1,500,000 Shares
FIRST WASHINGTON REALTY TRUST, INC.
Common Stock
First Washington Realty Trust, Inc. (the 'Company') engages in the
acquisition, management, renovation and development of principally
supermarket-anchored neighborhood shopping centers. The Company is a
fully-integrated, self-administered and self-managed real estate company that
operates as a real estate investment trust (a 'REIT'). The Company owns a
portfolio of 33 retail properties, and expects to complete the acquisition of
six additional retail properties promptly following the Offering (as defined
below). The 39 retail properties contain a total of approximately 3.9 million
square feet of gross leasable area in the Mid-Atlantic region. The Company also
manages properties owned by third parties.
All of the shares of common stock offered hereby ('Common Stock') are being
offered by the Company (the 'Offering'). To assist the Company in maintaining
its qualification as a REIT, transfer of the Common Stock and the Company's
outstanding 9.75% Series A Cumulative Participating Convertible Preferred Stock
(the 'Convertible Preferred Stock') is restricted, and actual or constructive
ownership by any person is limited to 9.8% of the outstanding shares of such
class of stock, subject to certain exceptions.
The Common Stock is listed on the New York Stock Exchange ('NYSE') under
the symbol FRW. On November 25, 1996, the last reported sale price of the Common
stock on the NYSE was $21 7/8 per share. Since inception the Company has paid
regular quarterly distributions of $.4875 on its Common Stock, representing an
annualized distribution per share of $1.95. See 'Price Range of the Common Stock
and Distributions.'
----------
SEE 'RISK FACTORS' BEGINNING ON PAGE EIGHT FOR CERTAIN FACTORS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK INCLUDING:
o Risks of leverage and default, including the uncertainty associated with
the ability of the Company to refinance mortgage indebtedness of
approximately $97.0 million at maturity dates ranging from 1997 to 2001 and
$25.0 million of Exchangeable Debentures (as defined) due 1999
o Limitations on distributions payable on the Common Stock, due to the right
of the Convertible Preferred Stock to receive a participating distribution
after specified distributions have been made on the Common Stock
o Substantially all distributions paid on the Common Stock for fiscal year
1995 represented a return of capital for tax purposes rather than ordinary
income
o General real estate investment considerations and financing risks
o Possible conflicts of interest in connection with the operation of the
Company
o Limitations on potential changes of control of the Company, including
restrictions on ownership of Common Stock and Convertible Preferred Stock
o Adverse consequences of failure to qualify as a REIT
----------
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.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------ -------------- ----------
<S> <C> <C> <C>
Per share ........ $21.75 $1.20 $20.55
Total(3) ......... $32,625,000 $1,800,000 $30,825,000
- ----------
<FN>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See 'Underwriting.'
(2) Before deducting expenses of the Offering, estimated at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
225,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $37,518,750,
$2,070,000 and $35,448,750, respectively. See 'Underwriting.'
</FN>
</TABLE>
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and to the
right of the Underwriters to reject any order in whole or in part, and to
certain other conditions. It is expected that delivery of the shares of Common
Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore,
Maryland, on or about December 2, 1996.
ALEX. BROWN & SONS
INCORPORATED
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
TUCKER ANTHONY
INCORPORATED
THE DATE OF THIS PROSPECTUS IS NOVEMBER 25, 1996.
<PAGE>
[PHOTOGRAPHS OF CERTAIN OF THE RETAIL PROPERTIES
AND A MAP SPECIFYING THE GENERAL LOCATION OF ALL OF THE PROPERTIES.]
----------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE CONVERTIBLE PREFERRED STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY...................................... 1
The Company........................................... 1
Risk Factors.......................................... 2
Recent Developments................................... 3
Properties............................................ 4
The Offering.......................................... 5
Summary Pro Forma and Historical Information.......... 6
RISK FACTORS............................................ 8
Risks Associated With Indebtedness.................... 8
Historical Operating Losses and Net Deficit........... 9
Limitation on the Level of Distributions Payable to
Common Stock; Subordination of Distributions with
Respect to Common Stock............................. 9
Distributions Representing Return of Capital.......... 9
Limited Geographic Diversification; Dependence on the
Mid-Atlantic Region................................. 9
Effect of Exchange of Exchangeable Indebtedness....... 10
Environmental Matters................................. 10
Risks of Third-Party Management, Leasing and Related
Service Business.................................... 11
Conflicts of Interest................................. 11
Changes in Investment and Financing Policies Without
Stockholder Approval................................ 12
Influence of Executive Officers....................... 12
Dependence on Key Personnel........................... 12
General Real Estate Investment Risks; Adverse Impact
on Ability to Make Distributions.................... 12
Ownership Limit and Limits on Changes in Control...... 14
Adverse Consequences of Failure to Qualify as a REIT.. 16
Effect on Price of Shares Available for Future Sale... 17
New Retail Properties................................. 18
THE COMPANY............................................. 19
General............................................... 19
Growth Strategies..................................... 19
Property Management, Leasing and Related Service
Business............................................ 20
PROPERTIES.............................................. 21
Tenant Diversification................................ 24
Additional Information Concerning Certain of the
Properties.......................................... 25
Indebtedness.......................................... 29
Competition........................................... 30
Regulations and Insurance............................. 30
Environmental Matters................................. 31
Legal Proceedings..................................... 32
USE OF PROCEEDS......................................... 33
PRICE RANGE OF THE COMMON STOCK AND DISTRIBUTIONS....... 33
CAPITALIZATION.......................................... 35
SELECTED PRO FORMA AND HISTORICAL FINANCIAL AND
PORTFOLIO INFORMATION............................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 39
Overview.............................................. 39
Results of Operations................................. 39
Liquidity and Capital Resources....................... 42
Inflation; Economic Conditions........................ 45
MANAGEMENT.............................................. 46
Directors and Executive Officers...................... 46
Board of Directors and Committees..................... 48
Compensation of Directors............................. 48
Compensation of Officers.............................. 49
Employment Agreements................................. 51
Additional Information................................ 54
Limitation of Liability and Indemnification........... 54
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............. 55
Investment Policies................................... 55
Financing Policies.................................... 56
Conflicts of Interest Policies........................ 57
Development Policies.................................. 57
Policies with Respect to Other Activities............. 57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 59
Partnership Agreement; Exchange Rights................ 59
Certain Properties Not Transferred to the Company..... 59
Management Company.................................... 59
Other................................................. 59
PRINCIPAL STOCKHOLDERS.................................. 60
DESCRIPTION OF CAPITAL STOCK............................ 61
General............................................... 61
Common Stock.......................................... 61
Convertible Preferred Stock........................... 62
Power to Issue Additional Shares of Common Stock and
Preferred Stock....................................... 64
Restrictions on Ownership, Transfer and Conversion 64
Registration Rights Agreements........................ 67
NYSE Listing.......................................... 67
SHARES AVAILABLE FOR FUTURE SALE........................ 67
CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S
CHARTER AND BYLAWS...................................... 68
Classification of the Board of Directors.............. 68
Removal of Directors.................................. 69
Business Combinations................................. 69
Control Share Acquisitions............................ 69
Amendment to the Charter.............................. 70
Dissolution of the Company............................ 70
Advance Notice of Director Nominations and New
Business............................................ 70
FEDERAL INCOME TAX CONSIDERATIONS....................... 71
Taxation of the Company............................... 71
Failure to Qualify.................................... 77
Taxation of Taxable U.S. Stockholders................. 77
Backup Withholding.................................... 78
Taxation of Tax-Exempt Stockholders................... 78
Taxation of Non-U.S. Stockholders..................... 79
Tax Aspects of the Operating Partnership.............. 81
Other Tax Consequences................................ 84
UNDERWRITING............................................ 85
EXPERTS................................................. 86
LEGAL MATTERS........................................... 86
ADDITIONAL INFORMATION.................................. 86
GLOSSARY OF TERMS....................................... 87
INDEX TO FINANCIAL STATEMENTS........................... F-1
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Although the Company, the Operating Partnership and the
Management Company (as such terms are defined below) are separate entities, each
of which is managed in accordance with its governing documents, for ease of
reference the term 'Company' as used herein shall refer to the businesses and
properties of the Company, the Operating Partnership and the Management Company
(and their predecessors), unless the context indicates otherwise. Except as
otherwise specified, all information presented in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and assumes consummation of
the acquisition of the New Retail Properties. Capitalized terms used herein
without definition shall have the meanings set forth in the Glossary.
THE COMPANY
First Washington Realty Trust, Inc. (the 'Company') is a fully integrated,
self-administered and self-managed real estate company that operates as a REIT
with expertise in the acquisition, management, renovation and development of
principally supermarket-anchored neighborhood shopping centers. As of September
30, 1996, the Company owned a portfolio of 33 retail properties (the 'Existing
Retail Properties'). The Company expects to complete the acquisition of six
additional retail properties promptly following the closing of the Offering (the
'New Retail Properties,' and together with the Existing Retail Properties, the
'Retail Properties'). The Retail Properties contain a total of approximately 3.9
million square feet of gross leasable area ('GLA') in the Mid-Atlantic region.
The Company also owns two multifamily properties in the Mid-Atlantic region (the
'Multifamily Properties') (the Retail Properties and the Multifamily Properties
are collectively referred to as the 'Properties').
The Company's business strategy is highly focused with respect to property
type and location. The Company concentrates its efforts on supermarket-anchored
neighborhood shopping centers. The Company generally seeks to own properties
located in densely populated areas, that have high visibility, open-air designs
and ease of entry and exit, and that may be readily adaptable over time to
expansion, renovation and redevelopment.
The Retail Properties are strategically located neighborhood shopping
centers, principally anchored by well-known tenants such as Shoppers Food
Warehouse, Weis Markets, Rite Aid, A&P Superfresh, Giant Food, CVS/Pharmacy,
Safeway, Winn Dixie and Acme Markets. As of September 30, 1996, national and
regional tenants accounted for approximately 73% of leased GLA and approximately
60% of annualized minimum rents for the Retail Properties. The anchor tenants at
the Retail Properties typically offer daily necessity items. Management believes
that anchor tenants offering daily necessity items help to generate regular
consumer traffic and to provide economic stability.
Since December 31, 1991, the occupancy rate for the Existing Retail
Properties (during the respective periods each such property was owned by the
Company) has averaged approximately 95%. Average effective net rents (as
measured by base rent divided by square feet leased, excluding vacant space)
increased from $8.89 per square foot as of December 31, 1991 to $10.54 as of
September 30, 1996.
The Company manages and leases all of the Existing Retail Properties and
will manage and lease the New Retail Properties. In addition, the Company
provides management, leasing and related services for third parties. As of
September 30, 1996, the Company provided management, leasing and related
services to third-party clients for 33 shopping centers containing approximately
3.5 million square feet of GLA throughout the Mid-Atlantic region.
1
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See 'Risk
Factors' for certain factors relevant to an investment in the Common Stock,
including:
o Risks associated with borrowing, including: (i) the uncertainty associated
with the ability of the Company to refinance mortgage indebtedness of
approximately $97.0 million at maturity dates ranging from 1997 to 2001 and
$25.0 million of Exchangeable Debentures due 1999, (ii) that indebtedness
might be refinanced on less favorable terms, (iii) that there is a lack of
limitations on the amount of indebtedness that the Company may incur, (iv)
that interest rates might increase on variable rate or refinanced
indebtedness and (v) that the Company's leverage may limit its ability to
grow through additional debt financing.
o Limitations on the level of distributions payable on the Common Stock due
to the right of the Convertible Preferred Stock to participate in quarterly
distributions on the Common Stock to the extent that such per share
distributions exceed $0.4875 per quarter.
o That: (i) 100% of the distributions on the Common Stock for fiscal year
1995 represented a return of capital for federal income tax purposes and
(ii) based on the level of distributions on the Common Stock that
represented a return of capital in 1995, the Company would not have been
required to make any distributions on the Common Stock in 1995 to satisfy
its obligation under federal income tax law to distribute annually at least
95% of its REIT taxable income.
o General real estate investment and financing risks, such as the effect of
local economic and other conditions on property values, the ability of the
Properties to generate income sufficient to meet operating expenses, risks
associated with the renovation and acquisition of properties and the
potential liability of the Company for unknown or future environmental
liabilities on its past, present or future properties.
o Risks associated with the Company's third-party management business, which
is conducted by the Management Company (as defined), including the
inability of the Company to control the Management Company, which could
result in decisions which do not fully reflect the Company's interest, and
the risk that most management contracts are generally cancelable by the
Company's third-party clients upon 30 days' notice.
o Possible conflicts of interest in connection with the Company's operations.
o Limitations on the stockholders' ability to change control of the Company,
due to restrictions on actual or constructive ownership of more than 9.8%
of the Company's outstanding shares of stock or any class thereof, a
staggered Board of Directors, and a supermajority vote requirement
involving the merger or sale of all or substantially all of the assets of
the Company, any of which may discourage a change in control and limit the
opportunity for stockholders to receive a premium over then-current market
prices for their shares of stock.
o Taxation of the Company as a regular corporation if it fails to qualify as
a REIT, treatment of the Operating Partnership (or any subsidiary
partnership of the Operating Partnership) as an association taxable as a
corporation if any such partnership fails to qualify as a partnership (and
the resulting failure of the Company to qualify as a REIT), and the
resulting decrease in funds available for distribution.
2
<PAGE>
RECENT DEVELOPMENTS
New Retail Properties. The following table sets forth certain information
with respect to the New Retail Properties:
<TABLE>
<CAPTION>
Purchase GLA
Name Location Price (sq. ft.)
- ---- -------- ----- ---------
<S> <C> <C> <C>
City Line Shopping Center(1)........... Philadelphia, PA $13,150,000 153,899
Four Mile Fork Shopping Center......... Fredericksburg, VA 5,700,000 101,262
Kings Park Shopping Center............. Burke, VA 5,700,000 76,212
Newtown Square Shopping Center......... Newtown Square, PA 11,700,000 137,569
Northway Shopping Center............... Millersville, MD 9,000,000 91,276
Shoppes of Graylyn..................... Wilmington, DE 7,200,000 65,746
----------- -------
Total.............................. $52,450,000(2) 625,964
=========== =======
- ----------
<FN>
(1) The Company will own an 89% interest in this property. The seller of City
Line Shopping Center will retain an 11% interest which it is obligated to
transfer to the Company and which the Company is obligated to acquire
approximately three years after the initial closing in exchange for Common
Units. In addition, the Company is obligated to issue to the seller
additional Common Units with a value of up to $750,000 if certain portions
of this property are re-leased within three years after closing at rental
rates higher than rates as of the closing of the acquisition of the
property.
(2) This amount includes assumption of $21.1 million of mortgage indebtedness
and the issuance of 300,000 Common Units with a market value as of the date
of each acquisition of approximately $6.2 million.
</FN>
</TABLE>
Recent Acquisitions. The following table sets forth certain information with
respect to the eight Retail Properties acquired since July 1995:
<TABLE>
<CAPTION>
Purchase GLA
Name Location Price (sq. ft.)
- ---- -------- ----- ---------
<S> <C> <C> <C>
Centre Ridge Marketplace............... Centreville, VA $ 9,449,000 69,854
Clopper's Mill Village................. Germantown, MD 19,833,000 137,952
15th & Allen Shopping Center........... Allentown, PA 4,242,000 46,503
Firstfield Shopping Center............. Gaithersburg, MD 3,600,000 22,504
Kenhorst Plaza Shopping Center......... Reading, PA 11,000,000 138,034
Southside Marketplace.................. Baltimore, MD 10,998,000 125,146
Stefko Boulevard Shopping Center....... Bethlehem, PA 5,618,000 135,864
Takoma Park Shopping Center............ Takoma Park, MD 4,605,000 103,581
------------ ---------
Total.............................. $ 69,345,000(1) 779,438
============ =========
- ----------
<FN>
(1) This amount includes assumptions of $8.1 million of mortgage indebtedness, a
seller note of $2.5 million and the issuance of: (i) approximately 36,189
shares of Convertible Preferred Stock with a market value of approximately
$0.8 million; (ii) approximately 69,000 Preferred Units with a market value
of approximately $1.7 million and (iii) approximately 304,000 Common Units
with a market value of approximately $5.7 million.
</FN>
</TABLE>
3
<PAGE>
Renovations and Expansions. As part of its operating strategy, the Company
regularly renovates and expands its Retail Properties. The Company seeks
expansion and renovation opportunities that enhance operating results through
favorable internal rates of return on invested capital. The following table sets
forth information with respect to the Company's recent and ongoing renovations
and expansions:
<TABLE>
<CAPTION>
ESTIMATED
COMPLETION ESTIMATED ADDITIONAL
NAME DESCRIPTION DATE COST SQUARE FEET
- ---- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Fox Mill Shopping Center............ Expansion--Giant Food Fourth Quarter 1996 -- (1) 10,560
Glen Lea Shopping Center............ Facade renovations Fourth Quarter 1996 $ 186,000(2) --
Laburnum Square Shopping Center..... Facade renovations Fourth Quarter 1996 189,600(2) --
Takoma Park Shopping Center......... Expansion--Shoppers Food
Warehouse First Quarter 1997 -- (1) 22,000
Takoma Park Shopping Center......... Facade renovations First Quarter 1997 800,000(3) --
First State Plaza................... Expansion--Shop Rite
Supermarket First Quarter 1997 -- (1) 2,075
Centre Ridge Marketplace............ Expansion--Sears Paint and
Hardware and small shop
space Second Quarter 1997 1,500,000(3) 30,600
Firstfield Shopping Center.......... Facade renovations Second Quarter 1997 109,000(2) --
Kenhorst Plaza Shopping Center...... Expansion--Sears Paint and
Hardware Second Quarter 1997 1,250,000(3) 21,000
Valley Centre Shopping Center....... Expansion--T.J. Maxx Second Quarter 1997 625,000 10,000
Kenhorst Plaza Shopping Center...... Expansion--Redner's
Supermarket Third Quarter 1997 -- (1) 8,000
Laburnum Park Shopping Center....... Expansion--Ukrops
Supermarket Third Quarter 1997 -- (1) 10,000
- ----------
<FN>
(1) Paid by tenant.
(2) Funded either through draws on the Company's Lines of Credit or by
working capital.
(3) Funded through specific construction loans secured by the property.
</FN>
</TABLE>
New York Stock Exchange Listing. The Common Stock commenced trading on the
New York Stock Exchange on August 13, 1996. From June 27, 1995 until such time,
the Common Stock was traded on the Nasdaq National Market.
PROPERTIES
Retail Properties. The Retail Properties are primarily supermarket-anchored
neighborhood shopping centers containing a total of approximately 3.9 million
square feet of GLA occupied by approximately 794 tenants. Neighborhood shopping
centers are typically open-air centers ranging in size from 50,000 to 150,000
square feet of GLA and anchored by supermarkets and/or drug stores. The Retail
Properties average approximately 100,000 square feet of GLA. The Company's
portfolio is comprised of a diversified tenant base, with no single tenant
representing more than 2.7% of the Company's annualized minimum rent. All of the
Existing Retail Properties are managed by the Company, and all of the New Retail
Properties will be managed by the Company upon acquisition. As of September 30,
1996, 60.0% of the Retail Properties' annualized minimum rents were derived from
lease payments by national and regional tenants. As of September 30, 1996, the
Retail Properties were 95.6% leased.
4
<PAGE>
The chart below shows certain additional information with respect to the
Retail Properties as of September 30, 1996:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NUMBER OF GLA PERCENTAGE OF ANNUALIZED ANNUALIZED
PROPERTIES (SQ. FT.) TOTAL GLA OCCUPANCY MINIMUM RENT MINIMUM RENT
---------- --------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
EXISTING RETAIL
PROPERTIES
Maryland...................... 12 1,480,339 37.9% 95.7% $15,094,620 40.4%
Virginia...................... 11 919,625 23.5 95.3 8,316,491 22.2
Pennsylvania.................. 5 460,164 11.8 96.3 4,186,571 11.2
District of Columbia.......... 2 25,052 0.6 100.0 575,809 1.5
South Carolina................ 1 88,557 2.3 100.0 584,638 1.6
North Carolina................ 1 148,205 3.8 98.9 1,289,204 3.4
Delaware...................... 1 162,404 4.2 100.0 1,605,604 4.3
-- --------- ----- ----- ----------- ----
Subtotal................. 33 3,284,346 84.1% 96.1% $31,652,937 84.6%
-- --------- ----- ----- ----------- ----
NEW RETAIL PROPERTIES
Maryland...................... 1 91,276 2.3% 97.8% $ 993,604 2.7%
Virginia...................... 2 177,474 4.5 95.5 1,254,374 3.4
Pennsylvania.................. 2 291,468 7.4 91.1 2,828,395 7.5
Delaware...................... 1 65,746 1.7 86.2 673,698 1.8
-- --------- ----- ----- ----------- ----
Subtotal................. 6 625,964 15.9% 92.8% $ 5,750,071 15.4%
-- --------- ----- ----- ----------- ----
Total.................. 39 3,910,310 100.0% 95.6% $37,403,008 100.0%
== ========= ===== ===== =========== =====
</TABLE>
Multifamily Properties. The two Multifamily Properties, comprising 401
units, are located in Charleston, South Carolina, in close proximity to one of
the Retail Properties. The Multifamily Properties comprise a relatively small
portion of the Company's revenues (4.0% as of September 30, 1996) and the
Company anticipates that its principal strategic focus will continue to be the
acquisition of additional supermarket-anchored neighborhood shopping centers.
THE OFFERING
Common Stock offered hereby ................ 1,500,000 shares
Common Stock to be outstanding after the
Offering(1)............................... 4,791,245 shares
Use of proceeds ............................ The net proceeds will be used to
acquire the New Retail Properties,
to expand certain Properties, to
repay existing indebtedness, and
for general working capital.
NYSE symbol................................. FRW
- ----------
(1) Does not reflect 5,921,497 shares of Common Stock issuable upon
exchange or conversion of Common Units, including Common Units issued
or to be issued in connection with the acquisition of the New Retail
Properties, Convertible Preferred Stock, Exchangeable Preferred Units,
Exchangeable Debentures and exchange of the FS Note, or 594,874 shares
of Common Stock reserved for issuance under the Company's 1994 Stock
Incentive Plan, 1994 Contingent Stock Awards, 1996 Restricted Stock
Plan and 1996 Contingent Stock Awards. See 'Shares Available for
Future Sale.'
5
<PAGE>
SUMMARY PRO FORMA AND HISTORICAL INFORMATION
The following tables set forth pro forma summary consolidated financial
information for the Company and historical summary financial information for the
Company and its predecessor, the FWM Group (as defined below). The unaudited pro
forma information for the year ended December 31, 1995 is presented as if: (i)
the June 1995 Offering had occurred and the proceeds therefrom had been used, as
of January 1, 1995, to purchase the Retail Properties acquired in connection
with the June 1995 Offering; and (ii) the Offering had occurred and the net
proceeds therefrom had been used, as of January 1, 1995, as described in 'Use of
Proceeds,' and the 1996 Acquisitions had occurred as of January 1, 1995. The
unaudited pro forma information for the nine months ended September 30, 1996 is
presented as if the Offering had occurred and the net proceeds therefrom had
been used, as of January 1, 1996, as described in 'Use of Proceeds,' and the
1996 Acquisitions had occurred as of January 1, 1996. The 'FWM Group' consists
of the combined financial statements for the periods presented of: (i) the FWM
Properties and (ii) the third party management, leasing, and related service
business of FWM. The following summary 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>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ -------------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FINANCIAL INFORMATION:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues............................ $ 17,192 $ 20,199 $ 29,580 $ 45,204 $ 20,792 $ 30,113 $ 36,963
--------- --------- --------- --------- --------- --------- ---------
Total expenses............................ 18,432 21,535 27,098 39,417 19,433 26,779 32,312
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income from
Management Company, extraordinary item
and minority interest.................... (1,240) (1,336) 2,482 5,787 1,359 3,334 4,651
Income from Management Company(1)......... -- 500 449 449 361 97 97
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before distributions to
preferred stockholders, extraordinary
item and minority interest............... (1,240) (836) 2,931 6,236 1,720 3,431 4,748
Extraordinary item........................ 2,665 2,251 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income before minority interest and
distributions to preferred
stockholders............................. 1,425 1,415 2,931 6,236 1,720 3,431 4,748
(Income) loss allocated to minority
interest................................. -- (1,101) (602) (977) (87) (486) (746)
Distributions to preferred stockholders... -- (1,811) (5,117) (5,641) (3,728) (4,231) (4,231)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) allocated to common
stockholders............................. $ 1,425 $ (1,497) $ (2,788) $ (382) $ (2,095) $ (1,286) $ (229)
========= ========= ========= ========= ========= ========= =========
Net income (loss) per Common
Share(2)........................... $ (0.95) $ (1.19) $ (0.08) $ (1.01) $ (0.40) $ (0.05)
========= ========= ========= ========= ========= =========
Shares of Common Stock, in thousands...... 1,574 2,351 4,701 2,081 3,227 4,727
========= ========= ========= ========= ========= =========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
PRO FORMA
1993 1994 1995 1996 1996
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT RETAIL PROPERTY INFORMATION)
BALANCE SHEET INFORMATION:
<S> <C> <C> <C> <C> <C>
Rental properties, gross.............................. $ 87,749 $ 175,213 $ 228,092 $ 285,774 $ 341,478
Total assets.......................................... 81,056 172,487 227,405 274,969 336,072
Mortgage and other notes payable...................... 92,382 89,858 116,182 162,346 186,976
Exchangeable Debentures............................... -- 25,000 25,000 25,000 25,000
Total liabilities..................................... 96,216 117,925 145,241 192,561 217,191
Minority interest(3).................................. -- 8,580 11,088 12,573 19,367
Stockholders' equity (deficit)........................ (15,160) 45,982 71,076 69,835 99,514
RETAIL PROPERTY
INFORMATION:
Retail Occupancy...................................... 95.4% 94.4% 96.0% 96.1% 95.6%
Number of Retail Properties........................... 14 20 27 33 39
Retail Properties GLA (thousands of sq. ft.).......... 1,186 2,014 2,646 3,284 3,910
Average rent(4):
Retail Properties (per sq. ft.)..................... $ 9.16 $ 10.08 $ 10.28 $ 10.54 $ 10.43
OTHER DATA:(5)
Funds From Operations(6).............................. -- -- $ 10,539 $ 10,264 $ 12,873
Cash flow from operating activities................... $ 831 $ 3,164 10,003 9,466
Cash flow (used in) investing activities.............. (450) (56,236) (29,884) (42,260)
Cash flow provided by (used in) financing activities.. (529) 53,615 26,574 26,858
- ----------
<FN>
(1) Subsequent to June 27, 1994, activity of the Management Company is being
reflected using the equity method of accounting.
(2) Because the Company's income is based on its percentage interest in the
Operating Partnership's income, the net loss per share would be unchanged
for the periods presented even if Common Units were exchanged for Common
Stock of the Company.
(3) Reflects the Exchangeable Preferred Units and Common Units of the Operating
Partnership not owned by the Company.
(4) Represents base rent divided by square feet leased, for the annualized
12-month period.
(5) For the year or nine months ending as of the date indicated
(6) The Company considers Funds From Operations to be an appropriate measure of
the performance of an equity REIT. On March 3, 1995, NAREIT adopted the
NAREIT White Paper on Funds From Operations (the 'NAREIT White Paper')
which provided additional guidance on the calculation of Funds From
Operations. Funds From Operations is defined by NAREIT as net income
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect Funds From
Operations on the same basis. Funds From Operations does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available
to fund cash needs and should not be considered an alternative to net
income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity or of ability to make
distributions.
</FN>
</TABLE>
Information contained in this Prospectus contains Forward-looking
Statements relating to, without limitation, future economic performance, plans
and objectives of management for future operations and projections of revenue
and other financial items, which can be identified by the use of forward-looking
terminology such as may, will, should, expect, anticipate, estimate or continue
or the negative thereof or other variations thereon or comparable terminology.
The cautionary statements set forth under the caption Risk Factors and elsewhere
in the Prospectus identify important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such
forward-looking statements.
7
<PAGE>
RISK FACTORS
In addition to other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the shares of
Common Stock offered by this Prospectus.
RISKS ASSOCIATED WITH INDEBTEDNESS
Leverage. As of September 30, 1996, the Company had outstanding
approximately $162.3 million of long-term mortgage indebtedness and $25.0
million of Exchangeable Debentures. Upon completion of the Offering and use of
the proceeds contemplated thereby, and upon consummation of the acquisition of
the New Retail Properties, the ratio of the Company's debt (including the
Exchangeable Debentures) to total market capitalization will be approximately
51.5%, and the ratio of the Company's debt (excluding the Exchangeable
Debentures) to total market capitalization will be approximately 44.8%.
Near Term Maturity of Indebtedness. The Company is subject to the risks
normally associated with debt financing, including the risk that the Company's
cash flow will be insufficient to meet required payments of principal and
interest, the risk that existing indebtedness on the Properties (which in most
cases will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancing will not be as favorable as the
terms of the existing indebtedness. A large portion of the Company's mortgage
indebtedness will become due by 1999, requiring payments of, $3.2 million in
1997, $13.6 million in 1998 and $86.2 million (including $25.0 million of
Exchangeable Debentures) in 1999. From 1997 through 2020, the Company will have
to refinance an aggregate of approximately $212.9 million.
Because the Company anticipates that only a small portion of the principal
of the Company's mortgage indebtedness will be repaid prior to maturity and does
not plan to retain cash sufficient to repay such indebtedness at maturity, it
will be necessary for the Company to refinance debt through additional debt
financing or equity offerings. If the Company is unable to refinance this
indebtedness on acceptable terms, the Company may be forced to dispose of
properties upon disadvantageous terms, which might result in losses to the
Company and might adversely affect cash available for distributions to
stockholders. If prevailing interest rates or other factors at the time of
refinancing result in higher interest rates on refinancings, the Company's
interest expense would increase, which would adversely affect the Company's
ability to pay expected distributions to stockholders. Further, if a property or
properties are mortgaged to collateralize payment of indebtedness and the
Company is unable to meet mortgage payments, the property or properties could be
foreclosed upon by or otherwise transferred to the mortgagee with a consequent
loss of income and asset value to the Company. Even with respect to nonrecourse
indebtedness, the lender may have the right to recover deficiencies from the
Company in certain circumstances, including environmental liabilities. See
'Properties--Indebtedness.'
Risk of Rising Interest Rates. Of the Company's mortgage indebtedness
(including indebtedness to be incurred in connection with the acquisition of the
New Retail Properties, but excluding the Exchangeable Debentures), $22.7 million
(10.6%) is variable rate indebtedness. Future indebtedness may bear interest at
a variable rate. Accordingly, increases in prevailing interest rates could
increase the Company's interest expense, which would adversely affect the
Company's cash available for distribution and its ability to pay expected
distributions to stockholders. A one-half of one percent increase in interest
rates would increase the Company's interest expense by $0.1 million ($0.01 per
share) (assuming the exchange of all Common Units and Exchangeable Preferred
Units and the conversion of all Convertible Preferred Stock into Common Stock)
in 1997.
No Limitation on Debt. The Company currently has a policy of maintaining a
ratio of debt (excluding the Exchangeable Debentures) to total market
capitalization of 50% or less, but the organizational documents of the Company
do not contain any limitation on the amount of indebtedness the Company may
incur. Accordingly, the Board of Directors could alter or eliminate
8
<PAGE>
this policy. If this policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service that could adversely affect
the Company.
Cross-Collateralization. A total of 15 Properties are cross-collateralized
with one or more other Properties. A default in a single loan which is
cross-collateralized by other properties may result in the foreclosure on all of
such properties by the mortgagee with a consequent loss of income and asset
value to the Company. See 'Properties--Indebtedness.'
HISTORICAL OPERATING LOSSES AND NET DEFICIT
The Company historically has experienced losses allocated to common
stockholders (as measured by generally accepted accounting principles) before
extraordinary items. These net losses reflect substantial non-cash charges such
as depreciation and amortization and the effect of distributions to holders of
the Convertible Preferred Stock. There can be no assurance that the Company will
operate profitably in the future. If some or all of the Properties continue to
operate at a loss, the Company's ability to make distributions to its
stockholders could be adversely affected. See '--Risks Associated With
Indebtedness' and '--General Real Estate Investment Risks; Adverse Impact on
Ability to Make Distributions.'
LIMITATION ON THE LEVEL OF DISTRIBUTIONS PAYABLE TO COMMON STOCK;
SUBORDINATION OF DISTRIBUTIONS WITH RESPECT TO COMMON STOCK
The Company's charter provides that when distributions are declared by the
Board of Directors, each share of Convertible Preferred Stock is entitled to
receive distributions equal to $0.6094 per quarter, plus a participating
distribution equal to the amount, if any, of distributions in excess of $0.4875
per quarter payable to the Common Stock with respect to the number of shares of
Common Stock into which the Convertible Preferred Stock is then convertible. See
'Description of Capital Stock--Convertible Preferred Stock--Distributions.' The
payment of distributions with respect to the Convertible Preferred Stock reduces
the income allocable to the holders of Common Stock and therefore causes a
decrease in such common stockholders' equity. The fact that the Convertible
Preferred Stock is entitled to receive participating distributions also limits
the level of distributions that the Company can pay on the outstanding shares of
Common Stock.
DISTRIBUTIONS REPRESENTING RETURN OF CAPITAL
Approximately 22% and 100% (or $.54 per share and $1.95 per share) of the
distributions made through December 31, 1995 on the Convertible Preferred Stock
and the Common Stock, respectively, represented a return of capital for federal
income tax purposes. Based on the level of distributions on the Common Stock
constituting a return of capital, the Company would not have been required to
make any distributions on the Common Stock in 1995 to satisfy its obligation
under federal income tax law to distribute annually at least 95% of its REIT
taxable income. The major difference between the Company's net income and cash
flow is the allowance for depreciation. By making distributions out of cash flow
instead of net income, the Company is not taking into account the allowance for
depreciation, a non-cash item. There is a risk that because the Company is
distributing a return of capital that there will be insufficient funds in the
future to pay for major repairs or replacements to the Properties.
LIMITED GEOGRAPHIC DIVERSIFICATION; DEPENDENCE ON THE MID-ATLANTIC REGION
The Properties consist exclusively of retail and multifamily properties
located in the Mid-Atlantic region. Approximately 59% of the Retail Properties
(based on GLA) are located in the Washington-Baltimore corridor. The Company's
performance may therefore be linked to economic conditions and the market for
neighborhood shopping centers in this region. A decline in the economy in this
market may adversely affect the ability of the Company to make distributions to
stockholders.
9
<PAGE>
EFFECT OF EXCHANGE OF EXCHANGEABLE INDEBTEDNESS
As part of the Company's formation, the Operating Partnership issued $25.0
million of Exchangeable Debentures, which are exchangeable for 1,000,000 shares
of Convertible Preferred Stock. If the Exchangeable Debentures, which bear
interest at the rate of 8.25% per annum, are exchanged for Convertible Preferred
Stock, the annual amount of preferential distribution payments that the Company
will be required to make on the Convertible Preferred Stock (net of reductions
in interest payments) would be increased by approximately $0.4 million. Such
increase in distributions on the Convertible Preferred Stock would reduce the
annual cash available for distribution payable on outstanding shares of Common
Stock by $0.09 per share.
ENVIRONMENTAL MATTERS
General. Under various federal, state and local laws, ordinances and
regulations, an owner or operator of real estate may be required to investigate
and clean up hazardous or toxic substances or petroleum product releases at such
property and may be held liable to a governmental entity or to third parties for
property damage and for investigation and clean-up costs incurred by such
parties in connection with contamination. The cost of investigation, remediation
or removal of such substances may be substantial, and the presence of such
substances, or the failure to properly remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company, the
Operating Partnership or the Management Company, as the case may be, may be
considered an owner or operator of such properties or as having arranged for the
disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental fines and injuries to persons and
property. For a more complete discussion of environmental regulation affecting
the Properties, see 'Properties--Environmental Matters.' All of the Properties
(including the New Retail Properties) have been subject to a Phase I or similar
environmental audit (which involves general inspections without soil sampling or
groundwater analysis) completed by independent environmental consultants. These
environmental audits revealed the following potential environmental liabilities:
Penn Station Shopping Center. Contamination caused by dry cleaning solvents
has been detected in ground water below the Penn Station Shopping Center. The
source of the contamination has not been determined. Potential sources include a
dry cleaner tenant at the Penn Station Shopping Center and a dry cleaner located
in an adjacent property. Sampling conducted at the site indicates that the
contamination is limited and is unlikely to have any effect on human health.
Fox Mill Shopping Center. Petroleum has been detected in the soil of a
parcel adjacent to Fox Mill Shopping Center on property occupied by Exxon
Corporation ('Exxon') for use as a gas station (the 'Exxon Station'). Exxon has
taken steps to remediate the petroleum in and around the Exxon Station, which is
located downgradient from the Fox Mill Shopping Center. Exxon has agreed to take
full responsibility for the remediation of such petroleum. In addition, a dry
cleaning solvent has been detected in the groundwater below the Fox Mill
Shopping Center. A groundwater pump and treatment system, approved by the
Virginia Water Control Board, was installed in July 1992, and was operating
until recently when the Water Control Board ordered semi-annual sampling to
determine if further remediation is necessary. The previous owner of the Fox
Mill Shopping Center has agreed to fully remediate the groundwater
contamination. See 'Properties--Environmental Matters.'
Four Mile Fork Shopping Center. A dry cleaning solvent has been detected in
the soil below the Four Mile Fork Shopping Center. The Company intends to
conduct additional testing to determine the extent of contamination and the
appropriate remediation measures, if any. In any event, the Company does not
intend to close the acquisition of Four Mile Fork Shopping Center without a
closure letter from the responsible regulatory authority or adequate
indemnification from the seller of the center.
10
<PAGE>
The Management believes that environmental studies have not revealed
significant environmental liabilities that would have a material adverse effect
on the Company's business, results of operations and liquidity, however, no
assurances can be given that existing environmental studies with respect to any
of the Properties reveal all environmental liabilities, that any prior owner of
a Property did not create any material environmental condition not known to the
Company, or that a material environmental condition does not otherwise exist (or
may exist in the future) as to any one or more Properties. If such a material
environmental condition does in fact exist (or exists in the future), it could
have a significant adverse impact upon the Company's financial condition,
results of operations and liquidity.
RISKS OF THIRD-PARTY MANAGEMENT, LEASING AND RELATED SERVICE BUSINESS
Possible Termination of Management Contracts. The Company intends to pursue
actively the management, including contracts to lease space, of properties owned
by third parties. Risks associated with the management of properties owned by
third parties include: (i) the risk that the management and leasing contracts
(which are generally cancelable upon 30 days' notice or upon certain events,
including sale of the property) will be terminated by the property owner or will
be lost in connection with a sale of such property, (ii) that contracts may not
be renewed upon expiration or may not be renewed on terms consistent with
current terms and (iii) that the rental revenues upon which management fees are
based will decline as a result of general real estate market conditions or
specific market factors affecting properties managed by the Company, resulting
in decreased management fee income. See 'The Company--Property Management,
Leasing and Related Service Business.'
Possible Adverse Consequences of Lack of Control Over the Business of the
Management Company. Certain members of management, as holders of 100% of the
voting common stock of the Management Company, have the ability to elect the
board of directors of the Management Company. The Company is not able to elect
directors of the Management Company and, consequently, the Company has no
ability to influence the decisions of such entity. As a result, the board of
directors and management of the Management Company may implement business
policies or decisions that would not have been implemented by persons controlled
by the Company and that are adverse to the interests of the Company or that lead
to adverse financial results, which would adversely affect the Company's ability
to pay expected distributions to stockholders. The voting common stock of the
Management Company is subject to an assignable right of first refusal held by
Stuart D. Halpert and William J. Wolfe.
Possible Adverse Consequences of REIT Status on the Business of the
Management Company. Certain requirements for REIT qualification may limit the
Company's ability to increase third-party management, leasing and related
services offered by the Management Company without jeopardizing the Company's
qualification as a REIT. See '--Adverse Consequences of Failure to Qualify as a
REIT.'
CONFLICTS OF INTEREST
Policies with Respect to Conflicts of Interests. Although the Company has
adopted certain policies designed to eliminate or minimize conflicts of
interest, there can be no assurance that these policies will be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders. See 'Policies with Respect to Certain Activities--Conflicts of
Interest Policies.'
Tax Consequences Upon Sale of Properties. Prior to the exchange of Common
Units for shares of Common Stock, certain members of management will have tax
consequences different from those of the Company and its stockholders upon the
possible future sale or refinancing of any of the FWM Properties or the
repayment of certain debt collateralized by the FWM Properties and, therefore,
such persons and the Company may have different objectives regarding the pricing
and timing of any sale of FWM Properties. Consequently, such persons may
influence the Company not to sell or refinance
11
<PAGE>
FWM Properties (or repay debt collateralized by such properties) even though
such sale or refinancing might otherwise be financially advantageous to the
Company. There can be no assurance that policies adopted by the Board to
minimize the impact of this conflict will be successful in eliminating the
influence of such conflicts. If these policies are not successful, decisions
could be made that might fail to reflect fully the interests of all
stockholders. See 'Federal Income Tax Considerations--Tax Aspects of the
Operating Partnership--Tax Allocations with Respect to the Properties.'
Conflict of Interest with Respect to Mid-Atlantic Centers Limited
Partnership. Certain members of management are the sole owners of FW
Corporation, the sole general partner of FW Realty Limited Partnership, a
general partner of Mid-Atlantic Centers Limited Partnership (the 'MAC
Partnership'), which owns nine shopping centers currently managed by the Company
(the 'MAC Properties'). Such persons may have different objectives than the
Company regarding the determination of the management fee charged with respect
to the MAC Properties, or regarding any other transaction between the Company
and the MAC Partnership.
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT STOCKHOLDER APPROVAL
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 operating policies, are determined by the Board
of Directors. Although the Board of Directors 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 Directors without notice to or a vote of the stockholders of the
Company. See 'Policies with Respect to Certain Activities.' Accordingly,
stockholders may not have control over changes in policies of the Company and
changes in the Company's policies may not fully serve the interests of all
stockholders. A change in these policies could adversely affect the Company's
distributions, financial condition, results of operations or the market price of
shares of Common Stock.
INFLUENCE OF EXECUTIVE OFFICERS
As of September 30, 1996, and after giving effect to the Offering, the
Company's officers as a group beneficially owned approximately 11.0% of the
total issued and outstanding shares of Common Stock (assuming exchange of Common
Units) and 5.0% of the outstanding shares of Common Stock (assuming the exchange
and/or conversion of all Common Units, Convertible Preferred Stock, Exchangeable
Preferred Units, Exchangeable Debentures, and the FS Note). Such persons have
substantial influence on the Company, which influence might not be consistent
with the interests of other stockholders, and may in the future have a
substantial influence on the outcome of any matters submitted to the Company's
stockholders for approval. See 'Principal Stockholders.'
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Messrs. Halpert and Wolfe. While the Company believes that it could
find replacements for these key personnel, the loss of their services could have
an adverse effect on the operations of the Company. Messrs. Halpert and Wolfe
have entered into employment and non-compete agreements with the Company. See
'Management--Employment Agreements.'
GENERAL REAL ESTATE INVESTMENT RISKS; ADVERSE IMPACT ON ABILITY TO MAKE
DISTRIBUTIONS
General. Income from real property investments, and the Company's resulting
ability to make expected distributions to stockholders, may be adversely
affected by the general economic climate (particularly the economic climate of
the Mid-Atlantic region, where the Properties are located), the attractiveness
of the Properties to tenants, zoning or other regulatory restrictions,
competition from other available retail and multifamily properties, the ability
of the Company to provide adequate maintenance and insurance, and increased
operating costs (including insurance premiums and real estate taxes).
12
<PAGE>
The economic performance and values of real estate may be affected by
changes in the national, regional and local 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, competition from other
available space, changes in market rental rates, the ability of the owner to
provide adequate maintenance and insurance, the need to periodically renovate
and repair space and the cost thereof and increased operating costs. In
addition, real estate values may be affected by such factors as government
regulations and changes in real estate, changes in traffic patterns, zoning or
tax laws, interest rate levels, availability of financing, and potential
liability under environmental and other laws.
Risks of Acquisition, Renovation and Development Business. The Company
intends to continue actively with the acquisition of principally
supermarket-anchored neighborhood shopping centers. See 'The Company' and
'Properties.' Acquisition of neighborhood shopping centers entails risks that
investments will fail to perform in accordance with expectations. In addition,
there are general investments risks associated with any new real estate
investment. The Company intends to expand and/or renovate its properties or
develop new properties from time to time. See 'The Company--Growth Strategies.'
Expansion, renovation and development projects generally require expenditure of
capital as well as various government and other approvals, which cannot be
assured. While policies with respect to expansion, renovation and development
activities are intended to limit some of the risks otherwise associated with
such activities, such as initiating construction after securing commitments from
anchor tenants, the Company will nevertheless incur certain risks, including
expenditures of funds on, and devotion of management's time to, projects which
may not be completed. Any of the foregoing could have a material adverse effect
on the Company's ability to make anticipated distributions. See 'Price Range of
the Common Stock and Distributions.'
Dependence on Rental Income from Real Property; Tenants Involved in
Bankruptcy Proceedings. As a significant amount of the Company's income is
derived from rental income from real property, the Company's income and ability
to make distributions would be adversely affected if a significant number of the
Company's lessees were unable to meet their obligations to the Company or if the
Company were unable to lease a significant amount of space in its Properties on
economically favorable lease terms. Leases on 2.8% and 8.8% of the GLA in the
Retail Properties will be expiring in 1996 and 1997, respectively. In the event
of default by a lessee, the Company may experience delays in enforcing its
rights as lessor and may incur substantial costs in protecting its investment.
The bankruptcy or insolvency of a major tenant may have an adverse effect on the
Properties affected and the income produced by such Properties.
As of September 30, 1996, six tenants were involved in bankruptcy
proceedings. All of these tenants are currently paying rent. These tenants
represent approximately 1.3% of the total annual minimum rents of the
Properties. One tenant, Brendles, Inc., occupies 54,000 square feet at Shoppes
of Kildaire Shopping Center. The tenant filed for bankruptcy under Chapter 11.
The tenant vacated the premises in August 1996 but is obligated to pay rent
through February 1997. There can be no assurance that such tenants will continue
to pay rent or that additional tenants will not become bankrupt or insolvent.
Small Size of Certain Properties. Nine of the Properties are relatively
small in size, having less than 50,000 square feet of GLA and are not anchored
by a supermarket or drug store tenant. Such properties may be subject to greater
variability in consumer traffic.
Market Illiquidity. Equity real estate investments are relatively illiquid
and therefore tend to limit the ability of the Company to vary its portfolio
promptly in response to changes in economic or other conditions. The Company's
Properties primarily are neighborhood shopping centers, and the Company has no
present intention of varying the types of real estate in its portfolio. In
addition, certain significant expenditures associated with each equity
investment (such as mortgage payments, real estate taxes and maintenance costs)
are generally not reduced when circumstances cause a reduction in income from
the investment. Should such events occur, such events would adversely affect the
Company's ability to pay expected distributions to stockholders.
13
<PAGE>
Uninsured Loss. The Company carries comprehensive liability, fire, flood,
extended coverage and rental loss insurance with respect to its Properties with
policy specifications and insured limits that it believes are customary for
similar properties. There are, however, certain types of losses (generally of a
catastrophic nature, such as 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.
Competition. Numerous companies compete with the Company in seeking
properties for acquisition and tenants who will lease space in these properties,
or provide alternate arrangements for businesses seeking rental space. There can
be no assurance that the Company will be able to acquire suitable leased
properties and tenants for such properties in the future.
Investments in Mortgages. Although the Company currently has no plans to
invest in mortgages, the Company may invest in mortgages in the future. See
'Policies With Respect to Certain Activities--Investment Policies.' If the
Company were to invest in mortgages, it would be subject to the risks of such
investment, which include the risk that borrowers may not be able to make debt
service payments or pay principal when due, the risk that the value of mortgaged
property may be less than the amounts owed, and the risk that interest rates
payable on the mortgages may be lower than the Company's costs of funds.
Costs of Compliance with Americans with Disabilities Act and Similar Laws.
Under the Americans with Disabilities Act of 1990 (the 'ADA'), all places of
public accommodation are required to meet certain federal requirements related
to access and use by disabled persons. Although management believes that the
Properties are substantially in compliance with present requirements of the ADA,
the Company has not conducted an audit or investigation to determine its
compliance. There can be no assurance that the Company will not incur additional
costs of complying with the ADA. A number of additional federal, state and local
laws exist which also may require modifications to the Properties, or restrict
certain further renovations thereof, with respect to access thereto by disabled
persons. The ultimate amount of the cost of compliance with the ADA or such
legislation is not currently ascertainable, and, while such costs are not
expected to have a material effect on the Company, such costs could be
substantial.
OWNERSHIP LIMIT AND LIMITS ON CHANGES IN CONTROL
Ownership Limit Necessary to Maintain REIT Qualification. For the Company
to maintain its qualification as a REIT, not more than 50% in value of the
Company's outstanding capital stock may be owned, actually or constructively,
under the applicable attribution rules of the Code, by five or fewer individuals
(as defined in the Internal Revenue Code of 1986, as amended (the 'Code') to
include certain tax-exempt entities, other than, in general, qualified domestic
pension funds) at any time during the last half of any taxable year of the
Company other than the first taxable year for which the election to be taxed as
a REIT has been made (the 'five or fewer' requirement). The Company's charter
contains certain restrictions on the ownership and transfer of the Company's
capital stock, described below, which are intended to prevent concentration of
stock ownership. These restrictions, however, may not ensure that the Company
will be able to satisfy the 'five or fewer' requirement in all cases primarily,
though not exclusively, in the case of fluctuations in values among the
different classes of the Company's capital stock. If such requirement is not
satisfied, the Company's status as a REIT will terminate, and the Company will
not be able to prevent such termination.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. Such disqualification would
14
<PAGE>
reduce the net earnings of the Company available for investment or distribution
to its stockholders due to the additional tax liability of the Company for the
years involved. See 'Federal Income Tax Considerations--Failure to Qualify.'
The Company's charter prohibits ownership, either actually or under the
applicable attribution rules of the Code, of more than 9.8% of the outstanding
shares of Common Stock or the acquisition of more than 9.8% of the outstanding
shares of Convertible Preferred Stock by any holder (the 'Ownership Limit')
subject to certain important exceptions. See 'Description of Capital
Stock--Restrictions on Ownership, Transfer and Conversion.' The Company's
charter permits conversion of Convertible Preferred Stock, even if such a
conversion would result in an individual holder actually or constructively
owning more than 9.8% of the outstanding Common Stock. The Company's charter
does not, however, permit any person to acquire or own (actually or
constructively) shares of Common Stock or Convertible Preferred Stock, or
convert Convertible Preferred Stock into Common Stock, to the extent that such
person would own (actually or constructively) shares of Convertible Preferred
Stock and Common Stock which, in the aggregate, have a value greater than 9.8%
of the value of all of the capital stock of the Company. In addition, the
Company's charter does not permit any person to acquire or own (actually or
constructively) shares of Common Stock or Convertible Preferred Stock if such
ownership would cause the Company to fail to qualify as a REIT.
The Board of Directors may waive certain of these limitations with respect
to a particular stockholder if it is satisfied, based upon the advice of tax
counsel, that such ownership in excess of these limitations will not jeopardize
the Company's status as a REIT. Any attempted acquisition (actual or
constructive) of shares by a person who, as a result of such acquisition, would
violate one of these limitations will cause the shares purportedly transferred
to be automatically transferred to a trust for the benefit of a charitable
beneficiary or, under certain circumstances, the violative transfer will be
deemed void ab initio. In addition, violations of the ownership limitations
which are the result of certain other events (such as changes in the relative
values of different classes of the Company's capital stock) generally will
result in an automatic repurchase of the violative shares by the Company. See
'Description of Capital Stock--Restrictions on Ownership, Transfer and
Conversion' for additional information regarding the aforementioned limits.
The limitations on ownership of more than 9.8% of the outstanding shares of
Common Stock, Convertible Preferred Stock and capital stock may: (i) discourage
a change of control of the Company, (ii) deter tender offers for the capital
stock, which offers may be attractive to the Company's stockholders, or (iii)
limit the opportunity for stockholders to receive a premium for their capital
stock that might otherwise exist if an investor attempted to assemble a block of
capital stock in excess of 9.8% of the outstanding shares of Common Stock,
Convertible Preferred Stock or capital stock or to effect a change of control of
the Company. In addition, in certain circumstances, a holder of Convertible
Preferred Stock who is not otherwise in violation of the ownership limits could
be prevented from converting such holder's Convertible Preferred Stock into
shares of Common Stock.
Staggered Board. The Board of Directors of the Company has been divided
into three classes of directors. The staggered terms for directors may reduce
the possibility of a tender offer or an attempt to change control of the Company
even if a tender offer or a change in control were in the stockholders'
interest.
Preferred Stock. The Company's charter authorizes the Board of Directors to
issue up to 10,000,000 shares of preferred stock including the Convertible
Preferred Stock and to establish the preferences, rights and other terms
(including the right to vote and the right to convert into Common Stock) of any
shares issued. See 'Description of Capital Stock--Convertible Preferred Stock.'
The ability to issue preferred stock could have the effect of delaying or
preventing a tender offer or a change in control of the Company even if a tender
offer or a change in control were in the stockholders' interest. No shares of
preferred stock other than the Convertible Preferred Stock are currently issued
or outstanding.
15
<PAGE>
Exemptions for Certain Members of Management from the Maryland Business
Combination Law. Under the Maryland General Corporation Law, as amended
('MGCL'), certain 'business combinations' (including certain issuances of equity
securities) between a Maryland corporation and any person who owns ten percent
or more of the voting power of the corporation's shares (an 'Interested
Stockholder') or an affiliate thereof are prohibited for five years after the
most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be approved by two
super-majority stockholder votes unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. Pursuant
to the statute, the Company has exempted any business combination involving
Messrs. Halpert, Wolfe and Zimmerman and other officers of the Company, any of
their affiliates or associates or any person acting in concert with any of such
persons and, consequently, the five-year prohibition and the super-majority vote
requirements described above will not apply to business combinations between any
of them and the Company. As a result, Messrs. Halpert, Wolfe and Zimmerman and
other persons referred to in the preceding sentence may be able to enter into
business combinations with the Company, which may not be in the best interest of
the stockholders, without compliance by the Company with the super-majority vote
requirements and other provisions of the statute. See 'Certain Provisions of
Maryland Law and the Company's Charter and Bylaws--Business Combinations.'
Maryland Control Share Acquisition Statute. The MGCL provides that 'control
shares' of a Maryland corporation acquired in a 'control share acquisition' have
no voting rights except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares of stock owned by the
acquiror, by officers or by directors who are employees of the corporation. If
voting rights are not approved at a meeting of stockholders then, subject to
certain conditions and limitations, the issuer may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at a
stockholders meeting and the acquiror becomes entitled to vote a majority of the
shares entitled to vote, all other stockholders may exercise appraisal rights.
See 'Certain Provisions of Maryland Law and the Company's Charter and
Bylaws--Control Share Acquisitions.'
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Taxation as a Corporation. The Company believes that it has operated so as
to qualify as a REIT under the Code, commencing with its taxable year ended
December 31, 1994. Although management of the Company believes that the Company
has been organized and has operated and will operate in such a manner, no
assurance can be given that the Company has qualified or will remain qualified
as a REIT. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial and
administrative interpretations. The determination of various factual matters and
circumstances not entirely within the Company's control may affect the Company's
ability to qualify as a REIT. For example, in order to qualify as a REIT, at
least 95% of the Company's gross income in any year must be derived from
qualifying sources and the Company must make distributions to shareholders
aggregating annually at least 95% of its REIT taxable income (excluding capital
gains). In addition, no assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. The Company is relying on
the opinion of Latham & Watkins, counsel to the Company, to the effect that the
Company has been organized in conformity with the requirements under the Code
and that the Company's proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT. See 'Federal Income Tax
Considerations.' Such legal opinion is based on various assumptions and factual
representations by the Company regarding the Company's ability to meet the
various requirements for qualification as a REIT, and no assurance can be given
that actual operating results will meet these requirements. Such legal opinion
is not binding on the Internal Revenue Service.
16
<PAGE>
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the value of the REIT's
total assets on certain testing dates. See 'Federal Income Tax
Considerations--Taxation of the Company.' The Company believes that the value of
the securities of the Management Company held by the Company did not exceed at
any time up to and including the date of this Prospectus 5% of the value of the
Company's total assets and will not exceed such amount in the future, based on
the initial allocation of shares among participants in the Formation
Transactions and the Company's opinion regarding the maximum value that could be
assigned to the existing and expected future assets and net operating income of
the Management Company. In rendering its opinion as to the qualification of the
Company as a REIT, Latham & Watkins is relying on the conclusion of the Company
regarding the value of the Management Company. If the Company fails to satisfy
the 5% requirement or otherwise fails to qualify as a REIT, it will be subject
to federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates and would not be allowed a deduction
in computing its taxable income for amounts distributed to its stockholders. In
addition, unless entitled to relief under certain statutory provisions, the
Company will be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. The additional tax would
significantly reduce the cash flow available for distribution to stockholders.
See 'Federal Income Tax Considerations--Failure to Qualify.'
REIT Distribution Requirements and Potential Impact of Borrowings. To
obtain the favorable tax treatment associated with REITs qualifying under the
Code, the Company generally will be required each year to distribute to its
stockholders at least 95% of its net taxable income. In addition, the Company
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income, 95% of its capital gain net income and
100% of its undistributed income from prior years.
Differences in timing between the receipt of income, the payment of
expenses and the inclusion of such income and the deduction of such expenses in
arriving at taxable income (of the Company or the Operating Partnership), or the
effect of nondeductible capital expenditures, the creation of reserves or
required debt or amortization payments, could require the Company, directly or
through the Operating Partnership, to borrow funds on a short-term basis to meet
the distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT. In such instances, the Company might need
to borrow funds in order to avoid adverse tax consequences even if management
believed that then prevailing market conditions were not generally favorable for
such borrowings.
Adverse Consequences of Failure of the Operating Partnership or any of its
Subsidiary Partnerships to Qualify as a Partnership. The Company believes that
the Operating Partnership and each of its subsidiary partnerships have been
organized as partnerships and have qualified and will continue to qualify for
treatment as such under the Code. If the Operating Partnership or any of the
Lower Tier Partnerships fails to qualify for such treatment under the Code, the
Company would cease to qualify as a REIT, and the affected partnership would be
subject to federal income tax (including any alternative minimum tax) on its
income at corporate rates. See 'Federal Income Tax Considerations--Tax Aspects
of the Operating Partnership.'
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be
subject to certain federal, state and local taxes on its income and property. In
addition, the Management Company generally is subject to federal and state
income tax at regular corporate rates on its net taxable income, which will
include the Company's management, leasing and related service business. See
'Federal Income Tax Considerations.'
EFFECT ON PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the
perceptionthat such sales could occur, could adversely affect prevailing prices
for the Common Stock. The Company has reserved:
17
<PAGE>
(i) 709,716 shares of Common Stock for issuance upon exchange of Common Units
issued in connection with the formation of the Company and in connection with
property acquisitions, (ii) 2,966,909 shares of Common Stock for issuance upon
conversion of outstanding Convertible Preferred Stock issued in connection with
the formation of the Company and in connection with property acquisitions (which
becomes convertible on or after May 31, 1999), (iii) 1,822,068 shares of Common
Stock for issuance upon conversion of reserved Convertible Preferred Stock
(reserved for exchange of Exchangeable Preferred Units and the Exchangeable
Debentures issued in connection with the Formation and subsequent property
acquisitions), (iv) 123,077 shares of Common Stock for issuance upon conversion
of the FS Note, and (v) 594,874 shares of Common Stock for issuance under the
Company's 1994 Stock Incentive Plan, 1994 Contingent Stock Awards and 1996
Contingent Stock Awards. The Officers are permitted to sell only one-third of
their shares of Common Stock or Common Units issued in connection with the
Formation (including a redemption of Common Units for cash) at the end of each
of the three years following the June 1994 Offering.
The Company has filed or has agreed to file registration statements covering
the issuance of shares of Common Stock and Convertible Preferred Stock upon
exchange of Common Units and Exchangeable Preferred Units and the resale of
Convertible Preferred Stock issued in connection with the formation of the
Company and subsequent property acquisitions, including the acquisition of the
New Retail Properties. The exchange of such outstanding securities for Common
Stock and Convertible Preferred Stock will increase the number of outstanding
shares of Common Stock and Convertible Preferred Stock, and will increase the
Company's percentage ownership interest in the Operating Partnership.
In addition, the officers and directors of the Company and their affiliates
have agreed with the Underwriters not to sell shares of Common Stock for the
90-day period following the Offering. The Company has also agreed with the
Underwriters not to issue new shares of Common Stock (except pursuant to the
exchange or conversion of outstanding securities, the issuance of shares of
Common Stock pursuant to employee benefit plans and in connection with future
acquisitions) for a period of 90 days following the Offering. See 'Shares
Available for Future Sale.' No prediction can be made regarding the effect that
future sales of shares of securities will have on the market price of the Common
Stock.
NEW RETAIL PROPERTIES
Although the Company has entered into contracts to acquire the New Retail
Properties, these contracts are subject to customary conditions to closing,
including completion of due diligence investigations to the Company's
satisfaction. No assurance can be given that such transactions will close. With
respect to certain environmental contamination at Four Mile Fork Shopping
Center, the Company does not intend to close the acquisition of the center
without a closure letter from the responsible regulatory authority or adequate
indemnification from the seller. See "Properties--Environmental Matters." The
Offering is not conditioned upon the closing of the purchase of any of the New
Retail Properties. If any of the purchases of the New Retail Properties do not
close, the balance of any remaining net offering proceeds will be used to reduce
indebtedness, for new acquisitions and for general working capital.
18
<PAGE>
THE COMPANY
GENERAL
The Company is a fully-integrated, self-administered and self-managed real
estate company that operates as a REIT with expertise in the acquisition,
management, renovation and development of principally supermarket anchored
neighborhood shopping centers. As of September 30, 1996, the Company owned a
portfolio of 33 retail properties (the 'Existing Retail Properties'); and the
Company expects to complete the acquisition of six additional retail properties
promptly following the closing of the Offering (the 'New Retail Properties,' and
together with the Existing Retail Properties, the 'Retail Properties'). The
Retail Properties contain a total of approximately 3.9 million square feet of
GLA in the Mid-Atlantic region. The Company also owns two multifamily properties
in the Mid-Atlantic region (the 'Multifamily Properties,' and together with the
Retail Properties, the 'Properties').
The Company's business strategy is highly focused with respect to property
type and location. The Company concentrates its efforts on supermarket anchored
neighborhood shopping centers. The Company generally seeks to own properties
located in densely populated areas, that have high visibility, open-air designs
and ease of entry and exit, and that may be readily adaptable over time to
expansion, renovation and redevelopment.
The Retail Properties are strategically located neighborhood shopping
centers, principally anchored by well-known tenants such as Shoppers Food
Warehouse, Weis Markets, A&P Super Fresh, Giant Food, CVS/Pharmacy, Safeway,
Winn Dixie, Rite Aid and Acme Markets. The anchor tenants at the Retail
Properties typically offer daily necessity items rather than specialty goods.
Management believes that anchor tenants offering daily necessity items help to
generate regular consumer traffic and to provide economic stability for shopping
centers. Neighborhood shopping centers are typically open-air centers ranging in
size from 50,000 to 150,000 square feet of GLA and are anchored by supermarkets
and/or drug stores. The Retail Properties average approximately 100,000 square
feet of GLA.
The Company's operations are conducted through the Operating Partnership.
The Company is the general partner of the Operating Partnership and as of
September 30, 1996, the Company owned approximately 83.4% of the partnership
interests in the Operating Partnership. The Operating Partnership owns 100% of
the non-voting Preferred Stock of the Management Company, and is entitled to 99%
of the cash flow from the Management Company.
The Company was formed in April 1994 to continue and expand the
neighborhood shopping center acquisition, management and renovation strategies
of the First Washington Management, Inc. ('FWM'), which has been engaged in the
business since 1983. FWM was founded by Stuart D. Halpert, the Company's
Chairman, William J. Wolfe, President and Chief Executive Officer, and Lester
Zimmerman, an Executive Vice President.
The Company has approximately 70 employees, including a team of asset and
property managers and leasing agents and in-house legal, architectural,
engineering, accounting, marketing and computer specialists. The Company's
executive and principal property management office is located at 4350 East-West
Highway, Suite 400, Bethesda, Maryland 20814 and its telephone number is (301)
907-7800. The Company has regional property management offices located in North
Carolina, Pennsylvania and Virginia.
GROWTH STRATEGIES
The Company seeks to increase cash flow and distributions, as well as the
value of its portfolio, through intensive property management and strategic
renovation and expansion of its properties and acquisition of additional
neighborhood shopping centers.
Intensive Management. The Company seeks to increase operating margins
through a combination of increasing revenues (through increased occupancy and/or
rental rates), maintaining high tenant retention rates (i.e., the percentage of
tenants who renew their leases upon expiration), and aggressively managing
operating expenses.
19
<PAGE>
Management believes that, as a fully integrated real estate organization
with both owned and third-party managed properties, it enjoys significant
operating efficiencies relative to many of its competitors that operate smaller,
fragmented portfolios. These operating efficiencies are the result of economies
of scale in operating expenses, more effective leasing and marketing efforts,
and enhanced tenant retention levels. Management believes that the scope of the
Company's portfolio, combined with management's professional and community ties
to the Mid-Atlantic region, has enabled the Company to develop long-term
relationships with national and regional tenants which occupy multiple
properties in its portfolio. Management believes that such tenant relationships
result in high occupancy rates and tenant retention levels.
Strategic Renovation and Expansion. The Company seeks to increase operating
results through the strategic renovation and expansion of certain of the
Properties. The Retail Properties are typically adaptable for varied tenant
layouts and can be reconfigured to accommodate new tenants or the changing space
needs of existing tenants. The Company believes that the Retail Properties will
provide opportunities for renovation and expansion.
Acquisitions. The Company seeks to acquire properties that are located in
densely populated areas, that have high visibility, open-air designs and ease of
entry and exit, and that may be readily adaptable over time to expansion,
renovation and redevelopment. When evaluating potential acquisitions and
development projects, the Company will consider such factors as: (i) economic,
demographic, and regulatory and zoning conditions in the property's local and
regional market; (ii) the location, construction quality, and design of the
property; (iii) the current and projected cash flow of the property and the
potential to increase cash flow; (iv) the potential for capital appreciation of
the property; (v) the terms of tenant leases, including the relationship between
the property's current rents and market rents and the ability to increase rents
upon lease rollover; (vi) the occupancy and demand by tenants for properties of
a similar type in the market area; (vii) the potential to complete a strategic
renovation, expansion, or retenanting of the property; (viii) the property's
current expense structure and the potential to increase operating margins; (ix)
the ability of the Company to subsequently sell or refinance the property; and
(x) competition from comparable retail properties in the market area.
Through the Management Company's third-party management, leasing and
related service business and network of regional management and leasing offices,
the Company is familiar with local conditions and acquisition opportunities in
its given markets. Management believes that opportunities for neighborhood
shopping center acquisitions remain attractive at this time because of the
fragmentation in ownership of such properties, including owners that can benefit
from exchanging their properties for Common Units, the limited amount of real
estate capital for smaller, privately held retail property development and
acquisition, and the limited construction of new retail properties.
PROPERTY MANAGEMENT, LEASING AND RELATED SERVICE BUSINESS
Through its interest in the Management Company, the Company has continued
the property management, leasing and related service business of FWM. The
Operating Partnership owns all of the non-voting preferred stock of the
Management Company, entitled to 99% of the cash flow of the Management Company.
The outstanding common stock of the Management Company, entitled to 1% of the
cash flow of the Management Company, is owned by certain members of management.
In addition to the Properties, as of September 30, 1996, the Management Company
provided management, leasing and related services to 33 properties comprising
approximately 3.5 million square feet of GLA for 16 third-party clients. In
addition to providing another source of growth for funds from operations,
management believes that the third-party management business allows the Company
to: (i) achieve operating efficiencies in managing its owned properties through
the bulk purchase of goods and services; (ii) develop more extensive, long-term
relationships with tenants in multiple properties; and (iii) identify additional
acquisition opportunities from third-party clients interested in the eventual
sale of their properties.
Services are provided to third-party owners pursuant to contracts that are
of varying lengths of time and which generally provide for management fees of up
to 5.0% of monthly gross property
20
<PAGE>
receipts. The management contracts are typically cancelable upon 30 days' notice
or upon certain events, including the sale of the property. Leasing fees
typically range from 3.0% to 6.0% of the minimum base rents payable during the
initial term of the lease. Management believes that the Management Company has
an excellent reputation with respect to lease renewals, increases in net
operating income for managed properties, and its timely and accurate reporting
to clients. In addition to its third-party management and leasing business, the
Management Company provides related services including consulting and brokerage
services for which it receives customary fees.
PROPERTIES
The Company engages in the acquisition, management and renovation of
neighborhood shopping centers. The Company owns a portfolio of 33 retail
properties containing a total of approximately 3.3 million square feet and two
multifamily properties. The Company expects to complete the acquisition of the
six New Retail Properties containing a total of approximately 626,000 square
feet promptly following consummation of the Offering. All references to net rent
per square foot are calculated without giving effect to vacant space, unless
otherwise specified.
21
<PAGE>
The following table sets forth certain information relating to the
Properties as of September 30, 1996:
FIRST WASHINGTON REALTY TRUST, INC.
PROPERTY SUMMARY TABLE
<TABLE>
<CAPTION>
YEAR GLA NUMBER
YEAR DEVELOPED OR LAND AREA (SQ. FT. OR OF
LOCATION OF PROPERTY BUILT ACQUIRED (ACRES) UNITS) TENANTS
-------------------- ----- ------------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
MARYLAND
Bryans Road Shopping Center............... Bryans Road, MD 1972 1990 11.8 118,676 19
Capital Corner Shopping Center............ Landover, MD 1987 1987 4.1 42,625 16
Clinton Square Shopping Center............ Clinton, MD 1979 1984 2.0 18,961 11
Clopper's Mill Village Shopping Center.... Germantown, MD 1995 1996 14.2 137,952 21
Festival At Woodholme..................... Baltimore, MD 1986 1995 7.1 81,027 29
Firstfield Shopping Center................ Gaithersburg, MD 1978 1995 2.4 22,504 9
Penn Station Shopping Center(1)........... District Heights, MD 1989 1987 22.5 334,970 48
P.G. County Commercial Park............... Beltsville, MD 1988 1985 9.7 146,438 28
Rosecroft Shopping Center................. Temple Hills, MD 1963 1985 8.3 119,010 22
Southside Marketplace..................... Baltimore, MD 1990 1996 9.1 125,146 25
Takoma Park Shopping Center............... Takoma Park, MD 1960 1996 9.8 103,581 16
Valley Centre............................. Owings Mills, MD 1987 1994 33.0 229,449 25
VIRGINIA
Brafferton Center......................... Garrisonville, VA 1974 1994 9.4 94,731 20
Centre Ridge Marketplace.................. Centreville, VA 1996 1996 10.9 69,854 6
Chesapeake Bagel Building................. Alexandria, VA 1800's 1983 0.1 11,288 16
Davis Ford Crossing....................... Manassas, VA 1988 1994 20.8 147,622 31
Fox Mill Shopping Center.................. Reston, VA 1977 1994 14.0 97,119 24
Glen Lea Shopping Center.................. Richmond, VA 1969 1995 9.2 78,823 11
Hanover Village Shopping Center........... Mechanicsville, VA 1971 1995 9.5 95,556 17
Laburnum Park Shopping Center............. Richmond, VA 1988 1995 9.3 113,992 27
Laburnum Square Shopping Center(2)........ Richmond, VA 1975 1995 11.4 109,405 21
Potomac Plaza............................. Woodbridge, VA 1963 1986 5.4 85,400 15
Thieves Market............................ Alexandria, VA 1946 1986 2.3 15,835 10
NORTH CAROLINA
Shoppes of Kildaire....................... Cary, NC 1986 1986 14.0 148,205 28
PENNSYLVANIA
Colonial Square Shopping Center........... York, PA 1955 1990 2.9 27,488 15
Fifteenth & Allen Shopping Center......... Allentown, PA 1958 1995 4.1 46,503 13
Kenhorst Plaza Shopping Center............ Reading, PA 1990 1995 19.2 138,034 26
Mayfair Shopping Center................... Philadelphia, PA 1988 1994 5.7 112,275 27
Stefko Boulevard Shopping Center.......... Bethlehem, PA 1958-60-75 1995 10.3 135,864 18
DELAWARE
First State Plaza......................... New Castle County, DE 1988 1994 21.0 162,404 20
SOUTH CAROLINA
Branchwood Apartments..................... Charleston, SC 1986 1989 5.4 96 N/A
Broadmoor Apartments...................... Charleston, SC 1973 1990 21.2 305 N/A
James Island Shopping Center.............. Charleston, SC 1967 1990 6.5 88,557 21
WASHINGTON, D.C.
Connecticut Avenue Shops.................. Washington, DC 1954 1986 0.1 3,000 3
The Georgetown Shops...................... Washington, DC(3) 1800s 1981-1989 0.3 22,052 11
----- --------- ---
Subtotal/Average....................... 346.8 3,284,346(4) 649
----- --------- ---
NEW RETAIL PROPERTIES
MARYLAND
Northway Shopping Center.................. Millersville, MD 1987 1996 9.6 91,276 20
VIRGINIA
Four Mile Fork Shopping Center............ Fredericksburg, VA 1975 1996 10.3 101,262 18
Kings Park Shopping Center................ Burke, VA 1966 1996 8.6 76,212 18
PENNSYLVANIA
City Line Shopping Center(5).............. Philadelphia, PA 1950's-60's 1996 12.2 153,899 37
Newtown Square Shopping Center............ Newtown Square, PA 1960's-70's 1996 14.4 137,569 37
DELAWARE
Shoppes of Graylyn........................ Wilmington, DE 1971 1996 5.0 65,746 15
----- --------- ---
Subtotal/Average....................... 60.1 625,964 145
----- --------- ---
Total/Average.......................... 406.9 3,910,310(4) 794
===== ========= ===
- ----------
<FN>
(1) Safeway (50,000 square feet) and bowling alley (40,000 square feet) are
located in this shopping center on pad sites not owned by the Company, and they
are not tenants of the Company at the center. GLA (sq. ft. or units) includes
Safeway and bowling alley.
(2) Ukrops Supermarket (43,500 square feet) is located on a pad site not
owned by the Company, and it is not a tenant of the Company at this center. GLA
(sq. ft. or units) includes Ukrops supermarket.
(3) Represents five historic retail shops all clustered in close proximity
in the central shopping district in the Georgetown area of Washington, DC.
(4) Total does not include the Multifamily Properties.
(5) The Company will own an 89% interest in this property. The seller of
City Line will retain an 11% interest which it is obligated to transfer to the
Company and which the Company is obligated to acquire approximately three years
after the initial closing in exchange for Common Units.
</FN>
</TABLE>
22
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC.
PROPERTY SUMMARY TABLE--Continued
<TABLE>
<CAPTION>
TOTAL
ANNUALIZED AVERAGE MINIMUM RENT
MINIMUM RENT PER SQ. FT. PERCENT LEASED SIGNIFICANT TENANTS (LEASE EXPIRATION DATE)
- ---------- ----------------- -------------- -------------------------------------------
<S> <C> <C> <C>
$964,650 $ 8.13 100.0% Safeway (2014), CVS/Pharmacy (1998)
608,929 14.29 100.0 Burger King (2007), Dollar Bills (2001), Gallo Clothing (2001)
271,647 14.33 100.0 Mattress Discounters (1997)
2,114,173 16.05 98.9 Shoppers Food Warehouse (2015), CVS/Pharmacy (2006)
1,740,347 21.48 100.0 Pier One Imports (1999), Sutton Place Gourmet (2006)
309,840 13.77 93.3 Jerry's Sub (2010)
2,891,643 12.09 98.2 Safeway, Service Merchandise (2006), Kid City Clothing (2003)
895,632 6.69 97.5 Atlantic Telco (month-to-month), Montgomery Automotive (2006)
736,932 7.28 85.1 Food Lion (2015), Rite Aid (1998)
1,364,911 12.31 95.1 Metro Foods (2016), Rite Aid (2001)
695,020 7.79 87.9 Shoppers Food Warehouse (2011)
2,500,896 11.07 94.4 Weis Markets (2002), T.J. Maxx (2007), Ross (1998), Sony Theater (2005)
734,908 8.29 96.7 Giant Food (2009)
958,153 13.95 98.3 A&P Superfresh (2016)
239,756 21.24 100.0 Chesapeake Bagel Bakery (1998)
1,659,378 12.70 88.5 Weis Markets (2010), CVS/Pharmacy (2000)
1,390,424 14.53 97.0 Giant Food (2018), Blockbuster (2001)
464,730 6.10 100.0 Winn Dixie (2005), Revco (2000)
686,434 7.74 96.9 Rack 'n Sack (2008), Rite Aid (1998)
782,195 7.10 100.0 Ukrops Supermarket, Rite Aid (2007)
774,814 7.64 97.3 Hannaford Bros. (2013), CVS/Pharmacy (1999)
410,922 5.33 90.3 Western Sizzlin (2000), Aaron Rents (2001)
214,777 15.72 72.9
1,289,204 8.80 98.9 Winn Dixie (2006)
333,450 12.28 98.8 Minich Pharmacy (1999), York Nat'l Bk (1999)
553,761 12.65 98.1 Laneco Supermarket (2003), Thrift Drug (2004)
1,325,695 9.87 96.4 Redner's Supermarket (2009), Rite Aid (2000)
1,354,130 13.00 100.0 Shop 'N Bag Supermarket (2013), Thrift Drug (2006)
619,535 4.81 92.1 Laneco Supermarket (2003), McCrory (1998)
1,605,604 9.89 100.0 Shop Rite Supermarket (2009), Cinemark USA (2011)
544,046
1,340,650
584,638 6.60 100.0 Piggly Wiggly Supermarket (2010), Rite Aid (1997)
168,769 56.26 100.0 Mill End Shop (1997)
407,040 18.46 100.0 Radio Shack (1999)
- ----------- -------- -----
$33,537,633 $ 10.54 96.1%(4)
- ----------- -------- -----
$993,604 $ 11.13 97.8% Metro Foods (2007), Rite Aid (1997)
650,325 7.00 91.8 Safeway (2000), CVS/Pharmacy (2001)
604,049 7.93 100.0 Giant Food (2013), CVS/Pharmacy (1998)
1,492,644 10.88 89.1 Acme Supermarkets (1999), Thrift Drug (1999), T J Maxx (2001)
1,335,751 10.50 92.5 Acme Supermarkets (1999), Thrift Drug (1999)
673,698 11.89 86.2 Rite Aid (2016)
- ----------- -------- -----
$5,750,071 $ 9.89 92.8%
- ----------- -------- -----
$39,287,704 $ 10.43 95.6%
=========== ======== =====
</TABLE>
23
<PAGE>
The following table sets forth the square footage and percentage of leased
GLA of the Retail Properties leased to anchor and other tenants, and national,
regional and local tenants as of September 30, 1996. The Company believes that
anchor tenants are those that, due to size, reputation or other factors, in the
view of the Company's management, are particularly responsible for drawing other
tenants and shoppers to the shopping center. The Company has considered tenants
located primarily in two or three states to be regional tenants; tenants with
wider distribution of stores have been treated as national tenants; and tenants
located entirely within a local area have been treated as local tenants:
<TABLE>
<CAPTION>
ANCHOR OTHER NATIONAL REGIONAL LOCAL
TENANTS TENANTS TOTAL TENANTS TENANTS TENANTS TOTAL
------- ------- ----- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Existing Retail Properties (sq. ft.).. 1,356,178 1,783,192 3,139,370 983,987 1,307,826 847,557 3,139,370
New Retail Properties.(sq. ft.)....... 334,697 246,429 581,126 266,410 164,854 149,862 581,126
--------- --------- --------- --------- --------- ------- ---------
Total Leased GLA.(sq. ft.)............ 1,690,875 2,029,621 3,720,496 1,250,397 1,472,680 997,419 3,720,496
========= ========= ========= ========= ========= ======= =========
Percentage of Total Leased GLA........ 45.5% 54.5% 100.0% 33.6% 39.6% 26.8% 100.0%
</TABLE>
TENANT DIVERSIFICATION
The following table sets forth information regarding the Company's leases
with its 20 largest tenants based upon annualized minimum rents as of September
30, 1996:
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
NUMBER ANNUALIZED ANNUALIZED
GLA OF MINIMUM MINIMUM
TENANT (SQ. FT.) PROPERTIES RENT RENTS
- ------ --------- ---------- ---- -----
<S> <C> <C> <C> <C>
Shoppers Food Warehouse...... 129,113 2 $1,075,280 2.7%
Metro Foods.................. 93,292 2 847,121 2.2
Weis Markets................. 86,890 2 786,200 2.0
Rite Aid..................... 92,168 8 692,653 1.8
A&P Superfresh............... 55,138 1 661,656 1.7
Giant Food................... 121,518 3 606,740 1.5
CVS/Pharmacy................. 77,350 7 527,929 1.3
Safeway...................... 74,851 2 485,025 1.2
Winn Dixie................... 79,000 2 481,500 1.2
Hollywood Video.............. 22,366 3 424,520 1.1
Redner's Supermarket......... 52,570 1 416,560 1.1
Shop Rite Supermarket........ 55,244 1 386,708 1.0
Sony Theaters................ 32,058 1 384,696 1.0
Thrift Drug.................. 36,662 4 380,014 1.0
T.J. Maxx.................... 46,686 2 359,804 0.9
Laneco Supermarket........... 95,075 2 329,237 0.8
Blockbuster Video............ 17,715 3 330,161 0.8
Service Merchandise.......... 50,000 1 325,000 0.8
Cinemark USA................. 29,452 1 301,883 0.8
Sutton Place Gourmet......... 14,207 1 298,347 0.8
--------- ---------- ----
Total................. 1,261,355 $10,101,034 25.7%
========= ========== ====
</TABLE>
24
<PAGE>
The following table sets forth gross leasable area, occupancy, and
effective net rent per leased square foot as of the end of each of the last five
years for the Existing Retail Properties during the respective periods each such
property was owned by the Company:
<TABLE>
<CAPTION>
GLA PERCENT AVERAGE EFFECTIVE NET RENT
PERIOD-END (SQ. FT.) LEASED PER LEASED SQ. FT.(1)
- ---------- --------- ------- --------------------------
<S> <C> <C> <C>
December 31, 1991.......... 1,185,977 90.8% $ 8.89
December 31, 1992.......... 1,185,977 94.6 9.07
December 31, 1993.......... 1,185,977 95.4 9.16
December 31, 1994.......... 2,014,180 96.4 10.08
December 31, 1995.......... 2,668,171 96.0 10.28
September 30, 1996......... 3,284,346 96.1 10.57
- ----------
<FN>
(1) Average effective net rent per leased square foot is calculated using
weighted average rents and occupancy during the respective periods, without
giving effect to vacant space. If vacant space were included, the effective net
rent per square foot would be $10.08 (September 30, 1996), $9.87 (December 31,
1995), $9.72 (December 31, 1994), $8.74 (December 31, 1993), $8.58 (December 31,
1992), and $8.07 (December 31, 1991).
</FN>
</TABLE>
Lease Expirations. The following table shows lease expirations (excluding
renewal options) from October 1, 1996 through 2004 and thereafter:
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE AVERAGE ANNUAL
NUMBER OF GLA PERCENT OF ANNUALIZED ANNUALIZED MINIMUM RENT
YEAR LEASES (SQ. FT.) TOTAL GLA MINIMUM RENT MINIMUM RENT PER SQ. FT.
- ---- ------ --------- ---------- ------------ ------------ -----------
<C> <C> <C> <C> <C> <C> <C>
1996............................. 53 100,277 2.8% $1,289,772 3.4% $ 12.86
1997............................. 142 316,794 8.8 3,448,779 9.1 10.89
1998............................. 132 426,366 11.9 4,021,023 10.6 9.43
1999............................. 126 395,068 11.0 4,457,211 11.8 11.28
2000............................. 90 304,564 8.5 3,525,052 9.3 11.57
2001............................. 89 301,767 8.4 3,734,458 9.9 12.38
2002............................. 25 124,147 3.5 1,607,710 4.3 12.95
2003............................. 24 183,439 5.1 1,724,762 4.6 9.40
2004............................. 15 58,591 1.6 783,321 2.1 13.37
Thereafter....................... 98 1,373,631 38.3 13,181,943 34.9 9.60
--- --------- ----- ---------- ----- ---------
Total/Average.................... 794 3,584,644 100.0% $37,774,031 100.0% $ 10.54
=== ========= ===== ========== ===== =========
</TABLE>
Certain Tenants in Bankruptcy. As of September 30, 1996, six tenants were
involved in bankruptcy proceedings. All of these tenants are currently paying
rent. One tenant, Brendles, Inc., occupying 54,000 square feet at Shoppes of
Kildaire Shopping Center, filed for bankruptcy under Chapter 11 in April 1996.
The tenant vacated the premises in August 1996 but is obligated to pay rent
through February 1997.
ADDITIONAL INFORMATION CONCERNING CERTAIN OF THE PROPERTIES
As of December 31, 1995, two of the Properties, Penn Station Shopping
Center and Valley Centre, either had a book value equal to or greater than 10%
of the total assets of the Company or gross revenues which accounted for more
than 10% of the Company's aggregate gross revenues. Set forth below is
additional information with respect to such Properties.
Penn Station Shopping Center. Penn Station is a 334,970 square foot
shopping center occupied by 48 tenants and located at the intersection of
Pennsylvania Avenue and Silver Hill Road in Prince George's County, Maryland,
two miles outside of Washington, D.C. and one and one-half miles inside of the
Capital Beltway. Prince George's county is the home of the U.S. Census Bureau,
Andrews Air Force Base, the Goddard Space Center, and the University of
Maryland. Penn Station was built by the Company during 1989 and 1990, and was
commended with the 'Pride of Prince George's County' award for the finest new
shopping center in the county. The center is fully-integrated with a Safeway
Supermarket (50,000 square feet) and a bowling alley (40,000 square feet), both
of which are owned by third parties. Because of its strategic location as the
first shopping center on Pennsylvania Avenue outside of the District of
Columbia, with approximately 68,000 cars travelling by the property each day and
approximately 375,000 people residing within 5 miles, the center has attracted
a full range of national and regional chain store tenants including Service
25
<PAGE>
Merchandise, Blockbuster Video, Pic 'N Pay Shoes, Kid City Clothing, Pizza Hut,
Gallo Clothing, Cato Fashions, Rent-A-Center, Dollar Bills, Linen World, Little
Caesar's, Fleet Finance, Casual Male Big & Tall, Subway and Household Finance
Corporation. Pad sites are occupied by First Union Bank, Hardees and Black-Eyed
Pea Restaurant. Penn Station was approximately 98.2% leased as of September 30,
1996. Although Penn Station is a single property, it has been divided for loan
collateralization purposes into Phase I and Phase II portions.
Service Merchandise, the only tenant which occupies more than ten percent
of the GLA at Penn Station, occupies 50,000 square feet of GLA under a lease
which expires in February 2006 and has five renewal options of five years each.
The annual minimum rent of the Service Merchandise lease is $325,000.
The following table sets forth a schedule of lease expirations, assuming
none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE AVERAGE ANNUALIZED
NUMBER OF GLA PERCENT OF ANNUALIZED ANNUALIZED MINIMUM RENT
YEAR LEASES (SQ. FT.) TOTAL GLA MINIMUM RENT MINIMUM RENT PER SQ. FT.
- ---- ------ --------- --------- ------------ ------------ -----------
<C> <C> <C> <C> <C> <C> <C>
1996............................. 0 0 0.0% $ 0 0.0% $ 0.00
1997............................. 5 13,896 5.9 223,429 7.7 16.08
1998............................. 8 18,695 7.9 275,365 9.5 14.73
1999............................. 15 44,412 18.7 688,339 23.8 15.50
2000............................. 6 27,312 11.5 350,755 12.1 12.84
2001............................. 4 14,912 6.3 219,802 7.6 14.74
2002............................. 2 6,055 2.6 97,034 3.4 16.03
2003............................. 2 19,548 8.2 244,953 8.5 12.53
2004............................. 2 20,546 8.7 186,000 6.4 9.05
Thereafter....................... 4 71,872 30.2 608,447 21.0 8.47
-- ------- ----- --------- ----- ---------
Total/Average.................... 48 237,248 100.0% 2,894,124 100.0% $ 12.20
== ======= ===== ========= ===== =========
</TABLE>
The following table sets forth the average annual rental income per square
foot of GLA at Penn Station:
Year ended December 31, 1990................ $11.84(1)
Year ended December 31, 1991................ $11.22
Year ended December 31, 1992................ $11.64
Year ended December 31, 1993................ $11.68
Year ended December 31, 1994................ $11.64
Year ended December 31, 1995................ $11.96
Nine months ended September 30, 1996........ $12.09
- ----------
(1) Refers only to Phase I of the Penn Station property.
The following table sets forth the percentage of Penn Station that was
leased as of the dates shown:
December 31, 1990........................... 97.7%(1)
December 31, 1991........................... 96.7%
December 31, 1992........................... 90.0%
December 31, 1993........................... 94.7%
December 31, 1994........................... 97.8%
December 31, 1995........................... 98.3%
September 30, 1996.......................... 98.2%
- ----------
(1) Refers only to Phase I of the Penn Station property.
Depreciation (for book and tax purposes) on the Penn Station Property is
taken on a straight line basis over 311/2 years, resulting in a rate of
approximately 3.17% per year. At December 31, 1995, the federal tax basis of the
Penn Station Shopping Center was approximately $20.8 million. The realty tax
rate on the Penn Station property is approximately $3.453 per $100 of assessed
value, resulting in a 1995 realty tax of approximately $268,861.
26
<PAGE>
Valley Centre. Valley Centre is a 229,449 square foot shopping center
occupied by 25 tenants and located on Maryland State Route 140, approximately
two miles from the Baltimore Beltway (I-695) in Owings Mills, Maryland. In
addition to serving Owings Mills, a bedroom community of Baltimore, Maryland,
Valley Centre serves the neighborhoods of Pikesville, Stevenson and Greenspring
Valley, Maryland. Valley Centre, with approximately 45,000 automobiles
travelling by the property each day and approximately 170,000 people residing
within five miles of the center, is occupied by national and regional tenants
including Weis Supermarket, T.J. Maxx, Ross Stores, Annie Sez, Cosmetic Center,
Hair Cuttery, Payless Shoes and Sony Theatre. Valley Centre was 94.4% leased as
of September 30, 1996.
Four tenants, Weis Markets, T.J. Maxx, Ross Stores and Sony Theaters, each
occupy in excess of 10% of the GLA at Valley Centre. Weis Markets occupies
41,350 square feet of GLA under a lease which expires in May 2002 and has three
renewal options of five years each. The annual minimum rent is $330,800, which
is subject to a $1.00 per square foot increase for each option. T.J. Maxx
occupies 24,148 square feet of GLA under a lease which expires in 2007 and has
two renewal options of five years each. The annual minimum rent of the T.J. Maxx
lease is $156,962, plus percentage rent equal to 2% of gross sales over $6.5
million. The rent increases $0.50 per square foot for each option. The tenant is
currently expanding by 8,000 square feet. Upon completion of the expansion, the
annual rent will increase to $297,369 and the percentage rent break-point will
increase to $7.5 million. Ross Stores occupies 27,618 square feet of GLA under a
lease which expires January 1998 and has two renewal options of five years each.
The annual minimum rent of the Ross Stores lease is $220,944, plus percentage
rent equal to 2% of gross sales over approximately $11 million. The rental
amounts for the renewal options are set at fixed amounts which average
approximately 9.25% increase per option period. Sony Theaters occupies 32,058
square feet of GLA under a lease which expires February 2005 and has three
renewal options of five years each. The annual minimum rent of the Sony Theaters
lease is $384,696 with an increase of $1.00 per square foot in the year 2000.
Under the terms of the lease, the tenant pays percentage rent equal to 8% of
gross sales over $4.8 million. The lease provides that the rent increases $0.50
per square foot for each option.
The following table sets forth a schedule of lease expirations for the next
ten years, assuming none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE AVERAGE ANNUALIZED
NUMBER OF GLA PERCENT OF ANNUALIZED ANNUALIZED MINIMUM RENT
YEAR LEASES (SQ. FT.) TOTAL GLA MINIMUM RENT MINIMUM RENT PER SQ. FT.
- ---- ------ --------- --------- ------------ ------------ -----------
<C> <C> <C> <C> <C> <C> <C>
1996............................. 1 3,042 1.4% $ 59,161 2.4% $ 19.45
1997............................. 4 10,028 4.6 155,029 6.2 15.45
1998............................. 3 39,097 18.1 366,789 14.6 9.38
1999............................. 1 3,704 1.7 63,744 2.5 17.21
2000............................. 5 18,495 8.6 344,258 13.7 18.61
2001............................. 2 17,566 8.1 197,892 7.9 11.27
2002............................. 5 60,902 28.2 626,724 24.9 10.29
2003............................. 1 2,060 1.0 35,823 1.4 17.39
2004............................. - -- -- -- -- --
Thereafter....................... 2 61,206 28.3 666,266 26.4 10.89
-- ------- ----- --------- ----- ---------
Total/Average.................... 25 216,100 100.0% $2,515,687 100.0% $ 11.64
== ======= ===== ========= ===== =========
</TABLE>
The following table sets forth the average net effective rent per square
foot of GLA at Valley Centre:
Year ended December 31, 1990.................... $ 9.92
Year ended December 31, 1991.................... $10.18
Year ended December 31, 1992.................... $10.55
Year ended December 31, 1993.................... $10.86
Year ended December 31, 1994.................... $11.10
Year ended December 31, 1995.................... $11.54
Nine months ended September 30, 1996............ $11.07
27
<PAGE>
The following table sets forth the percentage of Valley Centre that was
leased as of the dates shown:
December 31, 1990............................... 95.0%
December 31, 1991............................... 93.0%
December 31, 1992............................... 98.0%
December 31, 1993............................... 100.0%
December 31, 1994............................... 99.4%
December 31, 1995............................... 100.0%
September 30, 1996.............................. 94.4%
Depreciation (for tax purposes) on Valley Centre is taken as follows: (i)
approximately $15.3 million of the basis uses a 19-year Accelerated Cost
Recovery System ('ACRS') depreciation, and (ii) $3.1 million of basis is
depreciated on a straight-line basis over 311/2 years, resulting in a combined
rate of approximately 4.94% per year. Depreciation for book purposes is
calculated on a straight-line basis over 311/2 years. At December 31, 1995, the
federal tax basis of Valley Centre was approximately $23.0 million. The realty
tax rate on Valley Centre is approximately $3.07 per $100 of assessed value,
resulting in a 1995 realty tax of approximately $261,000.
28
<PAGE>
INDEBTEDNESS
The following table sets forth certain information regarding the
indebtedness of the Company (excluding the Exchangeable Debentures) as of
September 30, 1996:
<TABLE>
<CAPTION>
BALANCE
INTEREST FACE PROJECTED ANNUAL MATURITY DUE AT
RATE AMOUNT INTEREST PAYMENTS DATE(1) MATURITY(2)
-------- ------ ----------------- -------- -----------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS
Branchwood Apartments............................. 6.50% $ 2,121 $ 138 01/01/97 $ 2,121
Broadmoor Apartments.............................. 6.50 3,826 249 06/30/99 3,826
Bryans Road Shopping Center....................... 8.00 150 12 01/29/97 150
Capital Corner Shopping Center.................... 6.50 3,587 233 07/01/99 3,587
Centre Ridge Marketplace(3)....................... 7.75 7,060 547 03/28/02 7,060
Chesapeake Bagel Building......................... 6.50 735 48 06/01/01 735
Clinton Square Shopping Center.................... 6.50 1,312 85 07/01/99 1,312
Clopper's Mill Village Shopping Center............ 7.18 14,412 1,035 03/21/06 11,492
Colonial Shopping Center(4)....................... 9.50 1,530 145 02/20/20 1,530
Connecticut Avenue Shops.......................... 6.50 626 41 07/01/99 626
Davis Ford; First State Plaza; James Island;
Valley Centre and Bryans Road(5)................ 7.09 38,500 2,730 07/01/99 38,500
Festival at Woodholme............................. 9.60 11,613 1,115 04/30/00 11,245
Firstfield Shopping Center........................ 7.50 2,503 188 12/01/05 2,233
Fifteenth & Allen and Stefko Blvd(6).............. 7.75 6,024 467 01/31/21 --
Glen Lea, Hanover Village, Laburnum Park and
Laburnum Square(7).............................. 8.57 14,011 1,201 10/31/05 11,159
Mayfair Shopping Center(8)........................ 5.60 7,265 407 06/24/98 3,235
Penn Station (Phase II)........................... 7.00 3,500 245 07/01/99 3,500
P.G. County....................................... 6.50 4,150 270 06/06/98 4,150
Potomac Plaza Shopping Center..................... 7.00 3,656 256 06/01/99 3,656
Rosecroft Shopping Center......................... 6.50 2,000 130 07/01/99 2,000
Shoppes of Kildaire(9)............................ 6.50 7,949 517 04/05/06 4,491
Southside Marketplace............................. 8.75 8,081 707 07/01/05 7,332
Takoma Park Shopping Center(10)................... 8.50 2,587 220 04/01/99 2,587
The Georgetown Shops.............................. 6.50 1,653 107 07/01/99 1,655
Thieves Market.................................... 6.50 734 48 04/30/99 734
First Union Line of Credit(11).................... 7.50 1,500 113 06/01/98 1,500
FS Note(12)....................................... 5.00 4,800 240 07/01/00 4,800
Mellon Line of Credit(11)......................... 7.50 6,848 514 03/29/98 6,848
-------- ------- -------
Subtotal.................................... 162,733 12,008 142,064
-------- ------- -------
NEW MORTGAGE LOANS
City Line Shopping Center (13).................... 8.00 8,979 718 10/19/05 8,238
Kings Park Shopping Center(14).................... 9.00 4,320 389 11/30/14 --
Newtown Square Shopping Center(15)................ 8.25 8,244 680 12/31/06 7,269
Northway Shopping Center(14)...................... 8.90 6,000 534 12/30/06 4,943
Northway Shopping Center(14)...................... 10.25 1,777 182 08/01/99 1,736
------- ------- -------
Total....................................... $192,053 $14,511 $164,250
======== ======= ========
- ----------
<FN>
(1) Except for Centre Ridge Marketplace, Colonial Shopping Center, Penn Station
(Phase II), Potomac Plaza Shopping Center, Takoma Park Shopping Center, the
FS Note and the Lines of Credit, all the properties are subject to
mortgages which contain prepayment penalties, typically calculated using a
yield maintenance formula.
(2) Branchwood Apartments, P.G. County Commercial Park, Shoppes of Kildaire and
Thieves Market, amounts reflect a reduction of the outstanding balances of
the mortgages due to amortization which was escrowed at the formation of
the Company for the remaining loan term in the amounts of $36,000,
$507,000, $259,000 and $66,000, respectively.
(3) The interest rate on this mortgage floats at 2.25% above the 30 day LIBOR
rate.
(4) The interest rate on this mortgage loan floats at 2.75% above the
applicable one-year treasury bill rate.
(5) This debt (the Nomura Mortgage Loan) is collateralized by these five
properties. The Company has entered into an interest rate swap agreement
which fixes the rate at 7.09% for the period July 1, 1996 through June 30,
1999.
(6) This debt is collateralized by these two properties.
(7) This debt is collateralized by these four properties.
(8) The debt service on this mortgage loan is determined based upon a variable
rate of interest, plus a credit enhancement fee of 2.0%. The variable
interest rate is determined weekly at the rate necessary to produce a bid
in the process of remarketing the Bond Obligations equal to par plus
accrued interest, based on comparable issues in the market.
(9) The interest rate adjusts to 7.75% effective July 1, 1997.
(10) The interest rate on this mortgage floats at 0.25% above the prime rate.
(11) The interest rate on the Lines of Credit floats at 2.00% above the 30 day
LIBOR rate. The First Union Line of Credit is collateralized by Brafferton
Center. The Mellon Line of Credit is collateralized by Kenhorst Plaza
Shopping Center.
(12) Excludes a $387,000 discount recorded on the FS Note due to its below
market interest rate. Such discount is being amortized over the life of the
loan using the effective interest method.
(13) Represents 89% of the mortgage on this property. The Company is acquiring
an 89% interest in this property. The seller will retain an 11% interest
which it is obligated to transfer to the Company and which the Company is
obligated to acquire approximately three years after the initial closing.
(14) The effects of the difference between the coupon rates and the market rates
on these loans is immaterial.
(15) The Company expects to refinance this property with a new mortgage
substantially on these terms.
</FN>
</TABLE>
29
<PAGE>
The $25.0 million aggregate principal amount of Exchangeable Debentures
issued in June 1994 are exchangeable in the aggregate for 1,000,000 shares of
Preferred Stock of the Company, subject to adjustment. Interest on the
Debentures is payable quarterly, in arrears. The Debentures mature on June 27,
1999. The Debentures are redeemable by the Operating Partnership at any time on
or after July 15, 1999, or at any time for certain reasons intended to protect
the Company's status as a REIT, at the option of the Company, at 100% of the
principal amount thereof, together with accrued interest. The rights of holders
of Common Stock and Preferred Stock are effectively subordinated to the rights
of holders of Debentures. The Exchangeable Debentures are secured by First
Mortgages on Penn Station Shopping Center (Phase I) and Fox Mill Shopping
Center.
COMPETITION
All of the Properties are located in developed areas that include other
neighborhood shopping center properties. The number of retail properties in a
particular area could have a material effect on the Company's ability to lease
space and on rents charged at the Properties or at any newly acquired
properties. The Company may be competing with others that have greater resources
than the Company and whose officers and directors have more experience than the
Company's officers and directors. In addition, other types of retail shopping
centers, such as regional malls and 'power centers,' provide leasing
alternatives to potential tenants of neighborhood shopping centers like the
Retail Properties.
The third-party management, leasing and related service business is highly
competitive and fragmented. The Company has competitors that include a variety
of local, regional and national firms with no one firm controlling a significant
market share in the regions where the Company engages in its third-party
business. The Company believes, however, that it has a competitive advantage in
these businesses based on the quality and experience of its employees, the
services provided by the Company and the market presence that the Company has
developed over the past ten years.
REGULATIONS AND INSURANCE
General. Retail and multifamily properties are subject to various laws,
ordinances and regulations. The Company believes that each of its Properties has
the necessary operating permits and approvals to operate its respective
business.
Americans with Disabilities Act and Similar Laws. Under the Americans with
Disabilities Act of 1990 (the 'ADA'), all places of public accommodation are
required to meet certain Federal requirements related to access and use by
disabled persons. These requirements became effective in 1992. Although
management of the Company believes that the Properties are substantially in
compliance with present requirements of the ADA, the Company has not conducted
and does not presently intend to conduct an audit or an investigation to
determine its compliance. There can be no assurance that the Company will not
incur additional costs of complying with the ADA. A number of additional
federal, state and local laws exist which also may require modifications to the
Properties, or restrict certain further renovations thereof, with respect to
access thereto by disabled persons.
Additional legislation may place further burdens or restrictions on owners
with respect to access by disabled persons. The ultimate amount of the cost of
compliance with the ADA or such legislation is not currently ascertainable, and,
while such costs are not expected to have a material effect on the Company, such
costs could be substantial. Limitations or restrictions on the completion of
certain renovations may limit application of the Company's investment strategy
in certain instances or reduce overall returns on the Company's investments.
Insurance. Under their leases, the Company's tenants are generally
responsible for providing adequate insurance on the Properties they lease. The
Company believes the Properties are covered by adequate fire, flood and property
insurance provided by reputable companies. However, some of the Properties are
not covered by disaster insurance with respect to certain hazards (such as
30
<PAGE>
earthquakes) for which coverage is not available or available only at rates
which, in the opinion of the Company, are prohibitive.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of
1988 ('FHA') requires apartment properties first occupied after March 13, 1990
to be accessible to the handicapped. Noncompliance with the FHA could result in
the imposition of fines or an award of damages to private litigants. The Company
believes that its Multifamily Properties that are subject to the FHA are in
compliance with such law.
Rent Control Legislation. Although not currently applicable to any of the
Properties, state and local rent control laws in certain jurisdictions may limit
a property owner's ability to increase apartment rents and to recover increases
in operating expenses and the costs of capital improvements. Enactment of such
laws has been considered from time to time in jurisdictions in which the
Multifamily Properties are located. The Company does not presently intend to
develop or acquire multifamily apartment properties in markets that are either
subject to rent control or in which rent limiting legislation exists.
ENVIRONMENTAL MATTERS
The Company seeks to protect itself from environmental liabilities in a
number of ways. As part of its internal due diligence process, the Company
obtains environmental site assessments prior to purchasing a property. In the
event these assessments reveal potential environmental liabilities, the Company
evaluates the risks and attempts to quantify the potential costs associated with
such liabilities and then makes a determination of whether to acquire the
property. If the Company chooses to acquire the property, it will typically
require the prospective seller to agree to remediate any environmental problems
and may obtain a letter of credit or other security to provide adequate
assurance to the Company that sufficient funds will be available to complete the
work.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate may be required to investigate and clean up
hazardous or toxic substances or petroleum product releases at such property and
may be held liable to a governmental entity or to third parties for property
damage and for investigation and clean-up costs incurred by such parties in
connection with contamination. Many such laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act of 1986 ('CERCLA'), typically
impose such liability without regard for whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances and the
liability under such laws has been interpreted to be joint and several unless
divisible and there is a reasonable basis for allocation of responsibility. The
cost of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Some environmental laws create a lien on a contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. The owner of a contaminated site also may be subject to
common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from such site. Certain federal, state and
local laws, regulations and ordinances also govern the removal, encapsulation or
disturbance of asbestos-containing materials ('ACMs') when such materials are in
poor condition or in the event of construction, remodeling, renovation or
demolition of a building. Such laws may impose liability for release of ACMs and
may provide for third parties to seek recovery from owners or operators of such
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company, the Operating Partnership or the Management Company, as
the case may be, may be considered an owner or operator of such properties or as
having arranged for the disposal or treatment of hazardous or toxic substances
and, therefore, potentially liable for removal or remediation costs, as well as
certain other related costs, including governmental fines and injuries to
persons and property. Except for the
31
<PAGE>
following matters, the Company has not been notified by any governmental
authority of any non-compliance, liability or other claim in connection with any
of the Properties.
Penn Station Shopping Center. A dry cleaning solvent has been detected in
groundwater below the Penn Station Shopping Center. The source of the
contamination has not been determined. Potential sources include a dry cleaner
tenant at the Penn Station Shopping Center and a dry cleaner located in an
adjacent property. Sampling conducted at the site indicates that the
contamination is limited and is unlikely to have any effect on human health. The
Maryland Department of the Environment was notified as of September 1993. At
this time the Company has not received an estimate of the costs of remediating
the contamination. Based upon the information provided by the Phase I
environmental audit, the Company does not believe that the contamination
relating to the dry cleaning solvents at Penn Station Shopping Center poses a
material adverse risk to the Company's results of operations, financial
condition or liquidity.
Fox Mill Shopping Center. Petroleum has been detected in the soil at a
parcel adjacent to Fox Mill Shopping Center on property occupied by Exxon
Corporation ('Exxon') for use as a gas station (the 'Exxon Station'). Exxon has
taken steps to remediate the petroleum in and around the Exxon Station, which is
located downgradient from the Fox Mill Shopping Center. Exxon has agreed to take
full responsibility for the remediation of such petroleum. In addition, a dry
cleaning solvent has been detected in the groundwater below the Fox Mill
Shopping Center. A groundwater pump and treatment system, approved by the
Virginia Water Control Board, was installed in July 1992, and was operating
until recently when the Control Board ordered semi-annual sampling to determine
if further remediation is necessary. The previous owner of the Fox Mill Shopping
Center has agreed to fully remediate the groundwater contamination. The Company
has received preliminary estimates which indicate that the anticipated costs to
remediate the environmental contamination at the Fox Mill Shopping Center will
be approximately $75,000 over the course of the next three to four years. Based
upon the information provided by the Phase I environmental audit, the Company
does not believe that the contamination associated with either the petroleum or
the dry cleaning solvent at the Fox Mill Shopping Center poses a material
adverse risk to the Company's results of operations, financial condition or
liquidity.
Four Mile Fork Shopping Center. A dry cleaning solvent has been detected in
the soil below the Four Mile Fork Shopping Center. The Company intends to
conduct additional testing to determine the extent of contamination and the
appropriate remediation measures, if any. In any event, the Company does not
intend to close the acquisition of Four Mile Fork Shopping Center without a
closure letter from the responsible regulatory authority or adequate
indemnification from the seller of the center.
All of the Properties (including the New Retail Properties) have been
subject to Phase I or similar environmental audits (which involved a general
inspection without soil sampling or groundwater analysis) by independent
environmental consultants. Management believes that these environmental audits
have not revealed any significant environmental liability that would have a
material adverse effect on the Company's business. No assurance can be given
that the environmental studies that were performed at the Properties disclose
all environmental liabilities thereon, that any prior owner thereof did not
create a material environmental condition not known to the Company or that a
material environmental condition does not otherwise exist as to any of the
Properties.
LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any
material litigation nor, to the Company's knowledge, is any material litigation
threatened against the Company or the Properties, other than routine litigation
and administrative proceedings arising in the ordinary course of business, which
collectively are not expected to have a material adverse effect on the business,
financial condition or results of operations of the Company.
32
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby, after payment of all expenses of the Offering, are approximately $30.3
million ($34.9 million if the Underwriters' over-allotment option is exercised
in full). The net cash proceeds of the Offering will be used as follows:
approximately $18.8 million for the purchase of the New Retail Properties (the
balance of the purchase price of the New Retail Properties will be paid for by
the issuance of Common Units and assumption of indebtedness); approximately $4.7
million to repay existing indebtedness (with a weighted average interest rate of
8.5% and a weighted average term to maturity of nine years from September 30,
1996), approximately $1.9 million for property expansions and approximately $4.9
million for working capital. The foregoing represent estimates and the actual
amounts and timing of such expenditures will depend upon numerous factors
including the timing of acquisitions, renovations and expansions. If any of the
purchases of the New Retail Properties do not close, the balance of any
remaining net offering proceeds will be used to reduce indebtedness, for new
acquisitions and for general working capital. See "Risk Factors--New Retail
Properties." Pending such uses, the Company intends to invest such net proceeds
in short-term, income-producing investments which are consistent with the
Company's intention to qualify for taxation as a REIT.
Any net proceeds from the exercise of the Underwriters' over-allotment
option will be invested as described above. These funds will be used to develop
or acquire additional properties (including expansion and redevelopment of the
Properties) consistent with the Company's investment policies and growth
strategies.
PRICE RANGE OF THE COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock began trading on the Nasdaq National Market
('NASDAQ') on June 27, 1995 and on the NYSE on August 13, 1996. The table below
sets forth for the fiscal periods indicated the high and low sales prices per
share of the Company's Common Stock, as reported on the NYSE composite tape or
NASDAQ and the distributions paid for such periods.
DISTRIBUTIONS
HIGH LOW PER SHARE
---- --- -------------
1995
Third Quarter............................... $18 $17 $.4875
Fourth Quarter.............................. 18 1/2 17 .4875
1996
First Quarter............................... 19 17 3/4 .4875
Second Quarter.............................. 20 1/2 18 1/4 .4875
Third Quarter............................... 21 1/4 19 1/4 .4875
Fourth Quarter (through November 25, 1996).. 23 20 5/8 (1)
- ----------
(1) On October 19, 1996, the Company declared a distribution of $0.4875 per
share to the holders of Common Stock of record on November 1, 1996, payable
on November 15, 1996. Purchasers of Common Stock offered hereby will not be
entitled to such distribution.
On November 25, 1996, the closing sale price of the Common Stock as
reported on the NYSE was $21 7/8 per share. As of November 25, 1996, the
approximate number of holders of record of the Common Stock was 144.
For the year ended December 31, 1995, 100% (or $1.95 per share) of the
distributions made through December 31, 1995 on the Common Stock represented a
return of capital for federal income tax purposes.
In the future, the Company's ability to make distributions will be affected
by a number of factors, including the revenues received from its properties, the
operating expenses of the Company, the interest expense incurred on outstanding
indebtedness, the ability of tenants to meet their obligations under leases,
unanticipated capital expenditures and dividends received from the Management
Company. In addition, if the Exchangeable Debentures are exchanged for
Convertible Preferred Stock annual cash available for distribution will be
reduced by approximately $375,000.
33
<PAGE>
One or more of the foregoing factors could limit the Company's ability to
maintain distributions at the current level.
Management believes that the amount of cash available for distribution not
distributed will be sufficient to cover: (i) tenant allowances and other costs
associated with the renewal or replacement of current tenants as their leases
expire, (ii) recurring capital expenditures that will not be reimbursed by
tenants and (iii) unforeseen cash needs. The expected amount of distributions
will not allow the Company, using only cash from operations, to retire all of
its debt when due, and therefore the Company will be required to seek additional
debt or equity financings, and/or sell properties, to repay such debt.
Federal income tax law requires a REIT to distribute annually at least 95%
of its REIT taxable income. For the twelve-month period ended December 31, 1995,
the amount of distributions necessary to maintain the Company's REIT status for
that year would have been approximately $2.9 million or $1.26 per share of
Convertible Preferred Stock. Based on the level of distributions on the Common
Stock constituting a return of capital, the Company would not have been required
to make any distributions on the Common Stock in 1995 in order to satisfy its
obligation under Federal income tax law to distribute annually at least 95% of
its REIT taxable income.
Distributions by the Company to the extent of its current or accumulated
earnings and profits for Federal income tax purposes, other than capital gain
dividends, will be taxable to stockholders as ordinary dividend income. Capital
gain dividends generally will be treated as long-term capital gains.
Distributions in excess of earnings and profits generally will be treated as a
non-taxable reduction of the stockholder's basis in the stock to the extent
thereof, and thereafter as taxable gain. Distributions treated as non-taxable
reduction in basis will have the effect of deferring taxation until the sale of
a stockholder's capital stock. For a discussion of the tax treatment of
distributions to holders of shares of capital stock, see 'Federal Income Tax
Considerations--Taxation of Taxable U.S. Stockholders.'
34
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company and the pro forma capitalization of the Company as of September 30,
1996, after giving effect to the sale of the Common Stock offered hereby,
certain acquisitions and the application of the net proceeds from the Offering
as described under the caption 'Use of Proceeds.' The information set forth in
the following table should be read in conjunction with the consolidated
financial statements and notes thereto and the pro forma financial information
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>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Mortgage and other notes payable.................................................. $162,346 $186,976
Exchangeable Debentures(1)........................................................ 25,000 25,000
Minority interest(2).............................................................. 12,573 19,367
Stockholders' equity:(3)
Preferred Stock, $.01 par value, 10,000,000 shares authorized;
Convertible Preferred Stock, $.01 par value, 3,750,000 shares designated;
2,314,189 shares issued and outstanding(4)....................................... 23 23
Common Stock, $.01 par value, 90,000,000 shares authorized;
3,291,245 and 4,791,245 shares issued and outstanding,
respectively..................................................................... 32 47
Additional paid-in capital........................................................ 86,538 116,202
Accumulated distributions in excess of earnings................................... (16,758) (16,758)
-------- --------
Total stockholders' equity.................................................... 69,835 99,514
-------- --------
Total capitalization...................................................... $269,754 $330,857
========= =========
<FN>
____________
(1) The $25.0 million of Exchangeable Debentures, due 1999, are exchangeable
for shares of Convertible Preferred Stock at $25.00 per share (1,000,000
shares) and are collateralized by two Properties.
(2) Reflects the 421,215 Exchangeable Preferred Units and 709,716 (Historical)
and 1,009,716 (Pro Forma) Common Units of the Operating Partnership not
owned by the Company.
(3) Does not include: (i) 709,716 (Historical) and 1,009,716 (Pro Forma) shares
of Common Stock and 421,215 shares of Convertible Preferred Stock reserved
for issuance upon exchange of issued and outstanding Common Units and
Exchangeable Preferred Units, respectively, (ii) 594,874 shares of Common
Stock reserved for issuance under the 1994 Stock Incentive Plan, 1994
Contingent Stock Awards and 1996 Contingent Stock Awards. See
'Management--Compensation of Officers.'
(4) The Convertible Preferred Stock has a stated liquidation preference of
$25.00 per share, is convertible (based on the then-applicable liquidation
preference of the Convertible Preferred Stock) on or after May 31, 1999
into shares of Common Stock at a conversion price equal to $19.50, and is
not redeemable by the Company prior to July 15, 1999.
</FN>
</TABLE>
35
<PAGE>
SELECTED PRO FORMA AND HISTORICAL FINANCIAL AND PORTFOLIO INFORMATION
The following tables set forth pro forma summary financial information for
the Company and historical summary financial information for the Company and its
predecessor, the FWM Group. The following selected 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.
The historical operating data of the Company and its predecessor for the years
ended December 31, 1991, 1992, 1993, 1994 and 1995 have been derived from the
historical consolidated financial statements audited by Coopers & Lybrand
L.L.P., independent accountants, whose report with respect to the information
for the years ended December 31, 1993, 1994 and 1995 is included elsewhere in
this Prospectus. The operating data for the nine months ended September 30, 1995
and 1996 has been derived from the unaudited consolidated financial statements
of the Company. In the opinion of management, the operating data for the nine
months ended September 30, 1995 and 1996 included all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
information set forth therein.
The unaudited selected pro forma information for the year ended December
31, 1995 is presented as if: (i) the June 1995 Offering had occurred and the
proceeds therefrom had been used, as of January 1, 1995, to purchase the Retail
Properties acquired in connection with the June 1995 Offering; and (ii) the
Offering had occurred and the net proceeds therefrom had been used as of January
1, 1995 as described in 'Use of Proceeds,' and the 1996 Acquisitions had
occurred as of January 1, 1995. The unaudited selected pro forma information for
the nine months ended September 30, 1996 is presented as if the Offering had
occurred and the net proceeds therefrom had been used, as of January 1, 1996, as
described in 'Use of Proceeds,' and the 1996 Acquisitions had occurred as of
January 1, 1996. The pro forma financial information is not necessarily
indicative of what the actual results of operations of the Company would have
been for the period indicated, nor does it purport to represent the results of
operations for future periods.
Per share data for periods prior to the formation of the Company are not
relevant to the historical combined financial statements of the FWM Group
because such financial statements are a combined presentation of the predecessor
entities. Historical operating results, including net income, may not be
comparable to future operating results because of the recapitalization resulting
from the formation of the Company. In addition, the Company believes that the
book value of the Properties, which reflects historical cost of such assets,
less accumulated depreciation, is not indicative of the fair value of the
Properties.
36
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------- ------------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- --------- ---- ---- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL INFORMATION:
Revenues:
Minimum rent................ $10,362 $10,242 $10,594 $14,701 $23,276 $35,874 $16,597 $23,408 $28,724
Percentage rent............. 134 114 68 255 495 1,063 302 501 763
Tenant reimbursements....... 1,802 1,642 1,889 2,823 4,362 6,762 3,106 5,015 6,272
Third-party fees............ 1,400 3,095 4,396 1,912 -- -- -- -- --
Other income................ 520 310 245 508 1,447 1,505 787 1,189 1,204
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues............. 14,218 15,403 17,192 20,199 29,580 45,204 20,792 30,113 36,963
Expenses:
Property operating and
maintenance................ 4,475 4,726 5,137 6,299 7,229 10,555 5,024 7,623 9,422
General and administrative.. 1,162 2,115 2,665 1,356 2,831 2,831 2,152 2,348 2,348
Interest.................... 8,947 8,144 7,909 9,301 11,230 17,088 8,095 11,025 13,467
Depreciation and
amortization............... 2,441 2,514 2,721 4,579 5,808 8,943 4,162 5,783 7,075
------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses............. 17,025 17,499 18,432 21,535 27,098 39,417 19,433 26,779 32,312
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
from Management Company,
extraordinary item and
minority interest............. (2,807) (2,096) (1,240) (1,336) 2,482 5,787 1,359 3,334 4,651
Income from Management
Company(1)................... -- -- -- 500 449 449 361 97 97
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
distributions to preferred
stockholders, extraordinary
item and minority interest... (2,807) (2,096) (1,240) (836) 2,931 6,236 1,720 3,431 4,748
Extraordinary item............ -- -- 2,665 2,251 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............. $(2,807)$(2,096) $1,425
======= ======= ======
Income before minority
interest and distributions to
preferred stockholders....... 1,415 2,931 6,236 1,720 3,431 4,748
(Income) loss allocated to
minority interest............ (1,101) (602) (977) (87) (486) (746)
------- ------- ------- ------- ------- -------
Income before distributions to
preferred stockholders....... 314 2,329 5,259 1,633 2,945 4,002
Distributions to preferred
stockholders................. (1,811) (5,117) (5,641) (3,728) (4,231) (4,231)
------- ------- ------- ------- ------- -------
Loss allocated to common
stockholders................. $(1,497)$(2,788) $ (382) $(2,095) $(1,286) $(229)
======= ======= ======= ======= ======= =======
Net loss per Common
Share(2)................... $(0.95)$ (1.19) $(0.08) $(1.01) $(0.40) $(0.05)
======= ======= ======= ======= ======= =======
Shares of Common Stock, in
thousands.................... 1,574 2,351 4,701 2,081 3,227 4,727
======= ======= ======= ======= ======= =======
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
PRO FORMA
1991 1992 1993 1994 1995 1995 1995 1996
---- ---- ---- ---- ---- --------- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RETAIL PROPERTY INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Rental properties, gross........ $ 85,663 $ 87,299 $ 87,749 $ 175,213 $ 228,092 $ 211,885 $ 285,774
Total assets.................... 83,552 82,798 81,056 172,487 227,405 210,695 274,969
Mortgage and other notes
payable......................... 90,834 93,918 92,382 89,858 116,182 99,486 162,346
Exchangeable Debentures......... -- -- -- 25,000 25,000 25,000 25,000
Total liabilities............... 97,032 99,235 96,216 117,925 145,241 127,067 192,561
Minority interest(3)............ -- -- -- 8,580 11,088 11,059 12,573
Stockholders' equity
(deficit)....................... (13,480) (16,437) (15,160) 45,982 71,076 72,569 69,835
RETAIL PROPERTY INFORMATION:
Retail Occupancy................ 90.8% 94.6% 95.4% 94.7% 96.0% 95.6% 96.1%
Number of Retail Properties..... 14 14 14 20 27 39 26 33
Retail Properties GLA (thousands
of square feet)............... 1,186 1,186 1,186 2,014 2,646 3,910 2,645 3,286
Average rent(4):
Retail Properties (per square
foot)....................... $ 8.89 $ 9.07 $ 9.16 $ 10.08 $ 10.28 $ 10.54
OTHER DATA:(5)
Funds From Operations(6)........ $ 10,539 $16,979 $ 7,382 $ 10,264
Cash flow from operating
activities.................... $ 785 $ 1,037 $ 831 $ 3,164 10,003 6,788 9,466
Cash flow (used in) investing
activities.................... (3,998) (1,636) (450) (56,236) (29,884) (15,271) (42,260)
Cash flow provided by (used in)
financing activities.......... 2,846 367 (529) 53,615 26,574 14,076 26,858
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
PRO FORMA
1996
---------
(UNAUDITED)
<S> <C>
BALANCE SHEET INFORMATION:
Rental properties, gross........ $ 341,478
Total assets.................... 336,072
Mortgage and other notes
payable......................... 186,976
Exchangeable Debentures......... 25,000
Total liabilities............... 217,191
Minority interest(3)............ 19,367
Stockholders' equity
(deficit)....................... 99,514
RETAIL PROPERTY INFORMATION:
Retail Occupancy................ 95.6%
Number of Retail Properties..... 39
Retail Properties GLA (thousands
of square feet)............... 3,910
Average rent(4):
Retail Properties (per square
foot)....................... $ 10.43
OTHER DATA (FOR THE YEAR OR SIX
MONTHS ENDING AS OF THE DATE
INDICATED):
Funds From Operations(5)........ $ 12,873
Cash flow from operating
activities....................
Cash flow (used in) investing
activities....................
Cash flow provided by (used in)
financing activities..........
- ----------
<FN>
(1) Subsequent to June 27, 1994, activity of the Management Company is being
reflected using the equity method of accounting.
(2) Because the Company's income is based on its percentage interest in the
Operating Partnership's income, the net loss per share would be unchanged
for the periods presented even if Common Units were exchanged for Common
Stock of the Company.
(3) Reflects the Exchangeable Preferred Units and Common Units of the Operating
Partnership not owned by the Company.
(4) Represents base rent divided by square feet leased, for the annualized
12-month period.
(5) For the year or nine months ending as of the date indicated.
(6) The Company considers Funds From Operations to be an appropriate measure of
the performance of an equity REIT. On March 3, 1995, NAREIT adopted the
NAREIT White Paper on Funds From Operations (the 'NAREIT White Paper')
which provided additional guidance on the calculation of Funds From
Operations. Funds From Operations is defined by NAREIT as net income
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect Funds From
Operations on the same basis. Funds From Operations does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available
to fund cash needs and should not be considered an alternative to net
income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity or of ability to make
distributions.
</FN>
</TABLE>
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the 'Selected
and Pro Forma and Historical Financial and Portfolio Information' and all of the
historical and pro forma financial statements and the notes thereto appearing
elsewhere in this Prospectus. The pro forma information assumes the completion
of the June 1995 Offering and the Offering (and the application of the proceeds
therefrom) at the beginning of the periods indicated.
RESULTS OF OPERATIONS
Pro forma results of operations of the Company for the nine months ended
September 30, 1996 compared to the historical results for the nine months ended
September 30, 1996.
For the nine months ended September 30, 1996, the net loss allocated to
common stockholders on a pro forma basis decreased by $1.1 million from a net
loss of $1.3 million to a net loss of $0.2 million, when compared to the nine
months ended September 30, 1996, primarily due to an increase in revenues offset
by an increase in expenses and income allocated to minority interests.
Total revenues increased by $6.9 million or 22.9%, from $30.1 million to
$37.0 million, due primarily to an increase in minimum rents of $5.3 million and
tenant reimbursements of $1.3 million. The increases are due to the effect of
the expected purchase of the New Retail Properties.
Property operating and maintenance expense increased by $1.8 million, or
23.7%, from $7.6 million to $9.4 million, primarily due to the effect of the
expected purchase of the New Retail Properties.
Interest expense increased by $2.5 million, or 22.7%, from $11.0 million,
to $13.5 million primarily due to the increased mortgage indebtedness associated
with the expected purchase of the New Retail Properties.
Depreciation and amortization expenses increased by $1.3 million, or 22.4%,
from $5.8 million to $7.1 million, primarily due to the effect of the expected
purchase of the New Retail Properties.
Income allocated to minority interest increased by $0.3 million from $0.5
million to $0.8 million due to an increase in net income.
Comparison of the nine months ended September 30, 1996 to the nine months
ended September 30, 1995.
For the nine months ended September 30, 1996, the net loss allocated to
common stockholders decreased by $0.8 million from a net loss of $2.1 million to
a net loss of $1.3 million, when compared to the nine months ended September 30,
1995, primarily due to an increase in the amount of revenues offset by an
increase in expenses, distributions to holders of Convertible Preferred Stock,
and income allocated to minority interest.
Total revenues increased by $9.3 million, or 44.7%, from $20.8 million to
$30.1 million, primarily due to an increase in minimum rents of $6.8 million and
tenant reimbursements of $1.9 million. The increases were primarily due to the
1995 and 1996 Acquisitions.
Property operating and maintenance expense increased by $2.6 million, or
52.0%, from $5.0 million to $7.6 million, primarily due to the 1995 and 1996
Acquisitions. General and administrative expenses increased by 9.1% or $0.2
million, from $2.2 million to $2.4 million, primarily due to New York Stock
Exchange filing fees of $0.2 million, bonuses of $0.2 million and other expenses
of $0.2 million offset by a decrease of $0.4 million for compensation paid or
payable in Company stock.
39
<PAGE>
Interest expense increased by $2.9 million, or 35.8%, from $8.1 million, to
$11.0 million, primarily due to the increased mortgage indebtedness associated
with the purchase of the 1995 and 1996 Acquisitions.
Depreciation and amortization expenses increased by $1.6 million, or 38.1%,
from $4.2 million to $5.8 million, primarily due to the 1995 and 1996
Acquisitions.
During the nine months ended September 30, 1996, distributions payable to
owners of the Convertible Preferred Stock increased from $3.8 million to $4.2
million due to the issuance of Preferred Stock to the former owners of Laburnum
Park Shopping Center, Laburnum Square Shopping Center, Glen Lea Shopping Center,
Hanover Village Shopping Center and Firstfield Shopping Center.
Income allocated to minority interest increased by $0.4 million from $0.1
million to $0.5 million due to an increase in net income.
Pro forma results of operations of the Company for the year ended December
31, 1995 compared to the historical results for the year ended December 31,
1995.
For the year ended December 31, 1995, the net loss allocated to common
stockholders on a pro forma basis decreased by $2.4 million from a net loss of
$2.8 million to a net loss of $0.4 million, when compared to the year ended
December 31, 1995, primarily due to an increase in revenues offset by an
increase in expenses, distributions to holders of Convertible Preferred Stock,
and income allocated to minority interests.
Total revenues increased by $15.6 million or 52.7%, from $29.6 million to
$45.2 million, due primarily to an increase in minimum rents of $12.6 million
and tenant reimbursements of $2.4 million. The increases were primarily due to
the purchase of Festival at Woodholme Shopping Center on June 1, 1995, Glen Lea,
Hanover Village, Laburnum Park and Laburnum Square on July 1, 1995, Kenhorst
Plaza on October 12, 1995 and Firstfield Shopping Center on November 15, 1995
(the '1995 Acquisitions') and the purchase of Stefko Boulevard and 15th & Allen
Shopping Centers on January 4, 1996, Clopper's Mill Village Center on March 1,
1996, Centre Ridge Marketplace on March 29, 1996, Takoma Park Shopping Center on
April 29, 1996 and Southside Marketplace on June 7, 1996 (the '1996
Acquisitions') and the expected purchase of the New Retail Properties (together
the 'Acquisitions').
Property operating and maintenance expense increased by $3.4 million, or
47.2%, from $7.2 million to $10.6 million, due primarily to the Acquisitions.
Interest expense increased by $5.9 million, or 52.7%, from $11.2 million,
to $17.1 million due primarily to the increased mortgage indebtedness associated
with the purchase of the Acquisitions.
Depreciation and amortization expenses increased by $3.1 million, or 53.4%,
from $5.8 million to $8.9 million, primarily due to the Acquisitions.
Distributions payable to owners of the Convertible Preferred Stock
increased from $5.1 million to $5.6 million due to the issuance of Preferred
Stock to the former owners of the UDR Properties during 1995.
Income allocated to minority interest increased by $0.4 million from $0.6
million to $1.0 million due to an increase in net income.
Comparison of the year ended December 31, 1995 to the year ended December
31, 1994.
For the year ended December 31, 1995, net loss allocated to common
stockholders increased by $1.3 million from a net loss of $1.5 million to a net
loss of $2.8 million, when compared to the year ended December 31, 1994,
primarily due to an increase in expenses and distributions to holders of
Convertible Preferred Stock, offset by an increases in revenues and a decrease
in income allocated to minority interest.
40
<PAGE>
Total revenues increased by $9.4 million or 46.5%, from $20.2 million to
$29.6 million, due primarily to an increase in minimum rents of $8.6 million and
tenant reimbursements of $1.5 million, partially offset by a decrease in
third-party fees of $1.9 million due to the change in the ownership of the
Management Company from voting to nonvoting stock and the related change in the
method of accounting for the Management Company, effective June 27, 1994. The
increases were primarily due to the purchase of Brafferton Shopping Center,
Davis Ford Crossing, First State Plaza, Fox Mill Shopping Center, Mayfair
Shopping Center and Valley Centre (the "1994 Acquisitions") on June 27, 1994
resulting in only six months revenues being included in the year ended December
31, 1994 and the the 1995 Acquisitions.
Property operating and maintenance expense increased by $0.9 million, or
14.8%, from $6.3 million to $7.2 million, due primarily to the purchase of the
1994 Acquisitions on June 27, 1994 resulting in only six months of expenses
being included in the year ended December 31, 1994 and the 1995 Acquisitions.
Property operating and maintenance expenses as a percentage of total revenues
decreased from 31% in 1994 to 24% in 1995 primarily due to savings in property
management fee expenses due to the increased size of the Company's portfolio and
a reduction in the reserve for allowance for doubtful accounts.
General and administrative expenses increased by $1.4 million, or 100.0%,
from $1.4 million to $2.8 million due primarily to compensation paid or payable
in company stock in the amount of $1.8 million to key employees offset by the
change in accounting for the Management Company on June 27, 1994, resulting from
the change in ownership from voting to non-voting stock. Prior to June 27, 1994,
the expenses of the Management Company were consolidated with the properties.
Subsequent to June 27, 1994, activity of the Management Company is being
reflected using the cost method of accounting (1994) and the equity method of
accounting (1995).
Interest expense increased by $1.9 million, or 20.4%, from $9.3 million, to
$11.2 million, due primarily to the 1995 Acquisitions.
Depreciation and amortization expenses increased by $1.2 million, or 26.1%,
from $4.6 million to $5.8 million, primarily due to an increase in depreciable
basis due to the 1995 Acquisitions and a full year of depreciation on the
1994 Acquisitions.
During 1995, distributions payable to owners of the Convertible Preferred
increased by $3.3 million from $1.8 million to $5.1 million primarily due to the
preferred stock being outstanding for only six months in 1994 and the issuance
of an additional 358,000 shares during 1995.
Income allocated to minority interest decreased by $0.5 million from $1.1
million to $0.6 million for the year ended December 31, 1995 primarily because
all pre-June 27, 1994 income was allocated to minority interests in 1994,
partially offset by increased earnings in 1995. During 1994 there was
extraordinary income of $2.3 million. There was no such item during 1995.
Potomac Plaza's occupancy rate as of December 31, 1995 was 75.3%. The
Company completed a renovation of the shopping center in April 1996 which should
increase the marketability of the property. As of September 30, 1996, the
occupancy rate had increased to 95%. Broadmoor Apartments occupancy was 71.9% as
of December 31, 1995 primarily due to the closing of the Charleston, South
Carolina Naval Base. Broadmoor has historically relied on the Navy Base as a
source of tenants. The Company completed an exterior renovation of the property
and has renamed the property Park Place. These activities should increase the
marketability of the apartments.
Net cash flow provided by operating activities increased from $3.2 million
in 1994 to $10.0 million in 1995, primarily due to the acquisition of new
properties during 1995 and realizing the full years operations from properties
purchased in 1994 and improved property performance. Net cash flows used in
investing activities decreased from $56.2 million in 1994 to $29.9 million in
1995 primarily due to a decrease in the amount of property acquisitions during
1995. Net cash flow provided by financing activities decreased from $53.6
million to $26.6 million primarily due to a decrease in the amount of equity
capital raised and a decrease in acquisitions in 1995 resulting in less
financing needs.
41
<PAGE>
Comparison of the year ended December 31, 1994 for the Company to the year
ended December 31, 1993 for the FWM Group.
For the year ended December 31, 1994, total revenues increased by $3.0
million, or 17.4%, from $17.2 million to $20.2 million, due primarily to an
increase in minimum rents of $4.1 million and tenant reimbursements of $0.9
million, partially offset by a decrease in third-party fees of $2.5 million due
to the change in the ownership of the Management Company from voting to
nonvoting stock and the related change in the method of accounting for the
Management Company, effective June 27, 1994. The increases were primarily due to
the purchase of the 1994 Acquisitions on June 27, 1994 resulting in six months
revenues being included in the year ended December 31, 1994.
Property operating and maintenance expense increased by $1.2 million, or
23.5%, from $5.1 million to $6.3 million, due primarily to the purchase of the
1994 Acquisitions on June 27, 1994 resulting in six months expenses being
included in the year ended December 31, 1994.
General and administrative expenses decreased by $1.3 million, or 48.1%,
from $2.7 million to $1.4 million, due primarily to the change in accounting for
the Management Company on June 27, 1994, resulting from the change in ownership
from voting to non-voting stock. Prior to June 27, 1994, the expenses of the
Management Company were consolidated with the Properties. Subsequent to June 27,
1994 and until December 31, 1994, activity of the Management Company is being
reflected using the cost method of accounting.
Interest expense increased by $1.4 million, or 17.7%, from $7.9 million to
$9.3 million, due primarily to the amortization of loan costs associated with
the $38.5 million Nomura Mortgage Loan (including amortization of the interest
rate cap in the amount of $0.5 million), issuance of $25.0 million Exchangeable
Debentures, assumption of $14.4 million of debt related to the 1994 Acquisitions
and amortization of deferred loan costs associated with the modification of
existing debt.
Depreciation and amortization expenses increased by $1.9 million, or 70.4%,
from $2.7 million to $4.6 million, primarily due to an increase in depreciable
basis due to the purchase of the 1994 Acquisitions. During 1994, distributions
of $1.8 million were paid to owners of the Convertible Preferred Stock and
Exchangeable Preferred Units. There was no similar items during the year ended
December 31, 1993. Income of $1.1 million was allocated to the minority interest
during the year ended December 31, 1994. There were no similar item during the
year ended December 31, 1993.
Net income decreased by $2.9 million from a net income of $1.4 million to a
net loss of $1.5 million, when compared to the year ended December 31, 1993,
primarily due to a distribution to holders of Convertible Preferred Stock, and
an allocation of income to minority interests.
Net cash flow provided by operating activities increased from $0.8 million
in 1993 to $3.2 million in 1994, primarily due to improved property performance
and income from the Management Company.
Net cash flows used in investing activities increased from $0.5 million in
1993 to $56.2 million in 1994 due primarily to the purchase of the 1994
Acquisitions in the amount of $76.1 million (net of debt assumed of $14.4
million) and the issuance of Exchangeable Preferred Units of $8.8 million.
Net cash flow provided by financing activities increased from a use of $0.5
million in the 1993 to a source of $53.6 million in 1994. The increase was
primarily due to proceeds from the Exchangeable Debentures, sale of Common
Stock, sale of Convertible Preferred Stock and new mortgage borrowings, offset
by repayments of mortgage notes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had total indebtedness of
approximately $187.3 million (including $25.0 million of debentures and
approximately $162.3 million of mortgages and lines of credit). The mortgage
indebtedness consisted of approximately $155 million in indebtedness
collateralized by 32 of the Properties and tax-exempt bond financing obligations
issued by the
42
<PAGE>
Philadelphia Authority for Industrial Development (the 'Bond Obligations') of
approximately $7.3 million collateralized by one of the properties. Of the
Company's mortgage indebtedness $26.8 million (14.3%) is variable rate
indebtedness, and $160.5 million (85.7%) is at a fixed rate. This indebtedness
has interest rates ranging from 5.0% to 9.6%, with a weighted average interest
rate (excluding the Bond Obligations) of 7.6%, and will mature between 1997 and
2021. A large portion of the Company's indebtedness will become due by 1999,
requiring payments of $3.2 million in 1997, $13.5 million in 1998 and $87.0
million in 1999. From 1997 through 2021, the Company will have to refinance an
aggregate of approximately $187.7 million. Since the Company anticipates that
only a small portion of the principal of such indebtedness will be repaid prior
to 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 additional offering of equity securities.
On June 27, 1994, the Company borrowed $38.5 million under new mortgage
loans (collectively, the 'Nomura Mortgage Loan') collateralized by five of the
properties. These loans, which bear interest at 30-day LIBOR (5.4% at September
30, 1996) plus 2.0% and mature on July 1, 1999, are closed to prepayment until
July 1, 1998 and can be prepaid thereafter based on a 1.50% declining prepayment
penalty. To mitigate its exposure to these variable rate loans, the Company
entered into a five year interest rate protection agreement for a notional
amount of $38.5 million that is effective through the loan's maturity, and caps
the interest rate at 6.20% until June 27, 1995, 6.70% until June 27, 1996 and
7.70% from July 1, 1996 until June 27, 1999. The financing cost of the interest
rate protection agreement of approximately $3.2 million, is being amortized over
the life of the agreement using the effective interest rate method resulting in
an effective interest rate on the Nomura Mortgage Loan of approximately 8.9% per
annum. The estimated fair market value of the interest rate protection
agreement, as determined by the issuing financial institution, was approximately
$0.7 million at October 11, 1996.
In December 1995, the Company entered into two interest rate swap contracts
with a notional amount of $38.5 million. The Company intends to hold such
contracts, the first of which commenced in July 1996 and expires in June 1999
and the second of which commences in July 1999 and expires in December 2003,
until their expiration dates. The purpose of the swaps is to fix the interest
rate on the $38.5 million Normura loan through its expiration date of June 1999
at 7.09% and to mitigate any interest rate exposure upon refinancing the loan by
fixing the LIBOR rate at 6.375% for the period beginning July 1999 through
December 2003. Under the terms of the interest rate contract, the Company will
be paying a fixed rate of 5.09% to the counter party to the contract (the
'Counter Party') through June 1999 and a fixed rate of 6.375% through December
2003. The Company will be receiving variable payments from the Counter Party
based on 30-day LIBOR through December 2003. The Counter Party has as collateral
a $2.4 million restriction on the $5.8 million line of credit it provided the
Company (see below). The fair market value of each of the interest rate swaps is
determined by the amount at which they could be settled. If the Company had
settled these agreements with the Counter Party on October 11, 1996, the Company
would have been paid approximately $0.9 million.
The Company currently has two collateralized revolving lines of credit (the
'Lines of Credit'). The Company currently has a collateralized revolving line of
credit of up to $5.8 million from First Union Bank. Loans under the line of
credit bear interest at LIBOR plus 2% per annum, and will mature on June 30,
1998. Loans under this line of credit are collateralized by a first mortgage
lien on one of the Properties. The loan agreement with respect to the line of
credit calls for the amount of the facility to be curtailed at any point when it
exceeds 75% of the appraised value of the collateral. During the second quarter,
of 1996 the Company closed an additional collateralized revolving line of credit
of approximately $7.0 million with Mellon Bank and facility was recently
increased to $8.25 million. The loan matures in April 1998. Loans under this
line of credit bear interest at LIBOR plus 2% per annum. As of September 30,
1996, $8.3 million was outstanding under the Lines of Credit. Definitive
agreements with respect to the Lines of Credit contain customary
representations, warranties and covenants.
43
<PAGE>
The Company expects to meet its short-term liquidity requirements generally
through its working capital, net cash provided by operations and draws on its
Lines of Credit. The Company believes that the foregoing sources of liquidity
will be sufficient to fund liquidity needs through 1997.
The Company expects, from time-to-time, to meet certain long-term liquidity
requirements such as development, property acquisitions, scheduled debt
maturities, renovations, expansions and other non-recurring capital improvements
through long-term secured and unsecured indebtedness, including the Lines of
Credit, and the issuance of additional equity securities (including units of the
Operating Partnership and the issuance of shares in this Offering). Any
additional issuances of equity securities (including Convertible Preferred Stock
and Common Units issued or to be issued in connection with the acquisition of
the New Retail Properties) will have the effect of reducing the current
stockholders' ownership percentage in the Company. The Company also expects to
use funds available under the Lines of Credit to fund acquisitions, development
activities and capital improvements on an interim basis. Although management
believes that the combination of these sources of funds will be sufficient to
meet the Company's liquidity needs and its growth plans, there can be no
assurance that such additional financing will be available or as to the terms of
such financing.
The table below sets forth the Company's capital expenditures from 1991
through the nine months ended September 30, 1996. The capital expenditures fall
into three categories: recurring, non-recurring and tenant improvements.
Recurring capital expenditures are typical repairs and replacements to a
property which have been capitalized for financial statement purposes such as
roof replacements, mechanical equipment replacements or repaving of a parking
lot. Non-recurring capital expenditures are not repair-type items but rather a
major renovation or cosmetic facelift of a property. Examples would include a
new facade, parking lot or significant expansion. Tenant improvements represent
funds expended on a particular tenant to induce a tenant to lease space at the
property, including painting, carpeting, floor covering, drop ceiling and
mechanical equipment. Such expenditures are typically for work done to the
interior of a particular space. The following table summarizes capital
expenditures since 1991:
<TABLE>
<CAPTION>
NON-
RECURRING PER RECURRING PER PER
CAPITAL SQUARE CAPITAL SQUARE TENANT SQUARE
EXPENDITURES FOOT EXPENDITURES FOOT IMPROVEMENTS FOOT
------------ ------ ------------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
1991...................... $ 819,000 $0.71 $178,000 $0.16 $136,000 $0.12
1992...................... 1,485,000 1.26 87,000 0.08 187,000 0.16
1993...................... 33,000 0.03 96,000 0.08 219,000 0.19
1994...................... 2,584,000 1.63 160,000 0.10 504,000 0.32
1995...................... 768,000 0.34 363,000 0.16 994,000 0.44
Nine months ended September
30, 1996.................. 1,540,000 0.47 429,000 0.13 1,065,000 0.32
</TABLE>
A majority of the non-recurring capital expenditures prior to 1995 was
spent on three projects: completion of Phase II of Penn Station in 1991, the
renovation and expansion of Bryans Road Shopping Center between 1992 and 1994.
Prior to 1995 a large portion of the recurring capital expenditures was for the
replacement of roof sections at two properties.
The Company is currently involved in a number of property renovations and
expansions. See 'Prospectus Summary--Recent Developments.'
The following table sets forth estimated capital expenditures (including
those financed through the Offering proceeds) for the year ending December 31,
1996:
NON-RECURRING RECURRING
CAPITAL CAPITAL TENANT
EXPENDITURES EXPENDITURES IMPROVEMENTS
------------- ------------ ------------
Year ending December 31, 1996....... $1,740,000 $500,000 $1,364,000
44
<PAGE>
INFLATION; ECONOMIC CONDITIONS
Most of the Company's leases contain provisions designed to partially
mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentagerents based on tenant's gross sales
above predetermined levels, which rents generally increase as prices rise, or
escalation clauses which are typically related to increases in the Consumer
Price Index
or similar inflation indices. Most of the Company's leases require the tenant to
pay its share of operating expenses, including common area maintenance, real
estate taxes and insurance, thereby reducing the Company's exposure to increases
in costs and operating expenses resulting from inflation. In addition, the
Company periodically evaluates its exposure to interest rate fluctuations, and
may enter into interest rate protection agreements which mitigate, but do not
eliminate, the effect of changes in interest rates on its floating rate loans.
The Company, as a general policy, endeavors to obtain long-term fixed rate
financing when obtainable.
Concurrent with its formation the Company purchased a five-year interest
rate cap for the Nomura Mortgage Loan. See '--Liquidity and Capital Resources.'
In addition, the cost of the cap of approximately $3.2 million was capitalized
and is being amortized over the 5-year term using the effective interest rate
method. This resulted in non-cash interest expense in the year ended December
31, 1995 and the nine months ended September 30, 1996 of approximately $930,000
and $529,000, respectively.
In December 1995, the Company entered into two interest rate swap contracts
with a notional amount of $38.5 million. See '--Liquidity and Capital
Resources.'
Upon acquisition of additional properties through debt financing or the
refinancing of existing debt, the Company will consider the purchase of
additional interest rate caps. The effect of these caps will be to reduce the
exposure the Company has to increases in interest rates. The purchase of
additional interest rate caps will require outlays of capital and could affect
the Company's ability to continue its current level of distributions. The costs
of any future interest rate caps are dependent upon a number of factors,
including fluctuations in interest rates, and may increase in the future.
The Company's financial results are affected by general economic conditions
in the markets in which its properties are located. An economic recession, or
other adverse changes in general or local economic conditions, could result in
the inability of some existing tenants of the Company to meet their lease
obligations and could otherwise adversely affect the Company's ability to
attract or retain tenants. The Retail Properties are typically anchored by
supermarkets, drug stores and other consumer necessity and service retailers
which typically offer day-to-day necessities rather than luxury items. These
types of tenants, in the experience of the Company, generally maintain more
consistent sales performance during periods of adverse economic conditions.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The persons who are directors and executive officers of the Company, their
ages (as of September 30, 1996) and their respective positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stuart D. Halpert...................... 53 Chairman of the Board
William J. Wolfe....................... 44 President, Chief Executive Officer and Director
James G. Blumenthal.................... 40 Executive Vice President and Chief Financial Officer
Lester Zimmerman....................... 46 Executive Vice President and Director
Jeffrey S. Distenfeld.................. 41 Senior Vice President, Secretary and General Counsel
James G. Pounds........................ 40 Senior Vice President
Stephen Mitnick........................ 35 Vice President
Stanley T. Burns(1).................... 52 Director
Matthew J. Hart(1)..................... 44 Director
William M. Russell(1).................. 60 Director
Heywood Wilansky(1).................... 48 Director
<FN>
- ----------
(1) Member of Compensation and Audit Committees.
</FN>
</TABLE>
The following is a summary of the business experience of the officers,
directors and key employees of the Company:
STUART D. HALPERT. Mr. Halpert is the Chairman of the Board of Directors of
the Company. He co-founded the Company's predecessor in 1983 and has been its
Chairman since its inception. He has been involved in the real estate industry
for over 20 years. Mr. Halpert has played an active role in the structuring of
FWM and the many real estate ventures in which its affiliates have participated.
In addition, Mr. Halpert has been actively involved with all aspects of the
Company's business, including acquisitions, asset management, financing and
third-party services. He shares overall responsibility for the Company's
day-to-day operations with Mr. Wolfe. Prior to the formation of the Company's
predecessor, Mr. Halpert was a practicing attorney specializing in real estate
transactions and banking matters. Prior to entering private practice, Mr.
Halpert served as Counsel to the House Banking Committee, U.S. Congress. Mr.
Halpert is a past member of the Board of Directors of the District of Columbia
National Bank and the National Bank of Commerce. Mr. Halpert is a member of the
International Council of Shopping Centers. He received his Bachelor's Degree
from Brown University and his Juris Doctor Degree from The George Washington
University Law School.
WILLIAM J. WOLFE. Mr. Wolfe is the President and Chief Executive Officer of
the Company. He is also the President, Chief Executive Officer and co-founder of
the Company's predecessor. Mr. Wolfe shares overall responsibility for the
Company's day-to-day operations with Mr. Halpert, and has been involved in the
acquisition, development, financing, construction, renovation, leasing and
management of over 75 retail properties. Prior to co-founding the Company's
predecessor, from 1979 to 1982, Mr. Wolfe was a principal in a real estate firm
that developed, renovated and managed office buildings and condominiums in
downtown Washington, D.C. Prior to entering the real estate business, Mr. Wolfe
served in the Executive Office of the President of the United States. Mr. Wolfe
is a member of the International Council of Shopping Centers, and is a past
member of the Board of Directors of the National Bank of Commerce. He received
his Bachelor's Degree from Clark University and his Master's Degree from Harvard
University.
JAMES G. BLUMENTHAL. Mr. Blumenthal is an Executive Vice President and the
Chief Financial Officer of the Company. Mr. Blumenthal joined the Company's
predecessor in 1986 and has served in a variety of positions including Senior
Asset Manager and Director of Acquisitions. He has responsibility for accounting
and financial reporting for the Company. Prior to joining the Company's
predecessor, Mr. Blumenthal was a practicing CPA with the firm of Grant
Thornton. He is a member of the American Institute of Certified Public
Accountants. Mr. Blumenthal received his
46
<PAGE>
Bachelor's Degree from The George Washington University and his Master's of
Science in Taxation from The American University.
LESTER ZIMMERMAN. Mr. Zimmerman is an Executive Vice President of the
Company and co-founder of the Company's predecessor and has primary
responsibility for the brokerage activities of the Company. He has over 16 years
of experience in the acquisition, management and disposition of commercial
properties. Mr. Zimmerman received his Bachelor's Degree from the College of
William and Mary. Mr. Zimmerman is a member of the National Multi-Housing
Council, the National Association of Real Estate Investment Trusts and the
National Housing and Rehabilitation Association. Prior to joining the Company's
predecessor, Mr. Zimmerman was an executive with the Xerox Corporation in
Washington, D.C and Sydney, Australia.
JEFFREY S. DISTENFELD. Mr. Distenfeld is a Senior Vice President, Secretary
and General Counsel of the Company. He joined the Company's predecessor in 1989
and is responsible for all legal matters. Prior to joining the Company's
predecessor, Mr. Distenfeld was a partner with the law firm of Lane and Edson,
P.C., where he specialized in real estate and financing transactions. He is a
member of the bar of, and qualified to practice in, Maryland, Virginia and the
District of Columbia. Mr. Distenfeld received his Bachelor's Degree from The
George Washington University and his Juris Doctor Degree from the University of
Virginia School of Law.
JAMES G. POUNDS. Mr. Pounds is a Senior Vice President of the Company and
has responsibility for its third-party management business. He joined the
Company's predecessor in 1988 and has had a variety of responsibilities,
including construction management and supervision of expansion and renovation
projects. Prior to joining the Company's predecessor, Mr. Pounds was a Vice
President of T.F. Stone, a real estate development firm, where he was
responsible for the development and construction of a variety of commercial and
multifamily projects. Prior to that, he was a project manager with HKS, Inc., an
architectural firm, where he was responsible for development and construction of
commercial office properties. Mr. Pounds received his Bachelor's Degree in
Engineering from the University of Kansas and Master's of Business
Administration and Master's of Architecture from the University of Illinois.
STEPHEN MITNICK. Mr. Mitnick is a Vice President of the Company and has
responsibility for property acquisitions and financings. Prior to joining the
Company in 1995, Mr. Mitnick had been engaged for over ten years in real estate
consulting, mortgage finance, and property acquisition and disposition. Mr.
Mitnick received his Bachelor's Degree from the University of Pennsylvania and
Master's of Business Administration degree from The Wharton School with a
concentration in finance and real estate.
STANLEY T. BURNS. Mr. Burns is principal of The Calloway Group, a
consulting firm specializing in business strategy and finance. Mr. Burns is the
former president and chief executive officer of United Savings Bank in Virginia,
and served for over 22 years with Chase Manhattan Bank, N.A. and affiliates. In
1985, Mr. Burns negotiated the acquisition of three banks in Maryland on behalf
of the Chase Manhattan Corporation, which banks were then merged to form Chase
Bank of Maryland, where he served as president and chief executive officer until
1988. He received his undergraduate degree from Duke University and a Master's
Degree from Johns Hopkins University. He is the co- author of Educating Managers
and currently serves on the faculty of Johns Hopkins University.
MATTHEW J. HART. Mr. Hart is the Executive Vice President and Chief
Financial Officer of Hilton Hotel Corporation. Mr. Hart is primarily responsible
for Hilton's corporate finance and development activities. Prior to joining
Hilton, Mr. Hart was Senior Vice President and Treasurer of the Walt Disney
Company. Prior to joining Disney, Mr. Hart was Executive Vice President and
Chief Financial Officer of Host Marriott Corporation (formerly known as Marriott
Corporation). He was responsible for the company's corporate and project
financing activities, as well as the corporate control and the corporate tax
functions. Before joining Marriott Corporation, Mr. Hart had been a lending
officer with Bankers Trust Company in New York. Mr. Hart received his
undergraduate degree from Vanderbilt University and a Master's of Business
Administration from Columbia University.
47
<PAGE>
WILLIAM M. RUSSELL. Mr. Russell is the Senior Real Estate Advisor of Aetna,
Inc. Prior to his current position, Mr. Russell was chairman of the Real Estate
and Mortgage Investment Committee of the Aetna Life & Casualty Companies. Over
the term of his association with Aetna, Mr. Russell has held senior positions in
virtually every area of its real estate operations, including supervising
Aetna's $23 billion mortgage portfolio and serving as past president of Aetna
Property Services, a subsidiary engaged in the on-site management of Aetna-owned
properties and former chairman of AE Properties, Inc., a subsidiary engaged in
real estate development. Mr. Russell is a member of the board of directors and
past president of the Connecticut Housing Investment Fund. Mr. Russell was the
Governor's appointee to the Connecticut Blue Ribbon Commission on Housing, and
he is co-chairman of the Hartford Downtown Development Task Force.
HEYWOOD WILANSKY. Mr. Wilansky is the President, Chief Executive Officer
and a Director of the Bon-Ton Stores, Inc. a retail department store. Prior to
joining Bon-Ton Stores in August, 1995 Mr. Wilansky had been the president and
chief executive officer of Foley's Department Store, a 50 store division of May
Department Stores Company since 1992. Mr. Wilansky is the former president and
chief executive officer of Filene's Department Store and the former executive
vice president for merchandising of Lord & Taylor. Prior to that, Mr. Wilansky
held various positions with Hecht's Department Store of Washington, D.C., most
recently serving as senior vice president and general merchandise manager. Mr.
Wilansky received his Bachelor's Degree from Canaan College.
BOARD OF DIRECTORS AND COMMITTEES
The Company is managed by a seven member Board of Directors, a majority of
whom are independent of the Company's management. Messrs. Burns, Hart, Russell
and Wilansky comprise the Company's current independent directors (the
'Independent Directors'). The Board of Directors is divided into three classes
serving staggered three-year terms. See 'Certain Provisions of Maryland Law and
the Company's Charter and Bylaws--Classification of the Board of Directors.' The
Board is composed of two Class I directors (Messrs. Zimmerman and Russell), two
Class II directors (Messrs. Wolfe and Hart), and three Class III directors
(Messrs. Halpert, Burns and Wilansky), whose terms will expire upon the election
of directors at the annual meeting of stockholders held following the fiscal
years ending December 31, 1998, 1999 and 1997, respectively. At each annual
meeting of stockholders, directors will be reelected or elected for a full term
of three years to succeed those Directors whose terms are expiring. Messrs.
Wolfe and Hart were reelected for a full term of three years at the Company's
1996 annual meeting.
Audit Committee. The Board of Directors has established an Audit Committee
consisting of Messrs. Burns, Hart, Russell and Wilansky. The Audit Committee
makes recommendations concerning the engagement of independent public
accountants, reviews with independent public accountants the plans and results
of the audit engagement, approves professional services provided by the
independent accountants, reviews the independence of the independent
accountants, considers the range of audit and non-audit fees, and reviews the
adequacy of the Company's internal accounting controls.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee was established in November, 1994 and consists of Messrs.
Burns, Hart, Russell, and Wilansky, none of whom is or has been an officer or
employee of the Company. For a description of the background of each of these
individuals, see '--Directors and Executive Officers.' To the Company's
knowledge, there were no interrelationships involving members of the
Compensation Committee or other directors of the Company requiring disclosures
in this Prospectus.
COMPENSATION OF DIRECTORS
The Company compensates its directors who are not officers of the Company
with fees for their services as directors. The fee paid to each of such
directors currently is $12,000 annually. The Chairmen of the Audit and
Compensation Committees also receive $1,000 per meeting of their respective
committees. Under the Stock Incentive Plan described below, non-employee
directors receive, upon initial election to the Board of Directors, an option
to purchase 2,500 shares of
48
<PAGE>
Common Stock. The exercise price per share of all these options will be equal to
the market price at the time of grant. The exercise price for the options
granted to each of the existing Independent Directors is $19.50 per share. Each
option has a term of 10 years.
COMPENSATION OF OFFICERS
Executive Officers. The Company was organized as a Maryland corporation in
April 1994. The Company did not pay any cash compensation to its executive
officers for the year ended December 31, 1993, and did not commence paying
salaries until June 1994, immediately following the consummation of the series
of transactions by which the Company was formed. The following table sets forth
the salary paid, and stock options granted, to the Chief Executive Officer and
the other four most highly compensated executive officers of the Company (the
'Named Executive Officers') for the years-ended December 31, 1994 and December
31, 1995. Messrs. Halpert and Wolfe are the only employees that have employment
agreements.
The Named Executive Officers are employed and compensated by both the
Company and the Management Company. The Company believes that the effective
allocation of such executives' compensation as among such entities reflects the
services provided by such executives with respect to each entity.
49
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
COMPENSATION OPTIONS(4) STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY(2) BONUS (3) (#) GRANTS(5) COMPENSATION
- --------------------------- ------- ----------- ----- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William J. Wolfe................ 1995 $ 190,000 $ 50,000(6) -- -- 22,417 --
President and Chief 1994 73,328 -- 146,475 -- --
Executive Officer
Stuart D. Halpert............... 1995 190,000 50,000(6) -- -- 22,417 --
Chairman of the 1994 73,328 -- 146,475 -- --
Board
Lester Zimmerman................ 1995 111,548 -- -- -- 14,140 $ 217,442(7)
Executive Vice 1994 57,500 -- -- -- -- 102,291(7)
President and Director
Jeffrey S. Distenfeld........... 1995 126,458 -- -- -- 2,564 --
Senior Vice 1994 57,500 -- -- 5,130 -- --
President,
General Counsel
James G. Pounds................. 1995 115,000 -- -- -- 2,564 --
Senior Vice 1994 57,500 -- -- 5,130 -- --
President
<FN>
----------
(1) The Company was founded in April, 1994 and therefore no information is
available with respect to prior fiscal years. The Company paid advisory
and management fees to FWM of $1,178,000 in 1995. Certain of the named
individuals listed in this table have certain ownership interests in FWM.
See 'Certain Relationships and Related Transactions.'
(2) Salaries paid in 1994 were based on annual salaries for Messrs. Wolfe and
Halpert of $190,000 and Messrs. Zimmerman, Distenfeld and Pounds of
$115,000. Includes compensation that was accrued and deferred pursuant to
the Company's 401(k) Plan.
(3) Consists of the annual lease value of company-owned automobiles, membership
fees to professional organizations, and certain medical and life insurance
benefits. The aggregate value of such benefits does not exceed the lesser of
$50,000 or 10% of the total annual salary for the named individual.
(4) Represents options which were granted under the Company's 1994 Stock
Incentive Plan at an exercise price equal to $19.50 per share (the per share
price of Common Stock in the June 1994 Offering). See '--1994 Stock
Incentive Plan.' Concurrently with the formation of the Company, the Company
issued options to purchase 146,475 shares of Common Stock to each of Messrs.
Halpert and Wolfe pursuant to their employment agreements. The term of each
such option is 10 years from the date of grant. Such options vest 33 1/3%
per year over three years and are exercisable at $19.50 per share. In
December 1994, the Company issued options to purchase 5,130 shares of Common
Stock to each of Messrs. Distenfeld and Pounds. The term of each such option
is 10 years from the date of grant. Such options vest 331/3% per year over
three years and are exercisable at $19.50 per share.
(5) Represents shares granted pursuant to the 1994 Contingent Stock Awards. The
table does not include 133,334 shares of Common Stock that may be awarded
to the Named Executive Officers (or their designees) during the three years
following the formation of the Company if certain performance objectives are
satisfied pursuant to the 1994 Contingent Stock Awards. Also does not
include 128,400 shares of Common Stock that may be awarded to the Named
Executive Officers pursuant to the 1996 Restricted Stock Plan, and 60,000
shares of Common Stock that may be awarded to the Named Executive Officers
during the two years following March 31, 1998 if certain performance
objectives are satisfied pursuant to the 1996 Contingent Stock Awards. See
'--Employment Agreements.'
(6) As explained below under '--Employment Agreements.'
(7) Mr. Zimmerman, in his capacity as a licensed real estate broker, received
such amount as sales commissions in connection with sales of properties for
third-party owners. Mr. Zimmerman receives a share of sales commissions
which exceed a predetermined threshold amount.
</FN>
</TABLE>
OPTION GRANTS IN 1995
The Named Executive Officers did not receive any options to purchase Common
Stock for the fiscal year ended December 31, 1995. The Company does not have any
outstanding stock appreciation rights.
50
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information related to the number of
unexercised stock options at December 31, 1995 for each of the Named Executive
Officers listed below. No shares were acquired upon exercise of stock options
during 1995, and the 1995 fiscal year-end value of unexercised options was zero:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS AT
FY-END
-------------
EXERCISABLE/
NAME UNEXERCISABLE
- ---- -------------
<S> <C>
Stuart D. Halpert............................................ 97,650/48,825
William J. Wolfe............................................. 97,650/48,825
Jeffrey S. Distenfeld.................................... ... 3,420/1,710
James G. Pounds.............................................. 3,420/1,710
</TABLE>
EMPLOYMENT AGREEMENTS
Messrs. Halpert and Wolfe have entered into amended employment agreements
with the Company effective June 30, 1996. The employment agreements will expire
in 1999 and contain non-competition provisions applicable during, and for 18
months following, such officer's employment by the Company.
The employment agreements provide that, under certain circumstances Messrs.
Halpert and Wolfe shall receive a severance benefit equal to the greater of (a)
200% of the sum of (x) employee's annual base salary at the time of such
termination plus (y) the average annual bonus or (b) the sum of (x) the annual
base salary that the employee would otherwise have been entitled to receive from
the time of such termination through the end of the term of the employment
agreement plus (y) the average annual bonus annualized from the time of such
termination through the end of the employment term. If Mr. Halpert or Mr. Wolfe
is terminated prior to the expiration of his employment agreement, he shall
continue to receive medical benefits until the date his term of employment
otherwise would have expired.
Each of the employment agreements provides for an annual base salary in the
amount of $250,000. The Compensation Committee has discretionary authority to
award bonuses to Messrs. Halpert and Wolfe of up to 100% of their base salary,
with a targeted annual bonus of 50% of annual base salary, subject to a maximum
bonus of $77,500 to each of Messrs. Halpert and Wolfe for bonus payments earned
from July 1, 1995 through December 31, 1996. The employment agreements provide
that the criteria governing the Compensation Committee's bonus decisions shall
be performance-based, based upon such measures as:(i) growth in funds from
operations, (ii) growth in total return (measured as the sum of the annual
dividend plus increases in the market price of the Company's portfolio), and
(iii) growth in portfolio based upon the original cost of such property.
In addition, each employment agreement provides for: (i) the issuance of
contingent shares pursuant to the 1994 Contingent Stock Awards and the 1996
Contingent Stock Awards as described below; (ii) the issuance of restricted
stock pursuant to the 1996 Restricted Stock Plan as described below and (iii)
the issuance of options pursuant to the 1994 Stock Incentive Plan as described
below.
1994 Contingent Stock Awards. In connection with the formation of the
Company, 200,000 shares of Common Stock (the 'Contingent Shares') were reserved
for issuance to Messrs. Halpert and Wolfe (or their designees), during the
three-year period following the formation of the Company based upon the
achievement of certain performance objectives for each of such three years (the
'1994 Contingent Stock Awards'). One-third of the Contingent Shares have been
issued to Messrs. Halpert and Wolfe (and their designees) as of the first
anniversary date of the formation of the Company. Specifically, Messrs. Halpert
and Wolfe each have received 22,417 shares of Common Stock, Lester Zimmerman has
received 14,140 shares of Common Stock and Jeffrey S. Distenfeld, James G.
Blumenthal and James G. Pounds each received 2,564 shares of Common Stock. At
the end of the third year following formation of the Company, Messrs. Halpert
and Wolfe shall be issued a
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<PAGE>
number of additional Contingent Shares such that the aggregate amount of
Contingent Shares issued (including all previously issued Contingent Shares) is
as follows: (i) one-third of the Contingent Shares if Funds From Operations
increased by 7%--14% between July 1, 1994 and June 30, 1997; (ii) two-thirds of
the Contingent Shares if Funds From Operations increased by 14%--21% between
July 1, 1994 and June 30, 1997; and (iii) all of the Contingent Shares if Funds
From Operations increased by 21% or more between July 1, 1994 and June 30, 1997.
It is anticipated that the Company will meet the performance criteria required
to issue the remaining Contingent Shares to Messrs. Halpert and Wolfe (and their
designees) in 1997.
1996 Contingent Stock Agreements. In April 1996, the stockholders of the
Company approved Contingent Stock Agreements (the '1996 Contingent Stock
Awards') between the Company and each of Messrs. Halpert and Wolfe. Messrs.
Halpert's and Wolfe's Agreements are identical. The principal features of the
1996 Contingent Stock Awards are summarized below but the description is
qualified in its entirety by reference to the 1996 Contingent Stock Agreements
themselves which are filed as Exhibits to the Registration Statement of which
this Prospectus forms a part.
As of April 1, 1996, 60,000 shares of Common Stock were reserved for grant
under the 1996 Contingent Stock Agreements (30,000 shares for each of Messrs.
Halpert and Wolfe). No shares of Common Stock have been granted under the 1996
Contingent Stock Agreements.
The 1996 Contingent Stock Agreements are administered by the Compensation
Committee of the Board of Directors (the 'Committee'). The 1996 Contingent Stock
Awards provide that each of Messrs. Halpert and Wolfe will be granted Common
Stock on the dates and in the amounts set forth in the table below if the
Committee determines that the Company has materially met certain targeted
performance criteria, set forth in the Company's annual budgeted financial
projections which shall include, but not be limited to, rental and other
revenues and net operating income during the performance periods shown in the
following table:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF CONTINGENT
DATE OF GRANT PERFORMANCE PERIOD STOCK TO BE GRANTED
------------- ------------------ --------------------
<S> <C> <C>
March 31, 1998 07/01/97--12/31/97 5,000
March 31, 1999 01/01/98--12/31/98 12,500
March 31, 2000 01/01/99--12/31/99 12,500
</TABLE>
The Common Stock will not be issued until the Contingent Stock Award has vested,
and Messrs. Halpert and Wolfe will have no voting or dividend rights prior to
the time which the vesting conditions are satisfied. Ungranted Contingent Stock
may be transferred only by will or by the laws of descent and distribution.
The following table sets forth the shares of Common Stock received pursuant
to the Contingent Stock Agreements:
<TABLE>
<CAPTION>
NUMBER OF
DOLLAR SHARES OF
NAME VALUE COMMON STOCK
- ---- ------ ------------
<S> <C> <C>
Stuart D. Halpert.......................................... (1) 30,000
William J. Wolfe........................................... (1) 30,000
======
Executive Group............................................ (1) 60,000
Non-Executive Director Group............................... -- --
Non-Executive Officer Employee Group....................... -- --
<FN>
- ----------
(1) The dollar value of the shares of Contingent Stock granted depends upon the
future market price of the Common Stock and therefore is not presently
determinable.
</FN>
</TABLE>
1996 Restricted Stock Plan. The Company has established a restricted stock
plan (the '1996 Restricted Stock Plan') to further the growth, development and
financial success of the Company by providing additional incentives to certain
of its employees, and to enable the Company to obtain and
52
<PAGE>
retain the services of the type of officers considered essential to the
long-range success of the Company.
Only those officers and employees who are selected from time to time by the
Compensation Committee, acting in its absolute discretion, may participate in
the Plan. It is currently anticipated the approximately seven officers and
employees of the Company will be eligible to participate in the Plan. On June
30, 1996, Messrs. Halpert and Wolfe were each granted 39,200 shares of
Restricted Stock under the Plan pursuant to the terms of their employment
agreements. As of September 30, 1996, 50,000 shares of Common Stock were
reserved for grants of restricted stock to officers and employees of the Company
under the Plan.
Their employment agreements provide that each of Messrs. Halpert and Wolfe
will be granted shares of restricted stock under the Plan pursuant to Restricted
Stock Agreements (the 'Restricted Stock Agreements'). Under the terms of Messrs.
Halpert and Wolfe's identical Restricted Stock Agreements shares of Common Stock
were sold to Messrs. Halpert and Wolfe on June 30, 1996, at a purchase price
equal to the par value ($.01 per share) of the Common Stock, subject to the
restrictions on vesting described below. The restricted stock granted to each of
Messrs. Halpert and Wolfe shall vest, and all restrictions with respect to such
shares shall expire, in accordance with the schedule set forth below:
NUMBER OF AGGREGATE NUMBER OF
VESTING DATE VESTED SHARES VESTED SHARES
------------ ------------- -------------------
July 1, 1997 5,000 5,000
March 31, 1998 11,400 16,400
March 31, 1999 11,400 27,800
March 31, 2000 11,400 39,200
1994 Stock Incentive Plan. The Company has reserved 351,540 shares of
Common Stock for issuance under a stock incentive plan (the '1994 Stock
Incentive Plan') to enable executive officers, directors, key employees of the
Company and all employees of the Operating Partnership (if any) and the
Management Company to participate in the ownership of the Company. The 1994
Stock Incentive Plan provides for the award to such executive officers,
directors and employees of the Company and the Management Company (subject to
the Ownership Limit) of nonqualified stock options and incentive stock options.
An optionee under the 1994 Stock Incentive Plan may, with the consent of the
Compensation Committee, elect to pay for the shares to be received upon exercise
of his or her options in cash, shares of Common Stock, or any combination
thereof.
Concurrently with the formation of the Company, the Company issued options
to purchase 146,475 shares of Common Stock to each of Messrs. Halpert and Wolfe
pursuant to their employment agreements. Such options vest 33 1/3% per year over
three years and are exercisable at $19.50 per share. In December 1994 the
Company issued options to purchase 5,130 shares of Common Stock to each of
Messrs. Distenfeld and Pounds. Such options vest 33 1/3% per year and are
exercisable at $19.50 per share.
In addition, upon the election of Messrs. Burns, Hart, Russell, and
Wilansky (the 'Independent Directors') to the Board of Directors in September
1994, the Company issued each Independent Director options to purchase 2,500
shares of Common Stock pursuant to the Stock Incentive Plan. See '--Compensation
of Directors.'
Retirement Plan. The Company has established the First Washington Realty
Trust, Inc. Retirement Plan (the '401(k) Plan') to cover employees of the
Company and the Management Company. The 401(k) Plan will permit employees of the
Company and the Management Company to defer a portion of their compensation, in
accordance with Section 401(k) of the Code. Such deferrals are treated for
federal income tax purposes as employer contributions. In addition,
participating employers are eligible to make a matching contribution and the
employer can make additional discretionary contributions. Employees of the
Company and the Management Company will be eligible to participate in the 401(k)
Plan if they meet certain requirements concerning period of service and other
matters.
53
<PAGE>
ADDITIONAL INFORMATION
Prior to the formation of the Company, Messrs. Halpert, Wolfe, and
Zimmerman were general partners of SP Associates Limited Partnership, the
Lower-Tier Partnership which owns the Penn Station Shopping Center. In August
1992, SP Associates Limited Partnership filed a voluntary bankruptcy petition
under Chapter 11 of the United States Bankruptcy Code as a result of its
lender's unwillingness to extend the non-recourse loan in the ordinary course on
terms and conditions acceptable to the partnership, and in August 1993 a Plan of
Reorganization was approved pursuant to which the loan was extended and each
creditor was to receive 100% of the payments owing to it.
Prior to the formation of the Company, Mr. Halpert was a general partner of
Elizabeth Associates Limited Partnership and Jamestown Associates Limited
Partnership, the partnerships which previously owned the portion of the
Georgetown Shops Property located at 1529 Wisconsin Avenue, N.W. and 3033 M
Street, N.W., respectively. In February 1992, Elizabeth Associates Limited
Partnership and Jamestown Associates Limited Partnership, which were parties to
a blanket loan on the property, each filed a voluntary bankruptcy petition under
such Chapter 11 as a result of its lender's unwillingness to extend the
non-recourse loan in the ordinary course on terms and conditions acceptable to
such partnerships. The partnerships and the lender reached a consensual
agreement in May 1993, and the petitions were dismissed prior to the filing of
any Plan of Reorganization.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision eliminating the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from: (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The charter of the
Company contains such a provision which limits such liability to the maximum
extent permitted by the MGCL. This provision does not limit the ability of the
Company or its stockholders to obtain other relief, such as an injunction or
rescission.
The bylaws of the Company obligate it to the maximum extent permitted by
Maryland law to indemnify and to pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to: (a) any present or former director or
officer or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise. The charter and
bylaws also permit the Company to indemnify and advance expenses to any person
who served a predecessor of the Company in any of the capacities described above
and to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that: (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
(i) was committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain: (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the Company as authorized by the bylaws and (b) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
Company if it shall ultimately be
54
<PAGE>
determined that the standard of conduct was not met. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted. It is the position of the
Commission that indemnification of directors and officers for liabilities
arising under the Securities Act is against public policy and is unenforceable
pursuant to Section 14 of the Securities Act of 1933, as amended.
The limited partnership agreement of the Operating Partnership (the
'Partnership Agreement') also provides for indemnification of the Company, as
general partner, and its officers and directors generally to the same extent as
permitted by the MGCL for a corporation's officers and directors and limits the
liability of the Company to the Operating Partnership and its partners in the
case of losses sustained, liabilities incurred or benefits not derived as a
result of errors in judgment or mistakes of fact or law or any act or omission
if the Company acted in good faith.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing, conflicts
of interest and other policies of the Company. These policies have been
determined by the Company's Board of Directors and generally may be amended or
revised from time to time by the Board of Directors without a vote of the
stockholders.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. The Company will
conduct all its investment activities through the Operating Partnership for as
long as the Operating Partnership exists. The Company's investment objective is
to achieve stable and increasing cash flow available for distributions and, over
time, to increase portfolio value through the intensive management, expansion
and renovation of its properties, by developing or selectively acquiring
additional retail or multifamily properties, or by expanding its third-party
management, leasing and related service business. See 'The Company--Growth
Strategies.'
The Company expects to pursue its investment objectives through the direct
or indirect ownership of properties. The Company currently intends to primarily
invest in or acquire retail properties concentrated in the Mid-Atlantic region.
However, future development or investment activities will not be limited to any
geographic area or product type or to a specified percentage of the Company's
assets. The Company will not have any limit on the amount or percentage of its
assets invested in one property. 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--Taxation of the Company.' 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.
Investments in Others. The Company also may participate with other entities
in property ownership, through joint ventures or other types of ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness which have priority over the equity of the Company. The Company
will not enter into a joint venture or partnership to make an investment that
would not otherwise meet its investment policies.
Investments in Real Estate Mortgages. While the Company has emphasized
equity real estate investments, it may, in its discretion, invest in mortgages
and other real estate and related interests, including securities of other
REITS. The Company has not previously invested in mortgages or securities of
other REITs and the Company does not presently intend to invest to a significant
extent in mortgages or securities of other REITS. The Company may invest in
participating or convertible mortgages if it concludes that it may benefit from
the cash flow or any appreciation in the value of the subject property.
55
<PAGE>
Interim Investments. Pending disbursement for investment as described
herein, the Company may invest funds in deposits at commercial banks, money
market accounts, certificates of deposit, government securities or other liquid
investments (including GNMA, FNMA, and FHLMC mortgage-backed securities) as the
Board of Directors deems appropriate.
FINANCING POLICIES
The Company's policy is to maintain a ratio of debt (excluding the
Exchangeable Debentures) to total market capitalization of approximately 50% or
less. Upon completion of the Offering and use of the proceeds contemplated
thereby, the ratio of the Company's debt (including the Exchangeable Debentures)
to total market capitalization will be approximately 51.1%, and the ratio of the
Company's debt (excluding the Exchangeable Debentures) to total market
capitalization will be approximately 44.8%. The Company may, however, from time
to time re-evaluate its borrowing policies in light of then current economic
conditions, relative costs of debt and equity capital, the market value of its
properties, growth and acquisition opportunities and other factors. There is no
limit on the Company's ratio of debt-to-total market capitalization, and
accordingly the Company may modify its borrowing policy and may increase or
decrease its ratio of debt-to-total market capitalization. The Company may raise
such capital through additional equity offerings, debt financing or retention of
cash flow subject to provisions in the Code concerning transferability of
undistributed REIT income, or a combination of these methods.
The Company presently anticipates that most additional borrowings would be
made through the Operating Partnership, although the Company may incur
indebtedness, the proceeds of which may be reloaned to the Operating
Partnership. Borrowings may be unsecured or may be secured by any or all of the
Properties and may have full or limited recourse to all or any assets of the
Company, the Operating Partnership or any new property-owning partnership. The
Company anticipates that all or substantially all of the proceeds of any future
sale of shares of capital stock will be transferred to the Operating Partnership
in exchange for Units in the Operating Partnership.
The Company intends to finance future acquisitions with the most
advantageous sources of capital available at the time, which may include
undistributed cash or the reinvestment of the proceeds from the disposition of
assets. The Company may incur additional indebtedness to finance acquisitions
through secured or unsecured borrowings, the exchange of properties or issuance
of additional partnership units in the Operating Partnership, shares of Common
Stock, shares of preferred stock or other securities. In addition to the
Exchangeable Debentures, which rank senior to the Common Stock and the
Convertible Preferred Stock, the Company may also issue additional securities
senior to the shares of Common Stock and Convertible Preferred Stock, including
preferred shares and debt securities (either of which may be convertible into
beneficial interests in the Company or be accompanied by warrants to purchase
beneficial interest in the Company). The Company may acquire properties subject
to seller financing, existing loans secured by mortgages, deeds of trust or
similar liens. The Company may also obtain mortgage financing for properties it
acquires and refinance its existing properties.
To the extent the Company determines to obtain additional debt financing,
the Company may do so generally through mortgage loans secured by liens on
properties. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.' These mortgage loans
may be recourse or non-recourse and may be cross-collateralized or contain
cross-default provisions. The Company does not have a policy limiting the number
or amount of mortgages that may be placed on any particular property, but
mortgage financing instruments usually limit additional liens on such
properties. Future credit facilities and lines of credit may be used for the
purpose of making acquisitions or capital improvements or to provide working
capital.
The Company may incur indebtedness for purposes other than the acquisition
of properties when it deems it advisable to do so. For example, the Company may
borrow to meet the REIT taxable income distribution requirement under the Code
if the Company has taxable income without receipt of cash sufficient to meet
these distribution requirements. For short-term purposes, from time to time the
Company may borrow under lines of credit or arrange for other short-term
56
<PAGE>
borrowings from banks or other sources. The Company's financing strategy may be
reviewed from time to time and changed by the Board of Directors without a vote
of the stockholders.
CONFLICTS OF INTEREST POLICIES
The Company has adopted certain policies designed to reduce potential
conflicts of interest. In general, the Company will not: (i) engage in any
transaction with any director, officer or affiliate thereof involving the sale
or disposition of an equity interest in Company property to such person; or (ii)
sell any of the FWM Properties, without approval of a majority of the Company's
disinterested directors, and other transactions between the Company and any
director or officer, or affiliate thereof, generally must be approved by a
majority vote (or in certain cases by a unanimous vote) of the disinterested
directors (including a majority of the Independent Directors) as being fair,
competitive, and commercially reasonable and no less favorable to the Company
than similar transactions between unaffiliated parties under the same
circumstances. Such restrictions do not apply where such director, officer or
affiliate has acquired the property for the sole purpose of facilitating its
acquisition by the Company, and the total consideration paid by the Company does
not exceed the cost of the property to such person (where the cost is increased
by the person's holding costs and decreased by any income received by the person
from the property) and no special benefit results to such person.
Stuart D. Halpert, the Company's Chairman of the Board, and William J.
Wolfe, the Company's President and Chief Executive Officer, will be subject to
certain conflict of interest restrictions as set forth in their employment
agreements with the Company. See 'Management--Employment Agreements.' Certain of
the Company's independent directors generally may engage in real estate
transactions which may be of the type conducted by the Company, but it is not
anticipated that such transactions will have a material affect upon the
Company's operations.
There can be no assurance that these conflicts of interest policies will
successfully eliminate the influence of potential conflicts of interest, and, if
they are not successful, decisions could be made that might fail to reflect
fully the interests of all stockholders.
DEVELOPMENT POLICIES
The Company anticipates that it will invest primarily in existing retail
properties, although it also may invest in newly constructed properties or
properties under development. See 'The Company--Growth Strategies.' The Company
may in the future pursue additional development projects.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer shares of Common Stock and Convertible
Preferred Stock or other securities and to repurchase or otherwise reacquire its
shares of Common Stock and Convertible Preferred Stock or any other securities
and may engage in such activities in the future. The Company expects (but is not
obligated) to issue shares of Common Stock to holders of Common Units in the
Operating Partnership upon exercise of their exchange rights. As of September
30, 1996 the Company had issued 37,547 shares of Common Stock in exchange for
Common Units. The Company has issued 394,189 shares of Convertible Preferred
Stock and the Operating Partnership has issued 400,207 Common Units and 69,215
Exchangeable Preferred Units in connection with the acquisition of the Existing
Retail Properties. The Company has no outstanding loans to other entities or
persons, including its officers and trustees. The Company may in the future make
loans to other persons with the approval of the independent directors. The
Company has not engaged in trading, underwriting or agency distribution or sale
of securities of other issuers other than the Operating Partnership, nor has the
Company invested in the securities of other issuers other than the Operating
Partnership and Management Company for the purpose of exercising control, and
does not intend to do so.
The Company intends to make investments in such a way that it will not be
treated as an investment company under the Investment Company Act of 1940.
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<PAGE>
The Company has delivered and intends to continue to deliver annual reports
to its stockholders. At all times, the Company intends to make investments in
such a manner as to qualify as a REIT, unless because of circumstances or
changes in the Code (or the Treasury Regulations), the Board of Directors
determines that it is no longer in the best interest of the Company to qualify
as a REIT.
The Company's policies with respect to all of the above activities may be
reviewed and modified from time to time by the Company's Board of Directors
without a vote of the stockholders.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PARTNERSHIP AGREEMENT; EXCHANGE RIGHTS
Messrs. Halpert, Wolfe, Zimmerman, Blumenthal, Distenfeld and Pounds are
limited partners in the Operating Partnership and, as such, are parties to the
Partnership Agreement. Among other things, the Partnership Agreement provides
such holders of Common Units with the right to have their Common Units redeemed
for cash, or, at the election of the Company, to exchange their Common Units for
shares of Common Stock (on a one-for-one basis). See 'Risk Factors--Conflicts of
Interest,' and 'Risk Factors--Influence of Executive Officers.'
CERTAIN PROPERTIES NOT TRANSFERRED TO THE COMPANY
Messrs. Halpert, Wolfe, and Zimmerman are the sole owners of the sole
general partner of FW Realty Limited Partnership, which is a general partner in
the Mid-Atlantic Centers Limited Partnership (the 'MAC Partnership'). The MAC
Partnership owns nine properties managed by the Management Company. Certain
conflicts of interest may arise regarding the payment by the MAC Partnership of
management fees to the Company. See 'Risk Factors--Conflicts of Interest.'
Messrs. Halpert, Wolfe, and Zimmerman hold a minority ownership interest in
an office building with approximately 45,000 square feet of GLA. The Management
Company provides management and leasing services for this property at market
rates. The property was not transferred to the Company at the time of its
formation because it is not part of the Company's portfolio of neighborhood and
community shopping centers, and it is inconsistent with the Company's investment
objectives, as set forth herein under 'The Company--Growth Strategies.'
MANAGEMENT COMPANY
All of the voting common stock of the Management Company is owned by
Messrs. Halpert, Wolfe, and Zimmerman, which enables such individuals to control
the election of the board of directors of the Management Company. The Operating
Partnership owns all of the non-voting preferred stock of the Management
Company, which is generally entitled to dividends equal to 99% of the net cash
flow of the Management Company. Messrs. Halpert and Wolfe have a right of first
refusal with respect to the remaining capital stock of the Management Company.
OTHER
The Company paid legal fees in excess of $60,000 during 1995 to the law
firm of Latham & Watkins. Mr. William J. Wolfe's brother, Mr. Scott N. Wolfe, is
a partner of Latham & Watkins.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Common Stock by each of the Company's executive officers, and
directors, by the Company's executive officers, directors and directors as a
group, and by all persons known by the Company to be the beneficial owner of
more than five percent of the Company's outstanding shares of Common Stock as of
September 30, 1996. To the Company's knowledge, each person identified in the
table has sole voting and investment power with respect to all shares shown as
beneficially owned by such person, except as otherwise set forth in the notes to
the table. Unless otherwise indicated, the address of each person listed below
is 4350 East-West Highway, Suite 400, Bethesda, Maryland 20814:
<TABLE>
<CAPTION>
PERCENTAGE OF ALL
PERCENTAGE OF ALL SHARES OF COMMON
SHARES OF STOCK
NUMBER OF SHARES COMMON STOCK OUTSTANDING AFTER
NAME OF COMMON STOCK(1) OUTSTANDING THE OFFERING(2)
------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Stuart D. Halpert(2)(5).......................... 227,774 6.7% 4.6%
William J. Wolfe(2)(5)........................... 227,774 6.7 4.6
Lester Zimmerman................................. 55,397 1.7 1.2
Jeffrey S. Distenfeld(2)(5)...................... 9,311 * *
James G. Pounds(2)(5)............................ 9,311 * *
James G. Blumenthal(2)(5)........................ 9,311 * *
Stanley T. Burns(3).............................. 2,500 * *
Matthew J. Hart(3)............................... 3,000 * *
William M. Russell(3)............................ 3,500 * *
Heywood Wilansky(3).............................. 2,500 * *
All executive officers and directors as a group
(10 persons)................................... 550,378 15.7% 11.0%
Farallon Capital Management, Inc.(4)............. 643,346 19.5% 13.4%
One Maritime Plaza
Suite 1325
San Francisco, CA 94111
<FN>
- ----------
* Denotes less than one percent.
(1) Includes shares of Common Stock issuable upon conversion of partnership
units ('Common Units') in the Operating Partnership. As of September 30,
1996, Common Units owned by the executive officers and directors were as
follows: Stuart D. Halpert--3,198, William J. Wolfe--3,198, Lester Zimmerman
--2,318, Jeffrey S. Distenfeld--3,077, James G. Pounds--3,077, and James G.
Blumenthal--3,077.
(2) Includes options to purchase shares of Common Stock (which are exercisable
within 60 days) as follows: Stuart D. Halpert--97,650, William J. Wolfe--
97,650, Jeffrey S. Distenfeld--1,710, James G. Pounds--1,710 and James G.
Blumenthal--1,710.
(3) Includes options to purchase 2,500 shares of Common Stock (which are
exercisable within 60 days).
(4) Consists of 196,254 shares held by Farallon Capital Partners, 195,182 shares
held by Farallon Capital Institutional, 42,107 shares held by Tinicum
Partners, 185,803 shares held by Farallon Capital Institutional Partners II,
and 24,000 shares held by Farallon Capital Management L.L.C. Each of the
foregoing entities are separate partnerships over which Farallon Capital
Management, Inc. has trading authority. Farallon Capital Management, Inc.
disclaims beneficial ownership over all such shares.
(5) Includes restricted shares of Common Stock held by Stuart D.
Halpert--39,200, William J. Wolfe--39,200, Jeffrey S. Distenfeld--1,960,
James G. Pounds--1,960 and James G. Blumenthal--1,960.
</FN>
</TABLE>
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Maryland law and to the Company's charter and the Company's
bylaws, copies of which are exhibits to the Registration Statement filed in
connection with the June 1994 Offering. See 'Additional Information.'
GENERAL
The charter of the Company provides that the Company may issue up to
100,000,000 shares of capital stock, consisting of 90,000,000 shares of common
stock, par value $0.01 per share (the 'Common Stock'), and 10,000,000 shares of
preferred stock, par value $0.01 per share. As of September 30, 1996, 3,291,245
shares of Common Stock and 2,314,189 shares of Convertible Preferred Stock were
issued and outstanding. Under Maryland law, stockholders generally are not
liable for the corporation's debts or obligations solely as a result of their
status as stockholders. In determining whether a distribution (other than upon
voluntary or involuntary liquidation), by distribution, redemption or other
acquisition of shares or otherwise, is permitted under the MGCL, the amount of
the aggregate liquidation preference of the Convertible Preferred Stock will not
be counted as a liability of the Company.
COMMON STOCK
Subject to the preferential rights of any other shares or series of capital
stock, holders of shares of Common Stock are entitled to receive distributions
on such shares if, as and when authorized and declared by the Board of Directors
of the Company out of assets legally available therefor and to share ratably in
the assets of the Company legally available for distribution to its stockholders
in the event of its liquidation, dissolution or winding-up after payment of, or
adequate provision for, all known debts and liabilities of the Company. Holders
of shares of Convertible Preferred Stock are entitled to participate in amounts
available for distribution on the Common Stock in excess of $0.4875 per share of
Common Stock with respect to any quarterly distribution payment, based on the
number of shares of Common Stock (or fraction thereof ) into which each share of
Convertible Preferred Stock is (or will be) convertible. See '--Convertible
Preferred Stock--Distributions.'
Subject to the matters discussed under 'Certain Provisions of Maryland Law
and the Company's Charter and Bylaws--Control Share Acquisitions,' each
outstanding share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors, and,
except as otherwise required by law or except as provided with respect to any
other class or series of stock, the holders of such shares of Common Stock
possess the exclusive voting power. There is no cumulative voting in the
election of directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares of Common Stock will not be
able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, sinking
fund, redemption, exchange or preemptive rights to subscribe for any securities
of the Company. All shares of a particular class of issued Common Stock have
equal dividend, distribution, liquidation and other rights.
Pursuant to the MGCL, a corporation generally cannot (except under and in
compliance with specifically enumerated provisions of the MGCL) dissolve, amend
its charter, merge, sell all or substantially all of its assets, engage in a
share exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Company's charter
provides for approval of any such action by a majority of the votes entitled to
be cast in the matter, except in the case of amendment of the charter provisions
relating to removal of directors, classification of the Board of Directors,
voting rights of the Common Stock or voting
61
<PAGE>
requirements for charter amendments. In addition, a number of other provisions
of the MGCL could have a significant effect on the shares of Common Stock and
the rights and obligations of holders thereof. See 'Certain Provisions of
Maryland Law and the Company's Charter and Bylaws.'
The transfer agent and registrar for the shares of Common Stock is American
Stock Transfer & Trust Company.
CONVERTIBLE PREFERRED STOCK
Distributions. Holders of shares of the Convertible Preferred Stock are
entitled to receive, when and as declared by the Board of Directors, out of
assets legally available for the payment of distributions, cumulative
preferential cash distributions in an amount per share of Convertible Preferred
Stock equal to $0.6094 per quarter ($2.4375 per annum) plus a participating
distribution equal to the amount, if any, of distributions in excess of $0.4875
per quarter payable on the applicable Distribution Payment Date with respect to
the number of shares of Common Stock (or fraction thereof) into which a share of
Convertible Preferred Stock is then (or will be) convertible. The amount of
participating distribution payable on any Distribution Payment Date will equal
the number of shares of Common Stock, or fraction thereof, into which a share of
Convertible Preferred Stock is then (or will be) convertible, multiplied by the
quarterly distribution in excess of $0.4875 per share paid with respect to a
share of Common Stock on such Distribution Payment Date. As a result of such
participation right of the Convertible Preferred Stock, distributions on
Convertible Preferred Stock and Common Stock will be made out of cash available
for distribution as follows: (i) first, the outstanding shares of Convertible
Preferred Stock will receive $0.6094 per share per quarter; (ii) second, the
outstanding shares of Common Stock will receive $0.4875 per share per quarter;
and (iii) third, any remaining cash available for distribution will be shared
equally among the outstanding shares of Common Stock and Convertible Preferred
Stock as if all of the outstanding shares of Convertible Preferred Stock were
converted into shares of Common Stock. Distributions with respect to the
Convertible Preferred Stock are cumulative from the date of original issuance of
such stock and are payable quarterly in arrears on the fifteenth day of each
August, November, February, and May or, if such day is not a business day, on
the next succeeding business day (each, a 'Distribution Payment Date').
If, for any taxable year, the Company elects to designate as 'capital gains
dividends' (as defined in Section 857 of the Code) any portion (the 'Capital
Gains Amount') of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of stock (the 'Total
Dividends'), then the portion of the Capital Gains Amount that will be allocable
to the holders of Convertible Preferred Stock will be the Capital Gains Amount
multiplied by a fraction, the numerator of which shall be the total dividends
(within the meaning of the Code) paid or made available to the holders of the
Convertible Preferred Stock for the year and the denominator of which shall be
the Total Dividends.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, subject to the prior rights of any series of capital stock
ranking senior to the Convertible Preferred Stock, the holders of shares of
Convertible Preferred Stock will be entitled to be paid out of the assets of the
Company legally available for distribution to its stockholders a liquidation
preference equal to the sum of $25.00 per share plus an amount equal to any
accrued and unpaid distributions thereon (whether or not earned or declared) to
the date of payment (the 'Convertible Preferred Liquidation Preference Amount'),
before any distribution of assets is made to holders of Common Stock or any
other capital stock that ranks junior to the Convertible Preferred Stock as to
liquidation rights. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Convertible Preferred
Stock will have no right or claim to any of the remaining assets of the Company.
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<PAGE>
Redemption. The Convertible Preferred Stock is not redeemable prior to July
15, 1999, except under certain limited circumstances to preserve the Company's
status as a REIT, as described below under '--Restrictions on Ownership,
Transfer and Conversion.' On and after July 15, 1999, the Company, at its option
(to the extent the Company has assets legally available therefor) upon not less
than 30 nor more than 60 days' written notice, may redeem shares of the
Convertible Preferred Stock, in whole or in part, at any time or from time to
time, for cash at the redemption price per share specified below, plus all
accrued and unpaid distributions, if any, thereon (whether or not earned or
declared) to the date fixed or redemption, if redeemed during the twelve-month
period beginning on July 15, of each year specified below:
<TABLE>
<CAPTION>
YEAR PRICE
<S> <C>
1999...................................... .......................... $27.44
2000................................................................. 26.95
2001................................................................. 26.46
2002................................................................. 25.98
2003................................................................. 25.49
2004 and thereafter.................................................. $25.00
</TABLE>
The Convertible Preferred Stock has no stated maturity and will not be
subject to any sinking fund. In addition to the redemption provision described
above, shares of Convertible Preferred Stock will be subject to redemption under
certain circumstances in order to preserve the Company's status as a REIT. See
'--Restrictions on Ownership, Transfer and Conversion.'
Voting Rights. Holders of the Convertible Preferred Stock do not have any
voting rights, except as set forth below. In any matter in which the Convertible
Preferred Stock may vote, including any action by written consent, each share of
Convertible Preferred Stock is entitled to one vote. The holders of each share
of the Convertible Preferred Stock may separately designate a proxy for the vote
to which that share of Convertible Preferred Stock is entitled.
Whenever distributions on any shares of the Convertible Preferred Stock
have been in arrears for six or more quarterly periods, the holders of such
shares of Convertible Preferred Stock (voting separately as a class with all
other series of preferred stock upon which rights to vote on such matter with
the Convertible Preferred Stock have been conferred and are then exercisable,
with each series having a number of votes proportional to the aggregate
liquidation preference of its outstanding shares) will be entitled to elect two
additional directors of the Company at a special meeting called by the holders
of record of at least 10% of the outstanding shares of Convertible Preferred
Stock and such other preferred stock, if any (unless such request is received
less than 90 days before the date fixed for the next annual or special meeting
of the stockholders), or at the next annual meeting of stockholders, and at each
subsequent annual meeting until all distributions accumulated on such shares of
the Convertible Preferred Stock for the past distribution periods and the then
current distribution period have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment. In such event, the
number of directors of the Company will be increased by two. Such right to elect
two directors will continue until payment of the distribution arrearage for the
Convertible Preferred Stock, at which time the term of any such directors shall
expire.
Conversion. Subject to the exceptions described under '--Restrictions on
Ownership, Transfer and Conversion,' holders of the Convertible Preferred Stock
have the right, as provided in the charter, exercisable on or after May 31,
1999, except in the case of Convertible Preferred Stock called for redemption,
to convert all or any of the outstanding shares of Convertible Preferred Stock
(with each share of Convertible Preferred Stock valued for purposes of
conversion at the Convertible Preferred Liquidation Preference Amount (currently
$25.00 per share) determined immediately following the most recent Convertible
Preferred Distribution Payment Date) into shares of Common Stock at a conversion
price of $19.50 per share of Common Stock, subject to adjustment upon the
occurrence of certain events. In the case of Convertible Preferred Stock called
for redemption, conversion rights will expire at the close of business on the
third business day immediately preceding the date fixed for redemption.
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<PAGE>
Restrictions on Ownership, Transfer and Conversion. As discussed below
under '--Restrictions on Ownership, Transfer and Conversion,' because the
Company intends to continue to qualify as a REIT under the Code, the Company's
charter contains certain provisions described more fully in that section
restricting the ownership, transfer and conversion of the Convertible Preferred
Stock and other classes of capital stock of the Company.
All certificates representing shares of Convertible Preferred Stock bear a
legend referring to the ownership, transfer and conversion restrictions
applicable to such shares.
Rank. The Convertible Preferred Stock, with respect to dividend rights and
distributions upon liquidation, dissolution, and winding up, ranks (i) senior to
the Common Stock, all other shares of Common Stock of the Company of all classes
and series, and shares of all other classes or series of capital stock issued by
the Company other than any series of capital stock the terms of which
specifically provide that the capital stock of such series rank senior to or on
a parity with such Convertible Preferred Stock with respect to dividend rights
or distributions upon liquidation, dissolution, or winding up of the Company, as
the case may be; (ii) on a parity with the shares of all other capital stock
issued by the Company the terms of which specifically provide that the shares
rank on a parity with the Convertible Preferred Stock with respect to dividends
and distributions upon liquidation, dissolution, or winding up of the Company or
make no specific provision as to their ranking; and (iii) junior to any capital
stock issued by the Company the terms of which specifically provide that the
shares rank senior to the Convertible Preferred Stock with respect to dividends
and distributions upon liquidation, dissolution, or winding up of the Company,
as the case may be (the issuance of which must have been approved by a vote of
at least a majority of the outstanding shares of Convertible Preferred Stock).
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Board of Directors has the power under the charter to authorize the
Company to issue additional authorized but unissued shares of Common Stock and
preferred stock (including any unissued shares of any series of preferred stock,
to the extent permitted by the terms of such series) and to classify or
reclassify unissued shares of Common or preferred stock and thereafter to cause
the Company to issue such classified or reclassified shares of stock. Prior to
the issuance of such shares of Common Stock and shares or series of preferred
stock, the Board of Directors is required by the MGCL and the charter of the
Company to fix, the terms, preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each share or series.
The Company believes that this power of the Board of Directors will provide the
Company with increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the Common Stock, will be available for issuance
without further action by the Company's stockholders (provided, however, that
the issuance of additional series of preferred stock with rights senior to the
Convertible Preferred Stock is subject to the approval of the holders of
Convertible Preferred Stock), unless such action is required by applicable law
or the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded. Although the Board of Directors
has no intention at the present time of doing so, it could authorize the Company
to issue a class or series that could, depending upon the terms of such class or
series, delay or impede a transaction or a change of control of the Company that
might involve a premium price for the Common Stock and Convertible Preferred
Stock or otherwise be in the best interest of the stockholders.
RESTRICTIONS ON OWNERSHIP, TRANSFER AND CONVERSION
For the Company to qualify as a REIT under the Code, not more than 50% in
value of the issued and outstanding capital stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year and the capital stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months (or during a proportionate part of a shorter
taxable year). In addition, rent
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<PAGE>
from Related Party Tenants (as defined below under 'Federal Income Tax
Considerations--Taxation of the Company --Income Tests') is not qualifying
income for purposes of the gross income tests of the Code. See 'Federal Income
Tax Considerations--Taxation of the Company--Requirements for Qualification.'
Because the Board of Directors believes it is essential for the Company to
qualify as a REIT, the Board of Directors has adopted, and the stockholders
prior to the June 1994 Offering have approved, provisions in the Company's
charter restricting the acquisition and ownership of shares of the Company's
capital stock.
Subject to certain exceptions specified in the Company's charter, no holder
may own, either actually or constructively under the applicable attribution
rules of the Code, more than 9.8% (by number or value, whichever is more
restrictive) of the outstanding shares of Common Stock (the 'Common Ownership
Limit'). Except as described below, the Common Ownership Limit will not apply,
however, to holders of shares of Common Stock who acquire shares of Common Stock
in excess of the Common Ownership Limit solely by reason of the conversion of
shares of Convertible Preferred Stock owned by such holder into shares of Common
Stock.
Subject to certain exceptions specified in the Company's charter, no holder
may acquire, either actually or constructively under the applicable attribution
rules of the Code, more than 9.8% (by number or value, whichever is more
restrictive) of the outstanding shares of Convertible Preferred Stock (the
'Convertible Preferred Ownership Limit'). Except as described below, there shall
be no restrictions on the ability of a holder of shares of Convertible Preferred
Stock to convert such shares into shares of Common Stock even if, as a result of
such conversion, the holder will own shares of Common Stock in excess of the
Common Ownership Limit. However, no person may actually or constructively
acquire or own shares of Convertible Preferred Stock or shares of Common Stock,
or convert Convertible Preferred Stock into Common Stock, to the extent that the
aggregate value of Convertible Preferred Stock and Common Stock actually and
constructively owned by such person would exceed 9.8% of the total value of the
outstanding shares of the capital stock of the Company (the 'Aggregate Stock
Ownership Limit'). Under certain circumstances, this limitation could prevent a
person who owns shares of Convertible Preferred Stock from converting a portion
of such shares into shares of Common Stock.
If, as a result of a purported acquisition (actual or constructive) of
capital stock, any person (a 'Prohibited Transferee') would acquire, either
actually or constructively under the applicable attribution rules of the Code,
shares of capital stock in excess of an applicable ownership restriction, such
shares will be automatically transferred to a trust for the benefit of a
charitable beneficiary, effective as of the close of business on the business
day prior to the purported acquisition by the Prohibited Transferee. While such
stock is held in trust, the trustee shall have all voting rights with respect to
the shares, and all dividends or distributions paid on such stock will be paid
to the trustee of the trust for the benefit of the charitable beneficiary (any
dividend or distribution paid on shares of capital stock prior to the discovery
by the Company that such shares have been automatically transferred to the trust
shall, upon demand, be paid over to the trustee for the benefit of the
charitable beneficiary). Within 20 days of receiving notice from the Company of
the transfer of shares to the trust, the trustee of the trust is required to
sell the shares held in the trust to a person who may own such shares without
violating the ownership restrictions (a 'Permitted Holder'). Upon such sale, the
price paid for the shares by the Permitted Holder shall be distributed to the
Prohibited Transferee to the extent of the lesser of (i) the price paid by the
Prohibited Transferee for the shares or, in the case of a transfer of shares to
a trust resulting from an event other than an actual acquisition of shares by a
Prohibited Transferee, the fair market value, on the date of transfer to the
trust, of the shares so transferred or (ii) the fair market value of the shares
on the date of transfer by the trustee to the Permitted Holder. Any proceeds in
excess of this amount shall be paid to the charitable beneficiary.
An automatic repurchase of shares by the Company will occur to the extent
necessary to prevent any violation of the Convertible Preferred Ownership Limit,
Common Stock Ownership Limit, or the Aggregate Stock Ownership Limit as the
result of events other than the actual or constructive acquisition of capital
stock by the holder, such as changes in the relative value of
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different classes of the Company's capital stock. In the event of any such
automatic repurchase, the repurchase price of each share will be equal to the
market price on the date of the event that resulted in the repurchase. Any
dividend or other distribution paid to a holder of repurchased shares (prior to
the discovery by the Company that such shares have been automatically
repurchased by the Company as described above) will be required to be repaid to
the Company upon demand.
If shares of capital stock which would cause the Company to be beneficially
owned by less than 100 persons are issued or transferred to any person, such
issuance or transfer shall be null and void to the intended transferee, and the
intended transferee would acquire no rights to such stock.
The Board of Directors may waive the Common Ownership Limit or the
Convertible Preferred Ownership Limit or the Aggregate Stock Ownership Limit
with respect to a particular stockholder if evidence satisfactory to the Board
of Directors 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 Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the REIT status of the Company.
In addition to any of the foregoing ownership limits, no holder may own,
either actually or constructively under the applicable attribution rules of the
Code, any shares of any class of the Company's capital stock if such ownership
or acquisition (i) would cause more than 50% in value of the Company's
outstanding capital stock to be owned, either actually or constructively under
the applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain entities), (ii) would result in the
Company's capital stock being beneficially owned by less than 100 persons
(determined without reference to any rules of attribution), or (iii) would
otherwise result in the Company failing to qualify as a REIT. Acquisition or
ownership (actual or constructive) of the Company's capital stock in violation
of these restrictions will result in automatic transfer of such stock to a trust
for the benefit of a charitable beneficiary, automatic repurchase of the
violative shares by the Company, or the violative transfer will be deemed void
ab initio, as described above.
If the Board of Directors shall at any time determine in good faith that a
person intends to acquire or own, has attempted to acquire or own, or may
acquire or own capital stock of the Company in violation of the above described
limits, the Board of Directors shall take such action as it deems advisable to
refuse to give effect or to prevent such ownership or acquisition, including but
not limited to causing the Company to repurchase stock, refusing to give effect
to such ownership or acquisition on the books of the Company, or instituting
proceedings to enjoin such ownership or acquisition.
The constructive ownership rules are complex and may cause Common Stock or
Convertible Preferred Stock owned actually or constructively by a group of
related individuals and/or entities to be constructively owned by one individual
or entity. As a result, the acquisition of less than 9.8% of the outstanding
Common Stock or less than 9.8% of the outstanding Convertible Preferred Stock
(or the acquisition of an interest in an entity which owns Common Stock or
Convertible Preferred Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to constructively own
Common Stock or Convertible Preferred Stock in excess of the limits described
above, and thus subject such stock to the Common Ownership Limit, the
Convertible Preferred Ownership Limit, or the Aggregate Stock Ownership Limit.
All certificates representing shares of the Company's capital stock bear a
legend referring to the restrictions described above.
All persons who own a specified percentage (or more) of the outstanding
shares of the stock of the Company must file a completed questionnaire annually
with the Company containing information regarding their ownership of such
shares, as set forth in the Treasury Regulations. Under current Treasury
Regulations, the percentage will be set between 0.5% and 5.0%, depending on the
number of record holders of shares. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information with
respect to the actual and
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constructive ownership of shares as the Board of Directors deems necessary to
comply with the provisions of the Code applicable to a REIT or to comply with
the requirements of any taxing authority or governmental agency.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of Common Stock or Convertible Preferred Stock might receive a premium for their
shares over the then prevailing market price or which such holders might believe
to be otherwise in their best interest.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to various registration rights agreements the Company has shelf
registration statements effective (or has agreed to file a registration
statement) that cover: (i) the resale of shares of Convertible Preferred Stock
and shares of Common Stock and the issuance of shares of Common Stock upon
exchange of Common Units that were issued in private placements at the time of
and since the formation of the Company and (ii) the exchange of the Exchangeable
Debentures and Exchangeable Preferred Units for Convertible Preferred Stock. The
Company has also agreed to file a registration statement with respect to the
exchange of Common Units issued in connection with the acquisition of the New
Retail Properties. The Company is obligated to use its best efforts to
maintain the effectiveness of such registration statements. The exchange of such
outstanding securities for Common Stock and Convertible Preferred Stock will
increase the number of outstanding shares of Common Stock and Convertible
Preferred Stock, and will increase the Company's percentage ownership interest
in the Operating Partnership.
NYSE LISTING
The Common Stock is listed on the NYSE under the symbol 'FRW.' The
Preferred Stock is listed on the NYSE under the symbol 'FRW pfA.' The current
rules of the NYSE effectively preclude the listing on the NYSE of any securities
of an issuer which has issued securities or taken other corporate action that
would have the effect of nullifying, restricting or disparately reducing the per
share voting rights of holders of an outstanding class or classes of equity
securities registered under Section 12 of the Securities Exchange Act of 1934,
as amended (the 'Exchange Act'). The Company does not intend to issue any
additional securities that would make it ineligible for inclusion on the NYSE or
any national securities exchange or national market system. However, in the
event the Company issues additional securities that cause it to become
ineligible for continued inclusion on NYSE, such ineligibility would be likely
to reduce materially the liquidity of an investment in the Common Stock and
would likely depress its market value below that which would otherwise prevail.
SHARES AVAILABLE FOR FUTURE SALE
Thereare currently 2,314,189 shares of Convertible Preferred Stock issued
and outstanding and 3,291,245 shares of Common Stock issued and outstanding.
Sales of a substantial number of shares of Common Stock, or the perception that
such sales could occur, could adversely affect prevailing prices for the Common
Stock. The Company has reserved: (i) 709,716 shares of Common Stock for issuance
upon exchange of Common Units issued in connection with the formation of the
Company, and in connection with property acquisitions, (ii) 2,966,909 shares of
Common Stock for issuance upon conversion of outstanding Convertible Preferred
Stock issued in connection with the formation of the Company and in connection
with property acquisitions (which becomes convertible on or after May 31, 1999),
(iii) 1,822,068 shares of Common Stock for issuance upon conversion of reserved
Convertible Preferred Stock, (reserved for exchange of Exchangeable Preferred
Units and the Exchangeable Debentures issued in connection with the Formation
and subsequent property acquisitions), (iv) 123,077 shares of Common Stock for
issuance upon conversion of the FS Note, and (v) 594,874 shares of Common Stock
for issuance under the Company's 1994 Stock Incentive Plan, 1994 Contingent
Stock Awards and 1996 Contingent Stock Awards. Certain members of management are
permitted to sell only one-third of their shares of Common Stock or Common Units
issued in connection with the formation of the Company
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(including a redemption of Common Units for cash) at the end of each of the
three years following the formation of the Company.
Pursuant to various registration rights agreements the Company has shelf
registration statements effective (or has agreed to file a registration
statement) that cover: (i) the resale of shares of Convertible Preferred Stock
and shares of Common Stock and the issuance of shares of Common Stock upon
exchange of Common Units that were issued in private placements at the time of
and since the formation of the Company and (ii) the exchange of the Exchangeable
Debentures and Exchangeable Preferred Units for Convertible Preferred Stock. The
Company has also agreed to file a registration statement with respect to the
exchange of Common Units issued in connection with the acquisition of the New
Retail Properties. The Company is obligated to use its best efforts to maintain
the effectiveness of each of such registration statements for at least three
years following the effective date. The exchange of such outstanding securities
for Common Stock and Convertible Preferred Stock will increase the number of
outstanding shares of Common Stock and Convertible Preferred Stock, and will
increase the Company's percentage ownership interest in the Operating
Partnership.
In addition, the officers and directors of the Company and their affiliates
have agreed with the Underwriters not to sell shares of Common Stock for the
90-day period following the Offering. The Company has also agreed with the
Underwriters not to issue new shares of Common Stock (except pursuant to the
exchange or conversion of outstanding securities, the issuance of shares of
Common Stock pursuant to employee benefit plans and in connection with future
acquisitions) for a period of 90 days following the Offering.
The Company has also filed a registration statement with respect to the
shares of Common Stock issuable under the Stock Incentive Plan, which shares may
be resold without restriction, unless held by affiliates and intends to file a
registration statement with respect to all other shares of Common Stock issued
or issuable under the Company's employee benefit plans. See 'Management.' Such
shares of Common Stock will be freely transferable by the holders thereof.
CERTAIN PROVISIONS OF MARYLAND LAW AND
THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's charter and bylaws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law and
to the Company's charter and bylaws, copies of which are exhibits to the
registration statement of which this Prospectus is a part. See 'Additional
Information.'
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's bylaws provide that the number of directors of the Company
may be established by the Board of Directors but may not be fewer than the
minimum number required by MGCL (which under most circumstances is three
directors) nor more than fifteen. Any vacancy will be filled, at any regular
meeting or at any special meeting called for that purpose, by a majority of the
remaining directors, except that a vacancy resulting from an increase in the
number of directors will be filled by a majority vote of the entire Board of
Directors. Pursuant to the terms of the charter, the directors are divided into
three classes. One class held office initially for a term which expired at the
annual meeting of stockholders held in May 1995 (and the directors of such class
were reelected for a full term of three years). Another class held office for a
term which expired at the annual meeting of stockholders held in 1996 (and the
directors of such class were reelected for a full term of three years) and
another class will hold office initially for a term expiring at the annual
meeting of stockholders to be held in 1997. As the term of each class expires,
directors in that class will be elected for a term of three years and until
their successors are duly elected and qualify. The Company believes that
classification of the Board of Directors will help to assure the continuity and
stability of the Company's business strategies and policies as determined by the
Board of Directors.
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The classified director provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. At least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of Common Stock will have no right to cumulative voting for
the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of shares of Common Stock will be able to elect all of
the successors of the class of directors whose term expires at that meeting.
REMOVAL OF DIRECTORS
The charter provides that a director may be removed only for cause (as
defined in the charter) and only by the affirmative vote of at least two-thirds
of the votes entitled to be cast in the election of directors. This provision,
when coupled with the provision in the bylaws authorizing the Board of Directors
to fill vacant directorships, precludes stockholders from removing incumbent
directors and filling the vacancies created by such removal with their own
nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain 'business combinations' (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an 'Interested Stockholder') or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder becomes an Interested Stockholder. Thereafter,
any such business combination must be recommended by the Board of Directors of
such corporation and approved by the affirmative vote of at least: (a) 80% of
the votes entitled to be cast by holders of outstanding voting shares of the
corporation and (b) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its shares. These provisions of Maryland law
do not apply, however, to business combinations that are approved or exempted by
the Board of Directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Board of Directors has
exempted from these provisions of the MGCL any business combination with the
Principals and other officers of the Company, any present or future affiliate or
associate of theirs or any other person acting in concert or as a group with any
of the foregoing persons. As a result, these persons may be able to enter into
business combinations with the Company, which may not be in the best interest of
the stockholders, without compliance by the Company with the super-majority vote
requirement and the other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that 'control shares' of a Maryland corporation acquired
in a 'control share acquisition' have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. 'Control Shares' are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third,
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(ii) one-third or more but less than a majority, or (iii) a majority of all
voting power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A 'control share acquisition' means the acquisition of control shares, subject
to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights previously have
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or of any meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid in
the control share acquisition, and certain limitations and restrictions
otherwise applicable to the exercise of dissenters' rights do not apply in the
context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
The business combination statute and the control share acquisition statute
could have the effect of discouraging others to acquire the Company and of
increasing the difficulty of consummating any offer.
AMENDMENT TO THE CHARTER
Certain provisions of the Company's charter, including its provisions on
classification of the Board of Directors, removal of directors, voting rights of
Common Stock and voting requirements for charter amendments, may be amended only
by the affirmative vote of the holders of not less than two-thirds of all of the
votes entitled to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of not less than a majority of all of the votes entitled to be cast
on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The bylaws of the Company provide that: (a) with respect to an annual
meeting of stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders may be
made only: (i) pursuant to the Company's notice of the meeting, (ii) by the
Board of Directors, (iii) by a stockholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in the
bylaws, and (b) with respect to special meetings of stockholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of stockholders, and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by the Board of Directors, or (iii) provided that the Board of Directors
has determined that directors shall be elected to such meeting, by a stockholder
who is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the bylaws.
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The provisions in the charter on classification of the Board of Directors
and removal of directors, the business combination and the control share
acquisition provisions of the MGCL, and the advance notice provisions of the
bylaws could have the effect of discouraging a takeover or other transaction in
which holders of some, or a majority, of the Common Stock might receive a
premium for their Common Stock over the then prevailing market price or which
such holders might believe to be otherwise in their best interests.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Company and the Common Stock being registered by the Company is
based on current law. The information set forth below, to the extent that it
constitutes matters of law, summaries of legal matters or legal conclusions, is
the opinion of Latham & Watkins, tax counsel to the Company, as to the material
federal income tax considerations relevant to purchasers of the Common Stock.
This discussion does not purport to deal with all aspects of taxation that may
be relevant to particular stockholders in light of their personal investment or
tax circumstances, or to certain types of stockholders (including insurance
companies, financial institutions or broker-dealers, tax-exempt organizations,
foreign corporations and persons who are not citizens or residents of the United
States, except to the extent discussed under the headings 'Taxation of
Tax-Exempt Stockholders' and 'Taxation of Non-U.S. Stockholders') subject to
special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF THE SHARES OF COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the 'Code'),
commencing with its taxable year ended December 31, 1994. The Company believes
that it has been organized and has operated in such a manner as to qualify for
taxation as a REIT under the Code commencing with such taxable year, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that it has operated or will continue to operate in such a manner so as to
qualify or remain qualified.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof. Latham &
Watkins has acted as tax counsel to the Company in connection with the Company's
election to be taxed as a REIT.
In the opinion of Latham & Watkins, commencing with the Company's taxable
year ended December 31, 1994, the Company has been organized in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation has enabled and will enable it to meet the requirements for continued
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various factual assumptions relating to the
organization and operation of the Company, the Operating Partnership, the Lower
Tier Partnerships, and the Management Company and is conditioned upon certain
representations made by the Company as to factual matters. In addition, this
opinion is based upon the factual representations of the Company concerning its
business and properties as set forth in this Prospectus and assumes that the
actions described in this Prospectus have been completed as described. Moreover,
such qualification and taxation as a REIT depends upon the Company's ability to
meet, through actual annual operating results, distribution levels and diversity
of stock ownership, the various qualification tests imposed under the Code
discussed below, the results of which have not been and will not be reviewed by
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Latham & Watkins. Accordingly, no assurance can be given that the actual results
of the Company's operation for any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described in this
Prospectus may be changed, perhaps retroactively, by legislative or
administrative action at any time. See '--Failure to Qualify.'
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the 'double
taxation' (at the corporate and stockholder levels) that generally results from
investment in a corporation. However, the Company will be subject to federal
income tax as follows: first, the Company will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the 'alternative minimum tax' on its items of tax preference. Third, if the
Company has (i) net income from the sale or other disposition of 'foreclosure
property' which is held primarily for sale to customers in the ordinary course
of business or (ii) other nonqualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth, if
the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on an
amount equal to (a) the gross income attributable to the greater of the amount
by which the Company fails the 75% or 95% test multiplied by (b) a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to an
asset (a 'Built-In Gain Asset') acquired by the Company from a corporation which
is or has been a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in certain transactions in which the basis of the Built-In
Gain Asset in the hands of the Company is determined by reference to the basis
of the asset in the hands of the C corporation, if the Company recognizes gain
on the disposition of such asset during the ten-year period (the 'Recognition
Period') beginning on the date on which such asset was acquired by the Company,
then, to the extent of the Built-In Gain (i.e., the excess of (a) the fair
market value of such asset over (b) the Company's adjusted basis in such asset,
determined as of the beginning of the Recognition Period), such gain will be
subject to tax at the highest regular corporate tax pursuant to Internal Revenue
Service ('IRS') regulations that have not yet been promulgated. The results
described above with respect to the recognition of Built-In Gain assume that the
Company will make an election pursuant to IRS Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or constructively, by
five or fewer individuals (as defined in the Code to include certain entities);
and (7) which meets certain other tests, described below, regarding the nature
of its income and assets. The Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of twelve months, or
during a proportionate part of a taxable year of less than twelve months.
Conditions (5) and (6) do not apply until after the first taxable year for which
an election is made to be taxed as a REIT. For purposes of conditions (5) and
(6), pension funds and certain other
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tax-exempt entities are treated as individuals, subject to a 'look-through'
exception in the case of condition (6).
The Company has satisfied condition (5) and believes that it has issued
sufficient shares to allow it to satisfy condition (6). In addition, the
Company's charter provides for restrictions regarding ownership and transfer of
shares, which restrictions are intended to assist the Company in continuing to
satisfy the share ownership requirements described in (5) and (6) above. Such
ownership and transfer restrictions are described in 'Description of Capital
Stock--Restrictions on Ownership, Transfer and Conversion.' These restrictions
may not ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above, primarily (though not exclusively) as a
result of fluctuations in value among the different classes of the Company's
capital stock. If the Company fails to satisfy such share ownership
requirements, the Company's status as a REIT will terminate. See '--Failure to
Qualify.'
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company has and will continue to have a
calendar taxable year.
Ownership of Subsidiaries. The Company owns interests in certain of the
Lower Tier Partnerships through subsidiaries. Code Section 856(i) provides that
a corporation which is a 'qualified REIT subsidiary' (defined as any corporation
if 100 percent of the stock of such corporation is held by the REIT at all times
during the period such corporation was in existence) shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a 'qualified REIT subsidiary' shall be treated as
assets, liabilities and such items (as the case may be) of the REIT. Each of the
Company's subsidiaries qualify as 'qualified REIT subsidiaries' within the
meaning of the Code. Thus, in applying the requirements described herein, the
Company's subsidiaries are ignored, and all assets, liabilities and items of
income, deduction and credit of such subsidiaries are treated as assets,
liabilities and items of income, deduction, and credit of the Company.
Ownership of a Partnership Interest. In the case of a REIT which is a
partner in a partnership, IRS regulations provide that the REIT will be deemed
to own its proportionate share of the assets of the partnership and will be
deemed to be entitled to the income of the partnership attributable to such
share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of any Lower Tier Partnership) are
treated as assets, liabilities and items of income of the Company for purposes
of applying the requirements described herein. A summary of the rules governing
the Federal income taxation of partnerships and their partners is provided below
in '--Tax Aspects of the Operating Partnership.' The Company has direct control
of the Operating Partnership and has and will continue to operate it consistent
with the requirements for qualification as a REIT.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including 'rents from
real property' and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
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Rents received by the Company will qualify as 'rents from real property' in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term 'rents from real
property' solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as 'rents from real property' in satisfying the gross
income tests if the REIT, or an actual or constructive owner of 10% or more of
the REIT, actually or constructively owns 10% or more of such tenant (a 'Related
Party Tenant'). Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as 'rents from real property.' Finally, for rents
received to qualify as 'rents from real property,' the REIT generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the REIT
derives no revenue. The REIT may, however, directly perform certain services
that are 'usually or customarily rendered' in connection with the rental of
space for occupancy only and are not otherwise considered 'rendered to the
occupant' of the property. The Company has not and will not (i) charge rent for
any property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage of receipts or sales, as
described above), (ii) rent any property to a Related Party Tenant (unless the
Board of Directors determines in its discretion that the rent received from such
Related Party Tenant is not material and will not jeopardize the Company's
status as a REIT), (iii) derive rental income attributable to personal property
(other than personal property leased in connection with the lease of real
property, the amount of which is less than 15% of the total rent received under
the lease), or (iv) perform services considered to be rendered to the occupant
of the property, other than through an independent contractor from whom the
Company derives no revenue.
The Management Company receives fees in exchange for the performance of
certain management services. Such fees will not accrue to the Company, but the
Company will derive dividends from the Management Company which qualify under
the 95% gross income test, but not the 75% gross income test. The Company
believes that the aggregate amount of any non-qualifying income in any taxable
year has not exceeded and will not exceed the limit on non-qualifying income
under the gross income tests.
The term 'interest' generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term 'interest'
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above in '--Taxation of the
Company--General,' even if these relief provisions apply, a tax would be imposed
with respect to the excess net income. No similar mitigation provision provides
relief if the Company fails the 30% gross income test. In such case, the Company
would cease to qualify as a REIT.
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Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including the Company's share of any such gain realized by
the Operating Partnership) will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income may also have an adverse effect upon the Company's ability to satisfy the
income tests for qualification as a REIT. Under existing law, whether property
is held as inventory or primarily for sale to customers in the ordinary course
of a trade or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Operating
Partnership intends to hold the Properties for investment with a view to
long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the Properties (and other properties) and to make such
occasional sales of the Properties as are consistent with the Operating
Partnership's investment objectives. There can be no assurance, however, that
the IRS might not contend that that one or more of such sales is subject to the
100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including its allocable
share of the assets held by the Operating Partnership) must be represented by
real estate assets (including (i) its allocable share of real estate assets held
by partnerships in which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities.
The Operating Partnership owns 100% of the nonvoting preferred stock of the
Management Company and a note of the Management Company. The Operating
Partnership does not and will not own any of the voting securities of the
Management Company, and therefore the Company will not be considered to own more
than 10% of the voting securities of the Management Company. In addition, the
Company believes (and has represented to counsel to the Company for purposes of
its opinion, as discussed below) that the value of its pro rata share of the
securities of the Management Company to be held by the Operating Partnership did
not exceed at any time up to and including the date of this Prospectus 5% of the
total value of the Company's assets and will not exceed such amount in the
future. Latham & Watkins, in rendering its opinion as to the qualification of
the Company as a REIT, is relying on representations of the Company to such
effect with respect to the value of such securities and assets. No independent
appraisals have been obtained to support this conclusion. There can be no
assurance that the IRS will not contend that the value of the securities of the
Management Company held by the Company (through the Operating Partnership)
exceeds the 5% value limitation.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
additional securities of the Management Company or other securities or other
property during a quarter (including as a result of the Company increasing its
interests in the Operating Partnership), the failure can be cured by disposition
of sufficient nonqualifying assets within 30 days after the close of that
quarter. The Company has maintained and will continue to maintain adequate
records of the value of its assets to ensure compliance with the asset tests and
to take such other actions within the 30 days after the close of any quarter as
may be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's 'REIT taxable income' (computed without regard to the
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dividends paid deduction and the Company's net capital gain) and (ii) 95% of the
net income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of noncash income. In addition, if the Company disposes of any
Built-In Gain Asset during its Recognition Period, the Company will be required,
pursuant to IRS regulations which have not yet been promulgated, to distribute
at least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its 'REIT taxable income,' as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax rates.
The Company has made and intends to make timely distributions sufficient to
satisfy these annual distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company. In the event that such timing differences occur,
in order to meet the distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying 'deficiency dividends'
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed.
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FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure to qualify as a REIT
would reduce the cash available for distribution by the Company to its
stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the extent
of the Company's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term 'U.S. Stockholder' means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, or (iii) is an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Stockholders
that are corporations. For purposes of determining whether distributions to
holders of Common Stock are out of current or accumulated earnings and profits,
the earnings and profits of the Company will be allocated first to the
Convertible Preferred Stock (to the extent of the preferred distribution on such
stock), then to the Common Stock (to the extent of distributions equal to
$0.4875 per quarter per share) and then pro-rata between both the Convertible
Preferred Stock and the Common Stock with respect to any distributions in which
the Convertible Preferred Stock is entitled to participate.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to taxable U.S. Stockholders
as long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his shares of stock. U.S. Stockholders that
are corporations may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income. For a discussion of the manner in which that
portion of any dividends designated by the Company as capital gain dividends
will be allocated among the holders of Convertible Preferred Stock and Common
Stock, see 'Description of Capital Stock--Convertible Preferred
Stock--Distributions.'
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in his shares of stock for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Stockholder's adjusted basis in his shares taxable as capital gains (provided
that the shares have been held as a capital asset). Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the stockholder on December 31 of such
year, provided that the dividend is actually paid by the Company on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any net operating losses or capital losses of the
Company.
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Distributions made by the Company and gain arising from the sale or
exchange by a U.S. Stockholder of shares of the Company will not be treated as
passive activity income, and, as a result, U.S. Stockholders generally will not
be able to apply any 'passive losses' against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition of
shares, however, will not be treated as investment income unless the U.S.
Stockholder elects to reduce the amount of such U.S. Stockholder's total net
capital gain eligible for the 28% maximum capital gains rate by the amount of
such gain with respect to the shares.
Upon any sale or other disposition of shares of the Company, a U.S.
Stockholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in the shares for tax purposes. Such gain or loss
will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been held for more than one year. In general, any loss recognized by
a U.S. Stockholder upon the sale or other disposition of shares of the Company
that have been held for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. Stockholder from the Company which were
required to be treated as long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any stockholders who fail to certify
their non-foreign status to the Company. See '--Taxation of Non-U.S.
Stockholders.'
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ('UBTI') when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt shareholders described below) has not held its shares
as 'debt financed property' within the meaning of the Code and the shares are
not otherwise used in a trade or business, the dividend income from the Company
will not be UBTI to a tax-exempt shareholder. Similarly, income from the sale of
shares will not constitute UBTI unless such tax-exempt shareholder has held such
shares as 'debt financed property' within the meaning of the Code or has used
the shares in trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
'set aside' and reserve requirements.
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Notwithstanding the above, however, the Omnibus Budget Reconciliation Act
of 1993 (the '1993 Act') provides that, effective for taxable years beginning in
1994, a portion of the dividends paid by a 'pension held REIT' shall be treated
as UBTI as to any trust which (1) is described in Section 401(a) of the Code,
(2) is tax-exempt under Section 501(a) of the Code, and (3) holds more than 10%
(by value) of the interests in the REIT. Tax-exempt pension funds that are
described in Section 401(a) of the Code are referred to below as 'qualified
trusts.'
A REIT is a 'pension held REIT' if (1) it would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act)
provides that stock owned by qualified trusts shall be treated, for purposes of
the 'not closely held' requirement, as owned by the beneficiaries of the trust
(rather than by the trust itself), and (2) either (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, or
(b) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend treated
as UBTI is equal to the ratio of (i) the UBTI earned by the REIT (treating the
REIT as if it were a qualified trust and therefore subject to tax on UBTI) to
(ii) the total gross income of the REIT. A de minimis exception applies where
the percentage is less than 5% for any year. The provisions requiring qualified
trusts to treat a portion of REIT distributions as UBTI will not apply if the
REIT is able to satisfy the 'not closely held' requirement without relying upon
the 'look-through' exception with respect to qualified trusts. As a result of
certain limitations on the transfer and ownership of stock contained in the
Charter, the Company is not and does not expect to be classified as a 'pension
held REIT.'
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, 'Non-U.S. Stockholders') are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Stockholder in light of its particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in stock, including any reporting
requirements.
Distributions. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains 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. Such distributions ordinarily will be subject to withholding of United
States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States trade
or business. Dividends that are effectively connected with such a trade or
business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as domestic stockholders are
taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder
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who wished to claim the benefit of an applicable treaty rate would be required
to satisfy certain certification and other requirements. Under certain treaties,
lower withholding rates generally applicable to dividends do not apply to
dividends from a REIT, such as the Company. Certain certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholders's stock, but rather
will reduce the adjusted basis of such stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Stockholder's stock, they
will give rise to gain from the sale or exchange of his stock, the tax treatment
of which is 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 or accumulated earnings and profits, the distribution will generally be
treated as a dividend for withholding purposes. However, amounts thus withheld
are generally refundable by the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current or accumulated earnings and
profits of the Company.
Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the stock is effectively connected with the Non-U.S. Stockholder's United
States trade or business, in which case the Non-U.S. Stockholder will be subject
to the same treatment as domestic stockholders with respect to such gain (except
that a stockholder that is a foreign corporation may also be subject to the 30%
branch profits tax, as discussed above), or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and has a 'tax home' in the United States, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Stockholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders (subject to a special alternative minimum tax in the case
of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Stockholder that is a corporation,
as discussed above. The Company is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
United States federal income tax liability.
Sale of Stock. Gain recognized by a Non-U.S. Stockholder upon the sale or
exchange of shares of stock generally will not be subject to United States
taxation unless the stock constitutes a 'United States real property interest'
within the meaning of FIRPTA. The stock will not constitute a 'United States
real property interest' so long as the Company is a 'domestically controlled
REIT.' A 'domestically controlled REIT' is a REIT in which at all times during a
specified testing period less than 50% in value of its stock is held directly or
indirectly by Non-U.S. Stockholders. The Company believes that it is currently a
'domestically controlled REIT,' and therefore that the sale of shares of stock
will not be subject to taxation under FIRPTA. However, because the shares of
stock will be publicly traded, no assurance can be given that the Company will
continue to be a 'domestically-controlled REIT.' Notwithstanding the foregoing,
gain from the sale or exchange of shares of stock not otherwise subject to
FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is
a nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a 'tax home' in the United States. In
such case, the nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
If the Company is not or ceases to be a 'domestically-controlled REIT,'
whether gain arising from the sale or exchange by a Non-U.S. Stockholder of
shares of Stock would be subject to United
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States taxation under FIRPTA as a sale of a 'United States real property
interest' will depend on whether the shares are 'regularly traded' (as defined
by applicable Treasury Regulations) on an established securities market (e.g.,
the New York Stock Exchange) and on the size of the selling Non-U.S.
Stockholder's interest in the Company. If gain on the sale or exchange of shares
of stock were subject to taxation under FIRPTA, the Non-U.S. Stockholder would
be subject to regular United States income tax with respect to such gain in the
same manner as a U.S. Stockholder (subject to any applicable alternative minimum
tax, a special alternative minimum tax in the case of nonresident alien
individuals and the possible application of the 30% branch profits tax in the
case of foreign corporations), and the purchaser of the stock would be required
to withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of stocks by or through a foreign office of a foreign broker.
Information reporting (but not backup withholding) will apply, however, to a
payment of the proceeds of a sale of stock by a foreign office of a broker that
(a) is a United States person, (b) derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States or
(c) is a 'controlled foreign corporation' (generally, a foreign corporation
controlled by United States stockholders) for United States tax purposes, unless
the broker has documentary evidence in its records that the holder is a Non-U.S.
Stockholder and certain other conditions are met, or the stockholder otherwise
establishes an exemption. Payment to or through a United States office of a
broker of the proceeds of sale of stocks is subject to both backup withholding
and information reporting unless the stockholder certifies under penalties of
perjury that the stockholder is a Non-U.S. Stockholder, or otherwise establishes
an exemption. A Non-U.S. Stockholder may obtain a refund of any amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify and modify reliance standards. If finalized in the current
form, the proposed regulations would generally be effective for payments made
after December 31, 1997, subject to certain transition rules.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
General. Substantially all of the Company's investments will be held
indirectly through the Operating Partnership. In general, partnerships are
'pass-through' entities which are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. The Company will include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, the Company will include its proportionate share of assets
held by the Operating Partnership. See '--Taxation of the Company.'
Final regulations were recently released which provide that if a
partnership is formed or availed of in connection with a transaction a principal
purpose of which is to reduce substantially the present value of the partners'
aggregate federal income tax liability in a manner that is inconsistent with the
intent of subchapter K of the Code (governing partners and partnerships), the
81
<PAGE>
Commissioner of the IRS can recast the transaction for federal income tax
purposes, as appropriate, to achieve tax results that are consistent with the
intent of subchapter K. While it is anticipated that these regulations will not
affect treatment of the Company, the Operating Partnership or its partners, the
scope and effect of such regulations are unclear. If the regulations were to be
applied to the Operating Partnership, the Operating Partnership could be ignored
for tax purposes, with the result that the limited partners of the Operating
Partnership could be deemed to have received Common Stock in the Company instead
of Common Units in the Operating Partnership. Such treatment, however, should
not adversely affect the Company's ability to qualify as a REIT.
Entity Classification. The Company's interest in the Operating Partnership
and the Lower Tier Partnerships involve special tax considerations, including
the possibility of a challenge by the IRS of the status of the Operating
Partnership or any Lower Tier Partnership as a partnership (as opposed to an
association taxable as a corporation) for Federal income tax purposes. If any of
the partnerships were treated as an association, such partnership would be
taxable as a corporation and therefore subject to an entity-level tax on its
income. In such a situation, the character of the Company's assets and items of
gross income would change and preclude the Company from satisfying the asset
tests and possibly the income tests (see '--Taxation of the Company --Asset
Tests' and '--Income Tests'), and in turn would prevent the Company from
qualifying as a REIT. See '--Taxation of the Company' and '--Failure to Qualify'
above for a discussion of the effect of the Company's failure to meet such tests
for a taxable year. In addition, a change in any of the partnerships' status for
tax purposes might be treated as a taxable event in which case the Company might
incur a tax liability without any related cash distributions.
An organization formed as a partnership will be treated as a partnership
for federal income tax purposes rather than as a corporation only if it has no
more than two of the four corporate characteristics that the Treasury
Regulations use to distinguish a partnership from a corporation for tax
purposes. These four characteristics are (i) continuity of life, (ii)
centralization of management, (iii) limited liability and (iv) free
transferability of interests. The Company has not requested, and does not intend
to request, a ruling from the IRS that each of the partnerships will be treated
as partnerships for federal income tax purposes. However, in connection with the
filing of the Registration Statement of which this Prospectus is a part, Latham
& Watkins delivered an opinion to the Company stating that based on the
provisions of the Partnership Agreement (and each of the partnership agreements
for the Lower Tier Partnerships), and certain factual assumptions and
representations described in the opinion, the Operating Partnership (and each of
the Lower Tier Partnerships) will be treated as a partnership for federal income
tax purposes (and not as an association or a publicly traded partnership taxable
as a corporation). Unlike a private letter ruling, an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
challenge the status of the Operating Partnership (or any of the Lower Tier
Partnerships) as partnerships for federal income tax purposes. If such
challenges were sustained by a court, the Operating Partnership or any of the
Lower Tier Partnerships could be treated as a corporation for federal income tax
purposes.
Recently proposed Treasury Regulations (the 'Proposed Regulations'), if
finalized in their present form, would eliminate the four factor test described
above and, in its place, permit a partnership or limited liability company to
elect to be taxed as a partnership for federal income tax purposes without
regard to the number of corporate characteristics possessed by such entity. The
Proposed Regulations are proposed to apply for tax periods beginning on or after
the date that final regulations are published by the IRS. Until that time, the
existing regulations will continue to apply. The Proposed Regulations provide
that the IRS will not challenge the classification of any existing partnership
or limited liability company for tax periods to which the existing Treasury
Regulations apply if (1) the entity had a reasonable basis for its claimed
classification, (2) the entity claimed that same classification in all prior
years, and (3) as of the date that the proposed regulations were published,
neither the entity nor any member of the entity had been notified in writing
that the classification of the entity is under examination by the IRS.
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Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of such property at the time of contribution (a 'Book-Tax Difference').
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including certain of the Properties). Moreover, subsequent
to the formation of the Operating Partnership, additional persons have
contributed appreciated property to the Operating Partnership in exchange for
interests in the Operating Partnership. The Partnership Agreement requires that
such allocations be made in a manner consistent with Section 704(c) of the Code.
In general, the principals of FWM and other Continuing Investors who are
limited partners of the Operating Partnership will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition of
any of the contributed assets which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to such
limited partners, and the Company will generally be allocated only its share of
capital gains attributable to appreciation, if any, occurring after the time of
contribution to the Operating Partnership. This will tend to eliminate the
Book-Tax Difference over the life of the Operating Partnership. However, the
special allocation rules of Section 704(c) do not always entirely eliminate the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands the Operating Partnership may cause the Company to be allocated
lower depreciation and other deductions, and possibly an amount of taxable
income in the event of a sale of such contributed assets in excess of the
economic or book income allocated to it as a result of such sale. This may cause
the Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements. See '--Taxation of the Company--Annual Distribution Requirements.'
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the 'traditional method' or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to be
entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company have
determined to use the 'traditional method' for accounting for Book-Tax
Differences with respect to the Properties initially contributed to the
Operating Partnership.
83
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With respect to any property purchased by the Operating Partnership
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Code will not apply.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share of
the Operating Partnership's income and (b) its allocable share of indebtedness
of the Operating Partnership and (iii) will be reduced, but not below zero, by
the Company's allocable share of (a) losses suffered by the Operating
Partnership, (b) the amount of cash distributed to the Company and (c) by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decreases being considered a
cash distribution to the partners), exceeds the Company's adjusted tax basis,
such excess distributions (including such constructive distributions) constitute
taxable income to the Company. Such taxable income will normally be
characterized as a capital gain, and if the Company's interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gain.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
A significant portion of the cash to be used by the Operating Partnership
to fund distributions to partners is expected to come from the Management
Company, through interest payments and dividends on non-voting preferred stock
to be held by the Operating Partnership. The Management Company will pay federal
and state tax on its net income at full corporate rates, which will reduce the
cash available for distribution to stockholders.
84
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the 'Underwriters'), have severally agreed to purchase
from the Company the following respective numbers of shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated........................ 500,000
Friedman, Billings, Ramsey & Co., Inc.................. 500,000
Tucker Anthony Incorporated............................ 500,000
---------
Total.................................................. 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of Common Stock offered hereby if any of
such shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $.70 per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $.10 per
share to certain other dealers. After the public offering, the offering price
and other selling terms may be changed by the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 1,500,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will sell such additional shares on the same terms as those on
which the 1,500,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
In addition, the Company and each of its executives, officers and directors
have agreed with the Underwriters not to offer, sell, contract to sell or
otherwise issue or dispose of shares of Common Stock for the 90-day period
following the Offering, except that the Company may issue new shares of Common
Stock pursuant to the exchange or conversion of outstanding securities, the
issuance of shares of Common Stock pursuant to employee benefit plans and in
connection with future acquisitions. See 'Shares Available for Future Sale.'
Alex. Brown & Sons Incorporated and Friedman, Billings, Ramsey & Co., Inc.
will receive an advisory fee of $125,000 (to be divided equally between them) in
connection with the Offering.
85
<PAGE>
EXPERTS
The consolidated balance sheets of First Washington Realty Trust, Inc. as
of December 31, 1995 and 1994 and the consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, the combined statement of revenues and certain expenses
of the New Retail Properties for the year ended December 31, 1995 and the
combined statement of revenues and certain expenses of the 1996(B) Acquisition
Properties included in this Prospectus, have been included herein in reliance on
the reports of Coopers & Lybrand L.L.P, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Latham &
Watkins, Washington, D.C. Latham & Watkins will rely as to certain matters of
Maryland law, including the legality of the Common Stock, on the opinion of
Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. In addition, the
description of federal income tax consequences contained in this Prospectus
entitled 'Federal Income Tax Considerations' is based upon the opinion of Latham
& Watkins. Certain legal matters related to the Offering will be passed upon for
the Underwriters by Hogan & Hartson L.L.P., Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a registration statement on Form S-11 under the Securities Act
with respect to the securities offered hereby. This Prospectus, which
constitutes part of the registration statement, omits certain information
contained in the registration statement and the exhibits thereto on file with
the Commission pursuant to the Securities Act and the rules and regulations of
the Commission thereunder. The Company is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the 'Exchange
Act'). The Company has filed reports and other information with the Commission
and is subject to the periodic reporting and informational requirements of the
Exchange Act. The registration statement, the exhibits and schedules forming a
part thereof as well as such reports and other information filed by the Company
with the Commission can be inspected and copies obtained from the Commission at
Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
website at http://www.sec.gov containing reports, prospectuses and information
statements and other information regarding registrants, including the Company,
that file electronically with the Commission. In addition, similar information
concerning the Company can be inspected and copied at the offices of the NYSE,
20 Broad Street, New York, NY 10005. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respect by such reference.
The Company furnishes its stockholders with annual reports containing
consolidated financial statements audited by its independent accountants.
86
<PAGE>
GLOSSARY OF TERMS
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus:
'ACMs' means asbestos-containing materials.
'ADA' means the Americans with Disabilities Act.
'Affiliate' of an issuer means, as defined in Rule 144, a person that
directly, or indirectly, through the use of one or more intermediaries controls,
or is controlled by, or is under the common control with, such issuer.
'Aggregate Ownership Limit' has the meaning ascribed to it in 'Description
of Capital Stock--Restrictions on Ownership, Transfer and Conversion.'
'Awards' means, collectively, non-qualified stock options, incentive stock
options and stock appreciation rights.
'Board of Directors' means the board of directors of the Company.
'Bond Obligations' means tax-exempt bond financing obligations of
approximately $7.3 million (collateralized by the Mayfair Shopping Center)
issued by the Philadelphia Industrial Development Authority.
'Book-Tax Difference' has the meaning ascribed to it in the section
entitled 'Federal Income Tax Considerations--Tax Aspects of the Operating
Partnership--Tax Allocations with Respect to the Properties.'
'Business Combinations,' shall have the meaning associated to it under
Section 3-601 of the MGCL.
'Capital Gains Amount' has the meaning ascribed to it in Section 857 of
the Code.
'CERCLA' means the Comprehensive Environmental Response, Compensation and
Liability Act, as amended by the Superfund Amendments and Reauthorization Act of
1986.
'Code' means the Internal Revenue Code of 1986, as amended.
'Commission' means the Securities and Exchange Commission.
'Common Stock' means shares of the common stock of the Company, $0.01 par
value per share.
'Common Stock Ownership Limit' shall have the meaning ascribed to it in
'Description of Capital Stock--Restrictions on Ownership, Transfer and
Conversion.'
'Common Unit' means the units of the Operating Partnership exchangeable for
shares of Common Stock on a one-for-one basis (or, at the option of the Company,
redeemable by the Operating Partnership for cash).
'Company' means First Washington Realty Trust, Inc., a Maryland
corporation, and, unless the context otherwise requires, those entities owned or
controlled by the Company.
'Compensation Committee' means the committee appointed by the Company's
Board of Directors to determine the granting of Awards.
'Control Shares' has the meaning ascribed to it in the section entitled
'Risk Factors--Ownership Limit and Limits on Changes in Control--Maryland
Control Share Acquisition Statute.'
'Convertible Preferred Ownership Limit' shall have the meaning ascribed to
it in 'Description of Capital Stock--Restrictions on Ownership, Transfer and
Conversion.'
'Convertible Preferred Stock' means Series A Cumulative Participating
Convertible Preferred Stock of the Company.
87
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'Distribution Payment Date' means the date on which the distributions with
respect to the Convertible Preferred Stock will be paid.
'EBITDA' is equal to earnings before interest, taxes, depreciation,
amortization and minority interest.
'Exchange Act' means the Securities Exchange Act of 1934, as amended.
'Exchangeable Debentures' means the $25 million in aggregate principal
amount of 8.25% Exchangeable Debentures issued by the Operating Partnership in
the Formation Transactions, which are exchangeable for shares of Convertible
Preferred Stock.
'Existing Retail Properties' means the 33 retail properties currently owned
by the Company. The Existing Retail Properties are: Brafferton Center, Bryans
Road Shopping Center, Capital Corner Shopping Center, Chesapeake Bagel Building,
Clinton Square Shopping Center, Clopper's Mill Village Shopping Center, Colonial
Square Shopping Center, Centre Ridge Marketplace, Connecticut Avenue Shops,
Davis Ford Crossing, Festival at Woodholme, 15th & Allen Shopping Center,
Firstfield Shopping Center, First State Plaza, Fox Mill Shopping Center, The
Georgetown Shops, Glen Lea Shopping Center, Hanover Village Shopping Center,
James Island Shopping Center, Kenhorst Plaza Shopping Center, Laburnum Park
Shopping Center, Laburnum Square Shopping Center, Mayfair Shopping Center, P.G.
County Commercial Park, Penn Station Shopping Center, Potomac Plaza, Rosecroft
Shopping Center, Shoppes of Kildaire, Stefko Boulevard Shopping Center,
Southside Marketplace, Takoma Park Shopping Center, Thieves Market and Valley
Centre.
'Exchangeable Preferred Unit' means exchangeable preferred units of the
Operating Partnership that are exchangeable for shares of Common Stock on a
one-for-one basis (or, at the option of the Company, redeemable by the Operating
Partnership for cash).
'Farallon' means Farallon Capital Management, Inc.
'FHA' means the Fair Housing Amendments Act of 1988.
'FHLMC' means Federal Home Loan Mortgage Commission.
'FIRPTA' means the Foreign Investment in Real Property Tax Act of 1980.
'FNMA' means Federal National Mortgage Association.
'FS Note' means the $4.8 million note issued by the Operating Partnership
in connection with the Formation Transactions to the prior owner of First State
Plaza Shopping Center, which note is exchangeable for Common Stock.
'FWM' means First Washington Management, Inc., a District of Columbia
corporation.
'FWM Common Stock' means common stock of FWM entitled to receive 1% of the
cash flow of FWM.
'FWM Note' means a promissory note issued to Messrs. Halpert, Wolfe and
Zimmerman in the face amount of $4.0 million.
'FWM Partnerships' means the limited partnerships that owned the FWM
Properties prior to the transfer to the Operating Partnership.
'FWM Preferred Stock' means non-voting preferred stock of FWM entitled to
receive 99% of the cash flow of FWM.
'FWM Properties' means the Properties formerly owned by the FWM
Partnerships.
'FWM Retail Properties' means the 14 Retail Properties formerly owned by
the FWM Partnerships.
'GAAP' means Generally Accepted Accounting Principles.
'GLA' means gross leasable area and includes two pad sites at Penn Station
Shopping Center (90,000 square feet) and one pad site at Laburnum Park Shopping
Center (43,500 square feet) that are not owned by the Company.
88
<PAGE>
'GNMA' means Government National Mortgage Association.
'Interested Stockholders,' under Maryland law, means all persons owning
beneficially, directly or indirectly, more than 10% of the voting power of
outstanding voting shares of stock of a Maryland corporation.
'IRS' means the Internal Revenue Service.
'June 1995 Offering' means the initial public offering of Common Stock in
June 1995.
'Lower Tier Partnerships' means those partnerships in which the Operating
Partnership owns a 99% partnership interest and the Company (or a wholly owned
subsidiary of the Company) owns a 1% partnership interest, which limited
partnerships own six of the Properties.
'MAC Partnership' means Mid-Atlantic Centers Limited Partnership, a
Maryland limited partnership and an affiliate of FWM.
'Management Company' means FWM after formation of the Company. The
Management Company conducts property management, leasing and related services
for the Company and for certain third parties. The Company owns 100% of FWM's
non-voting Preferred Stock, but does not own any of the voting Common Stock of
FWM.
'MGCL' means the Maryland General Corporation Law, as amended from time to
time.
'Multifamily Properties' means Branchwood Apartments and Broadmoor
Apartments, the two multifamily apartment properties which the Company acquired
in connection with the Formation Transactions.
'NAREIT' means the National Association of Real Estate Investment Trusts,
Inc.
'NASDAQ' means the Nasdaq National Market.
'Net Operating Income' represents minimum and percentage rents, tenant
reimbursements and other related income, reduced by real estate taxes, insurance
expense, common area maintenance expenses, utilities and management fees.
'New Retail Properties' means the following six retail properties: City
Line Shopping Center, Four Mile Fork Shopping Center, Kings Park Shopping
Center, Newtown Square Shopping Center, Northway Shopping Center and Shoppes of
Graylyn.
'Nomura Capital' means Nomura Asset Capital Corporation, which provided the
Nomura Mortgage Loan.
'Nomura Mortgage Loan' means the $38.5 million mortgage loan from Nomura
Capital secured by four of the Properties.
'NYSE' means the New York Stock Exchange.
'Operating Partnership' means First Washington Realty Limited Partnership,
a Maryland limited partnership. The Operating Partnership owns all of the
Properties (or interests therein). Upon conversion of all Common Units and
Exchangeable Preferred Units, the Company will own a 100% general partnership
interest in the Operating Partnership.
'Options' means the opportunities granted to certain officers, directors,
key employees and consultants of the Company to acquire Common Stock pursuant to
its Stock Incentive Plan.
'Partnership Agreement' means the agreement of limited partnership of the
Operating Partnership.
'Preferred Stock' means the preferred stock of the Company, $0.01 par value
per share.
'Properties' means one or more of the 39 Retail Properties and the two
Multifamily Properties owned or to be acquired by the Company, as more
particularly described in the section entitled 'Properties.'
89
<PAGE>
'REIT' means a real estate investment trust as defined pursuant to Sections
856 through 860 of the Code.
'Retail Properties' means one or more of the 33 Existing Retail Properties
and the 6 New Retail Properties.
'Securities Act' means the Securities Act of 1933, as amended.
'Stock Incentive Plan' means the Company's 1994 Stock Option Plan.
'Subsidiaries' means all of the subsidiaries of the Company.
'Total market capitalization' means the sum of: (i) the aggregate market
value of the outstanding shares of Common Stock (based on $21.75 per share)
assuming full exchange of Common Units in the Operating Partnership for shares
of Common Stock, and full exchange of Convertible Preferred Stock for Common
Stock, plus (ii) the total debt of the Company.
'UBTI' means unrelated business taxable income as defined pursuant to
Sections 511 and 512 of the Code.
'U.S. Shareholder' has the meaning ascribed to it in the section entitled
'Federal Income Tax Considerations--Taxation of Taxable U.S. Stockholders.'
90
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
PRO FORMA (UNAUDITED):
- -- Pro Forma Consolidated Balance Sheet as of September 30, 1996........................................... F- 2
- -- Pro Forma Consolidated Statement of Operations for the nine months ended September 30, 1996............. F- 3
- -- Pro Forma Consolidated Statement of Operations for the year ended December 31, 1995..................... F- 4
- -- Notes and Management's Assumptions to the Pro Forma Consolidated Financial Statements................... F- 5
HISTORICAL:
- -- Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995.................. F- 8
- -- Consolidated Statements of Operations for the nine months and three months ended September 30, 1996
(unaudited) and 1995 (unaudited)...................................................................... F- 9
- -- Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 (unaudited) and 1995
(unaudited)........................................................................................... F-10
- -- Notes to Unaudited Consolidated Financial Statements.................................................... F-11
- -- Report of Independent Accountants....................................................................... F-15
- -- Consolidated Balance Sheets as of December 31, 1995 and 1994............................................ F-16
- -- Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993.............. F-17
- -- Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993.... F-18
- -- Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.............. F-19
- -- Notes to the Consolidated Financial Statements.......................................................... F-20
NEW RETAIL PROPERTIES:
- -- Report of Independent Accountants....................................................................... F-36
- -- Combined Statement of Revenues and Certain Expenses for the year ended December 31, 1995 and the nine
months ended September 30, 1996 (unaudited)........................................................... F-37
- -- Notes to Combined Statement of Revenues and Certain Expenses............................................ F-38
1996(B) ACQUISITION PROPERTIES:
- -- Report of Independent Accountants....................................................................... F-39
- -- Combined Statement of Revenues and Certain Expenses for the year ended December 31, 1995 and the six
months ended June 30, 1996 (unaudited) and 1995 (unaudited)........................................... F-40
- -- Notes to Combined Statement of Revenues and Certain Expenses............................................ F-41
</TABLE>
F-1
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
PROFORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
--------------------------------------
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -----
ASSETS
<S> <C> <C> <C>
Rental properties:
Land................................................................. $ 56,511 $ 11,141(A) $ 67,652
Building and improvements............................................ 229,263 44,563(A) 273,826
------- ------ -------
285,774 55,704 341,478
Accumulated depreciation............................................. (28,324) -- (28,324)
------- ------ -------
Rental properties, net............................................... 257,450 55,704 313,154
Cash and equivalents................................................... 1,870 4,966(C) 6,836
Tenant receivables, net................................................ 4,692 -- 4,692
Deferred financing costs, net.......................................... 4,717 433(A) 5,150
Other assets........................................................... 6,240 -- 6,240
----- ------ -----
Total assets.................................................... $ 274,969 $ 61,103 $ 336,072
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage and other notes payable..................................... $ 162,346 $ 24,630(D) $ 186,976
Debentures........................................................... 25,000 -- 25,000
Accounts payable and accrued expenses................................ 5,215 -- 5,215
------- ------ -------
Total liabilities 192,561 24,630 217,191
Minority interest...................................................... 12,573 6,794(B) 19,367
Stockholders' equity:
Convertible Preferred Stock $.01 par value, 3,500,000 shares
designated; 2,314,189 shares issued and outstanding............... 23 -- 23
Common Stock $.01 par value, 90,000,000 shares authorized; 3,291,245
and 4,791,245 shares issued and outstanding respectively........ 32 15(E) 47
Additional paid-in capital........................................... 86,538 29,664(F) 116,202
Accumulated distributions in excess of earnings...................... (16,758) -- (16,758)
------- ------ -------
Total stockholders' equity...................................... 69,835 29,679 99,514
------ ------ -------
Total liabilities and stockholders' equity...................... $ 274,969 $ 61,103 $ 336,072
========== ========= ==========
</TABLE>
The accompanying notes and management assumptions are an integral part of
these pro forma consolidated financial statements.
F-2
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------------------
1996(A) 1996(B)
ACQUISITION ACQUISITION NEW RETAIL PRO
HISTORICAL PROPERTIES PROPERTIES PROPERTIES ADJUSTMENTS FORMA
---------- ----------- ----------- ---------- ----------- -----
(B) (C) (D)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Minimum rents............................. $ 23,408 $ 250 $ 774 $ 4,292 -- $ 28,724
Percentage rents.......................... 501 0 0 262 -- 763
Tenant reimbursements..................... 5,015 58 176 1,023 -- 6,272
Other income.............................. 1,189 1 1 13 -- 1,204
------ --- --- ----- -- ------
Total revenues 30,113 309 951 5,590 36,963
------ --- --- ----- ------ ------
Expenses:
Property operating and maintenance........ 7,623 67 222 1,337 173(E) 9,422
General and administrative................ 2,348 -- -- -- -- 2,348
Interest.................................. 11,025 -- -- -- 2,442(F) 13,467
Depreciation and amortization............. 5,783 -- -- -- 1,292(G) 7,075
----- -- --- ----- ----- -----
26,779 67 222 1,337 3,907 32,312
------ -- --- ----- ----- ------
Income before income from Management
Company, minority interest and
distributions to Preferred Stockholders... 3,334 242 729 4,253 (3,907) 4,651
Income from Management Company.............. 97 -- -- -- -- 97
--- --- --- --- --- ---
Income before minority interest and
distributions to Preferred Stockholders... 3,431 242 729 4,253 (3,907) 4,748
(Income)/loss allocated to minority
interest.................................. (486) -- -- -- (260)(H) (746)
---- ---- ---- ---- ---- ----
Income before distributions to preferred
stockholders.............................. 2,945 242 729 4,253 (4,167) 4,002
Distributions to preferred stockholders..... (4,231) -- -- -- -- (4,231)
------ ------ ------ ------ ------ ------
Income (loss) allocated to common
stockholders.............................. $ (1,286) $ 242 $ 729 $ 4,253 $(4,167) $ (229)
--------- --------- --------- --------- ------- ---------
Net loss per Common Share................... $ (0.40) $ (0.05)
========= =========
Shares of Common Stock, in thousands........ 3,227 4,727
===== =====
</TABLE>
The accompanying notes and management assumptions are an integral part of
these pro forma consolidated financial statements.
F-3
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
1996(A) 1996(B)
ACQUISITION ACQUISITION NEW RETAIL PRO
HISTORICAL PROPERTIES PROPERTIES PROPERTIES ADJUSTMENTS FORMA
---------- ----------- ----------- ---------- ----------- -----
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Minimum rents............................... $ 26,876 $ 1,474 $ 1,946 $ 5,578 -- $ 35,874
Percentage rents............................ 662 -- -- 401 -- 1,063
Tenant reimbursements....................... 5,016 318 407 1,021 -- 6,762
Other income................................ 1,463 3 -- 39 -- 1,505
----- ----- ----- ----- ----- -----
Total revenues 34,017 1,795 2,353 7,039 -- 45,204
------ ----- ----- ----- ----- ------
Expenses:
Property operating and maintenance.......... 8,048 399 524 1,307 277(E) 10,555
General and administrative.................. 2,831 -- -- -- -- 2,831
Interest.................................... 12,666 -- -- -- 4,422(F) 17,088
Depreciation and amortization............... 6,606 -- -- -- 2,337(G) 8,943
----- ----- ----- ----- ----- -----
30,151 399 524 1,307 7,036 39,417
------ --- --- ----- ----- ------
Income before income from Management Company,
minority interest and distributions to
Preferred Stockholders...................... 3,866 1,396 1,829 5,732 (7,036) 5,787
Income from Management Company................ 449 -- -- -- -- 449
--- --- --- --- --- ---
Income before minority interest and
distributions to Preferred Stockholders..... 4,315 1,396 1,829 5,732 (7,036) 6,236
(Income) loss allocated to minority
interest.................................... (570) -- -- -- (407)(H) (977)
---- ---- ---- ---- ---- ----
Income before distributions to preferred
stockholders................................ 3,745 1,396 1,829 5,732 (7,443) 5,259
Distributions to preferred stockholders....... (5,641) -- -- -- -- (5,641)
------ ------ ------ ------ ------ ------
Income (loss) allocated to common
stockholders................................ $ (1,896) $ 1,396 $ 1,829 $ 5,732 $(7,443) $ (382)
--------- --------- --------- --------- ------- ---------
Net loss per Common Share..................... $ (0.59) $ (0.08)
========= =========
Shares of Common Stock, in thousands.......... 3,201 4,701
===== =====
</TABLE>
The accompanying notes and management assumptions are an integral part of
these pro forma consolidated financial statements.
F-4
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited Pro Forma Consolidated Balance Sheet is
presented as if the Offering, and the acquisition of the New Retail
Properties had been consummated on September 30, 1996.
The accompanying unaudited Pro Forma Consolidated Statements of Operations
are presented as if:
(i) the acquisition of the 1996(A) and the 1996(B) Acquisition Properties
and the proposed acquisition of the the New Retail Properties had been
consummated as of January 1, 1995; and
(ii) the June 1995 Offering had occurred as of January 1, 1995; and
(iii) the Offering had occurred as of January 1, 1995.
The 1996(A) Acquisition Properties consist of the operations of Stefko
Boulevard Shopping Center and 15th & Allen Shopping Center, both purchased on
January 4, 1996, Clopper's Mill Village Shopping Center purchased on March
20, 1996 and Centre Ridge Marketplace purchased on March 29, 1996.
The 1996(B) Acquisition Properties consist of the operations of Takoma Park
Shopping Center Purchased on April 29, 1996 and Southside Marketplace
Shopping Center purchased on June 7, 1996.
These pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and notes thereto,
included elsewhere in this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of the acquisition of the
1996(A) and 1996(B) Acquisition Properties, the proposed acquisition of the
New Retail Properties and the June 1995 offering and the Offering have been
made.
The unaudited pro forma consolidated financial statements are not necessarily
indicative of the actual financial position at September 30, 1996 or what the
actual results of operations of the Company would have been assuming the June
1995 Offering, the acquisitions of the 1996(A) and 1996(B) Acquisition
Properties and the proposed acquisition of the New Retail Properties had been
completed as of January 1, 1995, nor are they indicative of the results of
operations for future periods.
2. ADJUSTMENTS TO PRO FORMA CONSOLIDATED BALANCE SHEET:
(A) Reflects the purchase of the New Retail Properties for $53,829,
(including the payment of transaction expenses of $1,379), expansions of
existing retail properties of $1,875 and deferred financing costs of $433.
These items were financed through new mortgage debt of $8,244, the assumption
of existing mortgage debt of $21,076, cash of $20,669 from the proceeds of
the Offering and the issuance of approximately 300,000 Common Units with a
value of approximately $6,148.
(B) Reflects the common minority interest share (17.5%) of the Offering
proceeds as follows:
<TABLE>
<S> <C>
ProForma Stockholders' Equity before Minority Interest adjustment.... $118,881
Less Preferred Stockholder liquidation preference.................... (57,855)
Less Preferred Unitholders liquidation preference.................... (10,530)
--------
Equity available for Common Unitholders.............................. 50,496
Common Minority interest ownership %................................. 17.5%
Common Minority interest ownership................................... 8,837
Preferred Minority interest ownership................................ 10,530
--------
ProForma Minority Interest........................................... $ 19,367
========
</TABLE>
F-5
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands)
(unaudited)
(C) Reflects the following transactions:
<TABLE>
<S> <C>
Sale of 1,500,000 shares of Common Stock at $21.75 per share....................... $ 32,625
Transaction costs associated with the sale of Common Stock......................... (2,300)
------
Net Proceeds....................................................................... 30,325
Purchase of the New Retail Properties.............................................. (18,794)
Repayment of Mortgage Debt......................................................... (4,690)
Property expansion expenditures.................................................... (1,875)
------
$ 4,966
=========
</TABLE>
(D) Reflects new mortgage debt of $8,244 and the assumption of mortgage debt
in the amount of $21,076 in connection with the acquisition of the New
Retail Properties less repayment of $4,690 of Mortgage Debt with proceeds
from the Offering.
(E) Reflects $.01 par value associated with the sale of 1,500,000 shares of
Common Stock.
(F) Reflects the net proceeds of the offering ($30,310) plus the issuance
of approximately 300,000 Common Units ($6,859) less the amounts
allocated to minority interests ($6,794).
3. ADJUSTMENTS TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS:
(A) Reflects the proforma results of operations for the year ended December 31,
1995 as reported in Footnote 2 of the Company's 1995 financial statements
included herein. The proforma results of operations were presented as if
the June 1995 Offering and the Acquisitions of the Festival at Woodholme
Shopping Center, the UDR Properties, Kenhorst Shopping Center and
Firstfield Shopping Center had occurred on January 1, 1995.
(B) Reflects the operations of the 1996(A) Acquisition Properties for the six
months ended June 30, 1996 and the year ended December 31, 1995. The
adjustment for the six months ended June 30, 1996 represents the activity
only for the period of time prior to the acquisition of the 1996(A)
Acquisition Properties by the Company.
(C) Reflects the operations of the 1996(B) Acquisition Properties for the six
months ended June 30, 1996 and the year ended December 31, 1995. The
adjustment for the six months ended June 30, 1996 represents the activity
only for the period of time prior to the acquisition of the 1996(B)
Acquisition Properties by the Company.
(D) Reflects the operations of the New Retail Properties for the nine months
ended September 30, 1996 and the year ended December 31, 1995.
F-6
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
(E) Reflects the net increase in property operating and
maintenance costs relating to:
1996(A) Acquisition Properties management fees to be incurred.......... $ 8 $ 43
1996(B) Acquisition Properties management fees to be incurred.......... 23 58
New Retail Properties Management fees to be incurred................... 142 176
--------- ---------
$ 173 $ 277
========= =========
(F) Reflects the net increase (decrease) in interest expense relating to:
Repayment of existing mortgage debt ($4,690, 8.5%)..................... $ (298) $ (397)
The 1996(A) Acquisition Properties mortgage debt....................... 229 818
The 1996(B) Acquisition Properties debt................................ 530 1,307
Debt related to the New Retail Properties ............................. 1,951 2,600
Amortization relating to:
The New Retail Properties mortgage financing costs................... 29 39
Deferred financing costs on mortgages to be repaid................... (12) (17)
The 1996(A) Acquisition Properties Mortgage debt..................... 3 15
The 1996(B) Acquisition Properties Mortgage debt..................... 10 57
--------- ---------
$ 2,442 $ 4,422
========= =========
(G) Reflects the net increase in depreciation and amortization
relating to:
The 1996(A) Acquisition Properties (Cost basis: $17.1 million)......... $ 86 $ 542
The 1996(B) Acquisition Properties (Cost basis: $12.7 million)......... 162 402
The New Retail Properties (Cost basis: $43.9 million).................. 1,044 1,393
--------- ---------
$ 1,292 $ 2,337
========= =========
Depreciation is calculated using the
straight-line method over 31.5 years. It is
assumed that 80% of the acquisition cost
basis is allocated to the building.
(H) Reflects the limited partners' interest in the Operating
Partnership after preferred distributions.
Pro forma income before distributions and minority interest............ $ 4,731 $ 6,216
========= =========
Distributions to Preferred Stockholders (84.6%)........................ $ (4,231) $ (5,641)
Distributions to Preferred Unitholders (15.4%)......................... (721) (858)
---- ----
Total distributions............................................. $ (4,952) $ (6,499)
========= =========
Income allocated to Preferred Minority interest........................ 729 957
Minority interest ownership of City Line Shopping Center (11%)......... 17 20
-- --
Total income allocated to minority interest............................ $ 746 $ 977
========= =========
</TABLE>
F-7
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Rental properties:
Land................................................................................. $ 56,511 $ 42,420
Buildings and improvements........................................................... 229,263 185,672
------- -------
285,774 228,092
Accumulated depreciation............................................................... (28,324) (22,775)
------- -------
Rental properties, net............................................................... 257,450 205,317
Cash and equivalents................................................................... 1,870 7,806
Tenant receivables, net................................................................ 4,692 3,214
Deferred financing costs, net.......................................................... 4,717 5,690
Other assets........................................................................... 6,240 5,378
--------- ----------
Total assets................................................................. $ 274,969 $ 227,405
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable............................................................... $ 162,346 $ 116,182
Debentures........................................................................... 25,000 25,000
Accounts payable and accrued expenses................................................ 5,215 4,059
------- -------
Total liabilities............................................................ 192,561 145,241
Minority interest...................................................................... 12,573 11,088
Stockholders' equity:
Convertible preferred stock $.01 par value, 3,750,000 shares designated; 2,314,189
issued and outstanding................................................................. 23 23
Common stock $.01 par value, 90,000,000 shares authorized; 3,291,245 and 3,189,549
shares issued and outstanding, respectively............................................ 32 32
Additional paid-in capital........................................................... 86,538 80,699
Accumulated distributions in excess of earnings...................................... (16,758) (9,678)
------- ------
Total stockholders' equity................................................... 69,835 71,076
--------- ----------
Total liabilities and stockholders' equity................................... $ 274,969 $ 227,405
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
FOR THREE MONTHS
ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Minimum rents........................................... $ 8,390 $ 6,152 $ 23,408 $ 16,597
Percentage rents........................................ 107 121 501 302
Tenant reimbursements................................... 1,742 1,175 5,015 3,106
Other income............................................ 275 256 1,189 787
--- --- --- ---
Total revenues..................................... 10,514 7,704 30,113 20,792
------ ----- ------ ------
Expenses:
Property operating and maintenance...................... 2,631 1,787 7,623 5,024
General and administrative.............................. 648 1,737 2,348 2,152
Interest................................................ 3,999 2,845 11,025 8,095
Depreciation and amortization........................... 2,039 1,533 5,783 4,162
----- ----- ----- -----
Total expenses..................................... 9,317 7,902 26,779 19,433
----- ----- ------ ------
Income before income from Management Company, minority
interest and distributions to Preferred Stockholders.... 1,197 (198) 3,334 1,359
Income from Management Company............................ 90 87 97 361
-- --- - ---
Income before minority interest and distributions to
Preferred Stockholders.................................. 1,287 (111) 3,431 1,720
(Income) loss allocated to minority interest.............. (188) (218) (486) (87)
---- --- ---- ---
Income before distributions to Preferred Stockholders..... 1,099 (329) 2,945 1,633
Distributions to Preferred Stockholders................... (1,410) (1,388) (4,231) (3,728)
------ ------ ------ ------
Net Income (loss) allocated to common stockholders........ $ (311) $ (1,717) $ (1,286) $ (2,095)
========= ========= ========= =========
Net Income (loss) per Common Share........................ $ (0.09) $ (0.56) $ (0.40) $ (1.01)
========= ========= ========= =========
Shares of Common Stock, in thousands...................... 3,288 3,076 3,227 2,081
===== ===== ===== =====
Distributions per share................................... $ 0.4875 $ 0.4875 $ 1.4625 $ 1.4625
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Income before distributions to Preferred Stockholders............................... $ 2,945 $ 1,633
Adjustment to reconcile net cash provided by operating activities:
Income allocated to minority interest............................................. 486 87
Depreciation and amortization..................................................... 5,784 4,162
Amortization of deferred financing costs and loan discounts....................... 1,668 1,713
Equity in earnings of Management Company.......................................... 263 99
Compensation paid or payable in company stock..................................... 1,136 1,183
Provision for uncollectible accounts.............................................. 228 349
Recognition of deferred rent...................................................... (691) (549)
Net changes in:
Tenant receivables.............................................................. (1,015) (46)
Other assets.................................................................... (1,359) (1,329)
Account payable and accrued expenses............................................ 21 (514)
---- ----
Net cash provided by operating activities.................................. 9,466 6,788
----- -----
Investing activities:
Additions to rental properties...................................................... (3,298) (1,420)
Purchase of rental properties....................................................... (38,962) (13,851)
------- -------
Net cash used in investing activities...................................... (42,260) (15,271)
------- -------
Financing activities:
Proceeds from line of credit........................................................ 8,348 --
Proceeds from mortgage notes........................................................ 30,225 --
Proceeds from issuance of Common Stock.............................................. -- 27,129
Cost of raising equity capital...................................................... -- (2,334)
Repayment on mortgage notes......................................................... (612) (2,193)
Additions to deferred financing costs............................................... (591) (136)
Repayments of Advances due Principals............................................... -- (447)
Distributions paid to Preferred Stockholders........................................ (4,231) (3,728)
Distributions paid to Common Stockholders........................................... (4,720) (3,048)
Distributions paid to minority interest............................................. (1,561) (1,167)
---- ----
Net cash provided by financing activities.................................. 26,858 14,076
------ ------
Net increase (decrease) in cash and equivalents..................................... (5,936) 5,593
Cash and equivalents, beginning of period........................................... 7,806 1,113
----- -----
Cash and equivalents, end of period................................................. $ 1,870 $ 6,706
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim consolidated financial statements of the Company are
prepared pursuant to the Securities and Exchange Commission's rules and
regulations for reporting on Form S-11 and should be read in conjunction
with the audited financial statements included herein. Accordingly certain
disclosures accompany annual financial statements prepared in accordance
with generally accepted accounting principles are omitted. In the opinion
of management, all adjustments, consisting solely of normal recurring
adjustments, necessary for fair presentation of the consolidated financial
statements for the interim periods have been included. The current period's
results of operations are not necessarily indicative of results which
ultimately may be achieved for the year.
The consolidated financial statements include the accounts of the Company
and its majority owned partnerships, including the Operating Partnership.
All significant intercompany balances and transactions have been
eliminated.
Loss per Share
Loss per share is calculated by dividing income after minority interest,
less preferred distributions by the weighted average number of common shares
outstanding during the three months and nine months ended September 30,
1996 and 1995 respectively. The weighted average number of common shares
outstanding during three months ended September 30, 1996 and 1995 were
3,288,000 and 3,076,000, respectively and the weighted average number of
common shares outstanding during nine months ended September 30, 1996 and
1995 were 3,227,000 and 2,081,000 respectively. Options outstanding are not
included since their inclusion would be anti-dilutive. The assumed conversion
of the Preferred Stock as of the date of issuance would have been
anti-dilutive. The assumed conversion of the partnership units held by the
limited partners of the Operating Partnership as of the REIT formation, which
would result in the elimination of earnings and losses allocated to minority
interests would have been anti-dilutive, as the allocation of losses to
limited partners was suspended due to their lack of responsibility to fund
losses. The Debentures, which are exchangeable into shares of Convertible
Preferred Stock, do not meet the criteria for classification as common
stock equivalents.
2. PURCHASE OF RENTAL PROPERTIES
On June 1, 1995, the Company purchased the Festival at Woodholme Shopping
Center located in Baltimore, Maryland for an approximate purchase price of
$14.3 million. The acquisition was financed through the issuance of
approximately 96,000 Operating Partnership common units with a value of
approximately $1.6 million and assumed mortgage indebtedness of $12.7
million. Concurrent with the closing, the Company made a $1.0 million
mortgage curtailment. The mortgage bears interest at 9.6% per annum and is
payable monthly based on a 28 year amortization schedule. The loan is due
in April 2000. The center is anchored by Sutton Place Gourmet and Pier One
Imports.
On June 30, 1995, (effective July 1, 1995) the Company purchased four
shopping centers located in Richmond, Virginia for an approximate purchase
price of $20.3 million. The shopping centers are Glen Lea, anchored by
Winn-Dixie Supermarket; Hanover Village, anchored by Farm Fresh
Supermarket; Laburnum Square, anchored by Hannaford Brothers Supermarket;
and Laburnum Park, anchored by Ukrops Supermarket. The acquisition was
financed through the issuance of approximately 358,000 shares of Preferred
Stock with a value of approximately $8.1 million, and cash of approximately
$12.2 million.
F-11
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
On October 12, 1995, the Company purchased Kenhorst Plaza Shopping Center
in Reading, Pennsylvania for an approximate purchase price of $11.0
million. The center is anchored by Redner's Supermarket and Rite-Aid Drugs.
The property was financed from the proceeds of the $14.2 million mortgage
loan obtained from Lutheran Brotherhood using Glen Lea, Hanover Village,
Laburnum Park and Laburnum Square as collateral.
On November 15, 1995, the Company purchased Firstfield Shopping Center
located in Gaithersburg, Maryland for an approximate price of $3.4 million.
The acquisition was financed through the issuance of approximately 36,000
shares of Preferred Stock with a value of approximately $0.8 million, a
seller provided purchase money note in the amount of approximately $2.5
million and $0.1 million cash.
On January 4, 1996, the Company purchased two shopping centers, Stefko
Boulevard Shopping Center, located in Bethlehem, Pennsylvania and 15th &
Allen Shopping Center, located in Allentown, Pennsylvania, from one seller
for an approximate purchase price of $9.3 million. The shopping centers are
each anchored by Laneco Supermarket. The acquisition was financed through
the issuance of approximately 121,000 Common Units with a value of
approximately $2.2 million, mortgage indebtedness of approximately $6.1
million and $1.0 million cash. The mortgage loan bears interest at 7.745%
per annum and is self amortizing over a 25 year period.
On March 20, 1996, the Company purchased the Clopper's Mill Village
Shopping Center located in Germantown, Maryland for an approximate purchase
price of $20.2 million. The center is anchored by Shoppers Food Warehouse
and CVS/Pharmacy. The purchase was financed with new mortgage debt of $14.5
million, the issuance of approximately 183,000 Common Units with a value of
approximately $3.5 million, the issuance of approximately 69,000 Preferred
Units with a value of approximately $1.7 million and approximately $.5
million cash. The mortgage loan bears interest at 7.18% per annum,
amortizes over a 25 year period and matures in 10 years.
On March 29, 1996, the Company purchased Centre Ridge Marketplace located
in Centreville, Virginia. The purchase price of the property was $5.5
million. On June 1, 1996, the Company purchased the Superfresh Supermarket
building, which anchors the shopping center for $3.0 million. The Company
expects to spend approximately $2.1 million for the construction of an
additional 34,000 square feet. The total cost of the project will be
approximately $11.0 million which will be financed through a $9.0 million
construction loan and $2.0 million of cash. A portion of the cash came from
a draw on the Company's line of credit.
On April 29, 1996, the Company purchased Takoma Park Shopping Center
located in Takoma Park, Maryland for an approximate purchase price of $4.6
million. The center is anchored by Shoppers Food Warehouse. The purchase
was financed with new mortgage debt of $2.4 million and a draw on the
Company's line of credit in the amount of $2.1 million and $0.1 million
cash. The Company plans on renovating the shopping center at a cost of
approximately $.8 million. The work is expected to be completed by October
1996 and will be financed through additional proceeds from the current
first trust lender.
On June 7, 1996, the Company purchased Southside Marketplace shopping
center located in Baltimore, Maryland for an approximate purchase price of
$11.0 million. The center is anchored by Metro Foods and Rite Aid Drugs.
The purchase was financed through the assumption of an $8.1 million first
trust mortgage and a draw on the Company's line of credit in the amount of
approximately $2.9 million.
The following unaudited pro forma condensed consolidated results of
operations are presented as if the acquisitions had occurred on January 1
of the period presented. In preparing the pro forma data, adjustments have
been made for the June 1995 Offering transactions. The pro forma
information is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results
of operations of the Company.
F-12
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Total revenues........................................ $ 31,373 $ 27,837 $ 37,865
--------- --------- ---------
Expenses:
Property operating and maintenance.................. 7,943 6,560 9,074
General and administrative.......................... 2,348 2,152 2,831
Interest............................................ 11,800 10,886 14,856
Depreciation and amortization....................... 6,031 5,402 7,419
----- ----- -----
Total Expenses................................. 28,122 25,000 34,180
------ ------ ------
Income before income from Management Company, minority
interest and distributions to Preferred
Stockholders........................................ 3,251 2,837 3,685
Income from Management Company........................ 97 361 449
-- --- ---
Income before minority interest and distributions to
Preferred Stockholders.............................. 3,348 3,198 4,134
Income allocated to minority interest................. (516) (422) (637)
---- ---- ----
Income before distributions to Preferred
Stockholders........................................ 2,832 2,776 3,497
Distributions to Preferred Stockholders............... (4,231) (4,231) (5,642)
------ ------ ------
Loss allocated to Common Stockholders................. $ (1,399) $ (1,455) $ (2,145)
========= ========= =========
Net loss per common share............................. $ (0.43) $ (0.45) $ (0.66)
========= ========= =========
</TABLE>
3. SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash transactions for the nine months ended September 30, 1996
and 1995 and were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Liabilities assumed in purchase of rental properties.......................... $ 8,097 $ 11,723
Common units in the Operating Partnership issued in connection with the
purchase of rental properties............................................... -- $ 1,630
Convertible Preferred Stock issued in connection with the Purchase of UDR
Properties.................................................................. -- $ 8,055
Adjustment for minority interest's ownership of the operating partnership $ 1,485 $ 3,560
Accrual of cost of raising equity capital..................................... -- $ 474
Recognition of excess minority interest share of losses previously allocated
to common stockholders...................................................... -- $ 647
</TABLE>
F-13
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
4. ENVIRONMENTAL
The Company, as an owner of real estate, is subject to various
environmental laws of Federal and local governments. Compliance by the
Company with existing laws has not had a material adverse effect on its
financial condition and management does not believe it will have such an
effect in the future. However, the Company cannot predict the impact of new
or changed laws or regulations on its current Properties.
All of the Properties have been subjected to Phase I environmental audits.
Such audits have not revealed, nor is management aware of any environmental
liability that management believes would have a material adverse impact on
the consolidated financial position, results from operations or liquidity,
including the two situations discussed below. Management is unaware of any
instances in which it would incur and be financially responsible for any
material environmental costs if any or all Properties were sold, disposed
of or abandoned.
Contamination caused by dry cleaning solvents has been detected in ground
water below the Penn Station Shopping Center. The source of the
contamination has not been determined. Potential sources include a dry
cleaner tenant at the Penn Station Shopping Center and a dry cleaner
located in an adjacent property. Sampling conducted at the site indicates
that the contamination is limited and is unlikely to have any effect on
human health. The Company has made a request for closure to the State of
Maryland. Management believes that there is very little exposure at this
time, and therefore has not recorded an accrued environmental clean-up
liability.
Petroleum has been detected in the soil of a parcel adjacent to Fox Mill
Shopping Center on property occupied by Exxon Corporation ('Exxon') for use
as a gas station (the 'Exxon Station'). Exxon has taken steps to remediate
the petroleum in and around the Exxon Station, which is located
down-gradient from the Fox Mill Shopping Center. Exxon has agreed to take
full responsibility for the remediation of such petroleum. Currently, there
has been no contamination of the Company's property and none is expected to
occur. In addition, a dry cleaning solvent has been detected in the
groundwater below the Fox Mill Shopping Center. A groundwater pump and
treatment system, approved by the Virginia Water Control Board, was
installed in July 1992, and was operating until recently when the Control
Board ordered quarterly sampling to determine if further remediation is
necessary. The cost of running the pumps and monitoring the contamination
is approximately $10 per annum. The previous owner of the Fox Mill Shopping
Center has agreed to fully remediate the groundwater contamination.
Management does not believe that it has a material probable liability,
notwithstanding the pledge of the previous owner and the Company believes
that there is minimal exposure at this time, and therefore has not recorded
an accrued environmental clean-up liability.
5. SUBSEQUENT EVENTS
On October 19, 1996, the Board of Directors declared a distribution of
$0.4875 and $.6094 per share of Common Stock and Preferred Stock,
respectively to shareholders of record as of November 1, 1996, paid on
November 15, 1996.
F-14
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of First Washington Realty Trust, Inc.
We have audited the accompanying consolidated balance sheets of First
Washington Realty Trust, Inc. and Subsidiaries, as of December 31, 1995 and
1994, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
management of First Washington Realty Trust, Inc. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Washington Realty Trust, Inc. and Subsidiaries as of December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
February 9, 1996
F-15
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1995 and 1994
(dollars in thousands except share data)
<TABLE>
<CAPTION>
1995 1994
---- ----
ASSETS
<S> <C> <C>
Rental properties:
Land.................................................................................... $ 42,420 $ 32,417
Buildings and improvements.............................................................. 185,672 142,796
------- -------
228,092 175,213
Accumulated depreciation................................................................ (22,775) (17,241)
------- -------
Rental properties, net.................................................................. 205,317 157,972
Cash and equivalents...................................................................... 7,806 1,113
Tenant receivables, net................................................................... 3,214 2,550
Deferred financing costs, net............................................................. 5,690 7,228
Other assets.............................................................................. 5,378 3,624
----- -----
Total assets.................................................................... $ 227,405 $ 172,487
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................................................. $ 116,182 $ 89,858
Debentures.............................................................................. 25,000 25,000
Accounts payable and accrued expenses................................................... 4,059 2,620
Advances due Principals................................................................. -- 447
------- -------
Total liabilities............................................................... 145,241 117,925
Minority interest......................................................................... 11,088 8,580
Stockholders' equity:
Convertible preferred stock $.01 par value, 3,750,000 shares designated; 2,314,189 and
1,920,000 shares issued and outstanding, respectively..................................... 23 19
Common stock $.01 par value, 90,000,000 shares authorized; 3,189,549 and 1,574,359
shares issued and outstanding, respectively............................................... 32 16
Additional paid-in capital................................................................ 80,699 48,245
Accumulated distributions in excess of earnings........................................... (9,678) (2,298)
------ ------
Total stockholders' equity...................................................... 71,076 45,982
------ ------
Total liabilities and stockholders' equity...................................... $ 227,405 $ 172,487
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Minimum rents.................................................................. $ 23,276 $ 14,701 $ 10,594
Percentage rents............................................................... 495 255 68
Tenant reimbursements.......................................................... 4,362 2,823 1,889
Third-party fees............................................................... -- 1,912 4,396
Other income................................................................... 1,447 508 245
----- --- ---
Total revenues............................................................ 29,580 20,199 17,192
------ ------ ------
Expenses:
Property operating and maintenance............................................. 7,229 6,299 5,137
General and administrative..................................................... 2,831 1,356 2,665
Interest....................................................................... 11,230 9,301 7,909
Depreciation and amortization.................................................. 5,808 4,579 2,721
----- ----- -----
Total expenses............................................................ 27,098 21,535 18,432
------ ------ ------
Income (loss) before income from Management Company, extraordinary item,
distribution to Preferred Stockholders and minority interest................... 2,482 (1,336) (1,240)
Income from Management Company................................................... 449 500 --
--- --- -----
Income (loss) before extraordinary item, distributions to Preferred Stockholders
and minority interest.......................................................... 2,931 (836) (1,240)
Extraordinary item--Gain on early extinguishment of debt and debt
restructuring.................................................................. -- 2,251 2,665
----- ----- -----
Income before distributions to Preferred Stockholders and minority interest...... 2,931 1,415 $ 1,425
======
Income allocated to minority interest............................................ (602) (1,101)
---- ------
Income before distributions to Preferred Stockholders............................ 2,329 314
Distributions to Preferred Stockholders.......................................... (5,117) (1,811)
------ ------
Loss allocated to Common Stockholders............................................ $ (2,788) $ (1,497)
========= =========
Net loss per Common Share........................................................ $ (1.19) $ (0.95)
========= =========
Shares of Common Stock, in thousands............................................. 2,351 1,574
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993
(dollars in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
CONVERTIBLE ADDITIONAL DISTRIBUTIONS
COMMON PREFERRED PAID IN EXCESS ACCUMULATED
STOCK STOCK IN CAPITAL OF EARNINGS DEFICIT TOTAL
----- ----- ---------- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992...... $ $ $ $ $ (16,437) $ (16,437)
----- ------ ------ ------ -------- -------
Net income........................ 1,425 1,425
Distributions..................... (441) (441)
Contributions..................... 293 293
------ ------- ------- ------ --- ---
Balance, December 31, 1993........ (15,160) (15,160)
Common stock issued in connection
with June 1994 Offering
(1,282,051 shares).............. 13 24,987 25,000
Common stock issued in exchange
for $4 million note due from
Management Company (189,744
shares)......................... 2 (2)
Stock issued to Farallon (102,564
shares)......................... 1 1,999 2,000
Convertible Preferred Stock issued
in connection with June 1994
Offering (1,920,000 shares)..... 19 47,981 48,000
Cost of raising capital........... (11,902) (11,902)
Net income........................ 314 875 1,189
Cash distributions................ (2,612) (2,039) (4,651)
Pre-reorganization
contributions................... 1,772 1,772
Adjustment for deconsolidation of
Management Company.............. (204) (204)
Reclassification of accumulated
deficit upon reorganization..... (14,756) 14,756 --
Reclassification of minority
interest........................ (62) (62)
------- ------- --- ------ ------ ---
Balance, December 31, 1994........ 16 19 48,245 (2,298) -- 45,982
Net Income........................ 2,329 2,329
Issuance of Common Stock
(1,528,393 shares).............. 15 27,114 27,129
Issuance of Preferred Stock
(358,000 shares)................ 4 8,051 8,055
Issuance of Common Stock for
compensation (66,666 shares).... 1 1,182 1,183
Issuance of Preferred Stock
(36,189 shares)................. 0 787 787
Cost of raising equity capital.... (2,808) (2,808)
Cash distributions................ (9,709) (9,709)
Exchange of common units for
common shares (20,131 shares)... 119 119
Adjustment for Minority Interest's
ownership of the Operating
Partnership..................... (1,991) (1,991)
------- ------- ------- ------ ------- ------
Balance, December 31, 1995........ $ 32 $ 23 $ 80,699 ($ 9,678) $ -- $ 71,076
========= ========= ========= ========= ======== =========
</TABLE>
F-18
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Income before distributions to Preferred Stockholders........................... $ 2,329 $ 314 $ 1,425
Adjustment to reconcile net cash provided by operating activities:
Income allocated to minority interest......................................... 602 1,101 --
Depreciation and amortization................................................. 5,808 4,579 2,721
Amortization of deferred financing costs and loan discounts................... 2,260 1,308 216
Compensation paid or payable in company stock................................. 1,800 -- --
Provision for uncollectible accounts.......................................... 483 941 318
Gain on early extinguishment of debt and debt restructuring................... -- (2,251) (2,665)
Recognition of deferred rent.................................................. (855) 537 30
Net changes in:
Tenant receivables.......................................................... (292) (1,336) (522)
Other assets................................................................ (2,160) (1,048) (417)
Account payable and accrued expenses........................................ (3) (981) (275)
Equity in earnings of Management Company.................................... 31 -- --
-- -------- -------
Net cash provided by operating activities.............................. 10,003 3,164 831
------ ----- ---
Investing activities:
Additions to rental properties.................................................. (2,067) (3,301) (515)
Purchase of rental properties................................................... (27,917) (52,935) --
Sale of land.................................................................... -- -- 65
Distributions from Management Company........................................... 100 -- --
-------- -------- -------
Net cash used in investing activities.................................. (29,884) (56,236) (450)
-------- -------- -------
Financing activities:
Proceeds from mortgage notes.................................................... 16,720 40,834 5,801
Proceeds from Debentures........................................................ -- 25,000 --
Proceeds from sale of Common Stock.............................................. 27,129 25,000 --
Proceeds from sale of Preferred Stock........................................... -- 48,000 --
Cost of raising equity capital.................................................. (2,680) (8,962) --
Repayment on mortgage notes..................................................... (2,260) (63,800) (5,395)
Additions to deferred financing costs........................................... (581) (8,032) (300)
(Reduction in) addition to Advances due Principals.............................. (447) -- (487)
Establishment of Lender escrows................................................. -- (737) --
Prepayment penalties............................................................ -- (276) --
Distributions paid--Pre-reorganization.......................................... -- (2,039) (441)
Distributions paid to Preferred Stockholders.................................... (5,117) (1,811) --
Distributions paid to Common Stockholders....................................... (4,593) (801) --
Distributions paid to minority interest......................................... (1,597) (509) --
Contributions--Pre-reorganization............................................... -- 1,772 293
Deconsolidation of Management Company........................................... -- (24) --
------ --- -------
Net cash provided by (used in) financing activities.................... 26,574 53,615 (529)
------ ------ ----
Net increase (decrease) in cash and equivalents................................. 6,693 543 (148)
Cash and equivalents, beginning of period....................................... 1,113 570 718
----- --- ---
Cash and equivalents, end of period............................................. $ 7,806 $ 1,113 $ 570
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
1. ORGANIZATION AND BUSINESS
First Washington Realty Trust, Inc. and subsidiaries (collectively, the
'Company') is the successor to substantially all of the interests of First
Washington Management, Inc. ('FWM'), its affiliates and certain others in a
portfolio of 14 retail and two multifamily properties owned by FWM and its
affiliates (collectively, the 'Existing Properties'), and six properties
acquired from unrelated third parties (the 'Acquisition Properties' and
collectively, the 'Properties') all located in the Mid-Atlantic region and
the economic beneficiary of the related acquisition, property management,
renovation and third-party businesses (together with the Existing
Properties, the 'FWM Group' or 'Predecessor') through the issuance of
1,282,051 and 1,920,000 shares of Common and Convertible Preferred Stock,
respectively, (the 'Offering') of the Company.
The Company, incorporated in Maryland in April 1994, is self-managed and
self-administered and has elected to be taxed as a real estate investment
trust ('REIT') under the Internal Revenue Code of 1986, as amended (the
'Code').
On June 27, 1994, the Company completed a private placement offering (the
'June 1994 Offering') of 1,920,000 shares of 9.75% Series A Cumulative
Participating Convertible Preferred Stock ('Preferred Stock') with a $0.01
par value per share and a liquidation preference of $25.00 per share, and
1,282,051 shares of $0.01 par value Common Stock. The June 1994 Offering
price per share of Preferred Stock and Common Stock was $25.00 and $19.50,
respectively, resulting in gross offering proceeds of $73.0 million. Net of
Initial Purchaser's Discount/Placement Agent's fee and total estimated
offering expenses, the Company received approximately $63.1 million in
proceeds.
Simultaneously with the June 1994 Offering, the Company was admitted as the
sole general partner of First Washington Realty Limited Partnership (the
'Operating Partnership'). The transactions leading to the admittance of the
Company into the Operating Partnership were as follows:
The Operating Partnership was formed via the contribution of
substantially all the assets of or interests in the FWM Properties by
the owners, net of related mortgage indebtedness. In addition, certain
of the Principals contributed a $4.0 million promissory note with no
cost basis (the 'FWM Note') due from First Washington Management, Inc.
('FWM'), operator of the related acquisition, property management,
leasing and brokerage business, to the Company in exchange for 189,744
shares of Common Stock. The Company was admitted as the sole general
partner of the Operating Partnership, receiving an approximate
ownership interest of 83.5% in exchange for contributing the net June
1994 Offering proceeds and the FWM Note.
The net proceeds of the June 1994 Offering, together with borrowings
of $38.5 million under new mortgage loans collateralized by certain of
the Properties and the issuance of $25.0 million of Exchangeable
Debentures, were used to repay indebtedness of $68.1 million including
approximately $3.1 million for prepaid interest and amortization,
prepayment penalties and term extension fees; to purchase the
Acquisition Properties at a cost of $51.9 million; to pay expenses in
connection with the Formation Transactions of $6.5 million; and, to
fund working capital. The original owners' interests in the properties
were converted into 337,732 limited partnership units, including 2,564
units received by the Principals in connection with their contribution
of all of the non-voting preferred stock entitled to 99% of the cash
flow of FWM, which are exchangeable on a one-for-one basis for shares
of the Company's common stock.
Farallon Capital Management, Inc. ('Farallon'), a previously unrelated third
party, along with certain of its affiliates were reimbursed approximately
$1.1 million advanced in connection with their funding of certain expenses
relating to the Offering and received 102,564 shares of Common Stock with a
value of $2.0 million
F-20
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
based upon the June 1994 Offering price of $19.50 per share. The Common
Stock issued was recorded at its fair value with a corresponding increase
in costs of raising capital.
The accompanying financial statements for the periods prior to the REIT
formation are presented on a combined historical cost basis due to their
common control and management. The exchange of the Predecessor for
interests in the Operating Partnership was accounted for as a
reorganization of entities under common control. As such, these assets and
liabilities were transferred and accounted for at historical cost in a
manner similar to that in a pooling of interests.
The Company's assets are held by, and all its operations conducted through,
the Operating Partnership and FWM. As of December 31, 1995, the Company and
the Operating Partnership, including subsidiary partnerships, collectively
owned 100% of the properties. Due to the Company's ability, as the general
partner, to exercise both financial and operational control over the
Operating Partnership, the Operating Partnership is consolidated for
financial reporting purposes. Subsequent to the admittance of the Company,
allocation of net income to the limited partners of the Operating
Partnership is based on their respective partnership interests and is
reflected in the accompanying Consolidated Financial Statements as minority
interests. Losses allocable to the limited partners in excess of their
basis are allocated to the Common Stockholders as the limited partners have
no requirement to fund losses.
The Company's investment in the preferred stock of FWM is accounted for
under the equity method of accounting. In addition to receiving fees under
third-party management, leasing and brokerage agreements, FWM manages all
the properties owned by the Operating Partnership in exchange for a fee.
On September 14, 1994, the Company filed a registration statement with the
Securities and Exchange Commission to register shares issued or reserved
for issuance pursuant to the June 1994 Offering. The registration statement
was declared effective on December 15, 1994.
On June 27, 1995, the Company completed a public offering of 1,450,000
shares of Common stock (the 'June 1995 offering'). The shares of stock were
priced at $17.75 per share, resulting in gross offering proceeds of $25.7
million. The Company netted $23.0 million after deducting the underwriters
discount and estimated offering expenses of $2.7 million.
On July 27, 1995, an additional 78,393 shares of Common Stock were issued
pursuant to the exercise of a portion of the underwriters over-allotment
option. The Company received additional proceeds of $1.3 million net of the
underwriters discount.
The Company's financial results are affected by general economic conditions
in the markets in which its properties are located. An economic recession,
or other adverse changes in general or local economic conditions, could
result in the inability of some existing tenants of the Company to meet
their lease obligations and could otherwise adversely affect the Company's
ability to attract or retain tenants. The Retail Properties are typically
anchored by supermarkets, drug stores and other consumer necessity and
service retailers which usually offer day-to-day necessities rather than
luxury items. These types of tenants, in the experience of the Company,
generally maintain more consistent sales performance during periods of
adverse economic conditions.
2. ACQUISITION OF RENTAL PROPERTIES
With the proceeds from the June 1994 Offering, the Company acquired six
additional retail properties (collectively, the 'Acquisition Properties'),
net of mortgage debt assumed, for an aggregate purchase price of
approximately $83.8 million. The properties were acquired for approximately
$51.9 million in cash, the assumption of approximately $14.4 million of
debt, including purchase money notes exchangeable into either
F-21
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
shares of Convertible Preferred Stock or Common Stock (see Note 3),
issuance of 352,000 Exchangeable Preferred Units and net of an additional
$8.7 million of debt assumed and repaid. The acquisitions were accounted
for using the purchase method of accounting.
On June 1, 1995, the Company purchased the Festival at Woodholme Shopping
Center located in Baltimore, Maryland for an approximate price of $14.3
million. The acquisition was financed through the issuance of approximately
96,000 Operating Partnership common units with a value of approximately
$1.6 million and assumed mortgage of indebtedness of $12.7 million.
Concurrent with the closing, the Company made a $1.0 million mortgage
curtailment. The mortgage bears interest at 9.6% per annum and is payable
monthly based on a 28 year amortization schedule. The loan is due in April
2000. The center is anchored by Sutton Place Gourmet and Pier One Imports.
On June 30, 1995 (effective July 1, 1995), the Company purchased four
shopping centers located in Richmond, Virginia for an approximate purchase
price of $20.3 million. The shopping centers are Glen Lea, anchored by
Winn-Dixie Supermarket; Hanover Village, anchored by Farm Fresh Supermarket
Supermarket; Laburnum Square, anchored by Hannaford Brothers; and Laburnum
Park, anchored by Ukrops Supermarket. The acquisition was financed through
the issuance of approximately 358,000 shares of Preferred Stock with a
value of approximately $8.1 million, and cash of approximately $12.2
million.
The Company obtained a loan commitment using the four Richmond properties
as collateral, in the amount of $14.2 million which has a term of ten
years, and bears interest at 8.57% per annum, with monthly payments based
on a 22 year amortization schedule. The loan closed on October 6, 1995.
On October 12, 1995, the Company purchased Kenhorst Plaza Shopping Center
in Reading, Pennsylvania for an approximate purchase price of $11.0
million. The center is anchored by Redner's Supermarket and Rite-Aid Drugs.
The property was financed from the proceeds of the $14.2 million loan
discussed above.
On November 15, 1995, the Company purchased Firstfield Shopping Center
located in Gaithersburg, Maryland for an approximate price of $3.4 million.
The acquisition was financed through the issuance of approximately 36,000
shares of Preferred Stock with a value of approximately $0.8 million, a
seller provided purchase money note in the amount of approximately $2.5
million and $0.1 million cash.
The following unaudited pro forma condensed combined results of operations
for the years ended December 31, 1995 and 1994 are presented as if the
acquisitions of the rental properties occurred on January 1 of the period
presented. In preparing the pro forma data, adjustments have been made for
the June 1995 Offering and the June 1994 Offering and Formation
transactions. The proforma statements are provided for information purposes
only. They are based on historical information and do not necessarily
reflect the actual results that would have occurred nor are they
necessarily indicative of future results of operations of the Company.
F-22
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
1995 1994
---- ----
(UNAUDITED)
<S> <C> <C>
Total revenues.................................................................. $ 34,017 $ 31,026
Expenses:
Property operating and maintenance............................................ 8,048 8,693
General and administrative.................................................... 2,831 603
Interest...................................................................... 12,666 12,624
Depreciation and amortization................................................. 6,606 6,882
----- -----
30,151 28,802
------ ------
Income before income from Management Company and minority interest.............. 3,866 2,224
Income from Management Company.................................................. 449 700
--- ---
Income before distributions to preferred stockholders and minority interest..... 4,315 2,924
Income allocated to minority interest........................................... (570) (386)
Distributions to preferred stockholders......................................... (5,641) (5,641)
------ ------
Loss allocated to common stockholders........................................... $ (1,896) $ (3,103)
========= =========
Net loss per common share....................................................... $ (0.59) $ (0.97)
========= =========
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its majority owned partnerships, including the Operating Partnership.
All significant intercompany balances and transactions have been
eliminated. Combined financial statements, including the accounts after
elimination of all transactions between business entities included in the
FWM Group, are presented prior to the June 1994 Offering.
Following the formation of the Company and the recapitalization of FWM, the
accounts of the Management Affiliate were deconsolidated, resulting in a
net charge to accumulated deficit of $204.
Use of Accounting 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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect
to, among other things, various future economic factors which are difficult
to predict and are beyond the control of the Company. Therefore, actual
amounts could differ from these estimates.
Rental Properties
Rental properties are carried at the lower of cost less accumulated
depreciation or net realizable value. Depreciation is computed on the
straight-line basis over the estimated useful lives of the assets. The
Company uses a 27.5-to 31.5-year estimated life for buildings and 5-to
31.5-year estimated life for capital improvements. Tenant improvement
expenditures are depreciated over the term of the related lease.
Expenditures for ordinary maintenance and repairs are charged to operations
as incurred while significant
F-23
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
renovations and improvements that improve and/or extend the useful life of
the asset are capitalized and depreciated over the estimated useful life.
In determining whether there has been any impairment losses, the Company
determines that the property's net projected undiscounted cash flow before
debt service is sufficient to recover the cost of the asset. An impairment
loss would result if the carrying value were greater than the cumulative
undiscounted net cash flow. The amount of an impairment would be calculated
by determining the difference between the carrying value and the cumulative
discounted net cash flow.
Cash and Equivalents
All demand, money market accounts, certificates of deposit and repurchase
agreement accounts with an original maturity of three months or less at
date of purchase are considered to be cash and equivalents. The Company
places its temporary cash investments with high quality financial
institutions. The deposits at such financial institutions are guaranteed by
the Federal Deposit Insurance Corporation ('FDIC') up to $100. At various
times during the year, the Company has deposits in excess of the FDIC
insurance limit. In addition, the Company is required to maintain escrow
deposits with certain lenders. Such amounts which are included in other
assets, are also in excess of FDIC insurance limits.
Deferred Lease Costs
Deferred lease costs consist of fees and costs incurred to initiate and
renew operating leases, including amounts paid to FWM, and are amortized
over the lease term and are included in other assets.
Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain
long-term financing and are being amortized over the terms of the
respective loans using the effective interest method. Unamortized deferred
financing costs are charged to expense when debt is retired before the
maturity date. Accumulated amortization of deferred financing costs at
December 31, 1995 and 1994 was $3,492 and $1,373, respectively. Deferred
financing cost amortization expense is included in interest expense and
amounted to $2,260, $1,308 and $216 during 1995, 1994, and 1993
respectively.
Revenue Recognition
Rental income attributable to leases is recorded when due from tenants.
Certain of the leases provide for escalating base rents, which are
recognized on a straight-line basis over the term of the agreement. Rents
accrued, but not yet paid, are included in accounts receivable. As of
December 31, 1995 and 1994, the amounts of these straight-line receivables
were $2,396 and $1,541, respectively. The amount of rental income from the
straight-lining of rents amounted to $855, ($603) and ($30) for the years
ended 1995, 1994 and 1993, respectively. Certain of the leases also provide
for additional revenue to be paid based upon the level of sales achieved by
the lessee. Most leases provide for tenant reimbursement of common area
maintenance and other operating expenses.
An allowance for doubtful accounts has been provided against the portion of
tenant accounts receivable which is estimated to be uncollectible. Tenant
accounts receivable in the accompanying combined balance sheets are shown
net of an allowance for doubtful accounts of $418 and $391 as of December
31, 1995, and 1994, respectively.
F-24
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
Income Taxes
The Company operates and intends to continue to operate in a manner
intended to qualify as a REIT under the Code. A trust which distributes at
least 95% of its taxable income to its shareholders each year and which
meets certain other conditions will not be taxed on that portion of its
taxable income which is distributed to its shareholders. During 1995,
common and preferred distributions paid of $0 and $1.90 per share are
treated as ordinary income, respectively and $1.95 and $0.54 are treated as
a return of capital, respectively.
If the Company fails to qualify as a REIT in any tax year, the Company will
be subject to Federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Even if the
company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property and federal income
and excise taxes on its undistributed income.
Loss per Share
Loss per share is calculated by dividing income after minority interest,
less preferred distributions by the weighted average number of common
shares outstanding during the respective periods. Options outstanding are
not included since their inclusion would be anti-dilutive. The assumed
conversion of the Preferred Stock as of the date of issuance would have
been anti-dilutive. The assumed conversion of the partnership units held by
the limited partners of the Operating Partnership as of the REIT formation,
which would result in the elimination of earnings and losses allocated to
minority interests would have no effect for 1995 and would have been
anti-dilutive in 1994, as the allocation of losses to limited partners was
suspended due to their lack of responsibility to fund losses. The
Debentures, which are exchangeable into shares of Convertible Preferred
Stock, do not meet the criteria for classification as common stock
equivalents.
Minority Interest
Minority interest represents the limited partners' interest of 422,802, and
347,056 common units as of December 31, 1995 and 1994, respectively, and
352,000 Exchangeable Preferred Units in the Operating Partnership. The
Exchangeable Preferred Units have an aggregate liquidation preference of
$8,800. At the date of formation, the minority interest was established
based on their interest in the value of the Operating Partnership.
Annually, the income is assigned to Preferred Stockholders to the extent of
their distributions and amounts necessary to maintain their balance at its
liquidation value. Any remaining income is assigned to minority Common
Stockholders based on their percentage interest during the period the
income is generated. Losses of the Operating Partnership are allocated to
minority Common Stockholders based on their percentage interest to the
extent that they have capital available. In the event that consolidated net
assets decrease below the Preferred Stock liquidation value, operating
losses are allocated to the Preferred minority interest based on their
percentage ownership. Additionally, the impact on stockholders equity of
changes in minority interest percentage ownership caused by the issuance of
common stock or conversions of preferred stock are reflected in additional
paid in capital.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS 121, which is required to be adopted by January 1, 1996,
established accounting standards for the impairment of long-lived assets,
certain intangible assets and cost in excess of net assets related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
F-25
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123, which is required to be adopted by January 1, 1996,
established financial accounting and reporting standards for issuance of
equity instruments to acquire goods and services from non-employees. The
Company intends to continue to measure compensation using the accounting
prescribed by APB Opinion No. 25.
The Company does not expect that adoption of SFAS 121 and 123 will have a
material effect on its consolidated financial position, consolidated
statement of income or liquidity.
4. RENTAL PROPERTIES
Depreciation expense for each of the years ended December 31, 1995, 1994,
and 1993 was $5,534, $4,223, and $2,296, respectively.
For each of the years ended December 31, 1995, 1994, and 1993, maintenance
and repairs expense was $1,872, $1,552, and $771, respectively, and real
estate taxes were $2,044, $1,484, and $1,109, respectively. Such amounts
are included in property operating and maintenance expense in the
accompanying consolidated statements of operations.
5. DEFERRED FINANCING COSTS
As part of the June 1994 Offering, the Company purchased an interest rate
cap, prepaid some mortgage interest and incurred various finance charges
and other costs associated with the mortgage loans. These costs have been
recorded as deferred finance charges and are amortized over the life of the
related loans. A summary of the charges incurred during 1994 is as follows:
Purchase of interest rate cap......................... $ 3,204
Buy down of interest rates............................ 2,751
Lender's points, fees and other charges............... 2,077
-----
Total incurred................................. $ 8,032
=========
F-26
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
6. MORTGAGE DEBT
Mortgage and other notes payable consisted of the following as of December
31, 1995 and 1994, respectively:
1995 1994
---- ----
Mortgage notes with fixed interest at:
8.50%, maturing July 1997........................ $ $ 2,000
6.50%, maturing June 1998........................ 4,151 4,151
6.50%, maturing July 1999(f)..................... 3,587 3,587
6.50%, maturing July 1999........................ 3,826 3,826
6.70%, maturing July 1999(a)(b)(c)............... 38,500 38,500
7.00%, maturing July 1999........................ 3,500 3,518
7.00%, maturing July 1999........................ 3,656 3,656
9.60% maturing April 2000........................ 11,671 --
5.00%, maturing July 2000(d)..................... 4,308 4,167
6.50% to 8.00%, maturing through July 2001....... 9,332 9,325
8.57% maturing October 2005...................... 14,163 --
7.50% maturing December 2005..................... 2,520 --
6.50%, maturing April 2006....................... 7,998 7,998
----- -----
Total fixed rate notes........................... 107,212 80,728
------- ------
Mortgage notes with variable rates:
Variable maturing June 1998(e)................... 7,440 7,600
Variable maturing February 2020.................. 1,530 1,530
----- -----
Total variable rate notes........................ 8,970 9,130
----- -----
$ 116,182 $ 89,858
========== =========
(a) As part of this loan the lender required the Company to establish
escrow accounts for real estate taxes, insurance and a replacement
reserve. These escrows, totaling $512 at December 31, 1995, are
included in other assets.
(b) The Company borrowed $38.5 million under new mortgage loans
(collectively, the 'Nomura Mortgage Loan') collateralized by five of
the Properties. These loans, which bear interest at 30-day LIBOR
(5.69% at December 31, 1995) plus 2.0% and mature on July 1, 1999,
are closed to prepayment for 48 months and can be prepaid thereafter
based on a 1.50% declining prepayment penalty. To mitigate its
exposure to these variable rate loans, the Company entered into a
five year interest rate protection agreement for a notional amount
of $38.5 million that is effective through the loans maturity, and
caps the interest rate at 6.20% for year one, 6.70% for year two,
and 7.70% for years three through five. The financing cost of the
interest rate protection agreement of approximately $3.2 million, is
being amortized over the life of the agreement using the effective
interest rate method resulting in an effective interest rate on the
Nomura Mortgage Loan of approximately 8.9% per annum. The estimated
fair market value of the interest rate protection agreement, as
determined by the issuing financial institution, was approximately
$1.2 million at December 31, 1995.
F-27
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
(c) In December 1995, the Company entered into two interest rate swap
contracts with a notional amount of $38.5 million. The Company
intends to hold such contracts, the first of which commences in July
1996 and expires in June 1999 and the second of which commences in
July 1999 and expires in December 2003,until their expiration dates.
The purpose of the swaps is to fix the interest rate on the $38.5
million Nomura loan through its expiration date of June 1999 at
7.09% and to mitigate any interest rate exposure upon refinancing
the loan by fixing the LIBOR rate at 6.375% for the period beginning
July 1999 through December 2003. Under the terms of the interest
rate contract, the Company will be paying a fixed rate of 5.09% to
the Counter Party through June 1999 and a fixed rate of 6.375%
through December 2003. The Company will be receiving variable
payments from the Counter Party based on 30 day libor through
December 2003. The Counter Party has as collateral a $2.4 million
restriction on the $5.8 million line of credit it provided the
Company (see below). The fair market value of each of the interest
rate swaps is determined by the amounts at which they could be
settled. If the Company had settled these agreements with the
counter party on December 31, 1995, the Company would have paid
approximately $1.2 million.
(d) In connection with the purchase of First State Plaza and Valley
Centre, the Company issued a $4.8 million note (the 'FS Note')
bearing interest at 5.0% per annum, plus a participation under
certain circumstances as described in the agreement, and is
exchangeable for shares of Common Stock. The FS Note was recorded
net of a discount of $703 of which $492 remains outstanding,
reflecting an effective interest rate of approximately 8.2% as the
stated interest rate represented a below market rate. This discount
is being amortized over the life of the loan using the effective
interest method.
(e) The Company assumed Bond Obligations of $7.6 million collateralized
by Mayfair Shopping Center. The Bond Obligations bear interest at a
variable rate, plus a credit enhancement fee of 2.0%. The variable
rate is determined weekly at the rate necessary to produce a bid in
the process of remarketing the Bond Obligations equal to par plus
accrued interest, based on comparable issues in the market. The
interest rate, including the 2.0% credit enhancement fee, was 7.35%
at December 31, 1995. The Bond Obligations have a stated maturity of
February 1, 2010, however, the letter of credit supporting the Bond
Obligations expires on June 24, 1998.
(f) $1,750 of this loan was repaid with proceeds from the June 1994
Offering. As part of this transaction, the lender waived $787 of
accrued interest. This has been recorded as an extraordinary item
during 1994.
A portion of the net proceeds from the June 1994 Offering, along with
proceeds from the aforementioned new borrowings were used to repay
indebtedness of $68.1 million, including approximately $3.1 million for
prepaid and escrowed interest and principal amortization, prepayment
penalties and loan extension fees. The Operating Partnership recorded
extraordinary gains of approximately $2,251, including $787 of accrued
interest, resulting from the early extinguishment of debt at a discount.
In June 1993, the Company purchased at a discount the original debt,
which bore interest at the prime rate plus 1.0% and matured on December
31, 1993, including accrued interest of $54, for a payment of $4,578 and
a note for $1,044. The $1,618 discount has been reflected as an
extraordinary gain in 1993.
In August 1992, an FWM-affiliated partnership owning the Penn Station
Shopping Center was voluntarily placed in Chapter 11 under the United
States Bankruptcy Code as a result of the lender's unwillingness to
extend the loan in the ordinary course on terms and conditions acceptable
to the partnership. Among other matters, the lender, as a condition to
the extension, endeavored to convert the loan from non-recourse to
personal recourse. In July 1993, a consensual plan was approved by all
parties and the loan was modified and extended, on a non-recourse basis,
to provide for capitalization of $800 of accrued interest, bringing the
F-28
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
principal balance to $20,000, waiver of approximately $897 of accrued
interest and an extension of the maturity through August 1998. Interest
would accrue at the rate of 8% per annum through August 1995, increasing
to 8.5% for the year ending August 1996 and increasing to 8.75% for the
remainder of the term, resulting in an effective rate of approximately
8.4% per annum. Principal amortization, based on a 30-year amortization
schedule, would begin in September 1995. The original note of $19,200 had
accrued interest outstanding of $1,697 at July 30, 1993. Accordingly, the
Company reflected an extraordinary gain of $897 in 1993 for the forgiveness
of interest on the debt pursuant to the plan of reorganization. The note
was repaid in June 1994 from proceeds of the June 1994 Offering and an
extraordinary gain was recognized during 1994 for $1,200 less the
write-off of unamortized deferred charges of $198.
The Nomura Mortgage Loan, the Debentures (see Note 7), the Bond
Obligations, and the FS Note contain affirmative and negative covenants,
events of default and other provisions as are customarily required for
such instruments. The most restrictive covenants require the Company to
maintain a leverage ratio (total indebtedness divided by net worth) of at
least 2.50, maintain a debt service coverage ratio (net income before
interest and depreciation divided by scheduled debt service payments) of
at least 1.50 and require the Operating Partnership to maintain a net
worth of at least $57 million. Management believes that the Company is in
compliance with all restrictive covenants. In the case of mortgage loans
on four of the Properties, scheduled principal amortization for the five
years subsequent to June 27, 1994 of approximately $868 was escrowed in
an irrevocable trust at closing of the June 1994 Offering with the
corresponding note balances reduced for reporting purposes. As of
December 31, 1995, $328 was considered extinguished.
Maturities of the existing indebtedness at December 31, 1995 are as
follows for the years ending December 31:
AMOUNT
------
1996...................................................... $ 522
1997...................................................... 2,838
1998...................................................... 4,768
1999...................................................... 59,013
2000...................................................... 16,637
Thereafter................................................ 32,896
------
116,674
Less: Unamortized loan discount........................... (492)
----
$ 116,182
==========
The fair market value of the Company's mortgage debt at December 31, 1995
was approximately $116.6 million. The amount was estimated by the Company
using a discounted cash flow analysis using the Company's estimate of
current interest rates for similar notes.
The Company has entered into a line-of-credit agreement (the 'Agreement')
providing for a borrowing facility up to $5.8 million, with interest
payable monthly at a rate of LIBOR (5.69% December 31, 1995) plus 2.0%.
The Agreement, which matures June 1, 1998, is collateralized by one of
the properties and requires an annual non-refundable facility fee of $16.
The Agreement calls for the amount of the facility to be curtailed at any
point when it exceeds 75% of the appraised value of the collateral.
Interest paid for the years ended December 31, 1995, 1994, and 1993 was
$8,965, $9,114, and $7,548, respectively.
F-29
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
7. DEBENTURES
Simultaneous with the June 1994 Offering, the Company effected a private
placement with respect to $25.0 million of aggregate principal amount of
8.25% Debentures due June 27, 1999, with interest payable quarterly
beginning September 27, 1994. The Debentures are exchangeable in the
aggregate for one million shares of Convertible Preferred Stock,
representing approximately 15.4% of all shares of Common Stock (assuming
exchange/conversion of all Common Units and Convertible Preferred Stock (or
securities exchangeable into Convertible Preferred Stock or Common Stock)).
The Debentures are collateralized by two of the Properties. The fair market
value of the Debentures as of December 31, 1995 was approximately $24.5
million.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of
December 31, 1995 and 1994, respectively:
1995 1994
---- ----
Tenant Security Deposits............................ $ 993 $ 683
Accrued compensation................................ 617 --
Accounts payable and other accrued expenses......... 1,569 1,503
Accrued tenant improvement construction allowance... 700 --
Due to Management Affiliate......................... 180 434
--- ---
$ 4,059 $ 2,620
========= =========
9. PREFERRED STOCK
The Company's charter authorizes the issuance of up to 10,000,000 shares of
preferred stock, par value $.01 per share. In connection with the June 1994
Offering, the Company designated 3,500,000 (subsequently increased to
3,750,000) shares of preferred stock as Convertible Preferred Stock, of
which 1,920,000 shares were issued and remain outstanding. The Convertible
Preferred Stock has a liquidation preference equal to $25.00 per share plus
an amount equal to any accrued and unpaid dividend, (the 'Convertible
Preferred Liquidation Preference Amount'). Holders of the Convertible
Preferred Stock are entitled to receive cumulative preferential cash
dividends in an amount per share of Convertible Preferred Stock equal to
$0.6094 per quarter plus a participating dividend equal to the amount, if
any, of dividends in excess of $0.4875 per quarter with respect to the
number of shares of Common Stock into which a share of Convertible
Preferred Stock is then convertible.
Shares of Convertible Preferred are convertible on or after May 31, 1999
into shares of Common Stock, at a conversion price equal to $19.50.
F-30
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
10. SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash transactions for the year ended December 31, 1995,
and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Liabilities assumed in purchase of rental properties................................... $ 11,723 $ 22,428
Common and Preferred units in the Operating Partnership issued in connection with the
purchase of the rental properties....................................................... $ 1,630 $ 8,800
Convertible Preferred Stock issued in connection with the purchase of rental
properties............................................................................. $ 8,842 --
Common Stock issued as a fee for the funding of offering costs......................... -- $ 2,000
Accrual of cost of raising capital..................................................... $ 128 $ 940
Reclassification of accumulated deficit at June 27, 1994 to additional paid-in
capital................................................................................ -- $ 14,756
Adjustment for Minority Interest's ownership of the Operating Partnership.............. $ 1,991 $ 8,862
Deconsolidation of Management Affiliate................................................ -- $ 204
Accrual of tenant improvement construction allowance................................... $ 700 --
</TABLE>
There were no significant noncash transactions for the year ended
December 31, 1993.
The above information supplements the disclosures required by Statement
of Financial Accounting Standards No. 95-'Statement of Cash Flows.'
11. LEASE AGREEMENTS
The Company is the lessor of 27 retail properties with initial lease
terms expiring through the year 2020. Many leases are renewable for three
to five years at the lessee's option. Future minimum lease receipts under
noncancelable operating leases as of December 31, 1995 are as follows:
1996.............................................. $ 22,005
1997.............................................. 19,533
1998.............................................. 16,856
1999.............................................. 14,373
2000.............................................. 11,994
Thereafter........................................ 74,215
------
$ 158,976
===========
These future rentals do not include additional rent which may be received
from tenants for pass-through provisions in leases related to increases
in operating expenses and percentage rentals or rentals on the
multifamily properties due to their short duration.
F-31
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
12. COMMITMENTS AND CONTINGENCIES
Environmental
The Company, as an owner of real estate, is subject to various
environmental laws of Federal and local governments. Compliance by the
Company with existing laws has not had a material adverse effect on its
financial condition and management does not believe it will have such an
effect in the future. However, the Company cannot predict the impact of
new or changed laws or regulations on its current Properties.
All of the Properties have been subjected to Phase I environmental
audits. Such audits have not revealed, nor is management aware of any
environmental liability that management believes would have a material
adverse impact on the consolidated financial position, results from
operations or liquidity, including the two situations discussed below.
Management is unaware of any instances in which it would incur and be
financially responsible for any material environmental costs if any or
all Properties were sold, disposed or abandoned.
Contamination caused by dry cleaning solvents has been detected in ground
water below the Penn Station Shopping Center. The source of the
contamination has not been determined. Potential sources include a dry
cleaner tenant at the Penn Station Shopping Center and a dry cleaner
located in an adjacent property. Sampling conducted at the site indicates
that the contamination is limited and is unlikely to have any effect on
human health. The Company has made a request for closure to the State of
Maryland. Management believes that there is minimal exposure at this
time, and therefore has not recorded an accrued environmental clean-up
liability.
Petroleum has been detected in the soil of a parcel adjacent to Fox Mill
Shopping Center on property occupied by Exxon Corporation ('Exxon') for
use as a gas station (the 'Exxon Station'). Exxon has taken steps to
remediate the petroleum in and around the Exxon Station, which is located
down gradient from the Fox Mill Shopping Center. Exxon has agreed to take
full responsibility for the remediation of such petroleum. Currently,
there has been no contamination of the Company's property and none is
expected to occur. In addition, a dry cleaning solvent has been detected
in the groundwater below the Fox Mill Shopping Center. A groundwater pump
and treatment system, approved by the Virginia Water Control Board, was
installed in July 1992, and was operating until recently when the Control
Board ordered quarterly sampling to determine if further remediation is
necessary. The cost of running the pumps and monitoring the contamination
is approximately $10 per annum. The previous owner of the Fox Mill
Shopping Center has agreed to fully remediate the groundwater
contamination. Management does not believe that it has a material
probable liability, not withstanding the pledge of the previous owner and
the Company believes that there is minimal exposure at this time and
therefore has not recorded an accrued environmental clean-up liability.
Employment agreements
Two of the Company's officers have entered into three year employment
agreements. The agreements call for a base salary plus an incentive
compensation arrangement based on the Company meeting certain operating
result requirements. The incentive compensation is in the form of common
stock grants. Up to 100,000 shares of stock may be issued to each of the
two officers (or their designees). These additional shares of stock will
be recorded as additional compensation in the period earned. During 1995,
22,417 shares were issued to each of the two officers. No additional
shares were issued during 1994.
F-32
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
13. RELATED-PARTY TRANSACTIONS
The Operating Partnership owns 100% of the Preferred non-voting stock of
First Washington Management, Inc. (FWM), which entitles it to 99% of the
cash flow of FWM, which amounted to $100 and $255 in 1995 and 1994
respectively. Certain of the officers of the Company own 100% of the
Common Stock of FWM which entitles them to 1% of the cash flow of FWM,
which amounted to approximately $1 and $3 in 1995 and 1994 respectively.
In addition, the Company received $480 and $245 of interest income,
included in income from Management Affiliate, on the FWM Note in 1995 and
1994 respectively. The Company's equity in earnings of FWM for the year
ended December 31, 1995 and 1994 was ($31) and $0, respectively.
FWM provides property management, leasing and other related services to
the Company. Management and other fees paid by the Company in 1995
amounted to $1,178. Management and other fees paid by the Company during
the period from June 27, 1994 through December 31, 1994 amounted to $350.
Fees for such services were eliminated in the combined financial
statements for the periods prior to the REIT formation.
14. STOCK INCENTIVE PLAN
The Company established a stock incentive plan (the 'Stock Incentive
Plan') for the Company's directors, executive officers and other key
employees.
The Stock Incentive Plan provides that 351,540 shares of Common Stock
will be reserved for issuance. Currently, with the closing of the June
1994 Offering, the Company issued options to two officers to purchase
146,475 Shares of Common Stock each, pursuant to their respective
employment agreements. Such options vest 33 1/3% per years over 3 years,
have a life of ten years and are exercisable at $19.50 per Share. As of
December 31, 1995, no options were exercised.
The Company has also issued options to certain officers and employees to
purchase an aggregate of 35,868 Shares of Common Stock. The options have
an exercise price of $19.50 and have a term of ten years. The option
rights vest 20% per year beginning with the first anniversary date of the
grant if the employee continues to be employed by the Company. As of
December 31, 1995 no options were exercised. During 1995, 9,781 options
were forfeited.
The Company has also issued a total of 10,000 options to the four
independent board members. These options have an exercise price of $19.50
and have a term of 10 years. These option rights are vested immediately.
F-33
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
15. CONDENSED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1995 FIRST SECOND THIRD FOURTH
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Total Revenues.............................................. $ 6,480 $ 6,608 $ 7,704 $ 8,788
Net Income (loss) before Preferred Distributions and
Minority Interest........................................... $ 979 $ 918(1)$ (78)(1)$ 1,112
Net Income (loss) allocated to Common Stockholders.......... $ (536) $ 224(1)$ (1,684)(1)$ (792)
Net Income (loss) per Common Share.......................... $ (0.34) $ 0.14 $ (0.55) $ (0.25)
1994 FIRST SECOND THIRD FOURTH
---- ----- ------ ----- ------
Total Revenues.............................................. $ 4,038 $ 4,184 $ 5,865 $ 6,112
Net Income (loss) before Preferred Distributions and
Minority Interest........................................... $ (595) $ 1,470(3) $ 383 $ 157
Net Income (loss) allocated to Common Stockholders.......... n/a(2) n/a(2) $ (1,130)(4) $ (367)
Net Income (loss) per Common Share.......................... n/a(2) n/a(2) $ (0.72) $ (0.32)
</TABLE>
(1) The decrease in net income allocated to Common Shareholders in the
third quarter was due to increases in general and administrative
expenses, operating and maintenance expenses, depreciation and
amortization expense and interest expense. The increase in these
expenses were partially offset by increased revenues. General and
administrative expenses increased due to the awarding of performance
bonuses in the form of stock grants during the third quarter. The
increases in other expenses and revenues were due to the acquisition
of five properties. In addition, there was an increase in the amount
of income allocated to minority interests in the third quarter when
compared to the previous quarter. This occurred because the common
minority interests were allocated losses in the second quarter which
were suspended from previous quarters due to lack of basis. The
common minority interests are not allocated losses if their basis
would fall below zero because they are not required to fund losses.
The common minority interests currently have basis.
(2) Not applicable--the Company commenced operations as a corporation on
June 27, 1994.
(3) Large increase in net income due to the recognition of a $2,251 gain
on early extinguishment of debt and debt restructuring.
(4) Includes reclassification of net income prior to the June 1994
offering to minority interest.
16. SUBSEQUENT EVENTS
On January 19, 1996, the Board of Directors declared a distribution of
$0.4875 and $.6094 per Common and Preferred share of stock, respectively
to shareholders of record as of February 1, 1996. On February 15, 1996,
distributions in the amount of $2,965 were paid.
On January 4, 1996, the Company purchased two shopping centers, Stefko
Boulevard Shopping Center, located in Bethlehem, Pennsylvania and 15th &
Allen Shopping Center, located in Allentown, Pennsylvania, from one seller
for an approximate purchase price of $9.3 million. The shopping centers
are each anchored by Laneco Supermarket. The acquisition was financed
through the issuance of approximately 121,000 Common Units with a value of
approximately $2.2 million, mortgage indebtedness of approximately $6.1
million and $1.0 million cash. The mortgage loan bears interest at 7.745%
per annum and is self amortizing over a 25 year period.
On March 20, 1996, the Company purchased the Clopper's Mill Village
Shopping Center located in Germantown, Maryland for an approximate
purchase price of $20.2 million. The center is anchored by Shoppers
Food Warehouse and CVS/Pharmacy. The purchase was financed with new
mortgage debt of
F-34
<PAGE>
FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
$14.5 million, the issuance of approximately 183,000 Common Units with
a value of approximately $3.5 million, the issuance of approximately
69,000 Preferred Units with a value of approximately $1.7 million and
approximately $500,000 cash. The mortgage loan bears interest at 7.18%
per annum, amortizes over a 25 year period and matures in 10 years.
On March 29, 1996, the company purchased Centre Ridge Marketplace located
in Centreville, Virginia. The purchase price of the property was $5.5
million. The company expects to spend approximately $2.1 million for the
construction of an additional 34,000 square feet and $3.0 million for the
purchase of the building currently owned by the Superfresh Supermarket,
which anchors the shopping center. The purchase of the Superfresh
building will occur when the tenant opens for business which is expected
to take place in June 1996. The total cost of the project will be
approximately $11.0 million which will be financed through a $9.0 million
construction loan and $2.0 million of cash. A portion of the cash is
expected to come from a draw on the Company's line of credit.
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
First Washington Realty Trust, Inc.
We have audited the combined statement of revenues and certain expenses
of the New Retail Properties, as described in Note 1, for the year ended
December 31, 1995. This financial statement is the responsibility of each of
the respective New Retail Properties' management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined statement of revenues
and certain expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement. 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
audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and certain expenses was prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the Form S-11 of First Washington
Realty Trust, Inc., and is not intended to be a complete presentation of the
New Retail Properties' revenues and expenses and may not be comparable to
results from future operations of the New Retail Properties.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the combined revenues and certain expenses
of the New Retail Properties for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
October 18, 1996
F-36
<PAGE>
NEW RETAIL PROPERTIES
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
(dollars in thousands)
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
Revenues:
Minimum rents......................... $ 4,292 $ 5,578
Percentage rents...................... 262 401
Tenant reimbursements................. 1,023 1,021
Other income.......................... 13 39
----- -----
Total revenues................... 5,590 7,039
----- -----
Certain expenses:
Real estate taxes..................... 494 591
Recoverable operating expenses........ 777 646
Other operating expenses.............. 66 70
----- -----
Total certain expenses........... 1,337 1,307
----- -----
Revenues in excess of certain expenses..... $ 4,253 $ 5,732
========= =========
The accompanying notes are an integral part of this combined statement of
revenues and certain expenses.
F-37
<PAGE>
NEW RETAIL PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
(dollars in thousands)
1. BASIS OF PRESENTATION
The statement of revenues and certain expenses relates to the operations of
six properties (the 'New Retail Properties') which are expected to be
acquired by First Washington Realty Limited Partnership (the 'Operating
Partnership'), whose general partner is First Washington Realty Trust, Inc.
The accompanying combined statement of revenues and certain expenses
includes the accounts of the following shopping center properties, City
Line Shopping Center located in Philadelphia, Pennsylvania, Four Mile Fork
Shopping Center located in Fredericksburg, Virginia, Kings Park Shopping
Center located in Burke, Virginia, Newtown Square Shopping Center located
in Newtown Square, Pennsylvania, Northway Shopping Center located in
Millersville, Maryland, and Shoppes of Graylyn located in Wilmington,
Delaware. The accompanying combined financial statement includes the
operations of these properties.
Rental revenues and expenses are recorded using the accrual basis of
accounting.
The accompanying combined financial statement is not representative of the
actual operations for the year presented as certain expenses which may not
be comparable to the expenses expected to be incurred by the Company in the
proposed future operations of the New Retail Properties have been excluded.
The Company is not aware of any material factors relating to the New Retail
Properties that would cause the reported financial information not to be
necessarily indicative of future operating results. Expenses excluded
consist of interest, depreciation and amortization and the following other
costs which, in the opinion of management, are not directly related to the
future operations of the New Retail Properties.
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
Management fees........................ $ 257 $ 336
Leasing commissions.................... $ 156 $ 27
Non-recurring capital expenditures..... $ 51 $ 0
Other.................................. $ 85 $ 81
2. OPERATING LEASES
In addition to minimum rent, certain tenant leases provide for the
reimbursement of certain operating expenses and/or percentage rent in the
amount of a percentage of annual gross sales in excess of a specified base
sales amount.
Minimum rents presented for the nine months ended September 30, 1996 and the
year ended December 31, 1995, contain straight-line adjustments for rental
revenue increases or abatements in accordance with generally accepted
accounting principles. The aggregate rental revenue increases (decreases)
resulting from the straight-line adjustments for the nine months ended
September 30, 1996 (unaudited) and the year ended December 31, 1995 was $(6)
and $16, respectively.
No individual tenant accounts for 10% or more of the total rents for the
nine months ended September 30, 1996 or the year ended December 31, 1995.
The New Retail Properties are leased to tenants under operating leases with
expiration dates extending to the year 2013. Minimum future base rentals
under noncancelable operating leases as of December 31, 1995 are
approximately as follows:
1996............................................................ $ 5,495
1997............................................................ 5,159
1998............................................................ 4,362
1999............................................................ 3,338
2000............................................................ 2,452
2001 and thereafter............................................. 10,309
------
$ 31,115
=========
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of First Washington Realty Trust, Inc.
We have audited the combined statement of revenues and certain expenses
of the 1996(B) Acquisition Properties, as described in Note 1, for the year
ended December 31, 1995. This financial statement is the responsibility of
each of the respective 1996(B) Acquisition Properties' management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenues and
certain expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement. 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
audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and certain expenses was prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the Form S-11 of First Washington
Realty Trust, Inc., and is not intended to be a complete presentation of the
1996(B) Acquisition Properties' revenues and expenses and may not be
comparable to results from future operations of the 1996(B) Acquisition
Properties.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of the
1996(B) Acquisition Properties for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
July 2, 1996
F-39
<PAGE>
1996(B) ACQUISITION PROPERTIES
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
(dollars in thousands)
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
Revenues:
Minimum rents........................ $ 774 $ 1,946
Tenant reimbursements................ 176 407
Other income......................... 1 --
--- -----
Total revenues.................. 951 2,353
--- -----
Certain expenses:
Real estate taxes.................... 112 287
Recoverable operating expenses....... 105 192
Other operating expenses............. 5 45
- --
Total certain expenses.......... 222 524
--- ---
Revenues in excess of certain expenses.... $ 729 $ 1,829
========= =========
The accompanying notes are an integral part of this combined statement of
revenues and certain expenses.
F-40
<PAGE>
1996(B) ACQUISITION PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
(dollars in thousands)
1. BASIS OF PRESENTATION
The combined statement of revenues and certain expenses relates to the
operations of the two 1996(B) Acquisition Properties which were acquired by
First Washington Realty Limited Partnership (the 'Operating Partnership'),
whose general partner is First Washington Realty Trust, Inc. The accompanying
combined statement of revenues and certain expenses includes the accounts of
Takoma Park Shopping Center located in Takoma Park, Maryland (acquired April
29, 1996) and Southside Marketplace Shopping Center located in Baltimore,
Maryland (acquired June 7, 1996) for the period of time prior to acquisition.
Rental revenues and expenses are recorded using the accrual basis of
accounting.
The accompanying combined financial statement is not representative of the
actual operations for the year presented as certain expenses which may not be
comparable to the expenses expected to be incurred by the Company in the
proposed future operations of the 1996(B) Acquisition Properties have been
excluded. The Company is not aware of any material factors relating to the
1996(B) Acquisition Properties that would cause the reported financial
information not to be necessarily indicative of future operating results.
Expenses excluded consist of interest, depreciation and amortization of the
following there costs which, in the opinion of management, are not directly
related to the future operations of the 1996(B) Acquisition Properties.
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
Management fees..................... $ 14 $ 99
Leasing Commissions................. $ 0 $ 6
Professional Fees................... $ 6 $ 240
2. OPERATING LEASES
In addition to minimum rent, certain tenant leases provide for the
reimbursement of certain operating expenses and/or percentage rent in the
amount of a percentage of annual gross sales in excess of a specified base
sales amount.
There are no tenants which accounted for 10% or more of the total rents for
the six months ended June 30, 1996 or the year ended December 31, 1995.
The 1996(B) Acquisition Properties are leased to tenants under operating
leases with expiration dates extending to the year 2016. Minimum future base
rentals noncancelable operating leases as of December 31, 1995 are
approximately as follows:
1996............................................................ $ 1,161
1997............................................................ 1,934
1998............................................................ 1,918
1999............................................................ 1,842
2000............................................................ 1,784
2001 and thereafter............................................. 13,438
------
$ 22,077
=========
F-41
<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. 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 DATE SUBSEQUENT TO THE DATE
HEREOF.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary............................... 1
Risk Factors..................................... 8
The Company...................................... 19
Properties....................................... 21
Use of Proceeds.................................. 33
Price Range of the Common Stock and
Distributions.................................. 33
Capitalization................................... 35
Selected Pro Forma and Historical Financial and
Portfolio Information.......................... 36
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 39
Management....................................... 46
Policies With Respect to Certain Activities...... 55
Certain Relationships and Related Transactions... 59
Principal Stockholders........................... 60
Description of Capital Stock..................... 61
Shares Available for Future Sale................. 67
Certain Provisions of Maryland Law and the
Company's Charter and Bylaws................... 68
Federal Income Tax Considerations................ 71
Underwriting..................................... 85
Experts.......................................... 86
Legal Matters.................................... 86
Additional Information........................... 86
Glossary of Terms................................ 87
Index to Financial Statements.................... F-1
1,500,000 SHARES
FIRST WASHINGTON
REALTY TRUST, INC.
COMMON STOCK
----------
PROSPECTUS
----------
Alex. Brown & Sons
Incorporated
Friedman, Billings & Co.
Inc.
Tucker Anthony
Incorporated
November 25, 1996
