 14,061 7,512
--------- --------- --------
INVESTING ACTIVITIES
Investment in apartments ..................................... (37,034) (1,263) (8,505)
Construction expenditures .................................... (6,209) (11,753)
Proceeds from sale of real estate ............................ 2,830
Investment in joint ventures ................................. 358 (65) (1,895)
Purchase of land for development ............................. (3,928)
Other real estate assets ..................................... 251 179 3,985
Restricted cash .............................................. (5,895) (808) 861
Reduction in mortgage assets ................................. 5,039 6,838 7,088
--------- --------- --------
Cash Used In Investing Activities ............................ (40,660) (6,872) (2,394)
--------- --------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable ........................ 13,540 6,895
Payment of loan costs ........................................ (793) (71)
Proceeds from construction loan .............................. 12,595 255
Repayment of notes payable
Real estate notes ........................................... (2,860) (357) (7,955)
Notes secured by mortgage assets ............................ (4,002)
Short-term borrowing ......................................... (2,014) (2,481) 4,495
Construction costs payable ................................... (1,581) 1,581
Stock issuance ............................................... 5,033 85 45
Payment of dividends ......................................... (8,506) (6,308) (6,304)
Distributions to Minority Interests .......................... (1,428)
Other ........................................................ 394 89
--------- --------- --------
Cash Provided By (Used In) Financing Activities .............. 14,380 (7,207) (6,826)
--------- --------- --------
CASH AND CASH EQUIVALENTS
Increase (decrease) during the period ....................... 584 (18) (1,708)
Balance -- beginning of period .............................. 2,403 2,421 4,129
--------- --------- --------
Balance -- end of period .................................... $ 2,987 $ 2,403 $ 2,421
========= ========= ========
Supplemental Disclosure of Cash Flow Information
Interest paid ................................................ $ 10,847 $ 4,525 $ 5,033
Interest capitalized ......................................... 575 99
Stock issued for contract termination ........................ 5,250
Non-cash transactions associated with acquisitions:
Issuance of common stock .................................... 26,909
Issuance of convertible LP Units ............................ 19,527
Notes payable assumed ....................................... 100,092
</TABLE>
F-5
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
(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, December 31, 1994 .......... 3,249 $32 $ 155,126 $ (115,747) $ (2,311) $ 37,100
Net income .......................... 6,554 6,554
Dividends ........................... (6,304) (6,304)
Stock issuance (repurchase) ......... 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 ........................... (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
Net income .......................... 9,834 9,834
Dividends ........................... (8,506) (8,506)
Stock issuance (repurchase)
(Note 2 & 10) ...................... 1,867 18 37,451 118 (482) 37,105
----- --- --------- ---------- ------ -------- --------
Balance, December 31, 1997 .......... 5,175 $51 $ 193,415 $ (111,636) $ (267) $ (3,028) $ 78,535
===== === ========= ========== ====== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
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, 1997, the
Company owned 41 apartment communities and one office building located in
Arizona, Texas, New Mexico and Washington. Prior to 1994, the Company invested
in mortgage assets. In early 1993, the Company determined to shift its focus to
the acquisition, development and operation of apartment communities.
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 for 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 Investments 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 271|M/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's mortgage interests entitled 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 were secured. The Company
also had the right to cause the early redemption of the structured financings
under specified limited conditions; in such event, the mortgage instruments
were sold and the net proceeds after the redemption of the structured financing
were remitted to the Company. Redemption transactions occurred from time to
time as specified conditions were met rather than on a monthly or quarterly
basis; therefore, the amount of net proceeds and the income from the redemption
transactions fluctuated significantly between periods.
Presentation and Income Recognition. Mortgage assets are stated at their
net investment amounts. Income was recognized using the prospective yield
method. 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 was recognized when the transaction was 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, 1997, 1996 and 1995 -- (Continued)
Minority Interests -- Net income is allocated to Minority Interests based
on their respective ownership percentages in Heritage Communities L.P. LP units
held by non-affiliates are considered common stock equivalents in the
determination of earnings per share. See Note 4 for additional description of
the Partnership.
Gain on Sale of Real Estate -- Gains on sales of properties are recognized
by the Company when the recognition criteria set forth by generally accounting
principles have been met.
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 -- Long-lived assets
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If the
sum of the expected future cash flows (undiscounted and without interest
charges) from an asset to be held and used is less than the carrying amount of
the asset, an impairment loss must be recorded for the difference between the
carrying amount of the asset and the fair value.
Earnings Per Share -- No earnings per share information has been presented
as the Company was acquired by United Dominion Realty (see Note 3).
Reclassification -- Certain reclassifications have been made to conform
the prior years with the current year presentation.
F-8
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
2. REAL ESTATE ACQUISITIONS AND DEVELOPMENT
At December 31, 1996, the Company owned directly 18 apartment communities
(2,683 units) in operation and one community (Finisterra Apartments) under
construction. These communities are located in Arizona, Texas, and New Mexico.
The Company completed the construction of the Finisterra Apartments (356 units)
in June 1997. The Company made the following acquisitions during 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Number of communities acquired ......... 1 17 4 1 23
Number of units acquired ............... 266 3,042 1,102 276 4,686
Total purchase price ................... $4,450 $118,782 $39,996 $13,249 $176,477
Total mortgage loans ................... $3,700 $ 75,696 $26,411 $ 7,825 $113,632
</TABLE>
Winton Acquisition. On April 30, 1997, the Company completed the
acquisition of 13 apartment communities containing 2,260 units located in
Houston and Dallas, Texas and Pullman, Washington, and one office building
located in Seattle, Washington (the "Winton Properties"). The acquisitions were
made pursuant to a Master Combination and Contribution Agreement dated November
8, 1996. The sellers were 15 separate limited partnerships. The total purchase
price of the properties was approximately $83,223,000. The Company (i) assumed
or refinanced first mortgage loans totalling $49,396,000, (ii) issued 682,098
shares of common stock, (iii) issued limited partnership units ("LP Units")
convertible to 943,701 shares of common stock of the Company after April 30,
1998; and (iv) paid the sellers $1,250,000 for transaction costs. As a part of
the acquisition, the Company issued 70,284 shares of common stock to acquire
the entire interests in Winton & Associates, the property management company
for the Winton Properties.
The acquisitions of the Winton Properties and Winton & Associates have
been accounted for under the purchase method. The common stock and the LP Units
are recorded at $20.038 per share, the average closing price of the Company's
common stock for the ten days preceding the announcement of the acquisitions on
November 19, 1996. The excess of the cost of the purchase price of Winton &
Associates over the net tangible assets acquired is recorded as goodwill and is
being amortized over 20 years.
Merit Acquisition On September 18, 1997, the Company acquired a portfolio
of three apartment communities (totaling 900 units) in Dallas, Texas, for
approximately $29,346,000. The Company (i) obtained or assumed mortgage loans
of approximately $18,511,000 with an average fixed interest rate of 7.57%, (ii)
issued 374,581 shares of common stock and 27,721 of convertible LP Units, and
(iii) paid $2,400,000 in cash to the sellers. The Company plans to spend
$1,900,000 on numerous substantive improvements to the communities.
Individual Acquisitions In March 1997, the Company acquired a 266-unit
apartment community in northwest Houston, Texas for $4,450,000. The Company
plans to spend $700,000 on numerous substantive improvements to the community.
The Company obtained a first mortgage loan of $3,700,000 with a fixed rate of
8.39%. The Company issued 86,500 shares of common stock for net proceeds of
$1,622,000 to provide for the cash used in the acquisition.
In April 1997, the Company acquired a 257-unit community in Houston,
Texas, for $6,000,000 and obtained a first mortgage loan for $4,400,000 with a
fixed interest rate of 8.57%. The Company plans to spend $600,000 on numerous
substantive improvements to the community. On May 9, 1997, the Company acquired
a 175-unit apartment community in Seattle, Washington, for $4,059,000 and
obtained a first mortgage loan of $2,900,000 with a fixed interest rate of
8.67%. The Company plans to spend $400,000 on numerous substantive improvements
to the community. The Company issued 187,847 shares of common stock for total
net proceeds of $3,394,000 to pay for the two purchases.
On September 30, 1997, the Company acquired a 202-unit apartment community
located in Kennewick, Washington, for $10,650,000. The Company (i) assumed
mortgage debt of $7,900,000 with an
F-9
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
interest rate of 7.87%, (ii) issued 91,678 shares of the Company's common stock
and (iii) paid $650,000 in cash to the seller. As the community is relatively
new, the Company does not plan to incur major capital improvement expenditures.
On October 27, 1997, the Company acquired a 276-unit apartment community
in Kitsap County, Washington, for $13,249,000. The Company (i) obtained or
assumed mortgage loans of approximately $7,825,000 with an average fixed
interest rate of 8.47%, (ii) issued 86,184 shares of common stock and (iii)
paid $3,100,000 in cash to the seller. As the community is relatively new, the
Company does not plan to incur major capital improvement expenditures.
Development/Construction In Progress In March 1996, the Company began
construction of a 356-unit apartment community, Finisterra Apartments, in
Tempe, Arizona. At December 31, 1996, the Company had invested $14,694,000 of
its own cash and began the lease up phase in December 1996. In June 1997, the
construction was substantially completed at a total cost of approximately
$21,000,000. The Company obtained a $15,350,000 construction loan of which
$255,000 was outstanding at December 31, 1996. The construction loan was
converted to a mini-perm loan that bears interest at 2.5% over the one-month
LIBOR. The loan becomes due on March 26, 1998 at which time the Company may
renew the loan.
Joint Ventures Prior to May 1997, the Company owned six apartment
communities (1,441 units) through joint ventures in which the Company was a 15%
equity partner and the managing partner. On May 1, 1997, the Company acquired
the remaining interest in one joint venture, La Privada Apartments L.L.C., for
$8,233,000 and sold to its partner the Company's entire interests in the other
five joint ventures for total net proceeds of $2,062,000. The Company recorded
a gain of $474,000 on the sale. The La Privada Apartments is a 350-unit
community in Scottsdale, Arizona. The Company obtained a $3,000,000 loan to pay
for the acquisition. The loan bears interest at 3% over LIBOR. The purchase
increased the Company's investment in apartments by approximately $25,500,000
and real estate notes payable by $19,000,000.
With the above transactions, the Company, at December 31, 1997, owned 41
apartment communities containing 7,725 units and an office building.
Proforma Data The following selected unaudited pro forma results of
operations data for the years ended December 31, 1997 and 1996 have been
prepared as if the above transactions (excluding the sale described below) had
occurred at January 1, 1996. The proforma data are provided for information
purposes only and are not indicative of the results that would have occurred or
which may occur in the future (in thousands).
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real and other income ..................... $ 46,822 $ 44,759
Real estate operating expenses:
Operating .............................. (21,306) (20,642)
Depreciation and amortization .......... (9,634) (9,839)
Interest expense or
real estate mortgages .......................... (13,694) (13,429)
--------- ---------
Income from real estate ................... 2,188 849
Gain on sale of real estate ............... 474 --
Income from mortgage assets ............... 17,265 12,103
Acquisition related expenses .............. (6,685) (381)
Administrative expenses ................... (3,059) (2,777)
Other income (expenses), net .............. 340 (438)
--------- ---------
Proforma Net Income ....................... $ 10,523 $ 9,356
========= =========
</TABLE>
F-10
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
Sale of Property
On February, 20, 1998, the Company sold the 175-unit apartment community
that it had acquired in May of 1997, for a sale price of $4,450,000. The
Company received 73,858 shares of its Common Stock (valued at $1,616,000) from
the buyer who also assumed the first mortgage loan. The Company did not realize
a material gain or loss from the sale.
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. UNITED DOMINION REALTY MERGER
In December 1997, the Company announced the execution of a definitive
agreement to which ASR will merge with and into a wholly-owned subsidiary of
United Dominion Realty Trust ("UDR"). The merger has been structured as a
tax-free transaction for ASR's shareholders and is expected to be effective
March 27, 1998 pending shareholder approval at a special meeting of
stockholders to be held on March 25, 1998. The merger provides that each share
of common stock of ASR will be converted into the right to receive 1.575 shares
of UDR's common stock and cash in lieu of the issuance of any fractional
shares. The merger also provides that ASR will pay a closing dividend in an
amount that will vary depending on the effective date of the merger. Assuming
consummation of the merger on March 27, 1998, the closing dividend will be $.15
per share.
4. HERITAGE COMMUNITIES L.P.
The Company formed Heritage Communities L.P. ("Heritage LP"), an operating
partnership, in 1997 for the purpose of acquiring the Winton Properties and
other apartment communities. Heritage is a Delaware limited partnership in
which the Company and a wholly owned subsidiary of the Company, Heritage SGP,
are the sole general partners. To the extent that Heritage LP has sufficient
operating cash flows, holders of limited partnership units ("LP Units") will
receive quarterly distributions per unit equal to the per share dividend on the
Company's common stock. To the extent that Heritage LP has insufficient cash to
pay the distributions, the holders of LP units will be credited for the unpaid
distribution and interest on the unpaid distribution; such unpaid balances will
be given priority for future distributions.
Heritage LP's items of income, gain, loss and deduction are allocated
among its partners, subject to certain special allocations, in a similar manner
for purposes of both book gain or loss and tax gain or loss. Net income is
allocated (i) first, to each limited partner to the extent that, on a
cumulative basis, net losses previously allocated to the limited partners
exceed net income previously allocated to limited partners, (ii) second, to
each limited partner to the extent that such limited partner has been allocated
on a cumulative basis, net income equal to the sum of the distributions paid to
such limited partner and the unreturned balances in the accrual accounts and
the unpaid distribution accounts maintained with respect to the LP Units held
by such limited partner, and (iii) the general partners on a pro rata basis.
Notwithstanding the allocations in (i) and (ii) above, at least one percent of
each item of gain, loss, income and deduction for each year is allocated to the
general partners.
Net losses are allocated to the partners in accordance with their
respective percentage interests in Heritage LP, except that net losses are not
allocated to any limited partner to the extent that such allocation would cause
the limited partner to have an adjusted capital account deficit at the end of
the taxable year. All net losses in excess of such limitations will be
allocated to the general partners on a pro rata basis
The LP Units are convertible to one share of the Company's Common Stock
after one year from the date of issuance. If an LP Unit is converted prior to
April 30, 2007, the holder will also be paid any unpaid balances in the
holder's distribution account. An LP Unit holder who exercises the conversion
after April
F-11
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
30, 2007 will not be paid any unpaid balance in the holder's distribution
account if the market value of the Company's common stock is equal to at least
110% of the sum of the initial contribution and the unpaid balance.
Holders of LP Units do not have the right to take part in the management
or control of the business or affairs of Heritage L.P. Amendment of the
partnership agreement would require the consent of the general partners and
more than 50% of the LP Units. Heritage L.P. will be dissolved upon the
occurrence of certain specified and limited events or December 31, 2086.
Heritage LP issued 943,701 LP Units to the sellers of the Winton
Properties and 27,721 LP Units to the sellers of the three Dallas apartment
communities acquired in September 1997. In 1997, Heritage LP issued 1,887,415
LP Units to the Company in connection with the 1997 acquisitions discussed in
Note 2. As of December 31, 1997, Heritage LP had 2,858,837 LP Units
outstanding. Heritage LP declared a distribution of $0.50 per Unit for each of
the quarters ended June 30, 1997, September 30, 1997 and December 31, 1997.
5. MORTGAGE ASSETS
In 1997, the Company received a total of $20,880,000 from the sale or
redemption of all remaining mortgage assets and realized total redemption
income of $16,650,000. During 1996, the Company sold or exercised its
redemption rights on nine mortgage assets for net proceeds of $13,625,000 and
redemption 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
redemption 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.
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%.
The cash flows and prospective yield income were affected primarily by
mortgage prepayment rates and short-term interest rates. Higher mortgage
prepayment rates or higher short-term rates reduced the income and total cash
flows over the life of the mortgage assets. Income from mortgage asset
redemptions was 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 did not occur on a regular basis and the income
fluctuated significantly between periods. In addition, redemption of mortgage
assets reduced the prospective yield income in future periods.
6. NOTES PAYABLE
Real estate notes payable
During 1997, the Company obtained new mortgage loans or assumed existing
mortgage loans totalling $113,632,000 in connection with its apartment
acquisitions. In addition, as discussed in Note 2, the Company had obtained a
$15,350,000 construction loan to finance the construction of its Finisterra
apartment community. The loan bore interest at 1% per annum above the bank's
prime rate. The interest rate at December 31, 1996 was 9.25%. At December 31,
1997 and 1996, the amount outstanding was $12,748,000 and $255,000. In
September 1997, the Company converted the construction loan into a miniperm
loan that bears interest at 2.5% over the one-month LIBOR. The loan matures at
the end of March 1998 at which time the Company may extend the loan or
refinance it to a permanent loan at a lower interest rate.
Excluding the construction loan, all the Company's mortgage loans are
nonrecourse and non-cross collateralized. They generally have terms from seven
to fifteen years. At December, 31, 1997, the mortgage loans consisted of
$145,364,000 of fixed rate loans and $27,789,000 of variable rate loans which
F-12
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
includes the construction loan. All of the Company's mortgage loans were fixed
rate at December 31, 1996. The fixed interest rates range from 7.1% to 10.1%,
with a weighted average rate for all the Company's loans of 8.1% and 8.6% at
December 31, 1997 and 1996. Amortization of deferred loan costs were $412,000,
$155,000 and $120,000 for 1997, 1996 and 1995.
The scheduled maturities of the real estate notes payable are as follows
(in thousands):
1998 .............. $ 15,863
1999 .............. 2,262
2000 .............. 17,426
2001 .............. 26,390
2002 .............. 2,143
2003-2017 ......... 109,069
--------
Total ........ $173,153
========
On February, 27, 1998, the Company obtained a $2,500,000 short-term loan
secured by one its apartment communities. The apartment community's first
mortgage loan had been paid off in December 1997. The loan bears interest at
one-month LIBOR plus 2.75% and matures on August 27, 1998.
Short-term Borrowing (Secured By Mortgage Assets) -- At December 31, 1996,
the Company had short-term borrowing of $2,014,000. These borrowings were
secured by mortgage assets with a total carrying value of $3,084,000,
respectively. The interest rate averaged 6.55% during 1996 and was 6.88% at
December 31, 1996. During 1997, the Company paid off all of the short-term
borrowing in connection with the sale of its mortgage asset portfolio.
7. 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 Pima Mortgage L.P., (the "Manager" of the Company's
operations), 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. In February 1997, two holders
exchanged the value of 60.134 shares of SARs for options granted under the
Company's KEPSOP (see Note 8). As of December 31, 1997, 30,067 SARs and 309,800
options were remaining and exercisable.
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
F-13
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
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.
During 1997, one optionholder paid off his note with cash of $118,000. Notes
outstanding at December 31, 1997 totaled $267,000.
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
employees received payments equal to the product of the per share dividend
amount times the number of SARs outstanding. At the beginning of 1997, the
Company eliminated the dividend payment on one third of the employees' SARs and
resumed a salary compensation plan for the three employees. At December 31,
1997, 61,667 of the stock appreciation rights for these employees were
outstanding. During 1997 and 1996, as a result of the increase in the Company's
common stock price, the Company recorded an accrual for the SARs of
approximately $642,000 and $750,000, respectively, which is included in
administrative expenses.
Information on all stock options and stock appreciation rights granted is
summarized below:
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average
Shares Per Share Exercise Price
------ --------- --------------
<S> <C> <C> <C>
Stock Options:
Outstanding at December 31, 1995 ........... 357,744 $ 8.13-$20.90 $ 9.60
Options exercised .......................... (4,666) $ 11.25 $ 11.25
-------
Outstanding at December 31, 1996 ........... 353,078 $ 8.13-$20.90 $ 9.60
-------
Options exercised .......................... (1,725) $ 8.13-$11.19 $ 10.04
-------
Outstanding and exercisable at December
31, 1997 .................................. 351,353 $ 8.13-$20.90 $ 9.60
=======
Options at December 31, 1997 consisted of
the following:
1991 options granted .................... 24,420 $ 20.00-$20.90 $ 20.07
1990, 1992-1994 options granted ......... 326,933 $ 8.13-$13.13 $ 8.80
-------
Outstanding at December, 31 1997 ........... 351,353 $ 8.13-$20.90 $ 9.60
=======
Stock Appreciation Rights:
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-$16.63 $ 13.74
SARs exercised ............................. (163,466) $ 8.60-$16.63 $ 12.47
--------
Outstanding and exercisable at December
31, 1997 .................................. 91,734 $ 8.60-$16.63 $ 13.97
========
</TABLE>
At December 31, 1997, the weighted average contractual life of the above
stock options and stock appreciation rights was 1.4 and 1 years, respectively.
8. DEFERRED COMPENSATION ARRANGEMENTS
In January 1997, the Company adopted a Key Executive Share Option Plan
(the "KEYSOP") whereby participants could elect to defer the receipt of future
compensation and exchange the value of such deferred compensation into options
to purchase designated property from the Company. The Company is required to
purchase the designated property for options granted. The obligations of the
Company to the participants are unsecured general obligations and the
designated properties purchased by the Company are general assets of the
Company. At December 31, 1997, the amounts deferred under the KEYSOP amounted
$1,113,000 and the designated properties and the related liabilities are
included in Other Assets and Other Liabilities, respectively, in the
accompanying Consolidated Balance Sheet.
F-14
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
In addition, the Company approved deferred compensation agreements in 1997
whereby participants could elect to defer the receipt of future compensation
until a future date. The obligations of the Company to the participants are
unsecured general obligations. At December 31, 1997, such deferred compensation
totalled $1,438,964 which is included in Other Liabilities in the accompanying
Consolidated Balance Sheet.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at December 31, 1997 and 1996
consisted of real estate notes payable. Although management uses its best
judgement in estimating the fair value of financial 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. The Company has used the carrying value of real estate
notes payable as their fair value. At December 31, 1997, the interest rates on
the Company's notes payable approximated the market rates for debt instruments
with similar terms and maturities.
10. RELATED PARTY TRANSACTIONS
From the inception of the Company through April 30, 1997, Pima Mortgage
L.P. (the "Manager"), managed the operations of the Company pursuant to a
management agreement. The Company also had a property management agreement with
Pima Realty Advisors, Inc. (the "Property Manager") for each of its apartment
communities. The Manager and the Property Manager were owned by three principal
executive officers of the Company. On April 30, 1997, pursuant to the approval
of the Company's stockholders, the Company acquired the entire interests in the
Manager and the Property Manager as well as 24,000 shares of ASR common stock
owned by the Manager, for 262,008 shares of common stock and terminated the
management agreements. The common stock issued was recorded at $20.038 per
share which was the average closing price of the common stock for the ten days
preceding the public announcement of the acquisition. In addition, the Company
paid the three principal executive officers $802,700 in connection with the
acquisition of the Winton Properties. As the contracts with the Pima entities
were effectively terminated, the cost of the Pima entities and the amounts paid
to the executive officers were recorded as an acquisition related expense in
the accompanying statements of income. Furthermore, as a result of the
acquisition, the Company has become a self-administered and self-managed REIT
and the owners of the previous Manager continue to be executive officers and
members of the Board of Directors of the Company.
Pursuant to the agreement which was terminated April 30, 1997, the Manager
received a base management fee of 3|M/8 of 1% per annum of the Company's
average invested assets before deduction for reserves and depreciation. The
management fees for 1997, 1996 and 1995 were $167,000, $386,000 and $374,000,
respectively.
Under the agreement, the Manager was required to 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 1997 (prior to
April 30, 1997), 1996 and 1995. Additionally, if the agreement was terminated
without cause (as defined) or not renewed on terms as favorable to the Manager,
the Manager was 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 had also performed 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 $52,000 for 1997, $193,000 for 1996 and $216,000 for 1995.
F-15
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
As discussed in Note 7, 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 1997, 1996 and 1995,
the dividend equivalent payments were $680,000, $800,000 and $800,000 which are
included in administrative expenses. As a result of the increase in the common
stock price, the Company recorded an accrual for the SARs of $214,000 in 1997,
$101,000 in 1996 and $705,000 in 1995, which amounts are included in
administrative expenses.
As discussed above, the Company had a property management agreement with
Pima Realty Advisors, Inc. (the "Property Manager"), an affiliate of the
Manager, for each of its apartment properties. Under the property management
agreements, the Property Manager provided 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 were allocated to the Company monthly based on the ratio
of the number of units owned by the Company relative to the total apartment
units managed by the Property Manager. The costs allocated to the Company for
1997 (through April 30, 1997), 1996 and 1995 were $190,000, $466,000 and
$417,000 respectively.
11. TAXABLE INCOME (LOSS)
As of December 31, 1997, 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
1997, 1996 and 1995 dividends consist of the following:
1997 1996 1995
---- ---- ----
Ordinary Income ........................ 33.6% 8.5% 14.5%
Long Term Capital Gain -- 20% .......... 14.7% -- --
Long Term Capital Gain -- 28% .......... 10.0% 69.0% --
Return of Capital ...................... 41.7% 22.5% 85.5%
In 1997, 1996, and 1995, 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 the 1996 and 1995 years is excess
inclusion income. Approximately 88% of the ordinary income for 1997 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 1997 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.
12. SUBSEQUENT EVENT
On March 27, 1998, following the approval by the shareholders on March 25,
1998, the acquisition by UDR, which is described in Note 3, was consummated. In
connection with the acquisition of ASR by UDR the following also occurred: (i)
a closing dividend of $737,000 or $.15 per share was declared and
F-16
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995 -- (Continued)
paid, (ii) a distribution of $146,000 or $.15 per LP Unit was declared and paid
by Heritage Communities L.P. to minority unitholders of LP Units, (iii)
severance payments to employees of $1,071,000 were paid, (iv) employment
agreement termination payments to executive officers of $1,225,000 were paid,
and (v) all SARs outstanding, 91,734 shares, were exercised.
In addition, on March 26, 1998, holders of options to purchase 309,801
shares of the Company's common stock exchanged the value of the stock options
for options agreements granted under the Company's KEYSOP. The exchange
resulted in a charge to income for financial accounting purposes of $4,256,000.
On March 26, 1998, options to purchase 30,372 shares of the Company's common
stock were exercised for which the Company elected to pay cash of $174,000.
All of the above transactions were accounted for as 1998 transactions and
are not reflected in the accompanying statements of operations for the year
ended December 31, 1997.
13. QUARTERLY FINANCIAL DATA (unaudited)
(Dollars in Thousands Except Per Share Amounts)
Total Dividend
Income Net Income Per share
------ ---------- ---------
1997
----
First ................. $ 9,557 $ 4,946 $ 0.50
Second ................ 19,348 5,194 0.50
Third ................. 10,232 (106) 0.50
Fourth ................ 12,341 (200) 0.50
1996
----
First ................. $ 6,429 $ 2,340 $ 0.50
Second ................ 7,529 3,326 0.50
Third ................. 7,129 2,092 0.50
Fourth ................ 5,585 1,083 0.50
1995
----
First ................. $ 7,983 $ 3,359 $ 0.50
Second ................ 6,410 2,015 0.50
Third ................. 4,798 570 0.50
Fourth ................ 4,491 610 0.50
The amount of net income for the second and third quarter have been
restated to reflect the limited partnership units discussed in Note 4 as income
allocated to minority interest is deducted in arriving at net income. This
change reduced the amount of net income previously reported by $33,000 and
$82,000 for the second and third quarters, respectively.
F-17
<PAGE>
ASR INVESTMENTS CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Initial Cost to Company
----------------------------------------------------
Cost
Building Capitalized
Year Year and Subsequent to
Apartment Property Built Acquired Encumbrances Land Improvements Acquisition
------------------ ----- -------- ------------ ---- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills ................. 1986 1994 1,008 255 1,089 88
Casa Del Norte ............... 1984 1994 1,350 386 1,453 157
Desert Springs ............... 1985 1994 4,523 1,115 4,754 481
Landmark ..................... 1986 1994 2,986 409 4,138 519
Park Terrace ................. 1986 1994 2,648 316 3,191 336
Park Village ................. 1985 1994 577 92 672 110
Posada Del Rio ............... 1980 1994 0 534 3,022 190
South Point .................. 1984 1994 1,826 291 2,135 206
PHOENIX, ARIZONA
Contempo Heights ............. 1978 1995 3,754 1,833 4,523 320
La Privada ................... 1987 1997 18,951 8,505 16,479 180
Finisterra ................... 1996-1997 (b) 12,837 2,699 18,137 23
HOUSTON, TEXAS
Clear Lake Falls ............. 1980 1994 3,068 867 3,261 384
The Gallery .................. 1968 1994 1,611 732 1,196 865
Memorial Bend ................ 1967 1994 1,887 1,187 1,287 543
Nantucket Square II .......... 1983 1994 2,703 686 2,925 375
Prestonwood .................. 1978 1994 2,423 761 2,696 532
Riviera Pines ................ 1979 1994 3,207 1,025 3,073 928
Briar Park ................... 1983 1997 1,387 229 2,051 27
Country Club Park ............ 1985 1997 3,543 378 5,147 79
Chelsea Park ................. 1983 1997 3,399 1,255 4,624 88
Marymont ..................... 1983 1997 2,518 925 3,570 93
Riverway ..................... 1985 1997 1,175 248 1,702 102
Timbercreek Landing .......... 1984 1997 3,360 1,055 4,612 139
Ivystone ..................... 1983 1997 3,696 1,254 3,314 692
London Park .................. 1983 1997 4,401 1,379 4,757 392
DALLAS, TEXAS
Aspen Court .................. 1986 1997 2,016 588 4,028 38
Greenwood Creek .............. 1984 1997 4,987 1,172 6,796 71
Highlands of Preston ......... 1985 1997 4,815 1,693 7,398 71
Monfort Townhomes ............ 1986 1997 3,999 1,467 4,291 25
<CAPTION>
Gross Amount at Which Carried at December 31,
1997(a)
-------------------------------------------------
Building Depreciable
and Accumulated Lives Net
Apartment Property Land Improvements Depreciation Years(c)
------------------ ---- ------------ ------------ --------
<S> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills ................. 255 1,177 211 27.5
Casa Del Norte ............... 386 1,610 296 27.5
Desert Springs ............... 1,115 5,235 902 27.5
Landmark ..................... 409 4,657 791 27.5
Park Terrace ................. 316 3,527 632 27.5
Park Village ................. 92 782 154 27.5
Posada Del Rio ............... 534 3,212 578 27.5
South Point .................. 291 2,341 441 27.5
PHOENIX, ARIZONA
Contempo Heights ............. 1,833 4,843 609 27.5
La Privada ................... 8,505 16,659 412 27.5
Finisterra ................... 2,699 18,160 441 27.5
HOUSTON, TEXAS
Clear Lake Falls ............. 867 3,645 617 27.5
The Gallery .................. 732 2,061 362 27.5
Memorial Bend ................ 1,187 1,830 360 27.5
Nantucket Square II .......... 686 3,300 570 27.5
Prestonwood .................. 761 3,228 617 27.5
Riviera Pines ................ 1,025 4,001 681 27.5
Briar Park ................... 229 2,078 52 27.5
Country Club Park ............ 378 5,226 131 27.5
Chelsea Park ................. 1,255 4,712 119 27.5
Marymont ..................... 925 3,663 92 27.5
Riverway ..................... 248 1,804 47 27.5
Timbercreek Landing .......... 1,055 4,751 118 27.5
Ivystone ..................... 1,254 4,006 141 27.5
London Park .................. 1,379 5,149 150 27.5
DALLAS, TEXAS
Aspen Court .................. 588 4,066 100 27.5
Greenwood Creek .............. 1,172 6,867 171 27.5
Highlands of Preston ......... 1,693 7,469 186 27.5
Monfort Townhomes ............ 1,467 4,316 108 27
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Initial Cost to Company
----------------------------------------------------
Cost
Building Capitalized
Year Year and Subsequent to
Apartment Property Built Acquired Encumbrances Land Improvements Acquisition
------------------ ----- -------- ------------ ---- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Springfield .................. 1985 1997 5,439 1,877 6,832 51
Gentry Place ................. 1984 1997 7,443 2,151 9,402 298
Park on Preston .............. 1983 1997 5,595 1,463 7,899 48
Smith Summit ................. 1983 1997 5,536 1,408 7,581 46
SEATTLE/KENNEWICK,
WASHINGTON
Pacific South Center ......... 1975 1997 3,205 1,707 3,802 15
Court ........................ 1980 1997 2,904 1,168 2,949 308
Arbor Terrace ................ 1995-1996 1997 7,868 1,163 12,703 3
On the Boulevard ............. 1995 1997 7,952 1,060 9,742 14
PULLMAN, WASHINGTON
Campus Common North .......... 1985 1997 6,602 332 10,865 175
Campus Common South .......... 1972 1997 2,732 165 4,014 82
ALBUQUERQUE, NEW
MEXICO
Dorado Heights ............... 1986 1994 5,114 2,700 4,224 571
Villa Serena ................. 1986 1994 2,630 883 2,647 288
Whispering Sands ............. 1986 1994 5,478 1,442 6,149 541
------- ------ ------- ------
TOTAL ........................ 173,153 50,855 215,130 10,494
======= ====== ======= ======
<CAPTION>
Gross Amount at Which Carried at December 31,
1997(a)
-------------------------------------------------
Building Depreciable
and Accumulated Lives Net
Apartment Property Land Improvements Depreciation Years(c)
------------------ ---- ------------ ------------ --------
<S> <C> <C> <C> <C>
Springfield .................. 1,877 6,883 172 27.5
Gentry Place ................. 2,151 9,700 113 27.5
Park on Preston .............. 1,463 7,947 93 27.5
Smith Summit ................. 1,408 7,627 89 27.5
SEATTLE/KENNEWICK,
WASHINGTON
Pacific South Center ......... 1,707 3,817 87 27.5
Court ........................ 1,168 3,257 88 27.5
Arbor Terrace ................ 1,163 12,706 106 27.5
On the Boulevard ............. 1,060 9,756 111 27.5
PULLMAN, WASHINGTON
Campus Common North .......... 332 11,040 277 27.5
Campus Common South .......... 165 4,096 104 27.5
ALBUQUERQUE, NEW
MEXICO
Dorado Heights ............... 2,700 4,795 791 27.5
Villa Serena ................. 883 2,935 519 27.5
Whispering Sands ............. 1,442 6,690 1,204 27.5
----- ------ -----
TOTAL ........................ 50,855 225,624 13,843
====== ======= ======
</TABLE>
- ---------
(a) The aggregate cost of real estate investments for federal income tax puposes
is approximately $262,636 at December 31, 1997.
(b) Built by the Company.
(c) Building and Improvements are depreciated using 27.5 years while furniture
and fixtures are depreciated using 7 years.
F-19
<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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Real Estate Investments:
Balance, beginning of year ......... $ 73,990 $ 72,728 $ 64,264
Acquisitions .............................. 198,032 0 6,358
Improvements .............................. 4,457 1,269 2,106
Dispositions and other .................... 0 (7) 0
-------- -------- --------
Balance, end of year ............... 276,479 $ 73,990 $ 72,728
======== ======== ========
Accumulated Depreciation:
Balance, beginning of year ......... $ 7,504 $ 4,687 $ 1,995
Depreciation .............................. 6,335 2,819 2,692
Dispositions and other .................... 4 (2) 0
-------- -------- --------
Balance, end of year ............... 13,843 $ 7,504 $ 4,687
======== ======== ========
</TABLE>
F-20
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
Heritage Residential Group, Inc. ............... Arizona
Heritage SGP Corporation ....................... Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,987
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,987
<PP&E> 278,175
<DEPRECIATION> 13,843
<TOTAL-ASSETS> 280,743
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 78,535
<TOTAL-LIABILITY-AND-EQUITY> 280,743
<SALES> 0
<TOTAL-REVENUES> 51,478
<CGS> 0
<TOTAL-COSTS> 31,590
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,054
<INCOME-PRETAX> 10,150
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,834
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.11
</TABLE>
