<PAGE>
As filed with the Securities and Exchange Commission on June 18, 1997
File No. 333-
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
UNITED INVESTORS REALTY TRUST
(Exact name of Registrant as Specified in its Governing Instruments)
______________________
5847 SAN FELIPE, SUITE 850, HOUSTON, TEXAS 77057
(713) 781-2860
(Address of Principal Executive Offices)
________________
LEWIS H. SANDLER, CHIEF EXECUTIVE OFFICER
UNITED INVESTORS REALTY TRUST
5847 SAN FELIPE, SUITE 850
HOUSTON, TEXAS 77057
(713) 781-2860
(Name and Address of Agent for Service)
________________
COPIES TO:
Bryan L. Goolsby Bruce A. Cheatham
Gina E. Betts Winstead Sechrest & Minick P.C.
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. 1201 Elm Street, Suite 5400
2200 Ross Avenue, Suite 900 Dallas, Texas 75270
Dallas, Texas 75201 (214) 754-5400
(214) 220-4800
________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
=====================================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES OFFERING PRICE PROPOSED MAXIMUM REGISTRATION
BEING REGISTERED AMOUNT BEING REGISTERED(1) PER SHARE(2) AGGREGATE OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest, 3,450,000 shares(1) $11.75 $40,537,500 $12,285
no par value
=====================================================================================================================
</TABLE>
(1) Includes 450,000 Common Shares of Beneficial Interest which may be
purchased by the Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
in accordance with Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
UNITED INVESTORS REALTY TRUST
CROSS REFERENCE SHEET
ITEM
NO. ITEM CAPTION LOCATION IN PROSPECTUS
- ---- ------------ ----------------------
1. Forepart of Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Inside Front Cover Page
Cover Pages of Prospectus and Outside Back Cover Page
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings to Fixed
Charges
4. Determination of Offering Price Outside Front Cover Page;
Underwriting
5. Dilution Dilution
6. Selling Security Holders Not applicable
7. Plan of Distribution Underwriting
8. Use of Proceeds Use of Proceeds
9. Selected Financial Data Selected Financial Data
10. Management's Discussion and Management's Discussion and
Analysis of Financial Condition Analysis of Financial Condition
and Results of Operations and Results of Operations
11. General Information as to Business and Properties;
Registrant Management; Certain Provisions of
the Texas REIT Act and the
Company's Declaration of Trust
and Bylaws
12. Policy with Respect to Certain Business and Properties; Policies
Activities with Respect to Certain
Activities
13. Investment Policies of Registrant Prospectus Summary; Business and
Properties; Supplemental Property
Information
14. Description of Real Estate Prospectus Summary; Business and
Properties; Supplemental Property
Information
15. Operating Data Prospectus Summary; Business and
Properties; Selected Financial
Data
16. Tax Treatment of Registrant and Federal Income Tax Considerations
Its Security Holders
17. Market Price of and Dividends on Dividends and Distributions
the Registrant's Common Equity Policy; Description of Shares of
and Related Shareholder Matters Beneficial Interest
18. Description of Registrant's Description of Shares of
Securities Beneficial Interest; Certain
Provisions of the Texas REIT Act
and the Company's Declaration of
Trust and Bylaws; Dividends and
Distributions Policy
19. Legal Proceedings Business and Properties
20. Security Ownership of Certain Principal Shareholders
Beneficial Owners and Management
21. Trust Managers and Executive Management
Officers
22. Executive Compensation Management; Certain Relationships
and Transactions
i
<PAGE>
ITEM
NO. ITEM CAPTION LOCATION IN PROSPECTUS
- ---- ------------ ----------------------
23. Certain Relationships and Related Risk Factors; Investment Manager;
Transactions Certain Relationships and Related
Transactions
24. Selection, Management and Custody Business and Properties; Certain
of Registrant's Investments Relationships and Transactions
25. Policies with Respect to Certain Business and Properties; Policies
Transactions With Respect to Certain
Activities
26. Limitations of Liability Management; Description of Shares
of Beneficial Interest
27. Financial Statements and Prospectus Summary; Selected
Information Financial Data; Financial
Statements
28. Interests of Named Experts Experts; Legal Matters
and Counsel
29. Disclosure of Commission Position Not applicable
on Indemnification for Securities
Act Liabilities
ii
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 18, 1997
3,000,000 COMMON SHARES
UNITED INVESTORS REALTY TRUST
COMMON SHARES OF BENEFICIAL INTEREST
NO PAR VALUE PER SHARE
____________
United Investors Realty Trust, a Texas real estate investment trust (the
"Company"), has been operating since 1989 as a private real estate investment
trust engaged in the acquisition, ownership, management, leasing and
redevelopment of neighborhood and community shopping centers. Since its
inception, the Company has acquired and improved eight community shopping
centers located in Texas, Tennessee and Arizona (collectively, the
"Properties"). The Properties contain an aggregate of approximately 742,000
square feet of gross leasable space and had an aggregate occupancy rate of
approximately 93.3% on March 31, 1997. The Company has elected to be taxed
as a real estate investment trust ("REIT") for federal tax purposes since
1989 and is advised by an affiliate, FCA Corp (the "Investment Manager").
See "Investment Manager."
All of the common shares of beneficial interest of the Company, no par
value per share (the "Common Shares"), offered hereby (the "Offering") are
being sold by the Company. It is currently anticipated that the initial
public offering price per share will be between $ and $ .
See "Underwriting" for a discussion of the factors considered in determining
the initial public offering price.
Prior to the Offering, there has been no public market for the Common
Shares. The Company has applied for listing of the Common Shares on the
Stock Exchange. The Company intends to pay quarterly dividends to
its shareholders. See "Dividends and Distributions Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES INCLUDING:
- Limited geographic diversification of the Properties.
- The liquidation value of the Company may be less than the value of
the Company as a going concern.
- Dependence on Investment Manager for selection and acquisition of
new properties and management of existing properties.
- Ability of the Board of Trust Managers of the Company to change the
investment, financing, borrowing and other policies of the Company
at any time without shareholder approval.
- Potential anti-takeover effect of limiting ownership to 9.8% of the
outstanding Common Shares and of certain other provisions contained
in the Company's organizational documents.
- No limitations on amount or type of indebtedness.
- Possible conflict of interest with and dependence on the Investment
Manager.
- Real estate investment considerations such as the effect of economic
and other conditions on real estate operations and values.
- Immediate dilution in the net tangible book value of Common Shares
purchased in the Offering.
- Taxation of the Company as a corporation if it fails to qualify as a
REIT.
- Absence of a prior public market for the Common Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
____________________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
____________________
<PAGE>
================================================================================
Price to Public Underwriting Discount(1) Proceeds to Company(2)
- --------------------------------------------------------------------------------
Per Share $ $ $
Total(3) $ $ $
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering estimated at $ payable by
the Company.
(3) The Company has granted the Underwriters an option to purchase up to
450,000 additional Common Shares at the Price to Public, less the Underwriting
Discount, for the purposes of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
_________________
The Common Shares are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel
or reject orders in whole or in part and subject to certain other conditions.
It is expected that delivery of certificates representing the Common Shares
will be made against payment on or about , 1997 at the office of
Southwest Securities in New York, New York or through the facilities of The
Depository Trust Company.
SOUTHWEST SECURITIES
The date of this Prospectus is , 1997.
2
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR ON THE
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
3
<PAGE>
TABLE OF CONTENTS
Page
No.
----
PROSPECTUS SUMMARY
The Company............................................................. 6
Risk Factors............................................................ 7
The Properties.......................................................... 8
Business Objectives and Strategies...................................... 9
Dividends and Distributions............................................. 10
Tax Status.............................................................. 11
The Offering............................................................ 11
Summary Financial Data.................................................. 12
RISK FACTORS
Limited Geographic Diversification of the Portfolio..................... 13
Liquidation Value of Company May Be Less Than Value as a Going Concern.. 13
Reliance on Management and Investment Manager........................... 13
Changes in Investment and Financing Policies............................ 13
Ownership Limit; Anti-Takeover Effect................................... 13
No Limitation in Organizational Documents on the Incurrence of Debt..... 14
Conflicts of Interest................................................... 14
Real Estate Investment Considerations................................... 14
Immediate and Substantial Dilution...................................... 15
Limitations on Acquisition and Change in Control........................ 15
Absence of Prior Public Market for Common Shares........................ 15
Competition............................................................. 16
Adverse Consequences of Failure to Qualify as a REIT.................... 16
Adverse Effect of Increase In Market Interest Rate on Financial
Position and Common Share Price....................................... 16
Risks Associated with Borrowing, Including Loss of Properties in
the Event of a Foreclosure............................................ 16
Acquisition Risks....................................................... 16
Environmental Matters................................................... 17
Uninsured Loss and Condemnation......................................... 17
Shares Available for Future Sale........................................ 17
Risk for Investors Subject to ERISA..................................... 18
Risks Associated with Forward-Looking Statements Included in this
Prospectus............................................................ 18
BUSINESS AND PROPERTIES................................................... 18
Business................................................................ 19
Management and Leasing.................................................. 20
The Properties.......................................................... 20
Major Tenants........................................................... 22
Additional Information Concerning Certain Properties.................... 23
Leases.................................................................. 25
Bankruptcies and Tenant Delinquencies................................... 26
Mortgage Loan Indebtedness.............................................. 26
Other Debt.............................................................. 27
Rental Revenues......................................................... 28
Capital Expenditures.................................................... 28
Competition............................................................. 28
Legal Proceedings....................................................... 28
Regulations and Insurance............................................... 28
Environmental Matters................................................... 29
Supplemental Property Information....................................... 30
STRATEGY FOR FUTURE GROWTH
Growth Strategy......................................................... 30
Operating Strategy...................................................... 31
Acquisitions............................................................ 31
Redevelopment........................................................... 32
Financing............................................................... 32
USE OF PROCEEDS........................................................... 33
DIVIDENDS AND DISTRIBUTIONS POLICY........................................ 33
General................................................................. 33
Dividend Reinvestment Plan.............................................. 34
CAPITALIZATION............................................................ 35
DILUTION.................................................................. 36
SELECTED FINANCIAL INFORMATION............................................ 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF
RESULTS OF OPERATIONS................................................... 38
Overview................................................................ 38
Results of Operations................................................... 38
Liquidity and Capital Resources......................................... 40
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................... 43
Investment Policies..................................................... 43
Financing Policies...................................................... 44
Affiliate Transaction Policy............................................ 44
Certain Other Policies.................................................. 44
MANAGEMENT................................................................ 45
Trust Managers and Officers............................................. 45
Committees of the Board of Trust Managers............................... 47
Compensation of Trust Managers.......................................... 47
Executive Compensation.................................................. 48
Share Incentive Plan.................................................... 48
Indemnification Agreements.............................................. 48
Limitation of Liability and Indemnification............................. 49
4
<PAGE>
Page
No.
----
CERTAIN RELATIONSHIPS AND TRANSACTIONS.................................... 49
PRINCIPAL SHAREHOLDERS.................................................... 51
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST.............................. 52
General................................................................. 52
Restrictions on Transfer................................................ 53
Preemptive Rights and Cumulative Voting................................. 54
Share Dividends......................................................... 54
Redemption of Company Shares............................................ 54
Voting Rights........................................................... 54
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF THE COMPANY'S
DECLARATION OF TRUST AND BYLAWS......................................... 54
Board of Trust Managers................................................. 54
Business Combinations................................................... 55
Shareholder Liability................................................... 56
Trust Manager Liability................................................. 56
Special Shareholder Meetings............................................ 57
Termination of the Company.............................................. 57
Amendment of Declaration of Trust and Bylaws............................ 57
SHARES AVAILABLE FOR FUTURE SALE.......................................... 57
FEDERAL INCOME TAX CONSIDERATIONS......................................... 58
General................................................................. 58
Requirements for Qualification as a Real Estate Investment Trust........ 59
Federal Taxation of the Company......................................... 61
Taxation of Shareholders................................................ 62
Disclosure Regarding DRIP............................................... 62
Taxation of Tax Exempt Shareholders..................................... 63
Taxation of Foreign Shareholders........................................ 63
Other Taxation.......................................................... 64
ERISA CONSIDERATIONS...................................................... 64
UNDERWRITING.............................................................. 65
LEGAL MATTERS............................................................. 67
EXPERTS................................................................... 67
ADDITIONAL INFORMATION.................................................... 67
GLOSSARY.................................................................. 68
INDEX TO FINANCIAL STATEMENTS.............................................F-1
APPENDIX A................................................................A-1
SCHEDULE..................................................................S-1
5
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
DESCRIPTION AND FINANCIAL INFORMATION AND STATEMENTS, AND THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. CAPITALIZED AND CERTAIN OTHER TERMS
USED HEREIN SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE GLOSSARY. EXCEPT
AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
THE COMPANY
United Investors Realty Trust (the "Company") has been operating since
1989 as a private real estate investment trust engaged in the acquisition,
ownership, management, leasing and redevelopment of neighborhood and
community shopping centers. The Company was organized as a Massachusetts
business trust under the name UST Investors Realty Trust as of December 1,
1988. Effective as of August 6, 1990, the Company changed its state of
domicile by reorganizing as a real estate investment trust formed under the
Texas Real Estate Investment Trust Act (the "Texas REIT Act") with the name
United Investors Realty Trust. The Company has elected to be taxed as a
real estate investment trust ("REIT") under the Internal Revenue Code of
1986, as amended (the "Code"), since 1989.
The Company currently owns fee title or controlling interest in eight
shopping center properties located in Texas, Tennessee and Arizona
(collectively, the "Properties"). The Properties are strategically located
in areas to provide busy working families with the opportunity to get most of
their shopping done between work and home. The Properties range in size from
approximately 29,000 square feet to 190,000 square feet, and are anchored
primarily by national and regional supermarkets and retailers who offer
everyday necessities to their neighborhood communities. The Company leases
space to only one key retailer, Randall's Food & Drugs, Inc. ("Randall's"),
whose lease payments are 10% or more of the Company's revenues. Randall's
is located in the Randall's/University Park Shopping Center located
approximately one mile from the Texas A&M University campus in College
Station, Texas and represents approximately 13% of the Company's revenues.
Any future property acquisitions by the Company are expected to be in
established neighborhoods in small to medium-sized metropolitan communities,
where potential future appreciation will be driven by better than average
population and employment growth. The Company is currently in discussions
with owners of several neighborhood shopping centers that it would like to
acquire, but there can be no assurances that the Company will be able to
acquire these or any additional properties on favorable terms. The Company
currently relies on local, unaffiliated professional property managers and
leasing agents to help the Company manage its Properties. These local
professionals are, or can be, on site on a daily basis and are familiar
with the communities in which the centers are situated and the needs of the
tenants that these centers serve.
The investments of the Company are managed by FCA Corp, a closely-held
Texas corporation (the "Investment Manager"). Robert W. Scharar, Chairman of
the Board of the Company, is a principal shareholder of the Investment
Manager. The Company's President and Chief Executive Officer, Lewis H.
Sandler, is also the Chief Executive Officer of the real estate services
division of the Investment Manager. See "Risk Factors--Conflicts of Interest."
Since 1975, the Investment Manager, or its predecessor-in-interest, has been
registered with the Securities and Exchange Commission (the "Commission") as
an investment advisory firm under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"). The Investment Manager's senior
management originally sponsored the organization of the Company as a benefit
to a number of clients who desired to include real estate properties in their
investment portfolios. The Investment Manager currently provides
administrative, accounting, financial, legal and operating personnel as well
as asset management to the Company on an "as-needed" basis. See "Investment
Manager." From and after the effective date of this Offering, the Investment
Manager has agreed to dedicate the services of Randall D. Keith and Daniel M.
Jones III, to the administration of the Company. They are the Company's
Chief Operating Officer and Chief Financial Officer, respectively. See
"Management."
The Company's principal investment objective is to maximize shareholder
returns based on cash available for distribution, which includes funds
provided from operations and, from time to time, realized from gains on the
sale of investments. To this end, the Company intends to invest, directly or
through wholly-owned subsidiaries, joint ventures or partnerships, in
existing retail shopping centers. The Company actively seeks out acquisition
properties which it can renovate and/or expand because management believes
that such renovation or expansion will increase earnings and values. The
Company currently follows four general investment policies to achieve its
objectives. First, the Company
6
<PAGE>
seeks to maintain investment flexibility in the acquisition of real estate
assets for long-term investment and income while applying conservative
selection criteria for the acquisition of such assets. Second, the Company
intends to aggressively seek acquisitions, and maintain and intensively
manage a portfolio of high quality and well-located properties with a
majority of the space already leased. Third, the Company intends to focus
its acquisition efforts on communities in which it already has properties or
in areas where the Company can acquire several properties concurrently, in
order to obtain economies of scale in the use of local personnel, advertising
and purchasing of services. Finally, it is the policy of the Company to
selectively sell properties as dictated by market conditions in order to
realize capital gain and to improve the Company's overall portfolio profile
and valuation.
Although the Company is not currently entirely self-managed, the Company
nonetheless believes that it can compete effectively with other shopping
center operators in its peer group with respect to future acquisitions. It
has been management's experience that many retail center owners with an
interest in selling their properties wish to maintain an active role in the
management of their centers. Management believes that many of the Company's
competitors have no interest in or capacity for retaining the management
services of the persons who control the assets that such competitors wish to
acquire. The Company is prepared to allow certain qualified senior managers
to continue the management of their former assets if such persons can be
retained on terms satisfactory to the Company. The Company believes that its
ability to retain such managers will facilitate access to additional
acquisitions, integration of future property acquisitions, and retention of
the existing goodwill resulting from the long-term tenant relations and
community involvement of such managers.
The Company's principal executive offices are located at 5847 San
Felipe, Suite 850, Houston, Texas 77057, and its telephone number is (713)
781-2860.
RISK FACTORS
AN INVESTMENT IN THE COMMON SHARES INVOLVES VARIOUS RISKS, AND
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" PRIOR TO ANY INVESTMENT IN THE COMPANY. SUCH RISKS INCLUDE,
AMONG OTHERS:
- Limited geographic diversification of the Properties.
- The liquidation value of the Company may be less than the value of
the Company as a going concern.
- Dependence on Investment Manager for selection and acquisition of new
properties and management of existing properties.
- The ability of the Board of Trust Managers of the Company to change
the investment, financing and other policies of the Company at any
time without shareholder approval.
- The potential anti-takeover effect of limiting share ownership to 9.8%
of the outstanding Common Shares (with certain exceptions) and certain
other provisions contained in the organizational documents of the
Company, such as the ability to issue preferred shares, any of which
may discourage a change in control, and may limit the opportunity for
the Company's shareholders to receive a premium for their Common
Shares.
- The risk of potential increases in leverage due to the absence of a
provision in the organizational documents of the Company that limits
the amount and type of debt that the Company may incur, which may
result in increases in debt service requirements that could adversely
affect the Company's funds from operations and ability to pay
dividends to shareholders and an increased risk of default on the
Company's obligations.
- The officers of the Company and the Investment Manager may be subject
to certain potential conflicts of interest.
- Real estate investment risks, such as the effect of economic and other
conditions on commercial property values (including the dependence of
the Properties on the economies of the metropolitan
7
<PAGE>
areas in which they are located), the ability of tenants to make rent
payments, the ability of the Properties to generate revenues
sufficient to meet operating expenses, including future debt service,
and the illiquidity of real estate investments.
- Immediate dilution in the net tangible book value of Common Shares
purchased in the Offering.
- Many entities, as well as individuals, compete for investments similar
to those proposed to be made by the Company, many of whom have far
greater resources than the Company.
- The Company will be taxed as a corporation if it fails to maintain its
qualification as a REIT.
- Absence of a prior public market for the Common Shares.
- Increases in market interest rates may lead prospective purchasers of
the Common Shares to demand a higher annual yield from future
dividends, which may adversely affect the market price of the Common
Shares.
- Failure to make payments on secured indebtedness may result in the
loss of the property securing such indebtedness.
- Risks associated with the acquisition of additional properties
including financing risks and the risk that such properties may not
perform as expected.
- Potential liability of the Company relating to unknown or future
environmental issues.
- Potential losses in the event of a casualty or other liabilities that
are not insured, are uninsurable or not economically insurable.
- Future sales of Common Shares could adversely affect the prevailing
market price for Common Shares.
- Investment in Common Shares may not be suitable for certain investors
subject to ERISA.
THE PROPERTIES
The Properties consist of eight retail properties located in Austin,
College Station, El Campo and San Antonio, Texas; Lenoir City and Athens,
Tennessee; and Phoenix, Arizona. The Properties were built between 1970 and
1991, with the oldest property going through a substantial renovation in
1984. The aggregate occupancy rate for the Properties was 93.3% as of March
31, 1997.
The Properties range in size from approximately 29,000 square feet to
190,000 square feet. Further acquisitions are expected to concentrate on
similar properties that are anchored primarily by national and regional
supermarkets and retailers who offer everyday necessities to their
neighborhood communities. The Company's success has been based, in part, on
its ability to infuse capital into those shopping centers where the capital
is expected to generate greater occupancies and higher rents.
8
<PAGE>
The chart below shows certain additional information with respect to the
Properties as of March 31, 1997.
<TABLE>
Total Total Percentage of
GLA(1) Percentage of Aggregate Annualized Annualized
State Properties (sq. ft.) Total GLA Occupancy Base Rent(2) Base Rent
- ----- ---------- --------- ------------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Texas 5 473,800 63.85% 93.5% $3,502,512 71.45%
Tennessee 2 151,625 20.43 96.3 743,298 15.16
Arizona 1 116,665 15.72 88.5 656,484 13.39
-- ------- ------ ---- ---------- ------
8 742,090 100.00% 93.3% $4,902,294 100.00%
-- ------- ------ ---- ---------- ------
-- ------- ------ ---- ---------- ------
</TABLE>
- -------------------
(1) Gross leasable area.
(2) Based on March 31, 1997 rent roll.
BUSINESS OBJECTIVES AND STRATEGIES
The Company will seek to maximize growth and Cash Available for
Distribution and enhance the value of its portfolio through effective operating,
aggressive and flexible acquisition and conservative financing strategies as
well as intensive asset management policies and activities. The Company
believes that attractive opportunities exist to increase rental revenues and
funds from operations through leasing and management of the Properties in its
portfolio. The Company will also seek to create additional value through the
acquisition and redevelopment of existing community shopping centers with an
emphasis on small to medium-sized metropolitan communities where potential
future appreciation will be driven by better than average population and
employment growth. The Company's operating, acquisition and financing
strategies and management policies are determined by the Board of Trust
Managers and are implemented by the Company's executive officers and by the
Investment Manager. These strategies and policies may be amended or revised
from time to time at the discretion of the Board of Trust Managers without a
vote of the shareholders of the Company.
OPERATIONS
The Company's operating objectives are to:
- Hold and maintain properties for long-term investment and place a
strong emphasis on aesthetics, regular maintenance, periodic
renovation and capital improvements.
- Maintain and diversify its core base of national and regional
supermarket and retail tenants.
- Aggressively market vacant space, renew existing leases at higher base
rents per square foot, and utilize percentage rents and minimum base
rent escalation provisions in its leases.
GROWTH STRATEGY
The Company's growth strategy will be to:
- Focus primarily on acquisitions of retail properties in small to
medium-sized metropolitan communities where the Company's knowledge
of the real estate market is strongest or in areas where the Company
can acquire, concurrently, several properties, in order to obtain
economies of scale. In either event, the Company will focus on areas
where potential future appreciation will be driven by better than
average population and employment growth.
- Acquire shopping centers that are generally anchored by supermarkets
or by national or regional retailers with long term leases and who
offer everyday necessities to their neighborhood communities.
- Acquire shopping centers located along major traffic arteries in
established neighborhoods where the development of competing shopping
centers is impeded by the lack of developable land and zoning
restrictions and where tenant relocation alternatives are limited.
9
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- Take advantage of its structural flexibility by offering, on a
selective basis, senior management of prospective sellers an
opportunity to continue the management of their former shopping
centers if such persons can be retained on terms acceptable to the
Company.
- Acquire, redevelop and re-tenant under-managed retail properties in
areas with strong prospects for future growth.
- Renovate and expand the existing Properties to meet the needs of
existing or new tenants.
FINANCING
In order to most effectively pursue its business strategies, the
Company's financing strategy will be to:
- Maintain a capital structure with a ratio of long-term debt to Total
Market Capitalization of no more than 50%. On a pro forma basis at
March 31, 1997, after giving effect to the Offering (assuming an
initial public offering price of $11.75 per Common Share), the Company
would have a long-term debt to Total Market Capitalization ratio of
approximately 16.8%. Fluctuations in the market price of the Common
Shares may cause this ratio to vary from time to time. The Company
has established its financing policies relative to the Total Market
Capitalization of the Company rather than relative to the book value
of the Company's assets, a ratio that is frequently employed. The
Company has used Total Market Capitalization because management
believes that the book value of the Company's assets does not
accurately reflect the fair market value of such assets or the
Company's ability to borrow and to meet debt service requirements.
The Total Market Capitalization of the Company, however, is more
variable than book value, and does not necessarily reflect the fair
market value of the underlying assets of the Company at all times.
Although the Company will consider factors other than Total Market
Capitalization in making decisions regarding the incurrence of debt
(such as the purchase price of properties to be acquired with debt
financing, the estimated market value of property upon refinancing,
and the ability of particular properties and the Company as a whole to
generate cash flow to cover expected debt service), no assurance can
be given that the ratio of long-term debt to Total Market
Capitalization (or to any other measure of asset value) will be
consistent with the expected initial level of distributions to
shareholders. The Company will seek to avoid exposure to long-term
variable rate debt by utilizing either fixed-rate debt or entering
into interest rate protection agreements.
- Utilize the most appropriate sources of capital for potential future
acquisition projects, which may include undistributed cash available
for distribution, proceeds from the sale of properties, the issuance
of equity securities (including preferred shares), bank and other
institutional borrowings (secured and unsecured) and the issuance of
debt securities.
DIVIDENDS AND DISTRIBUTIONS
Initially, the Company intends to pay regular quarterly dividends to its
shareholders of $0.26 per share; $1.04 per share on an annualized basis. This
would represent an annual dividend rate of %, based on the
assumed public offering price of $ per share. The Company
intends to pay a dividend for the fourth quarter of 1997 (prorated for the
period from the completion of the Offering through December 31, 1997, if the
Offering is completed in such fourth quarter).
The dividend will be paid to shareholders of record on January 5, 1998.
Such payment will be made on or about January 27, 1998. The dividend
rate was established based on an estimate of "Cash Available for
Distribution." Cash Available for Distribution is defined as net income
(loss) available for holders of Common Shares, as computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains and losses
from debt restructuring and property sales, plus depreciation and
amortization, less capital expenditures. Cash Available for Distribution
does include the effect of the amortization of deferred financing costs, a
non-cash item which is considered a component of amortization expense. See
"Selected Financial Data." Cash Available for Distribution does not
represent cash generated
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<PAGE>
from operating activities in accordance with GAAP, is not necessarily
indicative of cash available to fund cash needs and should not be considered
as an alternative to cash flow as a measure of liquidity after the Offering.
The Company does not expect to change its estimated dividend rate if
the Underwriters' over-allotment option is exercised. The Company intends to
maintain at least the dividend rate set forth above for the one year
following the completion of the Offering unless the actual results of
operations, economic conditions or other factors differ from the assumptions
used in its estimates. Dividends depend upon a variety of factors, and
there can be no assurance that dividends will be made.
In order to maintain its qualification as a REIT under current tax laws,
the Company must, among other things, make an annual distribution to
shareholders of at least 95% of its REIT taxable income (which does not
include capital gains). Under certain circumstances, the Company may be
required to pay dividends in excess of funds from operations in order to
meet such distribution requirements. Dividends by the Company to the
extent of its current and accumulated earnings and profits for federal income
tax purposes will generally be taxable to shareholders as ordinary dividend
income. Distributions in excess of earnings and profits will generally be
treated as a non-taxable reduction of the shareholder's basis in the Common
Shares to the extent thereof, and thereafter as taxable gain. Dividends
that are treated as a reduction of the holder's basis in the Common Shares
will have the effect of deferring taxation until the sale of the shareholder's
Common Shares. The Company does not expect any portion of its dividend for
1997 to represent a return of capital. This could change if the Company
acquires any shopping centers in the last six months of 1997. See "Federal
Income Tax Considerations."
Prior to the end of fiscal 1997, the Company intends to adopt a dividend
reinvestment program under which holders of Common Shares may elect to
reinvest their dividends automatically in additional Common Shares.
TAX STATUS
The Company has elected to be treated as a REIT under sections 856
through 860 of the Code since the taxable year ended December 31, 1989. As a
REIT, the Company generally will not be subject to federal income tax
provided it makes certain distributions to its shareholders and meets certain
organizational and other requirements. If the Company fails to qualify as a
REIT in any taxable year, it will be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. See "Risk Factors--Adverse Consequences of the Failure to
Qualify as a REIT" and "Federal Income Tax Considerations." As a REIT, the
Company is subject to certain federal, state and local taxes. See "Federal
Income Tax Considerations."
THE OFFERING
Shares Offered...................... 3,000,000
Shares to be Outstanding After
the Offering...................... 3,887,489(1)
Use of Proceeds..................... To repay certain mortgage and other
indebtedness associated with the
Properties, acquisitions of properties
and for general working capital purposes.
Stock Exchange Symbol...............
- -------------------
(1) Does not include 200,000 Common Shares issuable upon exercise of options
to be granted pursuant to the Company's 1997 Share Incentive Plan (the
"Plan") effective upon completion of the Offering. Includes 44,000 Common
Shares to be awarded to the Investment Manager under the Plan and 2,000
Common Shares to be awarded to each of the three independent Trust
Managers under the Plan upon completion of the Offering. See
"Management--Share Incentive Plan."
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<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth pro forma information and historical summary
consolidated financial data of the Company. The following financial information
should be read in conjunction with all of the financial statements and notes
thereto included elsewhere in this Prospectus. The historical and pro forma
operating data of the Company may not be indicative of future operating results
of the Company. The pro forma operating data of the Company are presented as if
the Offering had occurred as of the beginning of each period presented. The pro
forma balance sheet data are presented as if the Offering had occurred on
March 31, 1997. The following pro forma information is not necessarily
indicative of what the Company's results of operations or financial condition
would have been for the periods or at the date indicated.
<TABLE>
Three Months ended March 31, Year ended December 31,
--------------------------------------- ----------------------------------------------------
Pro Forma Pro Forma
1997 1997 1996 1996 1996 1995 1994
----------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Base rents (1)(3) $ 1,215,752 $ 1,215,752 $ 962,663 $4,097,911 $ 4,097,911 $ 4,389,491 $ 3,794,711
Percentage rents 6,600 6,600 8,206 32,822 32,822 -- --
Expense reimbursements 273,868 273,868 193,952 835,940 835,940 848,975 844,299
Interest and other income 8,476 8,476 13,106 67,409 67,409 44,224 10,344
----------- ----------- ----------- ---------- ----------- ----------- -----------
Total revenues 1,504,696 1,504,696 1,177,927 5,034,082 5,034,082 5,282,690 4,649,354
----------- ----------- ----------- ---------- ----------- ----------- -----------
Expenses:
Operating and maintenance 130,561 130,561 90,419 442,701 442,701 662,687 445,635
Real estate taxes 188,566 188,566 131,165 558,000 558,000 569,634 512,070
General and administrative 197,822 197,822 143,275 642,944 642,944 657,466 507,137
Interest 207,434 611,203 504,277 609,102 2,132,390 2,177,447 2,101,762
Depreciation and amortization 300,666 284,416 221,235 1,023,778 958,778 960,876 756,914
----------- ----------- ----------- ---------- ----------- ----------- -----------
Total expenses 1,025,049 1,412,568 1,090,371 3,276,525 4,734,813 5,028,110 4,323,518
----------- ----------- ----------- ---------- ----------- ----------- -----------
Income before gain on sale of
investment real estate, minority
interest and preferred share
dividend requirements 479,647 92,128 87,556 1,757,557 299,269 254,580 325,836
Gain on sale of investment
real estate -- -- 6,760 240,000 240,000 25,020 --
----------- ----------- ----------- ---------- ----------- ----------- -----------
Income before minority interest and
preferred share dividend
requirements 479,647 92,128 94,316 1,997,557 539,269 279,600 325,836
Minority interest in net income of
real estate ventures (1,264) (9,070) (10,645) (2,417) (51,941) (43,278) (48,435)
----------- ----------- ----------- ---------- ----------- ----------- -----------
Income before preferred
share dividend requirements 478,383 83,058 83,671 1,995,140 487,328 236,322 277,401
Preferred share dividend
requirements (24,158) (24,158) (23,822) (96,296) (96,296) (43,618) --
----------- ----------- ----------- ---------- ----------- ----------- -----------
Net income available for
common shareholders $ 454,225 $ 58,900 $ 59,849 $1,898,844 $ 391,032 $ 192,704 $ 277,401
----------- ----------- ----------- ---------- ----------- ----------- -----------
----------- ----------- ----------- ---------- ----------- ----------- -----------
Net income per common share (2) $ 0.16 $ 0.07 $ 0.07 $ 0.68 $ 0.44 $ 0.22 $ 0.35
----------- ----------- ----------- ---------- ----------- ----------- -----------
----------- ----------- ----------- ---------- ----------- ----------- -----------
Weighted average shares outstanding 2,806,489 887,489 884,397 2,803,665 884,655 884,397 802,899
----------- ----------- ----------- ---------- ----------- ----------- -----------
----------- ----------- ----------- ---------- ----------- ----------- -----------
Cash dividends per common share (4) -- -- -- -- $ 0.40
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
BALANCE SHEET INFORMATION
Rental properties, gross $41,357,860 $39,408,381 $32,546,492 $39,368,700 $34,236,932 $33,852,975
Total assets 51,711,158 37,060,379 31,005,233 37,242,544 32,532,204 32,702,850
Mortgage and other notes payable 9,300,924 26,426,124 21,646,424 26,542,992 22,484,845 23,826,831
Total liabilities 10,035,058 27,160,258 22,160,654 27,406,859 23,407,145 24,647,866
Minority interests 651,688 1,320,209 693,816 1,314,673 699,984 794,730
Preferred stock 1,068,226 1,068,226 1,068,226 1,068,226 1,068,226 --
Common shareholders' equity 39,956,186 7,511,686 7,082,937 7,452,786 7,356,849 7,260,254
</TABLE>
- -----------------
(1) Base rent was lower in 1996 as a result of the spin-off of the One West
Hills office building on January 1, 1996.
(2) Net income per share is the result of dividing net income available for
common shareholders by the weighted average shares outstanding. For each
historical period shown, the weighted average shares outstanding have been
increased by 50,000 shares to reflect the planned 1997 share awards under
the Plan.
(3) During 1997, the Company changed its method of accounting for certain
rental revenues to when earned versus when received and certain expenses to
when incurred versus when paid. See note 10 in the Consolidated Financial
Statements.
(4) For 1996 and 1995, the Company distributed a dividend in kind of Ivy Realty
Trust stock consisting of $.40 and $.20 per share, respectively.
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES VARIOUS INVESTMENT RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS
TOGETHER WITH THE INFORMATION PROVIDED ELSEWHERE IN THIS PROSPECTUS IN
EVALUATING AN INVESTMENT IN THE COMPANY.
LIMITED GEOGRAPHIC DIVERSIFICATION OF THE PORTFOLIO
The Company's Properties are located in three states, Texas, Tennessee
and Arizona (primarily Texas). The concentration of the portfolio in a
limited number of geographic regions creates the risk that should any one of
these regions experience an economic downturn, the Company's operations may
be adversely affected.
LIQUIDATION VALUE OF THE COMPANY MAY BE LESS THAN VALUE AS A GOING CONCERN
The valuation of the Company has not been determined on a
property-by-property basis because the Company is an on-going business
enterprise. Rather, the Company has been valued based on the cash flow and
cash flow potential of the Properties owned by the Company, and the factors
set forth in this Prospectus. The Company does not obtain appraisals of its
properties in the ordinary course of business, and appraisals of the
Properties have not been obtained in connection with the Offering. Investors
should be aware that the liquidation value of the Company may be less than
the value of the Company as a going concern.
RELIANCE ON MANAGEMENT AND INVESTMENT MANAGER
The Company is dependent for the selection, structuring, closing and
monitoring of its investments upon the efforts and abilities of the officers
of the Investment Manager, Robert W. Scharar, the Investment Manager's
President, and Lewis H. Sandler, Chief Executive Officer of the real estate
services division of the Investment Manager. The loss or interruption of the
services of these persons could have a material adverse effect on the
Company. In addition, several of the officers of the Investment Manager also
serve as Trust Managers and officers of the Company and devote such time as
they deem appropriate to the Company. The success of the Company is
dependent in large part on its officers. These officers are paid by the
Investment Manager. Although management of the Company believes that the
Company can obtain the services of third party investment advisors or hire
sufficient personnel to manage the Company's investments, in the event that
the Amended and Restated Advisory Agreement (the "Advisory Agreement") is
terminated, no assurance can be given that the Company could obtain
alternative investment management services of a comparable quality.
CHANGES IN INVESTMENT AND FINANCING POLICIES
The investment and financing policies of the Company, and its policies
with respect to certain other activities, including its growth, debt
capitalization, distributions, REIT status and investment and operating
policies are determined by the Board of Trust Managers. Although it has no
present intention to do so, these policies may be amended or revised from
time to time at the discretion of the Board of Trust Managers without a vote
of the shareholders of the Company.
OWNERSHIP LIMIT; ANTI-TAKEOVER EFFECT
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding shares of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). To ensure that the Company will not fail to qualify as a
REIT under this test, the Amended and Restated Declaration of Trust (the
"Charter") provides that no holder of capital shares, other than any person
approved by the Trust Managers, may directly or indirectly own more than 9.8%
of the lesser of the number or value of the outstanding capital shares.
There can be no assurance that there will not be five or fewer individuals
who will own more than 50% in value of the shares thereby causing the Company
to fail to qualify as a REIT. The ownership limits may discourage a change of
control of the Company and may also (i) deter tender offers for the Common
Shares, which offers may be attractive to the shareholders or (ii) limit the
opportunity for shareholders to receive a premium for their Common Shares
that might otherwise exist if an investor attempted to assemble a block of
Common Shares in excess of 9.8% in number or value of the outstanding capital
shares or otherwise to effect a change of control of the Company. See
"Description of Shares of Beneficial Interest--Restrictions on Transfer."
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<PAGE>
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON THE INCURRENCE OF DEBT
The Company currently has a general policy of limiting its borrowings to
a ratio of approximately 50% or less of long-term debt to Total Market
Capitalization. The organizational documents of the Company contain no
limitation on the amount or percentage of indebtedness which the Company may
incur. Therefore, the Board of Trust Managers, without a vote of the
shareholders, could alter or eliminate the current policy of limiting
borrowings at any time. If the Company's debt to capitalization policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the Company's operating
cash flow and its ability to make expected distributions to shareholders, and
could result in an increased risk of default on its obligations.
Although the Company will consider factors other than Total Market
Capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of properties to be acquired with debt financing, the
estimated market value of properties upon refinancing, and the ability of
particular properties and the Company, as a whole, to generate cash flow to
cover expected debt service), there can be no assurance that the ratio of
debt to Total Market Capitalization will be consistent with the maintenance
of the expected level of distributions to shareholders.
CONFLICTS OF INTEREST
The fee of the Investment Manager is based on the Advisory Funds From
Operations and is not entirely dependent upon the profitability of the
Properties. The fee was not the result of an arm's length negotiation.
REAL ESTATE INVESTMENT CONSIDERATIONS
ECONOMIC PERFORMANCE AND VALUE OF PROPERTIES DEPENDENT ON MANY FACTORS.
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of
income generated and expenses incurred. If the Company's properties do not
generate income sufficient to meet operating expenses, including debt
service, the Company's income and ability to make distributions to its
shareholders will be adversely affected.
The income from and market value of a leased property may be adversely
affected by such factors as changes in the general economic climate, local
conditions such as an oversupply of space or a reduction in demand for real
estate in the area, the attractiveness of the properties to tenants and
competition from other available space. Real estate values and income are
also affected by such factors as government regulations and changes in real
estate, zoning or tax laws, interest rate levels, the availability of
financing and potential liability under environmental and other laws.
Adverse economic conditions could adversely affect the ability of a
tenant to make its lease payments to the Company, resulting in a reduction in
the cash flow of the Company and a decrease in the value of the property
leased to such tenant in the event the lease is terminated and the Company is
unable to lease the property to another tenant on similar or better terms, or
at all. In addition, the Company may experience delays in enforcing its
rights as lessor and may incur substantial costs in protecting its
investment. The Company not only could lose the cash flow from such
defaulting tenant, but in order to prevent a foreclosure, also might divert
cash flow generated by other properties to meet mortgage payments, if any,
and pay other expenses associated with owning the property with respect to
which the default occurred.
DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY TO MEET DEBT OBLIGATIONS
AND MAKE DISTRIBUTIONS. As substantially all of the Company's income is
derived from rental income from real property, the Company's income and Funds
From Operations could be adversely affected if a single major tenant was or a
number of smaller tenants were unable to meet their obligations to the
Company or if the Company was unable to lease on economically favorable terms
a significant amount of space in its Properties. Although such adverse
effect may be limited by the fact that the Company does not rely on any
single major tenant, such risk is not eliminated. In addition, the Company's
tenants may have the right to terminate their leases upon the occurrence of
certain customary events of default, or, in some cases, if the lease
14
<PAGE>
held by an anchor tenant or other principal tenant of the property expires,
is terminated or the property subject to the lease is vacated, even if rent
continues to be paid under the lease. No assurance can be given that leases
that expire or are terminated can be renewed or replaced, or that the
properties covered by leases that expire or are terminated can be leased to
comparable tenants or on comparable terms, or at all.
RISK OF BANKRUPTCY OF MAJOR TENANTS. The bankruptcy or insolvency of a
major tenant or a number of small tenants may have an adverse impact on the
properties affected and on the income produced by such properties. Under
bankruptcy law, a tenant has the option of continuing or terminating any
unexpired lease. If the tenant continues its lease with the Company, the
tenant must cure all defaults under the lease and provide the Company with
adequate assurance of its future performance under the lease. If the tenant
terminates the lease, the Company's claim for breach of the lease would
(absent collateral securing the claim) be treated as a general unsecured
claim. General unsecured claims are the last claims to be paid in a
bankruptcy and therefore funds may not be available to pay such claims. As
of June 15, 1997, none of the Company's major tenants are in bankruptcy
or have defaulted on a lease which caused a material adverse effect on
the Company.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Equity real estate investments
are relatively illiquid and therefore tend to limit the ability of the
Company to vary its portfolio in response to changes in economic or other
conditions. In addition, mortgage payments and, to the extent a property is
not subject to Triple Net Leases, certain significant expenditures such as
real estate taxes and maintenance costs generally are not reduced when
circumstances cause a reduction in income from the investment, and should
such events occur, the Company's income and Cash Available for Distribution
would be adversely affected. At this time, substantially all of the
Properties' leases are Triple Net Leases. See "--Risks Associated with
Borrowing, Including Loss of Properties in the Event of a Foreclosure."
CHANGES IN LAWS. Costs resulting from changes in real estate taxes
generally may be passed through to tenants and, to such extent, will not
affect the Company. Increases in income, service or transfer taxes, however,
generally are not passed through to tenants under the leases and may
adversely affect the Company's operating cash flow and its ability to make
distributions to shareholders. Similarly, changes in laws increasing the
potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions may result in
significant unanticipated expenditures, which would adversely affect the
Company's operating cash flow and its ability to make distributions to
shareholders.
IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the anticipated price per
Common Share in the Offering substantially exceeds the pro forma net tangible
book value per share immediately subsequent to the Offering. Accordingly, the
shareholders acquiring shares in the Offering will experience immediate and
substantial dilution of $ per share in the net tangible book
value of the Common Shares.
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
The Charter and Amended and Restated Bylaws (the "Bylaws") of the Company
contain a number of provisions, and the Board of Trust Managers has taken
certain actions, that could impede a change of control in the Company. The
Charter authorizes the Board of Trust Managers to create new classes and
series of securities and to establish the preferences and rights of any such
classes and series. See "Description of Capital Stock." The issuance of
securities by the Board of Trust Managers pursuant to this Charter provision
could have the effect of delaying or preventing a change of control of the
Company, even if a change of control were in the interest of some, or a
majority, of shareholders.
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES
Prior to the Offering, there has been no public market for the Common
Shares. Although the Common Shares are expected to be listed on the
Stock Exchange, there can be no assurance that an active trading market will
develop or be sustained or that investors in the Offering will be able to
resell their Common Shares at or above the initial public offering price.
The initial public offering price of the Common Shares was determined by
agreement among the Company and the Underwriters and may not be indicative of
the market price for the Common Shares after the Offering. See
"Underwriting."
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<PAGE>
COMPETITION
There are numerous commercial developers and real estate companies, many
of which may have greater financial and other resources than the Company,
that compete with the Company in seeking properties for acquisition and
identifying tenants who will lease space in these properties. There can be
no assurance of how well the Company will be able to successfully compete
with such entities in relation to its acquisition and leasing activities. In
addition, retailers at the Properties face increasing competition from outlet
malls, discount shopping clubs, catalog companies, direct mail and
telemarketing. This competition may affect the amount of percentage rent
retailers pay to the Company and their desire to renew their leases at the
Properties.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company must meet a number of highly technical and complex
requirements, described under "Federal Income Tax Considerations," to
maintain its status as a REIT under the Code. Failure to qualify as a REIT
would result in the taxation of the Company at corporate rates and loss of
pass-through tax treatment which would have a significant adverse effect on
the return to shareholders. Failure to qualify as a REIT under the Code
during a taxable year would generally render the Company ineligible to elect
REIT status again until the fifth subsequent taxable year. The Company will
not be required to make distributions to shareholders in the event that it
fails to qualify as a REIT under the Code and there can be no assurance that
the Company will continue to make distributions in such event. Transfers of
the Common Shares are subject to certain restrictions to protect the
Company's REIT status under the Code. In addition, the Company may be
subject to state or local taxes. No assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
change the tax laws with respect to qualification as a REIT, the federal
income tax consequences of such qualification or the application of state or
local taxes to the Company.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATE ON FINANCIAL POSITION AND
COMMON SHARE PRICE
One of the factors that may influence the price of the Company's shares
in public markets is the annual distribution rate on the Common Shares.
Thus, an increase in market interest rates may lead purchasers of Common
Shares to demand a higher annual distribution rate, which could adversely
affect the market price of the Common Shares. In addition, an increase in
the market rate of interest may increase interest expenses under any variable
rate indebtedness of the Company. After the Offering, the Company expects to
obtain a revolving credit line with variable rate interest. Although the
Company intends to purchase a collar or similar protection against
fluctuating interest rates, there can be no assurance that such collar or
similar arrangement will be available, or if available, at economically
feasible rates.
RISKS ASSOCIATED WITH BORROWING, INCLUDING LOSS OF PROPERTIES IN THE EVENT OF
A FORECLOSURE
At March 31, 1997, after giving effect to the Offering (assuming an
initial public offering price of $11.75 per Common Share), the Company would
have a ratio of long-term debt to Total Market Capitalization of
approximately 16.8%. Although the use of leverage may increase the Company's
rate of return on its investments and allow the Company to make more
investments than it otherwise would, the use of leverage also presents an
additional element of risk in the event that the cash flow from lease
payments on the Properties is insufficient to meet debt obligations, the
Company is unable to refinance its debt obligations as necessary or on as
favorable terms or there is an increase in interest rates. If a property is
mortgaged to secure payment of indebtedness and the Company is unable to meet
mortgage payments, the property could be lost through foreclosure with a
consequent loss of income and asset value to the Company.
ACQUISITION RISKS
The fact that the Company must distribute 95% of its taxable income in
order to maintain its qualification as a REIT will limit the ability of the
Company to rely upon income from operations or cash flow from operations to
finance new acquisitions. As a result, if permanent debt or equity financing
was not available on acceptable terms to finance acquisitions, then further
acquisitions might be limited or Cash Available for Distribution might be
adversely affected. Acquisitions entail risks that investments will fail to
perform in accordance with expectations and that judgments with
16
<PAGE>
respect to the costs of improvements to bring an acquired property up to
standards established for the market position intended for that property will
prove inaccurate, as well as general investment risks associated with any new
real estate investment.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
an owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The
costs of any required remediation or removal of such substances may be
substantial and the owner's liability therefor as to any property is
generally not limited under such laws, ordinances and regulations and could
exceed the value of the property. The presence of such substances, or the
failure to properly remediate such substances, may adversely affect the
owner's ability to sell the property or to borrow using real estate as
collateral. All of the Properties have been subject to Phase I environmental
audits (which involves inspection without soil sampling or ground water
analysis) by independent environmental consultants; however, only 3
properties have had Phase I audit reports prepared in the last two years.
Accordingly, environmental problems may have arisen on certain of the
Company's properties of which the Company has no knowledge. The existing
Phase I audit reports have not revealed any environmental liability, nor is
the Company aware of any environmental liability that the Company's
management believes would have a material adverse effect on the Company's
business, assets or results of operations, taken as a whole. No assurance,
however, can be given that these reports reveal all environmental liabilities
or that no prior owner created any material environmental condition not known
to the Company.
The Company believes that it is in compliance in all material respects
with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances, and neither the Company nor the Investment
Manager have been notified by any governmental authority of any
noncompliance, liability or other claim in connection with any of their
respective present or former properties.
UNINSURED LOSS AND CONDEMNATION
The Company carries comprehensive liability, fire, flood, extended
coverage and rental loss insurance with respect to the Properties with policy
specifications and insured limits customarily carried for similar properties.
There are, however, certain types of losses (such as from wars or
earthquakes) which may be either uninsurable or not economically insurable.
Should an uninsured loss occur, the Company could lose both its invested
capital in and anticipated profits from the property, and would continue to
be obligated to repay any mortgage indebtedness on the property, other than
non-recourse mortgage indebtedness. As of March 31, 1997, such non-recourse
mortgage indebtedness represented 100% of the Company's pro forma total
mortgage indebtedness.
Tenant leases may permit the tenant to terminate its lease in the event
of a substantial casualty or a taking by eminent domain of a substantial
portion of the property. Should any such event occur, the Company generally
will be compensated by insurance proceeds or a condemnation award. There can
be no assurance, however, that insurance proceeds, if available, or a
condemnation award, if given, will equal the value of the property or the
Company's investment in the property.
SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
market price of the Common Shares prevailing from time to time. Sales of
substantial amounts of Common Shares (including shares issued upon the
exercise of stock options), or the perception that such sales could occur,
could adversely affect prevailing market prices for the Common Shares.
Messrs. Scharar, Sandler and Jones have agreed not to offer, sell, contract
to sell or otherwise dispose of any Common Shares owned by them for a period
17
<PAGE>
of 180 days after the date of the Prospectus without the prior written
consent of the Underwriters. The Company has likewise agreed that for a
period of 90 days after the date of the Prospectus, without the consent of
the Underwriters, it will not issue any Common Shares or securities
convertible into Common Shares other than pursuant to the Plan (as defined
below).
RISK FOR INVESTORS SUBJECT TO ERISA
Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider whether the investment of plan assets in the
Common Shares satisfies the diversification requirements of ERISA, whether
the investment is prudent in light of possible limitations on the
marketability of the Common Shares, and whether such fiduciaries have
authority to acquire such Common Shares under their appropriate governing
instruments and Title I of ERISA. See "ERISA Considerations."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives
of management for future operations, including plans and objectives relating
to future growth of the property portfolio and availability of funds. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately and many of
which are beyond the control of the Company. Although the Company believes
that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
BUSINESS AND PROPERTIES
BUSINESS
The Company was formed for the purpose of investing directly in income
producing real property to be located in the continental United States and in
partnerships formed to own such real properties. The Company currently owns
fee title or controlling interest in eight shopping center properties located
in Texas, Tennessee and Arizona. The Properties are strategically located in
areas to provide busy working families with the opportunity to get most of
their shopping done between work and home. The Properties range in size from
approximately 29,000 square feet to 190,000 square feet, and are anchored
primarily by supermarkets and by national and regional retailers who offer
everyday necessities to their neighborhood communities. Randall's, which is
located in the Randall's/University Park Shopping Center, represents
approximately 13% of the Company's revenues. Any future property acquisitions
by the Company are expected to be in established neighborhoods in small to
medium-sized metropolitan communities, where potential future appreciation
will be driven by better than average population and employment growth. The
Company is currently in discussions with the owners of several neighborhood
shopping centers that it would like to acquire, but there can be no
assurances given that the Company will be able to acquire any additional
properties on favorable terms. The Company currently relies on local,
unaffiliated professional property managers and leasing agents to help the
Company manage its Properties. These local professionals are, or can be, on
site on a daily basis and are intimately familiar with the communities in
which the centers are situated and the needs of the tenants that these
centers serve.
The investments of the Company are managed by the Investment Manager.
Robert W. Scharar, the Company's Chairman of the Board, is a principal
shareholder of the Investment Manager. Since 1975, the Investment Manager,
or its predecessor in interest, has been registered with the Securities and
Exchange Commission as an investment advisory firm under the Investment
Advisers Act. The Investment Manager's senior management originally
sponsored the organization of the Company as a benefit to a number of clients
who had a desire to include real estate properties in their
18
<PAGE>
investment portfolios. The Investment Manager currently provides administrative,
accounting, financial, legal and operating personnel as well as asset management
to the Company on an "as-needed" basis together with office, communication and
other overhead services. See "Certain Relationships and Transactions."
The Company's principal investment objective is to maximize shareholder
returns based on funds available for distribution, which includes funds
provided from operations and, from time to time, realized from gains on the
sale of investments. To this end, the Company intends to invest, directly or
through wholly-owned subsidiaries, joint ventures and partnerships, in
existing retail shopping centers. In addition, the Company from time to time
may renovate and/or expand certain of its properties when management believes
such renovation or expansion adequately increase earnings and values. The
Company currently follows four general investment policies to achieve its
objective. First, the Company seeks to maintain investment flexibility in the
acquisition of real estate assets for long-term investment and income while
applying conservative selection criteria for the acquisition of such assets.
Second, the Company intends to aggressively seek acquisitions, and maintain
and intensively manage a portfolio of high quality, majority-leased and
well-located properties. Third, the Company plans to focus its acquisition
efforts in communities in which it already has properties or in areas where
the Company can acquire several properties concurrently in order to obtain
economies of scale in the use of local personnel, advertising and purchasing
of services. Finally, it is the policy of the Company to selectively sell
properties in order to realize capital gain and to improve the Company's
overall portfolio.
The Company's principal executive offices are located at 5847 San
Felipe, Suite 850, Houston, Texas 77057, and its telephone number is (713)
781-2860.
MANAGEMENT AND LEASING
The Company maintains operating flexibility while minimizing its
overhead expenses by using local third-party management and leasing firms to
handle the day-to-day activities of its centers. Under the direction of the
Company's executive officers, six property management firms currently perform
day-to-day on-site management functions at the Company's eight shopping
centers. The management contracts are typically cancelable upon 30 days'
notice or upon the occurrence of certain events, such as selling the
property. Company executives are in daily contact with local property
representatives and make all substantive management, capital expenditure and
tenant leasing decisions. The Company constantly monitors each property's
performance through its local representatives.
At its current size, the Company has the flexibility to select the best
available local firm or person who is familiar with the economies of each
tenant and the needs of each community served by its shopping centers. Such
selectivity is cost-effective for an entity the size of the Company. Because
the retail center management and leasing business is a highly competitive and
fragmented industry, the Company is able to select quality local third-party
management and leasing representatives at reasonably affordable prices.
The Company constantly monitors performance at each of its Properties as
well as the costs of retaining third-party representatives. Management
believes that as it acquires a concentration of retail centers in a limited
geographical area, it may become more cost effective and management efficient
to incorporate certain third-party functions in-house. This process has
already commenced with regard to certain lease renewal activities.
The Company's operating flexibility is expected to play an important
role in its ability to acquire additional retail centers. Many
owner-operators of well located and tenanted neighborhood centers are looking
for exit strategies. Management believes that if it offers certain senior
management of these neighborhood centers an opportunity to continue in
management positions, they will be willing to sell their retail centers to
the Company for a fair price. Where the exchange medium is, in part, Company
securities, or units in a Company operating partnership, the selling
owner-operator can control the timing of any tax burden that may be incurred
by reason of the sale.
The Company currently intends to restrict the timing of any resale of
the Company's securities by such former owners of its retail centers. Thus,
while continuing the management of their former retail centers, these former
owners will have a substantial interest in maximizing the performance of
their former properties.
19
<PAGE>
THE PROPERTIES
The Company's portfolio consists of eight retail properties. The
Properties are designed to meet the needs of surrounding local communities
and are anchored by supermarkets or by nationally and regionally recognized
credit tenants. The Properties are located in three states, including Texas,
Tennessee and Arizona.
The Properties contain approximately 742,000 square feet of total gross
leasable area, each of which is either owned by the Company or by a
partnership in which the Company has a controlling interest. Seven of the
Company's Properties are owned in fee. Park Northern is owned through a
long-term ground lease. The Company's three largest properties, Bandera
Shopping Center, Park Northern Shopping Center and McMinn Plaza Shopping
Center, account for approximately 25.5%, 15.7% and 13.5% of total gross
leasable area, respectively.
As of March 31, 1997, the Properties were approximately 93.3% leased.
Anchor space at the Properties, representing approximately 60% of total gross
leasable area, was 100% leased as of March 31, 1997, while non-anchor space,
accounting for the remaining 40% balance, was approximately 83% leased.
National, regional and local tenants represented 36.7%, 39.1% and 24.2% of
total leased area, respectively. Substantially all of the Company's income
from the Properties will consist of base rents and percentage rents
received under long-term leases, For the year ended December 31, 1996, total
base rents and percentage rents from the Properties were $4,097,911 and
$32,822, respectively.
The following tables present certain information with respect to the
Properties:
LOCATIONS OF THE PROPERTIES
Number of Total GLA Percentage of
State Properties (sq. ft.) Total GLA
- ----- ---------- --------- -------------
Texas 5 473,800 63.85%
Tennessee 2 151,625 20.43
Arizona 1 116,665 15.72
-- ------- ------
Total 8 742,090 100.00%
-- ------- ------
-- ------- ------
20
<PAGE>
Set forth below is information regarding the Properties as of March 31, 1997:
<TABLE>
Gross Total
Year Land Leasable Annualized
Property Location Developed Ownership Area (Acres) Area (sq. ft.) Base Rent(4)
-------- -------- --------- --------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Autobahn Shopping Center San Antonio, TX 1984 100% 2.4 28,878 $ 314,880
Bandera Shopping Center San Antonio, TX 1989 100 19.8 189,446 1,549,031
Centennial Shopping Center Austin, TX 1970 70(1) 6.3 80,492 600,407
El Campo Shopping Center El Campo, TX 1985 100 7.4 83,330 292,186
McMinn Plaza Shopping Center Athens, TN 1982 100 10.6 99,969 380,111
Park Northern Shopping Center Phoenix, AZ 1982 70(1) 15.0 116,665(3) 656,484
Twin Lakes Shopping Center Lenoir City, TN 1986 100 7.5 51,656 363,187
University Park Shopping Center College Station, TX 1991 56(2) 8.5 91,654 746,008
<CAPTION>
Avg. Base Annual
Rent per Percentage Anchor Tenant(s)
Property Square Foot Rent (5) Occupancy (Lease Expiration)
-------- ----------- ---------- --------- ------------------
<S> <C> <C> <C> <C>
Autobahn Shopping Center 10.9 -- 97.2% Blockbuster (2000)
Bandera Shopping Center 8.18 $15,550 98.5 Eckerd Drug (2008)
Kmart (2013)
Solo Serve (2004)
Centennial Shopping Center 7.46 -- 76.4 Drug Emporium (2001)
El Campo Shopping Center 3.51 -- 90.0 Stanley's Stores (2002)
McMinn Plaza Shopping Center 3.80 -- 94.4 Ingles (2002)
Walmart/Bud's (2002)
Park Northern Shopping Center 5.63 17,272 88.5 Walgreen's (2011)
Safeway (2003)
Twin Lakes Shopping Center 7.03 -- 100.0 Food City (2007)
University Park Shopping Center 8.14 -- 100.0 Randall's (2023)
</TABLE>
- -----------------
(1) Owned by Park Northern/Centennial Partners L.P., a Texas
limited partnership, in which the Company is the general
partner and owns 70% of the partnership interests.
(2) Owned by UIRT/University Park-I L.P., a Texas limited
partnership, in which the Company owns the 5% general
partner's interest through a corporate subsidiary and a 51%
interest as a limited partner.
(3) The gross leasable area does not include Safeway's current
expansion of its store by approximately 10,000 square feet,
which Safeway is building at its own expense, with a right
of set-off against percentage rent.
(4) Based on March 31, 1997 rent roll.
(5) Based on calendar year 1996.
The Properties are subject to regular maintenance activities, capital
expenditures, costs of repair and replacement and renovations and
refurbishing where necessary or appropriate, to preserve and enhance their
value. These activities usually include renovating existing facades,
installing uniform signage, repairing roofs, resurfacing parking lots and
increasing parking lot lighting. In addition to repair and maintenance costs
(which are expensed as incurred), the Company has budgeted approximately
$333,700 (net of tenant recoveries of approximately $91,000) for capital
improvements to the Properties in 1997.
21
<PAGE>
MAJOR TENANTS
The following table sets forth certain information as of March 31, 1997
with respect to certain of the Company's major tenants.
<TABLE>
Tenant Total % of Total
(Center % of Gross % of Total Gross Annualized Annualized
and Location) GLA Total GLA Annual Rent(1) Annual Rent Base Rents(2) Base Rents
------------- --- --------- -------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Blockbuster 12,356 1.7% $191,561 3.2% $146,789 3.0%
(Autobahn -
San Antonio, Texas)
Kmart 86,479 11.7 488,755 8.2 454,015 9.3
Solo Serve 30,000 4.0 286,800 4.8 213,900 4.4
(Bandera -
San Antonio, Texas)
Eckerd Drug 8,715 1.2 102,834 1.7 82,793 1.7
Drug Emporium 31,050 4.2 252,747 4.2 194,063 4.0
(Centennial -
Austin, Texas)
Stanley's Stores 30,195 4.1 104,113 1.7 78,000 1.6
(El Campo -
El Campo, Texas)
Walmart/Bud's 52,769 7.1 209,919 3.5 179,415 3.7
(McMinn -
Athens, Tennessee)
Ingles 27,200 3.7 128,028 2.1 108,000 2.2
Safeway 41,337(3) 5.6 284,458 4.7 184,363 3.8
Walgreen's 12,000 1.6 83,309 1.4 55,200 1.1
(Park Northern -
Phoenix, Arizona)
Food City 31,846 4.3 227,817 3.8 199,038 4.1
(Twin Lakes -
Lenoir City, Tennessee)
Randall's 80,478 10.8 817,416 13.6 601,013 12.3
(Randall's/University Park -
College Station, Texas)
</TABLE>
- -----------------
(1) Includes tenant reimbursements such as common area maintenance charges.
(2) Based on March 31, 1997 rent roll.
(3) Does not include approximately an additional 10,000 square feet under
construction by Safeway.
22
<PAGE>
The following chart shows a breakdown of base rents in place at March
31, 1997 and for each shopping center by type of retail tenant.
National Regional Local Total
---------- ---------- ---------- ----------
Autobahn $ 162,652 $ 112,533 $ 39,695 $ 314,880
Bandera 622,974 319,360 606,697 1,549,031
Centennial 177,156 210,863 212,389 600,407
El Campo 43,776 78,000 170,410 292,186
McMinn Plaza 191,415 116,400 72,296 380,111
Park Northern 268,363 81,661 306,460 656,484
Twin Lakes 11,400 199,038 152,750 363,187
University Park 0 682,079 63,929 746,008
---------- ---------- ---------- ----------
Total $1,477,736 $1,799,933 $1,624,626 $4,902,294
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
% of Total 30.1% 36.7% 33.1%
ADDITIONAL INFORMATION CONCERNING CERTAIN PROPERTIES
As of March 31, 1997, four of the Properties, Bandera Festival Shopping
Center, Centennial Shopping Center, Park Northern Shopping Center and
Randall's/University Park Shopping Center each had a book value equal to or
greater than 10% of the total assets of the Company or gross revenues equal
to or greater than 10% of the Company's aggregate gross revenues. Set forth
below is additional information with respect to such Properties.
BANDERA FESTIVAL SHOPPING CENTER
Bandera Festival is a 189,446 square foot shopping center located at the
northwest corner of Bandera Road and Guilbeau Road in northwest San Antonio,
Texas. The property consists of 19.8 acres. San Antonio is the home of
Kelly, Lackland and Randolph Air Force Bases, Fort Sam Houston and USAA
Insurance Company. The site offers excellent access, high visibility and a
traffic count of over 50,000 cars per day. The trade area supports a population
of approximately 198,500 within a five mile radius with an average household
income of approximately $45,000. Northwest San Antonio is the fastest growing
quadrant of the city. Bandera Festival was built in 1988. The center is one
story and constructed of concrete tilt walls with bar joists and a metal deck
with a built-up roof. The center is anchored by Kmart (86,479 square feet),
SoloServe (30,000 square feet), Eckerd Drugs (8,715 square feet) and
Blockbuster Video (6,000 square feet). McDonald's, Peter Piper Pizza and
Frost Bank are situated on outparcels adjacent to this Property. The Taco
Cabana site is a free-standing building within the shopping center and is
owned by the Company. Bandera has 27 tenants ranging in size from 975 square
feet to 86,479 square feet. The small tenants include a mix of national,
regional and local retail and service tenants. The center is currently 98.5%
occupied. Kmart and SoloServe are the only tenants occupying more than 10%
of the gross leasable area of the center. Kmart's lease expires October 31,
2013. The lease has ten 5-year renewal options. SoloServe's lease expires
June 31, 2004 with no renewal options.
CENTENNIAL SHOPPING CENTER
Centennial is a 80,492 square foot shopping center located in Austin,
Texas and is located on 6.31 acres. Austin, the capital of Texas, is home
to The University of Texas with approximately 50,000 students and over 400
technology companies. Centennial is located at the northeast corner of
Burnet Road and Greenlawn Parkway. Burnet Road has a traffic count of
over 30,000 cars daily. The trade area is north/central Austin, which is
considered an "in-fill" (i.e., a developed area with limited space available
for development by additional competition) location and
23
<PAGE>
supports a population of approximately 245,000 within a five mile radius.
Centennial is located approximately one mile from Northcross Mall.
Centennial was built in two phases. The original building, built in 1970,
was a Gibson's Discount center and contained 54,000 square feet. In 1984,
approximately 23,000 square feet of retail space was added along the north
boundary and extending from the original building toward Burnet Road. In
1986, a 3,155 square foot free-standing building was constructed at the
southwest corner of the site. The one story center is constructed of concrete
walls containing a brick veneer and glass store fronts. The original
building has a built-up roof. The addition has a corrugated metal roof. The
center is anchored by Drug Emporium (31,050 square feet) and Tuesday Morning
(23,493 square feet). Taco Bell is a free-standing building within the
shopping center and is owned by the Company. Additional revenue is received
from the parking lot that is leased in the evenings to an adjacent night
club. Centennial has 11 tenants ranging in size from 1,060 square feet to
31,050 square feet. The small tenants include a mix of regional and local
retail and service tenants. As of March 31, 1997, the center is 76.4%
occupied. Tenants occupying more than 10% of the gross leasable area of the
center are Drug Emporium and Tuesday Morning. Drug Emporium's lease expires
August 31, 2001 and includes three 5-year renewal options. Tuesday Morning
recently entered into a lease amendment which doubled its space. When the
lease term for the additional space commences, this retail center will be
90.9% occupied. The lease expires December 31, 2004. It has one 5-year
renewal option.
PARK NORTHERN SHOPPING CENTER
Park Northern is a 116,665 square foot shopping center located in
Phoenix, Arizona. The center was acquired in November 1996 by Park
Northern/Centennial Partners L.P., of which the Company is the general
partner and owns 70% of the limited partner interests. The shopping center
is located in the Glendale area, which is the northwest quadrant of Phoenix.
Park Northern is located at the northeast corner of Northern Avenue and
35th Avenue in North Phoenix on 14.9 acres. This is one of the busiest
intersections in the city of Phoenix with Northern Avenue the primary
east-west road into Glendale, Arizona, with an average daily traffic count of
over 70,000 cars. 35th Avenue is a major north-south artery with an
average daily traffic count of 70,000. This site is approximately one and
one-half miles from Metrocenter Mall, which is the largest mall in Arizona.
The center is also located one mile west of the Black Canyon Freeway (I-17),
which is the major interstate freeway through Phoenix.
The northwest area of Phoenix has seen tremendous growth over the past
ten years. Such growth includes openings for Arizona State University West
Campus and the American Graduate School of International Management.
Glendale Community College is also in the general vicinity and the Arrowhead
Ranch to the northwest has recently undergone substantial growth. The trade
area supports a population of approximately 400,000 within a five mile
radius.
The property is subject to a long term ground lease. Terms of the
ground lease are: $100,000 per year plus 5% of the base rent plus percentage
rent. The lease expires in November 2035 and has four 10-year renewal
options. The shopping center was built in 1982. The one story center is
constructed of concrete block with steel joists, stucco facade, aluminum
frames, glass store fronts and a built-up roof. The shopping center is
anchored by Safeway (41,337 square feet) and Walgreen's (12,000 square feet).
Safeway is currently expanding its store by approximately 10,000 square feet
at its own cost. The cost of the addition can be offset against future
percentage rents due, if any. Safeway's reimbursement of the shopping
center's common area maintenance expenses, taxes and insurance shall be
increased to reflect its higher prorata share of the leased premises. Long
John Silver's and Chuck E. Cheese's are free-standing buildings within the
shopping center and are owned by the Company. Bank One is situated on an
outparcel adjacent to the Property. The bank site is not owned by the
Company. Park Northern has 22 tenants ranging in size from 750 square feet
to 41,337 square feet. The small tenants include a mix of regional and local
retail and service tenants. The center is currently 88.5% occupied. The
only tenant occupying more than 10% of the gross leasable area of the center
is Safeway. Safeway's lease expires May 31, 2003. It includes eight 5-year
renewal options.
RANDALL'S/UNIVERSITY PARK SHOPPING CENTER
Randall's/University Park is a 91,654 square foot shopping center
located in College Station, Texas. The center is located at the northwest
corner of University Drive and Tarrow Drive. College Station is
approximately 100 miles northwest of Houston, Texas and is home to Texas A&M
University, which has an enrollment of over 40,000 students. The shopping
center is located approximately one mile east of the University.
Bryan/College Station is one
24
<PAGE>
of the fastest growing areas of Texas. University Drive has a traffic count
of over 35,000 cars daily. The trade area supports a population of
over 110,000 within a five mile radius. The property consists of 8.52 acres
excluding a 1.26 acre outparcel that the Company recently purchased. The
Company plans to commence development prior to the end of fiscal 1997 of an
approximate 13,000 square foot multi-tenant retail building on the site. It
is anticipated that construction will be completed during the first quarter
of 1998. The Company is in discussions with a national tenant which would
occupy approximately 60% of the proposed new building space. The shopping
center was built in 1991. The center currently consists of two one-story
buildings constructed of painted textured concrete tilt-up wall panels over
structured steel framing with glass store fronts and built-up roofs. The
shopping center is anchored by a Randall's (80,478 square feet).
Randall's/University Park has six tenants ranging in size from 1,168 square
feet to 80,478 square feet. The small tenants include a mix of regional and
local retail and service tenants. The center is currently 100% occupied. The
only tenant occupying more than 10% of the gross leasable area of the center
is Randall's. Randall's lease expires April 12, 2023. It has three 5-year
renewal options.
LEASES
The following table shows, as of March 31, 1997, certain information
with respect to the Company's leases, assuming that none of the tenants
exercise any renewal options and that none of the tenants' leases are
prematurely terminated. For 1996, approximately 1% of the Gross Receipts is
derived from percentage rent. In 1996, 1995 and 1994, the Company provided
tenant improvement allowances of $117,964, $202,939, and $60,052,
respectively. All such allowances are reflected in the base rents for such
properties. The Company anticipates providing such funds if to do so would
enable the Company to increase rent by an amount sufficient to provide the
Company with an acceptable rate of return on its investment.
<TABLE>
Annualized
Gross Leasable Area 1996 Base Rental Income
---------------------- ------------------------------
Lease No. of Leases Approximate Percent Percent Average/per
Expiration Expiring Sq. Feet of Total Amount of Total Sq. Foot
- ---------- ------------- ----------- -------- ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 19 31,948 4.6% $ 394,264 8.0% $12.34
1998 18 61,209 8.8 441,181 9.0 7.21
1999 18 50,368 7.3 441,350 9.0 8.76
2000 15 47,648 6.9 489,118 10.0 10.27
2001 14 63,093 9.1 545,052 11.1 8.64
2002 11 124,993 18.1 48,376 11.2 4.39
2003 4 47,229 6.8 52,699 5.2 5.35
2004 2 34,999 5.1 262,640 5.4 7.50
2005 0 0 0.0 0 0.0 --
2006 9 230,618 33.3 1,527,614 31.2 6.62
--- ------- ----- ---------- ----- ------
Total 110 692,105 100.0% $4,902,294 100.0% $ 7.08
--- ------- ----- ---------- ----- ------
--- ------- ----- ---------- ----- ------
</TABLE>
25
<PAGE>
Set forth below is information regarding capitalized tenant improvements
paid for by the Company at each of the Properties.
Tenant Improvements
-----------------------------
Property 1994 1995 1996
-------- ------- -------- --------
Autobahn $ 0 $ 0 $ 0
Bandera 44,630 94,074 97,187
Centennial 15,422 97,693 14,000
El Campo 0 0 0
McMinn 0 4,422 6,777
Park Northern 0 0 0
Twin Lakes 0 0 0
University Park 0 6,750 0
------- -------- --------
Totals $60,052 $202,939 $117,964
------- -------- --------
------- -------- --------
BANKRUPTCIES AND TENANT DELINQUENCIES
As of March 31, 1997, five tenants representing 2.7% of the total gross
leasable area of the properties were consistently delinquent with their rent.
Management expects two of these tenants to vacate and is actively seeking
replacement tenants. Management is not aware of any tenants that are currently
in bankruptcy.
MORTGAGE LOAN INDEBTEDNESS
The following table sets forth certain information regarding the mortgage
loan indebtedness of the Company as of March 31, 1997:
Projected
Annual
Interest Interest
Rate as Balance Payment Balance
of as of as Maturity Due at
Property 3/31/97 3/31/97 of 3/31/97 Dates(1) Maturity
-------- ------- ------- ---------- -------- --------
(in thousands)
Twin Lakes 9.00% $1,802 $162 05/10/05 $ 748
Autobahn Shopping 8.50 1,238 100 11/20/98 992
Centennial 9.00 3,770 338 09/25/98 3,731
Bandera Festival(2) 9.75 7,852 763 03/31/99 7,597
University Park 9.30 4,856 448 04/01/18 0
26
<PAGE>
Projected
Interest Annual
Rate as Balance Interest Balance
of as of Payment as Maturity Due at
Property 3/31/97 3/31/97 of 3/31/97 Dates(1) Maturity
-------- -------- ------- ---------- -------- --------
(in thousands)
McMinn Plaza 8.25% $ 427 $ 33 07/01/03 $ 0
McMinn Plaza 7.63 787 56 11/01/02 0
Centennial 9.00 26 2 03/25/98 0
Park Northern 8.37 2,786 231 11/19/06 1,952
El Campo 9.00 1,588 142 06/27/03 1,449
College Station 8.50 206 18 12/27/99 206
------- ------- -------
Total $25,338 $ 2,293 $16,675
------- ------- -------
------- ------- -------
- -------------------
(1) The mortgage loan secured by University Park Shopping Center is closed to
prepayment until May 2005 and can be prepaid thereafter with a penalty of
5%, 4%, 3%, 2%, and 1% in the next five years. The 7.625% mortgage loan
secured by McMinn Plaza Shopping Center is closed to prepayment until July,
1999 and can be prepaid thereafter with a penalty of 5%, 4%, 3%, 2%, and 1%
in the following years. The mortgage loan secured by Twin Lakes Shopping
Center can be prepaid prior to 5/10/00 by paying a penalty of 5%. After
May 10, 2000, the penalty declines annually by one percentage point per
annum. All of the other mortgage loans can be prepaid at any time, either
at par or subject to prepayment penalties calculated typically on a yield
maintenance basis.
(2) This mortgage loan requires one additional principal payment equal to 1/2%
of outstanding principal on 4/1/98.
(3) These mortgage loans can each be extended once for three years after the
due date. The Centennial mortgage loan extension calls for an increase in
the interest rate to 9.5% and a $100,000 principal payment on September 25,
1998. The El Campo mortgage loan extension requires a $150,000 principal
payment on June 27, 2003 and the payment of interest at the lesser of
Prime plus 1/2%, or 9% interest.
As of March 31, 1997, the Company's mortgage loan indebtedness consisted
of approximately $25.3 million, with each mortgage loan being secured by one
of the Properties. The Company's mortgage loan indebtedness bears interest rates
ranging from 7.63% to 9.75%, with a weighted average stated interest rate of
9.06% and a weighted maturity of 7.2 years.
All of the mortgage loans included in the above table, except the College
Station land loan, have fixed interest rates. Accordingly, 99.2% of the
Company's mortgage loan indebtedness have fixed interest rates.
OTHER DEBT
In 1996, the Company issued an aggregate $600,000 in notes bearing interest
at 11% per annum and maturing in 18 months. These notes are not secured and have
no renewal provisions. Management believes that, if necessary, it could obtain
an extension on the maturity date of the notes. It is anticipated that these
notes will be repaid from the proceeds of the Offering. See "Use of Proceeds."
As of March 31, 1997, the Company had $212,400 in Convertible Subordinated
Notes, Series 1992, that bear interest at 9.0% and mature on December 31, 2002.
These notes are not secured and can be converted into Common Shares on a
prescribed schedule.
27
<PAGE>
As of March 31, 1997, the Company had two unsecured Lines of Credit with
a total outstanding balance of $275,000. The first is a $100,000 Line of
Credit, with a balance of $100,000, that matures on May 5, 1998 and carries
interest at Prime (8.50% on March 31, 1997) plus 1.5%. The second is a
$200,000 Line of Credit, with a balance of $175,000, that matures in April
1998 and carries interest at Prime plus 0.5%.
RENTAL REVENUES
Substantially all of the income from the Properties consists of rent
received under long-term leases. In addition, the leases provide for payment
from tenants of a pro rata share of the real estate taxes, insurance,
utilities and common area maintenance of the property. Leases at the
Properties which provide for the payment of percentage rents represent 39% of
the total number of leases. Percentage rents represented approximately 1.0%
of gross rental revenue from the Properties, or approximately $33,000, for
the year ended December 31, 1996.
CAPITAL EXPENDITURES
The Company will incur capital expenditures in the ordinary course of
business in order to maintain the Properties. Such capital expenditures
typically include roof, parking lot and other structural repairs. A number of
leases specify that certain expenditures will be paid by the tenants.
Unreimbursed tenant related expenditures will be capitalized by the Company.
During 1994, 1995, and 1996, the Company paid approximately $263,757,
$239,136 and $161,063, respectively, for capital expenditures and tenant
improvements, net of tenant reimbursements, respectively. In 1994, the
Company expended approximately $200,000 for a new roof and HVAC system at one
of its properties and vacant space was finished out at a cost of $75,000. In
1995, the Company incurred expenses of $93,000 to build out the Tuesday
Morning space in the Centennial Shopping Center, and approximately $145,000
was expended to replace awnings at Autobahn and to build out One West Hills
(office building which was spun off to Ivy). By 1996, the major
rehabilitation programs at the Properties had been completed. Accordingly,
capital expenditures decreased 32.65% from the prior year. The Company has
budgeted $333,743 in 1997 for tenant improvements, net of tenant
reimbursements.
COMPETITION
All of the Properties are located in areas which have shopping centers
and other retail facilities. Generally, there are other neighborhood and
community shopping centers within close proximity to the Property. The amount
of rentable retail space in an area could have a material adverse effect on
the amount of rent charged by the Company and on the Company's ability to rent
vacant space and/or renew leases. There are numerous commercial developers,
real estate companies, REITs and major retailers that compete with the Company
in seeking properties for acquisition and tenants for properties, many of
which may have greater financial and other resources than the Company and may
have substantially more operating experience than that of the Company, its
officers and agents. There are numerous shopping facilities that compete
with the Properties in attracting retailers to lease space. In addition,
retailers at the Properties face increasing competition from outlet malls,
discount shopping clubs, catalog companies, direct mail and telemarketing.
LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor, to its
knowledge, is any litigation threatened against the Company or any of the
Properties, except for routine litigation arising in the ordinary course of
business which, in the opinion of the executive officers of the Company,
would not have a material adverse effect on the Company.
REGULATIONS AND INSURANCE
GENERAL. The Properties, as well as any other properties which the
Company may acquire in the future, are subject to various federal, state and
local laws, ordinances and regulations, including, among other things, zoning
regulations, land use controls, environmental controls relating to air and
water quality, noise pollution and indirect environmental impacts such as
increased motor vehicle activity. The Company believes that each Property
when acquired had all permits and approvals necessary under current law.
28
<PAGE>
INSURANCE. The Company believes that the Properties are covered by
adequate property and liability insurance provided by reputable, commercially
rated companies and with commercially reasonable deductibles and limits.
Management expects to maintain such insurance coverage and to obtain similar
coverage with respect to any additional properties acquired by the Company in
the near future. The Company has obtained or will obtain title insurance
relating to the Properties in an aggregate amount which the Company believes
to be adequate. See "Risk Factors--Uninsured Loss."
AMERICANS WITH DISABILITIES ACT. The Properties are subject to the
Americans with Disabilities Act of 1990 (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial
facilities" but generally requires that all public facilities be made
accessible to people with disabilities. The requirements became effective in
1992. Compliance with the ADA requirements could require removal of access
barriers and other capital improvements at the Properties. Noncompliance
could result in the imposition of fines by the U.S. government or an award of
damages to private litigants. The Company believes that the Properties are
substantially in compliance with these requirements.
ENVIRONMENTAL MATTERS
Under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), as well as similar state and
local laws, owners and operators of property, both past and present, may be
held financially responsible for the investigation and, if appropriate, the
remediation of hazardous substance releases into the environment. Other
parties who arranged for the disposition of hazardous substances or
transported hazardous substances for disposition also may be held liable.
Liability under CERCLA and similar laws is strict, joint and several and, in
many instances, may be imposed without regard to the party's culpability
concerning the hazardous substance release. Potentially responsible parties
may be liable to one another, the government and, in some instances, third
parties.
Costs recoverable under CERCLA must be consistent with the National
Contingency Plan. The National Contingency Plan establishes a procedure
whereby contaminated properties are identified and, if necessary, remediated
in a priority fashion. If conducted in the appropriate manner, these costs
will include, but may not be limited to, funds expended to investigate and to
remediate hazardous substance releases. Costs associated with any such
environmental activity may be substantial.
Phase I environmental assessments have been conducted on all of the
Properties. Only three of these reports have been prepared in the past two
years. See "Risk Factors -- Environmental Matters.". The purpose of Phase I
environmental assessments was to determine if past or present uses of, or
conditions on, the Properties or properties in the vicinity of the
Properties, indicate the potential for soil or groundwater contamination or
if other environmental conditions might affect future uses of the Properties
or liability associated therewith. Phase I environmental assessments
generally included the following: visual inspection of the property, review
of available land use records, interviews with the property representatives;
examination of information from environmental agencies; and a walk-through
survey for suspected asbestos and lead-containing materials. As may be
required by any applicable federal, state or local laws, the Company has
addressed or will address any recommendations contained in the Phase I
environmental assessment reports.
None of the reports from the Phase I environmental assessments or
subsequent investigations has revealed, nor is the Company or the Investment
Manager aware of, any environmental condition that the Company believes would
have a material adverse effect on the Company's business, assets or results
of operations. The Company and the Investment Manager believe that the
Properties are in compliance in all material respects with applicable
federal, state and local laws, ordinances and regulations concerning the
presence of hazardous substances. Neither the Company nor the Investment
Manager has been notified by any governmental authority, and is not otherwise
aware, of any material noncompliance, liability or claim relating to
hazardous substances in connection with any of its Properties. It is
possible, however, that the Phase I environmental assessments and subsequent
investigations do not reveal all environmental liability concerns or that
there are material environmental liabilities of which the Company is unaware.
Accordingly, no assurance can be given that: (i) future laws, ordinances or
regulations will not require or impose any material expenditures or
liabilities in connection with the environmental conditions by or on the
Company or the Properties: (ii) the current environmental condition of each
Property will not be affected by tenants and occupants of such Property, by
the condition of properties in the vicinity of such Property or by third
parties unrelated to the Company; and (iii) prior owners or prior or current
tenants of a Property did not create any material adverse environmental
condition of which the Company or the Investment Manager is unaware.
29
<PAGE>
SUPPLEMENTAL PROPERTY INFORMATION
For additional information regarding the Properties that accounted for
more than 10% of the Company's aggregate gross revenues for the year ended
December 31, 1996, see "Appendix A" at page A-1.
STRATEGY FOR FUTURE GROWTH
The Company will seek to maximize growth in Cash Available for
Distribution and enhance the value of its portfolio through effective
acquisition, operation, rehabilitation and financing strategies as well as
intensive management policies. With the proceeds from the Offering remaining
after debt repayment, the Company intends to implement an aggressive
acquisition program to acquire high quality and well-located shopping
centers. The Company will seek to acquire such properties at costs less than
the cost of new construction with substantial potential for cash flow growth
and capital appreciation. The Company believes that attractive opportunities
exist to increase rental revenues and Cash Available for Distribution through
effective leasing and intensive management of the Properties in its
portfolio. The Company's operating, acquisition and financing strategies and
management policies are determined by the Company's Board of Trust Managers
and implemented by the executive officers and other key employees of the
Investment Manager and may be amended or revised from time to time at the
discretion of the Board of Trust Managers without a vote of the shareholders
of the Company.
GROWTH STRATEGY
ACQUISITIONS
The Company believes that opportunities to acquire existing shopping
centers and other retail properties are and will continue to exist for
buyers, such as the Company, with access to the capital markets. The
Company's primary investment objective is to acquire well-located shopping
centers anchored by supermarkets and other national and regional
credit-worthy tenants with long-term leases. The Company's emphasis will be
on other retail properties with strong prospects for future cash flow growth
and capital appreciation, or on retail properties where significant
redevelopment opportunities exist. In evaluating the potential acquisition of
any property, management considers a variety of factors such as (i) the
location, visibility and accessibility of the property, (ii) the demographic
characteristics of the local market, including potential for growth, (iii)
the size of the property, (iv) the purchase price, (v) the availability of
funds or other consideration for the proposed acquisition and the cost
thereof, (vi) the geographic "fit" of the property with the Company's
existing portfolio, (vii) the existence of environmental problems, if any,
(viii) the current and projected cash flow of the property and the ability to
increase cash flow, (ix) the terms of the leases, including the potential for
rent increases, (x) the quality of construction, physical condition and
design of the property, and (xi) the terms of existing financing on the
property.
Although the Company is not currently entirely self-managed, the Company
nonetheless believes that it can compete effectively with other shopping
center operators in its peer group with respect to future acquisitions. It
has been management's experience that many retail center owners with an
interest in selling their properties wish to maintain an active roll in the
management of their centers. Management believes that many of the Company's
competitors have no interest in or capacity for retaining the management
services of the persons who control the assets that such competitors wish to
acquire. The Company is prepared to allow certain qualified senior management
to continue the management of their former assets if such persons can be
retained on terms satisfactory to the Company. The Company believes that its
ability to retain such managers will facilitate access to additional
acquisitions, integration of future property acquisitions, and retention of
the existing goodwill resulting from the long-term tenant relations and
community involvement of such managers.
Initially, the Company will concentrate its acquisition activities on
communities in which it already has properties or where the Company can
acquire several properties in order to obtain economies of scale in the use
of local personnel, advertising and purchasing of services locally. The
Company believes that its strategy to anchor its shopping centers with
supermarkets and other national and regional credit tenants under long-term
leases will continue to support stable cash flows from the Properties.
30
<PAGE>
REDEVELOPMENT
Redevelopment activities have been an integral part of the Company's
business strategy and will continue to be an important component of its
strategy in the future. Redevelopment activities generally involve
physically upgrading an existing retail facility in order to meet current
industry standards as well as to accommodate the expansion of existing
tenants and/or the placement of additional tenants. The Company has
significant experience in all phases of the redevelopment process.
OPERATING STRATEGY
The Company believes in an aggressive leasing and property management
strategy conducted by professionals with extensive experience, knowledge of
local markets and an established track record with national, regional and
local retailers. All of the Company's leasing and property management
activities are conducted by Company officers and by local leasing and
property managers retained and supervised by the Company's officers. The
Company believes that the expertise and relationships developed by such
people enhance the Company's ability to retain existing tenants as well as
attract national and regional retailers to its Properties.
The Company's overall property management and leasing strategy is
designed to permit the Company to realize significant opportunities for
increased rental revenue and cash flow growth. Each Property has a specific
management and leasing program which takes into account the location,
community needs, tenant mix and other factors affecting such Property. Key
elements of the Company's strategy include:
- TENANTS. The Company will maintain and expand its core base of
national and regional credit-worthy tenants. The Company will
attempt to specifically tailor the tenant mix at each Property to
meet the needs of the local communities and will continue to focus
its anchorage at each Property on supermarkets and on other
recognized national and regional tenants.
- LEASE RENEWALS/EXTENSIONS. Company officers and property managers
(under the direction of Company officers) will aggressively seek to
renew or extend existing leases with increased rental rates to the
extent allowed by lease and market conditions. The Company believes
that a number of its leases currently are below market rents and that
opportunities may exist in the future to renew those leases at higher
base rents upon expiration.
- PROPERTY MANAGEMENT. The Company seeks to maintain attractive
facilities through regularly scheduled inspection visits and
maintenance programs for each Property. The Company expects to
continue such programs and will budget annually what management
considers to be appropriate maintenance expenditures. The local
property managers will implement designated repairs and improvements,
which the Company's officers will regularly inspect. The Company
believes that such hands-on property management enhances the value
of its Properties in the eyes of its tenants and attracts new tenants
to its Properties.
- PROPERTY SALES. The Company may, from time to time, sell properties
at advantageous prices, depending on prevailing market conditions and
subject to certain limitations relating to the Company's taxation as
a REIT. The Company currently has no plans to sell any of the
Properties.
ACQUISITIONS
The Company believes that opportunities to acquire existing shopping
centers and other retail properties are and will continue to exist for
buyers, such as the Company, with access to the capital markets. The
Company's primary investment objective is to acquire well located shopping
centers anchored by supermarkets and other national and regional
credit-worthy tenants with long-term leases. The Company's emphasis will be
on other retail properties with strong prospects for future cash flow growth
and capital appreciation, or on retail properties where significant
redevelopment opportunities exist. In addition, the Company expects to
utilize the services and expertise of certain qualified senior managers of
retail properties acquired by the Company. The Company believes that its
intention and
31
<PAGE>
ability to continue such qualified management personnel in the management of
their former assets will facilitate the Company's acquisitions, and to a
lesser extent, its development strategies.
Initially, the Company will concentrate its acquisition activities on
communities in which it already has properties or where the Company can
acquire several properties in order to obtain economies of scale in the use
of local personnel, advertising and purchasing of services locally. The
Company believes that its strategy to anchor its shopping centers with
supermarkets and other national and regional credit tenants under long-term
leases will continue to support stable cash flows from the Properties.
REDEVELOPMENT
Redevelopment activities have been an integral part of the Company's
business strategy and will continue to be an important component of its
strategy in the future. Redevelopment activities generally involve physically
upgrading an existing retail facility in order to meet current industry
standards as well as to accommodate the expansion of existing tenants and/or
the placement of additional tenants. The Company's officers have significant
experience in all phases of the redevelopment process.
FINANCING
In order to most effectively pursue its acquisition, redevelopment and
operating strategies, the Company intends to maintain a capital structure with
a ratio of long-term debt to Total Market Capitalization of no more than
approximately 50%. On a pro forma basis at March 31, 1997, after giving effect
to the Offering (assuming an initial public offering price of $11.75 per
Common Share) and the application of the estimated net proceeds, the Company
would have had a long-term debt to Total Market Capitalization ratio of
approximately 16.8%. The Company, however, may from time to time increase or
decrease its ratio of long-term debt to Total Market Capitalization in light
of then current economic conditions, relative costs of debt and equity
capital, the market values of its properties, growth and acquisition
opportunities and other factors. Fluctuations in the market price of the
Common Shares may cause this ratio to vary from time to time. The Company has
established its financing policies relative to the Total Market Capitalization
of the Company rather than relative to the book value of the Company's assets.
The Company has used market capitalization because management believes that
the book value of the Company's assets does not accurately reflect the fair
market value of such assets or the Company's ability to borrow and to meet
debt service requirements. The market capitalization of the Company, however,
is more variable than book value, and does not necessarily reflect the fair
market value of the underlying assets of the Company at all times. Although
the Company will consider factors other than market capitalization in making
decisions regarding the incurrence of debt (such as the purchase price of
properties to be acquired with debt financing, the estimated market value of
properties upon refinancing, and the ability of particular properties and the
Company as a whole to generate cash flow to cover expected debt service), no
assurance can be given that the ratio of long-term debt to Total Market
Capitalization (or to any other measure of asset value) will be consistent
with the expected initial level of distribution to shareholders. The Company
intends to avoid exposure to long-term variable rate debt by utilizing either
fixed-rate debt or entering into interest rate protection agreements.
The Company intends to finance its acquisitions and redevelopments with
what it considers to be the most appropriate sources of capital, which may
include undistributed cash available for distribution, the issuance of equity
securities (including preferred shares), sales of investments, bank and other
institutional borrowings secured and unsecured and the issuance of debt
securities.
32
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of Common Shares in
the Offering, after payment of expenses, are estimated to be approximately
$32,782,500. The Company expects to use the net proceeds of the Offering to
reduce indebtedness, purchase minority interests in existing shopping
centers, develop existing shopping centers and acquire new shopping center
properties. The net proceeds of the Offering will be used as follows:
AMOUNT
Repay existing mortgage indebtedness, including
prepayment penalties..................................... $16,588,200
Repay short term notes payable and lines of credit......... 875,000
Purchase minority interests in University Park centers..... 928,000
Develop existing outparcels and shopping center upgrades... 1,690,000
Working Capital and Acquisitions........................... 12,701,300
-----------
Total net proceeds..................................... $32,782,500
-----------
-----------
The Company will use proceeds to repay certain mortgage and other indebtedness
relating to the Properties (including prepayment penalties on the Properties)
aggregating $16,588,200. It is anticipated that the following indebtedness will
be repaid:
<TABLE>
Amount of Indebtedness
Property Securing (Including prepayment Contractual Year of
Indebtedness penalties as of March 31, 1997) Interest Rate Maturity
- ----------------- ------------------------------- ------------- --------
<S> <C> <C> <C>
Twin Lakes Shopping Center....................... $ 1,892,000 9.00% 05/10/05
Autobahn Shopping Center......................... 1,275,000 8.50 11/30/98
Centennial Shopping Center....................... 3,770,000 9.00 09/25/98
Bandera Festival Shopping Center................. 8,063,200 9.75 03/31/99
El Campo Shopping Center......................... 1,588,000 9.00 06/27/03
-----------
Total........................................ $16,588,200(1)
-----------
-----------
</TABLE>
- -------------------
(1) Of this amount, approximately $338,000 represents prepayment penalties.
During the past 12 months, $600,000 in new, unsecured 11% short term notes
were issued and existing lines of credit were expanded to $275,000 to facilitate
the purchase of the El Campo and Park Northern Shopping Centers. It is
anticipated that these amounts will be repaid from the Offering proceeds.
The amount required to purchase the minority interest in University Park
Shopping Center is $928,000. The University Park partnership agreement
specifies the buy-out formula while the Park Northern/Centennial agreement is
silent on the subject and will have to be negotiated.
DIVIDENDS AND DISTRIBUTIONS POLICY
GENERAL
Initially, the Company intends to pay regular quarterly dividends to its
shareholders of $0.26 per share; $1.04 per share on an annualized basis. This
would represent an annual dividend rate of %, based on the assumed
public offering price of $ per share. The Company intends to pay a
dividend for the fourth quarter of 1997, prorated if the Offering is completed
in such quarter. The dividend rate was established based on an estimate of Cash
Available for Distribution after the Offering under present conditions. The
Company does not expect to change its estimated dividend rate if the
Underwriter's over-allotment option is exercised.
The Company's intended initial dividend is based upon an estimate of Cash
Available for Distribution that will be available for distributions after the
Offering under present conditions. This estimate has been based upon pro forma
1997 Cash Available for Distribution with certain adjustments based on the
assumptions described below. Prior to the consummation of this Offering, the
Company plans to distribute to its existing shareholders, as a distribution in
kind,
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<PAGE>
the remaining 333,759 shares of Ivy common shares held by the Company. The
first cash dividend after the completion of the Offering, in the amount of
$0.26 per Common Share, to be prorated if the Offering is completed during
the fourth quarter of 1997, is expected to be paid on January 27, 1998 to
record holders on January 5, 1998.
In order to maintain its qualification as a REIT, the Company must, among
other things, make an annual distribution to shareholders of at least 95% of its
REIT taxable income (which does not include capital gains). Under certain
circumstances, the Company may be required to make distributions in excess of
Cash Available for Distribution in order to meet such distribution requirements.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to shareholders as ordinary dividend income. Distributions in excess of
earnings and profits will generally be treated as a non-taxable reduction of the
shareholder's basis in the Common Shares to the extent thereof, and thereafter
as taxable gain. Distributions that are treated as a reduction of the holder's
basis in the Common Shares will have the effect of deferring taxation until the
sale of the shareholder's Common Shares. See "Federal Income Tax
Considerations."
The Company believes that its estimate of cash flow that will be available
for distributions constitutes a reasonable basis for setting the initial
dividend, and the Company expects to maintain its initial distribution rate for
the 12 months following the closing of the Offering, unless actual results of
operations, economic conditions or other factors differ materially from the
assumptions used in the estimate. The actual return that the Company will
realize will be affected by a number of factors, including the revenues received
from rental properties, the operating expenses of the Company, the interest
expense incurred in its borrowings, the ability of tenants to meet their
obligations to the Company and unanticipated capital expenditures. No assurance
can be given that the Company's estimate will prove accurate. Distributions in
subsequent years will be impacted by the Company's investing and financing
strategies. In particular, the Company expects to initially finance certain
acquisitions and redevelopments through borrowings. As a result, the Company's
need to repay and/or refinance such indebtedness may adversely effect its
ability to make future distributions.
Future dividends by the Company will be at the discretion of the Board of
Trust Managers and will depend on the actual cash flow of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code (see "Federal Income Tax Considerations --
Taxation of the Company -- Annual Distribution Requirements") and such other
factors as the Board of Trust Managers deems relevant. The Company anticipates
that distributions will be paid from Cash Available for Distribution, which will
be affected by a number of factors, including: (i) changes in rent attributable
to the renewal of existing leases or replacement leases; (ii) operating expenses
and capital expenditures requirements; and (iii) debt service requirements. For
a discussion of the tax treatment of distributions to the shareholders, see
"Federal Income Tax Considerations -- Taxation of Shareholders" and
" -- Taxation for Foreign Shareholders."
Dividends to shareholders of the Company for 1996 and 1995 consisted of a
distribution in kind of Ivy common shares of $0.40 and $0.20 per share,
respectively.
DIVIDEND REINVESTMENT PLAN
The Company intends to implement a Dividend Reinvestment Plan (the "DRIP")
upon consummation of the Offering. Pursuant to the DRIP, a shareholder whose
Common Shares are registered in his or her own name may elect to have all
dividends reinvested automatically in additional Common Shares by contacting
(the "Plan Agent"). The Company may place limitations
on participation in the DRIP to assure the maintenance of its REIT status. See
"Federal Income Tax Considerations." Shareholders whose Common Shares are held
in the name of a nominee may have dividends reinvested automatically by the
nominee in additional Common Shares under the DRIP, but only to the extent the
nominee participates on his or her behalf. Shareholders whose Common Shares are
held in the name of a nominee should contact the nominee for details. All
dividends to investors who do not participate (or whose nominee does not
participate) in the DRIP will be paid by check mailed directly to the record
holder by or under the direction of the Plan Agent.
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<PAGE>
The Plan Agent will promptly apply a DRIP participant's dividends to the
purchase of newly issued Common Shares from the Company. The purchase price per
share of Common Shares purchased from the Company will be 95% of the closing
price for Common Shares on the open market on the dividend payment date. The
number of Common Shares to be received by the DRIP participants of record on the
record date for the payment of the Company's dividends on account of the
dividend will be calculated on the basis of the open market price of the Common
Shares on the dividend payment date and will be credited to their accounts as of
the payment date of the dividend.
The Plan Agent will maintain all shareholder accounts in the DRIP and will
furnish written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Certificates
for the shares will be held in the name of the Plan Agent and will be issued to
a DRIP participant upon written request. There will be no charge to
participants for reinvesting dividends and capital gains distributions.
The DRIP also permits participants to purchase Common Shares thereunder by
making voluntary cash payments to the Plan Agent in amounts of not less than
$100 or more than $10,000 per calendar quarter. These optional cash payments
will be applied to acquire Common Shares from the Company on the same terms as
the reinvestment of dividends.
The automatic reinvestment of dividends will not relieve participants of
any income tax which may be payable on distributions.
Experience under the DRIP may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the DRIP on
written notice to participants in the DRIP. The Company may also amend or
terminate the DRIP without notice if necessary to preserve the Company's REIT
status. All correspondence concerning the DRIP should be directed to the
Company.
The Company has reserved 1,000,000 Common Shares for issuance pursuant to
the DRIP.
CAPITALIZATION
The following table sets forth, as of March 31, 1997, the consolidated
capitalization of the Company. The information set forth in the following table
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this Prospectus, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
<TABLE>
March 31, 1997(1) As Adjusted
----------------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Mortgage Notes Payable (2)..................................... $25,339 $ 9,088
Short Term Notes and Lines of Credit........................... 875 0
Redeemable Convertible Subordinated Notes...................... 212 212
Minority interest in real estate joint ventures................ 1,320 652
Redeemable Preferred Shares, no par value, 20,000 shares
designated at $100 par value; 10,737 shares issued and
outstanding................................................ 1,068 1,068
Common shareholders' equity:
Common Shares of Beneficial Interest, no par value, 837,489
shares issued and outstanding.............................. 7,598 40,381(3)
Accumulated deficit............................................ (86) (425)
------- -------
Total common shareholders' equity.............................. 7,512 39,956
------- -------
Total Capitalization........................................... $36,326 $50,976
------- -------
------- -------
</TABLE>
- -------------------
(1) Reflects capitalization of the Company as of March 31, 1997.
35
<PAGE>
(2) Assumes the prepayment of the mortgages at Twin Lakes Shopping Center,
Autobahn Shopping Center, Centennial Shopping Center, Bandera Festival
Shopping Centers and El Campo Shopping Center with a portion of the
proceeds of the Offering.
(3) Includes the offering of 3,000,000 Common Shares at the assumed offering
price per share of $11.75, less offering expenses of 7%. Assumes the
underwriters' over-allotment option to purchase up to 450,000 Common Shares
is not exercised. Includes 44,000 Common Shares to be awarded to the
Investment Manager and 2,000 Common Shares to be awarded to each of the
three independent Trust Managers in connection with but immediately prior
to the Offering. Does not include 200,000 shares issuable upon exercise of
options to be granted pursuant to the Plan which will be effective upon the
completion of the Offering. Does not assume the conversion of any
convertible notes, convertible preferred shares or minority interests into
Common Shares.
DILUTION
At March 31, 1997, the pro forma net tangible book value of the Company
immediately prior to the Offering would have been $ or $ per
Common Share. After giving effect to the sale by the Company of the Common
Shares offered thereby, the pro forma net tangible book value of the Company
at March 31, 1997 would have been $ or $ per Common Share.
This represents an immediate decrease in the net tangible book value per
Common Share to purchasers of Common Shares in the Offering. Net tangible
book value per Common Share represents the amount of total tangible assets of
the Company less total liabilities, divided by the number of Common Shares
outstanding. The following table illustrates the foregoing dilution.
Initial public offering price per Common Share (1)... $
Increase in net tangible book value per Common
Share attributable to the Offering............... $
Pro forma net tangible book value per Common
Share after the Offering......................... $
Dilution per Common Share to new public investors.... $
- -------------------
(1) Before deduction of underwriting discounts and estimated expenses of the
Offering.
The following table sets forth the number of Common Shares to be sold by
the Company in the Offering, the total price paid by purchasers of the Common
Shares sold in the Offering, the net book value as of March 31, 1997
attributable to the outstanding restricted shares and the price per share sold
in the Offering.
<TABLE>
Book Value of
Shares issued Book Value of Total Consideration Per
by the Company Consideration to the Company Common Share
----------------- ---------------------------- -----------------
Number Percent Amount Percent
------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Current Shareholder.... 837,489 % $ % $
New public investor....
------- ----- ------ -----
Total.................. 100.0% $ 100.0%
------- ----- ------ -----
------- ----- ------ -----
</TABLE>
36
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected consolidated financial information should be read in
conjunction with the discussion set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and all of the
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
Three Months ended March 31, Year ended December 31,
--------------------------------------- ---------------------------------------
Pro Forma Pro Forma
1997 1997 1996 1996 1996 1995
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Base rents (1)(3) $ 1,215,752 $ 1,215,752 $ 962,663 $4,097,911 $ 4,097,911 $ 4,389,491
Percentage rents 6,600 6,600 8,206 32,822 32,822 --
Expense reimbursements 273,868 273,868 193,952 835,940 835,940 848,975
Interest and other income 8,476 8,476 13,106 67,409 67,409 44,224
----------- ----------- ----------- ---------- ----------- -----------
Total revenues 1,504,696 1,504,696 1,177,927 5,034,082 5,034,082 5,282,690
----------- ----------- ----------- ---------- ----------- -----------
Expenses:
Operating and maintenance 130,561 130,561 90,419 442,701 442,701 662,687
Real estate taxes 188,566 188,566 131,165 558,000 558,000 569,634
General and administrative 197,822 197,822 143,275 642,944 642,944 657,466
Interest 207,434 611,203 504,277 609,102 2,132,390 2,177,447
Depreciation and amortization 300,666 284,416 221,235 1,023,778 958,778 960,876
----------- ----------- ----------- ---------- ----------- -----------
Total expenses 1,025,049 1,412,568 1,090,371 3,276,525 4,734,813 5,028,110
----------- ----------- ----------- ---------- ----------- -----------
Income before gain on sale of
investment real estate, minority
interest and preferred
share dividend requirements 479,647 92,128 87,556 1,757,557 299,269 254,580
Gain on sale of investment
real estate -- -- 6,760 240,000 240,000 25,020
----------- ----------- ----------- ---------- ----------- -----------
Income before minority interest and
preferred share requirements 479,647 92,128 94,316 1,997,557 539,269 279,600
Minority interest in net income of
real estate ventures (1,264) (9,070) (10,645) (2,417) (51,941) (43,278)
----------- ----------- ----------- ---------- ----------- -----------
Income before preferred
share dividend requirements 478,383 83,058 83,671 1,995,140 487,328 236,322
Preferred share dividend
requirements (24,158) (24,158) (23,822) (96,296) (96,296) (43,618)
----------- ----------- ----------- ---------- ----------- -----------
Net income (loss) available for
common shareholders $ 454,225 $ 58,900 $ 59,849 $1,898,844 $ 391,032 $ 192,704
=========== =========== =========== ========== =========== ===========
Net income (loss) per common
share (2) $ 0.16 $ 0.07 $ 0.07 $ 0.68 $ 0.44 $ 0.22
=========== =========== =========== ========== =========== ===========
Weighted average shares outstanding 2,806,489 887,489 884,397 2,803,665 884,655 884,397
=========== =========== =========== ========== =========== ===========
Cash dividends per common share (4) -- -- -- --
=========== =========== ========== =========== ===========
BALANCE SHEET INFORMATION
Rental properties, gross $41,357,860 $39,408,381 $32,546,492 $39,368,700 $34,236,932
Total assets 51,711,158 37,060,379 31,005,633 37,242,544 32,532,204
Mortgage and other notes payable 9,300,924 26,426,124 21,646,424 26,542,992 22,484,845
Total liabilities 10,035,058 27,160,258 22,160,654 27,406,859 23,407,145
Minority interests 651,688 1,320,209 693,816 1,314,673 699,984
Preferred stock 1,068,226 1,068,226 1,068,226 1,068,226 1,068,226
Common shareholders' equity 39,956,186 7,511,686 7,082,937 7,452,786 7,356,849
<CAPTION>
Year ended December 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C>
OPERATING INFORMATION:
Revenues:
Base rents (1)(3) $ 3,794,711 $ 3,194,084 $ 2,325,950
Percentage rents -- -- --
Expense reimbursements 844,299 622,164 477,188
Interest and other income 10,344 13,886 30,436
----------- ----------- -----------
Total revenues 4,649,354 3,830,134 2,833,574
----------- ----------- -----------
Expenses:
Operating and
maintenance 445,635 355,276 225,316
Real estate taxes 512,070 437,679 335,526
General and administrative 507,137 442,459 430,071
Interest 2,101,762 1,923,640 1,470,975
Depreciation and amortization 756,914 631,567 456,214
----------- ----------- -----------
Total expenses 4,323,518 3,790,621 2,918,102
----------- ----------- -----------
Income before gain on sale of
investment real estate, minority
interest and preferred
share dividend requirements 325,836 39,513 (84,528)
Gain on sale of investment
real estate -- -- --
----------- ----------- -----------
Income before minority interest and
preferred share requirements 325,836 39,513 (84,528)
Minority interest in net income of
real estate ventures (48,435) (31,084) 1,359
----------- ----------- -----------
Income before preferred
share dividend requirements 277,401 $ 8,429 $ (83,169)
Preferred share dividend
requirements -- $ -- $ --
----------- ----------- -----------
Net income (loss) available for
common shareholders $ 277,401 $ 8,429 $ (83,169)
=========== =========== ===========
Net income (loss) per common
share (2) $ 0.35 $ 0.01 $ (0.13)
=========== =========== ===========
Weighted average shares outstanding 802,899 720,725 640,782
=========== =========== ===========
Cash dividends per common share (4) $ 0.40 $ 0.39 $ 0.38
=========== =========== ===========
BALANCE SHEET INFORMATION
Rental properties, gross $33,852,975 $29,349,299 $22,268,417
Total assets 32,702,850 28,773,597 22,148,861
Mortgage and other notes payable 23,826,831 21,690,375 16,347,640
Total liabilities 24,647,866 22,381,487 16,927,667
Minority interests 794,730 813,578 69,600
Preferred stock -- -- --
Common shareholders' equity 7,260,254 5,578,532 5,151,594
</TABLE>
- -----------------
(1) Base rent was lower in 1996 as a result of the spin-off of the One West
Hills office building on January 1, 1996.
(2) Net income per share is the result of dividing net income available for
common shareholders by the weighted average shares outstanding. For each
historical period shown, the weighted average shares outstanding have been
increased by 50,000 shares to reflect the planned 1997 share awards under
the Plan.
(3) During 1997, the Company changed its method of accounting for certain
rental revenues to when earned versus when received and certain expenses
to when incurred versus when paid. See note 10 in the Consolidated
Financial Statements.
(4) For 1996 and 1995, the Company distributed a dividend in kind of Ivy
Realty Trust shares consisting of $.40 and $.20 per share, respectively.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE SELECTED
CONSOLIDATED FINANCIAL DATA AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE
RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Historical Consolidated Financial Statements for United Investors
Realty Trust present the financial position and results of operations of the
Company for each of the fiscal periods indicated. The financial results
presented in the Historical Consolidated Financial Statements and the related
Notes reflect the operating revenues and expenses associated with the
Properties, as well as other related expenses, including general and
administrative expenses associated with the management function such as
Investment Manager fees and direct overhead items.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996
For the three months ended March 31, 1997, net income available for common
shareholders was $58,900 versus $59,849 in the corresponding period of 1996, a
2% decrease. Excluding the gain on sale of investment real estate in 1996, net
income available for common shareholders increased 11%. The increase is
primarily attributed to the El Campo and Park Northern acquisitions which
occurred in June and November of 1996. Total revenues increased 28% to
$1,504,696 versus $1,177,927 in 1996. The increase in revenues is primarily due
to the acquisitions of the El Campo and Park Northern Shopping Centers and, to
a lesser extent, increased rental rates and occupancies for the Company's retail
centers.
Property operating and maintenance expenses increased 44% to $130,561 in
1997 from $90,419 last year. The increase is primarily attributable to the
acquisitions mentioned above.
Real estate taxes increased 44% to $188,566 in 1997 from $131,165 in 1996.
The increase is primarily attributable to the El Campo and Park Northern
acquisitions.
General and administrative expense increased 38% to $197,822 in 1997 from
$143,275 last year. The increase is primarily attributable to additional
expenses associated with a larger asset base in 1997 and ground lease expense of
$35,000 in 1997 from Park Northern.
Interest expense increased 21% to $611,203 in 1997 from $504,277 last year.
The increase is primarily attributed to the additional first mortgages on the
acquisitions mentioned above and the $600,000 of short-term notes issued by the
Company in the last quarter of 1996.
Depreciation and amortization expenses increased 29% to $284,416 in 1997
from $221,235 last year. The increase is primarily attributable to the
acquisitions mentioned above.
Advisory fees, which are included in general and administrative expenses,
increased 13% to $78,000 for the three months ended March 31, 1997, from
$69,000 for the corresponding period of the prior year. Advisory fees, which
were based on a percentage of assets of the Company, increased as a result of
the acquisitions of the El Campo and Park Northern properties. In connection
with the Offering, the basis for calculating the advisory fee is being changed
and will hereinafter be based on a percentage of Advisory Funds From Operations.
Management believes that an advisory fee based on Advisory Funds From Operations
is tantamount to incentive based compensation and that such basis is in the best
interests of the shareholders.
38
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, net income available for common
shareholders increased 103% to $391,032 versus $192,704 for the year ended
December 31, 1995. Excluding the gain on sale of investment for both years and
the net income generated by One West Hills of $68,710 in 1995, net income
available for common shareholders increased 53% to $151,032 in 1996 versus
$98,974 in 1995. The spin off of the One West Hills Office Building occurred
January 1, 1996.
Total revenues decreased 5% to $5,034,082 in 1996 versus $5,282,690 in
1995. Excluding One West Hills revenue of $619,820 in 1995 would have resulted
in an 8% increase in revenues for 1996 versus 1995. The additional revenues
consisted of $176,812 from the El Campo Shopping Center and $137,607 from the
Park Northern Shopping Center acquisitions which were both acquired during 1996,
with the balance from additional rents from existing shopping centers.
Gain on sale of investment real estate increased from $25,020 in 1995 to
$240,000 in 1996. The gain in 1995 was associated with the Company's
acquisition of notes at a discount on an office project in San Rafael,
California, which was subsequently sold resulting in the Company being paid
in full and a gain being realized. The gain in 1996 was associated with the
Company's partial business combination known as Park Northern/Centennial
Partners L.P. (the "Partnership"). The Company contributed its Centennial
Shopping Center and $600,000 for the general partner interest and a 70%
limited partner interest in the Partnership and an unrelated party
contributed Park Northern for a 30% ownership of the Partnership.
Property operating and maintenance expenses decreased 33% to $442,701 in
1996 from $662,687 for 1995. The decrease in property operating and maintenance
expenses is primarily attributable to the spin off of One West Hills which is
partially offset by additional operating expenses of $38,022 and $37,173 in
1996 for El Campo and Park Northern, respectively.
Real estate taxes decreased 2% to $558,000 in 1996 versus $569,634 in 1995.
The decrease is attributed to the spin off of One West Hills offset by the El
Campo and Park Northern acquisitions.
Advisory fees increased 1% to $279,000 in 1996 versus $276,000 in 1995.
The advisory fee, which was based on assets at year end, was prorated with
respect to the Properties acquired during the year.
Management fees decreased 34% to $139,780 in 1996 versus $212,506 in 1995.
The decrease, which is primarily attributed to the spin off of One West Hills,
was partially offset by the acquisitions of El Campo and Park Northern.
Management fees, which included on site personnel, are generally higher for
office buildings.
Legal and accounting expenses increased 54% to $93,302 in 1996 from $60,482
in 1995. The increase is primarily attributed to professional fees associated
with the development of the DownREIT documents relating to the Partnership.
Other general and administrative expenses increased 21% to $130,862 in
1996 versus $108,478 in 1995. The increase is primarily attributable to
additional expenses associated with a larger asset base in 1996 and ground
leases expenses in 1996 for Park Northern.
Interest expense decreased 2% to $2,132,390 in 1996 versus $2,177,447 in
1995. The decrease is also primarily attributed to the One West Hills spin off.
This was partially offset by interest expense from short notes issued in 1996.
Depreciation and amortization expenses decreased less than 1% to $958,778
in 1996 versus $960,876 in 1995. The decrease is attributed to the spin off of
One West Hills offset by the depreciation expense on the El Campo and Park
Northern acquisitions.
39
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
For the year ended December 31, 1995, net income available for common
shareholders decreased 30% to $192,704 in 1995 versus $277,401 in 1994. The
decrease is the result of higher depreciation expenses associated with the
McMinn Plaza Shopping Center and One West Hills Office Building acquisitions,
which occurred in June and September, 1994, respectively, and depreciation
expenses on capital improvements to the existing portfolio.
Total revenues increased 14% to $5,282,690 in 1995 versus $4,649,354 in
1994. The increase in revenues is primarily attributed to the acquisitions of
McMinn Plaza and One West Hills Office Building.
Property operating and maintenance expenses increased 49% to $662,687 in
1995 versus $445,635 for 1994. The increase in operating expenses is the result
of the acquisitions in 1994 of McMinn Plaza and One West Hills. Operating
expenses are generally higher on a per square foot basis at office buildings
versus shopping centers.
Real estate taxes increased 11% to $569,634 in 1995 versus $512,070 in
1994. The increase is primarily attributed to the McMinn Plaza and One West
Hills acquisitions.
Advisory fees increased 9% to $276,000 in 1995 from $253,000 in 1994. The
increase is primarily attributed to the One West Hills acquisition and McMinn
Plaza acquisition.
Management fees increased 70% to $212,506 in 1995 from $124,672 in 1994.
The increase is primarily attributed to the One West Hills acquisition and, to a
lesser extent, the McMinn Plaza acquisition.
Legal and accounting expenses increased 19% to $60,482 in 1995 versus
$50,657 in 1994. The increase is primarily attributed to higher professional
fees associated with the larger asset base in 1995 versus 1994.
Other general and administrative expenses increased 38% to $108,478 in
1995 versus $78,808 in 1994. The increase is primarily attributed franchise
tax associated with the McMinn Plaza acquisition and additional expenses
associated with a larger asset base.
Interest expense increased 4% to $2,177,447 in 1995 versus $2,101,762 in
1994. The increase is primarily attributed to the additional first mortgages
associated with the McMinn Plaza and One West Hills acquisitions partially
offset by the repayment of short term notes during 1994.
Depreciation and amortization expenses increased 27% to $960,876 in 1995
versus $756,914 in 1994. The increase is primarily attributed to the McMinn
Plaza and One West Hills acquisitions and, to a lesser extent, depreciation
expense on capital and tenant improvements at Bandera Festival Shopping Center
and Centennial Shopping Center.
LIQUIDITY AND CAPITAL RESOURCES
INDEBTEDNESS
As of March 31, 1997, the Company had total indebtedness of approximately
$26.4 million, which consisted of approximately $25.3 million in indebtedness
collateralized by the eight Properties and a vacant outparcel. Of the
Company's indebtedness, $0.5 million is variable rate indebtedness and $25.9
million is at a fixed rate. Under the current debt structure, in which only
$0.5 million is not fixed or capped, the Company does not hedge against
changes in interest rates. Upon acquisition of additional properties through
debt financing or the refinancing of existing debt, the Company will consider
the purchase of interest rate hedges. The purchase of hedges, in either
event, will require outlays of capital and could affect the Company's ability
to continue its planned level of distribution. Accordingly, the Company plans
to use variable rate debt only if the cost of an appropriate hedge is in line
with the Company's overall strategy for distribution and growth. The costs of
any future interest rate caps are dependent upon any number of factors,
including fluctuations in interest rates, and may increase in the future.
The Company's indebtedness has interest rates ranging from 7.63% to 11.00%,
with a weighted average interest rate of 9.17%, and will mature between 1997
and 2018, with a weighted average remaining term to
40
<PAGE>
maturity of 7.2 years. See "Business and Properties -- Mortgage Indebtedness."
Most of the Company's indebtedness in 1997, 1998 and 1999 is expected to be
repaid with proceeds from the Offering. From 2003 through 2006, the Company
will have to refinance approximately $2.0 million. Since the Company
anticipates that only a small portion of the principal of each indebtedness
will be repaid prior to the maturity and the Company will likely not have
sufficient funds on hand to repay such indebtedness, the Company will need to
refinance such indebtedness through modification or extension of existing
indebtedness, additional debt financing or through an additional offering of
equity securities. See "Risk Factors -- Risks Associated with Borrowing" for
a more complete discussion of uncertainties regarding refinancing of the
Company's mortgage indebtedness.
LIQUIDITY SOURCES AND REQUIREMENTS
Historically, the principal sources of funding for the Company's
acquisitions of properties have been equity offerings, mortgages, notes and
short term lines of credit.
The Company expects to meet its short term liquidity requirements generally
through working capital and net cash provided by operations. The Company
believes that its net cash provided by operations will be sufficient to allow
the Company to make any distributions necessary to enable the Company to
continue to qualify as a REIT. The Company also believes that the foregoing
sources of liquidity will be sufficient to fund its short-term liquidity needs
through 1997.
The Company expects to meet certain long term liquidity requirements such
as property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through long term collateralized and
uncollateralized indebtedness, including a new line of credit facility and the
issuance of additional equity securities.
The Company's primary demands for liquidity are expected to be funding
distributions to its shareholders, debt service payments, property operations
and general and administrative expenses.
With regard to future shareholder distributions, the Company must
distribute at least 95% of its "real estate investment trust taxable income" (as
defined in the Code) in order to meet the qualifications of a REIT. The
Company's regular quarterly dividends are expected to be paid with Cash
Available for Distribution. However, under certain circumstances, the Company
may be required to make distributions in excess of Cash Available for
Distribution in order to meet REIT distribution requirements.
CASH FLOW
Net cash flow from operating activities increased from $256,760 for the
first three months of 1996 to $346,451 for the first three months of 1997. The
net increase of $89,691 is primarily due to improved property performance (after
adding back depreciation), the addition of El Campo and Park Northern Shopping
Centers, and reductions in trade accounts receivable offset by increased prepaid
expenses relating to tax escrow accounts for Park Northern. Net cash flow
provided by operating activities increased from $958,510 in 1995 to $1,062,002
in 1996 due primarily to improved property performance in 1996. Trade accounts
receivable were up $191,717 at December 31, 1996 but were largely offset by
increased accounts receivable and decreased accrued expenses. For 1995, net
cash flow from operating activities was virtually unchanged from 1994 at
approximately $1.0 million in each year.
Net cash flow used in investing activities increased to $6,777 in the first
quarter 1996 to $26,402 in 1997 reflecting a higher level of capital
improvements. Cash flows used in investing activities increased from $269,479
in 1995 (roof at Centennial) to $1,319,213 (primarily new acquisitions) in 1996.
On January 1, 1996, the Company transferred its investment in One West Hills
office building to Ivy Realty Trust (see note 5) and during the year it acquired
El Campo Shopping Center and a majority interest in Park Northern Shopping
Center. Net cash flows used in investing activities in 1994 were $2,240,884,
mostly attributable to the acquisition of McMinn Shopping Center and the One
West Hills office building.
Net cash flow used for financing activities deceased from $218,632 in the
first three months of 1996 to $157,840 in the first three months of 1997 as
lines of credit were increased by $135,000 in 1997 to help fund $251,868 in
principal payments on mortgages in 1997, including a $50,000 prepayment on the
mortgage at Bandera Festival
41
<PAGE>
Shopping Center. Cash flows used for financing activities decreased from
$384,637 in 1995 to $51,293 in 1996. During 1996, $600,000 in new, short term
notes and new lines of credit totaling $140,000 were secured to complete the
purchase of the two shopping centers and pay down the mortgage at Park
Northern by $600,000. During 1995, $0.6 million was received as proceeds from
preferred stock and $2.0 million in new mortgage notes were obtained, and
$2.9 million in mortgage and note principal was retired. In 1994, $1.6
million in new mortgages were assumed as part of the McMinn Plaza and One West
Hills office building acquisitions and $0.4 million in principal was retired.
Total cash flows from financing operations in 1994 was $1.1 million.
CAPITAL EXPENDITURES
The Company's capital improvements have averaged approximately $0.43 per
square foot per year since inception. Several factors exist which help to
minimize capital improvements. They are:
(i) The majority of the Company's leases provide for the tenants to share
in the common area maintenance expenses of the shopping centers owned by the
Company.
(ii) Tenants are typically responsible for the repair and replacement of
their HVAC systems.
(iii) Only 2,990 square feet of the Company's portfolio is shell space
(i.e., not previously improved for a tenant).
(iv) Leases typically provide for the Company to provide tenants with a
"white box" (i.e., unfinished space). Hence, the tenant is responsible for
finishing out the space for its needs. Additionally, some leases provide
that the space is delivered to the tenant in an "as is" condition.
(v) The Company maintains an active preventative maintenance program
designed to preserve and lengthen the life of the roofs and parking lots of
its shopping centers.
The Company capitalized $161,063 in improvements during 1996 and has
budgeted approximately $333,743 for capital improvements for 1997, after
tenant recoveries of approximately $91,000.
INFLATION
During the periods presented above, inflation has not had a significant
impact on the Company. Most of the Company's long-term leases contain
provisions designed to mitigate the adverse impact of inflation on the Company's
net income. Such provisions include clauses enabling the Company to receive
percentage rents based on gross sales of tenants, which generally increase as
prices rise, and/or in certain instances, escalation clauses, which generally
increase rental rates during the terms of the leases. In addition, most of the
Company's leases require the tenants to pay their share of operating expense,
including common area maintenance, real estate taxes, insurance and utilities,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation.
42
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share" which simplifies the
standards for computing and presenting earnings per share ("EPS") and makes
them comparable to international EPS standards. This statement is effective
for the year ending December 31, 1997. Earlier application is not permitted
and restatement of prior period earnings per share data is required. The
Company does not believe that implementation of SFAS No. 128 will have a
material impact on its EPS.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's current policies with
respect to investments, financings, affiliate transactions and certain other
activities. The Company's policies with respect to these activities have
been determined by management and may be amended or revised from time to time
at the discretion of the Board of Trust Managers without a vote of the
shareholders of the Company. No assurance can be given that the Company's
investment objectives will be attained or that the value of the Company will
not decrease.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The Company's
primary business objective is to maximize shareholder value by maintaining
long-term growth in Cash Available for Distribution and paying dividends to
its shareholders. The Company intends to pursue this objective by continuing
to acquire properties for long-term ownership and to manage its properties
intensively, and thereby seek to maximize current and long-term income and
the value of its assets. The Company's policy is to acquire or redevelop
assets where the Company believes that opportunities exist for acceptable
investment returns.
The Company expects to pursue its investment objectives primarily
through the direct ownership of properties. The Company currently intends to
invest in or develop primarily shopping center properties in its primary
markets. However, future investment or redevelopment activities will not be
limited to any geographic area or to a specified percentage of the Company's
assets. All of the properties owned by the Company initially will be managed
by the Investment Manager or third party on-site property managers retained
by the Investment Manager.
The Company may also participate with other entities in property
ownership, through joint ventures or other types of common ownership. Equity
investments may be subject to existing mortgage financing and other
indebtedness which have priority over any equity interest of the Company.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company intends to
emphasize equity real estate investments, it may, in its discretion, invest
in mortgages or other real estate interests consistent with its qualification
as a REIT. The Company may also invest in participating or convertible
mortgages if the Trust Managers conclude that the Company and its
shareholders may benefit from the cash flow or any appreciation in the value
of the subject property. Such mortgages are similar to equity participations.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Subject to the percentage ownership
limitations and gross income tests necessary for REIT qualification, the
Company also may invest in securities of entities engaged in real estate
activities or securities of other issuers, including for the purpose of
exercising control over such entities, although it has not done so in the
past. See "Federal Income Tax Considerations -- Requirements for
Qualification as a Real Estate Investment Trust." The Company may acquire
all or substantially all of the securities or assets of other REITs or
similar entities where such investments would be consistent with the
Company's investment policies.
PERIODIC REVIEW OF ASSETS. The Company has no current intention to
dispose of any of the Properties. Nevertheless, the Company reserves the
right to dispose of any of the Properties or any property that may be
acquired in the future if the Company determines that the disposition of such
property is in the best interests of the Company and its shareholders.
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<PAGE>
FINANCING POLICIES
As a general policy, the Company intends to maintain a ratio of total
indebtedness to Total Market Capitalization of 50% or less. However, no
assurance can be given that the Company will be able to accomplish this
objective. The debt to Total Market Capitalization ratio is based upon the
stock market value of equity, and accordingly fluctuates with changes in the
price of the shares and differs from a debt-to tangible net worth ratio which
is based on book value of a company's assets. The Company is basing its debt
capitalization policy on a ratio of long-term debt to Total Market
Capitalization rather than debt-to-book value of assets because the Company
believes that market capitalization is a more appropriate measure of the
market value of the Company's assets than the book value of its assets and
more indicative of its ability to repay debt.
On a pro forma basis at March 31, 1997, after giving effect to the
Offering (assuming an initial public offering price of $11.75 per Common
Share), the Company had a ratio of long-term debt to Total Market
Capitalization of 16.8%. See "Capitalization." Assuming no change in the
market value of issued and outstanding Common Shares, the Company would be
able to incur approximately $36,000,000 of additional indebtedness and still
maintain a ratio of long-term debt to Total Market Capitalization of 50% or
less. The Company, however, may from time to time reevaluate its debt policy
in light of current economic conditions, relative cost of debt and equity
capital, changes in the market capitalization of the Company, acquisition
opportunities and other factors, and may modify its debt financing policy and
may increase or decrease its ratio of long-term debt to Total Market
Capitalization without a vote of its shareholders. The organizational
documents of the Company do not contain any limitations on the amount or
percentage of indebtedness the Company may incur.
Indebtedness incurred by the Company may be in the form of bank
borrowings, purchase money obligations to the sellers of properties, publicly
or privately placed debt instruments or financing from institutional
investors or other lenders, any of which indebtedness may be unsecured or may
be secured by mortgages or other interests in properties owned by the Company
or may be limited to the particular property to which the indebtedness
relates. The proceeds from any borrowings by the Company may be used for the
payment of dividends, for working capital, to refinance existing indebtedness
or to finance acquisitions of new properties.
In the event that the Trust Managers determine to raise additional
equity capital, the Trust Managers have the authority, without shareholder
approval, to issue additional Common Shares or Preferred Shares in any manner
(and on such terms and for such consideration) they deem appropriate, including
in exchange for property. Existing shareholders would have no preemptive right
to purchase such shares in any offering, and any such offering might cause a
dilution of a shareholder's investment in the Company. See "Description of
Shares of Beneficial Interest."
AFFILIATE TRANSACTION POLICY
The Company has adopted a policy that it will not without the approval
of a majority of the independent Trust Managers (i) acquire from or sell to
any Trust Manager, officer or employee of the Company, or any entity in which
a trust manager, officer or employee of the Company beneficially owns more
than a 1% interest, or, except for any property in which the Company owns an
economic interest, acquire from or sell to any affiliate of any of the
foregoing, any property or other assets of the Company, or (ii) make any loan
(other than pursuant to the Plan) to or borrow from any of the foregoing
persons.
CERTAIN OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuer, (ii) underwrite securities of other
issuers, or (iii) actively trade in loans or other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
purchase or otherwise reacquire Common Shares or any of its other securities
in the open market or otherwise and may engage in such activities in the
future. The Trusts Managers have no present intention of causing the Company
to repurchase any of the Common Shares, and any such action would be taken
only in conformity with applicable Federal and state laws and the
requirements for qualifying as a REIT under the Code. The Company may issue
securities in exchange for real estate assets if the Trust Managers determine
such issuances to be in the best interests of the Company's shareholders.
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<PAGE>
The Company has not made any loans to third parties, although it may in
the future make loans to third parties, including, without limitation, loans
to joint ventures in which it participates. The Company has not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers, and the Company does not intend to do so in the future. The
Company's policies with respect to such activities may be reviewed and
modified from time to time by the Board of Trust Managers without the vote of
the shareholders.
MANAGEMENT
TRUST MANAGERS AND OFFICERS
The Company's Trust Managers are elected annually by the shareholders
and remain in office until their successors, if any, are elected. The Trust
Managers are responsible for appointing the executive officers of the
Company, for selecting, monitoring and supervising the Investment Manager and
for approving borrowings by the Company. The Trust Managers are also
responsible for the adoption from time to time of such investment policies
and limitations as they may deem appropriate in light of the Company's
investment objective.
The following table sets forth the names and positions of the Trust Managers
and officers of the Company.
Positions and
Name Age Offices With the Company
- ---- --- -------------------------------------------
Robert W. Scharar 49 Trust Manager and Chairman of the Board
Jerry M. Coleman 61 Trust Manager
Josef C. Hermans 54 Trust Manager
William C. Brooks 60 Trust Manager
Lewis H. Sandler 60 President and Chief Executive Officer
Daniel M. Jones III 55 Chief Financial Officer
Randall D. Keith 39 Vice President and Chief Operating Officer
Robert P. Messer 44 Treasurer
W. Lance Hall 29 Vice President
Gerald A. Seade 30 Secretary
Information concerning the Trust Managers and executive officers of the
Company is as follows:
ROBERT W. SCHARAR. Mr. Scharar, who resides in Houston, Texas, received
a B.S.B.A. degree in business from the University of Florida in 1970, an
M.B.A. degree in 1971 from Northeastern University, a J.D. from Northeastern
University Law School in 1974, and an LL.M. degree in Taxation from Boston
University Law School in 1979. In 1975, he formed First Commonwealth
Associates, a Texas partnership, which engaged in financial planning and
advisory services. In 1981, the assets of First Commonwealth Associates were
acquired by UST Financial Planning Company, Inc., a subsidiary of UST Corp.
(a Massachusetts bank holding company), and Mr. Scharar served as President
of that subsidiary. In 1983, Mr. Scharar founded the Investment Manager, which
acquired the Texas and Florida offices of UST Financial Planning Company,
Inc. Mr. Scharar is President and a director of Investment Manager. Mr.
Scharar also serves as one of four Trustees of both First Commonwealth
Mortgage Trust ("FCMT"), a private real estate investment trust which is
engaged in the business of originating and investing in real estate mortgage
loans, and Ivy, a private REIT engaged in the business of acquiring and
operating office buildings. FCA Corp is also the Investment Manager for FCMT
and Ivy. Since 1991, Mr. Scharar has served as a director of Capstone New
Zealand Fund. From 1992 through 1996, he served as a director of South West
Property Trust, Inc. ("SWP") and in 1997 when SWP merged into United Dominion
Realty Trust, Inc. ("UDR"), he became a director of UDR.
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<PAGE>
JERRY M. COLEMAN. Mr. Coleman resides in El Paso, Texas and is a
commercial real estate developer and builder. Mr. Coleman received his J.D.
from the University of Texas. Since 1975, Mr. Coleman has served as Chairman
and CEO of Capital Resource & Investment Co. and managing partner of
Azar-Coleman Properties since 1982. From 1977 to 1980, Mr. Coleman was
Chairman of the Board and Chief Executive Officer of Citizen National Bank of
Austin, Texas and remained Chairman of the Board of the successor MBank until
1988.
JOSEF C. HERMANS. Mr. Hermans resides in Houston, Texas and is a
consultant to the hotel industry. Mr. Hermans is a graduate of the Lausanne,
Switzerland Hotel Management School. In addition to his early experience in
European hotels, Mr. Hermans served as Vice President of Operations of
Mariner Corporation between 1976 and 1983. Since 1983, Mr. Hermans has been
self-employed as a consultant in the hospitality industry. Mr. Hermans
currently serves as a Trust Manager of FCMT and Ivy and a director of Mirror
Properties Corp.
WILLIAM C. BROOKS. Mr. Brooks is a financial consultant who resides in
Boynton Beach, Florida. Mr. Brooks is a graduate of Oberlin College in
Oberlin, Ohio. From 1980 to 1994, Mr. Brooks was Chief Financial Officer,
Senior Vice President and Treasurer of UST Corp., a Nasdaq bank holding
company. Since 1994, Mr. Brooks has served as a financial consultant.
Mr. Brooks currently serves as a Trust Manager of FCMT and Ivy.
LEWIS H. SANDLER. Mr. Sandler resides in Dallas, Texas. Mr. Sandler
has served as President and Chief Executive Officer of the Company and the
Chief Executive Officer of the real estate services division of the
Investment Manager since January, 1997. Prior to that time, he served as
Executive Vice President, Secretary, General Counsel and a Director of South
West Realty, Ltd., a publicly traded multi-family limited partnership from
1983 through October, 1992. From October 1992 through December 1996, Mr.
Sandler served in similar roles for SWP. Mr. Sandler received a B.A. degree
from Hamilton College in 1958 and an L.L.B. from Columbia University Law
School in 1961. He is licensed to practice law in New York and Texas.
DANIEL M. JONES III. Mr. Jones, who resides in Garland, Texas, has been
Chief Financial Officer of the Company since May 1, 1997, and worked as a
consultant to the Company and the Investment Manager for several months prior
thereto. Prior to that time, he served from June 1996 until February 1997 as
Vice President, Treasurer and Chief Financial Officer for SWP. Prior to
SWP, Mr. Jones spent over 25 years as a senior financial officer in
the retail industry with such companies as Dayton Hudson Department Stores
(1979-81), Federated Department Stores (1981-83), R.H. Macy & Company
(1983-87) and Wyatt Cafeterias (1992-93). His work often included strategic
planning, site selection, real estate and legal responsibilities. Mr. Jones
also has an extensive background in contract and lease negotiations, all from
the tenant's side. He received his B.S. in Accounting from Virginia
Commonwealth University in Richmond, Virginia and is a CPA, licensed in Texas
and Virginia.
RANDALL D. KEITH. Mr. Keith resides in Houston, Texas. He received a
B.B.A. in Accounting from the University of Texas and is a Texas CPA. He is
a member of the Houston Society of Financial Analysts, Texas Society of
Certified Public Accountants and the Association for Management and Research.
Mr. Keith has experience with Service Corporation International in equity
research and portfolio management in both the public and private markets and
in auditing and taxation with Grant Thorton. Mr. Keith currently serves as
Vice President and Chief Operating Officer of the Company. Mr. Keith has
been with the Company since its inception in 1988. He served as Secretary of
the Company from 1988 to 1990 and from 1993 to 1996, Treasurer from 1990 to
1993, Vice President from 1993 to 1996, and as Vice President and Chief
Operating Officer from 1996 to the present. Mr. Keith also serves as a
senior officer in several related entities.
ROBERT P. MESSER. Mr. Messer, who resides in Katy, Texas, received a
B.S. degree in Accounting from McNeese State University in 1974 and an M.B.A.
degree in 1983 from Houston Baptist University. Since January 1994, Mr.
Messer has been employed by FCA Corp in the position of Chief Financial
Officer, and assumed the additional responsibility of Chief Operating Officer
in 1996. Mr. Messer currently serves as Treasurer of both First Commonwealth
Mortgage Trust and Ivy Realty Trust. Prior to joining FCA Corp, Mr. Messer
spent over 15 years in the oil-field service industry in senior management
positions. Mr. Messer worked for GEO Seismic Services as Chief Financial
Officer from 1979 through 1990 and President from 1990 through 1993.
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<PAGE>
W. LANCE HALL. Mr. Hall resides in Houston, Texas. He received a
B.B.A. in Finance from the University of Oklahoma. Mr. Hall currently serves
as Vice President of the Company, as well as Secretary of First Commonwealth
Mortgage Trust and Ivy. For the past five and one-half years, he has served
as an accountant for the Company and affiliated REITs. Mr. Hall also serves
as the Assistant Portfolio Manager of the Capstone New Zealand Fund, a fund
managed by the Investment Manager for the past three and one-half years.
GERALD A. SEADE. Mr. Seade resides in Houston, Texas. He received his
B.A. from the University of Texas, a J.D. from the University of Texas School
of Law, and, in 1994, and in 1994, an L.L.M. in Taxation from the University
of Houston Law Center. He is licensed to practice law in Texas and is a
member of the Section of Taxation of the State Bar of Texas. Mr. Seade has
served as a Senior Associate Financial Planner for FCA Corp and Secretary to
the Company since February 1996. Prior to joining FCA Corp, Mr. Seade worked
for the University of Houston Law Center from 1995 to 1996, and practiced law
with Foster & Hunter in Austin, Texas from 1994 to 1995.
All officers and Trust Managers hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal.
COMMITTEES OF THE BOARD OF TRUST MANAGERS
AUDIT COMMITTEE. Immediately prior to the consummation of Offering, the
Board of Trust Managers will establish an Audit Committee consisting of three
independent Trust Managers. The Audit Committee will be established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
EXECUTIVE COMMITTEE. The Board of Trust Managers will also establish,
after completion of the Offering, an Executive Committee, initially
consisting of Messrs. Scharar, Sandler and Jones. The Executive Committee
will have the authority to acquire, dispose of and finance investments for
the Company and execute contracts and agreements, including those related to
the borrowing of money by the Company, and generally exercise all other
powers of the Board of Trust Managers except for those which require action
by all Trust Managers or the independent Trust Managers under the Charter or
Bylaws or under applicable law.
COMPENSATION COMMITTEE. The Board of Trust Managers will also
establish, immediately prior to the completion of the Offering, a
Compensation Committee, initially consisting of three independent Trust
Managers. The Compensation Committee will have the authority to administer
the Plan and the DRIP. Although the Investment Manager will determine the
compensation for the Company's officers, the Compensation Committee will
evaluate the performance of the Company's officers and will make
recommendations to the Investment Manager regarding officer compensation.
COMPENSATION OF TRUST MANAGERS
For services provided during fiscal 1997, each of the three independent
Trust Managers will receive 800 Common Shares in August 1997.
Commencing in 1998, each independent Trust Manager will receive an
annual fee of $10,000 plus $250 per meeting attended. Trust Managers who are
employees of the Company and the Investment Manager will not be paid any
Trust Manager fees. In addition, the Company may reimburse the Trust
Managers for travel expenses incurred in connection with their activities on
behalf of the Company. Trust Managers who are not employees of the Company
and the Investment Manager will also each receive a grant of 2,000 Common
Shares together with options to purchase 8,000 Common Shares under the Plan
effective upon the consummation of the Offering. The options will vest over
a four year-period commencing January 1, 1999 and will be exercisable at a
price per Common Share equal to the initial public Offering price. The
unaffiliated Trust Managers will also be eligible to receive loans from the
Company for purposes of exercising vested options, all or a portion of which
may be forgiven over time.
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EXECUTIVE COMPENSATION
Under the Advisory Agreement, the Investment Manager has assumed the
responsibility for payment of all salaries and bonuses, if any, as well as
payroll taxes and other fringe benefits for each of the Executive Officers
of the Company and will make available at its own cost such other support
personnel as may be needed by the Company. The Investment Manager will also
supply the Company with office space and equipment, including telephones,
facsimile and duplicating machines, as well as access to conference rooms and
secretarial assistance. Should the advisory fee payable to the Investment
Manager prove insufficient to cover such costs and expenses, the Investment
Manager will bear the cost of any such overage. The Company will pay for its
own direct and variable expenses that are identifiable directly to the
Company's activities and operations. In this regard, the Company will bear
its own costs for long distance telephone charges, postage, travel expense,
printing costs and contract labor costs. See "Certain Relationships and
Transactions."
SHARE INCENTIVE PLAN
The Company has established an incentive compensation plan to enable
Trust Managers, executive officers and key employees of the Company (and
including any operating partnership of the Company) as well as key personnel
of the Investment Manager who contributed services to the Company to
participate in the ownership of the Company. The Plan is designed to attract
and retain executive officers, Trust Managers and other key employees of the
Company and the Investment Manager (collectively, "Plan Participants") and to
provide incentives to such persons to maximize the Company's growth and cash
flow available for distribution. The Plan provides for awards to the Plan
Participants of both grants and non-qualified stock options as well as
incentive stock options.
Under the Plan, the number of Common Shares reserved for issuance under
the Plan is equal to 10% of the Company's equity securities. The Compensation
Committee will administer the Plan and will determine the Plan Participants,
the number of shares to be granted, the number of options and shares covered
thereby to be granted and the terms and conditions of grant and/or option
exercise. The Compensation Committee is also authorized to adopt, amend and
rescind rules relating to the administration of the Plan. Loans, if any, to
facilitate the exercise of option grants will also be determined and
administered by the Compensation Committee.
Non-qualified stock options will provide for the right to purchase
Common Shares at a specified price which will not be less than the fair
market value on the date of the grant and usually will become exercisable in
installments for up to seven years after the grant date. Once vested,
options must generally be exercised within five to seven years.
Incentive stock options, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of the fair market
value of the Common Shares on the grant date and a ten year restriction on
their term. These options may be subsequently modified to disqualify them
for treatment as incentive stock options.
Concurrently with the consummation of the Offering, the Company intends
to award 44,000 Common Shares to the Investment Manager for the benefit of
Messrs. Scharar, Sandler, Jones and Keith as well as other key FCA Corp
employees who contribute to the Company's success, and to award 2,000 Common
Shares to each of the Company's independent Trust Managers. The Investment
Manager may transfer some or all of these Common Shares directly to the
beneficiaries. In addition, the Company intends to grant stock options
covering 200,000 Common Shares to FCA Corp for the benefit of certain FCA
Corp employees who contribute to the Company's success, including the
Company's executive officers. These options will be exercisable at the public
offering price of the Offering of the Common Shares and will vest evenly over
a four-year period commencing January 1, 1999. These options may also be
assigned directly to the beneficiaries for whom FCA Corp is holding them.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements requiring the
Company to indemnify its officers and Trust Managers, and advance expenses,
to the maximum extent permitted by Texas law. See "Certain Provisions of the
Texas REIT Act and of the Company's Declaration of Trust and
Bylaws--Limitation of Liability and Indemnification."
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LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 9.20 of the Texas REIT Act, subject to procedures and
limitations stated therein, allows the Company to indemnify any person who
was, is or is threatened to be made a named defendant or respondent in a
proceeding because the person is or was a trust manager or officer against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses actually incurred by the person in connection with
the proceeding. The Company is required by Section 9.20 of the Texas REIT
Act to indemnify a trust manager or officer against reasonable expenses
incurred by him in connection with a proceeding in which he is a named
defendant or respondent because he is or was a trust manager or officer if he
has been wholly successful, on the merits or otherwise, in the defense of the
proceeding. Under the Texas REIT Act, Trust Managers and officers are not
entitled to indemnification if (i) the trust manager or officer is found
liable to the real estate investment trust or is found liable on the basis
that personal benefit was improperly received and (ii) the trust manager or
officer was found liable for willful or intentional misconduct in the
performance of his duty to the real estate investment trust. The statute
provides that indemnification pursuant to its provisions is not exclusive of
other rights of indemnification to which a person may be entitled under any
provision of the Declaration of Trust, bylaws, agreements or otherwise. In
addition, the Company has, pursuant to Section 15.10 of the Texas REIT Act,
provided in its Charter that, to the fullest extent permitted by applicable
law, a trust manager of the Company shall not be liable for any act,
omission, loss, damage or expense arising from the performance of his duty
under the Texas REIT Act, except for his own willful misfeasance or gross
negligence.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Effective as of June 9, 1997, the Company amended the Advisory Agreement
with the Investment Manager. Under the terms of the Advisory Agreement, the
Investment Manager is obligated to present an investment program to the
Company, use its best efforts to obtain investments suitable to such program,
provide administrative services for the Company and supervise, subject to the
direction of the Trust Managers, the Company's day-to-day affairs. Subject
to their duty of overall supervision, the Trust Managers have delegated to
the Investment Manager the power and duty to: (i) perform necessary
administrative functions in the management of the Company; (ii) serve as the
investment and financial investment manager and provide research, economic
and statistical data in connection with investments and financial policies;
(iii) investigate, select and conduct relations with accountants, attorneys,
brokers, investors, banks and other lenders, and others as necessary in
connection with investments; (iv) maintain bank accounts, and arrange for
fidelity bonds with respect to fraudulent and negligent acts, errors and
omissions, in amounts specified by the Trust Managers, covering all of the
personnel handling funds and other assets of the Company, with the Company
named as an insured party; (v) administer such day-to-day bookkeeping and
accounting functions as are required for the proper management of the assets
of the Company, contract for audits and prepare or cause to be prepared such
reports as may be required by any governmental authority in connection with
the ordinary conduct of the Company's business; (vi) provide office space and
office equipment and the use of accounting or computing equipment when
required, and provide personnel necessary for the performance of such
services; (vii) obtain services that may be required in acquiring and
disposing of investments, disbursing and collecting funds, paying debts and
fulfilling the obligations and handling, prosecuting and settling any claims
of the Company; (viii) obtain the services of property managers or management
firms to perform customary property management services with regard to real
estate properties owned by it and as may be required to supervise and monitor
such property managers or management firms as would be performed by a prudent
owner; and (ix) advise in connection with negotiations with real estate
brokerage firms, investment banking firms, securities brokers or dealers and
other institutions or investors in connection with the sale of securities and
the purchase and sale of properties.
The initial term of the Advisory Agreement will expire on December 31,
1998, and will automatically be renewed for five successive one-year terms,
subject to a determination by a majority of the independent Trust Managers
that the performance of the Investment Manager has been satisfactory. If the
independent Trust Managers determine that the Investment Manager's
performance has been unsatisfactory or without cause, they may either (i)
terminate the Advisory Agreement upon six months prior notice, and (ii) pay
the Investment Manager a termination fee (the "Termination Fee") equal to 50%
of the product of the average monthly fee paid to the Investment Manager for
the three
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full calendar months immediately preceding the month in which termination
notice is given, times 12. The Company may terminate the contract for cause
at any time and without payment of a termination fee. The Investment Manager
may terminate the Advisory Agreement upon 90 days prior written notice
without premium or penalty. If the termination is for cause, however, the
Company would be obligated to pay the Termination Fee to the Investment
Manager.
Pursuant to the terms of the Bylaws and the Advisory Agreement, the
Investment Manager is prohibited from performing similar functions for any
real estate entity other than the Company whose primary function is to own
and operate shopping centers in the United States. There is no limit on the
right of any director, officer, employee or shareholder of the Investment
Manager to engage in any business (including competitive business activities)
or to render services of any kind to any other entity.
Under the Advisory Agreement, effective July 1, 1997, the Investment
Manager is entitled to a fee equal to 6.8% of the Advisory Funds From
Operations. Based upon revenues of the Company for the first quarter of
1997, on a pro forma basis, the fee payable to the Investment Manager for
1997 should be approximately $288,000, assuming no property acquisitions
during the year.
The Company may, in its discretion, grant awards to the Investment
Manager and the Investment Manager's officers and key employees who are
instrumental in the business and success of the Company. Concurrently with
the consummation of the Offering, the Company intends to award 44,000 Common
Shares to the Investment Manager for the benefit of Messrs. Scharar, Sandler,
Jones and Keith, and other of its key employees who contribute to the
Company's success. Additionally, the Company plans to grant the Investment
Manager options to purchase 200,000 Common Shares for the Offering price.
Such options will vest equally over a four year period. The Investment
Manager intends to transfer such options to certain of its executive officers
and key employees who have not yet been identified by the Investment Manager.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the outstanding Common Shares as of June 1, 1997, by
(i) the only shareholder known to the management of the Company to own
beneficially more than 5% of the outstanding Common Shares; (ii) each Trust
Manager and the executive officers of the Company; and (iii) the Trust
Managers and executive officers as a group. Unless otherwise indicated, each
person named in the table has sole voting and investment power with respect
to all of the Common Shares shown as beneficially owned by such person:
<TABLE>
Number of Percent of Percent of
Common Shares Class Prior Class After
Name of Beneficial Owner Beneficially Owned to the Offering The Offering
- ------------------------ ------------------ --------------- ------------
<S> <C> <C> <C>
GAIA Visions Partners, Ltd. 83,737(1) 9.30% 2.14%
c/o J.M. Haley
7149 Hillgreen
Dallas, TX 75214
FCA Corp 44,000(2) 4.88 1.13
5847 San Felipe, Suite 850
Houston, TX 77057
Alfred S. Ross 47,367 5.26 1.21
150 Elm Street
S. Dartmouth, MA 02748
Robert W. Scharar 63,302(3) 7.03 1.63
c/o FCA Corp
5847 San Felipe, Suite 850
Houston, TX 77057
Jerry M. Coleman 4,369(4)(6) * *
Josef C. Hermans 5,326(6) * *
William C. Brooks 2,800(6) * *
Randall D. Keith 1,500 * *
Robert P. Messer 1,078 * *
Lewis H. Sandler (5) -- -- --
Daniel M. Jones III -- -- --
Trust Managers / Officers as
a Group (8 persons) 77,375(3)(4)(6) 8.59 1.98
</TABLE>
- -------------------
* Less than 1%.
(1) Includes 12,832 Common Shares into which its 1,604 Preferred Shares are
convertible.
(2) Represents the 44,000 Common Shares to be awarded to the Investment Manager
under the Plan.
(3) Includes 44,000 Common Shares to be awarded to FCA Corp under the Plan.
Mr. Scharar is President and a Director and a 52.7% shareholder of
FCA Corp. As a result of his control of FCA Corp, the 44,000 Common Shares
are required to be included in the number of shares beneficially owned by
Mr. Scharar. Also includes 9,838 Common Shares as to which Mr. Scharar
is a trustee, but has no beneficial interest.
(4) Includes 1,569 Common Shares which are registered to Azar-Coleman Properties
and controlled by Mr. Coleman.
(5) Mr. Sandler expects to acquire at least 20,000 Common Shares in the
Offering.
(6) Includes 2,000 Common Shares to be awarded to each independent Trust Manager
under the Plan.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Charter authorizes the Company to issue up to 550,000,000 shares of
beneficial interest of the Company ("Trust Shares"), consisting of
500,000,000 Common Shares, no par value, 50,000,000 preferred shares of
beneficial interest, 20,000 of which are authorized to be issued at $100 par
value per share, the remainder of which are authorized to be issued at no par
value ("Preferred Shares") and such other types of classes of shares of
beneficial interest as the Trust Managers may create and authorize from time
to time. Upon completion of the Offering, 3,887,489 Common Shares will be
issued and outstanding an aggregate of 50,000 Common Shares to the Investment
Manager and the three independent Trust Managers and the exercise of options to
purchase 200,000 Common Shares which will be granted under the Plan effective
upon completion of the Offering, excluding up to 450,000 Common Shares which
may be purchased by the Underwriters to cover over-allotments. After the
Offering, there will be 10,737 Preferred Shares issued and outstanding.
As of June 1, 1997, there were 837,489 Common Shares issued and
outstanding.
COMMON SHARES OF BENEFICIAL INTEREST. Each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of Trust Managers. There is no
cumulative voting in the election of Trust Managers, which means that the
holders of a majority of the outstanding Common Shares can elect all of the
Trust Managers then standing for election. Holders of Common Shares are
entitled to such distributions as may be declared from time to time by the
Trust Managers out of funds legally available therefor. See "Dividends and
Distributions Policy."
Holders of Common Shares have no conversion, redemption or preemptive
rights to subscribe for any securities of the Company. All outstanding
Common Shares will be fully paid and nonassessable. In the event of any
liquidation, dissolution or winding-up of the affairs of the Company, holders
of Common Shares will be entitled to share ratably in the assets of the
Company remaining after provision for payment of liabilities to creditors and
payment of liquidation preferences to holders of Preferred Shares, if any.
PREFERRED SHARES. The Trust Managers are authorized (without any
further action by the shareholders) to issue Preferred Shares in one or more
series and to fix the voting rights, liquidation preferences, dividend rates,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences. Satisfaction of any
dividend preferences of outstanding Preferred Shares would reduce the amount
of funds available for the payment of dividends on the Common Shares. Also,
holders of Preferred Shares would normally be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding up
of the Company before any payment is made to the holders of Common Shares.
In addition, under certain circumstances, the issuance of Preferred Shares
may render more difficult or tend to discourage a merger, tender offer or
proxy contest, the assumption of control by a holder of a large block of the
Company's securities, or the removal of incumbent management. The Trust
Managers, without shareholder approval, may issue Preferred Shares with
voting and conversion rights which could adversely affect the holders of
Common Shares.
The Preferred Shares and the variety of characteristics available to it
offers the Company flexibility in financing and acquisition transactions. An
issuance of such shares could dilute the book value or adversely affect the
relative voting power of the Common Shares. The issuance of such shares
could be used to discourage unsolicited business combinations, for example,
by providing for class voting rights which would enable the holder of
Preferred Shares to block such a transaction. Although the Trust Managers
are required when issuing such securities to act based on their best judgment
as to the best interests of the shareholders of the Company, the Trust
Managers could act in a manner which would discourage or prevent a
transaction which some shareholders might believe is in the Company's best
interests or in which shareholders could or would receive a premium for their
shares over the market price. Any Preferred Shares issued would be subject
to restrictions similar to that set forth under "Restrictions on Transfer"
below.
The Company has outstanding 10,737 shares of Nine Percent Redeemable
Preferred Shares of Beneficial Interest, par value $100 per share ("9%
Preferred Shares"). Dividends on the 9% Preferred Shares are cumulative from
date of issuance and payable on a quarterly basis. The 9% Preferred Shares
are convertible at the option of the holder into Common Shares at a
conversion price of $12.50 per share. The 9% Preferred Shares are redeemable
at the option of the Company, in whole or in part, at
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a redemption price equal to the sum of par value plus the premium which is 4%
for 1997, 3% for 1998, 2% for 1999, 1% for 2000 and 0% for 2001 and
thereafter. The Company is required to redeem annually 20% of the 9%
Preferred Shares outstanding at par value commencing March 15, 2001 and
annually thereafter until all 9% Preferred Shares are redeemed.
The Company has no present intention to issue any additional Preferred
Shares or any other new class of securities.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, (i) not more than
50% in value of its outstanding Trust Shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year; (ii) the Trust
Shares must be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year; and (iii) certain percentages of the Company's gross
income must be from particular activities. See "Federal Income Tax
Considerations." Because the Trust Managers believe it is essential for the
Company to continue to qualify as a REIT, the Charter, subject to certain
exceptions, provides that no holder other than any person approved by the
Trust Managers, at their option and in their discretion (provided that such
approval will not result in the termination of the status of the Company as a
REIT), may own, or be deemed to own by virtue of the attribution provisions
of the Code, more than 9.8% (the "Ownership Limit") of the lesser of the
number or value (in either case as determined in good faith by the Trust
Managers) of the total outstanding Trust Shares. The Trust Managers may
waive the Ownership Limit if evidence satisfactory to the Trust Managers and
the Company's tax counsel is presented that such ownership will not then or
in the future jeopardize the Company's status as a REIT. As a condition of
such waiver, the intended transferee must give written notice to the Company
of the proposed transfer and must furnish such opinions of counsel,
affidavits, undertakings, agreements and information as may be required by
the Trust Managers no later than the fifteenth day prior to any transfer
which, if consummated, would result in the intended transferee owning Trust
Shares in excess of the Ownership Limit. The foregoing restrictions on
transferability and ownership will not apply if the Trust Managers determine
that it is no longer in the best interests of the Company to attempt to
qualify, or to continue to qualify, as a REIT. Any transfer or issuance of
Trust Shares or any security convertible into Trust Shares that would (i)
create a direct or indirect ownership of Trust Shares in excess of the
Ownership Limit; (ii) with respect to transfers only, result in the Trust
Shares being owned by fewer than 100 persons; or (iii) result in the Company
being "closely held" within the meaning of Section 856(h) of the Code, shall
be null and void, and the intended transferee will acquire no rights to the
Trust Shares. The Company's Charter provides that the Company, by notice to
the holder thereof, may purchase any or all Trust Shares (the "Excess
Shares") that are proposed to be transferred pursuant to a transfer which, if
consummated, would result in the intended transferee owning Trust Shares in
excess of the Ownership Limit or would otherwise jeopardize the REIT status
of the Company. The purchase price of any Excess Shares shall be equal to the
fair market value of such Excess Shares on the last trading day immediately
preceding the day on which notice of such proposed transfer was sent, as
reflected in the closing sales price for the Excess Shares, if then listed on
a national securities exchange, or such price for the Excess Shares on the
principal exchange if then listed on more than one national securities
exchange, or, if the Excess Shares are not then listed on a national
securities exchange, the latest bid quotation for the Excess Shares if then
traded over-the-counter, or, if no such closing sales prices or quotations
are available, the fair market value as determined by the Trust Managers in
good faith. From and after the date fixed for purchase by the Trust Managers,
so long as payment of the purchase price for the Excess Shares to be so
redeemed shall have been made or duly provided for, the holder of such Excess
Shares to be purchased by the Company shall cease to be entitled to
distributions, voting rights and other benefits with respect to such Excess
Shares except the right to payment of the purchase price for the Excess
Shares. Any dividend or distribution paid to a proposed transferee on Excess
Shares prior to the discovery by the Company that such Excess Shares have
been transferred in violation of the provisions of the Charter, shall be
repaid to the Company upon demand. If the foregoing transfer restrictions
are determined to be void or invalid by virtue of any legal decision,
statute, rule or regulation, then the intended transferee of any Excess
Shares may be deemed, at the option of the Company, to have acted as an agent
on behalf of the Company in acquiring such Excess Shares and to hold such
Excess Shares on behalf of the Company.
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PREEMPTIVE RIGHTS AND CUMULATIVE VOTING
The Common Shares issued by the Company shall have no preemptive rights,
and no shareholder may cumulate their votes in the election of Trust
Managers. The prohibition on cumulative voting is meant to insure that the
vote of holders of a majority of outstanding voting Common Shares elects
Trust Managers, rather than a plurality of the voting Common Shares voted in
the election of Trust Managers.
SHARE DIVIDENDS
The Charter allows for the payment of Common Share dividends to be paid
in Common Shares of the Company, cash and property. The general effect of
the provision is to afford the Company greater flexibility in the means by
which it pays distributions to its shareholders. When making a determination
of whether to declare a dividend, the Trust Managers shall make the
determination consistent with their fiduciary duties as Trust Managers.
However, no dividend shall be declared or paid when the Company is unable to
pay its debts as they become due in the usual course of its business, or when
the payment of such dividend would result in the Company being unable to pay
its debts as they become due in the usual course of business.
REDEMPTION OF COMPANY SHARES
The Company may purchase or acquire its own shares, subject to the
limitations of the Texas REIT Act. The Texas REIT Act allows REITs formed
thereunder to redeem or purchase shares unless (i) after giving effect
thereto, the Company would be insolvent, or (ii) the amount paid therefor
exceeds the surplus of the Company. The term "surplus" is defined by
reference to the Texas Business Corporation Act as the excess of the net
assets of a corporation over its stated capital. Moreover, if the net assets
of the Company are not less than the proposed distribution, the Company may
make a distribution to purchase or redeem any of its shares if the purchase
or redemption is made, for example, to effect the purchase or redemption of
redeemable shares in accordance with the Texas REIT Act that requires rights
of redemption to be enumerated by a Texas REIT in its operative declaration
of trust. The Charter provision affords the Company a means of distributing
assets of the Company by acquiring outstanding Common Shares, as well as the
ability to redeem shares in transactions in which such a redemption may be
beneficial to the Company and its shareholders.
VOTING RIGHTS
Each shareholder shall be entitled at each meeting of shareholders to
one vote on each matter submitted to a vote at such meeting for each share
having voting rights registered in his name on the books of the Company at
the time of the closing of the share transfer books (or at the record date)
for such meeting. When a quorum is present at any meeting (and not
withstanding the subsequent withdrawal of enough shareholders to leave less
than a quorum present), the votes of a majority of the Common Shares entitled
to vote, present in person or by proxy, shall decide any matter submitted to
such meeting, unless the matter is one upon which by law or by express
provision of the Charter or of the Bylaws the vote of a greater number is
required, in which case the vote of such greater number shall govern and
control the decision of such matter. In determining the number of Common
Shares entitled to vote, shares abstaining from voting or not voted on a
matter (including elections) will not be treated as entitled to vote.
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize certain provisions of Texas law and
the Charter and Bylaws. The summary does not purport to be complete and
reference is made to Texas law and the Charter and Bylaws, copies of which
are exhibits to the registration statement of which this Prospectus is a
part.
BOARD OF TRUST MANAGERS
The Bylaws provide that the number of Trust Managers of the Company may
not be fewer than two nor more than nine. In accordance with the terms of
the Charter and Bylaws, the Board of Trust Managers currently consists of
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four persons. Trust Managers hold office until their successors are duly
elected and qualified or until their death, resignation or removal.
The Bylaws also provide that any vacancy (including a vacancy created by
an increase in the number of Trust Managers) may be filled by a majority of
the remaining Trust Managers or by a vote of the holders of at least a
majority of the outstanding Common Shares at an annual or special meeting of
the shareholders. In addition, the Bylaws also require the affirmative vote
of a majority of the outstanding Common Shares to elect new Trust Managers.
Any Trust Manager that has been previously elected as a Trust Manager by the
shareholders who is not re-elected by such majority vote at a subsequent
annual meeting shall nevertheless remain in office until his or her successor
is elected and qualified. The Charter and Bylaws require the affirmative
vote of two-thirds of the outstanding Common Shares to remove a Trust
Manager, with or without cause.
BUSINESS COMBINATIONS
The Charter requires that except in certain circumstances, a Business
Combination (as defined below) between the Company and a Related Person (as
defined below) must be approved by the affirmative vote of the holders of 80%
of the outstanding Common Shares of the Company, including the affirmative
vote of the holders of not less than 50% of the outstanding Common Shares not
owned by the Related Person. However, the 50% voting requirement referred to
is not applicable if the Business Combination is approved by the affirmative
vote of the holders of not less than 80% of the outstanding Common Shares.
The Charter provides that a "Business Combination" is: (i) any merger or
consolidation, if and to the extent permitted by law, of the Company or a
subsidiary, with or into a Related Person; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of more than 35% of the book
value of the total assets of the Company and its subsidiaries (taken as a
whole) as of the end of the fiscal year ending prior to the time the
determination is being made, to or with a Related Person; (iii) the issuance
or transfer by the Company or a subsidiary (other than by way of a pro rata
distribution to all shareholders) of any securities of the Company or a
subsidiary of the Company to a Related Person; (iv) any reclassification of
securities (including any reverse Share split) or recapitalization by the
Company, the effect of which would be to increase the voting power of the
Related Person; (v) the adoption of any plan or proposal for the liquidation
or dissolution of the Company proposed by or on behalf of a Related Person
which involves any transfer of assets, or any other transaction, in which the
Related Person has any direct or indirect interest (except proportionally as
a shareholder); (vi) any series or combination of transactions having,
directly or indirectly, the same or substantially the same effect as any of
the foregoing; and (vii) and agreement, contract or other arrangement
providing, directly or indirectly, for any of the foregoing.
A "Related Person" generally is defined in the Charter to include any
individual, corporation, partnership or other person and the affiliates and
associates of any such individual, corporation, partnership or other person
which individually or together is the beneficial owner in the aggregate of
more than 50% of the outstanding Common Shares of the Company, except that an
individual, corporation, partnership or other person which individually or
together beneficially owned in excess of 30% of the outstanding Common Shares
at the time the Charter provision was adopted shall only be considered a
Related Person at such time as he, she, it or they acquire in the aggregate
beneficial ownership of more than 80% of the outstanding Common Shares.
The 80% and 50% voting requirements outlined above will not apply,
however, if: (i) the Trust Managers by a vote of not less than 80% of the
Trust Managers then holding office (a) have expressly approved in advance the
acquisition of Shares of the Company that caused the Related Person to become
a Related Person or (b) have expressly approved the Business Combination
prior to the date on which the Related Person involved in the Business
Combination shall have become a Related Person; or (ii) the Business
Combination is solely between the Company and another entity, 100% of the
voting stock, shares or comparable interests of which is owned directly or
indirectly by the Company; or (iii) the Business Combination is proposed to
be consummated within one year of the consummation of a Fair Tender Offer
(as defined in the Charter) by the Related Person in which Business
Combination the cash or fair market value of the property, securities or
other consideration to be received per share by all remaining holders of
Common Shares of the Company in the Business Combination is not less than the
price offered in the Fair Tender Offer; or (iv) all of
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the following conditions shall have been met: (a) the Business Combination is
a merger or consolidation, the consummation of which is proposed to take
place within one year of the date of the transaction pursuant to which such
person became a Related Person and the cash or fair market value of the
property, securities or other consideration to be received per share by all
remaining holders of Common Shares of the Company in the Business Combination
is not less than the highest per-share price, with appropriate adjustments
for recapitalizations and for share splits and share dividends, paid by the
Related Person in acquiring any of its holdings of the Company's Common
Shares (a "Fair Price"); (b) the consideration to be received by such holders
is either cash or, if the Related Person shall have acquired the majority of
its holdings of the Company's Common Shares for a form of consideration other
than cash, in the same form of consideration with which the Related Person
acquired such majority; (c) after such person has become a Related Person and
prior to consummation of such Business Combination: (1) there shall have been
no reduction in the annual rate of dividends, if any, paid per share on the
Company's Common Shares (adjusted as appropriate for recapitalizations and
for share splits, reverse share splits and share dividends), except any
reduction in such rate that is made proportionately with any decline in the
Company's net income for the period for which such dividends are declared and
except as approved by a majority of the Trust Managers continuing in office,
and (2) such Related Person shall not have received the benefit, directly or
indirectly (except proportionately as a shareholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or other
tax advantages provided by the Company prior to the consummation of such
Business Combination (other than in connection with financing a Fair Tender
Offer); and (d) a proxy statement that conforms in all respects with the
provisions of the Exchange Act and the rules and regulations thereunder shall
be mailed to holders of the Company's Common Shares at least 30 days prior to
the consummation of the Business Combination for the purpose of soliciting
shareholder approval of the Business Combination; or (v) the Rights (as
hereinafter defined) shall have become exercisable.
If a person has become a Related Person and within one year after the
date of the transaction pursuant to which the Related Person became a Related
Person (the "Acquisition Date"), (x) a Business Combination meeting all of
the requirements of clause (iv) above regarding the applicability of the 80%
voting requirement shall not have been consummated, and (y) a Fair Tender
Offer shall not have been consummated, and (z) the Company shall not have
been dissolved and liquidated, then, in such event the beneficial owner of
each Common Share (not including shares beneficially owned by the Related
Person) (each such beneficial owner being hereinafter referred to as a
"Holder") shall have the right (individually a "Right" and collectively the
"Rights"), which may be exercised subject to certain conditions, commencing
at the opening of business on the one-year anniversary date of the
Acquisition Date and continuing for a period of 90 days thereafter (the
"Exercise Period"), subject to certain extensions, to sell to the Company on
the terms set forth herein one Share upon exercise of such Right. At 5:00
P.M., Dallas, Texas time, on the last day of the Exercise Period, each Right
not exercised shall become void, all rights in respect thereof shall cease as
of such time and the Certificates shall no longer represent Rights.
SHAREHOLDER LIABILITY
Both the Texas REIT Act and the Bylaws provide that shareholders of the
Company shall not be liable personally or individually in any manner
whatsoever for any debt, act, omission or obligation incurred by the Company
or Trust Managers and shall be under no obligation to the Company or its
creditors with respect to his or her shares other than the obligation to pay
to the Company the full amount of the consideration for which his shares were
issued. The Trust Managers intend to conduct the operations of the Company in
such a way as to avoid, as far as practicable, the ultimate liability of the
shareholders of the Company.
TRUST MANAGER LIABILITY
Pursuant to the Texas REIT Act, the Charter provides that Trust Managers
shall be indemnified against all judgments, penalties (including excise and
similar taxes), fines, amounts paid in settlement and reasonable expenses
actually incurred by the Trust Manager in connection with any Proceeding (as
defined in the Charter) in which he or she was, is or is threatened to be
named defendant or respondent, or in which he or she was or is a witness
without being named a defendant or respondent, by reason, in whole or in
part, of his or her serving or having served, or having been nominated or
designated to serve, as a Trust Manager, to the fullest extent that
indemnification is permitted by Texas law in accordance with the Bylaws.
This indemnification shall not be deemed exclusive of, or to preclude, any
other rights to which those seeking indemnification may at any time be
entitled under the Bylaws, any law, agreement or vote of the shareholders or
disinterested Trust Managers.
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SPECIAL SHAREHOLDER MEETINGS
The Charter allows for the holders of 5% of the Common Shares to call a
special meeting. This provision was specifically adopted in light of the
Company's Excess Shares provisions, which generally limit the ownership of
Company Shares by persons to 9.8% of the Company's outstanding Common Shares.
The Texas REIT Act provides that holders of 10% of the Shares entitled to
vote may call a special meeting of a REIT formed under the Texas REIT Act
unless the declaration of trust for such REIT provides for a number of shares
greater than or less than 10% of the shares entitled to vote. Without this
provision in the Charter, the Texas REIT Act might prevent special meetings
from ever being called by shareholders of the Company in light of the Excess
Shares provision, which itself is necessary to protect the Company's
continued qualification as a REIT.
TERMINATION OF THE COMPANY
The Charter permits the termination of the Company and the
discontinuation of the operations of the Company by the affirmative vote of
the holders of a majority of the outstanding voting Common Shares.
AMENDMENT OF DECLARATION OF TRUST AND BYLAWS
The Charter may be amended from time to time by the affirmative vote of
the holders of at least two-thirds of the outstanding Common Shares.
However, certain provisions of the Charter that relate to Business
Combinations, number and removal of Trust Managers, certain investments and
share ownership requirements may not be amended or repealed, and provisions
inconsistent therewith may not be adopted, except by the affirmative vote of
the holders of at least 80% of the outstanding Common Shares. The Bylaws may
be amended by an affirmative vote of a majority of the Trust Managers. The
Bylaws may also be amended, to the extent not inconsistent with the Texas
REIT Act and the Charter and specified in the notice of the meeting, by an
affirmative vote of two-thirds of the outstanding Common Shares for Section
2.5 (business at the annual meeting), 3.3 (election of Trust Managers), 3.4
(nomination of Trust Managers), 3.6 (removal of Trust Managers) and 3.7
(vacancies on the Board) or Article XI (amendment of Bylaws), and a majority
vote for all other provisions.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offering, there will be 3,887,489 Common Shares
issued and outstanding (4,337,489 if the Underwriters' over-allotment option
is exercised in full). All of the Common Shares issued in the Offering will
be freely tradeable without registration or other restrictions under the
Securities Act, except for any Common Shares purchased by "affiliates" of the
Company. The Common Shares issuable upon exercise of the options granted to
certain persons who are employees and/or Trust Mangers of the Company on the
date of, or immediately following, the Offering (collectively, the
"restricted securities"), will be "restricted" securities under the meaning
of Rule 144 under the Securities Act and may be sold only pursuant to an
effective registration statement under the Securities Act or an applicable
exemption, including an exemption under Rules 144 and 144A under the
Securities Act. The Company intends to register the Common Shares available
for issuance under the Plan as soon as the Company is eligible to use Form
S-8.
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted securities
from the Company or any "affiliate" of the Company, as that term is defined
under the Securities Act, the acquirer or subsequent holder thereof is
entitled to sell within any three-month period a number of Common Shares that
does not exceed the greater of 1% of the then-outstanding Common Shares or
the average weekly trading volume of the Common Shares on all exchanges
and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144
are also subject to a certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. If two
years have elapsed since the date of acquisition of restricted securities
from the Company or from any "affiliate" of the Company, and the acquirer or
subsequent holder thereof is deemed not to have been an affiliate of the
Company at any time during the three months preceding a sale,
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such person would be entitled to sell such Common Shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements of Rule
144.
In addition, Rule 144A as currently in effect, in general, permits
unlimited resales of certain restricted securities of any issuer provided
that the purchaser is an institution that owns and invests on a discretionary
basis at least $100 million in securities or is a registered broker-dealer
that owns and invests at least $10 million in securities. Rule 144A allows
the existing shareholders of the Company to sell their Common Shares to such
institutions and registered broker-dealers without regard to any volume or
other restrictions. Unlike Rule 144, restricted securities sold under Rule
144A to non-affiliates do not lose their status as "restricted securities."
The Trust Managers and certain officers of the Company and the Company
have agreed not to offer, sell, contract to sell or otherwise dispose of any
Common Shares for a period of 180 days from the closing of the Offering,
without the prior consent of the Southwest Securities. The Company has
agreed that except under limited circumstances, it will not issue Common
Shares or securities convertible into Common Shares for a period of 90 days
from the closing of the Offering without the prior consent of the Southwest
Securities.
FEDERAL INCOME TAX CONSIDERATIONS
The Company elected to be taxed as a REIT for Federal income tax
purposes commencing with its tax year ended December 31, 1989. The following
general summary of the Federal tax rules governing a REIT and its
shareholders is based on the Code, judicial decisions, Treasury Regulations,
rulings and other administrative interpretations, all of which are subject to
change. Because many provisions of the Code have been revised substantially
by recent legislation, very few judicial decisions, Treasury Regulations,
rulings or other administrative pronouncements have been issued interpreting
many of the revisions to the Code. Investors should be aware that Congress
continues to consider new tax bills. Accordingly, no assurance can be given
that future legislation, administrative regulations, rulings, or
interpretations or court decisions will not alter significantly the tax
consequences described below or that such changes or decisions will not be
retroactive. The Company has not requested, nor does it presently intend to
request, a ruling from the Internal Revenue Service (the "Service") with
respect to any of the matters discussed below. Because the provisions
governing REITs are complex, no attempt is made in the following discussion
to discuss in detail all of the possible tax considerations applicable to the
Company or its shareholders, including state tax laws. ACCORDINGLY, EACH
PROSPECTIVE INVESTOR SHOULD SATISFY HIMSELF OR HERSELF AS TO THE INCOME AND
OTHER TAX CONSIDERATIONS AND CONSEQUENCES OF HIS OR HER PARTICIPATION IN THE
COMPANY BY CONSULTING HIS OR HER OWN TAX ADVISOR BEFORE PURCHASING COMMON
SHARES.
GENERAL
In general, as long as the Company qualifies as a REIT, it will not be
subject to Federal income tax on income or capital gain that it distributes
in a timely manner to shareholders.
In addition to the opinion filed as an exhibit to the registration
statement of which this Prospectus is a part, the Company and the
Underwriters will, prior to the closing of this offering, obtain an opinion
of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., counsel to the Company, that
the Company has been organized in conformity with the requirements for
qualification as a REIT for federal income tax purposes and that its
anticipated investments and its plan of operation (which plan includes
complying with all of the REIT requirements described in this Prospectus)
will enable it to continue to so qualify. Unlike a tax ruling (which will
not be sought), an opinion of counsel, which is based on counsel's review and
analysis of existing law, is not binding on the Service. Accordingly, no
assurance can be given that the Service would not successfully challenge the
tax status of the Company as a real estate investment trust.
If the Service successfully challenged the tax status of the Company as
a REIT, the Company's income and capital gains would become subject to
Federal income tax (including any applicable minimum tax) at corporate rates.
Consequently, the amount of after tax earnings available for distribution to
shareholders would decrease substantially. In addition, "net capital gain"
(net long-term capital gain in excess of net short-term capital loss)
distributed by the Company would be taxed as ordinary dividends to
shareholders rather than as long-term capital gain. The Company would not be
eligible to re-elect REIT status under the Code until the fifth taxable year
beginning after the taxable year
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in which it failed so to qualify, unless its failure to qualify was due to
reasonable cause and not to willful neglect and certain other requirements
were satisfied. Also, immediately prior to requalification as a REIT under
the Code, the Company could be taxed on any unrealized appreciation in its
assets.
Qualification of the Company as a REIT for Federal tax purposes will
depend on its continuing to meet various requirements governing, among other
things, the ownership of its Common Shares, the nature of its assets, the
sources of its income, and the amount of its distributions to shareholders.
Although the Trust Managers and the Investment Manager intend to cause the
Company to continue to operate in a manner that will enable it to comply with
such requirements, there can be no certainty that such intention will be
realized. In addition, because the relevant laws may change, compliance with
one or more of the REIT requirements may be impossible or impractical.
REQUIREMENTS FOR QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST
Although the Company must meet certain qualifications to be a real
estate investment trust under the Texas REIT Act (see "Certain Provisions of
the Texas REIT Act and of the Company's Declaration of Trust and Bylaws"),
the Company must independently qualify as a REIT under the Code. To qualify
as a REIT under the Code, the Company must properly elect to be a real estate
investment trust and must satisfy various requirements in each taxable year
including, among others, the following:
SHARE OWNERSHIP. (a) The beneficial ownership of Common Shares of
the Company must be held by a minimum of 100 persons for at least 335 days of
a taxable year consisting of 12 months (or a proportionate part of a taxable
year consisting of less than 12 full months), and (b) Common Shares
representing no more than 50% (by value) of the Company may be owned
(directly or under rules of constructive ownership prescribed by the Code) by
five or fewer individuals at any time during the last half of a taxable year
(the "50% Shareholder Test"). Certain tax-exempt entities are treated as
individuals for purposes of the 50% Shareholder Test. In addition, the
applicable constructive ownership rules provide, among other things, that
Common Shares held by a corporation, partnership, trust or estate will be
regarded as being held proportionately by its shareholders, partners or
beneficiaries, as the case may be, and Common Shares owned by certain persons
may be regarded as being owned by certain members of their families. Common
Shares held by a qualified pension plan will be treated as held
proportionately by its beneficiaries; however, Common Shares held by a
qualified pension plan will be treated as held by one individual if persons
related to the plan (such as the employer, employees, officers, or Trust
Managers) own in the aggregate more than 5% by value of the Common Shares and
the Company has accumulated earnings and profits attributable to any period
for which it did not qualify as a REIT.
To assure continued compliance with the 50% Shareholder Test, the
Company's Declaration of Trust prohibits any individual investor from
acquiring an interest in the Company such that the individual would own (or
be deemed under the applicable rules of constructive ownership to own) more
than 9.8% of the outstanding Common Shares, unless the Trust Managers
(including a majority of the independent Trust Managers) are provided
evidence satisfactory to them in their sole discretion that the qualification
of the Company as a REIT will not be jeopardized.
Treasury Regulations require the Company to maintain records of the
actual and constructive beneficial ownership of its Common Shares. In
accordance with those Regulations, the Company must and will demand from
shareholders written statements concerning the actual and constructive
beneficial ownership of Common Shares. Any shareholder who does not provide
the Company with required information concerning share ownership will be
required to include certain information relating thereto with his income tax
return.
ASSET DIVERSIFICATION. At the close of each quarter of the taxable
year, at least 75 % of the value of the Company's total assets must be
represented by "real estate assets" (which category includes interests in
real property, mortgages on real property and certain temporary investments),
cash, cash items and U.S. Government securities (the "75% Asset Test"). In
addition, at those times, no more than 25% of the value of the Company's
total assets may consist, in whole or in part, of securities in respect of
any one issuer in an amount greater in value than 5% of the value of the
Company's total assets or more than 10% of the outstanding voting securities
of such issuer (the "25% Asset Test"). If the Company is in violation of the
foregoing requirements (due to a discrepancy between the value of its
investments
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and such requirements) after the acquisition of any security or property,
then the Company will be treated as not violating the requirements if it
cures the violation within 30 days of the close of the quarter during which
the Company acquires such asset.
While the Investment Manager intends to manage the Company to meet the
75% Asset Test and 25% Asset Test, no assurance can be given that the Company
will be able to do so.
The assets of the Company's wholly-owned subsidiaries will be attributed
directly to the Company for purposes of the asset diversification rules.
Additionally, the Company will be deemed to own a proportionate share (based
upon its capital interest) of the assets of any partnerships in which the
Company owns an interest.
SOURCES OF INCOME. The Company must satisfy three distinct
income-based tests for each taxable year: the "75% Income Test," the "95%
Income Test" and the "30% Income Test."
The 75% Income Test requires that at least 75% of the Company's gross
income (other than from certain "prohibited transactions") in each taxable
year consist of certain types of income identified in the Code, including
qualifying rents from real property; qualifying interest on obligations
secured by mortgages on real property or interests in real property; gain
from the sale or other disposition of real property (including interests in
real property and mortgages on real property) held for investment and not
primarily for sale to customers in the ordinary course of business; income
and gain from certain properties acquired by the Company through foreclosure;
and income earned from certain qualifying types of temporary investments.
Income earned from qualifying temporary investments means income that is (i)
attributable to stock or debt instruments, (ii) attributable to the temporary
investment of capital received by the Company from the issuance of shares of
beneficial interest or from a public offering of debt securities that have a
maturity of at least five years, and (iii) received or accrued within one
year from the date the Company receives such capital. Interest income and
gain realized from the disposition of loans which are secured solely by real
property will constitute qualifying income for purposes of the 75% Income
Test, assuming that such interest income is not excluded from the calculation
of interest for purposes of the 75% Income Test by reason of such interest
being dependent on income or profits as described in Code Section 856(f) and
assuming that any such loan which is disposed of is held for investment and
not primarily for sale to customers in the ordinary course of a trade or
business.
Under the 95% Income Test, at least 95% of the Company's gross income
(other than from certain "prohibited transactions") in each taxable year must
consist of income which qualifies under the 75% Income Test as well as
dividends and interest from any other source, gain from the sale or other
disposition of Shares and other securities which is not dealer property, any
payment to the Company under an interest rate swap or cap agreement entered
into as a hedge against variable rate indebtedness incurred to acquire or
carry real estate assets, and any gain from the disposition of such an
agreement.
Finally, under the 30% Income Test, the Company must limit its
realization of certain types of income so that, in each taxable year, less
than 30% of its gross income is derived from sale or other disposition of (a)
Shares or securities held for less than one year (which includes an interest
rate swap or cap agreement entered into by the Company as a hedge against any
variable rate indebtedness incurred to acquire or carry real estate assets),
(b) with certain limited exceptions, real property (including interests in
and mortgages on real property) held for less than four years and (c)
property in a transaction treated as a "prohibited transaction" under the
Code.
The income of the Company's wholly-owned subsidiaries will be attributed
to the Company for purposes of the income tests described above.
Additionally, a proportionate share of the items of income of any partnership
in which the Company owns an interest will be attributed to the Company
(based on the Company's capital interest in any such partnership).
If the Company fails to meet the requirements of either or both the 75%
Income Test or the 95% Income Test in a taxable year but otherwise meets the
applicable requirements for qualification as a REIT, it may nevertheless
continue to qualify under the Code as a REIT if certain conditions are met.
While satisfaction of the conditions would prevent the Company from losing
its tax status as a REIT, the Company generally would be liable for a special
tax equal to 100% of the greater amount by which the Company fails the 75%
Income Test or the 95% Income Test. The Code
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does not provide for any mitigation provisions with respect to the 30% Income
Test. Accordingly, if the Company failed to meet the 30% Income Test, its
tax status as a REIT would terminate.
DISTRIBUTION REQUIREMENTS. With respect to each taxable year, the
Company must distribute to shareholders an amount at least equal to the sum
of 95% of its "REIT taxable income," computed without regard to the dividends
paid deduction and by excluding any net capital gain ("net investment
income"), and 95% of the excess of its net income from "foreclosure
property" over the Federal income tax imposed on such income, minus certain
items of noncash income. As noted under the caption "Dividends and
Distributions Policy," the Company distributes substantially all of its net
investment income annually. The Company likewise distributes annually
substantially all of its realized net capital gains. The Service may waive
the distribution requirements for any tax year if the Company establishes
that it was unable to meet such requirements by reason of distributions
previously made to meet the requirement of section 4981 of the Code (relating
to the 4% Federal excise tax on undistributed income discussed below).
Unlike net investment income, the Company's net capital gain need not be
distributed in order for the Company to maintain its status under the Code as
a REIT; however, the Company will be taxable on any net capital gain and net
investment income which it fails to distribute in a timely manner.
While the Company expects to meet its distribution requirements, its
ability to make distributions may be impaired if it has insufficient cash
flow or otherwise has excessive noncash income or nondeductible expenditures.
Furthermore, the distribution requirement may be determined not to have been
met in a given year by reason of the Service later successfully challenging
the deductibility of a Company expenditure. In such event, however, it may
be possible to cure a failure to meet the distribution requirement with a
"deficiency dividend," but if the Company uses that procedure, it may incur
substantial tax penalties and interest.
The Company will be subject to a nondeductible 4% Federal excise tax
with respect to undistributed ordinary income and capital gain net income
unless it also meets a calendar year distribution requirement. To meet this
requirement, the Company must, in general, distribute with respect to each
calendar year an amount equal to the sum of (a) 85% of its ordinary income
(adjusted under the Code for various items), (b) 95% of its capital gains in
excess of its capital losses (subject to certain adjustments) and (c) any
ordinary income and capital gain net income not distributed in prior calendar
years. The Company intends to make distributions to shareholders so that it
will not incur this tax but, as noted above, various situations could make it
impractical to meet the prescribed distribution schedule.
The Company is authorized to issue Preferred Shares. Should the Company
do so, and should the Company distribute a capital gain dividend while
Preferred Shares are outstanding, it may be required to designate a portion
of dividends entitled to be received by holders of the Preferred Shares as
capital gain dividends, thereby reducing the portion of total distributions
paid to holders of the Company's Common Shares which may be characterized as
capital gains dividends.
FEDERAL TAXATION OF THE COMPANY--SPECIFIC ITEMS
DISPOSITIONS OF ASSETS. The Company may realize a gain or loss on the
disposition of an asset that it owns. The gain or loss may be capital or
ordinary in character, depending upon a number of factors and the tax rules
governing the type of disposition involved.
If the Company were deemed to be holding property (such as real property
or loans) primarily for sale to customers in the ordinary course of business
(I.E., as a "dealer"), then (a) any gains recognized by the Company upon the
disposition of such property would be subject to a 100% tax on prohibited
transactions and (b) depending on the composition of the Company's total
gross income, the Company could fail the 30% Income Test or the 75% Income
Test for qualification as a real estate investment trust.
Under existing law, whether property is held primarily for sale to
customers in the ordinary course of business must be determined from all the
facts and circumstances surrounding the particular property and sale in
question. The
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Company intends to hold all property for investment purposes and to make
occasional dispositions which are, in the opinion of the Trust Managers and
the Investment Manager, consistent with the Company's investment objectives
and in compliance with all the rules discussed above governing the
qualification of the Company for REIT status under the Code. Accordingly,
the Company does not expect to be treated as a "dealer" with respect to any
of its assets. No assurance, however, can be given that the Service will not
take a contrary position.
ALTERNATIVE MINIMUM TAX. Under certain circumstances, the Company may
be subject to the alternative minimum tax on its items of tax preference.
NET INCOME FROM FORECLOSURE PROPERTY. If the Company has net income
from foreclosure property, it will be subject to tax on such income at the
highest corporate rate. Foreclosure property generally means real property
(and any personal property incident to such real property) which is acquired
as a result of a default either on a lease of such property or on
indebtedness which such property secured and with respect to which an
appropriate election is made.
TAXATION OF SHAREHOLDERS
Distributions by the Company of net investment income will be taxable to
shareholders as ordinary income to the extent of the current or accumulated
earnings and profits of the Company. Distributions of net capital gain, if
any, designated by the Company as capital gain dividends generally will be
taxable to shareholders as long-term capital gain, regardless of the length
of time the Common Shares have been held by the shareholders. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income pursuant to Section 291 of the Code. All
distributions are taxable, at least to the extent of the current or
accumulated earnings and profits of the Company, whether received in cash or
invested in additional Common Shares. Dividends declared by the Company in
October, November or December payable to shareholders of record on a date in
such a month and paid during the following January will be treated as having
been received by shareholders on December 31 in the year in which such
dividends were declared. Income (including dividends) from the Company
normally will be characterized as "portfolio" income (as opposed to "passive"
income) for purposes of the tax rules governing "passive" activities;
accordingly, passive losses of the shareholder may not be used to offset
income derived by the shareholder from the Company.
None of the distributions from the Company (as a REIT) received by
corporate shareholders, whether characterized as ordinary income or capital
gain, will qualify for the dividends received deduction generally available
to corporations.
The Company may be required to withhold and remit to the Service 31% of
the dividends paid to any shareholder who (a) fails to furnish the Company
with a properly certified taxpayer identification number, (b) has under
reported dividend or interest income to the Service or (c) fails to certify
to the Company that he is not subject to backup withholding. Any amount paid
as backup withholding will be creditable against the shareholder's income tax
liability. The Company will report to its shareholders and the Service the
amount of dividends paid during each calendar year and the amount of any tax
withheld.
In general, any gain or loss realized upon a taxable disposition of
Common Shares of the Company or upon receipt of a liquidating distribution by
a shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the Common Shares have been held for more than one
year and as short-term capital gain or loss if the Common Shares have been
held for one year or less. If, however, the shareholder receives any capital
gain dividends with respect to Common Shares held six months or less, any
loss realized upon a taxable disposition of such Common Shares shall, to the
extent of such capital gain dividends, be treated as a long-term capital
loss. All or a portion of any loss realized upon a taxable disposition of
Common Shares of the Company may be disallowed if other Common Shares of the
Company are purchased (under a dividend reinvestment plan or otherwise)
within 30 days before or after the disposition.
DISCLOSURE REGARDING DIVIDEND REINVESTMENT PLAN
Shareholders participating in the DRIP will be deemed to have received
the gross amount of any cash distributions which would have been paid by the
Company to such shareholders had they not elected to participate.
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These deemed distributions will be treated as actual distributions from the
company to the participating shareholders and will retain the character and
tax effects applicable to distributions from the Company generally. See
"Taxation of Taxable Domestic Shareholders" and "Taxation of Foreign
Shareholders." Participants in the DRIP are subject to federal income tax on
the amount of the deemed distributions to the extent that such distributions
represent dividends or gains, even thought they receive no cash. Common
Shares received under the DRIP will have a holding period beginning with the
day after purchase and a tax basis equal to their cost (which is the gross
amount of the deemed distribution).
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Except as noted below, based upon a revenue ruling issued by the
Service, dividend distributions by the Company to a shareholder that is a
tax-exempt entity should not constitute "unrelated business taxable income"
("UBTI"), provided that the tax-exempt entity has not financed the
acquisition of its Common Shares with "acquisition indebtedness" within the
meaning of the Code and the Common Shares are not otherwise used in an
unrelated trade or business of the tax-exempt entity. However, if a
tax-exempt entity borrows money to purchase its Common Shares, a portion of
its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules of the Code. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal service organizations that are exempt from
taxation under Code Sections 501(c)(7), (9), (17) and (20), respectively, are
subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. Also, it should be
noted that dividend distributions by a REIT to an exempt organization that is
a private foundation should constitute investment income for purposes of the
excise tax on net investment income of private foundations imposed by Section
4940 of the Code. If an employee trust qualified under Code Section
401(a)(a "qualified trust") owns more than 10% by value of the Common Shares
in the Company at any time during a tax year, then a portion of the dividends
paid by the Company to such trust may be treated as UBTI, but only if (i) the
Company would not have qualified as a REIT but for the provisions of the Code
which "look through" such a qualified trust for purposes of determining
ownership of a REIT and (ii) at least one qualified trust holds more than 25%
(by value) of the Common Shares in the Company or one or more qualified
trusts (each of which holds more than 10% of the Common Shares) hold in the
aggregate more than 50% (by value) of the Common Shares. If the Company were
treated as a "taxable mortgage pool," a substantial portion of the dividends
paid to a tax-exempt shareholder may be UBTI. Although the Company does not
believe that the Company, or any portion of its assets will be treated as a
taxable mortgage pool, no assurance can be given that the Service might not
successfully maintain that such a taxable mortgage pool exists.
Because of the complexity and variations of the UBTI rules, tax-exempt
entities should consult their own tax advisors.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other
foreign shareholders (collectively, "non-U.S. shareholders") are complex and
no attempt will be made herein to provide more than a summary of such rules.
Prospective non-U.S. shareholders should consult with their own tax advisors
to determine the impact of Federal, state and local income tax laws with
regard to an investment in Common Shares, including any reporting
requirements.
Distributions that are not attributable to gain from sales or exchanges
by the Company of "United States Real Property Interests" and not designated
by the Company as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Generally, such
distributions will be subject to a U.S. withholding tax equal to 30% of the
gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common
Shares is treated as effectively connected with the non-U.S. shareholder's
conduct of a United States trade or business, the non-U.S. shareholder
generally will be subject to a tax at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to such dividends (and may also be
subject to the 30% branch profits tax in the case of a shareholder that is a
foreign corporation). The Company expects to withhold United States income
tax at the rate of 30% on the gross amount of any such dividends made to a
non-U.S. shareholder unless (a) a lower treaty rate applies and the non-U.S.
shareholder files an IRS Form 1001 or (b) the non-U.S. shareholder files an
IRS Form 4224 with the Company claiming
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that the distribution is effectively connected income. Any distributions in
excess of current and accumulated earnings and profits of the Company will
not be taxable to a non-U.S. shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Common Shares, but rather will
reduce the adjusted basis of such Common Shares. To the extent that such
distributions exceed the adjusted basis of a non-U.S. shareholder's Common
Shares, they will give rise to tax liability if the non-U.S. shareholder
would otherwise be subject to tax on any gain from the sale or disposition of
his Common Shares, as described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the distributions
will be subject to withholding at the same rate as dividends. However,
amounts thus withheld are refundable if it subsequently is determined that
such distribution was, in fact, in excess of current and accumulated earnings
and profits of the Company.
For any year in which the Company qualifies as a real estate investment
trust, distributions that are attributable to gain from sales or exchanges by
the Company of "United States real property interests" will be taxed to a
non-U.S. shareholder under the provisions of the Foreign Investment in Real
Property Tax Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these
distributions are taxed to a non-U.S. shareholder as if such gain were
effectively connected with a United States business. Non-U.S. shareholders
would thus be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty
exemption. The Company is required by applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend to the extent that such capital gain dividends are
attributable to the sale or exchange by the Company of United States real
property interests. This amount is creditable against the non-U.S.
shareholder's Federal tax liability. Fixed rate mortgage loans will not
normally be classified as "United States real property interests."
Gain recognized by a non-U.S. shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled real estate investment trust," defined generally as a real estate
investment trust in which at all times during a specified testing period less
than 50% in value of the Common Shares were held directly or indirectly by
non-U.S. persons. Additionally, gain recognized by a non-U.S. shareholder
upon a sale of Common Shares generally will not be taxed under FIRPTA unless
the shareholder beneficially owns more than 5% of the total fair market value
of the Common Shares at any time during the shorter of the five-year period
ending on the date of disposition or the period during which the shareholder
held the Common Shares. Gain not subject to FIRPTA will be taxable to a
non-U.S. shareholder if (a) investment in the Common Shares is effectively
connected with the non-U.S. shareholder's United States trade or business, in
which case the non-U.S. shareholder will be subject to the same treatment as
U.S. shareholders with respect to such gain or (b) the non-U.S. shareholder
is a nonresident alien individual who was present in the United States for
183 days or more during the taxable year, in which case the nonresident alien
individual will be subject to a 30% tax on his U.S. source capital gains. If
the gain on the sale of Common Shares becomes subject to taxation under
FIRPTA, the non-U.S. shareholder will be subject to the same treatment as
U.S. shareholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals).
Subject to the provisions of any tax treaty that may exist between the
United States and the country in which the foreign holder is domiciled at the
time of his death, an individual foreign shareholder who owns Common Shares
at the time of his death will have the Common Shares subject to Federal
estate tax. The Federal estate tax will be assessed on the fair market value
of such Common Shares at the time of the foreign holder's death.
OTHER TAXATION
Tax treatment of the Company and its shareholders under tax laws other
than those governing Federal income tax may differ substantially from the
Federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OWN TAX ADVISOR WITH REGARD
TO THE STATE, LOCAL AND OTHER TAX CONSEQUENCES OF AN INVESTMENT IN THE
COMPANY.
ERISA CONSIDERATIONS
Because the Common Shares should qualify as a "publicly-offered
security," plans subject to ERISA , IRAs and H.R.10 Plans ("Keogh Plans") may
purchase Common Shares and treat such Common Shares, and not the Company's
assets, as plan assets. A fiduciary of an ERISA Plan should consider the
fiduciary standards under ERISA in the context of the plan's particular
circumstances before authorizing an investment of a portion of such plan's
assets in Common
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Shares. Accordingly, among other factors, such fiduciary should consider (i)
whether the plan's aggregate investments (including such an investment)
satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA,
(ii) whether the investment is in accordance with ERISA, the Code and the
documents and instruments governing the plan (as required by Section
404(a)(1)(D) of ERISA), and (iii) whether the investment is prudent,
considering the role such an investment plays in the plan's portfolio, the
nature of the Company's business, the possible limitations on the
marketability of Common Shares and the anticipated earnings of the Company.
Investors proposing to purchase Common Shares for their IRAs and Keogh Plans
should consider that an IRA and a Keogh Plan may only make investments that
are authorized by the appropriate governing instruments. Moreover, Keogh
Plans that cover Common law employees are also subject to the ERISA fiduciary
standards described above.
Any ERISA Plan or Keogh Plan covering Common law employees should also
consider prohibitions in ERISA relating to improper delegation of control
over or responsibility for "plan assets," prohibitions in ERISA and in the
Code relating to an ERISA Plan's engaging in certain transactions involving
"plan assets" with persons who are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the plan, and other
provisions in ERISA dealing with "plan assets." The Code provisions relating
to a plan's engaging in certain transactions involving "plan assets" with
persons who are "disqualified persons" under the Code with respect to the
plan also apply to IRAs and all Keogh Plans.
If the assets of the Company were deemed to be "plan assets" of plans
that are holders of Common Shares, Subtitle A and Parts 1 and 4 of Subtitle B
of Title I of ERISA (the prudence and fiduciary standards) with respect to
ERISA Plans and Keogh Plans covering Common law employees, and Section 4975
of the Code (the prohibitions on transactions involving disqualified persons)
with respect to ERISA Plans, IRAs and Keogh Plans, would extend to
transactions entered into and decisions made by the Company's management.
Furthermore, the Company's management would be deemed to be fiduciaries with
respect to such plans.
ERISA and the Code do not define "plan assets." On November 13, 1986,
the U.S. Department of Labor published a final regulation, amended on
December 31, 1986 and effective March 13, 1987, relating to the definition of
"plan assets," under which the assets of an entity in which employee benefits
plans, including ERISA Plans, IRAs and Keogh Plans, acquire interests would
be deemed "plan assets" under certain circumstances (the "Regulation"). The
Regulation generally provides that when a plan acquires an equity interest in
an entity which is a "publicly-offered security," the plan's assets include
only the acquired equity interest and not any interest in the underlying
assets of the entity. The Regulation defines a "publicly-offered security"
as a security that is "widely held," freely transferable and registered
pursuant to certain provisions of the Federal securities laws. The Company
believes that the Common Shares offered hereby will be a "publicly-offered
security," and thus that the Company's assets will not be deemed to be assets
of any employee benefit plan that is a holder of Common Shares.
FIDUCIARIES OF EMPLOYEE BENEFIT PLANS THAT ARE PROSPECTIVE SHAREHOLDERS
SHOULD CONSULT WITH THEIR OWN COUNSEL AND FINANCIAL ADVISORS TO DETERMINE THE
CONSEQUENCES UNDER ERISA OF AN INVESTMENT IN THE COMPANY, AND TO DETERMINE
THE PROPRIETY OF SUCH AN INVESTMENT IN LIGHT OF THE CIRCUMSTANCES OF THAT
PARTICULAR PLAN AND CURRENT APPLICABLE LAW.
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement entered
into between the Company and Southwest Securities, as the Representatives of
the Underwriters (the "Underwriting Agreement"), each of the Underwriters
named below has severally agreed to purchase from the Company, and the
Company has agreed to sell to the Underwriters, the respective number of
Common Shares set forth opposite its name below:
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Number
of Common
Underwriter Shares
- -------------------- ---------
Southwest Securities
Total
---------
---------
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel, and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of
the above Common Shares if any are purchased.
The Underwriters propose to offer the Common Shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $
per share to certain other dealers who are members of the National Association
of Securities Dealers, Inc. The Underwriters may allow, and such dealers may
re-allow, concessions not in excess of $ per share to certain
other dealers. The offering price and other selling terms may be changed
by the Underwriters.
Prior to the Offering, there has been no public market for the Common
Shares. The initial public offering price will be determined through
negotiations between the Company and the Representative. Among the factors
considered in such negotiations, in addition to the prevailing market
conditions, are dividend yields and financial characteristics of
publicly-traded REITs that the Company and the Representative believe to be
comparable to the Company, the expected results of operations of the Company
and the Properties, estimates of the future business potential and earnings
prospects of the Company as a whole, the current state of the real estate
market in the Company's target markets and the economy as a whole.
Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Common Shares. As an exception to
these rules, the Representative is permitted to engage in certain
transactions that stabilize the price of the Common Shares. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with this offering, i.e., if they sell more Common Shares than are
set forth on the cover page of this Prospectus, the Representative may reduce
that short position by purchasing Common Shares in the open market. The
Representative may also elect to reduce any short position by exercising all
or part of the over-allotment option described above.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
Common Shares in the open market to reduce the Underwriters' short position
or to stabilize the price of the Common Shares, they may reclaim the amount
of the selling concession from the Underwriters and selling group members who
sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a
penalty bid might also have an effect on the price of a security to the
extent that it were to discourage resales of the security before the
distribution is completed.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described below might have on the price of the Common Shares.
In addition, neither the Company nor any of the Underwriters makes any
representations that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discounted without
notice.
66
<PAGE>
The Underwriters have been granted a 30-day over-allotment option to
purchase up to an aggregate of 450,000 additional Common Shares, exercisable
at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof as the number of Common
Shares to be purchased by it as shown in the above table bears to the
3,000,000 Common Shares offered hereby. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Common Shares offered hereby. The Representatives of the Underwriters have
informed the Company that they do not expect the Underwriters to confirm
sales of Common Shares offered hereby to accounts over which they exercise
discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities
Act or to contribute to payments that the Underwriters may be required to
make in respect thereof.
The Company has agreed that it will not offer, sell, grant any option
(other than pursuant to the Plan) for the sale of, or otherwise dispose of
any shares or any securities convertible into or exchangeable for, or rights
to purchase or acquire Common Shares, for a period of 90 days after the date
hereof without the prior written consent of Southwest Securities. Such
restriction shall not apply, however, to Common Shares issued in exchange for
real property or to Common Shares issued in exchange for units in any
operating partnership controlled by the Company, if such Common Shares are
subject to a restriction on transferability of at least six (6) months. In
addition, the officers and Trust Managers of the Company have agreed with the
Underwriters not to offer, sell or otherwise dispose of any Common Shares for
a period of 180 days after the date hereof without the prior written consent
of Southwest Securities.
LEGAL MATTERS
The legality of the Common Shares offered hereby will be passed upon for
the Company by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas.
Certain legal matters will be passed on for the Underwriters by Winstead
Sechrest & Minick P.C.
EXPERTS
The consolidated balance sheet of the Company as of December 31, 1996
and 1995 and the related consolidated statements of operations, redeemable
preferred shares and common shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996 included in this
prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-11 under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder, with respect to the Common Shares offered
pursuant to this Prospectus. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and financial statement schedules
thereto. For further information with respect to the Company and the Common
Shares offered hereby, reference is made to the Registration Statement and
such exhibits and financial statement schedules, copies of which may be
examined without charge at, or obtained upon payment of prescribed fees from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices
of the Commission located at 7 World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding the Company and other
registrants that have been filed electronically with the Commission. The
address of such site is http://www.sec.gov.
67
<PAGE>
GLOSSARY
"ADA" means the Americans with Disabilities Act of 1990.
"Advisory Agreement" means the Amended and Restated Advisory Agreement
between the Company and the Investment Manager.
"Advisory Funds From Operations" means Funds From Operations plus annual
interest payments on outstanding indebtedness and the fee payable to the
Investment Manager.
"Board of Trust Managers" means the Company's Board of Trust Managers.
"Bylaws" means the Company's Amended and Restated Bylaws.
"Cash Available for Distribution" is defined as net income (loss) as computed
in accordance with GAAP, excluding gains and losses from debt restructuring
and property sales, plus depreciation and amortization, less capital
expenditures.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"Charter" means the Company's Amended and Restated Declaration of Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the Company's common shares of beneficial interest, no
par value per share.
"Company" means United Investors Realty Trust, a Texas real estate investment
trust.
"DRIP" means the Company's Dividend Reinvestment Plan to be implemented by
the Company upon consummation of the Offering.
"ERISA" means the Employee Retirement Income Securities Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excess Shares" means the shares into which shares of capital stock of the
Company owned, or deemed to be owned or transferred to the shareholders in
excess of the Ownership Limit will be automatically exchanged.
"Funds From Operations" means net income (loss) computed in accordance with
GAAP, excluding gains or losses from debt restructuring and sales of
property, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles in effect at date of
the Offering.
"Gross Receipts" means the gross revenues generated by the Company during a
period of time from operations, including rents, percentage rents, tenant
reimbursements, interest and income, but excluding receipts from capital
transactions, including sales, financings, refinancings and the sale of
equity securities.
"Investment Manager" means FCA Corp, an affiliate of the Company, that
provides investment and management services to the Company pursuant to the
terms of the Advisory Agreement.
"Investment Advisors Act" means the Investments Advisors Act of 1974, as
amended.
"IRA" means an individual retirement account.
"Ivy" means Ivy Realty Trust, an affiliate of the Company.
"9% Preferred Shares" means the Company's Nine Percent Redeemable Preferred
Shares of Beneficial Interest, par value $100 per share.
"Offering" means the initial public offering of the Common Shares as
described in this Prospectus.
68
<PAGE>
"Ownership Limit" means the restriction contained in the Charter providing
that, subject to certain exemptions, the holder may not own or be deemed to
own, by virtue of attribution rules of the Code, more than 9.8% of the total
outstanding Trust Shares.
"Plan Agent" means , as agent for the DRIP.
"Plan" means the Company's 1997 Share Incentive Plan.
"Preferred Shares" means the Company's preferred shares of beneficial
interest, of which 20,000 shares are authorized to be issued with a $100 par
value per share, the remainder to be issued at no par value.
"Properties" means the Company's eight community shopping centers located in
Texas, Tennessee and Arizona.
"Randall's" means Randall's Food & Drugs, Inc.
"REIT" means a real estate investment trust, as defined by Sections 856
through 860 of the Code.
"Service" means the Internal Revenue Service.
"Securities Act" means the Securities Act of 1933, as amended.
"Texas REIT Act" means the Texas Real Estate Investment Trust Act.
"Total Market Capitalization" means the total number of Common Shares and
Preferred Shares outstanding times the current market price of such shares
plus long-term debt.
"Triple Net Lease" means whereby a tenant pays in addition to base rent its
pro rata share of the shopping centers' common area maintenance expenses,
real estate taxes and insurance expenses.
"Trust Shares" means, collectively, the Common Shares and the Preferred
Shares.
69
<PAGE>
Statements contained in this Prospectus as to the contents of any
contract or other document which is filed as an exhibit to the Registration
Statement are not necessarily complete, and each such statement is qualified
in its entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other
information with the Commission pursuant to the Exchange Act.
In addition to applicable legal or Stock Exchange
requirements, if any, holders of the Common Shares will receive
annual reports containing audited financial statements with a
report thereon by the Company's independent certified public
accountants, and quarterly reports containing unaudited
financial information for each of the first three quarters of
each fiscal year.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
<S> <C>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES - FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidated Balance Sheet as of March 31, 1997 and
December 31, 1996 F-3
Condensed Consolidated Statement of Operations for the
three months ended March 31, 1997 and 1996 F-4
Condensed Consolidated Statement of Redeemable Preferred Shares and
Common Shareholders' Equity for the three months ended
March 31, 1997 F-5
Condensed Consolidated Statement of Cash Flows for the
three months ended March 31, 1997 and 1996 F-6
Notes to Condensed Consolidated Financial Statements F-7
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES - FINANCIAL STATEMENTS
Report of Independent Accountants F-10
Consolidated Balance Sheet as of December 31, 1996 and 1995 F-11
Consolidated Statement of Operations for the years ended
December 31, 1996, 1995 and 1994 F-12
Consolidated Statement of Redeemable Preferred Shares and Common
Shareholders' Equity for the years ended December 31, 1996, 1995
and 1994 F-13
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-14
Notes to Consolidated Financial Statements F-15
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS, CONTINUED
Page
FINANCIAL STATEMENT SCHEDULE
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1996 F-29
Notes to Schedule III F-30
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES- PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Introduction to Pro Forma Condensed Consolidated Financial Statements F-31
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997 F-32
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1997 F-33
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1996 F-34
Notes to Pro Forma Condensed Consolidated Financial Statements F-35
</TABLE>
F-2
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
March 31, December 31,
ASSETS 1997 1996
<S> <C> <C>
Investment real estate:
Land $ 8,118,723 $ 8,118,723
Buildings and improvements 31,289,658 31,249,977
----------- -----------
39,408,381 39,368,700
Less accumulated depreciation (4,034,426) (3,767,720)
----------- -----------
Investment real estate, net 35,373,955 35,600,980
Cash and cash equivalents 281,525 119,316
Accounts receivable, net of allowance of $33,652
and $31,209 for 1997 and 1996, respectively 682,664 885,157
Prepaid expenses and other assets 382,445 303,332
Investment in real estate venture 339,790 333,759
----------- -----------
Total assets $37,060,379 $37,242,544
----------- -----------
----------- -----------
LIABILITIES, MINORITY INTEREST, REDEEMABLE
PREFERRED SHARES AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $25,338,724 $25,590,592
Redeemable convertible subordinated notes 212,400 212,400
Short-term notes and lines of credit 875,000 740,000
Accounts payable and accrued expenses 623,453 751,766
Security deposits 110,681 112,101
----------- -----------
Total liabilities 27,160,258 27,406,859
----------- -----------
Minority interest in real estate ventures 1,320,209 1,314,673
----------- -----------
Commitments and contingencies
Redeemable preferred shares of beneficial interest,
$100 par value, 20,000 shares authorized, 10,737
shares issued and outstanding at 1997 and 1996,
respectively 1,068,226 1,068,226
----------- -----------
Common shareholders' equity:
Common shares of beneficial interest, no par value,
20,000,000 shares authorized, 837,489 shares
issued and outstanding at 1997 and 1996,
respectively 7,598,348 7,598,348
Accumulated deficit (86,662) (145,562)
----------- -----------
Total common shareholders' equity 7,511,686 7,452,786
----------- -----------
Total liabilities, minority interest, redeemable
preferred shares and common shareholders' equity $37,060,379 $37,242,544
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1997 1996
<S> <C> <C>
Revenues:
Base rents $1,215,752 $ 962,663
Percentage rents 6,600 8,206
Expense reimbursements 273,868 193,952
Interest and other income 8,476 13,106
---------- ----------
Total revenues 1,504,696 1,177,927
---------- ----------
Expenses:
Operating and maintenance 130,561 90,419
Real estate taxes 188,566 131,165
General and administrative 197,822 143,275
Interest 611,203 504,277
Depreciation and amortization 284,416 221,235
---------- ----------
Total expenses 1,412,568 1,090,371
---------- ----------
Income before gain on sale of investment real
estate, minority interest and preferred share
dividend requirements 92,128 87,556
Gain on sale of investment real estate 6,760
---------- ----------
Income before minority interest and preferred share
dividend requirements 92,128 94,316
Minority interest in net income of real estate ventures (9,070) (10,645)
---------- ----------
Income before preferred share dividend requirements 83,058 83,671
Preferred share dividend requirements (24,158) (23,822)
---------- ----------
Net income available for common shareholders $ 58,900 $ 59,849
---------- ----------
---------- ----------
Net income per common share $ .07 $ .07
---------- ----------
---------- ----------
Weighted average shares outstanding 887,489 884,397
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED
SHARES AND COMMON SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
REDEEMABLE PREFERRED COMMON
SHARES OF BENEFICIAL SHARES OF BENEFICIAL
INTEREST INTEREST
--------------------- ---------------------- ACCUMULATED
NUMBER AMOUNT NUMBER AMOUNT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,737 $1,068,226 837,489 $7,598,348 $(145,562)
Income before preferred share dividend
requirements 83,058
Redeemable preferred shares of
beneficial interest cash dividends,
$2.25 per share (24,158)
------ ---------- ------- ---------- ---------
Balance at March 31, 1997 10,737 $1,068,226 837,489 $7,598,348 $ (86,662)
------ ---------- ------- ---------- ---------
------ ---------- ------- ---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income available for common shareholders $ 58,900 $ 59,849
Adjustments to reconcile net income available for common
shareholders to net cash provided by operating activities:
Depreciation and amortization 284,416 221,235
Minority interest in net income of real estate ventures 9,070 10,645
Equity in net income of investment in real estate venture (6,031) (7,807)
Recognition of deferred rent (12,790) (20,550)
Provision for uncollectible accounts 2,443 2,055
Preferred share dividends 24,158 23,822
Changes in operating assets and liabilities:
Decrease in accounts receivable 212,840 110,326
Increase in prepaid expenses and other assets (96,822) (2,447)
Decrease in accounts payable and accrued expenses (128,313) (142,368)
Increase (decrease) in security deposits (1,420) 2,000
--------- ---------
Net cash provided by operating activities 346,451 256,760
--------- ---------
Cash flows from investing activities:
Purchase of and capital improvements to
investment real estate (26,402) (6,777)
--------- ---------
Cash used in investing activities (26,402) (6,777)
--------- ---------
Cash flows from financing activities:
Principal payments on mortgage notes payable (251,868) (177,996)
Proceeds from lines of credit 135,000
Distribution to holders of minority interests (16,814) (16,814)
Preferred share dividends paid (24,158) (23,822)
--------- ---------
Net cash used in financing activities (157,840) (218,632)
--------- ---------
Increase in cash and cash equivalents 162,209 31,351
Cash and cash equivalents at beginning of period 119,316 427,820
--------- ---------
Cash and cash equivalents at end of period $ 281,525 $ 459,171
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-6
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
of United Investors Realty Trust (the "Company") should be read in
conjunction with the consolidated financial statements and notes
thereto of the Company included elsewhere in this Prospectus. Certain
information in the notes to the condensed consolidated financial
statements normally included in financial statements prepared in
accordance with generally accepted accounting principles has been
condensed or omitted pursuant to these rules and regulations. In the
opinion of management, adjustments consisting of normal recurring
accruals considered necessary for a fair presentation of interim
financial statements have been included. Operating results for
interim periods are not necessarily indicative of the results that may
be expected for the full year.
2. REVOLVING LINES OF CREDIT:
During the three months ended March 31, 1997, the Company's $200,000
unsecured revolving line of credit facility due in April 1997 was
renewed and extended to April 1998. As of March 31, 1997, $175,000
was outstanding on the bank credit facility.
In addition, the Company's $100,000 unsecured revolving line of credit
due February 1997 was renewed and extended to May 5, 1998. As of
March 31, 1997, $100,000 was outstanding on the bank facility.
3. MORTGAGE DEBT:
As of March 31, 1997, the Company's mortgage indebtedness was $25.3
million, collateralized by investment real estate. The mortgage
indebtedness interest rates range from 7.63% to 9.75%, with a weighted
average interest rate of 9.06% and a weighted average maturity of 7.2
years.
F-7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS, CONTINUED
4. RECENT ACCOUNTING PRONOUNCEMENT:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share" which simplifies the standards for computing and presenting
earnings per share ("EPS") and makes them comparable to international
EPS standards. This statement is effective for the year ending
December 31, 1997. Earlier application is not permitted and
restatement of prior period earnings per share data is required. The
Company does not believe that implementation of SFAS No. 128 will have
a material impact on its EPS.
5. SUPPLEMENTAL CASH FLOW INFORMATION:
The following supplemental information is related to the statement of
cash flows:
1996
Exchange of investment real estate for 834,397 shares
of Ivy Realty Trust, an affiliated trust, transfer
of mortgage note payable, issuance of mortgage
note receivable and transfer of net liabilities $1,640,465
Payment of dividend with shares of affiliated trust 500,639
6. RELATED PARTY TRANSACTIONS:
The Company is managed and advised by FCA Corp (the "Advisor"), an
affiliate. Advisory fee expenses were $78,000 and $69,000 for the
three months ended March 31, 1997 and March 31, 1996, respectively.
Advisory fees are calculated at .8%, on an annual basis, of the
gross Company assets at year-end, increased by noncash reserves.
7. NET INCOME PER COMMON SHARE:
Net income per common share is calculated by dividing net income
available for common shareholders by the weighted average number of
shares of beneficial interest outstanding during the period. The
assumed conversion of redeemable debt and redeemable preferred shares
would be antidilutive in all periods presented. For each period
presented, the weighted average number of shares outstanding have been
increased by 50,000 shares of beneficial interest to reflect the
planned 1997 stock award (Note 8) to the Advisor and the Company's
independent trust managers.
F-8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS, CONTINUED
8. PUBLIC OFFERING:
The Company has announced it expects to register approximately
3,000,000 common shares of beneficial interest, no par value, in a
proposed public offering (the "Offering"). There is no assurance that
the Offering can be completed.
Contemporaneous with the Offering, the Company expects to award 50,000
shares of beneficial interest, at no cost, to the Advisor and the
Company's independent trust managers. As a result, the Company will
record a nonrecurring charge to compensation expense of approximately
$590,000 related to the share award subsequent to the Offering. In
addition, the Company intends to establish a share incentive plan (the
"Plan") for the Company's executives, key employees and certain
personnel of the Advisor. The Plan will provide that the maximum
number of share awards and share options granted will not exceed 10%
of the Company's outstanding common shares of beneficial interest at
any given time and will have exercise prices equal to or greater than
the fair market value on the date of grant.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
United Investors Realty Trust:
We have audited the accompanying consolidated balance sheet of United
Investors Realty Trust and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, redeemable preferred
shares and common shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996 and the financial statement
schedule listed in the index on page F-2. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 the
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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United
Investors Realty Trust and Subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information required to be included
therein.
As discussed in Note 10 to the consolidated financial statements, the Company
changed its method of recognizing certain rental revenues and expenses.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 25, 1997, except for Note 10,
as to which the date is June 10, 1997
F-10
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
Investment real estate:
Land $ 8,118,723 $ 7,482,154
Buildings and improvements 31,249,977 26,754,778
----------- -----------
39,368,700 34,236,932
Less accumulated depreciation (3,767,720) (2,988,030)
----------- -----------
Investment real estate, net 35,600,980 31,248,902
Cash and cash equivalents 119,316 427,820
Accounts receivable, net of allowance of $31,209
and $22,989 for 1996 and 1995, respectively 885,157 572,219
Prepaid expenses and other assets 303,332 283,263
Investment in real estate venture 333,759
----------- -----------
Total assets $37,242,544 $32,532,204
----------- -----------
----------- -----------
LIABILITIES, MINORITY INTEREST, REDEEMABLE
PREFERRED SHARES AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $25,590,592 $22,272,445
Redeemable convertible subordinated notes 212,400 212,400
Short-term notes and lines of credit 740,000
Accounts payable - trade 250,848 339,712
Accrued property taxes 500,918 454,842
Security deposits 112,101 127,746
----------- -----------
Total liabilities 27,406,859 23,407,145
----------- -----------
Minority interest in real estate ventures 1,314,673 699,984
----------- -----------
Commitments and contingencies (Note 7)
Redeemable preferred shares of beneficial interest,
$100 par value, 20,000 shares authorized, 10,737
shares issued and outstanding at December 31,
1996 and 1995 1,068,226 1,068,226
----------- -----------
Common shareholders' equity:
Common shares of beneficial interest, no par value,
20,000,000 shares authorized, 837,489 and 834,397
shares issued and outstanding at December 31, 1996
and 1995, respectively 7,598,348 7,559,684
Accumulated deficit (145,562) (202,835)
----------- -----------
Total common shareholders' equity 7,452,786 7,356,849
----------- -----------
Total liabilities, minority interest, redeemable
preferred shares and common shareholders'
equity $37,242,544 $32,532,204
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-11
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1996 1995 1994
Revenues:
Base rents $4,097,911 $4,389,491 $3,794,711
Percentage rents 32,822
Expense reimbursements 835,940 848,975 844,299
Interest and other income 67,409 44,224 10,344
---------- ---------- ----------
Total revenues 5,034,082 5,282,690 4,649,354
---------- ---------- ----------
Expenses:
Operating and maintenance 442,701 662,687 445,635
Real estate taxes 558,000 569,634 512,070
Advisory fees to affiliate 279,000 276,000 253,000
Management fees 139,780 212,506 124,672
General and administrative 130,862 108,478 78,808
Legal and accounting 93,302 60,482 50,657
Interest 2,132,390 2,177,447 2,101,762
Depreciation and amortization 958,778 960,876 756,914
---------- ---------- ----------
Total expenses 4,734,813 5,028,110 4,323,518
---------- ---------- ----------
Income before gain on sale of investment
real estate, minority interest and
preferred share dividend requirements 299,269 254,580 325,836
Gain on sale of investment real estate 240,000 25,020
---------- ---------- ----------
Income before minority interest and
preferred share dividend requirements 539,269 279,600 325,836
Minority interest in net income of real
estate ventures (51,941) (43,278) (48,435)
---------- ---------- ----------
Income before preferred share dividend
requirements 487,328 236,322 277,401
Preferred share dividend requirements (96,296) (43,618)
---------- ---------- ----------
Net income available for common
shareholders $ 391,032 $ 192,704 $ 277,401
---------- ---------- ----------
---------- ---------- ----------
Net income per common share $ .44 $ .22 $ .35
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding 884,655 884,397 802,899
---------- ---------- ----------
---------- ---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-12
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED SHARES
AND COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
PREFERRED COMMON
SHARES OF BENEFICIAL SHARES OF BENEFICIAL
INTEREST INTEREST
--------------------- ---------------------- ACCUMULATED
NUMBER AMOUNT NUMBER AMOUNT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993, as previously
reported 687,429 $5,751,784 $(262,054)
Change in accounting methods (Note 10) 88,802
------- ---------- ---------
Balance at December 31, 1993, as restated (Note 10) 687,429 5,751,784 (173,252)
Issuance of common shares of beneficial interest 146,968 1,755,930
Offering expenses (18,801)
Net income available for common shareholders 277,401
Dividends (332,808)
------- ---------- ---------
Balance at December 31, 1994, as restated (Note 10) 834,397 7,488,913 (228,659)
Acquisition of minority interest in Twin Lakes 70,771
Issuance of redeemable preferred shares 10,737 $1,073,700
Offering expenses (5,474)
Income before preferred share dividend requirements 236,322
Dividends (166,880)
Redeemable preferred shares of beneficial interest
cash dividends, $6.75 per share (43,618)
------ ---------- ------- ---------- ---------
Balance at December 31, 1995, as restated (Note 10) 10,737 1,068,226 834,397 7,559,684 (202,835)
Issuance of common shares of beneficial interest 3,092 38,664
Income before preferred share dividend requirements 487,328
Dividends (333,759)
Redeemable preferred shares of beneficial interest
cash dividends, $9.00 per share (96,296)
------ ---------- ------- ---------- ---------
Balance at December 31, 1996, as restated (Note 10) 10,737 $1,068,226 837,489 $7,598,348 $(145,562)
------ ---------- ------- ---------- ---------
------ ---------- ------- ---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-13
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income available for common shareholders $ 391,032 $ 192,704 $ 277,401
Adjustments to reconcile net income available
for common shareholders to net cash provided
by operating activities:
Depreciation and amortization 958,778 960,876 756,914
Minority interest in net income of real estate
ventures 51,941 43,278 48,435
Recognition of deferred rent (82,201) (44,677) (63,702)
Provision for uncollectible accounts 8,220 4,468 22,840
Gain on sale of investment real estate (240,000) (25,020)
Preferred dividends paid 96,296 43,618
Payment of common shares for services 38,664
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (178,533) 16,530 (107,601)
Increase in prepaid expenses and other assets (78,167) (167,660) (70,939)
Increase (decrease) in accounts payable - trade 191,717 (90,885) (15,759)
Increase (decrease) in accrued property taxes (53,910) 12,025 108,360
Increase (decrease) in security deposits (41,835) 13,253 37,323
----------- ----------- -----------
Net cash provided by operating activities 1,062,002 958,510 993,272
----------- ----------- -----------
Cash flows from investing activities:
Purchase of and capital improvements to
investment real estate (1,374,675) (383,957) (2,240,884)
Proceeds from sale of investment 114,478
Payment received on affiliate note receivable 55,462
----------- ----------- -----------
Net cash used in investing activities (1,319,213) (269,479) (2,240,884)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 740,000 2,021,210 1,608,900
Proceeds from short-term notes payable 235,000
Principal payments on mortgage notes payable (604,574) (2,629,496) (392,785)
Principal payments on short-term notes payable (23,103) (235,000)
Proceeds from issuing common shares of beneficial
interest, net 70,219
Proceeds from issuing preferred shares of beneficial
interest, net 569,526
Cash dividends paid (96,296) (43,618) (332,808)
Distribution to holders of minority interests (67,320) (67,259) (67,285)
----------- ----------- -----------
Net cash provided by (used in) financing
activities (51,293) (384,637) 1,121,241
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (308,504) 304,394 (126,371)
Cash and cash equivalents at beginning of year 427,820 123,426 249,797
----------- ----------- -----------
Cash and cash equivalents at end of year $ 119,316 $ 427,820 $ 123,426
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-14
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
United Investors Realty Trust (the "Company") was organized on
December 1, 1988, as a Massachusetts business trust and subsequently
converted to a Texas real estate investment trust. The Company was
formed for the purpose of investing directly in income-producing real
property and in partnerships formed to own such real property.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company, its subsidiaries and its majority interest in Park
Northern/Centennial Partners L.P. and University Park L.P.
Investments in 50% or less owned real estate ventures over which the
Company has the ability to exercise influence are accounted for using
the equity method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVESTMENT REAL ESTATE
Investment real estate, consisting of eight shopping centers, is
recorded at cost. The cost of real estate acquired by the issuance of
shares of beneficial interest is determined by the estimated value of
the shares issued or the real estate acquired. The allocation of cost
between land and building is based on the estimated fair value at the
time of the purchase. Depreciation is computed using the
straight-line method over the estimated useful lives of 30 to 40 years
for the shopping centers and 5 to 10 years for building improvements.
Depreciation expense included in the statement of operations was
$886,173, $902,380 and $727,189 for the years ended December 31, 1996,
1995 and 1994, respectively.
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant betterments are capitalized.
When assets are sold or retired, their costs and related accumulated
depreciation are removed from the accounts with the resulting gains or
losses reflected in operations for the period.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INVESTMENT REAL ESTATE, CONTINUED
Recoverability of investment real estate is evaluated periodically as
events or circumstances indicate a possible inability to recover its
carrying amount. Recoverability is determined on a property by
property basis utilizing the undiscounted cash flow method. If
undiscounted cash flows do not recover the carrying amount of the real
estate, the real estate is reduced to fair value.
REVENUE RECOGNITION
Base rental revenue is reported on a straight-line basis over the
terms of the respective leases. The impact of the straight-line rent
adjustment increased revenues by $82,201, $44,677 and $63,702 for the
years ended December 31, 1996, 1995 and 1994, respectively (See Note
10).
NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income
available for common shareholders by the weighted average number of
shares of beneficial interest outstanding during the year. The
assumed conversion of redeemable debt and redeemable preferred shares
would be antidilutive in all years presented. For each period
presented, the weighted average number of shares outstanding have been
increased by 50,000 shares of beneficial interest to reflect the
planned 1997 stock award (Note 11) to FCA Corp (the "Advisor"), an
affiliate, and the Company's independent trust managers.
CONCENTRATION OF CREDIT RISK
The Company's primary business activity is investing in income
producing real property. The Company's retail shopping center
properties are located in Austin, College Station, El Campo and San
Antonio, Texas; Lenoir City and Athens, Tennessee; and Phoenix,
Arizona. Additionally, the Company generally places its cash and cash
equivalents with financial institutions located in Texas.
During 1996, 1995 and 1994, the Company earned approximately
$1,151,000, $1,131,000 and $1,134,000, respectively, in rental revenue
from two tenants. These two tenants' revenues amount to approximately
23%, 21% and 24% of the Company's total revenue for the years ended
December 31, 1996, 1995 and 1994.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
2. INVESTMENT REAL ESTATE:
TWIN LAKES SHOPPING CENTER
Prior to 1995, the Company owned a majority interest in a shopping
center located in Lenoir City, a suburb of Knoxville, Tennessee.
Effective March 31, 1995 the Company acquired the remaining minority
interest in the shopping center. The shopping center is managed by an
unrelated third party.
AUTOBAHN SHOPPING CENTER
The Company purchased Autobahn Shopping Center in September 1990 for
$537,500 in cash and a note payable of $1,687,500. This shopping
center is located in San Antonio, Texas and is managed by an unrelated
third party.
CENTENNIAL SHOPPING CENTER/PARK NORTHERN SHOPPING CENTER
The Company purchased through UIRT I - Centennial, Inc., a
wholly-owned subsidiary, Centennial Shopping Center in September 1991
for $1,025,534 in cash and a note payable of $3,920,000. This
shopping center is located in Austin, Texas and is managed by an
unrelated third party. In November 1996, the Company acquired the
Park Northern Shopping Center through a contribution agreement whereby
the Company through its wholly-owned subsidiary, UIRT-I, Centennial,
Inc., contributed 100% of its ownership in Centennial Shopping Center
valued at $5.3 million less a note payable of $3.8 million plus
$600,000 cash in exchange for a 70% ownership in a newly organized
Texas limited partnership, Park Northern/Centennial Partners L.P. In
exchange, the seller contributed 100% of Park Northern Shopping Center
valued at $4.2 million less a note payable of $3.3 million in exchange
for 30% ownership in the newly formed limited partnership. As a
result of this transaction, the Company recorded a gain of $240,000.
The $600,000 was used to reduce the Park Northern note payable to $2.8
million plus the payment of certain closing costs. Profits and losses
are distributed based on ownership interest. Park Northern is located
in Phoenix, Arizona and is managed by an unrelated third party.
BANDERA FESTIVAL SHOPPING CENTER
The Company purchased through UIRT - Bandera Festival, Inc., a
wholly-owned subsidiary, Bandera Festival Shopping Center in February
1992 for $2,875,555 in cash and a note payable of $8,250,000. This
shopping center is located in San Antonio, Texas and is managed by an
unrelated third party.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
2. INVESTMENT REAL ESTATE, CONTINUED:
RANDALL'S/UNIVERSITY PARK SHOPPING CENTER
The Company purchased through UIRT/ University Park - I L.P., a Texas
limited partnership, Randall's University Park Shopping Center in
April 1993 for $1,537,500 in cash and a note payable of $5,100,000.
The shopping center is located in College Station, Texas and is
managed by an unrelated third party. The Company, through UIRT -
University Park, Inc., a wholly-owned subsidiary, owns a 5% general
partnership interest. Additionally, the Company owns 51% of the
limited partnership interests in the partnership. The remaining 44%
of the limited partnership interests are owned by unrelated persons
("Limited Class A Partners"). Net income, net gains, net losses, and
cash distributions are allocated to the partners in accordance with
the terms of the partnership agreement as follows:
* Net income, net gains and cash distributions to the partners as
follows:
a. First, to the Limited Class A Partners in an amount equal to
their annual priority return, as defined.
b. Next, to the general partner and the Company's limited
partnership interests in an amount equal to their annual
priority return, as defined.
c. The remaining balance may be allocated to the partners in
proportion to their respective partnership interests.
* Net losses are allocated to the partners in proportion to their
respective partnership interests.
Limited Class A Partners, with equity interests aggregating
approximately $747,000, have the right to require the Company to
repurchase their interests upon the occurrence of the following
events, whichever occurs first:
(a) The tenth annual anniversary date of the Partnership;
(b) Sale of the Subject Properties; or
(c) The Company issues additional Shares of Beneficial Interest
which are offered and sold pursuant to a Registration Statement
filed with the Securities and Exchange Commission under the
Securities Act of 1933.
The repurchase price is to be based upon the appraised value of the
partnership interests by an independent appraiser, or, if the Company
issues stock through an initial public offering (as described in item
(c) above), the greater of the value determined by an independent
appraiser or the original capital contributions plus 6% per annum from
the date of contributions through the date of repurchase.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
2. INVESTMENT REAL ESTATE, CONTINUED:
MCMINN PLAZA SHOPPING CENTER
The Company purchased through UIRT-I-McMinn, Inc. and UIRT-W-McMinn,
Inc., two wholly-owned subsidiaries, McMinn Plaza Shopping Center in
June 1994 for $221,282 in cash, 71,085 shares of beneficial interest
valued at $12 per share and two notes payable totaling $1,608,900.
This shopping center is located in Athens, Tennessee and is managed by
an unrelated third party.
EL CAMPO SHOPPING CENTER
The Company purchased El Campo Shopping Center in June 1996 for
$400,000 cash and a note payable of $1,600,000. The shopping center
is located in El Campo, Texas and is managed by an unrelated third
party.
ONE WEST HILLS OFFICE BUILDING
The Company purchased One West Hills Office Building in September 1994
for $126,749 in cash, 60,365 shares of beneficial interest and
assumption of a note payable of $685,341. The office building is
located in Dallas, Texas and is managed by an unrelated third party.
On January 1, 1996 the Company transferred its investment in the
office building to an affiliated real estate investment trust. (See
Note 5).
3. NOTES PAYABLE:
REDEEMABLE CONVERTIBLE SUBORDINATED NOTES
At December 31, 1996 and 1995, the Company had outstanding $212,400 of
redeemable convertible subordinated notes payable bearing interest at
9% with semi-annual interest payments due June 30 and December 31 of
each year. The notes are due on December 31, 2002.
Holders of the notes may convert the notes at their option, in
multiples of $1,000, into common shares of beneficial interest at the
following conversion prices per share:
YEAR PRICE
Through 12/31/97 $12.00
1998 12.50
1999 13.00
2000 13.50
2001 14.00
2002 14.50
During 1995, the holders of the notes were granted the option to
convert the notes to redeemable preferred shares of beneficial
interest at the conversion price of $100 per share and $498,700 of the
notes were converted to 4,987 shares of redeemable preferred shares.
(See Note 4.)
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
3. NOTES PAYABLE, CONTINUED:
REDEEMABLE CONVERTIBLE SUBORDINATED NOTES, CONTINUED
These notes can be redeemed by the Company for 100% of the redemption
price of $100 par value beginning in 1997.
MORTGAGE NOTES PAYABLE
As of December 31, 1996 and 1995, mortgage notes payable consisted of
the following:
<TABLE>
1996 1995
<S> <C> <C>
Mortgage note payable to a financial institution with
installments of principal and interest in the sum of
$20,167 payable monthly. The note bears interest at 8%,
and was originally due and payable on December 4, 1994.
In December 1994, the note was extended until June 4, 1995
at a rate of 9%, with principal and interest payments of
$21,086 payable monthly. The note was refinanced in June
1995 with installments of principal and interest in the
amount of $20,835 payable monthly. The note bears interest
at 9%, is callable on May 10, 2000 but otherwise due and
payable on May 10, 2005 and is collateralized by
Twin Lakes Shopping Center land and building. $ 1,824,213 $ 1,905,556
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $20,285.
The note bears interest at 8.5%, is due on November 20, 1998
and is collateralized by Autobahn Shopping Center land and
building. 1,271,592 1,400,540
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $31,541.
The note bears interest at 9%, is due on September 25, 1998,
and is collateralized by Centennial Shopping Center land and
building. In 1998, the Company has the option to renew the
note for three years at 9.5% with monthly installments of
principal and interest based upon a twenty-year amortization
schedule. If renewed, $100,000 of principal is due. 3,779,493 3,810,596
Mortgage note payable to a financial institution. The note
bears interest at 9.75%, is due and payable on March 31, 1999,
and is collateralized by Bandera Festival Shopping Center land
and building. Monthly installments of $73,519 are based on a
25-year amortization schedule. Additional annual principal
payments are due as follows:
April 1, 1997 - 1% of the then outstanding principal balance
April 1, 1998 - 1/2% of 1% of the then outstanding principal
balance 7,957,094 8,094,411
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
3. NOTES PAYABLE, CONTINUED:
MORTGAGE NOTES PAYABLE, CONTINUED
1996 1995
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the amount of $43,852.
The note bears interest at 9.3%, amortizes over 25 years until
April 1, 2018 and is collateralized by the Randall's/University
Park Shopping Center, land and building. 4,874,155 4,943,538
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the amount of $7,232.
The note bears interest of 8.25%, amortizes over the term of the
note, is due on July 1, 2003 and is collateralized by a portion
of the McMinn Plaza Shopping Center, land and building. 439,680 484,126
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $14,238.
The note bears interest at 7.625%, amortizes over the term of
the note, is due on November 1, 2002 and is collateralized by a
portion of the McMinn Plaza Shopping Center, land and building. 814,647 917,957
Mortgage note payable to an affiliated trust with monthly
installments of principal and interest in the amount of $8,401.
The note bears interest at 12%, amortizes over 15 years, is due
on November 15, 2000 and is collateralized by One West Hills
office building. 660,426
Mortgage note payable to a financial institution with interest
only due through March 25, 1995. Thereafter, monthly installments
of principal and interest in the amount of $2,287 are due. The note
bears interest at 9%, amortizes over three years, is collateralized
by Centennial Shopping Center land and building and is due on
March 25, 1998. 32,192 55,295
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $24,069.
The note bears interest at 8.37%, amortizes over twenty years,
is due on December 1, 2006, and is collateralized by the Park
Northern Shopping Center. 2,800,000
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
3. NOTES PAYABLE, CONTINUED:
MORTGAGE NOTES PAYABLE, CONTINUED
1996 1995
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $13,427.
The note bears interest at 9%, amortizes over twenty-five years,
is due on June 27, 2003 and is collateralized by the El Campo
Shopping Center, land and buildings. The Company can extend the
note for 3 years at a lesser of prime plus 1/2% or 9% with a
$150,000 principal reduction. 1,591,276
Mortgage note payable to a financial institution with
quarterly installments of interest only. The note bears
interest at the prime rate, is due on December 27, 1999 and
is collateralized by land in College Station, Texas. 206,250
----------- -----------
$25,590,592 $22,272,445
----------- -----------
----------- -----------
</TABLE>
Aggregate annual maturities of mortgage notes payable for each of the
five years ending December 31, and thereafter are as follows:
1997 $ 787,355
1998 5,471,953
1999 8,313,593
2000 1,935,377
2001 441,044
Thereafter 8,641,270
-----------
$25,590,592
-----------
-----------
SHORT TERM NOTES PAYABLE
During 1996, the Company issued $600,000 of unsecured promissory notes
to individuals with quarterly payments of interest only. The notes
bear interest at 11% and are due in 1997 and 1998.
REVOLVING LINES OF CREDIT
Effective August 23, 1996, the Company entered into a $200,000
unsecured revolving line of credit facility with a bank. Interest of
prime (8.25% at December 31, 1996) plus 1/2% is payable quarterly until
maturity in April 1997. As of December 31, 1996, the Company had drawn
$40,000 on the bank credit facility.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
3. NOTES PAYABLE, CONTINUED:
REVOLVING LINES OF CREDIT, CONTINUED
The Company entered into a $100,000 unsecured revolving line of credit
facility with a bank in February 1996. Interest of prime (8.25% at
December 31, 1996) plus 1.5% is payable monthly until maturity in
February 1997. As of December 31, 1996 the Company had drawn $100,000
on the bank credit facility. In March 1997, the revolving line of
credit was extended until May 5, 1998, under the same terms.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses are reasonable estimates of their fair values
because of the short maturities of these instruments. Mortgage notes payable
have aggregate carrying values which approximate their estimated fair values
based upon the remaining maturities for certain debt and interest rates for
debt with similar terms and remaining maturities.
4. SHARES OF BENEFICIAL INTEREST:
REDEEMABLE PREFERRED SHARES OF BENEFICIAL INTEREST
In 1995, the Company authorized 20,000, $100 par value, 9% redeemable
preferred shares of beneficial interest ("preferred shares"). The
Company issued 5,750 preferred shares at par value and 4,987 shares
through conversion from the 9% redeemable convertible subordinated
notes (see Note 3). No shares were issued during 1996. Dividends on
the preferred shares are cumulative from date of issuance and payable
on a quarterly basis. The preferred shares are convertible at the
option of the holder into common shares of beneficial interest of the
Company at a conversion price of $12.50 per share, subject to
adjustment under certain conditions. The preferred shares are
redeemable at the option of the Company, in whole or in part, at any
time after January 1, 1996, at a redemption price equal to the sum of
par value of the amount of the preferred shares being redeemed and the
premium. The premium is based upon the following annual rate computed
and the par value of the preferred shares being redeemed, as set forth
in the following schedule:
CALENDAR YEAR PREMIUM
1997 4%
1998 3%
1999 2%
2000 1%
2001 and thereafter 0%
The Company is required to purchase and redeem 20% of the number of
preferred shares outstanding at a redemption price equal to par value
commencing on March 15, 2001 and annually thereafter until all
preferred shares are redeemed. Holders of preferred shares are
entitled to limited voting rights at one vote per share.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
4. SHARES OF BENEFICIAL INTEREST, CONTINUED:
COMMON SHARES OF BENEFICIAL INTEREST
During 1996, the Company issued 2,400 shares at $12.50 per share to
the trustees for payment of services rendered (See Note 8). The
Company issued an additional 692 shares at $12.50 per share for
payment of lease commissions.
During 1994, the Company issued 8,063 shares of beneficial interest at
$11.04 per share, and the Company exchanged 131,450 shares of
beneficial interest for investment real estate. In addition, the
Company exchanged 7,455 shares of beneficial interest for purchase of
an investment.
5. INVESTMENT IN REAL ESTATE VENTURE:
In December 1995 the Company formed a new real estate investment
trust, Ivy Realty Trust ("Ivy"). On January 1, 1996 the Company
transferred its investment in One West Hills office building, the
related mortgage note payable of $660,426 and net liabilities to Ivy
in exchange for 834,397 shares valued at one dollar per share of Ivy
stock and a $55,462 promissory note. On January 15, 1996 the Company
distributed to its shareholders 500,638 shares of Ivy as a dividend.
One third of the dividend was treated as a 1995 dividend with the
remainder treated as a 1996 dividend.
At December 31, 1996, the investment in Ivy is accounted for using the
equity method. At December 31, 1996, Ivy's financial statements
reflected the following:
Assets $2,239,000
Liabilities 843,000
Net income 115,000
6. FEDERAL INCOME TAXES:
The Company operates in such a manner so as to qualify as a "real
estate investment trust" under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and the Treasury
Regulations promulgated thereunder. Under those Sections, the Company
will not be taxed on that portion of its income distributed to
shareholders so long as at least 95 percent of the Company's otherwise
taxable income is distributed to shareholders each year and other
requirements of a qualified real estate investment trust are met. The
Company satisfied the income distribution and other requirements for
the year ended December 31, 1995. The Company intends to satisfy the
income distribution requirement for the year ended December 31, 1996
by allocating a portion of the 1997 distributions to 1996 pursuant to
an election under Section 858 of the Internal Revenue Code.
Management believes all other requirements of a qualified real estate
investment trust have been met.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
6. FEDERAL INCOME TAXES, CONTINUED:
The Company has approximately $385,000 of net operating losses that
may be carried forward to offset future taxable income. However, in
1990 sales of shares of beneficial interest resulted in a change of
ownership for federal income tax purposes. As a result of the
ownership change, the amount of net operating losses generated prior
to the ownership change, which may be used to offset federal taxable
income, is subject to an annual limitation imposed by the Internal
Revenue Code. These net operating losses expire from 2006 through
2010.
The tax status of per-share dividend distributions relating to common
shares of beneficial interest declared attributable to the year
presented is as follows:
1996 1995 1994
Ordinary income $.40 $.20 $.40
---- ---- ----
---- ---- ----
7. LEASES:
TENANT LEASES
The shopping centers lease commercial retail space generally under
operating leases which provide for minimum base rentals plus
contingent rentals based upon a percentage of gross receipts. Most
leases also provide that the tenant must pay as additional rent a pro
rata share of real property taxes, insurance and common area
maintenance and provide for renewal at the lessee's option.
The future minimum base rents for the operating leases in existence at
December 31, 1996, are as follows:
1997 $ 4,612,581
1998 4,447,090
1999 4,091,333
2000 3,577,347
2001 3,320,955
Thereafter 24,060,411
-----------
$44,109,717
-----------
-----------
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
7. LEASES, CONTINUED:
GROUND LEASE
The Company has a forty year ground lease for Park Northern Shopping
Center with an unrelated third party. Rent of $8,333 plus 5% of total
gross revenues is payable monthly through the year 2035. The Company
has an option to extend this lease for four consecutive periods of ten
years each. Future minimum lease payments are as follows:
YEARS AMOUNT
1997 $ 100,000
1998 100,000
1999 100,000
2000 100,000
2001 through 2035 3,500,000
----------
$3,900,000
----------
----------
Rental expense included in the statement of operations was $8,333,
$25,353 and $6,500 in 1996, 1995 and 1994, respectively.
8. ADVISORY AGREEMENT AND RELATED PARTY TRANSACTIONS:
The Company is managed and advised by the Advisor. Advisory fee
expenses were $279,000, $276,000 and $253,000 for 1996, 1995 and 1994,
respectively. Advisory fees are to be calculated at .8%, on an annual
basis, of the gross Company assets at year-end, increased by noncash
reserves. During 1996, 1995 and 1994, the Advisor reduced its fees due
from the Company under the agreement by approximately $50,600, $9,200 and
$26,500, respectively, to reflect the timing of acquisitions made during
the year.
Total fees paid to independent trust managers were approximately
$33,000, $20,000 and $15,500 in 1996, 1995 and 1994, respectively.
During 1996, the Company initiated a five year program whereby each of
the three independent trust managers will be paid 800 shares of
beneficial interest per year at $12.50 per share. During 1996,
$30,000 of the investment management fees were satisfied by issuing a
total of 2,400 shares of beneficial interest. These shares are
restricted as to transfer or sale for two years after issuance date.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
9. SUPPLEMENTAL CASH FLOW INFORMATION:
The following supplemental information is related to the statement of
cash flows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Acquisition of land for mortgage note payable $ 206,250
Assumption of mortgage notes payable for acquisition
of investment real estate 4,400,000 $ 685,341
Net liabilities assumed in acquisition of investment
real estate 20,197
Minority interest granted in exchange for investment
real estate contributed 630,000
Net liabilities assumed in acquisition of investment
real estate 109,786
Exchange of investment real estate for 834,397 shares
of Ivy Realty Trust, an affiliated trust, transfer of
mortgage note payable, issuance of mortgage note
receivable and transfer of net liabilities 1,640,465
Payment of dividend with shares of affiliated trust 500,639
Cash paid for interest 2,112,038 $2,180,835 2,101,762
Issuance of 4,987 preferred shares of beneficial
interest for redeemable convertible notes payable 498,700
Dividend declared but not paid 166,880
Issuance of shares of beneficial interest for purchase
of an investment 89,460
Exchange of shares of beneficial interest for purchase of
investment real estate 1,577,450
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
10. ACCOUNTING CHANGES:
During 1997, the Company changed its method of accounting for certain
rental revenues to recording when earned versus when received. In
addition, the Company recognized certain expenses when incurred versus
recording when paid. The Company has also reclassified the 1994
dividend distribution to common shareholders of $332,808 from common
shares of beneficial interests to accumulated deficit. The
retroactive effect of these changes on net income available for common
shareholders, earnings per common share and retained earnings is as
follows:
<TABLE>
DECEMBER 31,
-------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net income available for common shareholders, as
previously reported $ 299,674 $ 147,776 $ 238,238
Net income available for common shareholders, as
restated 391,032 192,704 277,401
Net income per common share, as previously reported .34 .17 .30
Net income per common share, as restated .44 .22 .35
Accumulated deficit, as previously reported (77,005) (42,920) (23,816)
Accumulated deficit, as restated (145,562) (202,835) (228,659)
</TABLE>
11. SUBSEQUENT EVENT (UNAUDITED):
Subsequent to December 31, 1996, the Company announced it expects to
register approximately 3,000,000 common shares of beneficial interest,
no par value, in a proposed public offering (the "Offering"). There
is no assurance that the Offering can be completed.
Contemporaneous with the Offering, the Company expects to award 50,000
shares, at no cost, to the Advisor and the Company's independent trust
managers. As a result, the Company will record a nonrecurring charge
to compensation expense of approximately $590,000 related to the share
award subsequent to the Offering. In addition, the Company intends to
establish a share incentive plan (the "Plan") for the Company's
executives, key employees and certain personnel of the Advisor. The
Plan will provide that the maximum number of share awards and share
options granted will not exceed 10% of the Company's outstanding
common shares of beneficial interest at any given time and will have
exercise prices equal to or greater than the fair market value on the
date of grant.
F-28
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
COST WHICH CARRIED AT
INITIAL COST CAPITALIZED CLOSE OF PERIOD
DESCRIPTION ---------------------- SUBSEQUENT TO -------------------------
- ----------------------------------- BUILDINGS AND ACQUISITION- BUILDINGS AND
PROPERTY LOCATION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS
<S> <C> <C> <C> <C> <C> <C> <C>
Shopping centers:
Autobahn San Antonio, TX $ 1,271,592 $ 515,205 $1,726,150 $ 26,635 $ 515,205 $ 1,752,785
Bandera San Antonio, TX 7,957,094 2,350,000 8,759,593 476,514 2,350,000 9,236,107
Centennial Austin, TX 3,811,685 1,400,000 3,527,909 398,861 1,400,000 3,926,770
El Campo El Campo, TX 1,591,275 360,000 1,640,350 43,099 360,000 1,683,449
McMinn Athens, TN 1,254,327 513,912 2,170,052 28,206 513,912 2,198,258
Park Northern Phoenix, AZ 2,800,000 0 4,410,691 0 0 4,410,691
Twin Lakes Lenoir City, TN 1,824,213 860,706 3,040,000 39,677 860,706 3,079,677
University Park College Station, TX 4,874,156 1,842,331 4,955,490 6,750 1,842,331 4,962,240
Undeveloped land:
University Park College Station, TX 206,250 276,569 0 0 276,569 0
----------- ---------- ----------- ---------- ---------- -----------
Totals $25,590,592 $8,118,723 $30,230,235 $1,019,742 $8,118,723 $31,249,977
----------- ---------- ----------- ---------- ---------- -----------
----------- ---------- ----------- ---------- ---------- -----------
DESCRIPTION
- -------------------------------------- ACCUMULATED DATE OF DATE
PROPERTY LOCATION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
<S> <C> <C> <C> <C> <C>
Shopping centers:
Autobahn San Antonio, TX $ 2,267,990 $ 365,974 1984 1990
Bandera San Antonio, TX 11,586,107 1,230,559 1989 1992
Centennial Austin, TX 5,326,770 757,861 1970 1991
El Campo El Campo, TX 2,043,449 29,494 1985 1996
McMinn Athens, TN 2,712,170 281,760 1982 1994
Park Northern Phoenix, AZ 4,410,691 12,252 1982 1996
Twin Lakes Lenoir City, TN 3,940,383 628,320 1986 1989
University Park College Station, TX 6,804,571 461,500 1991 1993
Undeveloped land:
University Park College Station, TX 276,569 0 - 1996
----------- ----------
Totals $39,368,700 $3,767,720
----------- ----------
----------- ----------
</TABLE>
F-29
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO SCHEDULE III
(a) Initial cost for acquired property is cost at acquisition.
(b) The aggregate gross cost of land, buildings and improvements for federal
income tax and book purposes was substantially the same.
(c) RECONCILIATION OF REAL ESTATE
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $34,236,932 $33,852,975 $29,349,299
Additions - improvements 7,111,735 390,451 4,503,676
Deductions (1,979,967) (6,494) -
----------- ----------- -----------
Balance at end of year $39,368,700 $34,236,932 $33,852,975
----------- ----------- -----------
----------- ----------- -----------
RECONCILIATION OF ACCUMULATED DEPRECIATION
1996 1995 1994
Balance at beginning of year $2,988,030 $2,085,650 $1,358,461
Depreciation expense 886,173 902,380 727,189
Deductions (106,483)
----------- ----------- -----------
Balance at end of year $3,767,720 $2,988,030 $2,085,650
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(d) See description of mortgage notes payable in Note 3 to consolidated
financial statements.
(e) Depreciation is computed based upon the following estimated lives:
Buildings 30 - 40 years
Improvements 5 - 10 years
F-30
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION:
The accompanying unaudited pro forma condensed consolidated financial
statements presented herein give effect to the use of proceeds from United
Investors Realty Trust and Subsidiaries (the "Company") contemplated initial
public offering (the "Offering"). For the purposes of pro forma
presentation, the accompanying unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 1996 and the three
months ended March 31, 1997 assume the Offering occurred on January 1, 1996
and January 1, 1997, respectively. The condensed consolidated balance sheet
assumes the Offering occurred on March 31, 1997.
The unaudited pro forma condensed consolidated financial information is
presented for information purposes only and should not be construed to be
indicative of the financial results which may occur in the future. The
significant assumptions and adjustments are disclosed in the accompanying
notes to the unaudited pro forma condensed consolidated financial statements.
The pro forma condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company
included elsewhere in this Prospectus.
F-31
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
UNITED
INVESTORS PRO
REALTY FORMA TOTAL
ASSETS TRUST ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Investment real estate:
Land $ 8,118,723 $ 8,118,723
Buildings and improvements 31,289,658 $ 1,949,479 (B) 33,239,137
----------- ----------- -----------
39,408,381 1,949,479 41,357,860
Less accumulated depreciation (4,034,426) (4,034,426)
----------- ----------- -----------
Investment real estate, net 35,373,955 1,949,479 37,323,434
Cash and cash equivalents 281,525 12,701,300 (B) 12,982,825
Accounts receivable, net of allowance
of $33,652 682,664 682,664
Prepaid expenses and other assets 382,445 382,445
Investment in real estate venture 339,790 339,790
----------- ----------- -----------
Total assets $37,060,379 $ 14,650,779 $51,711,158
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES, MINORITY INTEREST, REDEEMABLE
PREFERRED SHARES AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $25,338,724 $(16,250,200)(B) $ 9,088,524
Redeemable convertible subordinated notes 212,400 212,400
Short-term notes and lines of credit 875,000 (875,000)(B)
Accounts payable and accrued expenses 623,453 623,453
Security deposits 110,681 110,681
----------- ----------- -----------
Total liabilities 27,160,258 (17,125,200) 10,035,058
----------- ----------- -----------
Minority interest in real estate joint ventures 1,320,209 (668,521)(B) 651,688
----------- ----------- -----------
Redeemable preferred shares of beneficial
interest, $100 par value, 20,000 shares
authorized, 10,737 shares issued and
outstanding at March 31, 1997 1,068,226 1,068,226
----------- -----------
Common shareholders' equity:
Common shares of beneficial interest,
no par value, 20,000,000 shares authorized,
837,489 shares issued and outstanding at
March 31, 1997 7,598,348 32,782,500 (A) 40,380,848
Accumulated deficit (86,662) (338,000)(B) (424,662)
----------- ----------- -----------
Total common shareholders' equity 7,511,686 32,444,500 39,956,186
----------- ----------- -----------
Total liabilities, minority interest,
redeemable preferred shares and
common shareholders' equity $37,060,379 $14,650,779 $51,711,158
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-32
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
UNITED
INVESTORS
REALTY PRO FORMA TOTAL
TRUST ADJUSTMENTS PRO FORMA
Revenues:
Base rents $1,215,752 $ 1,215,752
Percentage rents 6,600 6,600
Expense reimbursements 273,868 273,868
Interest and other income 8,476 8,476
---------- -----------
Total revenues 1,504,696 1,504,696
---------- -----------
Expenses:
Operating and maintenance 130,561 130,561
Real estate taxes 188,566 188,566
General and administrative 197,822 197,822
Interest 611,203 $ (403,769)(A) 207,434
Depreciation and amortization 284,416 16,250 (E) 300,666
---------- ----------- -----------
Total expenses 1,412,568 (387,519) 1,025,049
---------- ----------- -----------
Income before minority interest and
preferred share dividend requirements 92,128 387,519 479,647
Minority interest in net income of real
estate ventures (9,070) 7,806 (B) (1,264)
---------- ----------- -----------
Income before preferred share dividend
requirements 83,058 395,325 478,383
Preferred share dividend requirements (24,158) (24,158)
---------- ----------- -----------
Net income available for common
shareholders $ 58,900 $ 395,325 $ 454,225
---------- ----------- -----------
---------- ----------- -----------
Net income per common share $ .07 $ .16
---------- -----------
---------- -----------
3,000,000 (C)
Weighted average shares outstanding 887,489 (1,081,000)(D) 2,806,489
---------- ----------- -----------
---------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-33
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
UNITED
INVESTORS
REALTY PRO FORMA TOTAL
TRUST ADJUSTMENTS PRO FORMA
Revenues:
Base rents $4,097,911 $ 4,097,911
Percentage rents 32,822 32,822
Expense reimbursements 835,940 835,940
Interest and other income 67,409 67,409
---------- ----------
Total revenues 5,034,082 5,034,082
---------- ----------
Expenses:
Operating and maintenance 442,701 442,701
Real estate taxes 558,000 558,000
General and administrative 642,944 642,944
Interest 2,132,390 $(1,523,288)(A) 609,102
Depreciation and amortization 958,778 65,000 (E) 1,023,778
---------- ----------- ----------
Total expenses 4,734,813 (1,458,288) 3,276,525
---------- ----------- ----------
Income before gain on sale of investment
real estate, minority interest and
preferred share dividend requirements 299,269 1,458,288 1,757,557
Gain on sale of investment real estate 240,000 240,000
---------- ----------- ----------
Income before minority interest and
preferred share dividend requirements 539,269 1,458,288 1,997,557
Minority interest in net income of real
estate ventures (51,941) 49,524 (B) (2,417)
---------- ----------- ----------
Income before preferred share dividend
requirements 487,328 1,507,812 1,995,140
Preferred share dividend requirements (96,296) (96,296)
---------- ----------- ----------
Net income available for common
shareholders $ 391,032 $ 1,507,812 $1,898,844
---------- ----------- ----------
---------- ----------- ----------
Net income per common share $ .44 $ .68
---------- ----------
---------- ----------
3,000,000 (C)
Weighted average shares outstanding 884,655 (1,081,000)(D) 2,803,665
---------- ----------- ----------
---------- ----------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-34
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the purposes of pro forma presentation, the accompanying unaudited pro
forma condensed consolidated statement of operations for the year ended
December 31, 1996 and the three months ended March 31, 1997 assume the
"Offering" occurred on January 1, 1996 and January 1, 1997, respectively.
The condensed consolidated balance sheet assumes the Offering occurred on
March 31, 1997.
Contemporaneous with the Offering, the Company will award 50,000 shares of
beneficial interest, at no cost, to FCA Corp., the Company's advisor and the
Company's independent trust managers. Subsequent to the Offering, the
Company will record a nonrecurring charge to compensation expense of $587,500
related to the share award. The accompanying pro forma condensed
consolidated statement of operations for the year ended December 31, 1996 and
for the three months ended March 31, 1997 do not reflect this nonrecurring
charge of $587,500.
UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS:
(A) Reflects the issuance of 3,000,000 common shares of beneficial
ownership by the Company in the Offering, at an assumed public
offering price of $11.75 per share, net of issuance costs of
$2,467,500. The resulting net proceeds of $32,782,500 are
reflected as common shares of beneficial interest, no par value.
(B) Reflects the use of net proceeds as follows:
Repayment of mortgage notes payable, including
prepayment penalties of $338,000 $16,588,200
Repayment of short-term notes and lines of credit 875,000
Purchase of minority interest in real estate
venture and develop existing outparcels and
shopping center upgrades 2,618,000
Working capital and acquisitions 12,701,300
-----------
$32,782,500
-----------
-----------
The early repayment of certain mortgage notes payable will result
in prepayment penalties. The accompanying pro forma condensed
consolidated statement of operations for the year ended December
31, 1996 and for the three months ended March 31, 1997 does not
reflect this nonrecurring charge of $338,000.
F-35
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
(A) Reduce interest expense as a result of the prepayment of
certain mortgage notes payable.
(B) Reduce minority interest in net income of real estate ventures
as a result of the purchase of the minority interest in
Randall's/University Park Shopping Center.
(C) Issuance of 3,000,000 new common shares of beneficial interest
in the Offering.
(D) Reduction of 1,081,000 common shares of beneficial interest to
reflect that portion of proceeds from the Offering allocated to
working capital and unidentified future acquisitions.
(E) Increase in depreciation expense relating to development
activities assuming an average life of 30 years.
F-36
<PAGE>
APPENDIX A
ADDITIONAL INFORMATION REGARDING BANDERA
The largest of the Properties is Bandera Shopping Center, located in San
Antonio, Texas. In 1997, Bandera accounted for approximately 25.5% of the
total gross leasable area and 31.6% of the total annualized minimum rents
from the Properties. Bandera represents a total of 189,446 square feet of
gross leasable area. As of March 31, 1997, Bandera was 98.5% leased, with
approximately 66.1% of its gross leasable area occupied by anchor tenants.
The following table sets forth the percentage of GLA at Bandera which
was leased as of December 31 of each of the last five years:
As of: Percentage Leased
------ -----------------
December 31, 1992. . . . . . . . . . . 89.6%
December 31, 1993. . . . . . . . . . . 98.1
December 31, 1994 . . . . . . . . . . 98.1
December 31, 1995. . . . . . . . . . . 95.5
December 31, 1996 . . . . . . . . . . 98.5
The following table sets forth the average annual base rental income per
square foot at Bandera for each of the last five years ended December 31,
1996:
Average Annual Base
Period Rental Income per Sq. Ft.
------ -------------------------
Year Ended December 31, 1992 . . . . . $7.17
Year Ended December 31, 1993 . . . . . 7.93
Year Ended December 31, 1994 . . . . . 7.91
Year Ended December 31, 1995 . . . . . 7.73
Year Ended December 31, 1996 . . . . . 8.08
The following table shows as of March 31, 1996, Bandera Festival's
anchor tenants, their gross leasable area, gross annual rent for 1996 and
lease expiration date, not including renewal options:
Gross Annual Lease
Tenant GLA (Sq Ft) Rent Expiration Date
------------ ----------- ------------ ---------------
Eckerd Drugs 8,715 $ 89,154 October 31, 2008
Kmart 86,479 484,015 October 31, 2013
Solo Serve 30,000 286,800 January 31, 2004
A-1
<PAGE>
Scheduled lease expirations at Bandera during the next ten years are as
follows:
<TABLE>
Gross Leasable Area Annualized Base Rental Income
-------------------------------------- --------------------------------
Lease No. of Leases Approximate Percent of Amount Percent of Average per
Expiration Expiring Sq. Ft. Total Total Sq. Ft.
- ---------- ------------- ----------- ---------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 5 10,285 5.5% $ 139,160 9.0% $13.53
1998 2 11,920 6.4 154,080 9.9 12.93
1999 3 3,385 1.8 48,281 3.1 14.26
2000 3 9,390 5.0 99,245 6.4 10.57
2001 4 8,630 4.6 109,617 7.1 12.70
2002 2 4,478 2.4 53,964 3.5 12.05
2003 3 5,892 3.2 68,336 4.4 11.60
2004 2 34,999 18.8 262,640 17.0 7.50
2005 0 0 0.0 0 0.0 0
2006 &
Thereafter 3 97,594 52.3 613,707 39.6 6.29
-- ------- ----- ---------- ----- -----
Total 27 186,573 100.0% $1,549,031 100.0% $8.30
-- ------- ----- ---------- ----- -----
-- ------- ----- ---------- ----- -----
</TABLE>
Two tenants at Bandera each occupy more than 10% of the GLA. The
following description summarizes the terms of these tenant leases:
Solo Serve occupies 30,000 square feet and has annual minimum rent of
$213,900. The lease expires on January 31, 2004 and has 2 five-year options
under the same terms and conditions except rent which will be $9.00/sq. ft.
and $9.67/sq. ft. respectively.
Kmart occupies 86,479 square feet and has annual minimum rent of
$454,015. The lease expires on October 31, 2013 and has 10 five-year options
under the same terms and conditions.
A-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
United Investors Realty Trust:
In connection with our audits of the consolidated financial statements of
United Investors Realty Trust and Subsidiaries as of December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
which financial statements are included in the Prospectus, we have also
audited the financial statement schedule on page S-2.
In our opinion, the financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 25, 1997
S-1
<PAGE>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Receivable
Year end December 31, 1996 $22,989 $ 8,220 - - $31,209
Year end December 31, 1995 34,991 4,468 - $16,470 22,989
Year end December 31, 1994 19,880 22,840 - 7,729 34,991
</TABLE>
S-2
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE COMPANY'S
INVESTMENT MANAGER OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
_________________
TABLE OF CONTENTS
Prospectus Summary..................................
Risk Factors........................................
Business and Properties.............................
Strategy for Future Growth..........................
Use of Proceeds.....................................
Dividends and Distributions Policy..................
Capitalization......................................
Dilution............................................
Selected Financial Information......................
Management's Discussion and Analysis
of Financial Condition and
Results of Operations...........................
Policies with Respect to Certain Activities
Management..........................................
Certain Relationships and Transactions
Principal Shareholders..............................
Description of Shares of Beneficial Interest........
Certain Provisions of the Texas REIT Act and of the
Company's Declaration of Trust and Bylaws.......
Shares Available for Future Sale....................
Federal Income Tax Considerations...................
ERISA Considerations................................
Underwriting........................................
Legal Matters.......................................
Experts.............................................
Additional Information..............................
Glossary............................................
Index to Financial Statements.......................F-1
Appendix............................................A-1
Schedule............................................S-1
Until , 1997 all dealers effecting
transactions in the registered securities, whether or not
participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting
as Underwriters and with respect to their unsold
allotments or subscriptions.
3,000,000 SHARES
United Investors
Realty Trust
COMMON SHARES OF
BENEFICIAL INTEREST
________________
PROSPECTUS
________________
____________________
, 1997
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the offering of the Common Shares being registered. All of
the amounts shown are estimates except the Securities and Exchange Commission
registration fee, the NASD fee and the Stock Exchange listing fee.
Item Amount
- ---- ------
Registration Fee - Securities and Exchange Commission $12,285
NASD Fee
Exchange Listing Fee
Transfer Agent's and Registrar's Fees
Printing and Engraving Fees
Legal Fees and Expenses (other than Blue Sky)
Accounting Fees and Expenses
Blue Sky Fees and Expenses (including fees of counsel)
Miscellaneous Expenses
--------
TOTAL $
--------
--------
- ---------------
ITEM 31. SALES TO SPECIAL PARTIES
Not applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 33. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS
Section 9.20 of the Texas Real Estate Investment Trust Act (the "Texas
REIT Act"), subject to procedures and limitations stated therein, allows the
Company to indemnify any person who was, is or is threatened to be made a
named defendant or respondent in a proceeding because the person is or was a
Trust Manager or officer against judgments, penalties (including excise and
similar taxes), fines, settlements and reasonable expenses actually incurred
by the person in connection with the proceeding. The Company is required by
Section 9.20 to indemnify a Trust Manager or officer against reasonable
expenses incurred by him or her in connection with a proceeding in which he
is a named defendant or respondent because he or she is or was a Trust
Manager or officer if he or she has been wholly successful, on the merits or
otherwise, in the defense of the proceeding. Under the Texas REIT Act, Trust
Managers and officers are not entitled to indemnification if (i) the Trust
Manager or officer is found liable to the real estate investment trust or is
found liable for willful or intentional misconduct in the performance of his
duty to the real estate investment trust and (ii) the Trust Manager or
officer was found liable for willful or intentional misconduct in the
performance of his or her duty to the real estate investment trust. The
statute provides that indemnification pursuant to its provisions is not
exclusive of the rights of indemnification to which a person may be entitled
under any provision of the Amended and Restated Declaration of Trust, bylaws,
agreements, or otherwise. In addition, the Company has, pursuant to Section
15.10 of the Texas REIT Act, provided in its Amended and Restated Declaration
of Trust that, to the fullest extent permitted by applicable law, a Trust
Manager of the Company shall not be liable for any act, omission, loss,
damage or expense arising from the performance
II-1
<PAGE>
of his or her duty under the real estate investment trust, except for his or
her own willful misfeasance, malfeasance or negligence.
The Company's Amended and Restated Declaration of Trust and Bylaws
provide for indemnification by the Company of its Trust Managers and officers
to the fullest extent permitted by the Texas REIT Act. In addition, the
Company's Bylaws provide that the Company may pay or reimburse, in advance of
final disposition of a proceeding, reasonable expenses incurred by a present
or former Trust Manager or officer made a party to a proceeding by reason of
his or her status as a Trust Manager or officer provided that (i) the Trust
Managers have consented to the advancement of expenses (which consent shall
not be unreasonably withheld) and (ii) the Company shall have received (a) a
written affirmation by the Trust Manager or officer of his or her good faith
belief that he or she has met the standard of conduct necessary for
indemnification by the Company under the Texas REIT Act and (b) a written
undertaking by or on his or her behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of
conduct was not met or it is ultimately determined that indemnification of
the Trust Manager against expenses incurred by him in connection with that
proceeding is prohibited by Section 9.20 of the Texas REIT Act.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities
Act of 1933, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
ITEM 34. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
(Unaudited)
Condensed Consolidated Balance Sheet as of March 31, 1997 and December 31,
1996
Condensed Consolidated Statement of Operations for the three-months ended
March 31, 1997 and 1996
Condensed Consolidated Statement of Redeemable Preferred Shares and Common
Shareholders' Equity for the three-months ended March 31, 1997
Condensed Consolidated Statement of Cash Flows for the three-months ended
March 31, 1997 and 1996
(Audited)
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Operations for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statement of Redeemable Preferred Shares and Common
Shareholders' Equity for the Years Ended December 31, 1996, 1995 and
1994
Consolidated Statement of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Schedule III. Real Estate Investments and Accumulated Depreciation
Notes to Schedule III
b. SCHEDULES TO FINANCIAL STATEMENTS
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted or the required information is
inapplicable or the information is presented in the Company's
consolidated financial statements or related notes included in the
prospectus.
II-2
<PAGE>
c. EXHIBITS
*1.1 Form of Underwriting Agreement
*3.1 First Amended and Restated Declaration of Trust
*3.2 First Amended and Restated Bylaws
4.1 Instruments defining the rights of security holders.
The instruments are filed in response to items 3.1
and 3.2 above and are incorporated herein by reference.
*5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding the legality of the Common Shares.
*8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding tax matters.
*10.1 First Amended and Restated Advisory Agreement between
the Company and Investment Manager
*10.2 1997 Share Incentive Plan
*10.4 Dividend Reinvestment Plan
11.1 Statement Regarding Computation of Per Share Earnings
23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
Included in responses to items 5.1 and 8.1.
24.1 Powers of attorney of the persons signing this
registration statement are included on the signature
page of the registration statement.
- --------------------
* To be filed by amendment.
ITEM 36. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to
provide to the representatives of the underwriters at
the closing specified in the Underwriting Agreement
certificates in such denominations and registered in
such names as required by the representatives of the
underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
Trust Managers, officers, and controlling persons of
the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission
such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of
the registrant in the successful defense of any
action, suit or proceeding) is asserted by such
director, officer or controlling person in connection
with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
court of
II-3
<PAGE>
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from
the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or 497(h) under
the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to
be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
United Investors Realty Trust certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-11 and has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on June 18, 1997.
UNITED INVESTORS REALTY TRUST
By: /s/ Lewis H. Sandler
Lewis H. Sandler, Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that we the undersigned Trust Managers
and officers of United Investors Realty Trust hereby constitute and appoint
Lewis H. Sandler and Daniel M. Jones III and each of them, with full power
to act without the other and with full power of substitution and
resubstitution, our true and lawful attorneys-in-fact with full power to
execute in our name and on our behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments
thereto) to this Registration Statement and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and hereby ratify and confirm all that
such attorneys-in-fact, or either of them or substitutes shall lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
/s/ Robert W. Scharar Chairman of the Board and June 18, 1997
- ---------------------------------- Trust Manager
Robert W. Scharar
/s/ Lewis H. Sandler Chief Executive Officer, June 18, 1997
- ---------------------------------- (principal executive officer)
Lewis H. Sandler
/s/ Daniel M. Jones III Chief Financial Officer June 18, 1997
- ---------------------------------- (principal financial and
Daniel M. Jones III accounting officer)
/s/ William C. Brooks Trust Manager
- ---------------------------------- June 18, 1997
William C. Brooks
/s/Jerry M. Coleman Trust Manager June 18, 1997
- ----------------------------------
Jerry M. Coleman
/s/Josef C. Hermans Trust Manager June 18, 1997
- ----------------------------------
Josef C. Hermans
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
*1.1 Form of Underwriting Agreement
*3.1 First Amended and Restated Declaration of Trust
*3.2 First Amended and Restated Bylaws
4.1 Instruments defining the rights of security holders.
The instruments filed in response to items 3.1 and
3.2 above are incorporated in this item by reference.
*5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding the legality of the Common Shares.
*8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding tax matters.
*10.1 First Amended and Restated Advisory Agreement between the
Company and Investment Manager
*10.2 1997 Share Incentive Plan
*10.4 Dividend Reinvestment Plan
11.1 Statement Regarding Computation of Per Share Earnings
23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
Included in responses to items 5.1 and 8.1.
24.1 Powers of attorney of the persons signing this registration
statement are included on the signature page of the
registration statement.
* To be filed by amendment.
II-6
<PAGE>
EXHIBIT 11.1
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Computation of primary earnings per common and
common equivalent shares:
Net income available for common shareholders $391,032 $192,704 $277,401
-------- -------- --------
-------- -------- --------
Weighted average number of common shares
outstanding (A) 884,655 884,397 802,899
-------- -------- --------
-------- -------- --------
Primary earnings per common share $ .44 $ .22 $ .35
-------- -------- --------
-------- -------- --------
Computation of earnings per common share assuming
full dilution (B):
Net income available for common shareholders $391,032 $192,704 $277,401
Dividends on preferred shares 96,296 43,618 -
Interest on 9% redeemable convertible subordinated
notes 19,116 40,284 63,999
-------- -------- --------
Earnings assuming full dilution $506,444 $276,606 $341,400
-------- -------- --------
-------- -------- --------
Weighted average number of common shares
outstanding (A) 884,655 884,397 802,899
Shares assumed issued upon conversion of
preferred shares 85,896 42,948 -
Shares assumed issued upon conversion of 9%
redeemable convertible subordinated notes 17,700 38,479 59,258
-------- -------- --------
Common shares outstanding assuming full dilution 988,251 965,824 862,157
-------- -------- --------
-------- -------- --------
Earnings per common and common equivalent
share assuming full dilution $ .51 $ .29 $ .40
-------- -------- --------
-------- -------- --------
</TABLE>
(A) For each period presented, the weighted average number of shares
outstanding has been increased by 50,000 shares to reflect the planned
1997 share award to the Company's advisor and three independent Trust
Managers.
(B) This calculation is submitted in accordance with the Securities and
Exchange Act of 1934, Release No. 9083, although it is contrary to
paragraph 40 of APB Opinion No. 15 because it produced an anti-dilutive
result.
<PAGE>
EXHIBIT 11.1
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996
<S> <C> <C>
Computation of primary earnings per common and
common equivalent shares:
Net income available for common shareholders $ 58,900 $ 59,849
-------- --------
-------- --------
Weighted average number of common shares outstanding (A) 887,489 884,397
-------- --------
-------- --------
Primary earnings per common share $ .07 $ .07
-------- --------
-------- --------
Computation of earnings per common share assuming
full dilution (B):
Net income available for common shareholders $ 58,900 $ 59,849
Dividends on preferred shares 24,158 23,822
Interest on 9% redeemable convertible subordinated notes 4,714 4,766
-------- --------
Earnings assuming full dilution $ 87,772 $ 88,437
-------- --------
-------- --------
Weighted average number of common shares outstanding (A) 887,489 884,397
Shares assumed issued upon conversion of preferred shares 85,896 85,896
Shares assumed issued upon conversion of 9% redeemable
convertible subordinated notes 17,700 17,700
-------- --------
Common shares outstanding assuming full dilution 991,085 987,993
-------- --------
-------- --------
Earnings per common and common equivalent
share assuming full dilution $ .09 $ .09
-------- --------
-------- --------
</TABLE>
(A) For each period presented, the weighted average number of shares
outstanding has been increased by 50,000 shares to reflect the
planned 1997 share award to the Company's advisor and three independent
Trust Managers.
(B) This calculation is submitted in accordance with the Securities and
Exchange Act of 1934, Release No. 9083, although it is contrary to
paragraph 40 of APB Opinion No. 15 because it produced an anti-dilutive
result.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 of
United Investors Realty Trust (the "Company") relating to 3,450,000 common
shares of beneficial interest, no par value, of our report dated March 25,
1997, except for Note 10, as to which the date is June 10, 1997, on our
audits of the consolidated financial statements and financial statement
schedule and of our report dated March 25, 1997 on consolidated financial
statement schedule of the Company. We also consent to the reference to our
firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1997, RESPECTIVELY,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 119,316 281,525
<SECURITIES> 0 0
<RECEIVABLES> 916,366 716,316
<ALLOWANCES> 31,209 33,652
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 39,368,700 39,408,381
<DEPRECIATION> 3,767,720 4,034,426
<TOTAL-ASSETS> 37,242,544 37,060,379
<CURRENT-LIABILITIES> 0 0
<BONDS> 25,802,992 25,551,124
1,068,226 1,068,226
0 0
<COMMON> 7,598,348 7,598,348
<OTHER-SE> (145,562) (86,662)
<TOTAL-LIABILITY-AND-EQUITY> 37,242,544 37,060,379
<SALES> 0 0
<TOTAL-REVENUES> 5,034,082 1,504,696
<CGS> 0 0
<TOTAL-COSTS> 2,602,423 801,365
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 8,220 2,443
<INTEREST-EXPENSE> 2,132,390 611,203
<INCOME-PRETAX> 391,032 58,900
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 391,032 58,900
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 391,032 58,900
<EPS-PRIMARY> .44 .07
<EPS-DILUTED> 0 0
</TABLE>
