As filed with the Securities and Exchange Commission on October 14, 1999
Registration Statement No. 333-84953
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 3 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
Wellington Properties Trust
(Name of Small Business Issuer in its Charter)
Maryland 6798 39-6594066
State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation Code Number)
or Organization)
18650 West Corporate Drive, Suite 300
P.O. Box 0919
Brookfield, Wisconsin 53008-0919
(414) 792-8900
(Address and telephone Number of Principal
Executive Offices)
--------------------------
Robert F. Rice
President
18650 West Corporate Drive
P.O. Box 0919
Brookfield, Wisconsin 53008-0919
(414) 792-8900
(Name, Address, and Telephone number of agent for service)
Copies to:
Jay O. Rothman Albert A. Woodward
Foley & Lardner Maun & Simon, PLC
777 East Wisconsin Avenue 2000 Midwest Plaza Building West
Milwaukee, Wisconsin 53202 801 Nicollet Mall
(414) 271-2400 Minneapolis, Minnesota 54402
(612) 904-7400
Approximate date of commencement of proposed sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
<PAGE>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion - Dated October 14, 1999)
700,000 Class A Cumulative Convertible Preferred Shares
-----------------------
WELLINGTON PROPERTIES TRUST
-----------------------
We are a real estate investment trust, formed to acquire, develop, own
and operate investment real estate, principally office buildings, light
industrial facilities, community shopping centers and apartment communities.
This prospectus relates to the public offering of our Class A
Cumulative Convertible Preferred Shares (the "Class A Preferred Shares"), on
which dividends will accrue at an annual rate of 9.5%. The Class A Preferred
Shares may be converted by the holder into our common shares at any time.
Our common shares are currently listed for quotation on the Nasdaq
SmallCap Market(sm) under the symbol "WLPT." Our common shares have been
approved for listing on the American Stock Exchange under the symbol "RPP"
following the closing of the offering and once so listed, will no longer be
listed on the Nasdaq SmallCap Market(sm). No market currently exists for our
Class A Preferred Shares, but they have been approved for listing on the
American Stock Exchange under the symbol "RPP.A" upon the closing of the
offering.
The public offering price of our Class A Preferred Shares will be
$10.00 per share.
An investment by you in our Class A Preferred Shares involves a high
degree of risk. Before making an investment decision, you should carefully
consider the risks described under the heading "Risk Factors," beginning on page
10 of this prospectus.
The Offering Per Share Total
--------------------------------- ------------ ---------------
Public offering price $10.00 $7,000,000
Underwriting discount $ 0.75 $ 525,000
Proceeds to us (before
deduction of other
offering expenses) $ 9.25 $6,475,000
We are also offering our underwriters a 45-day option to purchase up to
105,000 additional shares, solely to cover any overallotments. In addition to
the underwriters' discount, we will pay the underwriters an aggregate of 2% of
total proceeds of this offering as payment for expenses they incur. We will also
issue the underwriters' representative a warrant to purchase 35,500 Class A
Preferred Shares.
In considering an investment in our Class A Preferred Shares, you
should rely only on the information in this prospectus. We have not authorized
anyone to provide you with information that is different.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of our Class A Preferred Shares or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
[logo of R. J. Steichen & Company]
[logo of Miller, Johnson & Kuehn, Incorporated]
______________________, 1999
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. To understand this offering fully, you should read the entire
prospectus carefully, including the risk factors and financial statements
contained in this prospectus.
All information in this prospectus has been adjusted, where
appropriate, to reflect a common share split on March 24, 1999, whereby every
holder of our common shares was issued 4.75 shares for each 3 shares held.
The Trust
Wellington Properties Trust is a self-administered real estate
investment trust or "REIT" formed on March 15, 1994 under Maryland law. In
November 1998, we became an umbrella partnership REIT when we formed an
operating partnership called Wellington Properties Investments, L.P., of which
we are the sole general partner. Through the operating partnership and our
subsidiaries, we acquire, develop, own and operate our investment properties.
We seek to develop a diversified portfolio of investment real estate,
including office buildings, light industrial facilities, community shopping
centers and apartment communities.
Our operating partnership or our subsidiaries currently own five
properties:
o a 119,722 square-foot office building in Minneapolis,
Minnesota;
o a 77,533 square-foot office building in St. Cloud, Minnesota;
o a 50,291 square-foot light industrial facility in Burnsville,
Minnesota;
o a 304-unit apartment community in Madison, Wisconsin; and
o a 72-unit apartment community in Schofield, Wisconsin.
Our Madison, Wisconsin apartment community is currently subject to sale under a
land purchase agreement.
Currently, each of our investment properties are managed by one of our
REITPLUS(sm) affiliates. We developed our REITPLUS(sm) strategy to create a
unique investment partnership with potential sellers of real estate properties
in order to expand our operations and attract quality properties from real
estate owners. REITPLUS(sm) provides potential sellers with traditional benefits
of an umbrella partnership REIT or "UPREIT," such as capital access,
diversification and tax deferral, PLUS it creates an entrepreneurial opportunity
uncommon in our industry, in that the sellers retain management and leasing
responsibility of the property, and participate in the equity appreciation of
our properties. Organizations looking to sell, but not "sell out," will be
incented to complete UPREIT transactions as a means to diversify holdings and
form strategic alliances. We designed the REITPLUS(sm) ownership and management
structure to attract these organizations and to provide them with the following
benefits:
o the seller becomes a partner, not an employee;
o the seller retains franchise value and name recognition of its
existing organization;
o the seller realizes benefits of our REIT tax status;
o the seller aligns itself with a publicly-traded entity, with
access to public capital markets; and
o the seller maintains autonomy and entrepreneurial focus.
3
<PAGE>
Key elements of the REITPLUS(sm) program include:
o REITPLUS(sm) Investment Strategies (External Growth). Our
investment strategy is to enter new markets and increase our
penetration in existing markets by procuring REITPLUS(sm)
affiliates with a significant market presence and operating
history. Typically, our REITPLUS(sm) investments include the
issuance of our common shares or operating partnership units,
thereby creating an ongoing incentive for our REITPLUS(sm)
affiliates to maximize long-term shareholder value. We believe
we have certain advantages which will enhance our ability to
identify and capitalize on REITPLUS(sm) opportunities,
including: (1) our management's multiple-market expertise in
identifying, structuring and closing acquisitions; (2)
management's experience in successfully growing and operating
a public real estate company; (3) management's long-standing
relationship with customers, real estate brokers and
institutional and other owners of real estate assets, which
collectively help us identify investment opportunities; and
(4) our ability to offer tax deferred consideration to
REITPLUS(sm) affiliates.
i o REITPLUS(sm) Operating Strategies (Internal Growth). Our
operating strategy is to serve the real estate needs of our
existing customers and expand our customer base. We intend to
implement proactive property management and leasing programs,
achieve operating efficiencies through increasing economies of
scale, and complete ongoing maintenance and value enhancement
improvements. We believe our operating strategy will provide
increasing cash flow from our properties through rental
increases and expense savings.
As we make future acquisitions of investment properties, including
through the application of the proceeds of this offering, we intend to diversify
our portfolio of investment real estate by acquiring properties throughout the
United States and by targeting, as opportunities present themselves, each of the
office, light industrial, retail and residential market segments.
Our principal offices are located at 18650 W. Corporate Drive, Suite
300, Brookfield, Wisconsin 53045 and 11000 Prairie Lakes Drive, Suite 610,
Minneapolis, Minnesota 55344. The telephone numbers of our offices are (414)
792-8900 (Brookfield) and (612) 826-6968 (Minneapolis).
The Offering
Class A Preferred
Shares offered................. 700,000 of our Class A Cumulative
Convertible Preferred Shares, $0.01 par
value per share.
Underwriters' overallotment
option......................... The underwriters of this offering will have
an option to purchase and sell up to an
additional 105,000 Class A Preferred Shares
solely to cover overallotments.
Trading symbols................. Our common shares are currently listed for
quotation on the Nasdaq SmallCap Market(sm)
under the symbol "WLPT," but will be listed
only on the American Stock Exchange under
the symbol "RPP" upon completion of the
offering.
The Class A Preferred Shares have been
approved for listing on the American Stock
Exchange under the symbol "RPP.A" following
completion of the offering.
4
<PAGE>
Equity to be outstanding
after the offering............. 1,372,152 of our common shares (not
including (1) 261,773 shares
subject to outstanding warrants
and share options, (2) an
estimated 1,645,000 shares
issuable upon conversion of the
Class A Preferred Shares, (3) an
estimated 822,030 shares
issuable upon conversion of our
Class B Junior Cumulative
Convertible Preferred Shares,
and (4) 1,719,335 shares
issuable upon conversion of
common units of our operating
partnership);
700,000 Class A Preferred Shares (not
including an additional 105,000
Class A Preferred Shares subject
to our underwriters'
overallotment option or warrants
we will issue to our
underwriters' representative to
purchase up to 35,500 Class A
Preferred Shares), as well as
700,000 Class A preferred units
of our operating partnership
that we will receive when we
contribute the net proceeds of
this offering to the operating
partnership (up to 805,000 Class
A preferred units if our
underwriters' overallotment
option is exercised in full);
349,800 of our Class B Junior Cumulative
Convertible Preferred Shares, as
well as 349,800 Class B
preferred units our operating
partnership has issued to us.
Voting rights................... Each of our Class A Preferred Shares will be
entitled, at all meetings of our
shareholders, to the number of votes equal
to the number of common shares into which
they are then convertible. Based on a
closing bid price of $3.875 on October 5,
1999, we estimate that each Class A
Preferred Share will initially entitle its
holder to approximately 2.35 votes. Holders
of our Class A Preferred Shares will
generally vote together with holders of our
common shares and holders of our Class B
Junior Cumulative Convertible Preferred
Shares as a single class. However, on
matters directly affecting the rights and
preferences of the Class A Preferred Shares,
the holders of our Class A Preferred Shares
will vote as a single class.
Liquidation..................... In the event of our dissolution or
liquidation, holders of our Class A
Preferred Shares will be entitled to receive
$10.00 per share, plus any accrued but
unpaid dividends on the Class A Preferred
Shares, before we make any distributions to
holders of any other existing class of our
shares.
5
<PAGE>
Dividends....................... A dividend on our Class A Preferred Shares
equal to $0.475 per share will accrue and be
payable every six months, beginning six
months after the initial closing date of
this offering. Dividends that we pay to you
as a holder of Class A Preferred Shares, to
the extent of our current and accumulated
earnings and profits for federal income tax
purposes, will be taxable to you as ordinary
dividend income. Distributions in excess of
earnings and profits generally will be
treated as a non-taxable reduction of your
basis in the Class A Preferred Shares to the
extent thereof, and thereafter as taxable
gain. Such distributions will have the
effect of deferring taxation until the sale
of your Class A Preferred Shares.
If, at any time, we fail to declare or pay a
dividend on the Class A Preferred Shares as
it accrues, such dividend will be
cumulative, without interest, with future
dividends. If, at any time, we fail to pay a
full year's accrued dividends on the Class A
Preferred Shares, then the holders of the
Class A Preferred Shares will be entitled,
voting as a class, to elect a majority of
the members of our board of trustees, who
will then serve on the board for so long as
a full year's dividends remain unpaid.
Conversion...................... Each of our Class A Preferred Shares will be
convertible at any time, at the option of
the holder, into a number of our common
shares equal to the quotient obtained by
dividing (1) $10.00, plus any dividends then
accrued but unpaid on the Class A Preferred
Shares, by (2) a price equal to 110% of the
average closing bid price for our common
shares over the 10 trading days preceding
the effective date of the registration
statement covering the Class A Preferred
Shares, or $____.
Redemption...................... We will have the option, after 30 days'
notice, to redeem our Class A Preferred
Shares (in whole or in part) at a per-share
price equal to $10.00, plus any dividends
then accrued but unpaid. However, we will
not have the right to redeem the Class A
Preferred Shares until two years after the
initial closing of this offering and only if
the closing bid price of our common shares
equals or exceeds 150% of the then effective
conversion price for 20 consecutive trading
days before the date of the redemption
notice.
Use of proceeds of this
offering....................... We intend to contribute all of the proceeds
from the sale of our Class A Preferred
Shares in this offering to our operating
partnership, principally to finance
acquisitions of additional investment
properties or equity securities of other
real estate investment entities. A portion
of the proceeds may be used for general
working capital purposes.
6
<PAGE>
Tax Status of the Trust
We are and currently intend to remain a real estate investment trust
under Sections 856 through 860 of the Internal Revenue Code. As a result, we are
generally not subject to federal income tax if we distribute at least 95% of our
taxable income (excluding net capital gains) to our shareholders. REITs are
subject to a number of organizational and operational requirements. If we fail
to qualify as a REIT in any taxable year, we will be subject to federal income
tax (including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. We have received a written opinion of Grant Thornton
LLP that we are qualified as a REIT under the Internal Revenue Code.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
We have set forth in the table below certain of our summary
consolidated financial information for the periods and at the dates indicated.
Historical data for the years 1994 through 1998 have been derived from our
audited consolidated financial statements for those years. Since this
information is only a summary, you should read such data in conjunction with our
financial statements, including the accompanying notes, and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
<TABLE>
Wellington Properties Trust
(Dollars in thousands, except per share data)
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------------------ ------------------------------------------------------------
Pro Pro
Forma Historical(d) Forma Historical(d)
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
1999(a) 1999 1998 1998(a) 1998 1997 1996 1995 1994
------- ---- ---- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue:
Rental revenue $ 2,153 $ 3,414 $ 1,517 $ 4,229 $ 3,488 $ 2,981 $ 2,557 $ 1,209 $ 196
Other 248 31 -- 512 21 199 9 12 1
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Revenue 2,401 3,445 1,517 4,741 3,509 3,180 2,566 1,221 197
------- ------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Interest 770 1,295 634 1,657 1,417 1,398 1,339 580 103
Depreciation and
amortization 430 681 294 773 694 606 552 236 34
Property expenses 1,007 1,589 589 1,840 1,555 1,278 1,200 671 70
General and administrative 379 388 148 340 289 174 188 104 17
Other nonrecurring -- 2,613 -- -- 1,010 -- -- -- --
Provision for uncollectible
advance related party -- -- -- -- 240 -- -- -- --
Termination of advisory
agreement -- 950 -- -- 310 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses 2,586 7,516 1,665 4,610 5,515 3,456 3,279 1,591 224
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before minority
interests (185) (4,071) (148) 131 (2,006) (276) (713) (370) (27)
Loss allocated to minority
interests 383 2,664 -- 490 1,065 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) 198 (1,407) (148) 621 (941) (276) (713) (370) (27)
Net income allocated to
Preferred Shares (499) -- -- (997) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss allocated to
Common Shares $ (301) $(1,407) $ (148) $ (376) $ (941) $ (276) $ (713) $ (370) $ (27)
======= ======= ======= ======= ======= ======= ======= ======= =======
Net loss per Common Share $ (0.22) $ (1.04) $ (0.13) $ (0.28) $ (0.80) $ (0.24) $ (0.68) $ (0.71) $ (0.23)
======= ======= ======= ======= ======= ======= ======= ======= =======
Cash dividends/distributions
declared $298 $253 $534 $543 $571 $259 $30
==== ==== ==== ==== ==== ==== ===
Cash dividends/distributions
per share $0.22 $0.22 $0.44 $0.49 $0.54 $0.52 $0.13
===== ===== ===== ===== ===== ===== =====
Balance Sheet Data (as of
period end):
Real estate investments, net
of accumulated depreciation $34,141 $49,250 $18,964 $49,747 $19,193 $21,249 $13,713 $ 1,704
Total assets 43,796 51,016 19,919 53,527 19,785 21,871 14,679 2,201
Mortgages payable 19,369 32,049 15,840 32,505 14,666 9,376 7,550 1,313
Total liabilities 21,753 38,599 16,718 36,522 16,308 17,974 11,504 1,353
Minority interests 7,689 8,755 -- 12,248 -- -- -- --
Shareholders' equity 14,354 3,662 3,201 4,758 3,477 3,897 3,175 848
</TABLE>
8
<PAGE>
<TABLE>
Wellington Properties Trust
(Dollars in thousands, except property data)
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
--------------------------- --------------------------------------------------------------
Pro Pro
Forma Historical(d) Forma Historical(d)
--------------- -------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
1999(a) 1999 1998 1998(a) 1998 1997 1996 1995 1994
------- ---- ---- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Cash flows provided (used in):
Operating activities (b) $520 $129 (b) $(1,187) $(5) $68 $225 $47
Investing activities (b) (20) (86) (b) (662) 1,814 (992) (8,921) (1)
Financing activities (b) (555) (188) (b) 1,889 (1,894) 504 8,820 449
Funds from operations (c) (325) 82 122 (145) 170 118 (240) (162) 7
Weighted average shares
outstanding (in thousands) 1,351 1,351 1,145 1,322 1,175 1,129 1,050 520 116
Property Data (as of period end):
Number of properties owned 4 5 2 4 5 2 3 3 1
Total rentable square feet
Owned (in thousands) 247 247 - 247 247 - - - -
Total apartment units owned 72 376 376 72 376 376 410 398 34
- --------------------
(a) The pro forma data reflects the effect, for the periods indicated, of
the offering of the Class A Preferred Shares, the proposed sale of our
Madison, Wisconsin apartment community and the various transactions
described elsewhere in this prospectus, beginning at page 61.
(b) Pro forma information relating to cash flows from operating, investing
and financing activities has not been included because we believe that
the information would not be meaningful, due to the number of
assumptions required in order to calculate this information.
(c) The White Paper on Funds from Operations ("FFO") approved by the Board
of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT") in March 1995 defines FFO as net income (loss)
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and
after all adjustments for unconsolidated partnerships and joint
ventures. We believe that FFO is helpful to investors as a measure of
the financial performance of an equity REIT because, along with the
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of our ability to
incur and service debt, to make capital expenditures and to fund other
cash needs. We compute FFO in accordance with standards established by
NAREIT, which may not be comparable to FFO reported by other REITs that
do not define the term in accordance with the current NAREIT definition
or that interpret the current NAREIT definition differently than we do.
FFO does not represent cash generated from operating activities
determined in accordance with generally accepted accounting principles
and should not be considered as an alternative to net income
(determined in accordance with generally accepted accounting
principles) as an indication of our financial performance or to cash
flow from operating activities (determined in accordance with generally
accepted accounting principles) as a measure of our liquidity, nor is
it indicative of funds available to fund our cash needs, including our
ability to make cash distributions.
(d) The historical summary consolidated financial information was derived
from our audited financial statements, unless otherwise specifically
noted.
</TABLE>
9
<PAGE>
RISK FACTORS
In deciding whether to purchase our Class A Preferred Shares in this
offering, you should consider all information in this prospectus, including
particularly each of the following risk factors:
We may be unable to pay accrued dividends on the Class A Preferred Shares
If our properties do not generate revenue sufficiently in excess of
operating expenses, our cash flow and our ability to make distributions to our
shareholders, including to holders of our Class A Preferred Shares, may be
adversely affected. Our properties are subject to all operating risks common to
real estate investment properties and a number of risks specific to us,
including the other factors described below, each of which could adversely
affect our revenues or costs and our ability to pay dividends.
We do not own all of our investment properties directly
Each of our Minnesota properties is owned by our operating partnership,
Wellington Properties Investments, L.P., in which we currently own approximately
a 8.8% of the common units and all of the 349,800 Class B preferred units, or
its subsidiaries. We also anticipate that future investment properties will be
acquired by the operating partnership or its subsidiaries. To enable such
acquisitions, we will deliver all of the net proceeds of this offering to the
operating partnership as an additional capital contribution. While our status as
the sole general partner of the operating partnership gives us management and
investment control over the operating partnership, we will likely retain only a
minority equity interest in the operating partnership for the foreseeable
future. In part, this means that, while we will be able to sell individual
investment properties from time to time, the sale of substantially all of our
properties in a single transaction would require the approval of a majority of
the limited partners of the operating partnership. In addition, if the operating
partnership were to be liquidated, its assets would be distributed among its
partners generally, not among our shareholders.
Our future investments have not been identified
We intend to invest a substantial portion of the proceeds of this
offering in additional properties, and we have not yet identified specific
acquisition targets. We may face significant competition from other investors in
attempting to acquire properties. We cannot be certain that attractive
properties will be available, that such properties may be acquired on terms
favorable to us or that any properties we ultimately acquire will perform to our
expectations.
If, during this offering, we identify likely material acquisitions, we
will supplement this prospectus to discuss such properties. You should not rely
on the initial disclosure of any proposed investment in a supplement as an
assurance that we will ultimately consummate the proposed transaction or that
the information provided concerning the proposed investment will not change
between the date of the supplement and the actual investment.
10
<PAGE>
We have a history of losses
We have reported net losses for each year since our inception. We had
an accumulated deficit of approximately $5.4 million at June 30, 1999. While we
have implemented a strategy to increase revenues and control costs through
improved efficiency, there can be no assurance that we will become profitable in
the future.
Dependence on External Sources of Capital
As with many other REITs, but unlike corporations generally, our
ability to reduce our debt and finance growth must be funded largely by external
sources of capital because we generally will have to distribute to our
shareholders 95% of our taxable income from the operation of our properties in
order to qualify as a REIT. Our access to external capital will depend upon a
number of factors, including the market's perception of our growth potential,
our current and potential future cash distributions and the market price of our
equity securities. The failure to obtain future sources of capital would have an
adverse effect on our ability to grow in accordance with our business strategy
and pay dividends on the Class A Preferred Shares as they become due.
We are dependent on our REITPLUS(sm) affiliates
Each of our current investment properties and some or all of our future
acquisitions will be managed on a day-to-day basis by our REITPLUS(sm)
affiliates. Therefore, the revenues and costs associated with our business will
remain largely out of our immediate control. The bankruptcy or failure to
perform to our expectations of any of these affiliates could have a material
adverse effect on the results of our operations and our ability to pay
distributions to our shareholders, including periodic dividends on our Class A
Preferred Shares.
We are dependent on our key personnel
Our ability to achieve our strategic business objectives and operate
profitably is dependent on identifying, attracting and retaining qualified key
management personnel. In particular, our strategic growth and operating results
will depend on the performance and retention of Duane H. Lund, our chief
executive officer, and Robert F. Rice, our president.
Shareholders' Agreement may make management changes more difficult
A number of our affiliated shareholders have entered into a
shareholders' agreement that expires in November 2008. The parties to the
agreement own or control an aggregate of 26.9% of our common shares as of
September 30, 1999 and assuming conversion of exercisable share options held by
them. The parties to the agreement also own or control 349,800 of our Class B
Preferred Shares. Under the terms of the agreement, each of the signing
shareholders agrees to vote his or her shares to cause Paul T. Lambert and
Steven B. Hoyt to remain members of our board of trustees, to fill vacancies on
the board with persons mutually selected by Wellington Management Corporation
and American Real Estate Equities, LLC, and to cause the board of trustees to
retain Arnold K. Leas as our chairman of the board, Duane H. Lund as our chief
executive officer and Robert F. Rice as our president. This agreement could make
changes in our management less likely, even if such changes might be in the best
interests of our business and shareholders.
11
<PAGE>
Delays in investing proceeds will have an adverse effect
Upon the closing of this offering, the proceeds we receive may not be
invested in real estate for some time as we identify and negotiate suitable
acquisitions. A delay in investing the proceeds from this offering will delay
the receipt of any returns from such investments. Moreover, until we invest in
properties, our investment returns will be limited to the rates of return
available on short-term, highly liquid investments that provide appropriate
safety of principal. We expect these rates of return, which affect the amount of
cash available to make distributions to our shareholders, to be considerably
lower than we would receive from property investments and considerably lower
than the periodic dividend that will accrue on the Class A Preferred Shares.
We are currently dependent on the Wisconsin and Minnesota markets
All of our existing properties are located in Wisconsin or Minnesota.
While we intend to seek acquisition targets in other regions of the United
States, our financial performance is currently dependent upon economic
conditions in these states in general and the specific local markets where our
existing properties are located. A decline in the economy in these markets
generally could adversely affect our ability to pay accrued dividends to holders
of our Class A Preferred Shares and the value of the common shares into which
our Class A Preferred Shares are convertible. In addition, the degree to which
we can achieve geographical diversification will depend on the funds available
to us for acquisitions.
Real estate investments entail particular risks
Effect of Economic and Real Estate Conditions. Real property
investments are subject to varying degrees of risk. The yields available from
equity investments in real estate depend on the amount of income generated and
expenses incurred. If our properties do not generate revenues sufficiently in
excess of operating expenses, including debt service and capital expenditures,
our cash flow and ability to pay distributions to our shareholders will be
adversely affected.
An investment property's revenues and value may be adversely affected
by a number of factors, including:
o the national economic climate;
o the local economic climate (which may be adversely impacted by
plant closings, local industry slowdowns and other factors);
o local real estate conditions (such as an oversupply of or a
reduced demand for rental properties);
o the perceptions by prospective tenants of the safety,
convenience and attractiveness of properties;
o our ability to provide adequate management, maintenance and
insurance; and
o increased operating costs (including real estate taxes).
Fixed expenses. Certain significant expenditures associated with each
equity investment (such as mortgage payments, if any, real estate taxes and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. If we mortgage a property to secure
payments of indebtedness, and if we are unable to meet our mortgage payments, a
loss could be sustained as a result of foreclosure on the property by the
mortgagee.
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Market Illiquidity. Equity real estate investments are relatively
illiquid. Such illiquidity will limit our ability to alter our portfolio,
whether necessary to sell our properties, to raise capital, or in response to
changes in economic or other conditions. In addition, the Internal Revenue Code
discourages REITs from selling properties held for a short period of time, which
may affect our ability to sell properties and to pay distributions to holders of
our Class A Preferred Shares and may adversely affect the value of the common
shares issuable upon conversion of our Class A Preferred Shares.
Operating Risks. Our properties will be subject to all operating risks
common to investment real estate properties in general, all of which might
adversely affect occupancy or rental rates of our properties. In addition,
increases in our operating costs due to inflation and other factors may not
necessarily be offset by increased rents. Nor can we be assured that our tenants
will be able and willing to pay increased rent or that rent control laws or
other laws regulating rental properties will not be adopted in our markets.
Renewals. The profitable operation of our investment properties will
depend, in part, on our ability to renew leases as they expire and to relet
commercial and residential space as it becomes available.
Acquisition Risks. Acquisitions of investment properties entail risks
that unforeseen liabilities will be assumed or that our investments will fail to
perform in accordance with expectations. In addition, improvements to acquired
properties will be costly and may not result in increases in revenue or profits.
Competition. Our present and future properties will compete with other
rental and ownership properties in attracting occupants. In addition, many of
our competitors for acquisitions and development projects have far greater
management, financial and other resources than we do.
Our acquisition activities entail special risks
We will incur special risks associated with our acquisition of
investment properties, including the risks that:
o we may assume unanticipated liabilities;
o occupancy rates and rents at an acquired property may not be
sufficient to make the property profitable;
o we may not be able to obtain, or may experience delays in
obtaining, necessary zoning, land use, building, occupancy and
other governmental and utility company authorizations;
o the relevant market may experience an economic downturn;
o financing may not be available on favorable terms; and
o lease-ups (if any) may not be completed on schedule, resulting
in increased debt service expense and construction costs.
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Advantageous transactions may be prevented
General. Certain provisions contained in our declaration of trust and
bylaws and under federal and Maryland laws may have the effect of discouraging a
third party from making any acquisition proposal for us. For example, such
provisions may:
o deter attractive tender offers for our shares, or
o deter purchases of large blocks of our shares, thereby
limiting the opportunity for our shareholders (including the
holders of our Class A Preferred Shares) to receive a premium
for their shares over then-prevailing market prices.
Preferred Shares. In addition to our Class A Preferred Shares being
offered in this offering and our existing Class B Junior Cumulative Convertible
Preferred Shares, our declaration of trust authorizes our board of trustees to
issue up to 8,132,200 preferred shares and to establish the preferences and
rights of any preferred shares issued. With the approval of two-thirds of the
outstanding Class A Preferred Shares, such preferences and rights could be
superior to those of the Class A Preferred Shares. The authority of our board of
trustees to issue additional series of preferred shares could also be used by
the board to further deter takeovers.
Ownership Limit. In order for us to maintain our qualification as a
REIT, not more than 50% in value of our outstanding shares may be owned,
directly or indirectly, by five or fewer individuals. Further, no person may own
more than 9.9% of our outstanding common shares. However, AREE is subject to a
separate contractual ownership limitation of 32.0%.
Our debt service obligations will entail additional risks
We will continue to be subject to the risks normally associated with
debt financing, including the risk that our funds from operations will be
insufficient to meet required payments of principal and interest, or, even if
sufficient to service our debt, will be insufficient to pay dividends on the
Class A Preferred Shares as they accrue, the risk that existing indebtedness on
our 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.
Our existing properties secure approximately $32.0 million of
outstanding aggregate mortgage indebtedness, of which $24.6 million is fixed at
a weighted average annual rate of 7.7% and $7.4 million is variable at a
weighted average annual rate of 9.6%. Present and future variable rate financing
and the need to refinance our holdings from time to time subjects us to the risk
that fluctuations in prevailing interest rates may increase our debt service
obligations beyond current expectations. We do not have any presently defined
source of refinancing upon the maturity of our existing debt. We are also likely
to acquire additional debt that requires balloon payments and there is no limit
as to the amount of the debt our board of trustees can approve or the ratio of
debt to total market capitalization that we must maintain. Typically only a
small portion of the principal of our indebtedness may be repaid prior to
maturity and we may not have sufficient funds on hand to repay such
indebtedness, in which case it will be necessary for us to refinance such debt,
either through additional debt financing secured by individual properties or
groups of properties, by unsecured private or public debt offerings or
additional equity offerings. If prevailing interest rates on refinancing exceed
their current rates, interest expense would increase, which would adversely
affect our funds from operations and our ability to pay dividends to holders of
our shares, including our Class A Preferred Shares. In addition, in the event
that we are unable to secure refinancing of our indebtedness on acceptable
terms, we might be forced to dispose of properties upon disadvantageous terms,
which could result in losses and might adversely affect cash flow available for
distribution as dividends. Further, if a property or properties are mortgaged to
secure payment of indebtedness and we are unable to meet
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mortgage payments, such property could be foreclosed upon by or otherwise
transferred to the mortgagee with a consequent loss of income and asset value to
us.
Prevailing interest rates could also have a dramatic effect on our financial
condition and the price of our shares
Because we intend to maintain a leveraged position following the
closing of the offering and because $7.4 million of our outstanding debt
obligations is subject to variable interest rates, increases in interest rates
could increase our interest expense, which could adversely affect our funds from
operations and our ability to pay dividends to our shareholders.
An increase in market interest rates may also lead prospective holders
of our shares to demand a higher anticipated annual yield than ownership of our
shares offers. Such an increase in the required anticipated distribution yield
may adversely affect the market price of our Class A Preferred Shares and of our
common shares.
Conflicts of interest
Wellington Management Corporation. Arnold K. Leas, the chairman of our
board of trustees, owns, together with his affiliates, 41.8% of the outstanding
stock of Wellington Management Corporation and Mr. Leas serves as its president
and chief executive officer.
In connection with a series of acquisitions that we intended to
complete in November 1998, Wellington Management agreed to terminate an
agreement we had with them for advisory services and to transfer ownership of
the office building housing our executive offices in Brookfield, Wisconsin. In
exchange, we agreed to (1) pay Wellington Management $1.6 million for the
termination of the advisory agreement, (2) pay $2.5 million in cash and 745,098
common units of our operating partnership for the Brookfield office building,
and to assume the existing mortgage obligations on the property, (3) hire Robert
F. Rice, who was then our executive vice president and a vice president of
Wellington Management, as our president, (4) contract with Wellington Realty,
Inc., a wholly-owned subsidiary of Wellington Management, for day-to-day
management of our Wisconsin apartment communities, and (5) issue a warrant to
Wellington Management allowing it to purchase up to 791,667 of our common
shares.
Due to the failure to close many of the related acquisitions with third
parties and our inability to finance the $2.5 million cash payment on favorable
terms, we agreed with Wellington Management that (1) the advisory agreement
would be terminated, but that Wellington would receive only cash payments of
$550,000 we made in 1998 and 95,000 of our Class B Junior Cumulative Convertible
Preferred Shares, (2) we would not acquire the Brookfield property at that time,
(3) we would retain Mr. Rice to serve as our president, (4) Wellington Realty,
Inc. would manage our existing Wisconsin properties for 5% of the gross revenues
those properties generate, a fee we believe is consistent with norms in the
industry, and (5) Wellington Management would return the warrant to purchase
common shares to us for cancellation.
Since we maintain a small corporate staff, we have contracted with
Wellington Management Corporation for accounting and certain other
administrative systems and services at fees which we believe are no greater than
an unaffiliated third party would be likely to charge.
We have in the past and may continue to contract with Wellington
Realty, Inc., a wholly-owned subsidiary of Wellington Management Corporation,
for real estate brokerage services. Under such agreements, Wellington Realty
will be entitled to receive real estate brokerage commissions. Currently, we
have entered into a listing agreement with Wellington Realty for the sale of our
Maple Grove and Lake Pointe apartment communities. Under the listing agreement,
we would pay Wellington Realty 3% of the sale price as a commission upon sale.
Typically, real estate brokerage commissions are paid by the seller of a
property, but some or all of such costs may be reflected in higher sale prices.
Though we are not actively
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marketing the Lake Pointe property at this time, the Maple Grove apartment
community is currently subject to a sale contract. Based on the terms of the
Maple Grove contract, Wellington would receive a commission of approximately
$501,000 upon closing.
From time to time, we may also purchase insurance from another
wholly-owned subsidiary of Wellington Management Corporation, Wellington
Insurance Services, Inc. If we do so, Wellington Insurance would be entitled to
a commission from the insurance companies of 15% of the premium we pay.
American Real Estate Equities, LLC. American Real Estate Equities, LLC
is owned in equal thirds by WLPT Funding, LLC, Lambert Equities II, LLC and
Steven B. Hoyt. Duane Lund, our chief executive officer, owns 100% of WLPT
Funding and is its sole manager. Paul T. Lambert, one of our trustees, is a
majority owner and sole manager of Lambert Equities. Steven Hoyt is also one of
our trustees.
In November 1998, our shareholders approved a transaction whereby
American Real Estate Equities would purchase 166,666 of our common shares for
$1,000,000, or $6.00 per share and would contribute certain assets, principally
our Cold Springs office center in St. Cloud, Minnesota and contracts for the
purchase of 29 other real estate investment properties (some of which Mr. Hoyt
had an ownership interest in), to our operating partnership. As consideration
for such assets, we agreed to (1) hire Mr. Lund as our chief executive officer
and nominate Mr. Lambert and Mr. Hoyt for election to our board of trustees; (2)
issue 4,933,233 units of beneficial interest in our operating partnership to
American Real Estate Equities or its members; (3) issue an additional 9,934,663
operating partnership units to the owners of the properties to be acquired
(including 4,510,671 units to Mr. Hoyt and his affiliates); (4) pay cash to the
owners of the properties to be acquired and assume all third-party mortgage
indebtedness on the properties to be acquired; (5) issue to American Real Estate
Equities a warrant to purchase 791,667 of our common shares; and (6) reimburse
certain of American Real Estate Equities' costs, including costs they incurred
in obtaining the contractual rights contributed to the operating partnership,
upon the completion of the transaction.
When most of the property acquisitions were not completed due to
increased financing costs, we and American Real Estate Equities consummated a
much smaller transaction pursuant to which the operating partnership acquired
only the Cold Springs office center and two other investments properties in
Minnesota. We still agreed to hire Mr. Lund as our chief executive officer and
Mr. Lambert and Mr. Hoyt were elected to our board of trustees. Subsequently,
American Real Estate Equities returned the warrant to us for cancellation and we
paid no cash to American Real Estate Equities in reimbursement of the $1,356,000
they spent in connection with the proposed transactions; instead, we issued
them, in the third quarter of 1999, 135,600 of our Class B Junior Cumulative
Convertible Preferred Shares, which we may redeem after two years for $1 if we
fail to meet certain financial goals. Among the units our operating partnership
issued to sellers of the acquired properties, Mr. Hoyt and his wife received a
total of 860,107 common units in consideration of their ownership interests in
those properties.
Apart from the foregoing transactions, American Real Estate Equities
advanced us an aggregate of $1,392,000 during the summer and fall of 1998 for
working capital purposes. We have since issued 119,200 of our Class B Junior
Cumulative Convertible Preferred Shares to them in discharge of $1,192,000 of
the repayment obligation. If we complete the sale of our Madison, Wisconsin
apartment community, which is currently subject to a sale contract, we plan to
use a portion of the proceeds of the sale to repay the $200,000 balance.
Hoyt Properties Inc. Steven B. Hoyt, one of our trustees, is the
controlling stockholder of Hoyt Properties Inc., whom we have retained to manage
our existing commercial properties in Minnesota. As with Wellington Realty, this
agreement was not negotiated at arm's length, but we believe that the stipulated
management fee of 5% of gross income from the managed properties is consistent
with industry norms for similar properties.
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Future Acquisitions. We anticipate that we will enter into property
management arrangements like those described above with new REITPLUS(sm)
affiliates in connection with future acquisitions and may also agree to nominate
principals of our new REITPLUS(sm) affiliates for election to our board of
trustees.
Failure to continue to qualify as a REIT
We believe that we are a qualified REIT under the Internal Revenue Code
and currently intend to maintain such qualification, although no assurance can
be given that we will be able to remain qualified as a REIT in the future and
our board of trustees could elect, without the approval of our shareholders, to
discontinue such qualification at any time. Qualification under the Internal
Revenue Code as a REIT involves the application of highly technical and complex
Internal Revenue Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters and
circumstances not entirely within our control may affect our ability to qualify
as a REIT in the future. For example, in order to qualify as a REIT, at least
95% of our gross income in any year must be derived from qualifying sources, and
we must pay distributions to our shareholders aggregating annually at least 95%
of our REIT income (excluding net capital gains). In addition, no assurance can
be given that new legislation, 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.
If we were to fail to qualify as a REIT in the future, we would not be
allowed a deduction for distributions to our shareholders in computing our
taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Unless entitled to relief under certain statutory provisions, we would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. As a result, the funds
available for distribution to our shareholders, including holders of our Class A
Preferred Shares, would be reduced for each of the years involved. In such a
circumstance, we could even be required to borrow funds or to liquidate certain
of our investments to pay the applicable tax.
For our 1996 and 1997 taxable years, we unintentionally failed to
demand certain share ownership information of our shareholders as required in
order to meet the share ownership tests for REITs. As a consequence of that
failure, the IRS could contend that we did not qualify as a REIT for 1996 and
1997, even though we did not (but for the failure to send the demand letters)
fail the share ownership tests. The IRS has given no indication that it intends
to challenge our qualification as a REIT for failure to send such letters. If
the IRS were successfully to challenge our status as a REIT, it could require us
to pay tax on our income as a regular corporation, and deny our ability to
re-elect REIT status until possibly as late as 2002. Given that we would have
reported a net taxable loss for 1996 and 1997 as an ordinary corporation, we
believe that the requirement to pay tax for those years on income as a regular
corporation would be of little consequence. Our inability to reelect status as a
REIT until 2002, however, could adversely affect our ability to pay scheduled
dividends to holders of our Class A Preferred Shares and could adversely affect
the value of the common shares into which our Class A Preferred Shares are
convertible.
We are subject to possible environmental liabilities
Under various federal, state and local environmental laws, ordinances,
and regulations, we may be required to investigate and clean up hazardous or
toxic substances or petroleum product releases at property we currently own or
previously owned, and may be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
such parties in connection with the contamination. Such laws typically impose
cleanup responsibility and liability without regard to whether the owner knows
of or caused the presence of the contaminants, and the liability under such laws
has been interpreted to be joint and several among potentially responsible
parties unless the harm is devisable and there is a reasonable basis for
allocation of responsibility. The costs of investigation, remediation or removal
of hazardous or toxic substances may be very substantial, and the presence of
such substances, or the failure to properly remediate such property, could
adversely affect our ability to sell or rent such property or to borrow using
such property as collateral.
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Some environmental laws can create liens on contaminated sites in favor
of the government for damages and costs it incurs in connection with
contamination. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not the person
owns or operates the facility. Also, the owner of a site may be subject to
common law claims by third parties based on damages resulting from environmental
contamination emanating from a site.
Other federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials when
they are in poor condition or in the event of building remodeling, renovation or
demolition. These laws may impose liability for release of asbestos and may
allow third parties to seek recovery from owners or operators of real properties
for personal injury associated with asbestos. In connection with our ownership
and operation of our properties, we may be liable for such costs.
Our limited assessments of our existing properties have not revealed
any environmental liability that we believe would have a material adverse effect
on our business, assets or results of operations, nor are we aware of any such
environmental liability. We also intend to condition future acquisitions on
satisfactory environmental assessments. Nevertheless, it is possible that our
past and future assessments will not reveal all environmental liabilities or
that there are existing or future material environmental liabilities of which we
will be unaware.
Compliance with applicable laws, rules and regulations, including the Americans
with Disabilities Act, can be costly
All places of public accommodation are required to meet certain federal
requirements, including but not limited to those associated with the Americans
with Disabilities Act.
A number of additional federal, state and local laws exist which also
may require modifications to our present and future properties or restrict
certain further renovations thereof, with respect to access by disabled persons.
For example, the Fair Housing Amendments Act of 1988 requires apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the Americans with Disabilities Act or the Fair
Housing Amendments Act could result in the imposition of fines or an award of
damages to private litigants.
While we believe that our existing properties are substantially in
compliance with present requirements, we have received notice of a Department of
Justice investigation of the architect and developer of our Maple Grove
apartment community in Madison, Wisconsin. In the event of a determination of
noncompliance, we may have some responsibility with respect to the last 60 units
constructed there, for which we acted as the developer, though we cannot
presently determine the costs of any actions that may ultimately be required of
us. We have entered into an agreement to sell the Maple Grove property. However,
the closing of the sale is subject to a number of conditions, including the
buyer's satisfactory completion of its due diligence review. Liability or the
threat of liability to remediate conditions at the property in order to comply
with the Americans With Disabilities Act could have the effect of delaying or
preventing the sale, or forcing us to make price or other concessions to the
buyer.
Future legislation may impose additional burdens or restrictions on
owners with respect to access by disabled persons. Although the costs of
compliance with any additional legislation are not currently ascertainable, the
costs could be substantial. Limitations or restrictions on the completion of
certain renovations may also limit application of our investment strategy in
certain instances or reduce overall returns on our investments.
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Uninsured losses could occur
We expect to continue to carry comprehensive liability, fire, extended
coverage and rental loss insurance with respect to all of our properties, with
policy specifications, insured limits and deductibles that we believe are
customarily carried for similar properties. There are, however, certain types of
losses (such as losses arising from wars) that are not generally insured because
insurance is unavailable or unavailable at a reasonable cost. Should an
uninsured loss or a loss in excess of insured limits occur, we could lose our
capital invested in the affected property, as well as the anticipated future
revenues from such property and could continue to be obligated on any mortgage
indebtedness or other obligation related to the property.
The offering price of the Class A Preferred Shares is arbitrary
While we have based the public offering price for the Class A Preferred
Shares on an assessment of current market conditions and have tied the
conversion ratio of the Class A Preferred Shares to prevailing trading prices
for our common shares, the offering price is arbitrary and does not reflect the
prices at which the Class A Preferred Shares or our common shares will trade
following the closing of this offering.
There is no prior public market for our Class A Preferred Shares
Prior to this offering, there has been no public market for our Class A
Preferred Shares and there can be no assurance that an active trading market
will develop or be sustained or that our Class A Preferred Shares may ever be
resold at or above the offering price. The market value of our Class A Preferred
Shares and the common shares into which they are convertible could be
substantially affected by all of the foregoing risk factors.
While the common shares into which the Class A Preferred Shares are
convertible are currently listed on the Nasdaq SmallCap Market(sm) and have been
approved for listing on the American Stock Exchange following the offering, we
might not be able to meet continued listing qualifications in the future. In
addition, trading volumes in our common shares have typically been very low,
which is typical of equity securities of comparable REITs. As a result,
investors may have difficulty in selling our common shares at generally
prevailing prices.
We make forward-looking statements in this prospectus which may prove to be
inaccurate
This prospectus contains "forward-looking statements" within the
meaning of the federal securities laws, which are intended to be covered by the
safe harbors created by those laws. You can generally identify these
forward-looking statements because we use words such as we "believe,"
"anticipate," "expect" or similar words when we make them. These statements
include our plans and objectives for future operations, including plans and
objectives relating to future growth. These forward-looking statements are based
on current expectations that involve numerous risks and uncertainties, including
changes in interest rates, our ability to borrow necessary investment capital,
changes in demand for commercial and residential space, tenant creditworthiness,
possible declines in property values or occupancy rates, changes in general
economic conditions and changes in the federal or state tax laws affecting
REITs. You should be aware that assumptions relating to our forward-looking
statements also involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to accurately predict and many of which are
beyond our control. Although we believe the assumptions underlying our
forward-looking statements in this prospectus, and the forward-looking
statements themselves are reasonable, circumstances could change and any of our
assumptions could prove to be inaccurate and actual results may differ
materially from our forward-looking statements. In light of the significant
uncertainties inherent in these forward-looking statements, the inclusion of
this information should not be regarded as a representation by us or any other
person that our objectives and plans will be achieved.
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USE OF PROCEEDS
After deducting the underwriters' discount, as well as our other
offering expenses, we expect to receive approximately $5,825,000 from the sale
of our Class A Preferred Shares, approximately $6,796,000 if the underwriters'
overallotment option is exercised in full.
We intend to contribute all of the net proceeds of this offering to our
operating partnership for use in obtaining additional investment properties or
equity securities of other real estate investment entities. Our operating
partnership will then issue us 700,000 of its Class A preferred units (up to
805,000 Class A preferred units if our underwriters' overallotment option is
exercised in full), which are economically equivalent to the Class A Preferred
Shares.
While we review prospective investment opportunities on a continual
basis, we have not entered into agreements or begun negotiations toward the
acquisition of any specific properties at this time.
Until our operating partnership uses the proceeds from this offering as
described above, we intend to cause our operating partnership to invest the
proceeds in short-term, interest-bearing securities, including money market
funds.
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DIVIDEND POLICY
Dividends on our shares are declared from time to time by our board of
trustees in their discretion. However, as a qualified REIT, we are required to
distribute no less than 95% of our REIT taxable income (excluding net capital
gains) to our shareholders.
Under the terms of the Class A Preferred Shares, we will not be able to
make distributions to holders of our common shares or holders of our Class B
Junior Cumulative Convertible Preferred Shares until first paying a cumulative
dividend of $0.95 per share per year on the Class A Preferred Shares. Dividends
on the Class A Preferred Shares will accrue and be payable in equal semi-annual
installments, beginning with a first dividend six months after the initial
closing of the offering. Assuming dividends on the Class A Preferred Shares and
on our Class B Junior Cumulative Convertible Preferred Shares are paid when
accrued, our board of trustees may declare dividends on our common shares in
which our existing classes of preferred shares will not participate.
Dividends that we pay to you as a holder of Class A Preferred Shares,
to the extent of our current and accumulated earnings and profits for federal
income tax purposes, will be taxable to you as ordinary dividend income.
Distributions in excess of earnings and profits generally will be treated as a
non-taxable reduction of your basis in the Class A Preferred Shares to the
extent thereof, and thereafter as taxable gain. Such distributions will have the
effect of deferring taxation until the sale of your Class A Preferred Shares.
If, at any time, we fail to declare or pay a dividend on the Class A
Preferred Shares as it accrues, such dividend will be cumulative, without
interest, with future dividends. If we should fail to pay a full year's accrued
dividends on the Class A Preferred Shares ($0.95), then the holders of the Class
A Preferred Shares will be entitled, voting as a class, to elect a majority of
the members of our board of trustees, who will then serve on the board for so
long as a full year's dividends remain unpaid.
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CAPITALIZATION
The following table sets forth, at June 30, 1999:
o our actual capitalization; and
o our capitalization as it would have been, giving effect to (1)
the sale of 700,000 Class A Preferred Shares at a price of
$10.00 per share and the receipt of the proceeds from such
sale, net of underwriters' discount and other estimated
offering expenses, (2) the issuance of 349,800 Class B Junior
Cumulative Preferred Shares in satisfaction of certain
liabilities to related parties and (3) the sale of the Maple
Grove apartment property and application of a portion of the
proceeds to the related mortgage loans payable.
You should read the following table in conjunction with the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements, including the accompanying
notes, appearing elsewhere in this prospectus.
The following table is based on the number of our common shares
outstanding as of June 30, 1999. It therefore does not reflect common shares
issuable upon the exercise of outstanding warrants and share options or upon
conversion of our Class A Preferred Shares, Class B Junior Cumulative Preferred
Shares or operating partnership units.
As of June 30, 1999
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Historical Proforma
Mortgage loans payable $ 32,049,000 $ 19,369,000
Minority interests 8,755,000 7,689,000
SHAREHOLDERS' EQUITY:
Preferred Shares:
$0.01 par value: 10,000,000
authorized, no shares issued
and outstanding on a
historical basis, -- --
700,000 Class A Cumulative
Convertible Preferred Shares
issued and outstanding on a
pro forma basis -- 7,000
349,800 Class B Junior
Cumulative Convertible
Preferred Shares issued and
outstanding on a pro forma basis -- 3,000
Common Shares, $0.01 par value;
100,000,000 authorized; 1,351,935
issued and outstanding 14,000 14,000
Additional paid-in capital 9,070,000 19,449,000
Accumulated deficit (5,422,000) (5,119,000)
------------- -------------
Total shareholders' equity 3,662,000 14,354,000
------------- -------------
Total capitalization $ 44,466,000 $ 41,412,000
============= =============
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PRICE RANGE OF COMMON SHARES AND DIVIDENDS
Our common shares are listed on the Nasdaq SmallCap Market(sm) under
the symbol "WLPT" and have been approved for listing on the American Stock
Exchange under the symbol "RPP" following the closing of the offering. The
following table sets forth, for the periods indicated, the high and low bid
prices per share for our common shares and dividends declared on our common
shares:
1997 High Low Dividend
- ---- ---- --- --------
First Quarter.......................... $6.45 $4.59 $0.1345
Second Quarter......................... 6.01 4.59 0.1345
Third Quarter.......................... 5.85 4.59 0.1108
Fourth Quarter......................... 5.78 4.51 0.1103
1998
First Quarter.......................... 5.62 3.96 0.1105
Second Quarter......................... 10.60 4.59 0.1108
Third Quarter.......................... 6.80 5.54 0.1108
Fourth Quarter......................... 6.25 4.19 0.1108
1999
First Quarter.......................... 6.33 3.48 0.1100
Second Quarter......................... 4.75 4.38 0.1100
Third Quarter.......................... 4.94 3.00 0.1100
- ------------------
The last reported sale price of our common shares on the Nasdaq
SmallCap Market(sm) as of October 5, 1999 was $3.875 per share. As of October 5,
1999, there were 303 holders of record of our common shares.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
As of June 30, 1999, we owned a portfolio of two residential and three
commercial properties. Our residential properties are located in Wisconsin and
contain an aggregate of 376 units. Our commercial properties are located in
Minnesota and contain an aggregate of 247,546 square feet of rental space. Our
interest in the commercial properties is held through our operating partnership.
We are the sole general partner of the operating partnership and, as of June 30,
1999, we held a 8.8% interest in the operating partnership.
The pro forma information below reflects the effect of the offering of
the Class A Preferred Shares, the proposed sale of our Madison, Wisconsin
apartment community and the various transactions described elsewhere (beginning
on page 61) in this prospectus. It may be helpful as you read this section to
refer to our summary financial information and consolidated financial
statements, including the notes thereto, included elsewhere in this prospectus.
Results of Operations
Pro Forma Operating Results
Comparison of the Six Months Ended June 30, 1999 on a Pro Forma Basis to the Six
Months Ended June 30, 1999 on a Historical Basis.
Our pro forma revenue was approximately $2,401,000 for the six months
ended June 30, 1999 as compared to $3,445,000 total historical revenue for the
six months ended June 30, 1999. The decrease results from our exclusion of pro
forma revenue related to the anticipated sale of our Maple Grove property of
$1,197,000 offset in part by an increase in interest income of $153,000 related
to our investment of cash we would have received from our issuance of the Class
A Preferred Shares.
Our pro forma expenses for the six months ended June 30, 1999 were
approximately $2,586,000 as compared to approximately $7,516,000 total
historical expenses for the six months ended June 30, 1999. The decrease is due
primarily to our exclusion of pro forma expenses totaling $1,367,000 relating to
the sale of our Maple Grove property and our exclusion of costs relating to the
termination of our advisory agreement with Wellington Management and other
nonrecurring expenses aggregating $3,563,000, since such costs are not expected
to have a continuing impact.
As a result of the above, our pro forma net loss before minority
interests for the six-month period ended June 30, 1999 was approximately
$185,000, as compared to historical net loss before minority interest of
$4,071,000, and our pro forma net loss allocated to our common shares was
$301,000 as compared to historical net loss allocated to common shares of
$1,407,000.
Comparison of the Year Ended December 31, 1998 on a Pro Forma Basis to the Year
Ended December 31, 1998 on a Historical Basis.
Our pro forma revenue was approximately $4,741,000 for the year ended
December 31, 1998 as compared to $3,509,000 total historical revenue for the
year ended December 31, 1998. The increase results from the following items: (1)
our inclusion of pro forma revenue of $3,392,000 from our acquisitions of the
commercial properties in Minnesota, and (2) inclusion of interest income
totaling $306,000 related to our investment of expected net cash proceeds
received from our issuance of the Class A
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Preferred Shares, partially offset by (3) our exclusion of pro forma revenue
totaling $2,466,000 from the sale of our Maple Grove property.
Our pro forma expenses for the year ended December 31, 1998 were
approximately $4,610,000 as compared to approximately $5,515,000 total
historical expenses for the year ended December 31, 1998. The decrease is due
primarily to: (1) our exclusion of pro forma expenses totaling $2,669,000
relating to our sale of the Maple Grove property, and (2) our exclusion of costs
relating to the termination of the advisory agreement with Wellington Management
and other nonrecurring expenses aggregating $1,560,000, since such costs are not
expected to have a continuing impact, partially offset by (3) our inclusion of
pro forma expenses of $3,249,000 relating to our acquisitions of the commercial
properties in Minnesota, and (4) our inclusion of additional pro forma general
and administrative expenses totaling $75,000 relating to our acquisitions.
As a result of the above, our pro forma net income before minority
interests for the year ended December 31, 1998 was approximately $131,000 as
compared to a historical net loss before minority interest of $2,006,000, and
our pro forma net loss allocated to common shares was $376,000 as compared to
historical net loss allocated to common shares of $941,000.
Historical Operating Results
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
30, 1998.
Our rental revenue increased by approximately $1,897,000 or 125% for
the six-month period ended June 30, 1999 compared to the six-month period ended
June 30, 1998. The increased revenue was primarily a result of our acquisitions
in 1998. Interest and other income increased by $31,000 during these same
periods, primarily due to interest earned on escrowed funds relating to our
acquisitions in 1998.
Our total expenses increased from $1,665,000 for the six-month period
ended June 30, 1998 to $7,516,000 for the six-month period ended June 30, 1999,
an increase of $5,851,000 of which $3,563,000 represents non-recurring charges
related to the termination of our advisory agreement and write-off of deferred
costs associated with our 1998 acquisition efforts. The remaining $2,288,000 was
attributable to increased property expenses of $904,000, increased management
fees of $96,000, increased depreciation and amortization of $387,000, increased
interest expense of $661,000, and increased general and administrative expenses
of $240,000, primarily as a result of our 1998 acquisition efforts.
Our depreciation and amortization increased from $294,000 for the
six-month period ended June 30, 1998 to $681,000 for the comparable period in
1999, an increase of 132%, as a result of our acquisitions in 1998. Our interest
expense increased from $634,000 for the six-month period ended June 30, 1998 to
$1,295,000 for the comparable period in 1999, an increase of 104%, primarily as
a result of additional borrowings associated with our acquisitions in 1998.
Our general and administrative expenses increased from $148,000 for the
six-month period ended June 30, 1998 to $388,000 for the comparable period in
1999, an increase of 162%. In November 1998, we converted from an externally
managed REIT to a self-administered REIT and commenced administrative operations
and, as a result, incurred payroll expenses of $150,000 for the six-month period
ended June 30, 1999 not incurred in the previous comparable period.
As a result of the above, our net loss before minority interests
increased from $148,000 for the six-month period ended June 30, 1998 to a loss
of $4,071,000 for the six-month period ended June 30, 1999. Our net loss
increased from $148,000 for the six-month period ended June 30, 1998 to
$1,407,000 for the six-month period ended June 30, 1999, attributable primarily
to the existence of minority interests resulting from our new structure
following our 1998 acquisitions, as well as the other factors described above.
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Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997.
Our rental revenue increased by approximately $507,000 or 17.0% for the
year ended December 31, 1998 compared to the year ended December 31, 1997. The
increased revenue was primarily a result of our acquisitions in 1998. Our
interest and other income decreased by $178,000 or 89.5%, during these same
periods, primarily due to our gain on the sale of a residential property during
the second quarter of 1997.
Our total expenses increased from $3,456,000 for the year ended
December 31, 1997 to $5,515,000 for the year ended December 31, 1998, an
increase of 59.6%, of which $1,560,000 represented non-recurring charges related
to the abandonment of certain potential transactions associated with our 1998
acquisitions, the provision for uncollectible advances, and our termination of
the advisory agreement with Wellington Management. The remaining $499,000 was
attributable to increased property expenses of $277,000, increased depreciation
and amortization of $88,000, increased interest expense of $19,000 and increased
general and administrative expenses of $115,000, primarily as a result of our
1998 acquisitions.
Our depreciation and amortization increased from $606,000 in 1997 to
$694,000 in 1998, an increase of 14.5%, as a result of our acquisitions in 1998.
Interest expenses increased from $1,398,000 in 1997 to $1,417,000 in 1998, an
increase of 1.3%, primarily as a result of additional borrowings associated with
our acquisitions in 1998.
Our general and administrative expenses increased from $174,000 in 1997
to $289,000 in 1998, an increase of 66.1%. During 1998, we converted from an
externally managed REIT to a self-administered REIT and commenced administrative
operations and incurred payroll expenses of $92,000 not incurred in previous
years.
As a result of the above factors, our net loss before minority
interests increased from $276,000 for the year ended December 31, 1997 to a loss
of $2,006,000 for the year ended December 31, 1998. Our net loss increased from
$276,000 for 1997 to $941,000 for 1998, attributable primarily to the existence
of minority interests resulting from our new structure following our 1998
acquisitions, as well as the other factors described above.
Liquidity and Capital Resources
Short-Term and Long-Term Liquidity
Cash provided by operations and borrowings from affiliates and lending
institutions have generally provided the primary sources of our liquidity.
Historically, we have used these sources to fund operating expenses, satisfy
debt service obligations and fund distributions to shareholders.
In connection with the offering, we expect to sell 700,000 Class A
Preferred Shares. We expect the net cash proceeds to us from the offering, after
estimated underwriting discounts and commissions and estimated expenses of the
offering, to be approximately $5,825,000 (approximately $6,796,000 if the
underwriter's over-allotment option is exercised in full).
Our Maple Grove apartment community is presently under contract for
sale to an independent third party. The contract is subject to certain closing
conditions and contingencies and provides for a purchase price of $16,700,000,
to be paid by assuming the first mortgage of approximately $12,680,000 and
paying the balance in cash at closing. After costs associated with the sale, we
expect net cash proceeds, on a pro forma basis, to be $2,437,000. The buyer has
advanced $400,000 of the cash purchase price in exchange for our 10% promissory
note. If the sale of the property is not completed by October 31, 1999, we will
be required to begin making payments under the note to the extent of excess
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cash flow from the property. The closing of the sale of the Maple Grove property
(which we describe more fully on page 35 of this prospectus) is contingent on
certain conditions, including the satisfactory resolution of the U.S. Department
of Justice's investigation of the property for compliance with laws regarding
accessibility by disabled persons.
No assurance can be given that the sale of the Maple Grove property
will be consummated and, if consummated, that it will be on terms described
above.
Currently, we have no contractual obligations for property acquisition
or material capital expenditures, other than tenant improvements in the ordinary
course of business. We expect to meet our long-term capital needs through a
combination of cash from operations, net cash proceeds from sales of real
estate, additional borrowings, additional equity issuances of common or
preferred shares, and/or units of our operating partnership.
Cash Flows
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
30, 1998.
During the six-month period ended June 30, 1999, we generated $520,000
in cash flows from operating activities and $163,000 from decreased escrowed
cash reserves. These cash flows were used primarily for (1) repayments of debt
obligations aggregating $465,000; (2) payment of cash dividends, net of our
dividend reinvestment plan, totaling $90,000; (3) investment in real estate
ventures aggregating $90,000; and (4) additions to fixed assets totaling
$93,000. As a result, our cash balances decreased by $55,000 to $99,000 at June
30, 1999 from $154,000 at December 31, 1998.
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997.
During the year ended December 31, 1998, we generated approximately
$4,494,000 in net proceeds from borrowings and $1,246,000 from the issuance of
common shares. These cash flows were used primarily for (1) repayments of debt
obligations and financing costs aggregating $3,345,000; (2) payment of cash
dividends aggregating approximately $506,000; (3) payment of costs associated
with new ventures aggregating $98,000; (4) payment of costs associated with our
1998 acquisitions aggregating $564,000; and (5) cash used in operating
activities of approximately $1,187,000. As a result, our cash balances increased
by approximately $40,000 to $154,000 at December 31, 1998 from $114,000 at
December 31, 1997.
Funds from Operations
We consider funds from operations ("FFO") to be meaningful to investors
as a measure of the financial performance of an equity REIT when considered with
the financial data presented under generally accepted accounting principles.
Under the National Association of Real Estate Investment Trusts' definition, FFO
means net income (loss) computed using generally accepted accounting principles,
excluding gains (or losses) from debt restructuring and sales of property, plus
real estate-related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Further, if the conversion of
securities into common shares is dilutive, we exclude any income allocated to
these securities in computing FFO. The FFO we present may not be comparable to
the FFO of other REITs, since they may interpret this definition of FFO
differently or they may use another definition of FFO. FFO is not the same as
cash generated from operating activities or net income determined in accordance
with generally accepted accounting principles. FFO is not necessarily an
indication of our cash flow available to fund cash needs. Additionally, it
should not be used as an alternative to net income when evaluating our financial
performance or to cash flow from operating, investing and financing when
evaluating our liquidity or ability to make cash distributions or pay debt
service.
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Our FFO, on a pro forma basis for the year ended December 31, 1998 and
the six months ended June 30, 1999, is summarized in the following table.
Pro Forma
--------------------------------------------
Year Ended Six-Month Period
December 31, 1998 Ended June 30, 1999
Income (loss) before minority
interests $ 131,000 $(185,000)
Less: net income allocated to
preferred shares (997,000) (499,000)
Add: real estate related
depreciation and
amortization 721,000 359,000
---------- -------------
Funds from operations - basic $ (145,000) $(325,000)
========== =============
Weighted average number of
shares and units: basic(1) 3,041,378 3,070,065
========== =============
- ----------------------
(1) Assumes exchange of all units, calculated on a weighted average basis
for common shares.
Year 2000 Issues
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, this could result in a system failure or
miscalculations causing disruption of operations, including a temporary
inability to process transactions, prepare financial statements, send invoices
or engage in similar normal business activities.
We rely on information technology systems of Wellington Management
Corporation, Wellington Realty, Inc. and Hoyt Properties Inc. on a contract
basis. Wellington Management Corporation and Wellington Realty, whose systems we
rely on for corporate and Wisconsin property management, completed installation
and testing of new hardware and software that is certified as Year 2000 ready by
their manufacturers in November 1998. Hoyt Properties, whose systems we rely on
for the management of our Minnesota properties, completed installation and
testing of hardware and software that is certified as Year 2000 ready by their
manufacturers in July 1999. Accordingly, we do not anticipate material problems
in processing the billing and collection of revenue, the payment of
expenditures, the recording of financial transactions, the preparation of
financial statements and maintaining and generating system-driven managerial
information.
Our property management team has been evaluating the impact of the Year
2000 issue on the various facets of property operating systems since July 1998.
Based on the current status of this evaluation process, we do not anticipate any
material adverse consequences of the Year 2000 on property operations.
However, we rely on third-party suppliers for a number of key services.
Interruption of supplier operations due to the Year 2000 issue could affect our
operations. We also are dependent upon our tenants for revenue and cash flow.
Interruptions in tenant operations due to the Year 2000 issue could result in
reduced revenue, increased receivable levels and cash flow reductions.
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Inflation
Inflation has historically not had a significant impact on our business
because of the relatively low rates of inflation in the markets in which we have
operated. We do not anticipate that inflation will have a direct, material
negative impact on our results of operations in the future, because residential
tenants typically enter into short-term leases and because most commercial
leases provide that tenants must pay their share of operating expenses. An
increase in prevailing inflation rates could, however, have a very dramatic
impact on mortgage interest rates and the yields of alternative investments,
with the effect of increasing our finance costs and adversely impacting real
estate markets and the market for our debt and equity securities.
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BUSINESS
Introduction
We are a self-administered real estate investment trust or "REIT,"
formed March 15, 1994 pursuant to Maryland law to acquire, own and operate
investment real estate.
We operate under the direction of our board of trustees. Our chief
executive officer and our president have day-to-day management responsibilities,
including identifying prospective property acquisitions, marketing, finance,
overseeing third-party managers and general administrative responsibilities.
In November 1998, we converted to an umbrella partnership REIT
structure by forming an operating partnership, Wellington Properties
Investments, L.P., of which we are the sole general partner. On November 20,
1998, the operating partnership acquired its initial three properties. We expect
future acquisitions to be made through the operating partnership.
Our operating partnership and our other subsidiaries currently own five
properties:
o a 119,722 square-foot office building in Minneapolis,
Minnesota,
o a 77,533 square-foot office building in St. Cloud, Minnesota,
o a 50,291 square-foot light industrial facility in Burnsville,
Minnesota,
o a 304-unit apartment community in Madison, Wisconsin, and
o a 72-unit apartment community in Schofield, Wisconsin.
Currently, our REITPLUS(sm) affiliates manage each of our investment properties.
Our Madison, Wisconsin apartment community is currently subject to sale
under a land purchase agreement.
We first qualified as a REIT for federal income tax purposes for the
taxable year ended December 31, 1996.
Our principal offices are located at 18650 W. Corporate Drive, Suite
300, Brookfield, Wisconsin 53045 and 11000 Prairie Lakes Drive, Suite 610,
Minneapolis, Minnesota 55344, and our telephone numbers are (414) 792-8900
(Brookfield) and (612) 826-6968 (Minneapolis).
The Operating Partnership and Operating Partnership Agreement
Our interests and those of all limited partners in the operating
partnership are represented by partnership units. Currently, the operating
partnership has issued ordinary common units (which are economically equivalent
to our common shares) and Class B common units, which have no current economic
value, but which will automatically convert to ordinary common units upon the
determination of our board of trustees that our funds from operations (as
defined by the National Association of Real Estate Investment Trusts) equal or
exceed $0.55 per share, assuming exercise of all outstanding rights to purchase
our equity securities and conversion of all securities convertible into our
common shares. If necessary, however, the number of Class B units that will
convert to ordinary common units will be limited so that the current holder of
the operating partnership's outstanding Class B units, American Real Estate
Equities,
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LLC, will not become a greater than 10% owner, assuming exercise of all
outstanding rights to purchase our equity securities and conversion of all
securities convertible into our common shares.
The operating partnership has also issued 349,800 Class B preferred
units to us, which are economically equivalent to our Class B Junior Cumulative
Convertible Preferred Shares. Upon the closing of this offering and our
contribution of our net proceeds to the operating partnership, the operating
partnership will also issue us 700,000 Class A preferred units (up to 805,000
Class A preferred units if our underwriters exercise their overallotment option
in full), which will be economically equivalent to the Class A Preferred Shares.
The operating partnership may also issue additional classes or series of
preferred units on such terms as we, as sole general partner, may determine.
Management. The operating partnership was formed on July 28, 1998 as a
limited partnership under the Delaware Revised Uniform Limited Partnership Act.
We are the sole general partner of the operating partnership and expect to own
only a minority interest in the operating partnership for the foreseeable
future. We will use the proceeds from the sale of the Class A Preferred Shares
to make an additional capital contribution to the operating partnership in
exchange for an equal number of Class A preferred units of the operating
partnership.
As sole general partner, we have the exclusive power and authority to
conduct the business of the operating partnership, subject to the consent of the
limited partners in certain limited circumstances. Limited partners have no
right or authority to act for or to bind the operating partnership. No limited
partner may take part in the conduct or control of the business or affairs of
the operating partnership by virtue of being a holder of units. In particular,
the limited partners expressly acknowledge in the operating partnership
agreement that we, as sole general partner, are acting on behalf of the
operating partnership's limited partners and our shareholders, collectively, and
are under no obligation to consider the tax consequences to limited partners
when making decisions for the benefit of the operating partnership. The limited
partners further agree that, in the event of a conflict between the interests of
our shareholders and the limited partners, we, as sole general partner, will
discharge our fiduciary duties to the limited partners by acting in the best
interests of our shareholders.
Removal of the General Partner. The operating partnership agreement
provides that the limited partners may not remove us, with or without cause, as
general partner of the operating partnership. In addition, we may not transfer
any of our interests as general partner in the operating partnership, except in
connection with a merger or sale of all or substantially all of our assets.
Redemption, Exchange and Conversion of Units. Subject to certain
limitations in the operating partnership agreement and, in the case of any
preferred units, following the conversion of such preferred units into common
units, holders of common units generally will have the right to require the
redemption of their common units at any time one year after the original
issuance date of such units. Limited partners that hold preferred units will
have the right to convert such preferred units into common units at a conversion
rate established at the time any particular class or series of preferred units
is established. Once the conversion has occurred, a converted preferred limited
partner will also have a right to require redemption of its common units.
Unless we elect to assume and perform the operating partnership's
obligation with respect to redemption of common units, a limited partner
demanding redemption will receive cash from the operating partnership in an
amount equal to the market value of the units to be redeemed. The market value
of a unit, for this purpose, will be equal to the average of the closing bid and
ask prices of our common shares for the ten trading days before the day on which
the redemption notice was given. Instead of the operating partnership acquiring
the units for cash, we will have the right to elect to acquire the units
directly from a limited partner demanding redemption, in exchange for either
cash or an equal number of our common shares, and, upon such acquisition, we
will become the owner of such units. This one-for-one conversion rate will be
adjusted appropriately in the event of a share split, share dividend or similar
event. No fewer
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than 1,000 units (or all remaining units owned by the limited partner if less
than 1,000 units) must be redeemed or exchanged each time units are redeemed.
We will always reserve a sufficient number of our authorized but
unissued common shares, solely for the purpose of unit redemptions. As of the
date of this prospectus, our operating partnership had outstanding 1,214,086
common units, 505,249 Class B common units and 349,800 Class B preferred units.
When we contribute the net proceeds of this offering to the operating
partnership (assuming no exercise of the underwriters' overallotment option),
the operating partnership will issue us 700,000 Class A preferred units.
If a limited partner receives common shares upon redemption of units,
the limited partner will receive registration rights for the common shares in
accordance with our master registration rights agreement. Under the agreement,
every time the operating partnership issues units, we agree to register the
common shares issuable in exchange for the units within one year and to use
commercially reasonable efforts to register those shares for public resale by
the former unit holder. Holders of partnership units also have the right under
the agreement, subject to certain limitations, to include common shares they
receive in exchange for units in registrations we may make for other purposes.
Sales of Assets. Under the operating partnership agreement, we, as sole
general partner, have the exclusive authority to determine whether, when and on
what terms the assets of the operating partnership will be sold. However, a sale
of all or substantially all of the assets of the operating partnership or a
merger of the operating partnership with another entity generally requires an
affirmative vote of the holders of a majority of the outstanding units held by
limited partners.
Conduct of Our Business and Distributions. Unless we first get the
consent of the limited partners, we may not enter into or conduct any business
other than in connection with managing the business of the operating
partnership. Generally, we and the operating partnership will make distributions
of cash to partners and our common shareholders, respectively, at the same time
and in equal per-share amounts, subject, of course, to the dividend preferences
of our preferred shares. To do so, we may be required to borrow funds from the
operating partnership from time to time.
Reimbursement; Transactions with Affiliates. We will not receive any
compensation for our services as general partner of the operating partnership.
We will, however, as a partner in the operating partnership, have the same right
to allocations and distributions as other partners holding common units. In
addition, the operating partnership will reimburse us for all our expenses
incurred in connection with our activities as general partner, our continued
existence and qualification as a REIT, and all other liabilities incurred by us
in connection with the pursuit of our business and affairs as they may relate to
the operating partnership.
Except as expressly permitted by the operating partnership agreement,
our affiliates will not engage in any transactions with the operating
partnership, except on terms that are fair and reasonable and no less favorable
to the operating partnership than terms that would be obtained from an
unaffiliated third party.
Issuance of Additional Units. We have broad discretion to cause the
operating partnership to issue additional units to the limited partners or
others (including us) for such consideration and on such terms and conditions as
we, as sole general partner, deem appropriate. However, if we issue common
shares, we must contribute the net proceeds to the operating partnership, and
the operating partnership must issue a number of common units to us equal to the
number of common shares we issued. The operating partnership agreement also
allows the operating partnership to issue preferred units of different classes
and series, having rights, preferences and other privileges, variations and
designations as we may determine. Any such preferred units may have terms,
provisions and rights which are preferential to the terms, provisions and rights
of the common units and existing preferred units. Preferred units, however, may
be issued to us only in connection with an offering of our securities having the
same terms and rights as the preferred units and
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the contribution by us to the operating partnership of the net proceeds of the
offering. No limited partner of the operating partnership has preemptive,
preferential or other similar rights with respect to additional capital
contributions or loans to the operating partnership or the issuance or sale of
any units.
Capital Contributions. No partner of the operating partnership will be
required to make additional capital contributions to the operating partnership,
except that we are generally required to contribute net proceeds of the sale of
our equity securities to the operating partnership. Except in the case of
certain limited partners who may agree to contribute capital to restore any
deficits in their respective capital accounts at liquidation, no limited or
general partner will be required to pay to the operating partnership any deficit
or negative balance which may exist in its capital account.
Exculpation and Indemnification. The operating partnership agreement
generally provides that we, as sole general partner, will incur no liability to
the operating partnership or any limited partner for losses sustained,
liabilities incurred, or benefits not derived as a result of errors in judgment
or for anything that we may do or refrain from doing in connection with the
business and affairs of the operating partnership if we carried out our duties
in good faith. We also have no liability for the loss of any limited partner's
capital and are not responsible for any misconduct, negligent act or omission of
any consultant, contractor, or agent that we select in good faith.
The operating partnership agreement also requires the operating
partnership to indemnify us, our trustees and officers against any loss or
damage, including reasonable legal fees and court costs, incurred by such person
by reason of anything it may do or refrain from doing for or on behalf of the
operating partnership, or in connection with its business or affairs, unless:
(1) the act or omission either was committed in bad faith or was the result of
active and deliberate dishonesty; (2) the indemnified person actually received
an improper personal benefit in money, property or services; or (3) the
indemnified person had reasonable cause to believe that the act or omission was
unlawful. Any such indemnification claims must be satisfied only out of the
assets of the operating partnership and any applicable insurance proceeds.
Amendment of the Operating Partnership Agreement. Amendments to the
operating partnership agreement may be proposed by us or by limited partners
owning at least 25% of the then outstanding units. Generally, the operating
partnership agreement can only be amended with our approval, and a majority of
all outstanding units.
Our Business Objectives and Operating Strategies
Our primary business objective is to grow our company by strategically
deploying and implementing our proprietary REITPLUS(sm) program. We believe that
our REITPLUS(sm) program provides the capital, legal and tax advantages of the
REIT structure, plus preserves the entrepreneurial opportunities required to
attract and retain talented, local real estate operators.
Key elements of the REITPLUS(sm) program include
o REITPLUS(sm) Investment Strategies (External Growth). Our
investment strategy is to enter new markets and increase our
penetration in existing markets by procuring REITPLUS(sm)
affiliates with a significant market presence and operating
history. Typically, our REITPLUS(sm) investments include the
issuance of our common shares or operating partnership units,
thereby creating an ongoing incentive for our REITPLUS(sm)
affiliates to maximize long-term shareholder value. We believe
we have certain advantages which will enhance our ability to
identify and capitalize on REITPLUS(sm) opportunities
including: (1) our multiple-market expertise in identifying,
structuring and closing acquisitions; (2) our experience in
successfully growing and operating a public real estate
company; (3) our long-standing relationship with customers,
real estate brokers and institutional and other owners of
33
<PAGE>
real estate assets, which collectively help us identify
investment opportunities; and (4) our ability to offer tax
deferred consideration to REITPLUS(sm) partners.
o REITPLUS(sm) Operating Strategies (Internal Growth). Our
operating strategy is to serve the real estate needs of our
existing customers and expand our customer base. We intend to
implement proactive property management and leasing programs,
achieve operating efficiencies through increasing economies of
scale, and complete ongoing maintenance and value enhancement
improvements. We believe our operating strategy will provide
increasing cash flow from our properties through rental
increases and expense savings.
Whenever possible, we intend to use our operating partnership to
acquire properties. For many acquisitions, we anticipate that a portion of the
purchase price will be paid in operating partnership units. The initial
operating partnership transaction consisted of the acquisition of two office
buildings and a light industrial building. Prior to that transaction, we owned
only apartment communities.
We also intend to continue to utilize the marketing and management
expertise of our trustees, our property managers and their affiliates. We will
continue to conduct market studies to identify tenant preferences and
acquisition and development opportunities.
In the future, we will likely continue to incur or guarantee
indebtedness in connection with the development and acquisition of real estate
assets. We currently intend to maintain a debt-to-total-market-capitalization
ratio of approximately 70%, although this is subject to change based on market
conditions. The amount of leverage will vary among investment properties that we
own. Our current leverage is approximately 65%.
Acquisition and Development Strategy
Directly and through our REITPLUS(sm) partners, we have established a
network of relationships with real estate owners, developers, brokers, lenders,
insurance companies, governmental agencies, and other institutions. We hope that
this network and our independent research will provide us with access to
acquisition opportunities before they become widely marketed.
We seek to invest in properties with one or more of the following
characteristics:
o ownership by potential REITPLUS(sm) affiliates with
considerable expertise in local markets;
o location in regions where geographic factors or governmental
policies restrict or reduce competition; and
o a history of poor management and/or occupancy and financial
problems.
In general, we seek to acquire properties that are not more than 10 years old
and offer above average amenities.
One of our goals is to provide a diversified portfolio of investment
properties that will resist market fluctuations. We believe that by creating a
portfolio of properties that is diverse as to type and location, we will be
better insulated against fluctuations within specific market segments.
Specifically, we will consider investment opportunities in office buildings,
light industrial properties, multi-family housing, well-anchored shopping
centers, community-based residential facilities and other types of investment
real estate.
With respect to new construction projects, we believe that, on a
selective basis, we may have an opportunity to achieve rental rates that justify
the risks associated with new development. We believe that expertise procured
through joint ventures with our REITPLUS(sm) affiliates in the development of
new
34
<PAGE>
properties may provide us with a competitive advantage as the value of existing
properties approaches replacement cost and new development becomes more
attractive.
In the ordinary course of our business, we and our agents engage in
preliminary discussions with potential sellers and buyers of investment
properties on a continual basis. At the present time, we do not have any
properties under contract but are engaged in preliminary discussions with
potential sellers.
Our Maple Grove apartment community is presently under contract for
sale to an independent third party. The contract provides for a purchase price
of $16,700,000 to be paid by assuming the first mortgage of approximately
$12,680,000 and the balance being paid in cash at closing. The contract is
subject to closing conditions and contingencies including:
o approval and consent of the holder of the first mortgage;
o our ability to deliver clear title;
o the purchaser inspecting the property; and
o a satisfactory resolution of the issues raised by the United
States Department of Justice concerning our compliance with
fair housing laws as they relate to access by disabled
persons.
The buyer has advanced $400,000 of the cash purchase price in exchange for our
10% promissory note. If the sale of the Maple Grove property is not consummated
by October 31, 1999, we will be required to begin making payments under the note
to the extent of excess cash flow from the property.
Property Management
We intend to contract for management of our properties through the
staff of professionals and support personnel, including certified property
managers, apartment managers, apartment maintenance technicians and leasing
agents of our REITPLUS(sm) affiliates. We intend that the depth of the
REITPLUS(sm) affiliates will enable us to deliver quality services on an
uninterrupted basis, thereby promoting tenant satisfaction and improving tenant
retention. Each of our properties will be operated by a staff specifically
selected by us, based on the size, location, age, management plan and marketing
plan of the individual property. We seek personnel that are carefully trained in
their appropriate areas of expertise, such as property management, marketing,
leasing, resident relations, income generation, curb appeal and maintenance.
Our Minnesota office buildings and light industrial facility are
currently managed by Hoyt Properties Inc. and our Wisconsin apartment
communities are managed by another REITPLUS(sm) affiliate, Wellington Realty,
Inc.
Our established policies and procedures specify reporting requirements
and management guidelines to be applied at each of our properties. The computer
network we use through our services agreement with Wellington Management
Corporation, using customized and conventional software programs, has the
capacity to connect our corporate headquarters with each property manager,
providing management with rapid access to all marketing and accounting
information. With respect to the apartment properties, on-site managers prepare
weekly marketing reports of each property's occupancy, lease expiration,
prospective resident traffic, unit availability, renewal, rental rate and tenant
profile information. We also regularly monitor accounting elements such as
receivables, payables, rent roll status and budget compliance through the
system.
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<PAGE>
We have designed our marketing and leasing activities and procedures
with the intent of complying with all established federal, state and local laws
and regulations. We seek to offer leases of appropriate terms, consistent with
individual property marketing plans structured to respond to local market
conditions. We establish qualifying standards for prospective tenants to comply
with the Fair Housing Amendments Act and the Americans with Disabilities Act and
attempt to stabilize service levels and income streams through lower tenant
turnover. None of our existing properties are currently subject to rent control
or rent stabilization regulations.
Each of our property managers receives a property management fee no
greater than 5% of gross rental income collected in connection with the
operation of our properties, a fee rate we believe is consistent with prevailing
market rates.
Property Marketing
Through our property managers, we conduct certain marketing and leasing
activities for our properties. Several of our officers and property managers
actively participate in various owners' organizations, including the Building
Owners and Managers Association, the Institute of Real Estate Management, the
National Apartment Association and the International Council of Shopping
Centers. Such organizations regularly provide market information and rent
studies which we use to supplement our own studies.
The Properties
The properties that we currently own are:
Name & Location Type Units/Square Feet
Cold Spring Center Office 77,533 square feet
St. Cloud, MN
Thresher Square East/West Office 119,722 square feet
Minneapolis, MN
Nicollet VI Light Industrial 50,291 square feet
Burnsville, MN
Lake Pointe Apartments 72 units
Schofield, WI
Maple Grove Apartments 304 units
Madison, WI
We describe each of the above properties and their locations in greater
detail below.
Minnesota Properties
Cold Spring Center
Our Cold Spring Center is a 77,533 square-foot office building located
in St. Cloud, Minnesota. The Class A, five-story building was built in 1990 and
is 100% leased. The property also has a surface parking lot which holds 318
cars.
36
<PAGE>
St. Cloud is located in central Minnesota, approximately 60 miles
northwest of the Minneapolis/St. Paul metropolitan area. St. Cloud is the
largest municipality in the St. Cloud Standard Metropolitan Statistical Area
which is comprised of three central Minnesota counties with a combined
population of 191,000. The city of St. Cloud is located at the junction of the
three counties and serves as the regional commerce centers for central Minnesota
and is one of the fastest growing municipalities in Minnesota, with a population
of approximately 60,000.
Cold Spring Center is located approximately 2.5 miles west of the
central business district of St. Cloud. The St. Cloud office market is currently
experiencing stable overall vacancy rates and it is difficult to find large
blocks of contiguous space. No new development is expected over the next couple
of years and, therefore, we believe that the market will be experiencing an
increase in rents.
Nicollet VI
Nicollet Business Center VI is a 50,291 square-foot office/warehouse
building located in Burnsville, Minnesota. The property is currently 100% leased
and was built in 1997. Burnsville is a suburb of Minneapolis/St. Paul, located
approximately 15 miles south of Minneapolis.
The property is located in the southeastern portion of central
Minnesota. The Twin Cities are ranked the 15th largest metropolitan area and the
eighth fastest growing area in the United States, with an overall annual growth
rate of 1.4%. As of 1996, the Twin Cities metropolitan population was
approximately 2.8 million, with 58% of the state's population residing in the
Twin Cities area.
The Twin Cities have approximately 284 million square feet of
industrial space with an availability rate of 5.27%. Overall availability in the
Twin Cities has averaged less than 5% over the last five years. The overall
industrial market in the Twin Cities is comprised of 40% office/warehouse, 30%
manufacturing, 20% bulk warehouse and 10% office showroom.
Thresher Square East/West
Thresher Square, which is located in Minneapolis, consists of two
buildings which are separated by a common wall with interior access between the
buildings on each floor. The seven-story East building was built in 1904 and
contains 64,020 square feet. The West building was built in 1900 and contains
55,845 square feet. The buildings were renovated in the mid 1990's, are
currently 100% occupied and are on the National Register of Historic Places.
Thresher Square is located in Minneapolis' central business district
and is characterized by the real estate industry as a Class B office building.
As of the first quarter 1999, the metropolitan area had an overall vacancy rate
of 6.25% and an office base of 53.76 million square feet. The Minneapolis
central business district contains 38% of that total square footage and has a
current vacancy rate of 4.38%.
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<PAGE>
Commercial Property Tables
The following tables present additional information related to
commercial properties in Minnesota:
<TABLE>
<CAPTION>
TOTALS OR
Light WEIGHTED
Office Properties Industrial Property AVERAGE
---------------------------------------------------------
Cold Springs Thresher Square
Office Center East/West Nicollet Business VI
St. Cloud, MN Minneapolis, MN Burnsville, MN
<S> <C> <C> <C> <C>
Year Acquired 1998 1998 1998
Year Built/ Renovated 1990 1900/1987 1997
Rentable Square Feet 77,533 119,722 N/A 197,255
GLA N/A N/A 50,291 50,291
Sq. Ft. % Leased
(as of July 1, 1999) 100% 100% 100% 100%
Annual Total Rental
Revenue(1) $1,438,190 $1,610,431 $529,777 $3,578,398
Annual Total Rental
Revenue Per Rentable Sq. $18.55 $13.45 $10.53 $14.46
Tenants Leasing 10%or Cold Spring Granite BRW, Inc.(48%) - Wakata Design
More of Rentable Square (55%) - 4/02; Central 7/01; Search Institute Systems (19%)
Footage as of July 1, MN ECSU (14%) - (16%) - 8/02 3/02; Quickdraw
1999 and Lease Expiration 9/02; First American Design, Inc.
Date Bank (17%) - 4/05 (30%)- 8/02;
Xata Corporation
(41%) - 6/04
- -------------------
(1) Total rental revenue is the monthly contractual base rent as of July 31,
1999, multiplied by 12, plus the estimated annualized expense
reimbursements under existing leases.
</TABLE>
38
<PAGE>
Tenants
We currently lease our Minnesota properties to approximately 25 tenants
that engage in a variety of businesses. The following table sets forth
information regarding leases with the 5 largest tenants of our Minnesota
properties, based upon annualized base rent for the relevant properties as of
July 31, 1999:
<TABLE>
<CAPTION>
% of
Remaining Aggregate % of Aggregate
Number of Lease Term Net Rentable Aggregate Annualized Annualized
Tenant Name Leases in Months Sq. Ft. Leased Leased Sq. Ft. Base Rent Base Rent
- ----------- ------ --------- -------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cold Spring
Granite 1 34 42,394 54.68% $540,523 61.66%
BRW, Inc.(1) 4 24 55,443 46.25% $436,322 40.79%
Xata Corp 1 60 25,388 50.80% $185,328 55.3%
Search Institute 2 38 21,781 39.00% $241,718 51.36%
First American
Bank 1 70 13,520 17.44% $195,548 22.31%
TOTALS 9 158,526 64.08%(2) $1,599,439 44.70%(2)
= ======= ========= ========== ======
- -------------------
(1) Space is leased in Thresher Square East and Thresher Square West.
(2) Figures are as to all of our Minnesota commercial properties, taken as a
whole.
</TABLE>
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<PAGE>
Lease Expirations
The following table sets forth detailed lease expiration information
for each of our Minnesota properties for leases in place as of July 31, 1999,
assuming that none of the tenants exercise renewal options or termination
rights, if any, at or prior to the scheduled expirations.
<TABLE>
<CAPTION>
2009
Year of Lease Expiration and
Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total
-------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- -----
Cold Springs
Office Center
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Square Footage of
Expiring Leases -- 6,145 3,980 53,605 -- -- 13,520 -- -- -- -- 77,250
Percentage of
Total Leased Sq.
Ft. -- 7.9% 5.1% 69.6% -- -- 17.4% -- -- -- -- 100%
Final Annual Base
Rent Under
Expiring Leases(2) -- $37,463 $58,307 $585,367 -- -- $195,548 -- -- -- -- $876,685
Final Annual Base
Rent per Sq. Ft.
Under Expiring
Leases(3) -- $6.10 $14.65 $10.92 -- -- $14.46 -- -- -- -- $11.35
Percentage of
Total Final Annual
Base Rent
Represented by
Expiring Leases -- 4.3% 6.7% 66.8% -- -- 22.2% -- -- -- -- 100%
Number of Leases
Expiring -- 2 1 2 -- -- 1 -- -- -- -- 6
- -------------------
(1) Represents lease expirations from August 1, 1999 to December 31, 1999.
(2) Represents annual base rent for the first annual period in accordance
with lease terms.
(3) Calculated by dividing the annual base rent for the final annual period
by the net rentable square feet subject to such leases.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
2009
Year of Lease Expiration and
Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total
-------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- -----
Nicollet Business VI
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Square Footage of
Expiring Leases -- -- -- 24,586 -- 25,388 -- -- -- -- -- 49,974
Percentage of
Total Leased Sq.
Ft. -- -- -- 49.2% -- 50.8% -- -- -- -- -- 100%
Final Annual Base
Rent Under
Expiring Leases(2) -- -- -- $149,748 -- $185,328 -- -- -- -- -- $335,076
Final Annual Base
Rent per Sq. Ft.
Under Expiring
Leases(3) -- -- -- $6.09 -- $7.30 -- -- -- -- -- $6.71
Percentage of
Total Final Annual
Base Rent
Represented by
Expiring Leases -- -- -- 44.7% -- 55.3% -- -- -- -- -- 100%
Number of Leases
Expiring -- -- -- 2 -- 1 -- -- -- -- -- 3
- -------------------
(1) Represents lease expirations from August 1, 1999 to December 31, 1999.
(2) Represents annual base rent for the first annual period in accordance
with lease terms.
(3) Calculated by dividing the annual base rent for the final annual period
by the net rentable square feet subject to such leases.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
2009
Year of Lease Expiration and
Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total
-------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- -----
Nicollet Business VI
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Thresher Square West
Square Footage of
Expiring Leases -- 686 33,378 21,781 -- -- -- -- -- -- -- 55,845
Percentage of
Total Leased Sq.
Ft. -- 1.2% 59.8% 39.0% -- -- -- -- -- -- -- 100%
Final Annual Base
Rent Under
Expiring Leases(2) -- $7,546 $249,462 $213,625 -- -- -- -- -- -- -- $470,633
Final Annual Base
Rent per Sq. Ft.
Under Expiring
Leases(3) -- $11.00 $7.47 $9.81 -- -- -- -- -- -- -- $8.43
Percentage of
Total Final Annual
Base Rent
Represented by
Expiring Leases -- 1.6% 53.0% 45.4% -- -- -- -- -- -- -- 100%
Number of Leases
Expiring -- 1 2 2 -- -- -- -- -- -- -- 5
- -------------------
(1) Represents lease expirations from August 1, 1999 to December 31, 1999.
(2) Represents annual base rent for the first annual period in accordance
with lease terms.
(3) Calculated by dividing the annual base rent for the final annual period
by the net rentable square feet subject to such leases.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
2009
Year of Lease Expiration and
Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total
-------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- -----
Thresher Square East
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Square Footage of
Expiring Leases 8,090(4) 4,216 27,508 13,787 10,419 -- -- -- -- -- -- 64,020
Percentage of
Total Leased Sq.
Ft. 12.6% 6.6% 43.0% 21.5% 16.3% -- -- -- -- -- -- 100%
Final Annual Base
Rent Under
Expiring Leases(2) $25,169 $34,798 $238,932 $155,775 $144,301 -- -- -- -- -- -- $598,975
Final Annual Base
Rent per Sq. Ft.
Under Expiring
Leases(3) $3.11 $8.25 $8.69 $11.3 $13.85 -- -- -- -- -- -- $9.36
Percentage of
Total Final Annual
Base Rent
Represented by
Expiring Leases 4.2% 5.8% 39.9% 26.0% 24.1% -- -- -- -- -- -- 100%
Number of Leases
Expiring 17 3 5 4 2 -- -- -- -- -- -- 31
- -------------------
(1) Represents lease expirations from August 1, 1999 to December 31, 1999.
(2) Represents annual base rent for the first annual period in accordance
with lease terms.
(3) Calculated by dividing the annual base rent for the final annual period
by the net rentable square feet subject to such leases.
(4) Includes month-to-month tenants and storage leases.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Year of Lease
Expiration 2009
Property and
Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total
---------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- -----
Consolidated
Totals for All
Commercial
Properties
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Square Footage of
Expiring Leases 8,090(4) 11,047 64,866 113,759 10,419 25,388 13,520 -- -- -- -- 247,089
Percentage of
Total Leased Sq.
Ft. 3.3% 4.5% 26.3% 46.0% 4.2% 10.3% 5.4% -- -- -- -- 100%
Final Annual Base
Rent Under
Expiring Leases(2) $25,169 $79,807 $546,701 $1,104,515 $144,301 $185,328 $195,548 -- -- -- -- $2,281,369
Final Annual Base
Rent per Sq. Ft.
Under Expiring
Leases(3) $3.11 $7.22 $8.43 $9.71 $13.85 $7.30 $14.46 -- -- -- -- $9.23
Percentage of
Total Final
Annual Base Rent
Represented by
Expiring Leases 1.1% 3.5% 24.0% 48.4% 6.3% 8.1% 8.6% -- -- -- -- 100%
Number of Leases
Expiring 17 6 8 10 2 1 1 -- -- -- -- 45
- -------------------
(1) Represents lease expirations from August 1, 1999 to December 31, 1999.
(2) Represents annual base rent for the first annual period in accordance
with lease terms.
(3) Calculated by dividing the annual base rent for the final annual period
by the net rentable square feet subject to such leases.
(4) Includes month-to-month leases and storage leases.
</TABLE>
44
<PAGE>
Wisconsin Properties
Lake Pointe
Lake Pointe is located on a point of land at the confluence of the Eau
Claire River and Lake Wausau, in Schofield, Wisconsin. Schofield is a southern
suburb of Wausau, Wisconsin and is considered a part of the Wausau urban area.
The City of Wausau is situated in north central Wisconsin approximately 140
miles north of Madison, 150 miles east of Minneapolis and 180 miles northwest of
Milwaukee.
Wausau, located in Marathon County, is the retail, industrial and
business hub of north central Wisconsin. While much of the county is home to
productive dairy and crop farms, the local economy is diversified, including
industries such as insurance, wood products and paper mills.
The greater Wausau area, with a population of over 115,000, is an
attractive site for new business and industry, aided by incentives such as
affordable industrial land, revolving loan funds offering lower than market
rates, job training funds, and an industrial mall complete with a laser lab.
There are two industrial parks in the Wausau area. One is on the west side and
the other is in the City of Schofield. Major industrial employers include
Weyerhauser Paper Company, Wausau Paper Mills and Land O' Lakes, Inc.
Lake Pointe has a unique location on a point, with Lake Wausau on the
west and the Eau Claire River on the east. A private marina is immediately
adjacent to the entrance to the property. The apartment community is situated on
a peninsula of approximately 4.13 acres and consists of 72 units with 72
garages, plus 72 additional parking spaces. It was built in 1990. The property's
26 boat slips offer opportunities for power boating, sailing and water skiing.
The sunning deck offers a place to relax and socialize with neighbors.
Lake Pointe won the Wausau Chamber of Commerce's Beautification Award
in 1991. The buildings at Lake Pointe are of a soft, contemporary design with a
light grey vinyl and white aluminum trim exterior. The property is extensively
landscaped and has an underground sprinkling system, picnic area and community
deck. Each building is equipped with elevators and laundry facilities on every
floor.
All units have a water view, patio or balcony, garage and
fully-equipped kitchen. Each unit has been professionally decorated with color
coordinated carpeting, drapes and mini blinds, oak wood trim, European-style
cabinetry and individual air conditioning and heating units. Some individual
units have walk-in closets and have a sink and mirror in the bedroom.
Maple Grove
Maple Grove is a 304-unit apartment community located in Madison,
Wisconsin. It was constructed in phases between 1991 and 1996. There are 144
two-bedroom apartments and 160 one-bedroom apartments.
Maple Grove is presently under contract for sale to an independent
third party. The contract provides for a purchase price of $16,700,000 to be
paid by assuming the first mortgage of approximately $12.7 million and paying
the balance in cash at closing. While we did not solicit offers to buy the Maple
Grove property, we think that the proposed transaction is in our best interests
because of (1) our near-term capital requirements, and (2) our belief that other
investment opportunities may provide a better return on capital.
45
<PAGE>
The contract is subject to closing conditions and contingencies
including:
o approval and consent of the holder of the first mortgage;
o our ability to deliver clear title;
o the purchaser inspecting the property; and
o a resolution of the issues raised by the United States
Department of Justice concerning our compliance with fair
housing laws as they relate to access by disabled persons.
The buyer has advanced $400,000 of the cash purchase price in exchange
for our 10% promissory note.
Maple Grove is located in southwestern Madison and is approximately 10
minutes from downtown Madison. It is situated on a 13.23-acre parcel in a
neighborhood which includes single family homes, duplexes, senior housing, a
commercial site, a day care center and a neighborhood shopping center.
It has 14 buildings. Nine of the buildings include underground parking.
There is a club house with a swimming pool, enclosed whirlpool, exercise
facility and party rooms.
The average size of the one-bedroom units is 756 square feet and the
two-bedroom units average 1,059 square feet. The units offer superior amenities
with many including fireplaces, two balconies, whirlpool tubs, creative floor
plans, oversized closets and in-unit washers and dryers.
Madison is located in Dane County, Wisconsin and is the state's capital
and second largest city. Madison is located approximately 140 miles from
Chicago, 80 miles from Milwaukee and 250 miles from Minneapolis.
Overall, Madison's economy is weighted heavily to government and
services. This tends to provide stability in economic cycles. Employment levels,
building activity, and consumer demand all tend to be rather stable compared to
cities more dependent upon industrial employment.
According to a study conducted by the Madison Gas and Electric Company,
occupancy of rental units in the area during the first three months of 1999 was
93.6%.
46
<PAGE>
Apartment Property Tables
The following table presents additional information concerning our
apartment properties:
<TABLE>
<CAPTION>
Property and Location
Maple Grove, Lake Pointe
Madison, Wisconsin Schofield, WI Totals/Weighted Average
<S> <C> <C> <C>
Year Acquired 1995-1996 1996 N/A
Number of Units 304 72 376
Approximate Rentable
Area (Sq. Ft.) 276,496 65,184 341,680
Total Acreage 13.23 4.13 17.36
Year Placed in
Service 1991-1996 1990 N/A
Average Unit Size
(Sq. Ft.) 910 905 909
1998 Average Occupancy 91.1% 97.2% 92.3%
Occupancy at July 1,
1999 98.6% 100% 98.9%
1998 Average Monthly
Rental Rates - Per Unit $735 $602 $710
1998 Average Monthly
Rental Rates - Per Sq. Ft. $0.81 $0.66 $0.78
</TABLE>
47
<PAGE>
Mortgage Indebtedness
The following chart summarizes the mortgage indebtedness of each of our
properties.
<TABLE>
<CAPTION>
Principal Interest Rate Amount
Face Amount Balance as of At Amortization Maturity Due at Prepayment
of Mortgage July 1, 1999 July 1, 1999 (Years) Date Maturity Penalty
----------- ------------ ------------ ------- ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Property Location
Nicollet Business VI $2,350,000 $2,317,794 7.0% 30 2/8/08 $2,012,720 Yield
Burnsville, MN Maintenance
Thresher Square East $4,335,000 $3,955,000 5.5% 19 5/1/15 $0
Minneapolis, MN
Thresher Square West $3,805,000 $2,965,000 6.5% 18 6/1/10 $0 June 1, 2000
Minneapolis, MN @ 101%;
June 1, 2000
@ 100.5%;
June 2002 @ par
Cold Springs Office $7,500,000 $7,408,491 9.25% on 20 9/30/00 $7,285,826 $20,000
Cntr., St. Cloud, MN $5,533,491(1);
10.75% on
$1,875,000(1)
Maple Grove $12,900,700 $12,680,308 8.1% 30 6/01/04 $11,960,225 Yield
Madison, WI Maintenance
Lake Pointe $ 2,750,000 $ 2,722,891 7.6% 30 3/11/28 $0 Yield
Schofield, WI Maintenance
TOTAL/WEIGHTED
AVERAGE % $33,640,000 $32,049,484 7.9%
- -------------------
(1) Represents a variable-rate mortgage.
</TABLE>
48
<PAGE>
Employees
We intend to maintain a small corporate staff. At the present time, our
only employees are our chief executive officer, Duane H. Lund, and our
president, Robert F. Rice. Currently, we have contracted with Wellington
Management Corporation for accounting services for a fee of $500.00 per month.
As we acquire additional assets, we expect to hire additional staff to provide
accounting services internally.
We have entered into a property management agreement with Wellington
Realty, Inc. with respect to our Wisconsin properties and with Hoyt Properties
Inc. with respect to our Minnesota properties. Each of these agreements provides
for the payment of management fees equal to 5% of gross rental income, which we
believe is consistent with prevailing market rates. We anticipate that, as we
add new REITPLUS(sm) affiliates, we will enter into similar property management
agreements.
Competition
Our office building properties compete with numerous alternatives for
tenants in the local markets in which they are located. The apartment community
properties compete directly with other multifamily properties and single family
homes that are available for rent in the markets in which our properties are
located. The apartment community properties also compete for tenants with the
new and existing home market. Other office buildings, community shopping
centers, light industrial facilities and residential communities that we may
acquire in the future will also compete for tenants with other similar
properties in the same local markets.
In addition, we compete with other investors for acquisitions and
development projects, and many such competitors have greater resources than we
do, including greater cash resources, greater access to debt and equity markets
and greater management and leasing resources and expertise.
Legal Proceedings
Neither we, nor any of our properties, are presently subject to any
material litigation nor, to our knowledge, is any material litigation threatened
against us or our properties, other than routine litigation arising in the
ordinary course of business and which is expected to be covered by liability
insurance. We have received notice of a Department of Justice investigation of
the architect and developer of our Maple Grove apartment community related to
handicap accessibility. If our Maple Grove property is not in compliance with
applicable laws, we may be responsible for any deficiencies. Though we expect
that our liability, if any, would be limited to the last 60 units constructed,
as to which we acted as the developer, we cannot presently determine the costs
of any actions that may ultimately be required of us.
Regulation
General. Apartment community properties are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas. We
believe that, under present laws, ordinances and regulations, each of our
existing properties has the permits and approvals necessary to operate.
Commercial and other properties are also subject to regulation. Community-based
residential facilities are extensively regulated and are generally licensed by
the state in which they are located.
Americans with Disabilities Act. All of our properties, as well as any
newly developed or acquired properties, must comply with the Americans with
Disabilities Act to the extent that the properties are "public accommodations"
and/or "commercial facilities" as defined by the statute. Compliance with the
Americans with Disabilities Act requirements could require removal of structural
barriers to handicapped access in certain public areas of our properties where
such removal is readily achievable. The act does not, however, consider
residential properties, such as multifamily properties or community-based
residential
49
<PAGE>
facilities, to be public accommodations or commercial facilities, except to the
extent portions of such facilities, such as a leasing office, are open to the
public. Commercial properties, such as shopping centers or office buildings are
considered public accommodations. To the extent possible through leases, we
intend to require that our commercial tenants comply with the Americans with
Disabilities Act. We will, of course, remain responsible for compliance with
respect to common areas in commercial properties. Although we believe that each
of our existing properties substantially complies with all present requirements
under the Americans with Disabilities Act and applicable state laws, final
regulations under the Act have not yet been promulgated. Noncompliance could
result in imposition of fines or an award of damages to private litigants. If
required changes involve greater expenditures than we currently anticipate, or
if the changes must be made on a more accelerated basis than we anticipate, our
ability to pay accrued dividends could be adversely affected. We believe that
our competitors face similar costs to comply with the requirements of the
Americans with Disabilities Act.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act
requires multifamily properties first occupied after March 13, 1990 to be
accessible to the handicapped. Noncompliance with the act could result in the
imposition of fines or an award of damages to private litigants.
While we believe that our existing properties are substantially in
compliance with present requirements under the Fair Housing Amendments Act, we
have received notice of a Department of Justice investigation of the architect
and developer of our Maple Grove apartment community in Madison, Wisconsin. If
our Maple Grove property is not in compliance with applicable laws, we believe
that we may be responsible for any deficiencies. Though we expect that our
liability, if any, should be limited to the last 60 units constructed, as to
which we acted as the developer, we cannot presently determine the costs of any
actions that may ultimately be required of us.
Rent Control Legislation. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
from tenants increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
some jurisdictions, although none of the jurisdictions in which we presently
operate has adopted such laws. We do not presently intend to develop or acquire
multifamily properties in markets that are either subject to rent control or in
which rent limiting legislation exists.
Environmental Matters
Under various federal, state, and local environmental laws,
regulations, and ordinances, a current or previous owner 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 cleanup
costs incurred by such parties in connection with the contamination. Such laws
typically impose cleanup responsibility without regard to whether the owner or
operator knew of, or caused the presence of the contaminants. The costs 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 an owner's ability to sell or rent such real
estate or to borrow using such real estate as collateral. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may be held liable for the costs of investigation, remediation, or
removal of such hazardous or toxic substances at or from the disposal or
treatment facility, regardless of whether such facility is owned or operated by
such person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site.
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<PAGE>
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of asbestos containing
materials when such materials are in poor condition or in the event of building
remodeling, renovation or demolition. Such laws may impose liability for the
release of such materials and may provide for third parties to seek recovery
from owners or operators of real estate for personal injury associated with
asbestos. In connection with our ownership and operation of our properties, we
may be potentially liable for costs in connection with these matters.
All of our properties were subject to Phase I environmental assessments
at the time we acquired them in order to discover information regarding, and to
evaluate the environmental condition of, the surveyed property and surrounding
properties. The Phase I assessments included a historical review, a public
records review, a preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos and equipment containing
polychlorinated biphenyls ("PCBs"), and underground storage tanks and the
preparation and issuance of a written report, but did not include soil sampling
or subsurface investigations. In addition, we conducted a Phase II environmental
assessment of our historical Thresher Square office buildings, which were
constructed between 1900 and 1904, at the time we acquired them.
None of our original environmental assessments have revealed any
environmental liability that we believe would have a material adverse effect on
our business, assets or results of operations, and our lenders have not
requested additional environmental assessments. Nevertheless, it is possible
that these assessments do not reveal all environmental liabilities or that there
are material environmental liabilities of which we are unaware. Moreover, no
assurances can be given that: (1) future laws, ordinances or regulations will
not require or impose any material expenditures or liabilities in connection
with environmental conditions by or on us or our properties, (2) the current
condition of properties in the vicinity of our properties (such as the presence
of underground storage tanks) may not impact us adversely, or (3) prior owners
of our properties did not create environmental problems of which we are not
aware.
We believe that our properties are each in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. We have not been
notified by any governmental authority, and are not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of our properties.
Insurance
We carry comprehensive liability, fire, extended coverage and rental
loss insurance with respect to all of our properties, with policy
specifications, insured limits and deductibles customarily carried for similar
properties. There are, however, certain types of losses (such as losses arising
from wars) that are not generally insurable. Should an uninsured loss or a loss
in excess of insured limits occur, we could lose our capital invested in the
affected property, as well as the anticipated future revenues from such property
and could also continue to be obligated on any mortgage indebtedness or other
obligations related to the property.
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<PAGE>
Certain Property Tax Information
Tenants of apartment communities generally are not required to pay
their proportionate share of any real estate taxes; tenants of commercial
properties do generally pay their proportionate share of real estate taxes.
The 1998 property taxes for our properties were as follows:
Cold Springs $ 241,270
Thresher Square East/West $ 296,571
Nicollet VI $ 49,439 (1)
Maple Grove $ 371,990
Lake Pointe $ 72,985
- ----------------------
(1) The Nicollet VI property should be fully assessed in 2000.
52
<PAGE>
MANAGEMENT
Board of Trustees
The following biographical descriptions set forth certain information
with respect to our trustees and executive officers, based on information
furnished to us by them. The following information is as of September 30, 1999,
unless otherwise specified.
Name Age Title(s)
Arnold K. Leas................. 65 Chairman of the Board of Trustees
Steven B. Hoyt................. 47 Trustee
Paul T. Lambert................ 47 Trustee
Peter Ogden.................... 41 Trustee
Robert P. Ripp................. 72 Trustee
Robert D. Salmen............... 44 Trustee
Mark S. Whiting (1)............ 42 Trustee
Duane H. Lund.................. 35 Chief Executive Officer and Treasurer
Robert F. Rice................. 48 President and Secretary
- ------------------------
(1) Mr. Whiting has agreed to serve as a trustee upon the closing of the
offering.
Class I Trustees - Terms to Expire in 2001
Paul T. Lambert, has been a trustee since November 1998. Mr. Lambert has been a
private investor since 1995. He served on the board of directors and was the
chief operating officer of First Industrial Realty Trust, Inc., from its initial
public offering in June 1994 to the end of 1995. Mr. Lambert was one of the
largest contributors to the formation of First Industrial and one of its
founding shareholders. Prior to forming First Industrial, Mr. Lambert was
managing partner of the Midwest region for The Shidler Group, a national private
real estate investment company. Prior to joining Shidler, Mr. Lambert was a
commercial real estate developer with Dillingham Corporation and, prior to that,
was a consultant with The Boston Consulting Group. Mr. Lambert was also a
founding stockholder of CGA Group, Ltd., a holding company whose subsidiary is a
AAA-rated financial guarantor based in Bermuda.
Arnold K. Leas, our chairman of the board of trustees, served as our original
president/chief executive officer from our inception in 1994 until November
1998. Mr. Leas has also served as a director, chief executive officer and
president of Wellington Management Corporation since its inception in 1988.
Wellington Management and its subsidiary, Wellington Investment Services Corp.,
currently manage over $100 million dollars of investors' funds. From 1984 to
1988, Mr. Leas was executive vice president of Decade Securities, Inc., a
Milwaukee, Wisconsin-based company that was involved primarily in the
syndication of multi-family apartment communities throughout the United States.
Mr. Leas has transacted real estate acquisitions and sales, directly or
indirectly, in excess of $200,000,000. Mr. Leas is on the board of directors of
the Metropolitan Milwaukee Association of Commerce Council of Small Business
Executives and is a graduate of the Realtors Institute.
Class II Trustees - Terms to Expire in 2000
Steven B. Hoyt became a trustee in November 1998. He has served as managing
general partner of Hoyt Development (from 1979 to 1989) and chief executive
officer of Hoyt Properties Inc. (from 1989 to present). Hoyt Properties
currently owns over 1,000,000 square feet of industrial and office property in
Minnesota and has developed over 5,000,000 square feet of commercial property
since its inception. From 1994 to 1995, Mr. Hoyt served as a senior regional
director of First Industrial Realty Trust, Inc. Mr. Hoyt
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<PAGE>
is a member of the board of directors of the Better Business Bureau and has
served in numerous state and national positions for the National Association of
Industrial and Office Parks (NAIOP).
Robert P. Ripp has served as one of our trustees since our inception in 1994.
Mr. Ripp is the owner of RESI Realtor, a Milwaukee-based real estate brokerage
firm. Prior to forming RESI Realtor in 1985, Mr. Ripp was the vice
president/general sales manager for Wauwatosa Realty, a real estate brokerage
firm with 27 offices in the State of Wisconsin.
Class III Trustees - Terms to Expire in 1999
Peter Ogden has been a trustee since our inception in 1994. Mr. Ogden has served
as the president and owner of Ogden & Company since 1990 and the vice president,
treasurer and owner of Ogden Development Group, Inc. since 1986, both of which
are Milwaukee-based providers of real estate brokerage, leasing and property
management services and which together manage over 2,500 apartment and
condominium units, in addition to shopping centers and office, industrial and
mixed-use buildings.
Robert D. Salmen joined our board of trustees in August 1999. Mr. Salmen founded
Equity Financial Services in 1993. While continuing to operate Equity
Financial's investment services company, he co-founded Equity Commercial
Services in 1996 to incorporate leasing and then property management services
for Equity Financial and currently serves as its president. Prior to founding
Equity Financial Services, Mr. Salmen was vice president of institutional
investment sales with Welsh Companies for eight years. He established the
Institutional Investment division at Welsh Companies in 1985. From its inception
through 1992, he directed Welsh's sales marketing force. Prior to joining Welsh,
Mr. Salmen spent over nine years with Towle Real Estate. Mr. Salmen is a
graduate of the University of Minnesota.
Mark S. Whiting has agreed to join our board of trustees upon the completion of
the offering of the Class A Preferred Shares. Mr. Whiting has an extensive
public REIT background, having served as the President and a member of the board
of directors of TriNet Corporate Realty Trust, Inc. (NYSE: TRI) from 1993 until
1998 and as its Chief Executive Officer from 1996 until 1998. At the time,
TriNet owned a commercial real estate portfolio consisting of over 20 million
square feet located in 26 states and a total market capitalization of $1.6
billion. Mr. Whiting holds an M.B.A. from the Stanford University Graduate
School of Business.
Executive Officers
Duane H. Lund has been our chief executive officer since November 1998. Mr. Lund
was a founding stockholder of First Industrial Realty Trust, Inc. and served as
a senior regional director of First Industrial from 1994 to June 1998. In such
capacity, Mr. Lund acquired and managed over 11,000,000 square feet of
commercial property with a value in excess of $750 million. From 1989 to 1994,
Mr. Lund was an acquisition partner with The Shidler Group, where he was
involved in coordinating the underwriting and due diligence for over $200
million of commercial property. Mr. Lund was a tax consultant with Peat Marwick
Main & Company from 1986 until 1988. Mr. Lund is a member of the boards of
directors of the Wisconsin Real Estate Alumni Association and National
Association of Industrial and Office Properties, Minnesota Chapter and is a
member of the advisory boards of the Midwest Real Estate News, the Minnesota
Real Estate Journal and the KPMG Peat Marwick Alumni Association.
Robert F. Rice, our president and corporate secretary, has served as secretary
since our inception in 1994 and as executive vice president from May 1997 until
becoming president in November 1998. Prior to November 1998, Mr. Rice served as
vice president and general counsel to Wellington Management Corporation
beginning in November 1993. From 1989 to October 1993, Mr. Rice provided advice
with respect to Resolution Trust Corporation matters through Resource
Alternatives, Inc., a provider of legal and
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<PAGE>
consulting services to the real estate industry. From 1984 to 1989, Mr. Rice
served as a director, officer and general counsel for various affiliates of St.
Francis Bank, F.S.B. Mr. Rice graduated from Marquette University Law School in
1976.
Our board of trustees held seven meetings during 1998. Each of the
trustees attended at least 75% of the total meetings of the board of trustees
and the committees of the board of trustees on which he served.
There are no familial relationships among any of our trustees or
executive officers.
We are currently seeking to identify and retain additional qualified
candidates with national commercial real estate and capital markets expertise
and experience to serve as non-employee members of our board of trustees.
Messrs. Ogden and Ripp have executed written agreements to resign as members of
our board of trustees once we have identified candidates that would be willing
to serve in their stead on the board. In accordance with our bylaws, the
remaining members of the board of trustees may fill the vacancies created by
such resignations without submission of the matter to a vote of our
shareholders.
Committees of the Board of Trustees
Our board of trustees has appointed an Audit Committee and a
Compensation Committee.
Audit Committee. Our Audit Committee, which held one meeting during
1998, currently consists of Messrs. Ogden and Salmen. The committee reviews
related party transactions, makes recommendations concerning the engagement of
independent public accountants, reviews with our independent public accountants
the plans and results of our audit engagement, approves professional services
provided by our independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
that we pay to our independent accountants and reviews the adequacy of the our
internal accounting controls.
Compensation Committee. Our Compensation Committee, which held one
meeting during 1998, currently consists of Messrs. Leas, Hoyt and Lambert. The
committee makes recommendations and exercises all powers of the board of
trustees in connection with certain compensation matters, including incentive
compensation and benefit plans. The Compensation Committee administers and has
authority to grant awards under our 1998 stock incentive plan.
Trustee Compensation
Our trustees receive a fee of $250 for each board or committee meeting
attended, plus the reimbursement of all reasonable out-of-pocket expenses
incurred in connection with such attendance.
Shareholders' Agreement
In November 1998, we entered into a ten-year shareholders' agreement
with each of American Real Estate Equities, LLC, Duane H. Lund, WLPT Funding,
Paul T. Lambert, Lambert Equities II, LLC, Steven B. Hoyt, Wellington Management
Corporation, Robert F. Rice, Arnold K. Leas, Rose Marie Leas and Gregory S.
Leas. Under the shareholders' agreement, the signing shareholders have agreed to
take whatever actions are necessary (including, but not limited to, the voting
of all shares owned, from time to time, by each of them, whether directly or
indirectly) in order to: (1) cause Messrs. Lambert and Hoyt to be, and to
continue to be, elected to our board of trustees; (2) cause our board of
trustees to fill any vacancies on the board with a person mutually selected by
American Real Estate Equities and Wellington Management Corporation; and (3)
cause the board of trustees to elect Mr. Lund as our chief executive officer,
Mr. Rice as our president, and Mr. Leas as our chairman of the board of
trustees.
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<PAGE>
Executive Compensation
Summary Compensation
From its inception in 1994 through the year ended December 31, 1997, we
were externally managed and paid no compensation to any of our executive
officers. In 1998 the following compensation was paid:
Name and Principal Securities Underlying
Position Year Salary Options
Duane H. Lund 1998 $18,750(1) --
Chief Executive Officer
Robert F. Rice 1998 $62,500(2) 7,917(3)
President and Secretary
Arnold K. Leas 1998 -- 9,500(3)
Chairman of the Board
- ---------------
(1) Amount reflects base annual salary of $150,000. Mr. Lund became our
chief executive officer on November 20, 1998.
(2) Amount reflects base annual salary of $150,000. Mr. Rice was paid
commencing August 1, 1998.
(3) All options were granted on May 27, 1998 and have an exercise price of
$5.37 per common share, which was the fair market value per share on
the date of grant. All such options are currently exercisable.
<TABLE>
<CAPTION>
Options/SAR Grants in Last Fiscal Year
Number of Common Percentage of Total
Shares Underlying Options Granted to Exercise Price Expiration
Name and principal position Options Granted Employees in Fiscal Year Date
<S> <C> <C> <C> <C>
Duane H. Lund
Chief Executive Officer -- -- -- --
Robert F. Rice
President and Secretary 7,917 18.98% $5.37 5-26-08
Arnold K. Leas
Chairman of the Board 9,500 22.77% $5.37 5-26-08
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year End Option/SAR Values
# of Securities
Underlying Value of unexercised
Common Shares Options/SARs at in-the-money options/SARs at
Acquired on Value Fiscal year End Fiscal Year End ($)
Name and principal position Exercise Realized Exercisable(1) Exercisable/Unexercisable(2)
- --------------------------- ------------ -------- -------------- ----------------------------
<S> <C> <C> <C> <C>
Duane H. Lund -- -- -- --
Chief Executive Officer
Robert F. Rice -- -- 7,917 $0/--
President and Secretary
Arnold K. Leas -- -- 9,500 $0/--
Chairman of the Board
- ---------------
(1) All of the options held by the named executive officers are currently
exercisable.
(2) Calculations are based upon the closing bid price of $4.30 per share as
of December 31, 1998.
</TABLE>
Employment Agreements
We have entered into new employment agreements with Duane H. Lund, our
chief executive officer, and Robert F. Rice, our president. The employment
agreements, which became effective as of October 1, 1999, each provide for an
initial base salary of $80,000 and, if we achieve progressive annual targets of
earnings per share, our board of trustees may elect to award Mr. Lund and Mr.
Rice a bonus of up to 100% of base salary. In addition, each employment
agreement provides that the officers shall receive those health, life and
disability and other benefits extended by the board of trustees to other
similarly situated executives. Each of the employment agreements extends through
December 31, 2000, subject to our right to terminate the agreement at any time.
In the event that we terminate either officer's employment without cause or in
the event such person's employment discontinues upon the expiration of the
employment agreement or following a change in control, we or, in the case of a
change in control, our successor, will be obligated to pay to such officer an
amount equal to one year's base salary and continue his benefits for one year.
In connection with the approval of the new employment agreements, we
also issued each of Mr. Lund and Mr. Rice options to purchase 80,000 of our
common shares at a price equal to 110% of the average closing bid price for our
common shares over the 10 trading days preceding the effective date of the
registration statement covering the Class A Preferred Shares. These options will
become exercisable as to 40,000 shares on December 31, 1999 and, if we meet
specified financial goals for the preceding periods, as to an additional 40,000
shares on December 31, 2000.
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<PAGE>
Indemnification and Insurance
Our trustees are accountable to us and our shareholders as fiduciaries
and consequently must exercise good faith and integrity in handling company
affairs.
Pursuant to Maryland law and our organizational documents, no trustee
shall be liable to us for any act, omission, loss, damage or expense arising
from the performance of his or her duty as trustee unless such trustee received
an improper personal benefit or acted in bad faith, with deliberate dishonesty
or with reason to believe that his actions were unlawful.
Our declaration of trust and bylaws provide that we will indemnify
every eligible indemnitee against all judgements, penalties, fines, amounts paid
in settlement and reasonable expenses actually incurred by the indemnitee in
connection with any proceeding in which such indemnitee was, is or is threatened
to be named as defendant or respondent or called as a witness, by reason of his
or her serving or having served us if it is determined that the indemnitee
conducted himself or herself in good faith, received no improper personal
benefit, did not act with deliberate dishonesty and, in the case of any criminal
proceeding, had no reasonable cause to believe that his or her conduct was
unlawful. For purposes of these provisions, an "eligible indemnitee" is (1) any
of our present or former trustees or officers, (2) any person who, while serving
in any of such capacities, served at our request as a trustee, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
trust or other enterprise, (3) any person nominated or designated by our board
of trustees or any committee thereof to serve in any of the capacities referred
to in the preceding clauses (1) or (2), and (4) any employee of Wellington
Realty, Inc. providing services to us. It is the position of the Securities and
Exchange Commission that indemnification for liabilities arising under the
Securities Act of 1933 is contrary to public policy and therefore unenforceable.
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PRINCIPAL SHAREHOLDERS
The following table describes the beneficial ownership of our voting
shares at September 30, 1999 by:
o each person that we know beneficially owns more than 5% of our
outstanding voting shares;
o each of our trustees;
o our chief executive officer and president; and
o all of our trustees and executive officers as a group.
Except as described in the notes to the table, each person named has
sole voting and investment power with respect to all shares beneficially owned.
<TABLE>
<CAPTION>
Class B Junior
Common Shares Cumulative Convertible
Beneficially Owned Preferred Shares Owned
as of as of
Name September 30, 1999 September 30, 1999
- --------------------------------------------------- -------------------------- --------------------------
Number(1) Percent(1) Number(2)
<S> <C> <C> <C>
Arnold K. Leas (3)(4)(5)........................... 197,178 14.3% 95,000
Steven B. Hoyt (3)(4)(6)(7)....................... 166,666 12.1% 254,800
Paul T. Lambert (3)(4)(7)(8)....................... 166,666 12.1% 254,800
Duane H. Lund (2)(3)(4)(7)(9)...................... 166,666 12.1% 254,800
American Real Estate Equities, LLC (4)(10)......... 166,666 12.1% 254,800
Lambert Equities II, LLC (4)(11)................... 166,666 12.1% 254,800
WLPT Funding, LLC (4)(12).......................... 166,666 12.1% 254,800
Wellington Management Corporation (4)(13).......... 150,321 11.0% 95,000
Esor and Company (14).............................. 70,693 5.2% 0
Peter Ogden (3)(15)................................ 3,167 * 0
Robert P. Ripp (3)(16)............................. 4,199 * 0
Mark S. Whiting (3) ............................... 0 * 0
Robert D. Salmen (3)(7)............................ 0 * 0
Robert F. Rice (3)(4)(7)(17)....................... 9,500 * 0
All trustees and current executive officers as a
group (8 persons) (18)........................ 380,710 27.3% 349,800
- ------------------------------------
* Indicates less than one percent.
(1) Based on 1,372,152 common shares outstanding as of September 30, 1999.
Also assumes exercise by only the shareholder or group named in each
row of all options and warrants for the purchase of our common shares
held by such shareholder or group and exercisable within 60 days of
September 30, 1999.
(2) Our Class B Cumulative Convertible Preferred Shares are each
convertible, at the option of the holder, into a number of our common
shares equal to the quotient obtained by dividing (a) $10.00, plus any
dividends then accrued but unpaid on the Class B preferred shares, by
(b) a price equal to 110% of the average closing bid price for our
common shares over the 10 trading days preceding the effective date of
the registration statement covering the Class A Preferred Shares. As a
result, the number of common shares into which the Class B preferred
shares will be convertible cannot be determined at this time.
(3) The business address for each of our current trustees and executive
officers is 18650 W. Corporate Drive, Suite 300, Brookfield, Wisconsin
53045.
(4) All of these parties have entered into a ten-year agreement providing
for the election of trustees and certain other matters. Each such party
disclaims beneficial ownership of our common shares owned by each other
party.
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<PAGE>
(5) Includes 990 common shares held by a trust for the benefit of Mr. Leas'
wife and options to purchase 9,500 common shares exercisable within 60
days of September 30, 1999. All shares held by Mr. Leas or for the
benefit of his wife have been transferred to an excess share trust and
may not be voted on any matter coming before our shareholders. Also
includes 150,321 common shares held by Wellington Management
Corporation, of which Mr. Leas is the president and chief executive
officer and with respect to which Mr. Leas, members of his immediate
family and trusts for the benefit of such persons own approximately
41.8% of the outstanding capital stock. The Class B Junior Cumulative
Convertible Preferred Shares indicated are also owned of record by
Wellington Management and include 66,531 shares which have been
transferred to an excess share trust and may not be voted by Wellington
Management Corporation on any matter coming before our shareholders.
Mr. Leas disclaims beneficial ownership of common shares held for the
benefit of his wife.
(6) Does not reflect 691,690 ordinary common units and 168,417 Class B
common units of our operating partnership held by Mr. Hoyt or members
of his immediate family. The common shares and the Class B Cumulative
Convertible Preferred Shares indicated are held by American Real Estate
Equities, LLC, of which Mr. Hoyt is a member.
(7) These parties have indicated an interest in buying some of the Class A
Preferred Shares offered by this prospectus.
(8) Does not reflect 168,416 Class B common units of our operating
partnership held by Lambert Equities II, LLC, of which Mr. Lambert is
the controlling majority member and sole manager. The common shares and
the Class B Junior Cumulative Convertible Preferred Shares indicated
are held by American Real Estate Equities, LLC, of which Lambert
Equities II, LLC is a member.
(9) Does not reflect 375,666 ordinary common units and 168,416 Class B
common units of our operating partnership held by WLPT Funding, LLC, of
which Mr. Lund is the owner and the sole manager. The common shares and
the Class B Junior Cumulative Convertible Preferred Shares indicated
are held by American Real Estate Equities, LLC, of which Mr. Lund is
the president and of which WLPT Funding, LLC is a member.
(10) The business address for American Real Estate Equities, LLC is 300
First Avenue North, Suite 115, Minneapolis, Minnesota 55401.
(11) The business address from Lambert Equities II, LLC is 4155 East Jewel,
Suite 103, Denver, Colorado 80222. Figures indicated do not reflect
ownership of 168,416 Class B common units of our operating partnership.
The common shares and Class B Junior Cumulative Convertible Preferred
Shares indicated are held by American Real Estate Equities, LLC, of
which Lambert Equities II, LLC is a member.
(12) The business address for WLPT Funding, LLC is c/o Golden Acres
Incorporated, 15315 Masons Pointe, Eden Prairie, Minnesota 55347.
Figures do not reflect 375,666 ordinary common units and 168,416 Class
B common units of our operating partnership. The common shares and
Class B Junior Cumulative Convertible Preferred Shares indicated are
held by American Real Estate Equities, LLC, of which WLPT Funding, LLC
is a member.
(13) Includes 66,531 Class B Junior Cumulative Convertible Preferred Shares
which have been transferred to an excess share trust; Wellington
Management Corporation may not vote such shares on any matter coming
before our shareholders. The business address for Wellington Management
Corporation is 18650 W. Corporate Drive, Suite 300, P.O. Box 0919,
Brookfield, Wisconsin 53045.
(14) The business address for Esor and Company is 1100 W. Wells Street,
Milwaukee, Wisconsin 53233.
(15) Consists solely of options to purchase common shares exercisable within
60 days of September 30, 1999.
(16) Includes options to purchase 3,167 common shares exercisable within 60
days of September 30, 1999.
(17) Includes options to purchase 7,917 common shares exercisable within 60
days of September 30, 1999.
(18) Includes options to purchase an aggregate of 23,651 common shares
exercisable within 60 days of September 30, 1999. Figures do not
reflect an aggregate of 1,067,356 common units and 505,249 Class B
common units of our operating partnership.
</TABLE>
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
American Real Estate Equities, LLC. American Real Estate Equities, LLC
is owned in equal thirds by WLPT Funding, LLC, Lambert Equities II, LLC and
Steven B. Hoyt. Duane Lund, our chief executive officer, owns 100% of WLPT
Funding and is its sole manager. Paul T. Lambert, one of our trustees, is a
majority owner and sole manager of Lambert Equities. Steven Hoyt is also one of
our trustees.
In November 1998, our shareholders approved a transaction whereby
American Real Estate Equities would purchase 166,666 of our common shares for
$1,000,000, or $6.00 per share, and would contribute certain assets, principally
our Cold Springs office center in St. Cloud, Minnesota and contracts for the
purchase of 29 other real estate investment properties (some of which Mr. Hoyt
had an ownership interest in), to our operating partnership, Wellington
Properties Investments, L.P. As consideration for such assets, we agreed to:
o hire Mr. Lund as our chief executive officer and nominate Mr.
Lambert and Mr. Hoyt for election to our board of trustees;
o issue 4,933,233 common units of our operating partnership to
American Real Estate Equities or its members;
o issue an additional 9,934,663 common units to the owners of
the properties to be acquired (including 4,510,671 units to
Mr. Hoyt and his affiliates);
o assume $64.0 million in third-party mortgage indebtedness on
the properties to be acquired;
o pay $31.2 million in cash to the owners of the properties to
be acquired (none of which was to be paid to Mr. Hoyt);
o issue to American Real Estate Equities a warrant to purchase
791,667 of our common shares at a price of $5.37 per share
with respect to 395,833 shares, $6.47 with respect to 197,917
shares, $7.74 per share with respect to 118,750 shares and
$9.32 per share with respect to 79,167 shares; and
o reimburse certain of American Real Estate Equities' costs,
including costs in obtaining the contractual rights
contributed to the operating partnership, upon the completion
of the transaction.
Following shareholder approval of the proposed arrangement in November
1998, due principally to increased financing costs, we and American Real Estate
Equities consummated a much smaller transaction pursuant to which the operating
partnership acquired only the Cold Springs office center and two other
investments properties in Minnesota. Under the final terms of the smaller
transaction we negotiated:
o we issued 2,557,707 units of our operating partnership;
o we assumed only $17.1 million in third-party mortgage
indebtedness on the properties acquired;
o we paid no cash to the owners of the properties acquired; and
o we hired Mr. Lund as our chief executive officer and Mr.
Lambert and Mr. Hoyt were elected to our board of trustees.
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During the second quarter of 1999, we entered into further discussions
with American Real Estate Equities because the original contemplated
transactions could not be consummated. As a result of these discussions:
o Mr. Lund remained our chief executive officer and Mr. Lambert
and Mr. Hoyt remained on our board of trustees;
o the recipients of the operating partnership units returned
838,372 units to us for cancellation; of the 1,719,335
operating partnership units still outstanding after the
cancellation, 1,214,086 units are ordinary common units and
505,249 are Class B common units, which have no direct
economic value, but which will convert to ordinary common
units upon the determination of our board of trustees that our
funds from operations equal or exceed $0.55 per share,
assuming the exercise of all outstanding rights to purchase
our equity securities and conversion of all securities
convertible into our common shares;
o only 1,719,335 operating partnership units remain outstanding
with the owners of the three properties acquired (including
only 860,107 units to Mr. Hoyt and his affiliates);
o American Real Estate Equities returned the warrant covering
791,667 of our common shares to us for cancellation; and
o we paid no cash to American Real Estate Equities in
reimbursement of the $1,356,000 it spent in connection with
the transaction; instead, we issued American Real Estate
Equities, in the third quarter of 1999, 135,600 of our Class B
Junior Cumulative Convertible Preferred Shares (generally
having the same rights, terms and preferences as the Class A
Preferred Shares, but ranking junior as to payment of
dividends and distributions upon our liquidation), all of
which we have the right to redeem for $1 if we do not have
total assets in excess of $150,000,000 or have not achieved
funds from operations equal to at least $0.55 per share (on a
fully-diluted basis) prior to June 30, 2002.
Apart from the foregoing transactions, American Real Estate Equities
advanced us an aggregate of $1,392,000 during the summer and fall of 1998 for
working capital purposes. Pursuant to the an agreement with American Real Estate
Equities, we have issued 119,200 of our Class B Junior Cumulative Convertible
Preferred Shares to them in discharge of $1,192,000 of the repayment obligation.
Wellington Management Corporation. Our chairman of the board, Arnold
Leas, is the president and chief executive officer of Wellington Management
Corporation and owns, together with certain members of his family and family
trusts, 41.8% of Wellington Management Corporation's outstanding stock. Our
president, Robert Rice, was a vice president and general counsel of Wellington
Management before joining us. Mr. Rice has no ownership interest in Wellington
Management Corporation.
In connection with the contemplated American Real Estate Equities
transactions of November 1998 described above, we also entered into a number of
agreements with Wellington Management Corporation pursuant to which:
o Mr. Rice would be appointed our president;
o Wellington Management would contribute the office building
housing our executive offices in Brookfield, Wisconsin to our
operating partnership in exchange for $2.5 million in cash,
the assumption of $7.3 million in mortgage indebtedness on the
property, and 745,098 operating partnership units;
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o we would issue to Wellington Management a warrant to purchase
791,667 of our common shares at a price of $5.37 per share
with respect to 395,833 shares, $6.47 with respect to 197,917
shares, $7.74 per share with respect to 118,750 shares and
$9.32 per share with respect to 79,167 shares;
o we would terminate our obligations to Wellington Management
under certain advisory fee arrangements in exchange for $1.6
million; and
o our operating partnership would enter into a property
management agreement with Wellington Realty, Inc., a
wholly-owned subsidiary of Wellington Management Corporation,
whereby Wellington Realty would manage the day-to-day
operations of our current apartment community properties in
Wisconsin for a management fee equal to 5% of gross income
from such properties.
Subsequent to November 1998, we and Wellington Management agreed that
the transfer of the Brookfield office building could not occur because we were
unable to arrange financing to provide the stipulated $2.5 million cash payment
on acceptable terms. In connection with the discussions described previously, we
entered into an agreement during the second quarter of 1999 with Wellington
Management whereby:
o Mr. Rice remained our president;
o Wellington Management returned the warrant covering 791,667 of
our common shares to us for cancellation;
o the advisory fee arrangement was still terminated, but we
agreed that Wellington Management would retain cash payments
received in 1998 totaling $550,000 and that we would issue, in
the third quarter of 1999, 95,000 Class B Junior Cumulative
Convertible Preferred Shares as consideration for the
termination; and
o we entered into the new property management agreement with
Wellington Realty, Inc. on the terms contemplated by the
original agreement.
In January 1998, we also entered into a listing agreement with
Wellington Realty, Inc. whereby we agreed to pay 3% of the sale price of our
Maple Grove and Lake Pointe apartment communities in the event of a sale. Though
we are not presently marketing the Lake Pointe property, we have entered into a
sale contract with respect to the Maple Grove property. In connection with the
pending contract for the sale of Maple Grove Apartments, Wellington Realty,
Inc., is expected to receive a fee totaling $501,000 upon consummation of the
sale.
From time to time, we may purchase insurance through another affiliate
of Wellington Management Corporation, Wellington Insurance Services, Inc., which
will receive a commission of those sales equal to 15% of scheduled premiums.
Hoyt Properties Inc. Steven Hoyt, one of our trustees is the principal
of Hoyt Properties Inc.
On November 20, 1998, our operating partnership entered into a property
management agreement with Hoyt Properties. Under this agreement, Hoyt Properties
manages the day-to-day operations of our current commercial properties in
Minnesota for a management fee equal to 5% of gross income from such properties,
a fee we believe is consistent with industry norms.
As mentioned above, Steven Hoyt also owns a one-third membership
interest in American Real Estate Equities, LLC.
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Additional advances of working capital. In April 1999, our operating
partnership borrowed $50,000 from each of American Real Estate Equities, LLC and
Wellington Management Corporation for working capital purposes under term loans
that are currently due December 31, 1999. An interest rate of 10% per year
accrues on the principal balance of each of these loans until repayment.
Deferred Salaries. As a result of our completion of only a small number
of the acquisitions proposed in November 1998, our chief executive officer and
our president have agreed to defer their salaries. As of September 30, 1999, the
deferral amounted to $106,250 as to Mr. Lund and $87,500 as to Mr. Rice. Of the
total amount deferred by Mr. Rice, Wellington Management has advanced $62,500 to
Mr. Rice. We intend to pay salaries in arrears and reimburse Wellington
Management with a portion of the proceeds of the Maple Grove sale. If, for any
reason, the sale of Maple Grove is prevented or delayed, we will not use any of
the proceeds of the offering of the Class A Preferred Shares to pay any deferred
salaries or to repay Wellington Management for any related advances.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
__________, 1999, our underwriters, for whom R.J. Steichen & Company will act as
representative, have agreed to purchase from us on a firm-commitment basis,
700,000 Class A Preferred Shares for resale to the public. Our underwriting
agreement provides that the underwriters will be obligated to purchase all of
those shares if any are purchased. The underwriters have agreed severally, but
not jointly, to purchase the numbers of Class A Preferred Shares set forth
opposite their respective names:
Underwriter Number of Shares
R.J. Steichen & Company...................................
Miller, Johnson & Kuehn, Incorporated.....................
----------
Total 700,000
==========
The underwriters have reserved the right to reoffer the Class A
Preferred Shares to selected securities dealers at the offering price set forth
on the cover page of this prospectus, less customary concessions.
We have agreed to pay the underwriters a discount of 7.5% of the gross
proceeds of this offering, including the gross proceeds from the sale of any
overallotment shares. In addition, we have agreed to pay to the underwriters a
non-accountable expense allowance of 2% of the gross proceeds of the offering,
including proceeds from the sale of overallotment shares.
We have granted to the underwriters an overallotment option,
exercisable for 45 days from the date of this prospectus, to purchase up to an
additional 105,000 of our Class A Preferred Shares at the public offering price,
less the 7.5% underwriting discount. The underwriters may exercise this option
solely to cover overallotments in the sale of the Class A Preferred Shares being
offered by this prospectus.
At the closing of the offering, we will sell to the underwriters'
representative, for nominal consideration, warrants to purchase 35,500 Class A
Preferred Shares. The underwriters' warrants will become exercisable one year
after the effective date of the registration statement covering the Class A
Preferred Shares and will be exercisable for a period of four years thereafter
at a price of $10.00. The underwriter's warrants will contain provisions for (1)
"cashless exercise," whereby the underwriters may forfeit a portion of the
warrants at the time of exercise in lieu of the cash payment of the exercise
price, (2) appropriate adjustment in the event of a merger, consolidation,
recapitalization, reclassification, share dividend, share split or similar
transaction, (3) a one-time right to demand registration of the common shares
underlying the warrants under the Securities Act of 1933, and (4) participation
of the common shares underlying such warrant, on a "piggy-back" basis, in
specified registrations by us during the duration of the underwriters' warrant
and for two years thereafter.
In order to facilitate the offering of our Class A Preferred Shares,
the underwriters may engage in transactions that stabilize, maintain or
otherwise affect the price of our Class A Preferred Shares. Specifically, the
underwriters may sell or allot more Class A Preferred Shares than the 700,000
shares we have agreed to sell them. This overallotment would create a short
position in our Class A Preferred Shares for the account of the underwriters. To
cover any overallotments or to stabilize the price of our Class A Preferred
Shares, the underwriters may bid for, and purchase our Class A Preferred Shares
in the open market. Finally, the
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underwriters may reclaim selling concessions allowed to dealers for distributing
our Class A Preferred Shares in the offering, if the underwriters repurchase
previously distributed Class A Preferred Shares in transactions to cover short
positions, in stabilization transactions or otherwise. The underwriters have
reserved the right to reclaim selling concessions in order to encourage dealers
to distribute our Class A Preferred Shares for investment, rather than for
short-term speculation. Increasing the proportion of the offering held for
investment may reduce the supply of our Class A Preferred Shares available for
short-term trading. Any of these activities may stabilize or maintain the market
price of our Class A Preferred Shares above independent market levels. The
underwriter is not required to engage in these activities, and may end any of
these activities at any time.
The underwriters have conditioned their performance under the
underwriting agreement on receipt of agreements from certain of our officers,
trustees and other shareholders prohibiting market sales of our securities by
such persons for a period of 180 days following the initial closing of this
offering.
We have agreed to indemnify the underwriters against any costs or
liabilities incurred by the underwriter by reason of misstatements or omissions
to state material facts in connection with the statements made in the
registration statement we filed and this prospectus. The underwriters have, in
turn, agreed to indemnify us against any costs or liabilities by reason of
misstatements or omissions to state material facts in connection with the
statements made in the registration statement filed and this prospectus, based
on information relating to the underwriters and provided by them. To the extent
that these provisions may purport to provide exculpation from possible
liabilities arising under the federal securities laws, in the opinion of the
Securities and Exchange Commission, such indemnification is contrary to public
policy and therefore unenforceable.
For a more complete description of the underwriting arrangements for
this offering, you should read the underwriting agreement included as an exhibit
to the registration statement of which this prospectus is a part.
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DESCRIPTION OF SECURITIES
General
Our declaration of trust provides that we may issue up to 110,000,000
shares of beneficial interest, consisting of 100,000,000 common shares, par
value $0.01 per share, and 10,000,000 preferred shares, par value $0.01 per
share. After this offering, 1,049,800 preferred shares will be issued and
outstanding, or 1,154,800 shares if our underwriters' overallotment option is
exercised in full.
Firstar Bank Milwaukee, N.A. is the transfer agent for our common
shares and will be the transfer agent for the Class A Preferred Shares following
the closing of this offering.
The Class A Preferred Shares
We have designated 1,518,000 of our preferred shares as Class A
Cumulative Convertible Preferred Shares, $0.01 par value per share.
Subject to the provisions of our declaration of trust regarding "excess
shares" (as described under the heading "Restrictions on Transfer" beginning on
page 70), a dividend on each Class A Preferred Shares equal to $0.475 will
accrue and be payable every six months, beginning six months after the initial
closing date of the offering. We may pay no dividends on any other existing
class or series of our shares unless we have paid all dividends then accrued on
the Class A Preferred Shares. The Class A Preferred Shares will not participate
in dividends declared on our common shares.
Upon our liquidation, no distribution of our assets will be made to
holders of any other existing class or series of our shares until we have first
paid the holders of the Class A Preferred Shares $10.00 per share, plus the
amount of all dividends on the Class A Preferred Shares that are then accrued
but unpaid.
Subject to the provisions of our declaration of trust regarding excess
shares, each of the Class A Preferred Shares will be entitled to the number of
votes at all meetings of our shareholders equal to the number of our common
shares into which they are then convertible. Holders of Class A Preferred Shares
will generally vote together with holders of our common shares and holders of
our Class B Junior Cumulative Convertible Preferred Shares as a single class,
provided that holders of Class A Preferred Shares will vote as a separate class
on proposals specifically affecting the relative rights and privileges of the
Class A Preferred Shares.
Each of our Class A Preferred Shares will be convertible at any time,
at the option of the holder, into a number of common shares equal to the
quotient obtained by dividing (1) $10.00, plus any dividends then accrued but
unpaid on the Class A Preferred Shares; by (2) a price equal to 110% of the
average closing bid price for our common shares over the 10 trading days
preceding the effective date of the registration statement covering the Class A
Preferred Shares, or $____.
We will have the option to redeem the Class A Preferred Shares at a
per-share price equal to the public offering price, plus any dividends then
accrued but unpaid, after 30 days' notice, any time after two years following
the initial closing of the offering if the closing bid price of our common
shares exceeds 150% of the then effective conversion price of the Class A
Preferred Shares for 20 consecutive trading days.
If, at any time, we fail to declare or pay a dividend on the Class A
Preferred Shares as it accrues, such dividend will be cumulative, without
interest, with future dividends. If we should fail to pay a full year's accrued
dividends on the Class A Preferred Shares, then the holders of the Class A
Preferred Shares will be entitled, voting as a class, to elect a majority of the
members of our board of trustees, who will then serve on the board for so long
as a full year's dividends remain unpaid.
When issued, the Class A Preferred Shares will be legally issued,
fully-paid and nonassessable.
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The Class B Junior Cumulative Convertible Preferred Shares
We have designated 349,800 of our preferred shares as Class B Junior
Cumulative Convertible Preferred Shares, $0.01 par value per share, all of which
are issued and outstanding.
The terms of the Class B preferred shares are identical to those of the
Class A Preferred Shares as to rights to dividends, rights to distributions upon
liquidation, voting rights, optional conversion and redemption. The Class B
preferred shares, however, rank junior to the Class A Preferred Shares as to
dividends and distributions upon liquidation, so that we may not pay dividends
on the Class B shares unless all dividends on the Class A Preferred Shares then
accrued have been paid, and we will not distribute assets to the holders of
Class B shares upon our liquidation until the full amount of the liquidation
preference on the Class A Preferred Shares has been paid in full.
The Class B Junior Cumulative Convertible Preferred Shares also differ
from the Class A Preferred Shares in that their holders will not be entitled to
elect a majority of our board of trustees in the event that a full year's
dividends are not paid when accrued.
Holders of Class B shares will vote as a separate class only on
proposals specifically affecting the relative rights and privileges of the Class
B shares.
The Common Shares
Subject to the preferential rights of our preferred shares (including
the Class A Preferred Shares offered by this prospectus and our Class B Junior
Cumulative Convertible Preferred Shares) or any other class or series of shares
and to the provisions of our declaration of trust regarding "excess shares,"
holders of our common shares are entitled to receive distributions on such
shares if, as and when authorized and declared by the board of trustees out of
assets legally available therefor and to share ratably in our assets legally
available for distribution to shareholders in the event of liquidation,
dissolution or winding up after payment of, or adequate provision for, all of
our known debts and liabilities. We have generally paid quarterly distributions
on our common shares, though the amount of dividends and the timing of payment
have varied.
Subject to the provisions of our declaration of trust regarding excess
shares, each outstanding common share entitles the holder to one vote on all
matters on which our shareholders are entitled to vote, including the election
of trustees, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares, the holders of such shares will
possess the exclusive voting power. There is no cumulative voting in the
election of trustees, which means that the holders of a majority of our
outstanding common shares can elect all of the trustees then standing for
election and the holders of our remaining shares are not able to elect any
trustees.
Warrants to Purchase Our Shares
In connection with prior transactions, we issued warrants to purchase
47,500 of our common shares. These warrants are currently exercisable and have
an exercise price of $5.37 per share.
In connection with the offering of the Class A Shares, we have also
agreed to issue our underwriters' representative a warrant to purchase 35,500
Class A Preferred Shares at a price of $10.00 per share. The underwriters'
representatives warrant will become exercisable one year after the effective
date of the registration statement covering the Class A Preferred Shares and
will be exercisable for a period of four years thereafter. The warrants will
contain provisions for "cashless exercise," whereby the underwriters may forfeit
a portion of the warrants at the time of exercise in lieu of the cash payment of
the exercise price and will also provide for customary adjustments in the event
of a merger, consolidation, recapitalization, reclassification, share dividend,
share split or similar transaction.
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Employee Share Options
We have issued options to purchase a total of 214,273 common shares to
certain of our employees under our 1998 stock incentive plan. A total of 54,273
of these outstanding options are all currently exercisable. The weighted average
exercise price of all our options is approximately $5.21 per share.
The incentive plan is designed to attract and retain competent
personnel and to provide to officers and other key employees long-term
incentives for high levels of performance by providing them with a means to
acquire a proprietary interest in our success. A total of 2,952,393 common
shares may be subject to dditional awards under the plan, which may include
incentive or non-qualified options.
Dividend Reinvestment Plan
Since 1996, we have maintained a dividend reinvestment plan whereby
holders of our common shares may automatically reinvest cash dividends we pay in
additional common shares. Under the plan, investors may also make optional cash
payments on a quarterly basis to acquire even more shares. The price of shares
sold under the plan is the average of the high and low sale prices of our common
shares on the scheduled date of reinvestment.
We have not instituted a dividend reinvestment plan with respect to the
Class A Preferred Shares.
Operating Partnership Units
Our interests and those of all limited partners in the operating
partnership are represented by partnership units. Currently, the operating
partnership has issued ordinary common units, which are economically equivalent
to our common shares and Class B common units, which have no direct economic
value, but which will automatically convert to ordinary common units upon the
determination of our board of trustees that our funds from operations (as
defined by the National Association of Real Estate Investment Trusts) equal or
exceed $0.55 per share, assuming exercise of all outstanding rights to purchase
our equity securities and conversion of all securities convertible into our
common shares. If necessary, however, the number of Class B units that will
convert to ordinary common units will be limited so that the current holder of
the operating partnership's outstanding Class B units, American Real Estate
Equities, LLC, will not become a greater than 10% owner, assuming exercise of
all outstanding rights to purchase our equity securities and conversion of all
securities convertible into our common shares.
The operating partnership has also issued Class B preferred units to
us, which are economically equivalent to our Class B Junior Cumulative
Convertible Preferred Shares. Upon the closing of this offering and our
contribution of our net proceeds to the operating partnership, the operating
partnership will also issue us 700,000 Class A preferred units (up to 805,000
Class A preferred units if our underwriters exercise their overallotment option
in full), which will be economically equivalent to the Class A Preferred Shares.
The operating partnership may also issue additional classes or series of
preferred units on such terms as we, as sole general partner, may determine.
Subject to certain limitations in our operating partnership agreement
and, in the case of any preferred units, following the conversion of such
preferred units into common units, holders of common units generally have the
right to require the redemption of their common units at any time one year after
the original issuance date of such units.
Unless we elect to assume and perform the operating partnership's
obligation with respect to redemption of common units, a limited partner
demanding redemption will receive cash from the operating partnership in an
amount equal to the market value of the units to be redeemed. Instead of the
operating partnership acquiring the units for cash, we will have the right to
elect to acquire the units directly from a limited partner demanding redemption,
in exchange for either cash or an equal number of our common shares, and, upon
such acquisition, we will become the owner of such units. This one-for-one
conversion rate will be adjusted appropriately in the event of a share split,
share dividend or similar event.
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Registration Rights
On March 5, 1998, we entered into a registration rights agreement in
connection with the issuance to Credit Suisse First Boston of a warrant to
purchase up to 47,500 of our common shares at a price of $5.37 per share. Under
the agreement, the holders of a majority of the shares represented by the Credit
Suisse First Boston warrant have the right to require us to prepare and file one
or more registration statements, under certain circumstances, with respect to
our common shares purchasable under the Credit Suisse First Boston warrant and
all other common shares owned by Credit Suisse First Boston or the
then-holder(s) of the Credit Suisse First Boston warrant.
Every holder of our operating partnership units also has registration
rights, under our master registration rights agreement, with respect to the
common shares that we might issue in exchange for the units. Under the
agreement, every time the operating partnership issues units, we agree to
register the common shares issuable in exchange for the units within one year
and to use commercially reasonable efforts to register those shares for public
resale by the former unit holder. Holders of partnership units also have the
right under the agreement, subject to certain limitations, to include common
shares they receive in exchange for units in registrations we may make for other
purposes.
The underwriters' representative's warrant will provide for a one-time
right to demand registration of the shares underlying the warrants under the
Securities Act of 1933, and participation of the common shares issuable upon
conversion of the Class A Preferred Shares underlying such warrant, on a
"piggy-back" basis, in specified registrations by us during the duration of the
warrant and for two years thereafter.
Restrictions on Transfer
General. For us to continue to qualify as a REIT under the Internal
Revenue Code, our common shares must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. Also, not more than 50% of the
value of our issued and outstanding shares, including the Class A Preferred
Shares, may be owned, directly or indirectly, by five or fewer individuals
during the last half of a taxable year or during a proportionate part of a
shorter taxable year.
Because our board of trustees believes it is essential for us to
qualify as a REIT, our declaration of trust, subject to certain exceptions,
provides that no holder may own, or be deemed to own by virtue of the
attribution provisions of the Internal Revenue Code, more than 9.9% of the value
of our issued and outstanding shares. The board of trustees, upon receipt of a
ruling from the Internal Revenue Service, an opinion of counsel or other
evidence satisfactory to the board of trustees and upon such other conditions as
the board of trustees may direct, may exempt a proposed transferee from the 9.9%
ownership limit. As a condition of such exemption, the intended transferee must
give written notice to us of the proposed transfer no later than the 50th day
prior to any transfer which, if consummated, would result in the intended
transferee owning shares in excess of the 9.9% ownership limit. The board of
trustees may require such opinions of counsel, affidavits, undertakings or
agreements as it may deem necessary or advisable in order to determine or ensure
our status as a REIT. Any transfer of shares that would (1) create a direct or
indirect ownership of shares of shares in excess of the 9.9% ownership limit,
(2) result in our shares being owned by fewer than 100 persons, or (3) result in
our being "closely held" within the meaning of Section 856(h) of the Internal
Revenue Code, shall be null and void, and the intended transferee will acquire
no rights to the shares. The foregoing restrictions on transferability and
ownership will not apply if our board of trustees determines that it is no
longer in our best interests to continue to qualify as a REIT.
Any purported transfer of shares that would result in a person owning
shares in excess of the 9.9% ownership limit or cause us to become "closely
held" under Section 856(h) of the Internal Revenue Code that is not otherwise
permitted as provided above will constitute "excess shares," which will be
transferred by operation of law to us as trustee for the exclusive benefit of
the person or persons to whom the excess shares are ultimately transferred,
until such time as the intended transferee retransfers the excess shares. While
these excess shares are held in trust, they will not be entitled to vote or to
share in any distributions (except upon
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liquidation). Subject to the 9.9% ownership limit, the excess shares may be
retransferred by the intended transferee to any person (if the excess shares
would not be excess shares in the hands of such person) at a price not to exceed
the price paid by the intended transferee (or, if no consideration was paid,
fair market value), at which point the excess shares will automatically be
exchanged for the shares to which the excess shares are attributable. In
addition, such excess shares held in trust are subject to purchase by us at a
purchase price equal to the price paid for the shares by the intended transferee
or, if no consideration was paid, fair market value as reflected in the last
reported sales price reported on the stock exchange or quotation system on which
the shares are listed on the trading day immediately preceding the relevant
date, or if not then listed on any exchange or quotation system, then the market
price of such shares on the relevant date as determined in good faith by our
board of trustees. From and after the intended transfer to the intended
transferee of the excess shares, the intended transferee shall cease to be
entitled to distributions (except upon liquidation), voting rights and other
benefits with respect to such shares, except the right to payment of the
purchase price for the shares or the retransfer of shares as provided above. Any
distribution paid to a proposed transferee on account of excess shares prior to
the discovery by us that such shares have been transferred in violation of the
provisions of the declaration of trust shall be repaid to us upon demand. If the
foregoing transfer restrictions are determined to be void or invalid by virtue
of any legal decision, statute, rule or regulation, then the intended transferee
of any excess shares may be deemed, at our option, to have acted as an agent on
our behalf in acquiring such excess shares and to hold such excess shares on our
behalf.
All certificates representing our shares, including the Class A
Preferred Shares, will bear a legend that references the restrictions described
above.
All persons who own, directly or by virtue of the attribution
provisions of the Internal Revenue Code, more than 5% (or such other percentage
between 1/2 of 1% and 5%, as provided in the rules and regulations promulgated
under the Internal Revenue Code) of the number or value of our then outstanding
shares must give a written notice to us by January 31 of each year. In addition,
each shareholder shall, upon demand, be required to disclose to us in writing
such information with respect to the direct, indirect and constructive ownership
of our shares as the board of trustees deems reasonably necessary to comply with
the provisions of the Internal Revenue Code applicable to a REIT, to comply with
the requirements of any taxing authority or governmental agency or determine any
such compliance.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
Class A Preferred Shares might receive a premium for their shares over the then
prevailing market price or which such holders might otherwise believe to be in
their best interest.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
OUR DECLARATION OF TRUST AND BYLAWS
The following summary highlights certain provisions of Maryland law,
our declaration of trust and our bylaws. It is not complete and is subject to
and qualified in its entirety by reference to Maryland law, the declaration of
trust and our bylaws for complete information.
Number of Trustees
Our declaration of trust provides that the number of trustees may be
established by the board of trustees, but may not be fewer than three nor more
than fifteen. Any vacancy of the board of trustees may be filled, at any regular
meeting or at any special meeting called for that purpose, by a majority of the
remaining trustees.
Removal of Trustees
Our declaration of trust provides that a trustee may be removed only by
the affirmative vote of at least a majority of the votes entitled to be cast in
the election of trustees.
Amendment to the Declaration of Trust
With certain exceptions, our declaration of trust, including its
provisions on removal of trustees, may be amended only 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.
Dissolution of the Trust
The voluntary dissolution of the trust 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 or the written consent of all holders of
shares entitled to vote on the matter.
Business Combinations
Under Maryland law, certain "business combinations" (including certain
mergers, consolidations, share exchanges, or, in certain circumstances, asset
transfers or issuances or reclassifications of equity securities) between a
Maryland real estate investment trust and an "interested shareholder" or an
affiliate of the interested shareholder are prohibited for 5 years after the
most recent date on which the interested shareholder becomes an interested
shareholder. An interested shareholder includes a person who beneficially owns,
and an affiliate or associate of the trust who, at any time during the two-year
period prior to the date in question, who was the beneficial owner of ten
percent of more of the voting power of the trust's then outstanding voting
shares. Thereafter, any such business combination must be: (a) recommended by
the trustees of such trust and (b) approved by the affirmative vote of at least:
(1) 80% of the votes entitled to be cast by holders of outstanding voting shares
of beneficial interest of the trust; and (2) two-thirds of the votes entitled to
be cast by holders of outstanding voting shares of beneficial interest other
than shares held by the interested shareholder with whom (or with whose
affiliate or associate) the business combination is to be effected, unless,
among other conditions, the trust's common shareholders receive a minimum price
(as defined under Maryland law) for their shares and the consideration is
received in cash or in the same form as previously paid by the interested
shareholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
trustees of the trust prior to the time that the interested shareholder becomes
an interested shareholder. An amendment to a Maryland REIT's declaration of
trust electing not to be subject to the foregoing requirements must be approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of outstanding voting shares of beneficial interest of the trust, voting
together as a single voting group, and two-thirds of the votes entitled to be
cast by holders of
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outstanding voting shares of beneficial interest other than shares of beneficial
interest held by interested shareholders. Any such amendment shall not be
effective until 18 months after the vote of shareholders and will not apply to
any business combination of the trust with an interested shareholder on the date
of the shareholder vote.
Maryland's business combination statute could have the effect of
delaying, deferring or preventing offers to acquire us and of increasing the
difficulty of acting on any such offer.
Control Share Acquisitions
Maryland law, as applicable to Maryland REITs, provides that "control
shares" of a Maryland real estate investment trust 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 by shareholders,
excluding shares owned by the acquiror, by officers or by trustees who are
employees of the trust in question. "Control shares" are voting shares of
beneficial interest which, if aggregated with all other shares previously
acquired by such acquiror or in respect of which the acquiror 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 the voting power in the
election of trustees within one of the following ranges of voting power: (a)
one-fifth or more but less than one-third, (b) one-third or more but less than a
majority, or (c) a majority or more of all voting power. Control shares do not
include shares that the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
generally means the acquisition of control shares.
Advance Notice of Trustee Nominations and New Business
Our bylaws provide that (1) with respect to an annual meeting of
shareholders, nominations of persons for election to the board of trustees and
the proposal of business to be considered by shareholders may be made only (a)
pursuant to our notice of the meeting, (b) by the board of trustees, or (c) by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in our bylaws, and (2) with respect to
special meetings of shareholders, only the business specified in our notice of
meeting may be brought before the meeting of shareholders, and nominations of
persons for election to the board of trustees may be made only (a) pursuant to
our notice of the meeting, (b) by the board of trustees, or (c) provided that
the board of trustees has determined that trustees shall be elected at such
meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in our bylaws.
Limitation of Liability and Indemnification
The Maryland REIT law permits a Maryland REIT to include in its
declaration of trust and bylaws a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages,
except for liability resulting from (1) actual receipt of an improper benefit or
profit in money, property or services or (2) active and deliberate dishonesty or
actions taken in bad faith or (3) unlawful acts that the trustee or officer had
reason to know were unlawful. Our declaration of trust contains such a provision
which eliminates liability of our trustees and officers to the maximum extent
permitted by Maryland law.
Our bylaws require us to indemnify, without requiring a preliminary
determination of the ultimate entitlement to indemnification, (1) any present or
former trustee or officer against any claim or liability to which he may become
subject by reason of such status unless it is established that (a) his act or
omission was committed in bad faith or was the result of active and deliberate
dishonesty, (b) he actually received an improper personal benefit in money,
property or services or (c) in the case of a criminal proceeding, he had
reasonable cause to believe that his act or omission was unlawful; and (2) each
shareholder or former shareholder against any claim or liability to which he may
be subject by reason of such status as a shareholder or former shareholder.
However, under Maryland law, we may not indemnify for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of liability on the
basis that personal benefit was improperly received unless, in either case, a
court orders indemnification and then only for expenses. In addition, our bylaws
require us to pay or reimburse, in advance
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of final disposition of a proceeding, reasonable expenses incurred by a present
or former trustee, officer or shareholder made a party to a proceeding by reason
of his status as a trustee, officer or shareholder provided that, in the case of
a trustee or officer, we shall have received (1) a written affirmation by the
trustee or officer of his good faith belief that he has met the applicable
standard of conduct necessary for indemnification as authorized by the bylaws
and (2) a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by us if it shall ultimately be determined that the applicable
standard of conduct was not met.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our trustees and officers, we have been advised
that, although the validity and scope of the governing statute has not been
tested in court, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and is, therefore, unenforceable. In
addition, indemnification may be limited by state securities laws.
Maryland Asset Requirements
To maintain our qualification as a Maryland REIT, the Maryland REIT law
requires that we hold, either directly or indirectly, at least 75% of the value
of our assets in real estate assets, mortgages or mortgage related securities,
government securities, cash and cash equivalent items. The Maryland REIT law
also prohibits us from using or applying land for farming, agricultural,
horticultural or similar purposes.
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FEDERAL INCOME TAX CONSIDERATIONS
We currently intend to continue to operate so as to meet the Internal
Revenue Code requirements for qualification as a REIT. However, no assurance can
be given that we will continue to meet such requirements. Such qualification
depends upon our ability to meet the various requirements imposed under the
Internal Revenue Code through actual operating results and actions taken, as
discussed below.
The following is a general summary of the Internal Revenue Code
provisions governing the federal income tax treatment of REITs and is not tax
advice. These provisions are highly technical and complex, and this summary is
qualified in its entirety by the applicable Internal Revenue Code provisions,
rules and regulations promulgated thereunder, and administrative and judicial
interpretations thereof. Moreover, this summary does not deal with all tax
aspects that might be relevant to you in light of your personal circumstances;
nor does it deal with particular types of shareholders that are subject to
special treatment under the Internal Revenue Code, such as tax-exempt
organizations, insurance companies, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States.
YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO YOUR
SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE
PURCHASE, HOLDING AND SALE OF THE CLASS A PREFERRED SHARES.
Taxation of the Trust as a Real Estate Investment Trust
General. As a REIT, in general we are not subject to federal corporate
income taxes on that portion of our ordinary income or capital gain that is
currently distributed to shareholders. The REIT provisions of the Internal
Revenue Code generally allow a REIT to deduct distributions paid to its
shareholders. This deduction for distributions paid to shareholders
substantially eliminates the federal "double taxation" on earnings (once at the
corporate level and once again at the shareholder level) that generally results
from investment in a corporation.
We are subject to federal income tax, however, as follows:
o First, we are taxed at regular corporate rates on our
undistributed REIT taxable income, including undistributed net
capital gains.
o Second, under certain circumstances, we are subject to the
"alternative minimum tax" on our items of tax preference to
the extent that the tax exceeds our regular tax.
o Third, if we have net income from the sale or other
disposition of "foreclosure property" that is held primarily
for sale to customers in the ordinary course of business or
other non-qualifying income from foreclosure property, it will
be subject to tax at the highest corporate rate on such
income.
o Fourth, any net income that we have from prohibited
transactions (which are, in general, certain sales or other
dispositions of property other than foreclosure property held
primarily for sale to customers in the ordinary course of
business) is subject to a 100% tax. Losses from prohibited
transactions may not offset gains in computing the 100% tax.
Such losses, however, may offset taxable REIT income.
o Fifth, if we should fail to satisfy either the 75% or 95%
gross income tests (as discussed below), and have nonetheless
maintained our qualification as a REIT because certain other
requirements have been met, we will be subject to a 100% tax
on the net income attributable to the greater of the amount by
which we fail the 75% or 95% test, multiplied by a fraction
intended to reflect our profitability.
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o Sixth, if we fail to distribute, during each year, at least
the sum of (1) 85% of our REIT ordinary income for such year,
(2) 95% of our REIT capital gain net income for such year, and
(3) any undistributed taxable income from preceding periods,
we will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
o Seventh, if an election is made pursuant to IRS Notice 88-19
and during the 10-year period (1) commencing on the first day
of the first taxable year that we qualified as a REIT, we
recognize a gain from the disposition of an asset held by us
at the beginning of such period, or (2) commencing on the day
on which an asset acquired by us from a C corporation in a
transaction in which we inherit the tax basis of the asset
from the C corporation, we recognize a gain from the
disposition of such asset, then we will be subject to tax at
the highest regular corporate rate on the excess, if any, or
the fair market value over the adjusted basis of any such
asset as of the beginning of its recognition period.
Requirements for Qualification To qualify as a REIT, we must continue
to meet the requirements, discussed below, relating to our organization, sources
of income, nature of assets and distributions of income to shareholders.
The Internal Revenue Code defines a REIT as a corporation, trust, or
association:
(1) that is managed by one or more trustees;
(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial
interest;
(3) that would be taxable as a domestic corporation but for the
REIT section of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance
company within the meaning of certain provisions of the
Internal Revenue 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 shares of which is owned, directly or
indirectly, through the application of certain attribution
rules, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain business entities);
and
(7) which meets certain other tests, described below, regarding
the nature of its income and assets.
The Internal Revenue Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must exist during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. For purposes of
conditions (5) and (6), pension funds and certain other tax-exempt entities are
treated as individuals. However, a trust described in section 401(a) of the
Internal Revenue Code and exempt from tax under section 501(a) is not generally
treated as a single individual for purposes of the five or fewer requirement.
Rather, beneficiaries of such trust are treated as holding shares in the REIT in
proportion to their interests in the trust.
Our declaration of trust includes certain restrictions regarding
transfer of our shares, which restrictions are intended (among other things) to
assist us in continuing to satisfy the share ownership requirements described in
(5) and (6) above.
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Income Tests. There are two percentage tests relating to the sources of
our gross income.
o First, at least 75% of our gross income (excluding gross
income from certain sales of property held primarily for sale)
must be directly or indirectly derived each taxable year from
investments relating to real property or mortgages on real
property or certain temporary investments.
o Second, at least 95% of our gross income (excluding gross
income from certain sales of property held primarily for sale)
must be directly or indirectly derived each taxable year from
any of the sources qualifying for the 75% test and from
distributions, interest, and gain from the sale or disposition
of shares or securities.
In applying these tests, if we invest in a partnership, such as our operating
partnership, we will be treated as realizing our share of the income and bearing
our share of the loss of the partnership (using special rules for determining a
REIT's share for this purpose), and the character of such income or loss, as
well as other partnership items, will be determined at the partnership level.
Rents received by us will qualify as "rents from real property" for
purposes of satisfying the gross income tests for a REIT only if several
conditions are met:
o First, the amount of rent must not be based, in whole or in
part, on the income or profits of any person, although rents
generally will not be excluded merely because they are based
on a fixed percentage of receipts or sales.
o Second, rents received from a tenant will not qualify as
"rents from real property" if the REIT, or an owner of 10% or
more of the REIT, directly or constructively owns 10% or more
of such tenant.
o 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."
o Finally, for rents to qualify as "rents from real property," a
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, except that a REIT may directly
perform services which are "usually or customarily rendered"
in connection with the rental of space for occupancy, other
than services which are considered to be rendered to the
occupant of the property. However, a REIT is currently
permitted to earn up to one percent of its gross income from
tenants, determined on a property-by-property basis, by
furnishing services that are non customary or provided
directly to the tenants, without causing the rental income to
fail to qualify as rents from real property.
The term "interest" generally does not include any amount if the
determination of such amount depends, in whole or in part, on the income or
profits of any person, although an amount generally will not be excluded from
the term "interest" solely by reason of being based on a fixed percentage of
receipts or sales.
The term "prohibited transaction" means a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of the taxpayer's trade or business. Any gross
income derived from a prohibited transaction is subject to a 100% tax. We may
wish to occasionally dispose of selected rental property assets. We believe such
assets will not be considered as held primarily for sale to customers and that
the occasional sale of such assets should not be considered to be in the
ordinary course of our business. Whether property is held "primarily for sale to
customers in the ordinary course of the taxpayer's trade or business" depends,
however, on the facts and circumstances in effect from time to time, including
those relating to a particular property. As a result, complete assurance cannot
be given that we can avoid being deemed to own property that the IRS later
characterizes as property held "primarily for sale to
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customers in the ordinary course of its trade or business." The Internal Revenue
Code provides a limited safe harbor pursuant to which certain sales by a REIT of
real estate assets held for at least four years will not constitute prohibited
transactions. There can be no assurance, however, that a sale of rental property
will qualify for this safe harbor. The determination of whether a sale not
qualifying for the safe harbor constitutes a prohibited transaction will be made
under the general rule described above. To the extent that we determine that it
is beneficial to sell properties that we have held for less than four years,
such dispositions will not qualify for the prohibited transaction safe harbor
described above.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for such year if we
are eligible for relief under certain provisions of the Internal Revenue Code.
These relief provisions will be generally available if our failure to meet such
tests is due to reasonable cause and not due to willful neglect, we attach a
schedule of the sources of our income to our return, and any incorrect
information on our schedule was not due to fraud with intent to evade tax. It is
not now possible to determine the circumstances under which we may be entitled
to the benefit of these relief provisions. For example, if we fail to satisfy
the gross income tests because non-qualifying income that we intentionally incur
exceeds the limits on such income, the Internal Revenue Service could conclude
that our failure to satisfy the tests was not due to reasonable cause. If these
relief provisions apply, a 100% tax is imposed on the net income attributable to
the greater of the amount by which we failed the 75% test or the 95% test,
multiplied by a fraction intended to reflect our profitability.
Asset Tests. At the close of each quarter of our taxable year, we must
also satisfy several tests relating to the nature and diversification of our
assets.
o First, at least 75% of the value of our total assets must be
represented by real estate assets, cash, cash items (including
receivables arising in the ordinary course of our operation)
and government securities.
o Second, not more than 25% of our total assets may be
represented by securities other than those includible in the
75% asset class.
o Third, the value of any one issuer's securities owned by us
may not exceed 5% of our total assets.
o Finally, we may not own more than 10% of any one issuer's
outstanding voting securities.
For purposes of the asset tests, we will be treated as owning our share of the
assets of any partnership in which we invest.
After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reasons of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, the failure can be cured by disposition of
sufficient non-qualifying assets within 30 days after the close of any quarter
as may be required to cure any noncompliance.
Annual Distribution and Information Requirements. In order to qualify
as a REIT, we are required to make distributions (other than capital gain
distributions) to our shareholders in an amount at least equal to (1) the sum of
(a) 95% of our "real estate investment trust taxable income" (computed without
regard to the distributions-paid deduction and our net capital gain) and (b) 95%
of the after-tax net income, if any, from foreclosure property, minus (2) the
sum of certain items of non-cash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before we timely file our tax return for such year and if paid on or before the
date of the first regular distribution payment after such declaration. To the
extent that we do not distribute all of our net capital gain or distribute at
least 95%, but less than 100%, of our "real estate investment trust taxable
income," as adjusted, we will be subject to tax thereon at regular corporate tax
rates. In order for us to qualify as a REIT, we are also required to keep
certain records and to demand, by January 30 of each year, certain information
from our shareholders of record.
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In addition, during our recognition period, if applicable, we dispose
of any asset subject to the built-in gain rules, we will be required, pursuant
to guidance issued by the Internal Revenue Service, to distribute at least 95%
of the built-in gains (after tax), if any, recognized on the disposition of the
asset.
Moreover, if we should fail to distribute, during each calendar year,
at least the sum of (1) 85% of our REIT ordinary income for that year, (2) 95%
of our REIT capital gain net income for that year, and (3) any undistributed
taxable income from prior periods, we would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. We
intend to make timely distributions sufficient to satisfy this annual
distribution requirement.
It is possible that we, from time to time, may not have sufficient cash
or other liquid assets to meet the 95% distribution requirement, or to
distribute such greater amount as may be necessary to avoid income and excise
taxation, due to (among other reasons) timing differences between (1) the actual
receipt of income and actual payment of deductible expenses, and (2) the
inclusion of such income and deduction of such expenses in arriving at our
taxable income. In the event that such timing differences occur, we may find it
necessary to arrange for borrowings or, if possible, pay taxable distributions
in order to meet the distribution requirement.
Under certain circumstances, if as a result of a deficiency determined
by the Internal Revenue Service, we may be able to rectify a resulting failure
to meet the distribution requirement for a year by paying "deficiency
distributions" to shareholders in a later year, which may be included in our
deduction for distributions paid for the earlier year. Thus, although we may be
able to avoid being taxed on amounts distributed as deficiency distributions, we
will be required to pay interest (and penalties, if any) based upon the amount
of any deduction taken for deficiency distributions.
Failure to Qualify as a Real Estate Investment Trust
Our election to be treated as a REIT will be automatically terminated
if we fail to meet the requirements described above. In that event, we will be
subject to tax (including any applicable minimum tax) on our taxable income at
regular corporate rates, and our distributions to shareholders will not be
deductible. All distributions to shareholders will be taxable as ordinary income
to the extent of current and accumulated earnings and profits and will be
eligible for the 70% distributions-received deduction for corporate
shareholders. We will not be eligible again to elect REIT status until the fifth
taxable year which begins after the year for which our election was terminated
unless we did not willfully fail to file a timely return with respect to the
termination taxable year, inclusion of any incorrect information in such return
was not due to fraud with intent to evade tax, and we establish that failure to
meet the requirement was due to reasonable cause and not willful neglect.
Failure to qualify for even one year could result in our incurring substantial
indebtedness (to the extent borrowings are feasible) or liquidating substantial
investments in order to pay the resulting taxes.
Federal Taxation of Shareholders
General. As long as we qualify for taxation as a REIT, distributions
made to our shareholders out of current or accumulated earnings and profits (and
not designated as capital gain distributions) will be includible by you as
ordinary income for federal income tax purposes. The distributions will not be
eligible for the distributions-received deduction for corporate shareholders.
Distributions in excess of current or accumulated earnings and profits
will not be taxable to you to the extent that they do not exceed the adjusted
basis of your shares. You will be required to reduce the tax basis of your
shares by the amount of such distributions until such basis has been reduced to
zero, after which such distributions will generally be taxable as capital gain.
The tax basis, as so reduced, will be used in computing the capital gain or
loss, if any, realized upon sale of your shares. Any loss upon a sale or
exchange of your shares held for six months or less (after applying certain
holding period rules) will generally be treated as a long-term capital loss to
the extent you previously received capital gain distributions with respect to
such shares.
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Capital Gain Distributions. Distributions to our U.S. shareholders that
are properly designated by us as capital gain distributions will be treated as
long-term capital gains (to the extent they do not exceed our actual net capital
gain for the taxable year), without regard to the period for which such
shareholder has held his or her shares. Capital gain distributions are also not
eligible for the distributions-received deduction for corporations. In addition,
corporate shareholders may be required to treat up to 20% of certain capital
gain distributions as ordinary income. In addition, we may elect to retain and
pay income tax on our net long-term capital gains. If we so elect, each
shareholder will take into income the shareholder's share of the retained
capital gain as long-term capital gain and will receive a credit or refund for
that shareholder's share of the tax paid by us. The shareholder will increase
the basis of such shareholder's shares by an amount equal to the excess of the
retained capital gain included in the shareholder's income over the tax deemed
paid by such shareholder.
You may not include in your individual federal income tax returns any
of our net operating losses or capital losses. In addition, any distribution
declared by us in October, November or December of any year payable to you on a
specified date in any such month shall be treated as both paid by us and
received by you on December 31 of such year, provided that the distribution is
actually paid by us no later than January 31 of the following year. We may be
required to withhold a portion of capital gain distributions to you if you fail
to certify your non-foreign status to us.
Passive Activity Loss and Investment Interest Limitations.
Distributions from us and gain from the disposition of our shares will not be
treated as passive activity income, and therefore, you will not be able to apply
any "passive activity losses" against such income. Distributions from us (to the
extent they do not constitute a return of capital or capital gain distributions)
will generally be treated as investment income for purposes of the rule limiting
the deduction of investment interest to investment income.
Backup Withholding. We will report to you and the Internal Revenue
Service the amount of distributions paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, you may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless you (1) are a corporation or come within certain other exempt
categories and, when required, demonstrate this fact, or (2) have provided a
correct taxpayer identification number, certify as to no loss of exemption from
backup withholding, and otherwise comply with applicable requirements of the
backup withholding rules. If you do not provide us with a correct taxpayer
identification number, you may also be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding will be credited
against your income tax liability.
Tax-Exempt Shareholders. The Internal Revenue Service has ruled that
amounts distributed by a REIT to a tax exempt pension trust did not constitute
unrelated business taxable income ("UBTI"). Although rulings are merely
interpretations of law by the Internal Revenue Service and may be revoked or
modified, based on this analysis, indebtedness incurred by us in connection with
the acquisition of an investment should not cause any income derived from the
investment to be treated as UBTI to a tax exempt entity. A tax exempt entity
that incurs indebtedness to finance its purchase of shares, however, will be
subject to UBTI by virtue of the acquisition indebtedness rules.
The Internal Revenue Code requires qualified trusts that hold more than
10% of the shares of a REIT to treat a percentage of REIT distributions as UBTI
for taxable years beginning after December 31, 1993. The requirement applies
only if (1) the qualification of the REIT depends upon the application of a
"look-through" exception to the restriction on REIT shareholdings by five or
fewer individuals, including qualified trusts, and (2) the REIT is
"predominantly held" by qualified trusts. A REIT is predominantly held if either
(1) a single qualified trust held more than 25% by value of the interests in the
REIT or (2) one or more qualified trusts, each owning more than 10% by value,
held, in the aggregate, more than 50% of the interests in the REIT. The
percentage of any distribution paid (or treated as paid) to the qualified trust
that would be treated as UBTI is determined by the amount of UBTI earned by the
REIT (treating the REIT as if it were a qualified trust, and therefore subject
to tax on UBTI) as a percentage of the total gross income of the REIT. A de
minimis exception applies where the percentage determined under the preceding
sentence is less than 5%. For purposes
80
<PAGE>
of these provisions, the term "qualified trust" means any trust described at
ss.401(a) and exempt from tax under ss.501(a) of the Internal Revenue Code.
Conversion of Series A Preferred Shares to Common Shares. Assuming that
Series A Preferred Shares will not be converted at a time when there are
distributions in arrears, in general, no gain or loss will be recognized for
federal income tax purposes upon the conversion of the Series A Preferred Shares
at the option of the holder solely into common shares. The basis that a holder
will have for tax purposes in the common shares received will be equal to the
adjusted basis the holder had in the Series A Preferred Shares so converted and,
provided that the Series A Preferred Shares were held as a capital asset, the
holding period for the common shares received will include the holding period
for the Series A Preferred Shares converted.
If a conversion occurs when there is a dividend arrearage on the Series
A Preferred Shares and the fair market value of the common shares exceeds the
issue price of the Series A Preferred Shares, a portion of the common shares
received might be treated as a dividend distribution, taxable as ordinary
income.
State and Local Taxation
We as well as you may be subject to state or local taxation in various
state or local jurisdictions, including those in which we or you transact
business or reside. Consequently, you should consult your own tax advisors
regarding the effect of state and local tax laws on an investment in the Class A
Preferred Shares.
LEGAL MATTERS
On our behalf, Foley & Lardner, Milwaukee, Wisconsin, will pass upon
the validity of the issuance of the securities being offered by this prospectus.
Maun & Simon, PLC, Minneapolis, Minnesota, will pass upon certain matters for
our underwriters.
EXPERTS
The financial statements included in this prospectus, to the extent and
for the periods indicated in their reports, have been audited by Grant Thornton
LLP, independent accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing. In addition, Grant
Thornton has provided us their written opinion that we are a qualified REIT for
purposes of the Internal Revenue Code.
81
<PAGE>
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933 with the Securities and Exchange Commission in
Washington, D.C. with respect to the Class A Preferred Shares and the common
shares that may be issued upon conversion of the Class A Preferred Shares. This
prospectus, which is part of the registration statement, does not contain all of
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information about us and the securities offered
by this prospectus, you should refer to the registration statement and the
exhibits and schedules filed with it. Statements contained in this prospectus as
to the contents of any agreement or any other document referred to are not
necessarily complete, and in each instance, if such agreement or document is
filed as an exhibit, you should refer to the copy of the agreement or document
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by reference to the exhibit.
The registration statement, including exhibits and schedules thereto,
may be inspected and copied at the principal office of the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of materials may also be obtained at prescribed rates from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, we are required to file
electronic versions of these documents with the Securities and Exchange
Commission through its Electronic Data Gathering, Analysis and Retrieval (EDGAR)
system. The Securities and Exchange Commission maintains a World Wide Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file public documents
electronically.
82
<PAGE>
WELLINGTON PROPERTIES TRUST
INDEX TO FINANCIAL STATEMENTS
I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Introduction to Pro Forma Condensed Consolidated Financial Information F-2
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999 F-4
Pro Forma Condensed Consolidated Statements of Operations for the Year
Ended December 31, 1998 and the Six Month Period Ended June 30, 1999 F-5
Notes and Management's Assumptions to Unaudited Pro Forma Condensed
Consolidated Financial Statements F-7
II. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Certified Public Accountants F-12
Consolidated Balance Sheet as of December 31, 1998 F-13
Consolidated Statements of Operations for the
Years Ended December 31, 1998 and December 31, 1997 F-14
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998 and December 31, 1997 F-15
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998 and December 31, 1997 F-17
Notes to Consolidated Financial Statements F-19
Unaudited Consolidated Balance Sheet as of June 30, 1999 F-25
Unaudited Consolidated Statements of Operations for the
Six and Three Month Periods Ended June 30, 1999 and June 30, 1998 F-26
Unaudited Consolidated Statements of Cash Flows for the
Six Month Period Ended June 30, 1999 and June 30, 1998 F-28
Notes to Consolidated Financial Statements F-29
F-1
<PAGE>
WELLINGTON PROPERTIES TRUST
I. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following sets forth the unaudited pro forma condensed consolidated
balance sheet of Wellington Properties Trust (the "Company") and its
consolidated affiliates, including Wellington Properties Investments, L.P. (the
"Operating Partnership") as of June 30, 1999, and the unaudited pro forma
condensed consolidated statements of operations for the year ended December 31,
1998 and the six-month period ended June 30, 1999.
In November 1998, the Operating Partnership acquired three commercial
properties (the "1998 Acquisition Properties") in exchange for (a) issuance by
the Operating Partnership of 2,557,707 limited partnership units ("Units")
(convertible, under certain circumstances, on a one-for-one basis such that one
Unit is convertible into one Common Share, as defined below); and (b) the
assumption of debt aggregating $17,066,000. In connection with the 1998
Acquisition Properties, the Company issued 166,666 common shares of beneficial
interest (the "Common Shares") to American Real Estate Equities, LLC ("AREE"),
or representatives thereof, in exchange for $1,000,000 in cash and the Company
received 166,666 Units from the Operating Partnership in exchange for
contributing $1,000,000 in cash. Simultaneous with the 1998 Acquisition
Properties, Wellington Management Corporation ("WMC") received a termination fee
and the advisory agreement between the Company and WMC was terminated. (The
above transactions are collectively referred to herein as the "1998
Transactions.")
The 1998 Transactions are reflected in the Company's historical
consolidated balance sheet as of June 30, 1999 for balance sheet purposes, and
are included in the pro forma condensed consolidating statements of operations
as if they occurred on January 1, 1998.
The pro forma condensed consolidating financial information is
presented as if the following transactions have been consummated on June 30,
1999 for balance sheet purposes, and at the beginning of the period presented
for purposes of the statements of operations:
o The future disposition of Maple Grove Apartments for
$16,700,000.
o The future issuance of 700,000 Class A Cumulative Preferred
Shares ("Class A Preferred Shares") to the public ("Preferred
Offering"). The Class A Preferred Shares will bear a
liquidation value of $10.00 per share and will accrue a
dividend equal to $0.475 per share, with such dividend payable
every six months. The Class A Preferred Shares will be
convertible into the number of Common Shares equal to the
quotient obtained by dividing (1) $10.00 plus any dividends
then accrued but unpaid on the Class A Preferred Shares, by
(2) a price equal to 110% of the average closing bid price of
Common Shares over the 10 trading days preceding the effective
date of the registration statement covering the Class A
Preferred Shares. The Company will have the right to redeem
the Class A Preferred Shares, under certain circumstances,
after the two year anniversary date of the initial closing of
the Preferred Offering.
o The agreement in the second quarter of 1999 between the
Company and AREE whereby:
o AREE returned a warrant covering 791,667 Common
Shares to the Company for cancellation.
o Recipients of 838,372 Units returned such Units to
the Company for cancellation.
o The Company agreed to the future issuance of 254,800 Class B
Cumulative Preferred Shares ("Class B Preferred Shares") to
AREE.
F-2
<PAGE>
o The Class B Preferred Shares will bear the same rights, terms
and preferences as the Class A Preferred Shares, but will rank
junior as to payment of dividends and distributions upon
liquidations.
o The agreement in the second quarter of 1999 between the
Company and WMC whereby, as consideration for termination of
the advisory agreement:
o WMC returned a warrant covering 791,667 Common Shares
to the Company for cancellation.
o The Company agreed to the future issuance of 95,000
Class B Preferred Shares to WMC and WMC will retain
cash payments of $550,000 received during 1998.
This pro forma condensed consolidated financial information should be
read in conjunction with the historical financial statements of the Company
included elsewhere in this prospectus. In management's opinion, all adjustments
necessary to reflect the effects of the above transactions have been made. This
pro forma condensed consolidated financial information is unaudited and is not
necessarily indicative of what the actual financial position would have been at
June 30, 1999, nor does it purport to represent the future financial position
and the results of operations of the Company.
F-3
<PAGE>
<TABLE>
Wellington Properties Trust
Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 1999
(Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Issuance of Issuance of Adjustment to
Historical Maple Grove Class A Class B Minority
Consolidated Apartments Preferred Preferred Interests Pro Forma
(A) (B) Shares Shares (E) Consolidated
(C) (D)
<S> <C> <C> <C> <C> <C> <C>
Assets
Net investments in real estate $ 49,250 $ (15,109) $ - $ - $ - $ 34,141
Cash and cash equivalents 98 2,437 5,825 - - 8,360
Escrowed cash 681 (254) - - - 427
Deferred costs, net 816 (119) - - - 697
Other assets 171 - - - - 171
------------ ---------- ---------- ---------- ---------- ------------
Total Assets $ 51,016 $ (13,045) $ 5,825 $ - $ - $ 43,796
============ ========== ========== ========== ========== ============
Liabilities and shareholders' equity
Liabilities
Mortgage loans payable $ 32,049 $ (12,680) $ - $ - $ - $ 19,369
Other liabilities 6,550 (668) - (3,498) - 2,384
------------ ---------- ---------- ---------- ---------- ------------
Total liabilities 38,599 (13,348) - (3,498) - 21,753
------------ ----------- ---------- ---------- ---------- ------------
Minority Interests 8,755 - - - (1,066) 7,689
Shareholders' equity
Common shares of beneficial interest 14 - - - - 14
Preferred shares of beneficial interest - - 7 3 - 10
Additional paid in capital 9,070 - 5,818 3,495 1,066 19,449
Accumulated deficit (5,422) 303 - - - (5,119)
----------- ---------- ---------- ---------- ---------- ------------
Total shareholders' equity 3,662 303 5,825 3,498 1,066 14,354
------------ ----------- ---------- ---------- ---------- ------------
Total liabilities and
shareholders' equity $ 51,016 $ (13,045) $ 5,825 $ - $ - $ 43,796
============ ========== ========== ========== ========== ============
</TABLE>
See accompanying notes to pro forma financial statements
F-4
<PAGE>
<TABLE>
Wellington Properties Trust
Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1998
(Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Maple Grove Issuance of
Historical 1998 Acquired Apartments Preferred Shares Pro Forma Pro Forma
Consolidated (A) Properties (B) (C) (D) Adjustments Consolidated
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental revenue $ 3,488 $ 3,335 (i) $ (2,594)(i) $ - $ - $ 4,229
Other 21 57 (i) 128(ii) 306 - 512
------------- ------------ ------------- ---------- ------------ ---------
Total revenue 3,509 3,392 (2,466) 306 - 4,741
------------- ------------ ------------- ---------- ------------ ---------
Expenses:
Property operating 1,564 1,404 (i) (1,128)(i) - - 1,840
General and
administrative 280 - (15)(i) - 75 (E) 340
Interest expense 1,417 1,275 (ii) (1,035)(i) - - 1,657
Depreciation and
amortization 694 570 (iii) (491)(i) - - 773
Nonrecurring expenses 1,560 - - - (1,560) (F) -
------------- ------------ ------------- ---------- ------------ ----------
Total expenses 5,515 3,249 (2,669) - (1,485) 4,610
------------- ------------ ------------- --------- ------------ ----------
Income (loss) before
minority interests (2,006) 143 203 306 1,485 131
Minority interests in
(income) loss 1,065 - - - (575) (G) 490
------------- ------------ ------------- ---------- ------------ ---------
Net income (loss) (941) 143 203 306 910 621
Net income allocated to
Preferred Shares - - - - (997) (G) (997)
------------- ------------ ------------- ---------- ------------ ---------
Net income (loss)
allocated to
Common Shares $ (941) $ 143 $ 203 $ 559 $ (87) $ (376)
============ ============ ============ ========== ============ ===========
Net loss per share:
Basic and diluted $ (0.80) $ (0.28)
============ ===========
Weighted average
number of shares:
Basic and diluted 1,175,438 1,322,043
============= ===========
</TABLE>
See accompanying notes to pro forma financial statements
F-5
<PAGE>
<TABLE>
Wellington Properties Trust
Pro Forma Condensed Consolidated Statement of Operations
For the Six Month Period Ended June 30, 1999
(Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Historical 1998 Acquired Maple Grove Issuance of Pro Forma Pro Forma
Consolidated (A) Properties (B) Apartments (C) Preferred Shares (D) Adjustments Consolidated
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental revenue $ 3,414 $ - $ (1,261) (i) $ - $ - $ 2,153
Other 31 - 64 (ii) 153 - 248
----------- ------------- ------------ -------------- ------------- ----------
Total revenue 3,445 - (1,197) 153 - 2,401
----------- ------------- ------------ -------------- ------------- ----------
Expenses:
Property operating 1,590 - (583) (i) - - 1,007
General and
administrative 387 - (8) (i) - - 379
Interest expense 1,295 - (525) (i) - - 770
Depreciation and
amortization 681 - (251) (i) - - 430
Nonrecurring expenses 3,563 - - - (3,563) (F) -
----------- ------------- ------------ -------------- ------------- ---------
Total expenses 7,516 - (1,367) - (3,563) 2,586
----------- ------------ ----------- ------------- ------------- ---------
Income (loss) before
minority interests (4,071) - 170 153 3,563 (185)
Minority interests in
(income) loss 2,664 - - - (2,281) (G) 383
----------- ------------- ------------ -------------- ------------- ----------
Net income (loss) (1,407) - 170 153 1,282 198
Net income allocated to
Preferred Shares - - - - (499) (G) (499)
----------- ------------- ------------ -------------- ------------- ----------
Net income (loss)
allocated
to Common Shares $ (1,407) $ - $ 170 $ 153 $ 783 $ (301)
========== ============= ============ ============== ============ =========
Net loss per share:
Basic and diluted $ (1.04) $ (0.22)
========== =========
Weighted average
number of shares:
Basic and
diluted 1,350,730 1,350,730
=========== ===========
</TABLE>
See accompanying notes to pro forma financial statements
F-6
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. Basis of Presentation:
The Company is a self-administered Maryland real estate investment
trust. As of June 30, 1999, the Company owned a portfolio of two residential and
three commercial properties. The residential properties are located in Wisconsin
and contain an aggregate of 376 units. The commercial properties are located in
Minnesota and contain an aggregate of 247,546 square feet. The Company is the
sole general partner of and, as of June 30, 1999, holds an approximately 8.8%
interest in the Operating Partnership which holds the commercial properties.
Because the Company controls the Operating Partnership, the Company consolidates
the net assets of the Operating Partnership with the Company.
These pro forma condensed consolidated financial statements should be
read in conjunction with the historical financial statements and notes thereto
of the Company included elsewhere in this prospectus. In management's opinion,
all adjustments necessary to reflect the effects of the consummated 1998
Transactions and the transactions to be consummated have been made.
2. Adjustments to Pro Forma Condensed Consolidated Balance Sheet:
(A) Reflects the historical consolidated balance sheet of the Company as of
June 30, 1999.
(B) Reflects the sale of the Maple Grove Apartments based upon a gross
sales price of $16,700 net of $1,169 used for costs associated with the
sale and $12,680 used to pay off the mortgage loan payable on the
property. In connection with the sale, escrowed cash reserves released
total $254 and general liabilities satisfied in connection with the
property total $668. Gain recognized on the sale is estimated to be
$422 and is calculated as net sales proceeds less basis of the property
of $15,109. Additionally in connection with the sale of the property,
deferred costs of $119 are written off.
(C) Reflects the proceeds of the Preferred Offering, based upon an offering
of 700,000 Class A Preferred Shares, at an offering price of $10.00 per
share, net of underwriting discounts and offering expenses aggregating
approximately $1,175.
(D) Reflects the issuance of 95,000 Class B Preferred Shares to WMC and
254,800 Class B Preferred Shares to AREE at a price of $10.00 per
share.
(E) Reflects the adjustment to minority interests. After giving effect to
the transactions to be consummated, the Company will hold an
approximately 8.8% interest in the Operating Partnership, calculated as
follows:
F-7
<PAGE>
Company Transaction (1) Consolidated
Minority interests
Common Units $ - $ 7,689 91.2% $ 7,689
Shareholders' equity (2)
Common Shares 3,114 741 8.8% 3,855
---------- ---------- ------ -----------
$ 3,114 $ 8,430 100.0% $ 11,544
========== ========== ====== ===========
(1) Reflects the impact of all effects of the 1998 Transactions
and the transactions to be consummated to minority interests
and total shareholders' equity.
(2) Excludes Class A Preferred Shares and Class B Preferred Shares
aggregating $10,499.
3. Adjustments to Pro Forma Condensed Consolidated Statements of
Operations:
(A) Reflects the historical consolidated operations of the Company.
(B) Reflects the combined operations of the 1998 Acquisition Properties.
For the Year For the Six Month
Ended Period Ended
December 31, 1998 June 30, 1999
(i) Reflects the combined historical
operations of the 1998 Acquisition
Properties for the period
January 1, 1998 through date of
acquisition, November 20, 1998:
Rental revenue $ 3,335 $ -
============= ==============
Other revenue 57 -
============= ==============
Property operating expense 1,404 -
============= ==============
(ii) Reflects the increase in interest
expense resulting from the debt
assumed in connection with the
1998 Acquisition Properties which
debt bears interest at an average
rate of 8.3% per annum. $ 1,275 $ -
============= ==============
F-8
<PAGE>
For the Year For the Six Month
Ended Period Ended
December 31, 1998 June 30, 1999
(iii) Reflects the increase in
depreciation and amortization
expense as follows:
Depreciation of buildings acquired
over a 40-year useful life
(allocating 20% to land and 80%
to depreciable basis), net of
historical depreciation expense
of the 1998 Acquisition Properties. $ 555 $ -
Amortization of deferred financing
fees related to debt assumed in
connection with the 1998 Acquisition
Properties, net of historical
amortization expense of the 1998
Acquisition Properties. 15 -
------------- -------------
$ 570 $ -
============= =============
(C) Reflects the adjustments as a result of the sale of the Maple Grove
Apartments.
For the Year For the Six Month
Ended Period Ended
December 31, 1998 June 30, 1999
(i) Reflects the historical operations of
Maple Grove Apartments:
Rental revenue $ (2,594) $ (1,261)
============= =============
Property operating expense (1,128) (583)
============= =============
General and administrative expense (15) (8)
============= =============
Interest expense (1,035) (525)
============= =============
Depreciation and amortization expense (491) (251)
============= ==============
(ii) Reflects the increase in interest
income from the investment of net
cash proceeds resulting from the
sale of Maple Grove Apartments
at an assumed rate of 5.25% per
annum (which rate approximates
that earned on United States
Treasury Bonds maturing in
August 2000). $ 128 $ 64
============= =============
(D) Reflects the increase in interest income from the investment of net
cash proceeds resulting from the Preferred Offering at an assumed rate
of 5.25% per annum (which rate approximates that earned on United
States Treasury Bonds maturing in August 2000).
(E) Reflects additional pro forma general and administrative costs expected
to be incurred as a result of the 1998 Transactions. Such costs are
expected to have a continuing impact on the Company.
F-9
<PAGE>
(F) In connection with the 1998 Transactions and the settlements between
the Company and AREE and the Company and WMC, the Company incurred
nonrecurring costs totaling $1,560 and $3,563 during the year ended
December 31, 1998 and the six month period ended June 30, 1999,
respectively. Such costs represent a combination of the aggregate
termination fee paid to WMC for the termination of the advisory
contract between the Company and WMC and costs incurred in connection
with the 1998 Transactions. Such adjustments have been omitted from the
pro forma condensed consolidated statements of operations for the year
ended December 31, 1998 and for the six month period ended June 30,
1999 as the events are not expected to have a continuing impact on the
Company.
(G) Minority interest in income (loss) has been reflected, on a pro forma
basis, in accordance with the Operating Partnership Agreement.
Consolidated income or loss is allocated between the Company and the
remaining partners pari passu based upon total weighted average Common
Shares and Units. The adjustments to record the income (loss) effect of
the minority interest share of income (loss) in the pro forma
statements of operations were computed as follows:
For the Year For the Six Month
Ended Period Ended
December 31, 1998 June 30, 1999
Income (loss) before minority
interests $ 131 $ (185)
Net income allocated to
Preferred Shares (997) (499)
------------- ------------
Net income (loss) allocated to
Units and Common Shares $ (866) $ (684)
============= ============
Pro forma minority share
1,719,335 Units for the year
ended December 31, 1998 and
the six month period
ended June 30, 1999 $ (490) $ (383)
============= ============
Net loss allocated to Common
Shareholders 1,322,043 Common
Shares for the year ended
December 31, 1998 and 1,350,730
Common Shares for the six months
ended June 30, 1999 $ (376) $ (301)
============= ============
F-10
<PAGE>
WELLINGTON PROPERTIES TRUST
II. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
F-11
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Trustees
Wellington Properties Trust and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Wellington Properties Trust and Subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, equity and cash flows for the
years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Trust's management. 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
Wellington Properties Trust and Subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
Fond du Lac, Wisconsin
April 9, 1999
F-12
<PAGE>
Wellington Properties Trust and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
Real estate property - at cost (notes A2, C, D and F)
Land and land improvements $ 9,013,206
Buildings 41,540,244
Appliances and equipment 924,353
------------
51,477,803
Accumulated depreciation 1,730,601
------------
49,747,202
Cash 153,901
Accounts receivable 15,861
Advance-related party, net of reserve of $240,000 (note F) --
Prepaid expenses 111,751
Property tax and other escrow 843,868
Deferred costs (note A4) 1,748,255
Organization costs and loan fees, net of accumulated
amortization of $231,995 (note A3) 906,241
------------
Total Assets $ 53,527,079
============
LIABILITIES AND EQUITY
Mortgage loans payable (note C) $ 32,505,152
Line of credit (note D) 200,000
Related party payable (note F) 1,744,423
Accounts payable 166,127
Tenant security deposits 156,373
Deferred rental revenue 65,372
Accrued liabilities 1,241,239
Dividends/distributions payable 443,018
------------
36,521,704
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 12,247,574
EQUITY
Common shares-authorized, 100,000,000 shares of
$.01 par value; issued 13,392
and outstanding 1,339,210 shares
Preferred shares-authorized, 10,000,000
shares of $.01 par value; no
shares issued or outstanding
Common share warrants 1,510,000
Additional paid-in capital 7,497,426
Accumulated deficit (4,263,017)
------------
4,757,801
------------
Total Liabilities and Equity $ 53,527,079
============
The accompanying notes are an integral part of this statement.
F-13
<PAGE>
Wellington Properties Trust and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1997
Revenues (note A5)
Rental revenue $ 3,488,481 $ 2,980,800
Gain on sale of real estate property -- 166,753
Interest and other 20,955 33,443
----------- -----------
3,509,436 3,180,996
Expenses
Property, operating and maintenance 738,972 656,591
Advertising and promotion 66,968 68,491
Property taxes and insurance 568,905 430,057
Depreciation and amortization 694,366 606,388
Interest Expense 1,417,194 1,398,457
General and administrative 287,871 174,200
Management fees (note F) 180,889 122,391
Other nonrecurring 1,010,154 --
Provision for uncollectible advance-
related party (note F) 240,000 --
Termination of advisory agreement
(note F) 310,000 --
----------- -----------
5,515,319 3,456,575
----------- -----------
Net loss before minority interest
in net loss of consolidated subsidiary (2,005,883) (275,579)
Minority interest in net loss of consolidated
subsidiary 1,064,501 --
----------- -----------
NET LOSS ALLOCATED TO COMMON SHARES $ (941,382) $ (275,579)
=========== ===========
Loss per common share
Net loss-Basic and diluted $ (0.80) $ (0.24)
=========== ===========
Weighted average number of common
shares outstanding(note A7) 1,175,438 1,129,061
=========== ===========
The accompanying notes are an integral part of these statements.
F-14
<PAGE>
<TABLE>
Wellington Properties Trust and Subsidiaries
Consolidated Statement of Equity
Years Ended December 31, 1998 and 1997
<CAPTION>
Excess of
purchase
price over
Common Additional affiliate's
Common share Paid-in basis in Accumulated Treasury
shares warrants Capital property acquired deficit shares Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 6,848 $ -- $ 6,018,071 $ (152,615) $(1,968,930) $ (6,818) $ 3,896,556
Cash dividends declared -- -- -- -- (543,482) -- (543,482)
Issuance of common shares in
connection with dividend
reinvestments 307 -- 274,793 -- -- -- 275,100
Release of the excess of
purchase price over
affiliate's basis in
property acquired due
to Forest Downs sale -- -- -- 152,615 -- -- 152,615
Retirement of 1,080 shares
of common shares in
treasury (7) -- (6,811) -- -- 6,818 --
Cost of 4,750 shares of
common shares acquired
for treasury -- -- -- -- -- (27,764) (27,764)
Net loss -- -- -- -- (275,579) -- (275,579)
--------- ------- ----------- ----------- ----------- --------- -----------
Balance at December 31, 1997 7,148 -- 6,286,053 -- (2,787,991) (27,764) 3,477,446
</TABLE>
The accompanying notes are an integral part of this statement.
F-15
<PAGE>
<TABLE>
Wellington Properties Trust and Subsidiaries
Consolidated Statement of Equity-Continued
Years ended December 31, 1998 and 1997
<CAPTION>
Excess of
purchase
price over
Common Additional affiliate's
Common share Paid-in basis in Accumulated Treasury
shares warrants Capital property acquired deficit shares Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 7,148 $ -- $ 6,286,053 $ -- $(2,787,991) $ (27,764) $ 3,477,446
Cash dividends declared -- -- -- -- (533,644) -- (533,644)
Issuance of common shares
in connection with
dividend reinvestments 257 -- 245,453 -- -- -- 245,710
Issuance of common shares
to AREE 1,053 -- 998,947 -- -- -- 1,000,000
Issuance of warrants
(note E) -- 1,510,000 -- -- -- -- 1,510,000
Cost of 66 common shares
acquired for treasury -- -- -- -- -- (329) (329)
Retirement of 4,816 shares
of common shares in
treasury -- -- (28,093) -- -- 28,093 --
Net loss -- -- -- -- (941,382) -- (941,382)
Reclassification due
to effect of common
share split 4,934 -- (4,934) -- -- -- --
-------- ----------- ----------- ------------ ----------- --------- -----------
Balance at December 31, 1998 $ 13,392 $ 1,510,000 $ 7,497,426 $ -- $(4,263,017) $ -- $ 4,757,801
======== =========== =========== ============ =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
Wellington Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (941,382) $ (275,579)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 694,366 606,388
Gain on sale of real estate property -- (166,753)
Minority interest (1,064,501) --
(Increase) decrease in accounts receivable 4,084 (11,460)
Increase in prepaid expenses (75,268) (30,047)
(Increase) decrease in property tax
and other escrow (192,081) 147,137
Increase (decrease) in accounts payable 106,216 (205,223)
Increase (decrease) in tenant
security deposits 34,913 (9,470)
Decrease in deferred rental revenue (25,624) (4,591)
Increase (decrease) in accrued liabilities 271,835 (55,582)
----------- -----------
(246,060) 270,399
----------- -----------
Net cash used in operating activities (1,187,442) (5,180)
Cash flows from investing activities:
Proceeds from sale of real estate property -- 1,898,962
Acquisitions of and additions to real
estate properties (563,413) (84,548)
Increase in deferred costs-net (98,437) --
----------- -----------
Net cash provided by (used in)
investing activities (661,850) 1,814,414
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
Wellington Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Year ended December 31,
1998 1997
---- ----
Cash flows from financing activities:
Proceeds from mortgage loans payable $ 2,750,000 $ 12,900,700
Proceeds from line of credit -- 815,270
Proceeds from related party payable 1,744,423 --
Repayments of mortgage loans payable (1,978,038) (7,610,011)
Repayments of line of credit (600,000) (800,000)
Repayments on land contract and
business note obligations -- (6,676,911)
Payment of financing costs (766,550) (205,958)
Issuance of Common Shares 1,245,710 275,100
Cash dividends paid-common shares (505,968) (564,421)
Purchase of treasury shares (329) (27,764)
------------ ------------
Net cash provided by (used in)
financing activities 1,889,248 (1,893,995)
------------ ------------
NET INCREASE (DECREASE) IN CASH 39,956 (84,761)
Cash at beginning of year 113,945 198,706
------------ ------------
Cash at end of year $ 153,901 $ 113,945
============ ============
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest $ 1,326,606 $ 1,509,569
============ ============
Supplemental non-cash investing and financing activities:
The Trust has dividends/distributions payable of $443,018 and
$124,571 as of December 31, 1998 and 1997, respectively.
On November 20, 1998, the Trust through its subsidiary,
Wellington Properties Investments, L.P., acquired two office properties
and one light industrial property for $30,797,781 plus direct costs of
acquisition. The acquisition were financed by the assumption of various
long-term debt in the amount of $17,066,935 and by issuing $13,730,846
of Wellington Properties Investments, L.P. units (note B).
On November 16, 1998, the Trust issued warrants to acquire up
to 791,667 Common shares to each of American Real Estate Equities, LLC
and Wellington Management Corporation. These warrants were valued at
$1,510,000 (note E).
The accompanying notes are an integral part of this statement.
F-18
<PAGE>
Wellington Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Wellington Properties Trust (Trust) is a real estate investment trust
organized under the laws of the state of Maryland. It was formed on March 15,
1994 to acquire, develop, own and operate investment real estate. The Trust owns
two residential and three commercial properties as of December 31, 1998. The
Trust is also the general partner and owns an approximately 6.1% interest, as of
December 31, 1998, of Wellington Properties Investments, L.P. (WPI), a Delaware
limited partnership formed in 1998.
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The consolidated financial statements include all the accounts of
Wellington Properties Trust, its wholly-owned subsidiaries, Maple Grove
Apartment Homes, Inc. and Lake Pointe Apartment Homes, Inc. and WPI. Because the
Trust controls WPI, the Trust has consolidated the accounts of WPI with the
Trust. Minority interest consists of limited partnership interests in WPI. All
intercompany accounts and transactions have been eliminated in the preparation
of the consolidated financial statements.
2. Real Estate Property
Real estate property is recorded at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over a 40-year estimated life
for buildings and seven-year estimated life for appliances and equipment.
Expenditures for ordinary maintenance and repairs are expensed to operations as
incurred and significant renovations and improvements that improve and/or extend
the useful life of the asset are capitalized and depreciated over their
estimated useful life. A combination of straight-line and accelerated methods is
used for income tax purposes.
3. Organization Costs and Loan Fees
The costs incurred in connection with the formation of the Trust are
amortized on a straight-line basis for over a period of fifteen years.
Costs incurred in obtaining and securing financing for mortgage notes
or bonds payable are amortized over the life of the respective loan using the
straight-line method.
4. Deferred Costs
The Trust has incurred costs in connection with the potential purchase
of properties by WPI. These costs, which total approximately $1,748,000 as of
December 31, 1998 consist primarily of legal and accounting fees and warrant
costs (note E), and are expected to be allocated among the properties purchased
and capitalized as part of the cost of the property.
5. Revenue Recognition
Rental income attributable to leases is recorded when due from tenants
and interest income is recorded on an accrual basis.
F-19
<PAGE>
Wellington Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
6. Income Taxes
The Trust has made an election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended, commencing with
its taxable year ending December 31, 1996. As a REIT, the Trust generally will
not be subject to Federal income tax if it distributes at least 95% of its REIT
taxable income (excluding capital gains) to its shareholders. All dividends
distributions for 1998 and 1997 were return of capital.
7. Loss Per Share
Net loss per share is computed based on the weighted average number of
shares of common shares outstanding for the period. Common share equivalents, to
include outstanding warrants and stock options, are not included in fully
diluted earnings per share as they would be anti-dilutive.
8. Financial Instruments
The carrying amount of financial instruments at December 31, 1998
approximates fair value.
9. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - ACQUISITION OF PROPERTIES
On November 20, 1998, the Trust through WPI, acquired two office
properties and one light industrial property in the Minneapolis, Minnesota
metropolitan area. The combined purchase price of such properties totaled
approximately $30.8 million, excluding closing costs. Such purchase price was
funded through the issuance of an aggregate of 2,557,707 limited partnership
units ("Units") in WPI (valued at $5.37 per Unit, or an aggregate value of
approximately $13.7 million) and the assumption of certain third-party
indebtedness of approximately $17.1 million secured by such properties. The
Units are exchangeable, under certain circumstances, on a one-for-one basis for
common shares of beneficial interest, $.01 par value per share from and after
the one-year anniversary of the date of issuance.
The following represents certain pro forma information for 1998 as if
these properties were acquired effective January 1, 1998.
Total revenue $ 7,007,000
Net loss before minority interest
in net loss of consolidated subsidiary (431,000)
Net loss allocated to common shares (148,000)
Net loss per common share-basic and diluted $ (0.11)
F-20
<PAGE>
Wellington Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998:
8.095% mortgage note payable to American Property Financing,
Inc. in monthly installments of $95,517 including interest;
final balloon payment due June 1, 2004; collateralized by the
Maple Grove Apartment Complex and an assignment of rents and
security agreement $ 12,738,783
7.600% mortgage note payable to First Union National Bank in
monthly installments of $19,417 including interest; final
balloon payment due March 11, 2008; collateralized by the Lake
Pointe Apartment Complex and an assignment of rents and
security agreement 2,734,512
7.000% mortgage note payable to GMAC Commercial Mortgage
Corporation in monthly installments of $15,635 including
interest; final balloon payment due February 1, 2008;
collateralized by the Nicollet Business Campus VI Complex and
an assignment of rents and security agreement 2,330,224
Commercial Development Revenue Refunding Bonds-Series 1996A
issued by the City of Minneapolis, Minnesota; interest payable
semi-annually at variable rates ranging from 5.25% to 7.25%;
principal payable annually on or before May 1 in amounts
ranging from $140,000 to $395,000 with a final payment due May
1, 2015; collateralized by a letter of credit, the Thresher
Square East Office Complex, equipment and an assignment of
rents 4,095,000
Commercial Development Revenue Refunding Bonds - dated October
1, 1992 issued by the City of Minneapolis, Minnesota; interest
payable semi-annually at variable rates ranging from 6.50% to
7.60%; principal payable annually on or before June 1 in
amounts ranging from $170,000 to $375,000 with a final payment
due June 1, 2010; collateralized by a letter of credit, the
Thresher Square West Office Complex and an assignment of rents
and security agreement 3,135,000
Note payable to Bremer Bank, N.A. in monthly installments of
$51,518 including interest at a variable rate (effective rate
of 8.75% at December 31, 1998) with a final balloon payment
due on October 1, 2000; collateralized by the Cold Springs
Office Complex and fixtures 5,596,633
Note payable to Bremer Business Financial Corp., interest
payments due monthly at a variable interest rate (effective
rate of 10.75% at December 31, 1998) with principal balance
due on September 30, 2000; collateralized by the Cold Springs
Office Complex and fixtures 1,875,000
-----------
$ 32,505,152
===========
F-21
<PAGE>
Wellington Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
Aggregate maturities on long-term debt after December 31, 1998 are as follows:
1999 $ 575,856
2000 7,884,414
2001 551,249
2002 592,284
2003 634,634
Thereafter 22,266,715
----------
$ 32,505,152
==========
NOTE D - LINE OF CREDIT
During 1998, the Trust obtained a line of credit for $300,000 with
Milwaukee Western Bank. Interest-only payments are due monthly with an interest
rate of .5% above the bank's reference rate (effective rate at December 31, 1998
of 8.25%). At December 31, 1998 the outstanding balance was $200,000. The due
date of this line of credit is March 31, 1999. The line of credit is
collateralized by the guarantee of WMC.
NOTE E - EQUITY
During 1998, the Trust entered into agreements with American Real
Estate Equities, LLC (AREE) and Wellington Management Corporation (WMC).
Pursuant to the agreements the Trust entered into transactions with AREE and WMC
related to issuance of warrants, issuance of Common Shares and contribution
agreements for various properties (note B).
The Trust issued warrants to acquire up to 791,667 Common Shares to
each of AREE and WMC. The Warrants will become exercisable one year after the
date of issuance (November 16, 1999) and will be exercisable for a nine-year
period thereafter, at an exercise price of $5.37 per Common Share with respect
to 395,833 Warrants held by each of AREE and WMC, $6.47 per Common Share with
respect to 197,917 Warrants held by each of AREE and WMC, $7.74 per Common Share
with respect to 118,750 Warrants held by each of AREE and WMC and $9.32 per
Common Share with respect to 79,167 Warrants held by each of AREE and WMC. A
value of $0.954 per warrant (based on a modified Black Scholes calculation) for
a total of $1,510,000 has been recognized at December 31, 1998.
The Trust issued 166,666 Common Shares to AREE in exchange for
$1,000,000 during 1998.
In March 1998, in connection with the refinancing of debt, the Trust
entered into an agreement with Credit Suisse First Boston Mortgage Capital LLC
which provides for the granting of warrants to purchase 47,500 Common Shares on
any date through March 5, 2008 at a price of $3.949 per share. The warrants were
not exercised during the year ended December 31, 1998. The value attributable to
the detachable warrants was not material as of and for the year ended December
31, 1998.
The Trust has a stock option plan (the "Old Plan") which provides for
the granting of share options to officers, trustees and employees at a price
determined by a formula in the Plan agreement. There are
F-22
<PAGE>
Wellington Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
54,387 options outstanding as of December 31, 1998. There were no options
exercised under the plan during the year ending December 31, 1998.
In November 1998, the Trust's shareholders approved a Share Option Plan
(the "New Plan") which provides for the granting of share options to officers,
trustees and employees at a price determined by a formula in the Plan agreement.
The options are exercisable over a period of time determined by the Plan
Committee, but no longer than ten years after the date they are granted.
Compensation resulting from the share options is initially measured at grant
date based on fair market value of the shares. The Plan was adopted as of
November 16, 1998, and there are 54,387 options outstanding as of December 31,
1998. There were no options exercised under the Plan during the year ending
December 31, 1998.
The Trust has elected to implement the disclosure provisions of SFAS
123, "Accounting for Stock-Based Compensation" in its financial statements. SFAS
123 requires that if not implemented, the impact be disclosed in the footnotes
to the financial statements on a pro-forma basis. The impact of SFAS 123 on the
net loss and loss per share of the Trust was not material as of and for the year
ended December 31, 1998.
NOTE F - RELATED PARTY TRANSACTIONS
Management Fees
The Trust has entered into Property Management Agreements with WMC
Realty, Inc. (WRI), a wholly-owned subsidiary of Wellington Management
Corporation (WMC), an affiliate of the Trust in which Arnold Leas (Chairman of
the Board of Trustees) is President and Chief Executive Officer, and Hoyt
Properties, Inc. (Hoyt), an entity controlled by Steve Hoyt (a trustee of the
Trust) to serve as Property Managers of properties owned by the Trust. The
Property Managers will manage the day to day operations of properties owned by
the Trust and will receive a management fee for this service. Management fees
consisted of $31,503 to Hoyt and $149,386 to WRI for the year ended December 31,
1998 and $122,391 to WRI for the year ended December 31, 1997.
Advisor Fees
On August 2, 1994, the Trust contracted to retain WMC to serve as
Advisor to the Trust. In payment for these services, the Advisor receives a fee
equal to 5% of the gross proceeds of the public share offering. Advisor fees for
the years ended December 31, 1998 and 1997 were $0. In addition, the Advisor is
entitled to receive an Incentive Advisory Fee equal to 10% of the realized gain
with respect to each sale or refinancing of property owned by the Trust. In the
event a property is sold at a loss, no incentive advisory fees will be paid
until the amount of the loss has been offset by gains from other sales.
Incentive advisory fees for the years ended December 31, 1998 and 1997 were $0
and $18,265, respectively.
In addition, the Advisor is entitled to recover certain expenses
including travel, legal, accounting and insurance. These expenses totaled
$149,178 and $114,133 for the years ended December 31, 1998 and 1997,
respectively. Fees for services, such as legal and accounting, provided by the
Advisor's employees, in the opinion of the Advisor may not exceed fees that
would have been charged by independent third parties.
Termination Fees
In connection with the purchase of properties by WPI (note B), the
Trust terminated the advisory agreement with WMC on November 20, 1998. The
termination fee, payable to WMC, is determined by taking 1% of the first
$150,000,000 of the aggregate gross purchase price for properties acquired by
WPI plus .25% of the aggregate gross purchase price for properties acquired in
excess of $150,000,000.
F-23
<PAGE>
Wellington Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
Termination fees paid to WMC, which are expensed as incurred, amounted to
$310,000 and $0 for the years ended December 31, 1998 and 1997, respectively.
Reimbursement of Certain Expenses by Related Parties
WPI is in negotiations with AREE regarding the reimbursement by WPI to
AREE of certain expenses incurred by AREE in the potential acquisition of
properties and certain administrative expenses. The accompanying consolidated
financial statements reflect all expenses incurred by AREE on behalf of WPI in
connection with the acquisitions, with a corresponding liability to AREE
totaling $1,504,423. In the event that the negotiations result in reimbursement
of certain expenses at a later date, that recovery will then be reflected in the
financial statements.
In connection with the negotiation by the Trust of the contribution
agreement between AREE and WPI, a $240,000 advance was paid to WMC by AREE for
the benefit of WPI. This amount was reflected as an advance to related party in
accompanying financial statements, with a related liability recorded due to
AREE. Under the terms of the contribution agreement, the advance was to be
repaid to AREE in the event certain transactions closed before December 31,
1998.
In connection with the negotiations discussed above, WMC management has
stated that the advance from WPI represents reimbursement from WPI for services
rendered by WMC in the organization of WPI and the acquisition of properties.
WMC management has stated that it does not intend to reimburse WPI for the
$240,000 advance. Due to the uncertainty of the collectibility of this advance,
the entire amount has been reserved as uncollectible in the accompanying
financial statements.
NOTE G - OPERATING LEASES
The Trust and its subsidiaries lease residential and commercial space
to individual and corporate tenants. These leases expire at various times
through 2005. The following is a schedule by year of minimum operating lease
receipts under such operating leases.
Year
1999 $3,733,271
2000 2,197,655
2001 1,923,698
2002 995,421
2003 426,689
Thereafter 358,477
----------
TOTAL $9,635,211
==========
One of the commercial properties has one primary tenant who leases 55%
of the property's rentable square footage. The future minimum operating lease
receipts from this tenant represent approximately 19% of the above total.
NOTE H - SUBSEQUENT EVENT
In March 1999, the Trust declared a Common Share split of 4.75 shares
for 3 shares. All Common Share amounts in the accompanying financial statements
have been restated to reflect the Common Share split.
F-24
<PAGE>
Wellington Properties Trust
Consolidated Balance Sheet
June 30, 1999 (Unaudited)
Assets
Real Estate Property
Land $ 9,009,936
Building 41,540,143
Tenant improvements 43,809
Appliances and equipment 976,096
------------
51,569,984
Accumulated depreciation (2,319,925)
------------
49,250,059
Cash 98,397
Escrowed cash 680,511
Accounts receivable 32,458
Prepaid expenses 23,550
Investment in unconsolidated subsidiary 90,000
Deferred financing costs, net 815,662
Other assets 25,000
------------
Total Assets $ 51,015,637
============
Liabilities and shareholders' equity
Liabilities
Mortgage loans payable $ 32,049,484
Line of credit 190,000
Accounts payable and accrued liabilities 1,336,559
Related party payable 3,926,878
Deferred rental revenue 66,648
Tenant security deposits 158,744
Dividends/distributions payable 871,100
------------
Total liabilities 38,599,413
------------
Minority interests in consolidated subsidiary 8,755,376
Shareholders' equity
Common shares - 100,000,000 authorized;
1,351,935 shares issued and outstanding;
par value $0.01 13,519
Preferred Stock - 10,000,000 authorized; no shares
issued and outstanding; par value $0.01 ---
Additional paid in capital 9,069,682
Accumulated deficit (5,422,353)
------------
Total shareholders' equity 3,660,848
------------
Total liabilities and shareholders' equity $ 51,015,637
============
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
Wellington Properties Trust
Consolidated Statements of Operations
(Unaudited)
For the Six Month Period Ended
June 30, 1999 June 30, 1998
Revenue:
Rental revenue and tenant reimbursements $ 3,414,376 $ 1,516,511
Interest and other 30,513 273
----------- -----------
Total revenue 3,444,889 1,516,784
----------- -----------
Expenses:
Property operating and maintenance 822,468 295,608
Real estate taxes and insurance 596,233 219,290
Depreciation and amortization 681,103 293,879
Interest expense 1,295,213 633,928
General and administrative 387,480 147,745
Management fees 170,015 74,515
Termination of advisory agreement 950,000 --
Nonrecurring expenses 2,613,383 --
----------- -----------
Total expenses 7,515,895 1,664,965
----------- -----------
Loss before minority interests (4,071,006) (148,181)
Less: Minority interests 2,664,093 --
----------- -----------
Loss allocated to Common Shares $(1,406,913) $ (148,181)
=========== ===========
Loss per share: Basic and diluted $ (1.04) $ (0.13)
=========== ===========
Weighted average number of shares:
Basic and diluted 1,350,730 1,144,793
=========== ===========
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
Wellington Properties Trust
Consolidated Statements of Operations
(Unaudited)
For the Three Month Period Ended
June 30, 1999 June 30, 1998
Revenue:
Rental revenue and tenant reimbursements $ 1,756,158 $ 750,581
Interest and other 16,076 210
----------- -----------
Total revenue 1,772,234 750,791
----------- -----------
Expenses:
Property operating and maintenance 450,153 135,118
Real estate taxes and insurance 279,368 109,645
Depreciation and amortization 357,526 148,283
Interest expense 650,225 319,511
General and administrative 192,721 74,598
Management fees 87,390 36,907
Termination of advisory agreement 950,000 --
Nonrecurring expenses 2,613,383 --
----------- -----------
Total expenses 5,580,766 824,062
----------- -----------
Loss before minority interests (3,808,532) (73,271)
Less: Minority interests 2,491,018 --
----------- -----------
Loss allocated to Common Shares $(1,317,514) $ (73,271)
=========== ===========
Loss per share: Basic and diluted $ (0.97) $ (0.06)
=========== ===========
Weighted average number of shares:
Basic and diluted 1,351,891 1,144,793
=========== ===========
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
<TABLE>
Wellington Properties Trust
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Month Period Ended
<CAPTION>
June 30, 1999 June 30, 1998
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(4,071,006) $ (148,181)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 681,103 293,879
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
and prepaid expenses 71,604 (50,861)
Decrease in deferred costs 1,723,255 --
Decrease in accounts payable and
accrued liabilities (70,809) (13,423)
Increase in accounts payable related party 2,182,455 41,883
Increase in tenant security deposits
and deferred rents 3,409 5,308
----------- -----------
Net cash provided by operating activities $ 520,011 $ 128,605
----------- -----------
Cash flows from investing activities:
Capital expenditures paid (93,380) (40,806)
Investment in unconsolidated subsidiary (90,000) --
Decrease (increase) in escrowed cash 163,357 (45,137)
----------- -----------
Net cash flow used in investing activities (20,023) (85,943)
----------- -----------
Cash flows from financing activities:
Proceeds from mortgage loans payable -- 2,750,000
Loan fees -- (436,285)
Payments on mortgage note (455,668) (2,376,180)
Payments on line of credit (10,000) --
Dividends paid (89,824) (125,794)
----------- -----------
Net cash flow used in financing activities (555,492) (188,259)
----------- -----------
Net decrease in cash (55,504) (145,597)
Cash at beginning of period 153,901 113,945
----------- -----------
Cash at end of period $ 98,397 $ (31,652)
=========== ===========
Supplemental Data:
Interest paid $ 1,318,972 $ 641,035
Dividends paid through issuance of
Common Shares $ (62,383) $ (124,287)
Issuance of Common Shares $ 62,383 $ 124,287
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE A - ORGANIZATION
Wellington Properties Trust ("Company") is a real estate investment trust
("REIT") organized in the state of Maryland. The Company was formed on March 15,
1994 to acquire, develop, own and operate investment real estate. As of June 30,
1999, the Company owned two residential and three commercial properties that
contain a total of 376 apartment units and 247,546 commercial rentable square
feet. The Company's interest in the commercial properties is held through
Wellington Properties Investments, LP (the "Operating Partnership"), a Delaware
limited partnership formed in 1998. The Company is the general partner of, and
as of June 30, 1999, owns an approximately 8.8% interest in the Operating
Partnership. On March 4, 1999, the Company acquired an 8% interest in Highlander
Acquisition Company, LLC ("Highlander") which owns a 154 unit apartment
community.
NOTE B - BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the Company without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the included disclosures are
adequate to make the information presented not misleading. In the opinion of the
Company, all adjustments (consisting solely of normal recurring matters, except
with respect to the nonrecurring expense) necessary to fairly present the
financial position of the Company as of June 30, 1999, the results of its
operations for the six month periods and three month periods ended June 30, 1999
and 1998, and its cash flows for the six month periods ended June 30, 1999 and
1998 have been included. During the second quarter of 1999, the Company
concluded that costs incurred and deferred in 1998 in connection with the
potential acquisition of 27 properties had no future value because such
potential acquisitions would not occur. Such costs approximated $2.6 million and
were expensed in the second quarter along with the costs to terminate the
advisory agreement of $950,000 (See Note H). The results of operations for such
interim periods are not necessarily indicative of the results for a full year.
For further information, refer to the Company's consolidated financial
statements and footnotes included in the Annual Report of Form 10-KSB/Amendment
No. 1 for the year ended December 31, 1998.
NOTE C - ACQUISITION OF PROPERTIES
On March 4, 1999, the Company acquired an 8% interest in Highlander at a cost
of $90,000 funded in cash. The Company believes that cost approximates fair
value.
On November 20, 1998, the Company through the Operating Partnership, acquired
two office properties and one light industrial property in the Minneapolis,
Minnesota metropolitan area. The combined purchase price of such properties
totaled approximately $31.1 million, including closing costs. Such purchase
price was funded through the issuance of an aggregate of 2,557,707 limited
partnership units ("Units") in the Operating Partnership (valued at $5.37 per
Unit, or an aggregate value of approximately $13.7 million) and the assumption
of certain third-party indebtedness of approximately $17.1 million secured by
such properties. The Units are exchangeable, under certain circumstances, on a
one-for-one basis for common shares of beneficial interest, $.01 par value per
share from and after the one-year anniversary of the date of issuance. (See Note
H).
F-29
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999
NOTE D - MORTGAGE NOTES PAYABLE AND OTHER FINANCING
Maple Grove
The mortgage payable with respect to Maple Grove is collateralized by Maple
Grove and an assignment of rents and had a principal balance as of June 30, 1999
of $12,680,308. The interest rate is fixed at 8.095%. Payments are due in
monthly installments of principal and interest of $95,517 with a final balloon
payment due June 1, 2004.
(See Note I.)
Lake Pointe
As of June 30, 1999, the Company was liable on a mortgage note payable of
$2,722,891. The note requires monthly payments of $19,417 including interest at
7.6%. The mortgage is due March 2008 and is secured by Lake Pointe and an
assignment of rents.
Thresher Square East
The financing consists of Commercial Development Revenue Refunding Bonds -
Series 1996A issued by the City of Minneapolis, Minnesota; interest payable
semi-annually at variable rates ranging from 5.25% to 7.25%; principal payable
annually on or before May 1 in amounts ranging from $140,000 to $395,000 with a
final payment due May 1, 2015; collateralized by a letter of credit, the
Thresher Square East Office Complex, equipment and an assignment of rents. As of
June 30, 1999 the principal balance was $3,955,000.
Thresher Square West
The financing consists of Commercial Development Revenue Refunding Bonds -
dated October 1, 1992 issued by the City of Minneapolis, Minnesota; interest
payable semi-annually at variable rates ranging from 6.50% to 7.60%; principal
payable annually on or before June 1 in amounts ranging from $170,000 to
$375,000 with a final payment due June 1, 2010; collateralized by a letter of
credit, the Thresher Square West Office Complex and an assignment of rents and
security agreement. As of June 30, 1999 the principal balance was $2,965,000.
Cold Springs
The financing consists of a note payable to Bremer Bank, N.A. in monthly
installments of $51,518 including interest at a variable rate (effective rate of
9.25% at June 30, 1999) with a final balloon payment due on October 1, 2000; and
collateralized by the Cold Springs Office Complex and fixtures. As of June 30,
1999 the principal balance was $5,533,491.
Additionally there is a note payable to Bremer Business Financial Corp.,
interest payments due monthly at a variable interest rate (effective rate of
10.75% at June 30, 1999) with principal balance due on September 30, 2000; and
collateralized by the Cold Springs Office Complex and fixtures. As of June 30,
1999 the principal balance was $1,875,000.
F-30
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999
NOTE D - MORTGAGE NOTES PAYABLE AND OTHER FINANCING - Continued
Nicollet VI
The financing consists of a 7.000% mortgage note payable to GMAC Commercial
Mortgage Corporation in monthly installments of $15,635 including interest;
final balloon payment due February 1, 2008; and collateralized by the Nicollet
Business Campus VI Complex and an assignment of rents and security agreement. As
of June 30, 1999 the principal balance was $2,317,794.
Line of Credit
During 1998, the Company obtained a line of credit for $300,000 with Milwaukee
Western Bank. Payments of $5,000 of principal plus interest are due monthly with
the final principal payment due on September 30, 1999. The interest rate is at
0.5% above the bank's reference rate (effective rate at June 30, 1999 of 8.75%).
At June 30, 1999, the outstanding balance was $190,000. The line of credit is
collateralized by the guarantee of Wellington Management Corporation ("WMC").
NOTE E - EQUITY
During 1998, the Company entered into agreements with American Real Estate
Equities, LLC ("AREE") and WMC. Pursuant to the agreements the Company entered
into transactions with AREE and WMC related to issuance of warrants, issuance of
Common Shares and contribution agreements for various properties.
On November 16, 1998, the Company issued warrants to acquire up to 791,667
Common Shares to each of AREE and WMC. The Warrants were to become exercisable
one year after the date of issuance (November 16, 1999) and would be exercisable
for a nine-year period thereafter, at an exercise price of $5.37 per Common
Share with respect to 395,833 Warrants held by each of AREE and WMC, $6.47 per
Common Share with respect to 197,917 Warrants held by each of AREE and WMC,
$7.74 per Common Share with respect to 118,750 Warrants held by each of AREE and
WMC and $9.32 per Common Share with respect to 79,167 Warrants held by each of
AREE and WMC. Effective June 30, 1999, all such warrants were returned to the
Company and canceled. (See Note H).
F-31
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999
NOTE F - DISTRIBUTIONS
On March 16, 1999, the Board of Trustees declared a split of 4.75 Common Shares
for each 3.00 Common Shares effective on March 24, 1999 to shareholders of
record as of March 22, 1999 ("Stock Split"). The Operating Partnership
simultaneously declared a split of 4.75 Units for each 3.00 Units effective on
March 24, 1999 to unitholders of record as of March 22, 1999. All amounts herein
have been adjusted to give effect to the Stock Split.
On March 30, 1999, the Board of Trustees declared a cash distribution of $0.11
per share totaling approximately $148,679 to shareholders of record as of March
31, 1999. The Operating Partnership simultaneously declared a $0.11 per unit
cash distribution to holders of Units. Such distribution totals $189,127. (See
Note H.)
On July 15, 1999, the Board of Trustees declared a cash distribution of $0.11
per share totaling approximately $148,679 to shareholders of record as of June
30, 1999. The Operating Partnership simultaneously declared a $0.11 per unit
cash distribution to holders of Units. Such distribution totals $189,127. (See
Note H.)
The Board of Trustees further voted to defer payment of both 1999 cash
distributions.
NOTE G - LOSS PER COMMON SHARE
Net loss per Common Share is computed based on the weighted average number of
Common Shares outstanding for the period. Common share equivalents, consisting
of outstanding warrants and options, are not included in the diluted loss per
Common Share as they would be anti-dilutive.
NOTE H - RELATED PARTY TRANSACTIONS
Reimbursement of Certain Expenses by Related Parties
The Operating Partnership has been in negotiations with AREE regarding the
reimbursement by the Operating Partnership to AREE of certain expenses incurred
by AREE in the potential acquisition of properties and certain administrative
expenses.
In connection with the negotiations during 1998 by the Company of the
contribution agreement between AREE and the Operating Partnership, a $240,000
advance was paid to WMC by AREE for the benefit of the Operating Partnership. As
of December 31, 1998, this amount was reflected as an advance to related party
in accompanying financial statements, with a related liability recorded due to
AREE. Under the terms of the contribution agreement, the advance was to be
repaid to AREE in the event certain transactions closed before December 31,
1998. Due to the uncertainty of the collectibility of this advance, the entire
amount was reserved as uncollectible as of December 31, 1998 and in connection
with the agreement discussed below, has been written off as of June 30, 1999. Of
the 30 properties to be acquired, three properties have been acquired as of June
30, 1999. Further, in connection with the agreements discussed below, WMC will
retain cash received totaling $550,000 as partial consideration for termination
of the advisory agreement.
F-32
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999
Management Fees
The Company has entered into Property Management Agreements with WMC Realty,
Inc. ("WRI"), a wholly-owned subsidiary of WMC, an affiliate of the Company in
which Arnold Leas (Chairman of the Board of Trustees) is President and Chief
Executive Officer, and Hoyt Properties Inc. ("Hoyt"), an entity controlled by
Steve Hoyt (a trustee of the Company) to serve as Property Managers of
properties owned by the Company. The Property Managers manage the day to day
operations of properties owned by the Company and receive a management fee for
this service. Management fees for the period January 1, 1999 through June 30,
1999 totaled $95,112 to Hoyt and $74,903 to WRI. Management fees for the period
January 1, 1998 through June 30, 1998 totaled $0 to Hoyt (management agreement
commenced November 1998) and $74,515 to WRI.
Advisor Fees
On August 2, 1994, the Company contracted to retain WMC to serve as Advisor to
the Company. In payment for these services, the Advisor receives a fee equal to
5% of the gross proceeds of the public offering of common shares, which
terminated October 1995. No advisor fees have been paid during 1999.
In addition, the Advisor is entitled to receive an Incentive Advisory Fee equal
to 10% of the realized gain with respect to each sale or refinancing of property
owned by the Company. In the event a property is sold at a loss, no Incentive
Advisory Fees will be paid until the amount of the loss has been offset by gains
from other sales. No Incentive Advisory Fees have been paid during 1999. In
addition, the Advisor is entitled to recover certain expenses including travel,
legal, accounting, and insurance. Fees for services, such as legal and
accounting, provided by the Advisor's employees, in the opinion of the Advisor,
may not exceed fees that would have been charged by independent third parties.
The initial term of the agreement ended on December 31, 1995 and had been
renewed automatically each year. The agreement was subject to termination
without cause, by either party, on 60 days written notice and by the Company for
cause immediately upon written notice.
Termination of Advisory Agreement
In connection with the purchase of properties by the Operating Partnership, the
Company terminated the advisory agreement with WMC on November 20, 1998. The
termination fee, payable to WMC, was estimated at $1.6 million and was to be
determined by taking 1% of the first $150,000,000 of the aggregate gross
purchase price for properties acquired by the Operating Partnership plus 0.25%
of the aggregate gross purchase price for properties acquired in excess of
$150,000,000. See agreement as of June 30, 1999 discussed below.
F-33
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999
NOTE H - RELATED PARTY TRANSACTIONS - Continued
Agreements: June 30, 1999
In the second quarter of 1999, due principally to the fact that the Operating
Partnership was able to acquire only three properties since November 1998, the
Company entered into discussion with AREE and WMC. As a result of these
discussions, effective as of June 30, 1999:
o Recipients of 838,372 Units, received in the November 1998 acquisitions as
described in Note C, have returned such Units to the Company for
cancellation.
o AREE has returned the warrant covering 791,667 Common Shares to the
Company. Further, the Company has agreed to issue 254,800 Class B Junior
Cumulative Convertible Preferred Shares ("Class B Preferred Shares") to
AREE in the third quarter of 1999 as consideration for an aggregate of
$2,548,000 representing advances to the Company for working capital
purposes and costs incurred in connection with the 1998 Transactions. The
Class B Preferred Shares will bear the same rights, terms and preferences
as the Class A Preferred Shares (defined below), but will rank junior as to
payment of dividends and distributions upon liquidations. Of the total
Class B Preferred Shares to be issued to AREE, 135,600 will be redeemable
by the Company for $1.00 if certain conditions are not met prior to June
30, 2002.
o As consideration for the Termination of the Advisory Agreement between the
Company and WMC, WMC has returned the warrant covering 791,667 Common
Shares to the Company, the Company has agreed to issue 95,000 Class B
Preferred Shares to WMC in the third quarter of 1999 and WMC will retain
cash payments of $550,000 received during 1998.
The obligation by the Company to issue the Class B Preferred Shares has been
reflected as a liability aggregating $3,498,000 on the Company's balance sheet
as of June 30, 1999.
Listing Agreement
In January 1998, the Company entered into a listing agreement with WRI. The
agreement provides that WRI would receive a fee equal to 3% of the sales price
in the event of a sale of either of the Company's residential properties. In
connection with the pending contract for the sale of Maple Grove Apartments,
discussed below, WRI is expected to receive a fee totaling $501,000 upon
consummation of the sale.
NOTE I - SUBSEQUENT EVENTS
The Company anticipates filing a Preliminary Registration Statement in August
1999 under the Securities Act of 1933 on Form SB-2 in order to commence the sale
of 700,000 Class A Cumulative Convertible Preferred Shares ("Class A Preferred
Shares") to the public ("Preferred Offering"). The Class A Preferred Shares will
bear a liquidation value of $10.00 per share and will accrue a dividend equal to
$0.475 per share, with such dividend payable every six months. The Class A
Preferred Shares will be convertible into the number of Common Shares equal to
the quotient obtained by dividing (1) $10.00 plus any dividends then accrued but
unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the
average closing bid price of Common Shares over the 10 trading days preceding
the effective date of the registration statement covering the Class A Preferred
Shares. The Company
F-34
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999
NOTE I - SUBSEQUENT EVENTS - Continued
will have the right to redeem the Class A Preferred Shares, under certain
circumstances, after the two year anniversary date of the initial closing of the
Preferred Offering.
The Company expects to use the net proceeds from the Preferred Offering to fund
the continued growth of the Company.
Maple Grove is presently under contract for sale to an independent third party.
The contract is subject to normal closing conditions and contingencies and
provides for a purchase price of $16,700,000 to be paid by assuming the first
mortgage of approximately $12,680,000 and paying the balance in cash at closing.
The proposed buyer has advanced $400,000 of the cash purchase price in exchange
for the Company's 10% promissory note.
No assurance can be given that the Preferred Offering or the sale of Maple Grove
will be consummated and if consummated, would be on terms described above or
otherwise.
F-35
<PAGE>
======================================== ======================================
No dealer, salesperson or other
individual has been authorized to give
any information or make any
representation not contained in this
prospectus in connection with the
offering covered by this prospectus. If
given or made, such information or
representations must not be relied upon
as having been authorized by us. This
prospectus does not constitute an offer 700,000 Shares
to sell, or a solicitation. Neither the Class A Cumulative Convertible
delivery of this prospectus nor any sale Preferred Shares
made hereunder shall, under any
circumstances, create an implication
that there has not been any change in
the facts set forth in this prospectus
or in our affairs since the date hereof.
TABLE OF CONTENTS
Prospectus Summary.................3
Risk Factors......................10
Use of Proceeds...................20
Dividend Policy...................21
Capitalization....................22
Price Range of Common
Shares and Dividends.............23
Management Discussion and
Analysis of Financial
Condition and Results
of Operations....................24
Business..........................30
Management........................53
Principal Shareholders............59
Certain Relationships and
Related Transactions.............61 WELLINGTON PROPERTIES TRUST
Underwriting......................65
Description of Securities.........67
Certain Provisions of
Maryland Law and of Our
Declaration of Trust and Bylaws..72
Federal Income Tax Consequences...75
Legal Matters.....................81
Experts...........................81
Additional Information............82
Financial Statements..............F-1
Until ______, 1999 (25 days after the
date of this prospectus), all dealers
effecting transactions in the Class A [logo of R.J. Steichen & Company]
Preferred Shares, whether or not
participating in this distribution, may [logo of Miller Johnson & Kuehn,
be required to deliver a current Incorporated]
prospectus with respect to those Class A
Preferred Shares to purchasers thereof
prior to or concurrent with the receipt
of the confirmation of the sale of those
Class A Preferred Shares. ________________, 1999
========================================= =====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Declaration of Trust and the Bylaws of the Trust provide that the
Trust may indemnify officers, directors, employees and agents of the Trust to
the fullest extent permitted by Maryland law. Pursuant to Maryland law, the
Trust generally has the power to indemnify its present and former directors,
officers, agents and employees, or persons serving as such in another entity at
the Trust's request, against expenses (including attorneys' fees) and
liabilities incurred by them in any action, suit, or proceeding to which they
are, or are threatened to be made, a party by reason of their serving in such
positions, so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the Trust, or in the
case of a criminal proceeding, had no reasonable cause to believe their conduct
was unlawful. In respect of suits by or in the right of the Trust, the
indemnification is generally limited to expenses (including attorneys' fees) and
is not available in respect of any claim where such person is adjudged liable to
the Trust, unless the court determines that indemnification is appropriate. To
the extent such person is successful in the defense of any suit, action or
proceeding, indemnification against expenses (including attorneys' fees) is
mandatory. The Trust has the power to purchase and maintain insurance for such
persons and indemnification. The indemnification provided by Maryland law is not
exclusive of other rights to indemnification which any person may otherwise be
entitled under any bylaw, agreement, shareholder or disinterested director vote,
or otherwise.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Trust in connection with the
offering described in this Registration Statement (other than underwriters'
discounts and expenses) are as follows:
SEC registration fee $ 3,836
Amex filing fee 33,750
NASD filing fee 1,880
Printing, engraving & Edgar expenses
Legal fees and expenses
Accounting fees and expenses 37,500
Transfer agent's fees
Other ----------
Total $
Item 26. Recent Sales of Unregistered Securities.
In the third quarter of 1999, the Registrant issued 95,000 of its
Class B Junior Cumulative Convertible Preferred Shares to Wellington Management
Corporation ("WMC") as partial consideration for termination of an agreement
retaining WMC to provide certain advisory services to the Registrant. Such
issuance was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In November 1998, the Registrant sold 166,666 of its Common Shares to
American Real Estate Equities, LLC ("AREE") for $6.00 per share. In a related
transaction, AREE contributed certain real estate and contractual rights to
acquire certain other real estate to an operating partnership of which the
Registrant is the sole general partner in exchange for 135,600 of the
Registrant's Class B Junior Cumulative Convertible Preferred Shares. All such
issuances were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In the third quarter of 1999, pursuant to a cost-sharing agreement
with AREE, the Registrant also issued 119,200 shares of its Class B Junior
Cumulative Convertible Preferred Shares. Such issuance was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
II-1
<PAGE>
On November 20, 1998, the Registrant issued to certain investors, upon
their contribution of real estate assets to the Registrant's operating
partnership, 1,214,086 Units of the Registrant's operating partnership, which
Units may be converted under certain circumstances, at the option of the
Registrant, into the Registrant's Common Shares. All such issuances were exempt
from registration under the Securities Act pursuant to Section 4(2) thereof.
On March 5, 1998, the Registrant issued a warrant to purchase 47,500
of its Common Shares to Credit Suisse First Boston in partial consideration of
the extension of credit to the Registrant. Such issuance was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
Item 27. Exhibits.
The exhibits to this Registration Statement appear on the Index to
Exhibits hereto.
Item 28. Undertakings.
The Registrant hereby undertakes that it will:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of this chapter (ss.
230.424(b) of this chapter) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and (iii) include any additional or changed material
information on the plan of distribution.
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, in the
City of Minneapolis, State of Minnesota, on October 14, 1999.
WELLINGTON PROPERTIES TRUST
By: /s/ Duane H. Lund
Duane H. Lund
Chief Executive Officer
(Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Duane H. Lund Chief Executive Officer October 14, 1999
Duane H. Lund (Principal Executive Officer)
/s/ Robert F. Rice President October 14, 1999
- ------------------------
Robert F. Rice
/s/ Arnold K. Leas* Chairman of the Board October 14, 1999
- ------------------------
Arnold K. Leas
/s/ Steven B. Hoyt* Trustee October 14, 1999
- ------------------------
Steven B. Hoyt
/s/ Paul T. Lambert* Trustee October 14, 1999
- ------------------------
Paul T. Lambert
/s/ Peter Ogden* Trustee October 14, 1999
Peter Ogden
/s/ Robert P. Ripp* Trustee October 14, 1999
- ------------------------
Robert P. Ripp
/s/ Robert D. Salmen* Trustee October 14, 1999
- ------------------------
Robert D. Salmen
* By: /s/ Duane H. Lund
Duane H. Lund
Attorney-in-Fact
II-3
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
1 Underwriting Agreement (filed on August 11, 1999 as Exhibit 1 to this
Registration Statement)
2 Amended and Restated Contribution Agreement between the Company, the
Operating Partnership, AREE and other limited partnership Unit
recipients dated as of August 31, 1998 (filed as Exhibit A with the
Company's Schedule 14A on November 6, 1998 and incorporated herein by
reference)
3.1 Articles of Amendment and Restatement of the Declaration of Trust and
Articles Supplementary thereto
3.2 Amended and Restated Bylaws of the Company
4.1 Common Stock Purchase Warrant by the Company to Credit Suisse First
Boston Mortgage Capital LLC, dated as of March 5, 1998 (filed with the
Company's Current Report on Form 8-K on August 31, 1998 and
incorporated herein by reference)
4.2 Form of Class A Preferred Stock Purchase Warrant to be issued to
underwriters pursuant to the Underwriting Agreement included as
Exhibit 1 to this Registration Statement (filed on August 11, 1999 as
Exhibit 4.2 to this Registration Statement)
4.3* Shareholders' Agreement, dated as of November 16, 1998 between the
Company and the shareholders identified on the signature page thereto
5 Opinion Letter of Foley & Lardner (filed on August 11, 1999 as Exhibit
5 to this Registration Statement)
8* Tax Opinion Letter of Grant Thornton LLP
10.1 Agreement of Limited Partnership of the Operating Partnership dated as
of August 31, 1998 (filed as Exhibit C with the Company's Schedule 14A
on November 6, 1998 and incorporated herein by reference)
10.2 Master Registration Rights Agreement dated as of August 31, 1998
(filed as Exhibit E of Exhibit C with the Company's Schedule 14A on
November 6, 1998 and incorporated herein by reference)
10.3 Business Credit Agreement between Milwaukee Western Bank and the
Company dated as of March 6, 1998 (filed with the Company's Current
Report on Form 8-K on August 31, 1998, and incorporated herein by
reference)
10.4 Guaranty by the Company for the benefit of Credit Suisse First Boston
Mortgage Capital LLC dated as of March 5, 1998 (filed with the
Company's Current Report on Form 8-K on August 31, 1998 and
incorporated herein by reference)
10.5 Promissory Note for $2,750,000 by Lake Pointe Apartment Homes, Inc.,
to Credit Suisse First Boston Mortgage Capital, LLC dated as of March
5, 1998 (filed with the Company's Current Report on Form 8-K on August
31, 1998 and incorporated herein by reference)
II-4
<PAGE>
10.6 Mortgage, Assignment of Leases and Rents and Security Agreement
between Lake Pointe Apartment Homes, Inc. to Credit Suisse First
Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed with the
Company's Current Report on Form 8-K on August 31, 1998 and
incorporated herein by reference)
10.7 Registration Rights Agreement between the Company and Credit Suisse
First Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed
with the Company's Current Report on Form 8-K on August 31, 1998 and
incorporated herein by reference)
10.8 Note between Maple Grove Apartment Homes, Inc. and American Property
Financing, Inc. dated as of May 6, 1997 (filed with the Company's
Current Report on Form 8-K on August 31, 1998 and incorporated herein
by reference)
10.9 Mortgage, Assignment of Leases and Rents and Security Agreement
between Maple Grove Apartment Homes, Inc. and American Property
Financing, Inc., dated as of May 6, 1997 (filed with the Company's
Current Report on Form 8-K on August 31, 1998 and incorporated herein
by reference)
10.10 Wellington Properties Trust 1998 Stock Option Plan (filed as Exhibit F
with the Company's Schedule 14A on November 6, 1998 and incorporated
herein by reference)
10.11 Wellington Properties Trust Dividend Reinvestment and Share Purchase
Plan (filed with the Company's Registration Statement on Form S-3 on
January 3, 1996 and incorporated herein by reference)
10.12* Subscription Agreement, dated as of June 30, 1999, between the Company
and Wellington Management Corporation
10.13* Subscription Agreement, dated as of June 30, 1999, between the Company
and American Real Estate Equities, LLC
10.14* Employment Agreement, dated as of November 16, 1998, between the
Company and Duane H. Lund.
10.15* Employment Agreement, dated as of November 16, 1998, between the
Company and Robert F. Rice.
10.16 Purchase Agreement, dated as of July 2, 1999, between Maple Grove
Apartment Home, Inc. and The Shelard Group, Inc. (filed on August 11,
1999 as Exhibit 10.16 to this Registration Statement)
10.17 Promissory Note, dated August 20, 1999, of the Company to The Shelard
Group, Inc.
21* List of subsidiaries
23.1 Consent of Grant Thornton LLP (filed on August 11, 1999 as Exhibit
23.1 to this Registration Statement)
23.2 Consent of Foley & Lardner (Included in Exhibit 5 hereto)
24 Power of Attorney (Included on the signature page hereof as filed on
August 11, 1999)
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* To be filed by amendment.
II-5
EXHIBIT 3.1
WELLINGTON PROPERTIES TRUST
ARTICLES OF AMENDMENT AND RESTATEMENT
Dated November 16, 1998
Wellington Properties Trust, a Maryland real estate investment trust,
hereby certifies as follows:
FIRST: Wellington Properties Trust desires to amend and restated its
Declaration of Trust as currently in effect.
SECOND: The amendments to and restatement of the Declaration of Trust
set forth herein shall become effective on the date and at the time that these
Articles of Amendment and Restatement are filed with and accepted for recording
by the State Department of Assessments and Taxation of the State of Maryland.
THIRD: The following are the provisions of the Declaration Trust
currently in effect as amended hereby:
ARTICLE I
THE TRUST; CERTAIN DEFINITIONS
Section 1.1 Name. The name of the trust (hereinafter referred to as the
"Trust) is:
Wellington Properties Trust
Section 1.2 Resident Agent. The name of the resident agent of the Trust
in the State of Maryland is CSC-Lawyers Incorporating Service Company, and the
address of such agent in the State of Maryland is 11 East Chase Street,
Baltimore, Maryland 21202. The Trust may have such offices or places of business
within or without the State of Maryland as the Trustees may from time to time
determine.
Section 1.3 Nature of Trust. The Trust is a real estate investment
trust within the meaning of Title 8 (as hereinafter defined).
Section 1.4 Powers. The Trust shall have all of the powers granted to
real estate investment trusts generally by Title 8 and shall have any other and
further powers as are not inconsistent with Title 8 or any other applicable law.
Section 1.5 Definitions. As used in this Declaration of Trust, the
following terms shall have the following meanings unless the context otherwise
requires:
"Board" or "Board of Trustees" means the board of trustees of the
Trust.
"Bylaws" shall mean the Bylaws of the Trust as in effect from time to
time.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and regulations promulgated thereunder.
"Declaration" or "Declaration of Trust" means this Declaration of
Trust, including any amendments or supplements hereto.
"Person" shall mean an individual, corporation, partnership, limited
liability company, estate, trust (other than a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section 642(c) of
the Code, association, private foundation within the meaning of Section 509(a)
of the Code, joint stock company or other entity and also includes a group as
that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended.
"REIT" means a real estate investment trust under Section 856 of the
Code.
"REIT Provisions of the Code" means Sections 856 through 860,
inclusive, of the code and any successor or other provision(s) of the Code
relating to real estate investment trusts (including provisions as to the
attribution of ownership of beneficial interests therein) and the regulations
promulgated thereunder.
"Securities means Shares (as hereinafter defined), any stock, shares or
other evidences of equity, beneficial or other interest, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares, or participation in, temporary or interim certificates for, guarantees
of, or warrants, options or rights to subscribe to, purchase or otherwise
acquire, any of the foregoing.
"Securities of the Trust" means any Securities issued by the Trust.
"Shareholders" means holders of record of outstanding Shares.
"Shares" means transferable shares of beneficial interest of the Trust
of any class or series.
"Title 8" means Title 8 of the Corporations and Associations Article of
the Annotated Code of Maryland, as amended, or any successor statute.
"Trustee" means, individually, an individual, and "Trustees" means,
collectively, the individuals, in each case as named in Section 2.2 of this
Declaration of Trust so long as they continue in office and any and all other
individuals who have been duly elected and qualify as trustees of the Trust
hereunder.
"Trust Property" means any and all property, real personal or
otherwise, tangible or intangible, which is transferred or conveyed to the Trust
or the Trustees (including all rents, income, profits or gains therefrom), which
is owned or held by, or for the account of, the Trust or the Trustees.
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<PAGE>
ARTICLE II
TRUSTEES
Section 2.1 Number. The number of Trustees shall be seven, which number
may be increased or decreased by the Trustees then in office form time to time
in accordance with the Bylaws then in effect or as specified in any rights or
preferences in any class or series of Shares; however, the total number of
Trustees shall not be less than three. No reduction in the number of Trustees
shall cause the removal of any Trustee from office prior to the expiration of
his term.
Section 2.2 Initial Board; Term. The Trustees shall be classified, with
respect to the time for which they severally hold office, into three classes, as
nearly equal in number as possible, one class to hold office initially for a
term expiring at the annual meeting of Shareholders to be held in 1999, another
class to hold office initially for a term expiring at the annual meeting of
Shareholders to be held in 2000, and another class to hold office initially for
a term expiring at the annual meeting of Shareholders to be held in 2001, with
the members of each class to hold office until their successors are duly elected
and qualify. As each annual meeting of Shareholders, the successors to the class
of Trustees whose term expires at such annual meeting shall be elected to hold
office for a term expiring at the annual meeting of Shareholders held in the
third year following the year of their election and the other Trustees shall
remain in office.
The names and classes of the Trustees serving on the date this
Declaration of Trust is amended and restated are:
Name Term Expiration
---- ---------------
Lyle W. Larcheid 1999
Peter Ogden 1999
Gerald Sobczak 1999
Paul Lambert 2000
Robert P. Ripp 2000
Steven B. Hoyt 2001
Arnold K. Leas 2001
Section 2.3 Resignation, Removal or Death. Any Trustee may resign by
written notice to the remaining Trustees, effective upon execution and delivery
to the Trust of such written notice or upon any future date specified in the
notice. A Trustee may be removed only with Cause (as hereinafter defined) at a
meeting of the Shareholders called for that purpose, by the affirmative vote of
the holders of not less than two-thirds of the Shares then outstanding
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<PAGE>
and entitled to vote in the election of Trustees. As used herein, "Cause" shall
mean (i) theft, fraud or embezzlement or active and deliberate dishonesty by a
Trustee; (ii) habitual neglect of duty by a Trustee having a material and
adverse significance to the Trust; or (iii) the conviction of a Trustee of a
felony or of any crime involving moral turpitude. Upon the resignation or
removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall
automatically cease to have any right, title or interest in and to the Trust
Property and shall execute and deliver such documents as the remaining Trustees
shall require for the conveyance of any Trust Property held in this name, and
shall account to the remaining Trustees as they require for all property which
he holds as Trustee. Upon the incapacity or death of any Trustee, his legal
representative shall perform those acts. Subject to the rights of holders of one
or more classes or series of Shares to elect one or more Trustees, any vacancy
created by removal for Cause may be filled by a majority of the remaining
Trustees or by the Shareholders. A vacancy arising for any reason other than the
removal of a Trustee may be filled by the remaining Trustees. A Trustee elected
by the Trustees to fill a vacancy will hold office until the next annual meeting
of Shareholders, at which time such Trustee may stand for election for the
balance of the term of his predecessor. A Trustee elected by the Shareholders to
fill a vacancy will have the same remaining term as that of his predecessor.
Section 2.4 Legal Title. Legal title to I Trust Property shall be
vested in the Trust, but it may cause legal title to any Trust Property to be
held by or in the name of any or all of the Trustees or any other Person as
nominee. Any right, title or interest of the Trustees in and to the Trust
Property shall automatically vest in successor and additional Trustees upon
their qualification and acceptance of election or appointment as Trustees, and
they shall thereupon have all the rights and obligations of Trustees, whether or
not conveying documents have been executed and delivered pursuant to Section 2.3
or otherwise. Written evidence of the qualification and acceptance of election
or appointment of successor and additional Trustees may be filed with the
records of the Trust and in such other offices, agencies or places as the Trust
or Trustees may deem necessary or desirable.
Section 2.5 Duties of Trustees. A Trustee shall perform his duties as a
Trustee, including his duties as a member of a committee of the Board on which
he serves: (a) in good faith; (b) in a manner he reasonably believes to be in
the best interests of the Trust; and (c) with the care that an ordinarily
prudent person in a like position would use under similar circumstances. In
performing his duties, a Trustee is entitled to rely on any information,
opinion, report, or statement, including any financial statement or other
financial data, prepared or presented by: (i) an officer or employee of the
Trust whom the Trustee reasonably believes to be reliable and competent in the
matters presented; (ii) a lawyer, public accountant, or other person, as to a
matter which the Trustee reasonably believes to be within the person's
professional or expert competence; or (iii) a committee of the Board on which
the Trustee does not serve, as to a matter within its designated authority, if
the Trustee reasonably believes the committee to merit confidence. A Trustee is
not acting in good faith if he has any knowledge concerning the matter in
question which would cause such reliance to be unwarranted.
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<PAGE>
ARTICLE III
POWERS OF TRUSTEES
Section 3.1 General Power. Subject to any express limitations contained
in this Declaration of Trust, the Bylaws or Maryland law, (a) the business and
affairs of the Trust shall be managed under the direction of the Board of
Trustees and (b) the Board shall have full, exclusive and absolute power,
control and authority over any and all of the Trust Property and over the
business of the Trust. Subject to Section 2.5, the Board may take any action as
in its sole judgment and discretion is necessary or appropriate to conduct the
business and affairs of the Trust. This Declaration of Trust shall be construed
with the presumption in favor of the grant of power and authority to the Board.
Any construction of this Declaration of Trust or determination made in good
faith by the Board concerning its powers and authority hereunder shall be
conclusive. The powers of the Trustees shall in no way be limited or restricted
by reference to or inference form the terms of this or any other provision of
the Declaration of Trust or construed or deemed by inference or otherwise in any
manner to exclude or limit the powers conferred upon the Trustees under the laws
of the State of Maryland or any other applicable laws as now or hereafter in
force.
ARTICLE IV
INVESTMENT POLICY
The fundamental investment policy of the Trust shall be to make
investments in such a manner as to comply with the REIT Provision of the Code
and with the requirements of Title 8 with respect to the composition of the
Trust's investment and the derivation of its income. Subject to Section 6.5, the
Trustees shall use their best efforts to carry out this fundamental investment
policy and to qualify the Trust for the tax treatment provided in the REIT
Provisions of the Code; provided, however, that no Trustee, officer, employee or
agent of the Trust shall be liable for any act or omission resulting in the loss
of tax benefits under the Code, except to the extent provided in Section 11.2.
ARTICLE V
SHARES
Section 5.1 Authorized Shares. The total number of Shares which the
Trust is authorized to issue is 110,000,000 shares, of which 100,000,000 are
Common Shares, par value $0.01 per share (individually a "Common Share") or
collectively "Common Shares"), and 10,000,000 are Preferred Shares, par value
$0.01 per share (individually, a "Preferred Share" or collectively "Preferred
Shares").
Section 5.2 Common Shares Voting. Subject to the provisions of Article
VII regarding Excess shares (as such term is defined therein) and to any special
voting rights as to any class or series of Shares, each Common Share shall
entitle the holder thereof to one vote on all matters upon which Shareholders
are entitled to vote. The holders of Common Shares shall not be entitled to
cumulative voting.
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<PAGE>
Section 5.3 Preferred Shares. Preferred Shares may be issued, from time
to time, in one or more series as authorized by the Board of Trustees. Prior to
issuance of Preferred Shares of each series, the Board of Trustees, by
resolution, shall designate that series of Preferred Shares to distinguish it
from all other series and classes of Preferred Shares, shall specify the number
of Preferred Shares to be included in the series and, subject to the provisions
of Article VII regarding Excess Shares, shall set the terms, preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption, and, in such event, the Trust shall file with the State Department
of Assessments and Taxation of the State of Maryland articles supplementary to
this Declaration of Trust in substance and form as prescribed by Maryland law.
Section 5.4 Classification or Reclassification of Unissued Shares.
Subject to the express terms of any series of Preferred Shares or any class of
Common Shares outstanding at the time and notwithstanding any other provision of
this Declaration of Trust, the Board of Trustees may increase or decrease the
aggregate number of Shares or the number of Shares of any class that the Trust
has authority to issue or classify or reclassify any unissued Shares by setting
or changing the preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends or other distributions, qualifications
or terms or condition of redemption of any series or class of Shares and, in
such event, the Trust shall file with the State Department of Assessments and
Taxation of the State of Maryland articles of amendment or articles
supplementary to this Declaration of Trust in substance and form as prescribed
by Maryland law.
Section 5.5 Declaration of Trust and Bylaws. All persons who shall
acquire Shares shall acquire the same subject to the provisions of this
Declaration of Trust and the Bylaws of the Trust.
Section 5.6 Dividends or Distributions. The Board of Trustees may from
time to time declare and pay to Shareholders such dividends or distributions in
cash, property or other assets of the trust or in Securities of the Trust or
from any other source as the Trustees in their discretion shall determine. The
Trustees shall endeavor to declare and pay such dividends and distributions as
shall be necessary for the Trust to qualify as a REIT under the REIT Provisions
of the Code; however, Shareholders shall have no right to any dividend or
distribution unless and until declared by the Trustees. Notwithstanding any
other provision in this Declaration of Trust, no determination shall be made by
the Board of Trustees nor shall any transaction be entered into by the Trust
which would cause any Shares or other beneficial interest in the Trust not to
constitute "transferable shares" or "transferable certificates of beneficial
interest" under Section 856(a)(2) of the Code or which would cause any
distribution to constitute a preferential dividend as described in Section
562(c) of the Code.
Section 5.7 Issuance of Rights to Purchase Securities and Other
Property. Subject to the rights of the holders of any series of Preferred
Shares, the Board of Trustees is hereby authorized to create and to authorize
and direct the issuance (on either a pro rata or a non-pro rata basis) by the
Trust of rights, options and warrants for the purchase of Shares of the Trust at
such times, in such amounts, to such persons, for such consideration (if any),
with such
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<PAGE>
form and content (including without limitation the consideration for which any
shares of capital stock of the Trust or other Securities of the Trust are to be
issued) and upon such terms and conditions as it may, from time to time,
determine, subject only to the retractions, limitations, conditions and
requirements imposed by Maryland law, other applicable laws and this Declaration
of Trust.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
TRUST AND OF THE SHAREHOLDERS AND TRUSTEES
Section 6.1 Authorization by Board of Share Issuance. The Board of
Trustees may authorize the issuance, from time to time, of Shares of any class
or Securities convertible into Shares of any class for such consideration as the
Board of Trustees may deem advisable. The Board of Trustees may create and issue
rights entitling holders thereof to purchase from the Trust Shares of any class
or other Securities or property.
Section 6.2 Preemptive and Appraisal Rights. Except as may be provided
by the Board of Trustees in authorizing the issuance of Preferred Shares
pursuant to Section 5.3, no holder of Shares shall, as such holder, (a) have any
preemptive right to purchase or subscribe for any additional Shares or any other
Securities of the Trust which the Trust may issue or sell, or (b) except as
expressly required by Maryland law, have any right to require the Trust to pay
such holder the fair value of such holder's Shares in an appraisal or similar
proceeding.
Section 6.3 Related Party Transaction. An agreement or transaction
between the Trust and any of its Trustees or between the Trust and any other
entity in which any Trustee is a trustee or director or has a material financial
interest shall not be void or voidable solely by reason of the existence of any
such relationship if either (a) the existence of such relationship is disclosed
or known by (i) the Board of Trustees and the contract or transaction is
approved or ratified by a majority of the Board of Trustees other than the
Trustee who has such relationship, even if those disinterested Trustees
constitute less than a quorum, or (ii) the contract or transaction is approved
or ratified by a majority of the votes case by Shareholders entitled to vote
other than votes of Shares owned of record or beneficially by the interested
Trustee or such other entity in which such Trustee is a trustee or director or
has a material financial interest, or (b) the contract or transaction is fair
and reasonable to the Trust. Any Trustee who is a trustee or director of such
other party or has such material financial interest may be counted in
determining the existence of a quorum at any meeting of the Board of Trustees
considering such matter.
Section 6.4 Determination by Board. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Trustees and in the absence of actual receipt of an improper benefit in
money, property or services or active and deliberate dishonesty established by a
court, shall be final and conclusive and shall be binding upon the Trust and
every holder of Shares: (a) the amount of the net income of the Trust for any
period and the amount of assets at any time available for the payment of
dividends, redemption of Shares or the payment of other distributions with
respect to Shares; (b) the
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<PAGE>
amount of paid-in surplus, net assets, other surplus, annual or other net
profit, net assets in excess of capital, undivided profits or excess of profits
over losses on sales of assets; (c) the amount, purpose, time of creation,
increase or decrease, alteration or cancellation of any reserves or charges and
the proprietary thereof (whether or not any obligation or liability for which
such reserves or charges shall have been created shall have been paid or
discharged); (d) the fair value, or any sale, bid or asked price to be applied
in determining the fair value, of any asset owned or held by the Trust; and (e)
any matters relating to the acquisition, holding and disposition of any assets
by the Trust.
Section 6.5 REIT Qualification. The Board of Trustees shall use its
reasonable best efforts to cause the Trust and the Shareholders to qualify for
federal income tax treatment in accordance with the REIT Provisions of the Code.
In furtherance of the foregoing, the Board of Trustees shall use its reasonable
best efforts to take such actions as are necessary, and may take such actions as
in its sole judgment and discretion are desirable, to preserve the status of the
Trust as a REIT, including amending the provisions of this Declaration of Trust
as provided in Article IX, provided, however, that if the Board of Trustees
determines that it is no longer in the best interests of the Trust for it to
continue to qualify as a REIT, the Board of Trustees may revoke or otherwise
terminate the Trust's REIT election.
ARTICLE VII
RESTRICTION ON TRANSFER;
DESIGNATION OF EXCESS SHARES
Section 7.1 Definitions. The following terms shall have the following
meanings:
"AREE" shall mean American Real Estate Equities, LLC, a Delaware
limited liability company.
"AREE Contribution Transaction" shall mean that certain transaction or
series of transactions pursuant to which (a) AREE first acquired Common Shares,
(b) the Trust, AREE, and certain other Persons acquired interests in Wellington
Properties Investments, L.P., and (c) AREE and other Persons acquired Rights.
"Beneficial Ownership" shall mean the ownership of Equity Shares by a
Person who would be treated as an owner of such Equity Shares either directly or
indirectly through the application of Section 544 of the Code, as modified by
subsection (h)(1) or (h)(2) of Section 856 of the Code. The terms "Beneficial
Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative
meanings.
"Beneficiary" shall mean, with respect to any Excess Shares Trust, one
or more organizations described in each of Section 170(b)(1)(A) and Section
170(c) of the Code which are named by the Board of Trustees as the beneficiary
or beneficiaries of such Excess Shares Trust, in accordance with the provisions
of Section 7.15.1 of this Article VII; provided, however, for all periods in
time prior to the time that the Board of Trustees effectively so designates such
organization as beneficiary of such Excess Shares Trust, the beneficiary shall
be the Default Beneficiary.
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<PAGE>
"Constructive Ownership" shall mean ownership of Equity Shares by a
Person who would be treated as an owner of such Equity Shares either directly or
indirectly through the application of Section 318 of the Code, as modified by
Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively
Owns" and "Constructively Owned" shall have correlative meanings.
"Default Beneficiary" shall mean the Salvation Army of the United
States.
"Equity Share(s)" shall mean a Share or Shares that are either
Preferred Shares or Common Shares and shall include all shares of Preferred
Shares or Common Shares that are held as Excess Shares in accordance with the
provisions of Section 7.15 of this Article VII.
"Excess Shares Trust" shall mean any separate trust created pursuant to
Section 7.3 of this Article VII and administered in accordance with the terms of
Section 7.15 of this Article VII for the exclusive benefit of any Beneficiary.
"Excess Shares Trustee" shall mean any person or entity unaffiliated
with both the Trust and any Purported Record Owners, such Excess Shares Trustee
to be designated by the Board of Trustees to act as trustee of any Excess Shares
Trust, or any successor trustee thereof.
"Existing Holder" shall mean (i) AREE, (ii) any Person who is the
Beneficial Owner of Common Shares and/or Preferred Shares in excess of the
Ownership Limit both upon and immediately after any closing date of the AREE
Contribution Transaction so long as, but only so long as, such person
Beneficially Owns Common Shares and/or Preferred Shares in excess of the
Ownership Limit, (iii) any Person to whom an Existing Holder Transfers, subject
to the limitations provided in this Article VII, Beneficial Ownership of Common
Shares and/or Preferred Shares causing such transferee to Beneficially Own
Common Shares and/or Preferred Shares in excess of the Ownership Limit, and (iv)
any Person subsequently designated by the Board of Trustees.
"Existing Holder Limit" (i) for AREE, shall mean 32%; (ii) for any
Existing Holder who is an Existing Holder by virtue of clause (ii) of the
definition thereof, shall mean, initially, the percentage of the outstanding
Equity Shares Beneficially Owned by such Existing Holder upon and immediately
after any closing date of the AREE Contribution Transaction and, after any
adjustment pursuant to Section 7.10, shall mean such percentage of the
outstanding Equity Shares as so adjusted, (iii) for any Existing Holder who
becomes an Existing Holder by virtue of clause (iii) of the definition thereof,
shall mean, initially, the percentage of the outstanding Equity Shares
Beneficially Owned by such Existing Holder at the time that such Existing Holder
becomes an Existing Holder, but in no event shall such percentage be greater
than the Existing Holder Limit for the Existing Holder who Transfers Beneficial
Ownership of Common Shares and/or Preferred Shares to such transferee Existing
Holder or, in the case of more than one transferor, in no event shall such
percentage be greater than the smallest Existing Holder Limit of any
transferring Existing Holder, and, after any adjustment pursuant to Section
7.10, shall mean such percentage of the outstanding Equity Shares as so
adjusted. From the closing date of the AREE Contribution Transaction and prior
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<PAGE>
to the Restriction Termination Date, the Secretary of the Trust shall maintain
and, upon request, make available to each Existing Holder a schedule which sets
forth the then current Existing Holder Limit for each Existing Holder; and (iv)
for any Existing Holder who becomes an Existing Holder by virtue of clause (iv)
of the definition thereof, shall mean, initially, the percentage of the
outstanding Equity Shares designated by the Board of Trustees.
"Market Price" on any date shall mean the average of the closing Price
for the five consecutive Trading Days ending on such date. The "Closing Price"
on any date shall mean the last sale price of Common Shares or Preferred Shares,
as the case may be, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange, or, if the Common Shares or Preferred Shares, as the case may be, are
not listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Common Shares or Preferred Shares, as the case may be, are listed or admitted to
trading or, if the Common Shares or Preferred Shares, as the case may be, are
not listed or admitted to trading on any national securities exchange, the last
quoted price, or if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotations system that may then be
in use or, if the Common Shares or Preferred Shares, as the case may be, are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Common Shares
or Preferred Shares, as the case may be, selected by the Board of Trustees of
the Company, or if no professional market maker is making a market in Common
Shares or Preferred Shares, as the case may be, then the market price of Common
Shares or Preferred Shares, as the case may be, on the relevant date as
determined in good faith by the Board of Trustees, which determination shall be
conclusive for all purposes hereof. "Trading Day" shall mean a day on which the
principal national securities exchange on which the Common Shares or Preferred
Shares, as the case may be, are listed or admitted to trading is open for the
transaction of business or, if the Common Shares or Preferred Shares, as the
case may be, are not listed or admitted to trading on any national securities
exchange, shall mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
"Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause any Person to Beneficially Own or Constructively Own
Equity Shares in excess of the Ownership Limit (in the case of any Person other
than an Existing Holder) or the applicable Existing Holder Limit (in the case of
an Existing Holder), including, but not limited to, the granting of any option
or entering into any agreement for the sale, transfer or other disposition of
Equity Shares or the sale, transfer, assignment or other disposition of any
Securities or rights convertible into or exchangeable for Equity Shares.
"Ownership Limit" shall initially mean an amount of Equity Shares which
aggregate the lesser of (a) 3% of the value of the outstanding Equity Shares of
the Trust, and after any
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adjustment as set forth in Section 7.11 of this Article VII, shall mean such
greater percentages of the value of the outstanding Equity Shares as so
adjusted, (b) 9.9% of the total combined voting power of all classes of Equity
Shares, or (c) 9.9% of the total number of shares of all classes of Equity
Shares. The value of outstanding Equity Shares shall be determined by the Board
of Trustees in good faith, which determination shall be conclusive for all
purposes hereof.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 7.15.5 hereof.
"Purported Record Owner" shall mean, with respect to any purported
Transfer or Non-Transfer Event, any Person who, but for the provisions of this
Article VII, would own record title to Equity Shares which have been
reclassified as Excess Shares.
"Restriction Termination Date" shall mean the first day after the date
of the AREE Contribution Transaction on which the Board of Trustees determines
that it is no longer in the best interests of the Trust to attempt, or to
continue to qualify as a REIT.
"Rights" shall mean the rights granted under the Wellington Partnership
Agreement to the limited partners thereof, including member of AREE, to acquire
Common Shares in exchange for limited partnership units of Wellington Properties
Investments, L.P.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Equity Shares, whether voluntary or involuntary, whether of
record, constructively or beneficially and whether by operation of law or
otherwise. The terms "Transfers" and "Transferred" shall have the correlative
meanings.
"Wellington Partnership Agreement" shall mean the agreement of limited
partnership of Wellington Properties Investments, L.P., as amended from time to
time.
"Wellington Properties Investments, L.P." shall mean Wellington
Properties Investments, L.P., a Delaware limited partnership.
Section 7.2 Restriction on Transfers.
7.2.1 Except as provided in Section 7.9 of this Article VII, from
the date of the AREE Contribution Transaction and prior to the Restriction
Termination Date, no Person (other than an Existing Holder) shall Beneficially
Own or Constructively Own shares of the outstanding Equity Shares in excess of
the Ownership Limit, and no Existing Holder shall Beneficially Own or
Constructively Own Equity Shares in excess of the Existing Holder Limit for such
Existing Holder.
7.2.2 Except as provided in Section 7.9 of this Article VII, form
the date of the AREE Contribution Transaction and prior to the Restriction
Termination Date, any Transfer that, if effective, would result in any Person
(other than an Existing Holder) Beneficially Owning or Constructively Owning
Equity Shares in excess of the Ownership Limit shall be void ab initio as to the
Transfer of that number of Equity Shares which would
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be otherwise Beneficially Owned or Constructively Owned by such Person in excess
of the Ownership Limit; and the intended transferee shall acquire no rights in
such excess Equity Shares.
7.2.3 Except as provided in Section 7.9 of this Article VII, from
the date of the AREE Contribution Transaction and prior to the Restriction
Termination Date, any Transfer that, if effective, would result in any Existing
Holder Beneficially Owning or constructively Owning Equity Shares in excess of
the applicable Existing Holder Limit shall be void ab initio as to the Transfer
of that number of Equity Shares which would be otherwise Beneficially Owned or
Constructively Owned by such Person in excess of the applicable Existing Holder
Limit; and such Existing Holder shall acquire no rights in such excess Equity
Shares.
7.2.4 Except as provided in Section 7.9 of this Article VII, from
the date of the AREE Contribution Transaction and prior to the Restriction
Termination Date, any Transfer that, if effective, would result in any Equity
Shares being beneficially owned (within the meaning of Section 856(a)(5) of the
Code) by fewer than 100 Persons (determined without reference to any rules of
attribution) shall be void ab initio as to the Transfer of that number of Equity
Shares which would be otherwise beneficially owned (determined without reference
to any rules of attribution) by the transferee; and the intended transferee
shall acquire no rights in such excess Equity Shares.
7.2.5 From the date of the AREE Contribution Transaction and prior
to the Restriction Termination Date, any Transfer of Equity Shares that, if
effective, would result in the Trust being "closely held" within the meaning of
Section 856(h) of the Code shall be void ab initio as to the Transfer of that
number of Equity Shares which would cause the Trust to be "closely held" within
the meaning of Section 856(h) of the Code; and the intended transferee shall
acquire no rights in such excess Equity Shares.
Section 7.3 Transfer to Excess Shares Trust.
7.3.1 If, notwithstanding the other provisions contained in this
Article VII, at any time after the date of the AREE Contribution Transaction and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer event, such any Person would either Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit (in the case
of any Person other than an Existing Holder) or Existing Holder Limit (in the
case of an Existing Holder), then, (i) except as otherwise provided in Section
7.9, the Purported Record Owner shall acquire no right or interest (or, in the
case of a Non-Transfer Event, shall cease to own any right or interest) in such
number of Equity Shares which would cause such Beneficial Owner or Constructive
Owner to Beneficially Own or Constructively Own Equity Shares in excess of the
Ownership Limit or the Existing Holder Limit, as the case may be; and (ii) such
number of Equity shares in excess of the Ownership Limit or the Existing Holder
Limit (rounded up to the nearest whole share) shall be designated Excess Shares
and, in accordance with Section 7.15 of this Article VII, transferred
automatically and by operation of law to an Excess Shares Trust to be held in
accordance with such Section 7.15. Such transfer to an Excess Shares Trust and
the designation of such Equity
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Shares as Excess Shares shall be effective as of the close of business on the
business day immediately preceding the date of the purported Transfer or
Non-Transfer Event, as the case may be.
7.3.2 If, notwithstanding the other provisions contained in this
Article VII, at any time after the date of the AREE Contribution Transaction and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would cause the Trust to become "closely
held" within the meaning of Section 856(h) of the Code, then (i) the Purported
Record Owner shall not acquire any right or interest (or, in the case of a
Non-Transfer Event, shall cease to own any right or interest) in such number of
Equity Shares, the ownership of which by such Purported Record Owner would cause
the Trust to be "closely held" within the meaning of Section 856(h) of the Code;
and (ii) such number of Equity Shares (rounded up to the nearest w hole share)
shall be designated Excess Shares and, in accordance with the provisions of
Section 7.15 of this Article VII, transferred automatically and by operation of
law to an Excess Shares Trust to be held in accordance with that Section 7.15.
Such transfer to an Excess Shares Trust and the designation of shares as Excess
Shares shall be effective as of the close of business on the business day
immediately preceding the date of the Transfer or Non-Transfer Event, as the
case may be.
Section 7.4 Remedies For Breach. If the Trust or its designees shall at
any time determine in good faith that a Transfer has taken place in violation of
Section 7.2 of this Article VII or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
Equity Shares in violation of Section 7.2 of this Article VII, the Trust shall
take such action as it deems advisable to refuse to give effect to or to prevent
such Transfer or acquisition, including, but not limited to, refusing to give
effect to such Transfer on the books of the Trust or instituting proceedings to
enjoin such Transfer or acquisition.
Section 7.5 Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire Equity Shares in violation of Section 7.2 of this Article
VII, or any Person who owned Equity Shares that were transferred to an Excess
Shares Trust pursuant to the provisions of Section 7.3 of this Article VII,
shall immediately give written notice to the Trust of such event and shall
provide to the Trust such other information as the Trust may request in order to
determine the effect, if any, of such Transfer or the Non-Transfer Event, as the
case may be, on the Trust's status as a REIT.
Section 7.6 Owners Required to Provide Information. From the date of
the AREE Contribution Transaction and prior to the Restriction Termination Date:
(a) every Beneficial Owner or Constructive Owner of more than 1%,
or such lower percentages as required pursuant to regulations under the Code, of
the outstanding Equity Shares of the Trust shall, within 30 days after each of
January 1 and June 30 of each year, give written notice to the Trust stating the
name and address of such Beneficial Owner or Constructive Owner, the number of
Equity Shares Beneficially Owned or Constructively Owned, and a description of
how such Equity Shares are held. Each such Beneficial Owner or Constructive
Owner shall provide to the Trust such additional information as the Trust may
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request in order to determine the effect, if any, of such Beneficial Ownership
on the Trust's status as a REIT and to ensure compliance with the Ownership
Limit and Existing Holder Limit; and
(b) each Person who is a Beneficial Owner or Constructive Owner of
Equity Shares and each Person (including the stockholder of record) who is
holding Equity Shares for a Beneficial Owner or Constructive Owner shall provide
to the Trust such information as the Trust may request in order to determine the
Trust's status as a REIT and to ensure compliance with the Ownership Limit and
Existing Holder Limit.
Section 7.7 Remedies Not Limited. Nothing contained in this Article VII
shall limit the authority of the Trust to take such other action as it deems
necessary or advisable to protect the Trust and the interests of its
Shareholders by preservation of the Trust's status as a REIT and to ensure
compliance with the Ownership Limit and Existing Holder Limit.
Section 7.8 Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article VII, including any definition contained
in Section 7.1, the Board of Trustees shall have the power to determine the
application of the provisions of this Article VII with respect to any situation
based on the facts known to it. If Section 7.2 or Section 7.3 of this Article
VII requires an action by the Board of Trustees and this Declaration of Trust
fails to provide specific guidance with respect to such action, the Board of
Trustees shall have the power to determine the action to be taken so long as
such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3 of
this Article VII.
Section 7.9 Exception. The Board of Trustees, upon receipt of a ruling
from the Internal Revenue Service or an opinion of counsel in each case to the
effect that the restrictions contained in Section 7.2.4 and/or Section 7.2.5 of
this Article VII will not violated, may exempt a Person from the Ownership Limit
or Existing Holder Limit, as the case may be, if such Person (i) is an
underwriter which participates in a public offering of the Equity Shares for a
period of 90 days following the purchase by such underwriter of the Equity
Shares, or (ii) is not an individual for purposes of Section 542(a)(2) of the
Code, and the Board of Trustees obtains such representations and undertakings
from such Person as are reasonably necessary to ascertain that no individual's
Beneficial Ownership of Equity Shares will violate the Ownership Limit or
Existing Holder Limit, as the case may be, and agrees that any violation or
attempted violation will result in such transfer to, an Excess Shares Trust of
Equity Shares pursuant to Section 7.3 of this Article VII.
Section 7.10 Modifications of Existing Holding Limits. The Existing
Holder Limit shall be modified as follows:
7.10.1 Upon any exercise of Rights pursuant to the Wellington
Partnership Agreement by any Existing Holder, or the acquisition of Equity
Shares by AREE, the Existing Holder Limit for such Existing Holder shall be
increased, pro rata in accordance with the number of shares of Common Shares to
be received by such Existing Holder, to the maximum extent possible under
Section 7.12 of this Article VII to permit the Beneficial Ownership or
Constructive Ownership of the Common Shares issuable upon such exercise or
acquisition.
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7.10.2 Subject to the limitation contained in Section 7.12, the
Board of Trustees may grant stock options which result in Beneficial Ownership
or Constructive Ownership of Equity Shares by an Existing Holder pursuant to a
stock option plan. Any such grant of stock options shall increase the Existing
Holder Limit for the affected Existing Holder to the maximum extent possible
under Section 7.12 to permit the Beneficial Ownership or Constructive Ownership
of the Equity Shares issuable upon exercise of such stock options.
7.10.3 The Board of Trustees may reduce the Existing Holder Limit
for any Existing Holder, with the written consent of such Existing Holder, after
any Transfer permitted under this Article VII by such Existing Holder to a
Person other than an Existing Holder or after the lapse (without exercise) of a
stock option described in Section 7.10.2.
Section 7.11 Modification of Ownership Limit. Subject to the
limitations contained in Section 7.12, the Board of Trustees may from time to
time increase or decrease the Ownership Limit.
Section 7.12 Limitations on Modifications.
7.12.1 Neither the Ownership Limit nor any Existing Holder Limit
may be increased (nor may any additional Existing Holder Limit be created) if,
after giving effect to such increase (or creation), five Beneficial Owners of
Equity Shares (including all of the then Existing Holders) could (assuming
ownership of Equity Shares by all Persons other than Existing Holders equal to
the Ownership Limit) Beneficially Own, in the aggregate, more than 50% of the
outstanding Equity Shares.
7.12.2 Prior to any modifications of any Existing Holder Limit or
Ownership Limit, the Board of Trustees of the Trust may require such opinions of
counsel, affidavits, undertakings or agreements as it may deem necessary or
advisable in order to determine or ensure the Trust's status as a REIT.
7.12.3 No existing Holder Limit shall be reduced to a percentage
that is less than the Ownership Limit.
7.12.4 The Ownership Limit may not be increased to a percentage
that is greater than 9.9%.
Section 7.13 Legend. Each certificate for Equity Shares shall bear the
following legend:
"The shares of Wellington Properties Trust (the "Trust)
represented by this certificate are subject to restrictions on transfer
for the purpose, among other things, of the Trust's maintenance of its
status as a real estate investment trust under the Internal Revenue
Code of 1986, as amended (the "Code"). No Person may (1) Beneficially
Own or Constructively Own Equity Shares in excess of (a) 8% (or such
other percentage as may be determined by the Board of Trustees of the
Trust) of the value of the outstanding Equity Shares of the Trust, (b)
9.9% of the total combined voting
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power of all classes of Equity Shares, or (c) 9.9% of the total number
of shares of all classes of Equity Shares, unless such Person is an
Existing Holder (in which case the Existing Holder Limit shall be
applicable); or (2) Beneficially Own Equity Shares which would result
in the Trust being "closely held" under Section 856(h) of the Code. Any
Person who attempts to Beneficially Own or Constructively Own Equity
Shares in excess of the above limitations must immediately notify the
Trust in writing. If the restrictions above are violated, the Equity
Shares represented hereby will be transferred automatically and by
operation of law to an Excess Shares Trust and shall be designated
Excess Shares. All capitalized terms in this legend have the meanings
defined in the Trust's Declaration of Trust, as the same may be further
amended from time to time, a copy of which, including the restrictions
on transfer, will be sent without charge to each Shareholder who so
requests."
Section 7.14 Severability. If any provisions of this Article VII or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
Section 7.15 Excess Shares.
7.15.1 Excess Shares Trust. Any Equity Shares transferred to an
Excess Shares Trust and designated Excess Shares pursuant to Section 7.3 of this
Article VII shall be held for the exclusive benefit of the Beneficiary. The
Board of Trustees shall name a new Beneficiary of each Excess Shares Trust
within five (5) days after discovery of the existence thereof and such newly
designated Person shall become Beneficiary of such Excess Shares Trust;
provided, however, that, in the event that the Board of Trustees fails to
designate a new Beneficiary within the time period described above, the Excess
Shares Trust shall be held for the benefit of the Default Beneficiary. Any
transfer to an Excess Shares Trust, and subsequent designation of Equity Shares
as Excess Shares, pursuant to Section 7.3 of this Article VII, shall be
effective as of the applicable date set forth in Section 7.3. Excess Shares
shall remain issued and outstanding Equity Shares of the Trust and shall be
entitled to the same rights and privileges on identical terms and conditions as
are all other issued and outstanding Equity Shares of the same class and series.
When transferred to the Permitted Transferee in accordance with the provisions
of Section 7.15.5 of this Article VII, such Excess Shares shall cease to be
designated as Excess Shares.
7.15.2 Dividend Rights. The Excess Shares Trustee, as record holder
of Excess Shares, shall be entitled to receive all dividends and distributions
as may be declared by the Board of Trustees on such Equity Shares and shall hold
such dividends or distributions in trust for the benefit of the Beneficiary. The
Purported Record Owner with respect to Excess Shares shall repay to the Excess
Shares Trustee the amount of any dividends or distributions received by if that
(i) are attributable to any Equity Shares designated Excess Shares and (ii) the
record date of which was on or after the date that such Equity Shares became
Excess Shares. The Trust shall take all measures that it determines reasonably
necessary to recover the amount of any such dividend or distribution paid to a
Purported
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Record Owner, including, if necessary, withholding any portion of future
dividends or distributions payable on Equity Shares Beneficially Owned or
Constructively Owned by the Purported Record Owner; and, as soon as reasonably
practicable following the trust's receipt or withholding thereof, shall pay over
to the Excess Shares Trustee for the benefit of the Beneficiary the dividends so
received or withheld, as the case may be.
7.15.3 Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Trust, distributions in respect of Excess Shares shall be
made ratably with each other distributions in respect of Equity Shares of the
same class or series of Equity Shares, that portion of the assets of the Trust
which is available for distribution in respect of such class and series of
Equity Shares. The Excess Shares Trustee shall distribute to the Purported
Record Owner the amounts received upon such liquidation, dissolution, or winding
up, or distribution; provided, however, that the Purported Record Owner shall
not be entitled to receive amounts pursuant to this Section 7.15.3 in excess of,
in the case of a purported Transfer in which the Purported Record Owner gave
value for Equity Shares and which Transfer resulted in the transfer of the
Equity Shares to the Excess Shares Trust, the price per share, if any, such
Purported Record Owner paid for the Equity Shares and, in the case of a
Non-Transfer Event or Transfer in which the Purported Record Owner did not give
value for such shares (e.g., if the shares were received through a gift or
devise) and which Non-Transfer Event or Transfer, as the case may be, resulted
in the transfer of shares to the Excess Shares Trust, the price per share equal
to the Market Price on the date of such Non-Transfer Event of Transfer. Any
remaining amount in such Excess Shares Trust shall be distributed to the
Beneficiary.
7.15.4 Voting Rights. The Excess Shares Trustee shall be entitled
to vote all Excess Shares. Any vote by a Purported Record Owner as a holder of
Equity Shares prior to the discovery by the Trust that the Equity Shares are
Excess Shares shall, subject to applicable law, be rescinded and shall be void
ab initio with respect to such Excess Shares and the Purported Record Owner
shall be deemed to have given, as of the close of business on the business day
immediately prior to the date of the purported Transfer or Non-Transfer Event
that results in the transfer to the Excess Shares Trust of the Equity Shares
under Section 7.3 of this Article VII, an irrevocable proxy to the Excess Shares
Trustee to vote the Excess Shares in the manner in which the Excess Shares
Trustee, in its sole and absolute discretion, desires.
7.15.5 Designation of Permitted Transferee. The Excess Shares
Trustee shall have the exclusive and absolute right to designate a Permitted
Transferee of any and all Excess Shares. As reasonably practicable as possible,
in an orderly fashion so as not to materially adversely affect the Market Price
of the Excess shares, the Excess Shares Trustee shall designate any Person as
Permitted Transferee, provided, however, that (i) the Permitted Transferee so
designated purchases for valuable consideration (whether in a public or private
sale) the Excess Shares and (ii) the Permitted Transferee so designated may
acquire such Excess Shares without such acquisition resulting in a transfer to
an Excess Shares Trust and the re-designation of such shares of the Equity
Shares so acquired as Excess Shares under Section 7.3 of this Article VII. Upon
the designation by the Excess Shares Trustee of a Permitted Transferee in
accordance with the provisions of this Section 7.15.5, the Excess Shares Trustee
of an Excess Shares Trust shall (i) cause to be transferred to the Permitted
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Transferee that number of Excess Shares acquired by the Permitted Transferee;
(ii) cause to be recorded on the books of the Trust that the Permitted
Transferee is the holder of record of such number of Equity Shares; and (iii)
distribute to the Beneficiary any and all amounts held with respect to the
Excess Shares after making that payment to the Purported Record Owner pursuant
to Section 7.15.6 of this Article VII.
7.15.6 Compensation to Record Holder of Equity Shares that Become
Excess Shares. A Purported Record shall be entitled (following discovery of the
Excess Shares and subsequent designation of the Permitted Transferee in
accordance with Section 7.15.5 of this Article VII) to receive from the Excess
Shares Trustee the lesser of (i) in the case of (a) a purported Transfer in
which the Purported Record Owner gave value for Equity Shares and which Transfer
resulted in the transfer of the Excess Shares to the Excess Shares Trust, the
price per share, if any, such Purported Record Owner paid for the Excess Shares,
or (b) a Non-Transfer Event or Transfer in which the Purported Record Owner did
not give value for such shares (e.g., if the shares were received through a gift
or devise) and which Non-Transfer Event or transfer, as the case may be,
resulted in the transfer of Excess Shares to the Excess Shares Trust, the price
per share equal to the Market Price on the date of such Non-Transfer Event or
Transfer, and (ii) the price per share received by the Excess Shares Trustee of
the Excess Shares Trust from the sale or other disposition of such Excess Shares
in accordance with Section 7.15.5 of this Article VII. Any amounts received by
the Excess Shares Trustee in respect of such Excess Shares and in excess of such
amounts to be paid the Purported Record Owner pursuant to this Section 7.15.6
shall be distributed to the Beneficiary in accordance with the provisions of
Section 7.15.5 of this Article VII. Each Beneficiary and Purported Record Owner
waives any and all claims that it may have against the Trust, the Excess Shares
Trustee and the Excess Shares Trust arising out of the disposition of Excess
Shares, except for claims arising out of the gross negligence or willful
misconduct of, or any failure to make payments in accordance with Sections
7.15.2, 7.15.3 or 7.15.5 of this Article VII by the Trust, such Excess Shares
Trustee or the Excess Shares Trust.
7.15.7 Purchase Right in Excess Shares. Excess Shares shall be
deemed to have been offered for sale to the Trust, or its designee, at a price
per share equal to the less of (i) the price per share in the transaction that
created such Excess Shares (or, in the case of Transfer or Non-Transfer Event in
which less than full consideration was given, the Market Price at the time of
such Transfer or Non-Transfer Event) and (ii) the Market Price on the date the
Trust, or its designee, accepts such offer. The Trust shall have the right to
accept such offer for a period of ninety days after the later of (x) the date of
the Non-Transfer Event or purported Transfer which resulted in such Excess
Shares and (y) the date the Trust determines in good faith that a Transfer or
Non-Transfer Event resulting in Excess Shares has occurred, if the Trust does
not receive a notice of such Transfer or Non-Transfer Event pursuant to Section
7.5 of this Article VII.
ARTICLE VIII
SHAREHOLDERS
Section 8.1 Meetings of Shareholders. There shall be an annual meeting
of the Shareholders, to be held at such time and place after delivery to the
Shareholders of the annual
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report as shall be determined by or in the manner prescribed in the Bylaws, at
which time the successors to the class of Trustees whose term expires at such
annual meeting shall be elected and any other proper business may be conducted.
Except as otherwise provided in this Declaration of Trust, special meetings of
Shareholders may be called in the manner provided in the Bylaws then in effect.
If there are no Trustees, the President or any officer of the Trust shall
promptly call a special meeting of the Shareholders entitled to vote for the
election of successor Trustees. Any meeting may be adjourned and reconvened by
the Trustees as provided in the Bylaws then in effect.
Section 8.2 Voting Rights of Shareholders. Subject to the provisions of
any class or series of Shares then outstanding, the Shareholders shall be
entitled to vote only on the following matters: (a) the election or removal of
Trustees; (b) the amendment of this Declaration of Trust; (c) the voluntary
dissolution or termination of the Trust; (d) the reorganization of the Trust;
and (e) the merger or consolidation of the rust or a share exchange by the Trust
or the sale or other disposition of all or substantially all of the Trust
Property. Except with respect to the foregoing matters, no action taken by the
Shareholders at any meeting shall in any way bind the Trustees. Notwithstanding
anything contained in this Declaration of Trust to the contrary or any provision
of Title 8 requiring the affirmative vote of more than a majority, the matters
contained in Subsections (b), (c), (d) and (e) of this Section 8.2 shall, upon
the approval of the Board of Trustees, be effective and valid if approved by the
affirmative vote of the holders of not less than a majority of all the Shares
then outstanding and entitled to vote on such matter.
ARTICLE IX
AMENDMENTS
Section 9.1 By Shareholders. Except as provided in Section 9.2, this
Declaration of Trust may be amended only upon the approval of the Board of
Trustees and with the affirmative vote of the holders of not less than a
majority of all the Shares then outstanding and entitled to vote on the matter.
Section 9.2 By Trustees. The Trustees, by a two-thirds vote of the
Trustees then in office and without the vote of the Shareholders, may amend
provisions of this Declaration of Trust form time tot time (i) as permitted by
Section 5.4 and/or (ii) to enable the Trust to qualify as a real estate
investment trust under the Code or under Title 8.
Section 9.3 No Other Amendment. This Declaration of Trust may not be
amended except as provided in this Article IX.
ARTICLE X
DURATION OF TRUST
The Trust shall continue perpetually unless terminated pursuant to any
applicable provision of Title 8. The Trust may be voluntarily dissolved or
reorganized or its existence terminated only by the affirmative vote of the
holders of not less than a majority of all the Shares then outstanding and
entitled to vote on the matter. The Trust may sell or otherwise
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dispose of all or substantially all of the Trust Property only by the
affirmative vote of the holders of not less than a majority of all the Shares
then outstanding and entitled to vote on the matter.
ARTICLE XI
LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS
EMPLOYEES AND AGENTS
AND TRANSACTIONS BETWEEN THEM AND THE TRUST
Section 11.1 Limitation of Shareholder Liability. No Shareholder shall
be liable for any debt, claim, demand, judgment or obligation of any kind of,
against or with respect to the Trust by reason of his being a Shareholder, nor
shall any Shareholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any Person in connection with the Trust Property or
the affairs of the Trust.
Section 11.2 Limitation of Trustee and Officer Liability. To the
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of trustees and officers of a real estate investment trust, no
Trustee or officer of the Trust shall be liable to the Trust or to any
Shareholder for money damages. Neither the amendment nor the repeal of this
Section 11.2, nor the adoption or amendment or any other provision of this
Declaration of Trust inconsistent with this Section 11.2, shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption. In the absence of any Maryland statute limiting the liability of
trustees and officers of a Maryland real estate investment trust for money
damages in a suit by or on behalf of the Trust or by an Shareholder, no Trustee
or officer of the Trust shall be liable to the Trust or to any Shareholder for
money damages except to the extent that (a) the Trustee or officer actually
received an improper benefit or profit in money, property or services, for the
amount of the benefit or profit in money, property or services actually received
or (b) a judgment or other final adjudication adverse to the Trustee or officer
is entered in a proceeding based on a finding in the proceeding that the
Trustee's or officer's action or failure to act was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in the
proceeding.
Section 11.3 Express Exculpatory Clauses in Instruments. Neither the
Shareholders nor the Trustees, officers, employees or agents of the Trust shall
be liable under any written instrument creating an obligation of the Trust, and
all Persons shall look solely to the Trust Property for the payment of any claim
under or for the performance of that instrument. The omission of the foregoing
exculpatory language from any instrument shall not affect the validity or
enforceability of such instrument, and shall not render any Shareholder,
Trustee, officer, employee or agent liable thereunder to any third party, and no
Shareholder or Trustee or any officer, employee or agent of the Trust shall be
liable to anyone for such omission.
Section 11.4 Indemnification and Advance for Expenses. The Trust shall,
to the fullest extent permitted by Maryland law, as applicable from time to
time, indemnify all persons who (a) at any time were or are Trustees or officers
of the Trust or (b) while a Trustee or officer of the Trust and at the express
request of the Trust, serves or has served as an
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officer, director, member, trustee or partner of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
for any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) relating to any action alleged
to have been taken or omitted by such person in such capacity. The Trust shall
pay or reimburse all reasonable expenses incurred by a present or former Trustee
or officer of the Trust in connection with any threatened, pending or completed
action, suit or proceeding (whether civil, criminal, administrative or
investigative) in which the present or former Trustee or officer is a party, in
advance of the final disposition of the proceeding, to the fullest extent
permitted by and in accordance with the applicable requirements of Maryland law,
as applicable from time to time. The Trust may indemnify any other persons
permitted but not required to be indemnified by Maryland law, as applicable form
time to time, if and to the extent indemnification is authorized and determined
to be appropriate in each case in accordance with applicable law by the Board of
Trustees, the Shareholders or special legal counsel appointed by the Board of
Trustees. The Trust may, but shall not be required to, purchase or maintain
insurance on behalf of any persons required or permitted to be indemnified. No
amendment of this Declaration of Trust shall limit or eliminate any of the
benefits provided to Trustees and officers hereunder in respect of any act or
omission that occurred prior to such amendment. The Trust shall have the power
to provide such indemnification to any person who served as predecessor of the
Trust in any of the capacities described above.
ARTICLE XII
MISCELLANEOUS
Section 12.1 Governing Law. This Declaration of Trust is executed by
the Trustees and delivered in the State of Maryland with reference to the laws
thereof, and the rights of all parties and the validity, construction and effect
of every provision hereof shall be subject to and construed in accordance with
the laws of the State of Maryland without regard to conflicts of laws provisions
thereof.
Section 12.2 Reliance by Third Parties. Any certificate shall be final
and conclusive as to any Person dealing with the Trust if executed by an
individual who, according to the records of the Trust or of any recording office
in which this Declaration of Trust may be recorded, appears to be the Secretary
or an Assistance Secretary of the Trust or a Trustee, and if certifying to the
following:
(a) the number or identity of Trustees, officers of the Trust or
Shareholders;
(b) the due authorization of the execution of any document;
(c) any action or vote taken, and the existence of a quorum at a
meeting of Trustees or Shareholders;
(d) a copy of this Declaration of Trust or of the Bylaws of the
Trust as a true and complete copy as then in force;
(e) an amendment to this Declaration of Trust;
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(f) the termination of the Trust; or
(g) the existence of any fact or facts which relate to the affairs
of the Trust.
No purchaser, lender, transfer agent or other Person shall be bound to
make any inquiry concerning the validity of any transaction purporting to be
made on behalf of the Trust by the Trustees or any officer, employee or agent of
the Trust.
Section 12.3 Provisions in Conflict with Law or Regulations.
12.3.1 The provisions of this Declaration of trust are severable,
and if the Trustees shall determine, with the advice of counsel, that any one or
more of such provisions ("Conflicting Provisions") are in conflict with the REIT
Provisions of the Code, Title 8 or any other applicable federal or state law,
the Conflicting Provisions shall be deemed never to have constituted a part of
this Declaration of Trust, even without any amendment of this Declaration
pursuant to Article IX; provided, however, that such determination by the
Trustees shall not affect or impair any of the remaining provisions of this
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.
12.3.2 If any provision of this Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such holding shall not in any
manner affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of this Declaration of Trust in any
jurisdiction.
Section 12.4 Construction. In this Declaration of Trust, unless the
context otherwise requires, words used in the singular or in the plural include
both the singular and plural, and words denoting any gender include all genders.
The title and headings of different parts of this Declaration of Trust are
inserted for convenience and shall not affect the meaning, construction or
effect of this Declaration of Trust.
FOURTH: The amendments to this Declaration of Trust set forth in these
Articles of Amendment and Restatement shall increase the total number of Shares
which the Trust has the authority to issue. Prior to the effectiveness of the
amendments set forth herein, the total number of Shares authorized to be issued
by the Trust were as follows:
Share Type Number of Shares Authorized Par Value
---------- --------------------------- ---------
Common 100,570,000 $0.01
Preferred 500,000 $0.01
Upon the effectiveness of these Articles of Amendment and Restatement,
the number of Shares which the Trust is authorized to issue is 110,000,000,
divided as follows:
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Share Type Number of Shares Authorized Par Value
---------- --------------------------- ---------
Common 100,570,000 $0.01
Preferred 500,000 $0.01
FIFTH: The amendments to and the restatement of this Declaration of
Trust set forth in these Articles of Amendment and Restatement were declared
advisable and approved by the Board of Trustees at a meeting duly called at
which quorum was present on August 12, 1998, and the amendments set forth
therein were approved by the Shareholders of the Trust at a meeting of the
Shareholders on November 16, 1998, all in the manner prescribed by and in
accordance with the provisions of Maryland law.
SIXTH: The name and address of the current resident agent of the Trust
are set forth in Section 1.2 of this Declaration of Trust set forth in paragraph
THIRD hereof.
SEVENTH: The names of those individuals currently serving as Trustees
of the Trust are set forth in Section 2.2 of this Declaration of Trust set forth
in Paragraph THIRD hereof.
IN WITNESS WHEREOF, these Articles of Amendment and Restatement have
been executed on February 22, 1999, by the undersigned Arnold K. Leas, Chairman
of the Board of Trustees of the Trust, who acknowledges this document to be the
act of the Trust and that, to the best of his knowledge, information and belief
and under the penalties for perjury, the matters and facts set forth herein are
true and correct in all material respects.
ATTEST:
/s/Robert F. Rice /s/Arnold K. Leas
- ---------------------------------- -------------------------------------
Robert F. Rice, Secretary Arnold K. Leas, Chairman (SEAL)
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ARTICLES SUPPLEMENTARY
to the
DECLARATION OF TRUST
of
WELLINGTON PROPERTIES TRUST
Pursuant to Section 8-203 of the Corporations and Associations Article
of the Maryland Code and in accordance with Section 5.3 of the Amended and
Restated Declaration of Trust of Wellington Properties Trust (the "Trust"), the
undersigned Chief Executive Officer of the Trust hereby certifies that:
1. On August 5, 1999, the Board of Trustees of the Trust by resolutions
designated 1,518,000 shares of the Trust's undesignated preferred shares as
Class A Cumulative Convertible Preferred Shares, $0.01 par value per share, of
the Trust and 349,800 additional shares of the Trust's undesignated preferred
shares as Class B Junior Cumulative Convertible Preferred Shares, $0.01 par
value per share, of the Trust.
2. Such resolutions of the Board of Trustees of the Trust provide that
such classes of preferred shares shall have the designations, preferences,
limitations and relative rights as are set forth below, which provisions shall
constitute new sections 5.8 and 5.9 of the Declaration of Trust of the Trust.
5.8 Class A Cumulative Convertible Preferred Shares.
5.8.1 Designation. The Trust is authorized to issue a class of
Preferred Shares that is designated the Class A Cumulative Convertible Preferred
Shares (the "Class A Preferred Shares"). The number of Class A Preferred Shares
shall be limited to 1,518,000.
5.8.2 Dividends. Holders of the Class A Preferred Shares shall be
entitled to receive cumulative dividends at an annual rate of $0.95 per share,
payable semiannually in installments of $0.475 per share on the date six months
following the initial closing date of the public offering of the Class A
Preferred Shares and one year following such date, and thereafter on each
anniversary of such dates (each a "Dividend Payment Date"), to shareholders of
record on the record date determined by the Board of Trustees and not exceeding
60 days preceding the applicable Dividend Payment Date. Subject to the rights of
any class or series of Preferred Shares ranking senior to the Class A Preferred
Shares as to payment of dividends, no dividends may be declared or paid on any
class or series of the Trust's shares unless all dividends on the Class A
Preferred Shares then accrued have first been paid.
5.8.3 Voting Rights. (a) Except as otherwise provided herein, the
holders of the Class A Preferred Shares shall be entitled to vote on each matter
submitted to a vote of shareholders of the Trust, voting together with holders
of every other class or series of shares of the Trust as a single class. Each
Class A Preferred Share shall entitle its holder to the
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number of votes equal to the number of Common Shares into which such Class A
Preferred Share is convertible on the applicable record date.
(b) During any period in which the condition described below shall
exist (a "Default Period"), the number of trustees constituting the Board of
Trustees of the Trust shall be automatically increased by the smallest number
that would constitute a majority of the Board of Trustees as so increased; and
the holders of all of the Preferred Shares of the Trust (but excluding the
holders of the Class B Preferred Shares, as defined below) shall be entitled,
voting as a class (to the exclusion of the holders of Common Shares), to elect
such number of additional trustees. A Default Period shall commence if, at any
time, accumulated dividends on the outstanding Preferred Shares (excluding the
Class B Preferred Shares) equal to at least $0.95 per share shall be due but
unpaid, whether or not such dividends have been declared and whether or not
sufficient funds are then legally available therefor. Upon cessation of any
Default Period, the terms of the additional trustees then in office and elected
by the holders of the Preferred Shares as provided in this paragraph as a result
of such Default Period will expire and terminate. Thereafter, the remaining
trustees shall constitute the entire Board of Trustees of the Trust.
(c) So long as any Class A Preferred Shares remain outstanding, the
approval of the holders of the Class A Preferred Shares, voting as a single
class shall be required to approve any amendment of the Declaration of Trust
that would curtail or diminish the rights or preferences of the holders of the
Class A Preferred Shares as provided herein.
5.8.4 Liquidation Preference. Subject to the rights of any class or
series of Preferred Shares ranking senior to the Class A Preferred Shares upon
liquidation, in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Trust, the holders of the Class
A Preferred Shares then outstanding shall be entitled to be paid, out of the
assets of the Trust available for distribution to its shareholders, an amount in
cash equal to $10.00, plus an amount equal to all dividends on such Class A
Preferred Shares accrued but unpaid on the date fixed for liquidation,
dissolution or winding up, before any payment shall be made or any assets
distributed to the holders of any other class or series of the Trust's shares.
After such payment, the holders of Class A Preferred Shares shall be entitled to
no other payments in respect of their Class A Preferred Shares. If the assets of
the Trust are not sufficient to pay in full the liquidation payments due to the
holders of the Class A Preferred Shares hereunder, the holders of all Class A
Preferred Shares shall share ratably in such distribution of assets in
proportion to the amount that would be payable on such distribution if the
amounts to which the holders of outstanding Class A Preferred Shares are
entitled were paid in full. For the purposes of this Section 5.8.4, a
consolidation or merger of the Trust with or into any other entity or a sale,
lease or other conveyance, whether for cash, securities or other property, of
all or any part of the assets of the Trust shall not be deemed or construed to
be a liquidation, dissolution or winding up of the Trust.
5.8.5 Conversion. (a) Each Class A Preferred Share shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance thereof and without the payment of any additional consideration
therefor, into that number of Common Shares as is
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determined by dividing the sum of $10.00 and any dividends then accrued but
unpaid on the Class A Preferred Shares by a conversion price (the "Class A
Conversion Price") in effect at the time of conversion. The Class A Conversion
Price shall initially be 110% of the average closing bid price of the Common
Shares on the Nasdaq SmallCap Market over the ten trading days immediately
preceding the effective date of the Trust's Registration Statement under the
Securities Act of 1933 covering the Class A Preferred Shares.
(b) In the event that, at any time after the initial closing of the
public offering of the Class A Preferred Shares, the Trust shall pay any
dividend or make any other distribution on the Common Shares payable in Common
Shares (other than pursuant to a dividend reinvestment plan), or effect a
subdivision of the Common Shares, then the Class A Conversion Price shall be
proportionately decreased. Likewise, in the event that the outstanding Common
Shares shall be combined or consolidated, then the Class A Conversion Price
shall be proportionately increased.
(c) Before any holder of Class A Preferred Shares shall be entitled to
convert the same into Common Shares, such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the principal office of the Trust or
the transfer agent for the Class A Preferred Shares, and shall give written
notice to the Trust at its principal office that such holder elects to convert
the same and shall state therein such holder's name or the name or names of the
nominees of such holder in which such holder wishes the certificate or
certificates for Common Shares to be issued, together with applicable federal
tax identification numbers. The Trust shall, as soon as practicable thereafter,
issue and deliver at such office, to such holder or its nominee or nominees, a
certificate or certificates representing the number of Common Shares to which
such holder or nominee(s) is entitled.
(d) The Trust shall, at all times when any of the Class A Preferred
Shares are outstanding, reserve such number of its Common Shares as shall from
time to time be sufficient to effect the conversion of all outstanding Class A
Preferred Shares and Class A Preferred Shares subject to outstanding purchase
rights.
(e) All Class A Preferred Shares that shall have been surrendered for
conversion as provided herein shall no longer be deemed to be outstanding and
all rights with respect to such shares shall immediately be terminated, except
the right to receive Common Shares in exchange therefor. Any Class A Preferred
Shares so converted shall be retired and shall not be reissued. The Trust may,
from time to time, take appropriate action to reduce the number of Class A
Preferred Shares that the Trust is authorized to issue.
5.8.6 Redemption. At any time after the two years from the date of the
initial closing of the public offering of the Class A Preferred Shares, the
Trust may, at the option of the Board of Trustees, redeem the Class A Preferred
Shares at a per-share price equal to $10.00, plus any dividends on the Class A
Preferred Shares then accrued but unpaid; provided, however, that the Trust must
first give the registered holders of the Class A Preferred Shares written notice
of its intent to redeem the Class A Preferred Shares no less than 30 days prior
to the scheduled date of the redemption; and provided further that the Trust may
only redeem the
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Class A Preferred Shares under this paragraph in the event that the closing sale
price of the Common Shares equals or exceed 150% of the then-effective Class A
Conversion Price for 20 consecutive trading days preceding the date of such
notice. All Class A Preferred Shares that have been redeemed as provided herein
shall no longer be deemed to be outstanding and all rights with respect to such
shares shall immediately be terminated, except the right to receive the cash
redemption price in exchange therefor. Any Class A Preferred Shares so redeemed
shall be retired and shall not be reissued.
5.9 Class B Junior Cumulative Convertible Preferred Shares.
5.9.1 Designation. The Trust is authorized to issue a class of
Preferred Shares that is designated the Class B Junior Cumulative Convertible
Preferred Shares (the "Class B Preferred Shares"). The number of Class B
Preferred Shares shall be limited to 349,800.
5.9.2 Dividends. Holders of the Class B Preferred Shares shall be
entitled to receive cumulative dividends at an annual rate of $0.95 per share,
payable semiannually in installments of $0.475 per share on the date six months
following the initial closing date of the public offering of the Class A
Preferred Shares and one year following such date, and thereafter on each
anniversary of such dates (each a "Dividend Payment Date"), to shareholders of
record on the record date determined by the Board of Trustees and not exceeding
60 days preceding the applicable Dividend Payment Date. Subject to the rights of
the Class A Preferred Shares and any other class or series of Preferred Shares
ranking senior to the Class B Preferred Shares as to payment of dividends, no
dividends may be declared or paid on any class or series of the Trust's shares
unless all dividends on the Class B Preferred Shares then accrued have first
been paid.
5.9.3 Voting Rights. (a) Except as otherwise provided herein, the
holders of the Class B Preferred Shares shall be entitled to vote on each matter
submitted to a vote of shareholders of the Trust, voting together with holders
of every other class or series of shares of the Trust as a single class. Each
Class B Preferred Share shall entitle its holder to the number of votes equal to
the number of Common Shares into which such Class B Preferred Share is
convertible on the applicable record date.
(b) So long as any Class B Preferred Shares remain outstanding, the
approval of the holders of the Class B Preferred Shares, voting as a single
class shall be required to approve any amendment of the Declaration of Trust
that would curtail or diminish the rights or preferences of the holders of the
Class B Preferred Shares as provided herein.
5.9.4 Liquidation Preference. Subject to the rights of the Class A
Preferred Shares and any other class or series of Preferred Shares ranking
senior to the Class B Preferred Shares upon liquidation, in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Trust, the holders of the Class B Preferred Shares then outstanding shall
be entitled to be paid, out of the assets of the Trust available for
distribution to its shareholders, an amount in cash equal to $10.00, plus an
amount equal to all dividends on such Class B Preferred Shares accrued but
unpaid on the date fixed for liquidation,
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dissolution or winding up, before any payment shall be made or any assets
distributed to the holders of any other class or series of the Trust's shares.
After such payment, the holders of Class B Preferred Shares shall be entitled to
no other payments in respect of their Class B Preferred Shares. If the assets of
the Trust are not sufficient to pay in full the liquidation payments due to the
holders of the Class B Preferred Shares hereunder, the holders of all Class B
Preferred Shares shall share ratably in such distribution of assets in
proportion to the amount that would be payable on such distribution if the
amounts to which the holders of outstanding Class B Preferred Shares are
entitled were paid in full. For the purposes of this Section 5.9.4, a
consolidation or merger of the Trust with or into any other entity or a sale,
lease or other conveyance, whether for cash, securities or other property, of
all or any part of the assets of the Trust shall not be deemed or construed to
be a liquidation, dissolution or winding up of the Trust.
5.9.5 Conversion. (a) Each Class B Preferred Share shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance thereof and without the payment of any additional consideration
therefor, into that number of Common Shares as is determined by dividing the sum
of $10.00 and any dividends then accrued but unpaid on the Class B Preferred
Shares by a conversion price (the "Class B Conversion Price") in effect at the
time of conversion. The Class B Conversion Price shall initially be 110% of the
average closing bid price of the Common Shares on the Nasdaq SmallCap Market
over the ten trading days immediately preceding the effective date of the
Trust's Registration Statement under the Securities Act of 1933 covering the
Class A Preferred Shares.
(b) In the event that, at any time after the initial closing of the
public offering of the Class A Preferred Shares, the Trust shall pay any
dividend or make any other distribution on the Common Shares payable in Common
Shares (other than pursuant to a dividend reinvestment plan), or effect a
subdivision of the Common Shares, then the Class B Conversion Price shall be
proportionately decreased. Likewise, in the event that the outstanding Common
Shares shall be combined or consolidated, then the Class B Conversion Price
shall be proportionately increased.
(c) Before any holder of Class B Preferred Shares shall be entitled to
convert the same into Common Shares, such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the principal office of the Trust
and shall give written notice to the Trust at its principal office that such
holder elects to convert the same and shall state therein such holder's name or
the name or names of the nominees of such holder in which such holder wishes the
certificate or certificates for Common Shares to be issued, together with
applicable federal tax identification numbers. The Trust shall, as soon as
practicable thereafter, issue and deliver at such office, to such holder or its
nominee or nominees, a certificate or certificates representing the number of
Common Shares to which such holder or nominee(s) is entitled.
(d) The Trust shall, at all times when any of the Class B Preferred
Shares are outstanding, reserve such number of its Common Shares as shall from
time to time be sufficient to effect the conversion of all outstanding Class B
Preferred Shares.
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(e) All Class B Preferred Shares that shall have been surrendered for
conversion as provided herein shall no longer be deemed to be outstanding and
all rights with respect to such shares shall immediately be terminated, except
the right to receive Common Shares in exchange therefor. Any Class B Preferred
Shares so converted shall be retired and shall not be reissued. The Trust may,
from time to time, take appropriate action to reduce the number of Class B
Preferred Shares that the Trust is authorized to issue.
5.9.6 Redemption. At any time after the two years from the date of the
initial closing of the public offering of the Class A Preferred Shares, the
Trust may, at the option of the Board of Trustees, redeem the Class B Preferred
Shares for a per-share price equal to $10.00, plus any dividends on the Class B
Preferred Shares then accrued but unpaid; provided, however, that the Trust must
first give the registered holders of the Class B Preferred Shares written notice
of its intent to redeem the Class B Preferred Shares no less than 30 days prior
to the scheduled date of the redemption; and provided further that the Trust may
only redeem the Class B Preferred Shares under this paragraph in the event that
the closing sale price of the Common Shares equals or exceed 150% of the
then-effective Class A Conversion Price for 20 consecutive trading days
preceding the date of such notice. All Class B Preferred Shares that have been
redeemed as provided herein shall no longer be deemed to be outstanding and all
rights with respect to such shares shall immediately be terminated, except the
right to receive the cash redemption price in exchange therefor. Any Class B
Preferred Shares so redeemed shall be retired and shall not be reissued. The
Trust may, from time to time, take appropriate action to reduce the number of
Class B Preferred Shares that the Trust is authorized to issue.
IN WITNESS WHEREOF, these Articles Supplementary have been executed on
August 5, 1999 by the undersigned Duane H. Lund, the Chief Executive Officer of
the Trust, who acknowledges this document to be the act of the Trust and that,
to the best of his knowledge, information and belief, and under penalties of
perjury, the matters and facts set forth herein are true and correct in all
material respects.
Attest:
/s/ Robert F. Rice /s/ Duane H. Lund
Robert F. Rice Duane H. Lund
Secretary Chief Executive Officer
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EXHIBIT 3.2
WELLINGTON PROPERTIES TRUST
AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
SECTION 1. Principal Office. The principal office of the Trust shall be
located at such place or places as the Trustees may designate.
SECTION 2. Additional Offices. The Trust may have additional offices at
such places as the Trustees may from time to time determine or the business of
the Trust may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. Place. All meetings of Shareholders shall be held at the
principal office of the Company or at such other place within the United States
as shall be stated in the notice of the meeting.
SECTION 2. Annual Meeting. An annual meeting of the Shareholders for
the election of Trustees and the transaction of any business within the powers
of the Trust shall be held at such time as the Trustees shall determine, after
delivery of the Trust's annual report to Shareholders, at a convenient location
and on proper notice.
SECTION 3. Special Meetings. The chairman of the board, the president,
a majority of the Trustees or a majority of the Independent Trustees may call
special meetings of the Shareholders. Special meetings of Shareholders shall
also be called by the secretary upon the written request of the holders of
Shares entitled to cast not less than 10% of all the votes entitled to be cast
at such meeting. Such request shall state the purpose of such meeting and the
matters proposed to be acted on at such meeting. Within 10 days of receipt of
such written request, the secretary shall give notice, in person or by mail, to
each Shareholder entitled to notice of the meeting. Unless requested by
Shareholders entitled to cast a majority of all the votes entitled to be cast at
such meeting, a special meeting need not be called to consider any matter which
is substantially the same as a matter voted on at any meeting of the
Shareholders held during the preceding twelve months.
SECTION 4. Notice. Not less than fifteen nor more than sixty days
before each meeting of Shareholders, the secretary shall give to each
Shareholder entitled to vote at such meeting and to each Shareholder not
entitled to vote who is entitled to notice of the meeting written or printed
notice stating the time and place of the meeting and, in the case of a special
meeting or as otherwise may be required by any statute, the purpose for which
the meeting is called, either by mail or by presenting it to such Shareholder
personally or by leaving it at his
<PAGE>
residence or usual place of business as reflected in the records of the Trust.
If mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the Shareholder at his post office address as it
appears on the records of the Trust, with postage thereon prepaid.
SECTION 5. Scope of Notice. Any business of the Trust may be transacted
at an annual meeting of Shareholders without being specifically designated in
the notice, except such business as is required by any statute to be stated in
such notice. No business shall be transacted at a special meeting of
Shareholders except as specifically designated in the notice.
SECTION 6. Quorum. At any meeting of Shareholders, the presence in
person or by proxy of Shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this Section
shall not affect any requirement under any statute or the Trust's Amended and
Restated Declaration of Trust (the "Declaration"), for the vote necessary for
the adoption of any measure. If, however, such quorum shall not be present at
any meeting of the Shareholders, the Shareholders entitled to vote at such
meeting, present in person or by proxy, shall have the power to adjourn the
meeting from time to time to a date not more than 120 days after the original
record date without notice other than announcement at the meeting. At such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified.
SECTION 7. Voting. A plurality at all the votes cast at a meeting of
Shareholders duly called and at which a quorum is present shall be sufficient to
elect a Trustee. Each Share may be voted for as many individuals as there are
Trustees to be elected and for whose election the Share is entitled to be voted.
A majority of the votes cast at a meeting of Shareholders duly called and at
which a quorum is present shall be sufficient to approve any other matter which
may properly come before the meeting, unless more than a majority of the votes
cast is required herein or by statute or by the Declaration. Unless otherwise
provided in the Declaration, each outstanding share, regardless of class, shall
be entitled to one vote on each matter submitted to a vote at a meeting of
Shareholders.
SECTION 8. Proxies. A Shareholder may vote the Shares owned of record
by him, either in person or by proxy executed in writing by the Shareholder or
by his duly authorized attorney in fact. Such proxy shall be filed with the
secretary of the Trust before or at the time of the meeting. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy.
SECTION 9. Voting of Shares by Certain Holders. Shares registered in
the name of a corporation, partnership, trust, limited liability company or
other entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner trustee or member thereof, as the case may be, or a
proxy appointed by any of the foregoing individuals, unless some other person
who has been appointed to vote such shares pursuant to a bylaw or a resolution
of the board of directors of such corporation or other entity presents a
certified copy of such bylaw or resolution, in which case such person may vote
such Shares. Any trustee or other
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fiduciary may vote shares registered in his name as such fiduciary, either in
person or by proxy.
Shares of the Trust directly or indirectly owned by it shall not be
voted at any meeting and shall not be counted in determining the total number of
outstanding shares entitled to be voted at any given time, unless they are held
by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The Trustees may adopt by resolution a procedure by which a Shareholder
may certify in writing to the Trust that any shares registered in the name of
the Shareholder are held for the account of a specified person other than the
Shareholder. The resolution shall set forth the class of Shareholders who may
make the certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the share transfer
books, the time after the record date or closing of the share transfer books
within which the certification must be received by the Trust; and any other
provisions with respect to the procedure which the Trustees consider necessary
or desirable. On receipt of such certification, the person specified in the
certification shall be regarded as, for the purposes set forth in the
certification, the Shareholder of record of the specified Shares in place of the
Shareholder who makes the certification.
SECTION 10. Inspectors. At any meeting of Shareholders, the chairman of
the meeting may, or upon the request of any Shareholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of Shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all of the Shareholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of Shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
SECTION 11. Reports to Shareholders. Reports shall be delivered to the
Shareholders pursuant to the Declaration and as the proper officers of the Trust
shall determine from time to time.
SECTION 12. Nominations and Shareholder Business.
(a) Annual Meetings of Shareholders.
(1) Nominations of persons for election to the Board of Trustees
and the proposal of business to be considered by the shareholders may be
made at an annual meeting of Shareholders (i) pursuant to the Trust's
notice of meeting, (ii) by or at the
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direction of the Trustees or (iii) by any Shareholder of the Trust who
was a Shareholder of record at the time of giving notice as provided for
in this Section 12(a), who is entitled to vote at the meeting and who
shall have complied with the notice procedures set forth in this Section
12(a).
(2) For nominations or other business to be properly brought
before an annual meeting by a Shareholder pursuant to clause (iii) of
paragraph (a)(1) of this Section 12, the Shareholder must have given
timely notice thereof in writing to the secretary of the Trust. To be
timely, a Shareholder's notice shall be delivered to the secretary at the
principal executive offices of the Trust not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 30 days or delayed by more than
60 days from such anniversary date, notice by the Shareholder to be
timely must be so delivered not earlier than the 90th day prior to such
annual meeting and not later than the close of business on the later of
the 60th day prior to such annual meeting is first made. Such
Shareholder's notice shall set forth (i) as to each person whom the
Shareholder proposes to nominate for election or reelection as a Trustee
all information relating to such person that is required to be disclosed
in solicitations of proxies for election of trustees, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), including such
person's written consent to being named in the proxy statement as a
nominee and to serving as a Trustee if elected; (ii) as to any other
business that the Shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the
meeting, the reasons for conducting business at the meeting and any
material interest in such business of such Shareholder and of the
beneficial owner, if any, on whose behalf the proposal is made; and (iii)
as to the Shareholder giving the notice and of the beneficial owner, if
any, on whose behalf the proposal is made, (x) the name and address of
such Shareholder, as they appear on the Trust's books, and of such
beneficial owner and (y) the number of each class of shares of the Trust
which is owned beneficially and of record by such Shareholder and such
beneficial owner.
(3) Notwithstanding anything appearing in the second sentence of
paragraph (a)(2) of this Section 12 to the contrary, in the event that
the number of Trustees to be elected to the Board of Trustees is
increased and there is no public announcement naming all of the nominees
for Trustee or specifying the size of the increased Board of Trustees
made by the Trust at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a Shareholder's notice required by this
Section 12(a) shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the secretary at the principal executive offices of the
Trust not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Trust.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of Shareholders as shall have been brought before
the meeting
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pursuant to the Trust's notice of meeting. Nominations of persons for election
to the Board of Trustees may be made at a special meeting of Shareholders at
which Trustees are to be elected pursuant to the Trustees notice of meeting (i)
by or at the direction of the Board of Trustees or (ii) provided that the Board
of Trustees has determined that Trustees shall be elected at such special
meeting, by any Shareholder of the Trust who was a Shareholder of record at the
time of giving notice as provided for in this Section 12(b), who is entitled to
vote at the meeting and who shall have complied with the notice procedures set
forth in this Section 12(b). In the event the Trust calls a special meeting of
Shareholders for the purpose of electing one or more Trustees to the Board of
Trustees, any such Shareholder may nominate a person or persons (as the case may
be) for election to such position as specified in the Trust's notice of meeting,
if the Shareholder's notice required by paragraph 9(a)(2) of this Section 12
shall be delivered to the secretary at the principal executive offices of the
Trust not earlier than the 90th day prior to such special meeting and not later
than the close of business on the later of the 60th day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Trustees to be elected at such meeting.
(c) General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 12 shall be eligible to serve as
Trustees and only such business shall be conducted at a meeting of
Shareholders as shall have been brought before the meeting in accordance
with the procedures set forth in this Section 12. The presiding officer
of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was
made in accordance with the procedures set forth in this Section 12 and,
if any proposed nomination or business is not in compliance with this
Section 12, to declare that such defective nomination or proposal be
disregarded.
(2) For purposes of this Section 12, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable news service or in a document
publicly filed by the Trust with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
shareholder shall also comply with all applicable requirements of state
law and of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 12. Nothing in this
Section 12 shall be deemed to affect any rights of Shareholders to
request inclusion of proposals in the Trust's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
SECTION 13. Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of Shareholders may be taken without a
meeting if a consent in writing, setting forth such action, is signed by each
Shareholder entitled to vote on the matter and any
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other Shareholder entitled to notice of a meeting of Shareholders (but not to
vote thereat) has waived in writing any right to dissent from such action, and
such consent and waiver are filed with the minutes of proceedings of the
Shareholders.
SECTION 14. Voting by Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any Shareholder
shall demand that voting be by ballot.
ARTICLE III
TRUSTEES
SECTION 1. General Powers; Qualifications. The business and affairs of
the Trust shall be managed under the direction of its Board of Trustees. A
Trustee shall be an individual at least 21 years of age who is not under legal
disability and shall have at least three years of relevant experience
demonstrating knowledge and experience required to successfully acquire and
manage the type of assets being acquired by the Trust.
SECTION 2. Annual and Regular Meetings. An annual meeting of the
Trustees shall be held immediately after and at the same place as the annual
meeting of Shareholders, no notice other than this Bylaw being necessary. The
Trustees may provide, by resolution, the time and place, either within or
without the State of Maryland, for the holding of regular meetings of the
Trustees without other notice than such resolution.
SECTION 3. Special Meetings. Special meetings of the Trustees May be
called by or at the request of the chairman of the board, the chief executive
officer or a majority of the Trustees or a majority of the Independent Trustees
then in office. The person or persons authorized to call special meetings of the
Trustees may fix any place, either within or without the State of Maryland, as
the place for holding any special meeting of the Trustees called by them.
SECTION 4. Notice. Notice of any special meeting shall be given by
written notice delivered personally, telegraphed or mailed to each Trustee at
his business or residence address. Personally delivered or telegraphed notices
shall be given at least two days prior to the meeting. Notice by mail should be
given at least five days prior to the meeting. If mailed, such notice shall be
deemed to have been given when deposited in the United States mail properly
addressed, with postage thereon prepaid. If given by telegram, such notice shall
be deemed to have been given when the telegram is delivered by the telegraph
company. Neither the business to be transacted at, nor the purpose of, any
annual, regular or special meeting of the Trustees need be stated in the notice,
unless specifically required by statute or these Bylaws. Personally delivered
notice shall include delivered by an overnight delivery service and shall be
deemed to have been given on the day deposited with such service for delivery.
SECTION 5. Quorum. A majority of the Trustees shall constitute a quorum
for the transaction of business at any meeting of the Trustees, provided that,
if less than a majority of such Trustees are present at such meeting, a majority
of the Trustees present may adjourn the
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meeting from time to time without further notice, and provided further that if,
pursuant to the Declaration or these Bylaws, the vote of a majority of a
particular group of Trustees is required for action, a quorum must also include
a majority of such group.
The Trustees present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough Trustees to leave less than a quorum.
SECTION 6. Voting. The action of a majority of the Trustees present at
a meeting at which a quorum is present shall be the action of the Trustees,
unless the concurrence of a greater proportion is required for such action by
applicable statute.
SECTION 7. Telephone Meetings. Trustees may participate in a meeting by
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
SECTION 8. Informal Action by Trustees. Any action required or
permitted to be taken at any meeting of the Trustees may be taken without a
meeting, if a consent in writing to such action is signed by each Trustee and
such written consent is filed with the minutes of proceedings of the Trustees.
SECTION 9. Vacancies. If for any reason any or all the Trustees cease
to be Trustees, such event shall not terminate the Trust or affect these Bylaws
or the powers of the remaining Trustees hereunder (even if fewer than three
Trustees remain). Any vacancy including a vacancy created by an increase in the
number of Trustees) shall be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the Trustees, or by unanimous
written consent pursuant to Section 8 of this Article. Any individual elected to
replace a Trustee shall hold office for the unexpired term of the Trustee he is
replacing.
SECTION 10. Compensation. Trustees shall not receive any stated salary
for their services as Trustees but, by resolution of the Trustees, may receive
fixed sums per year and/or per meeting. Expenses of attendance, if any, may be
allowed to Trustees for attendance at each annual, regular or special meeting of
the Trustees or of any committee thereof; but nothing herein contained shall be
construed to preclude any Trustee from serving the Trust in any other capacity
and receiving compensation therefor.
SECTION 11. Removal of Trustees. The Shareholders may, at any time,
remove any Trustee in the manner provided in the Declaration.
SECTION 12. Loss of Deposits. No Trustee shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association or other institution with whom moneys or Shares have been
deposited.
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SECTION 13. Surety Bonds. Unless required by law, no Trustee shall be
obligated to give any bond or surety or other security for the performance of
any of his duties as a Trustee.
SECTION 14. Reliance. Each Trustee, officer, employee and agent of the
Trust shall, in the performance of his duties with respect to the Trust, be
fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel or upon reports made to the Trust by any of its
officers or employees or by the advisor, accountants, appraisers or other
experts or consultants selected by the Trustees or officers of the Trust,
regardless of whether such counsel or expert may also be a Trustee.
SECTION 15. Certain Rights of Trustees, Officers, Employees and Agents.
The Trustees shall have no responsibility to devote their full time to the
affairs of the Trust. Any Trustee or officer, employee or agent of the Trust, in
his personal capacity or in a capacity as an affiliate, employee, or agent of
any other person, or otherwise, may have business interests and engage in
business activities similar to or in addition to those of or relating to the
Trust.
ARTICLE IV
COMMITTEES
SECTION 1. Number, Tenure and Qualification. The Board of Trustees may
appoint from among its members an Executive Committee, an Audit Committee and
other committees, composed of two or more Trustees, to serve at the pleasure of
the Trustees. A majority of the members of each committee must be Independent
Trustees.
SECTION 2. Powers. The Trustees may delegate to committees appointed
under Section 1 of this Article any of the powers of the Trustees, except as
prohibited by law.
SECTION 3. Meetings. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another Trustee to act in the place of such
absent member.
SECTION 4. Telephone Meetings. Members of a committee of the Trustees
may participate in a meeting by means of a conference telephone or similar
communications equipment if all person participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
SECTION 5. Informal Action by Committees. Any action required or
permitted to be taken at any meeting of a committee of the Trustees may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
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ARTICLE V
OFFICERS
SECTION 1. General Provisions. The officers of the Trust may consist of
a chairman of the board, a vice chairman of the board, a chief executive
officer, a president, one or more vice presidents, a treasurer, one or more
assistant treasurers, a secretary, and one or more assistant secretaries. In
addition, the Trustees may from time to time appoint such other officers with
such powers and duties as they shall deem necessary or desirable. The officers
of the Trust shall be elected annually by the Trustees at the first meeting of
the Trustees held after each annual meeting of shareholders. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Each officer shall hold office until his
successor is elected and qualifies or until his death, resignation or removal in
the manner hereinafter provided. Any two or more offices except president and
vice president may be held by the same person at the same time, except as
provided by law. In their discretion, the Trustees may leave unfilled any office
except that of president and secretary. Election of an officer or agent shall
not in and of itself create contract rights between the Trust and such officer
or agent.
SECTION 2. Removal and Resignation. Any officer or agent of the Trust
may be removed by the Trustees if, in their judgment, the best interests of the
Trust would be served thereby, but such removal shall be without prejudice to
the contract rights, if any, of the person so removed. Any officer of the Trust
may resign at any time by giving written notice of his resignation to the
Trustees, the chairman of the board, the president or the secretary. Any
resignation shall take affect at any time subsequent to the time specified
therein or, if the time when it shall become effective is not specified therein,
immediately upon its receipt. The acceptance of a resignation shall not be
necessary to make it effective unless otherwise stated in the resignation.
SECTION 3. Vacancies. A vacancy in any office may be filled by the
Trustees for the balance of the term.
SECTION 4. Chief Executive Officer. The Trustees may designate a chief
executive officer. The chief executive officer shall have responsibility for the
implementation of the policies of the Trust, as determined by the Trustees, and
for the administration of the business affairs of the Trust. In the absence of
both the chairman and the vice chairman of the board, if any, the chief
executive officer shall preside over the meetings of the Trustees and of the
shareholders at which he shall be present. The chief executive officer may
execute any deed, mortgage, bond, contract or other instrument, except in cases
where the execution thereof shall be expressly delegated by the Trustees or by
these Bylaws to some other officer or agent of the Trust or shall be required by
law to be otherwise executed; and shall in general perform all duties incident
to the office of president and such other duties as may be assigned to him by
the Trustees from time to time.
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SECTION 5. Chief Operating Officer. The Trustees may designate a chief
operating officer. Said officer shall have the duties and responsibilities set
forth by the Trustees or the chief executive officer.
SECTION 6. Chief Financial Officer. The Trustees may designate a chief
financial officer from among the elected officers. Said officer shall have the
duties and responsibilities set forth by the Trustees or the chief executive
officer.
SECTION 7. Chairman and Vice Chairman of the Board. The chairman of the
board shall preside over the meetings of the Trustees and of the shareholders at
which he shall be present and shall in general oversee all of the business and
affairs of the Trust. In the absence of the chairman of the board, the vice
chairman of the board shall preside at such meetings at which he shall be
present. The chairman and the vice chairman of the board may execute any deed,
mortgage, bond, contract or other instrument, except in cases where execution
thereof shall be expressly delegated by the Trustees or by these Bylaws to some
other officer or agent of the Trust or shall be required by law to be otherwise
executed. The chairman and the vice chairman of the board shall perform such
other duties as may be assigned to him or them by the Trustees.
SECTION 8. President. In the absence of the chairman of the board, the
vice chairman of the board and the chief executive officer, the president shall
preside over the meetings of the Trustees and of the shareholders at which he
shall be present. In the absence of a designation of a chief executive officer
by the Trustees, the president shall be the chief executive officer and shall be
ex officio a member of all committees that may, from time to time, be
constituted by the Trustees. The president may execute any deed, mortgage, bond,
contract or other instrument, except in cases where the execution thereof shall
be expressly delegated by the Trustees or by these Bylaws to some other officer
or agent of the Trust or shall be required by law to be otherwise executed; and
shall in general perform all duties incident to the office of president and such
other duties as may be assigned to him by the Trustees from time to time.
SECTION 9. Vice Presidents. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one president, the vice presidents in the order designated at the time
of their election or, in the absence of any designation, in the order of their
election) shall perform the duties of the president and when so acting shall
have all of the powers of and be subject to all of the restrictions upon the
president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Trustees. The Trustees may designate
one or more vice presidents as executive or senior vice president or as vice
president for a particular area of responsibility.
SECTION 10. Secretary. The secretary shall (a) keep the minutes of the
proceedings of the shareholders, the Trustees and committees of the Trustees in
one or more books provided for that purpose; (b) see that all notices are duly
given in accordance with the provisions of these Bylaws or as required by law;
(c) be custodian of the Trust records and of the seal of the Trust; (d) keep a
register of the post office address of each shareholder which
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address shall be furnished in writing to the secretary by each shareholder; (e)
have general charge, directly or through an independent transfer agent, of the
share transfer books of the Trust; and (f) in general perform such other duties
as from time to time may be assigned to him by the chief executive officer, the
president or the Trustees.
SECTION 11. Treasurer. The treasurer shall have the custody of the
funds and securities of the Trust and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit all
moneys and other valuable effects in the name and to the credit of the Trust in
such depositories as may be designated by the Trustees. The treasurer shall
disburse the funds of the Trust as may be ordered by the Trustees, taking proper
vouchers for such disbursements, and shall render to the president and Trustees,
at the regular meetings of the Trustees or whenever they may require, an account
of all his transactions as treasurer and of the financial condition of the
Trust. If required by the Trustees, the treasurer shall give the Trust a bond in
such sum and with such surety or sureties as shall be satisfactory to the
Trustees for the faithful performance of the duties of his office and for the
restoration of the Trust, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, moneys and other property
of whatever kind in his possession or under his control belonging to the Trust.
SECTION 12. Assistant Secretaries and Assistant Treasurers. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer, respectively,
or by the president or the Trustees. The assistant treasurers shall, if required
by the Trustees, give bonds to the Trust in such sums and with such surety or
sureties as shall be satisfactory to the Trustees for the faithful performance
of their duties.
SECTION 13. Salaries. The salaries of the officers shall be fixed from
time to time by the Trustees, and no officer shall be prevented from receiving
such salary by reason of the fact that he is also a Trustee.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. The Trustees may authorize any officer or agent
of the Trust to enter into any contract or to execute and deliver any instrument
in the name of and on behalf of the Trust, and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the Trustees or by an authorized person
shall be valid and binding upon the Trust when authorized or ratified by action
of the Trustees.
SECTION 2. Checks and Drafts. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Trust shall be signed by such officer or officers, agent or agents
of the Trust in such manner as shall from time to time be determined by the
Trustees.
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SECTION 3. Deposits. All funds of the Trust not otherwise employed
shall be deposited from time to time to the credit of the Trust in such banks,
trust companies or other depositories as the Trustees may designate.
ARTICLE VII
SHARES
SECTION 1. Certificates. Each shareholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
Shares of each class of stock or beneficial interest held by him in the Trust.
Each certificate shall be signed by the chief executive officer, the president
or a vice president and countersigned by the secretary or an assistant secretary
or the treasurer or an assistant treasurer and may be sealed with the seal, if
any, of the Trust. The signature may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Trust shall, from time to time,
issue several classes of shares, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing Shares that
are restricted as to their transferability or voting powers, which are preferred
or limited as to their dividends or as to their allocable portion of the assets
of the Trust upon liquidation or which are redeemable at the option of the
Trust, shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated thereon. In lieu of
such statement or summary, the Trust may set forth upon the face or back of the
certificate a statement that the Trust will furnish to any shareholder, upon
written request and without charge, a full statement of such information.
SECTION 2. Transfers. Certificates shall be treated as negotiable, and
title thereto and to the shares they represent shall be transferred by delivery
thereof to the same extent as those of a Maryland stock corporation. Upon
surrender to the Trust or the transfer agent of the Trust of a share certificate
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, the Trust shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books. The Trust shall be entitled to treat the holder of record of any share or
shares as the holder in fact thereof; and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland. Notwithstanding the foregoing, transfers of shares of any class of
stock will be subject in all respects to the provisions of Article VII of the
Declaration and all of the terms and conditions set forth therein.
SECTION 3. Lost Certificate. The Trustees (or any officer or officers
designated by them) may direct a new certificate to be issued in place of any
certificate previously issued by the Trust alleged to have been lost, stolen or
destroyed upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing the issuance
of a new certificate, the Trustees (or any officer or officers designated by
them) may, in his or their discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or his legal representative to advertise the same in
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such manner as he or they shall require and/or to give a bond, with sufficient
surety, to the Trust to indemnify it against any loss or claim which may arise
as a result of the issuance of a new certificate.
SECTION 4. Closing of Transfer Books or Fixing of Record Date. The
Trustees may set, in advance, a record date for the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
determining shareholder entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
shareholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall not
be more than 90 days and, in the case of a meeting of shareholders shall not be
less than ten days, before the date on which the meeting or particular action
requiring such determination of shareholders is to be held or taken. In lieu of
fixing a record date, the Trustees may provide that the share transfer books
shall be closed for a stated period not to exceed 20 days. If the share transfer
books are closed for the purpose of determining shareholders entitled to notice
of or to vote at a meeting of shareholders, such books shall be closed for at
least ten days before the date of such meeting.
If no record date is fixed and the share transfer books are not
closed for the determination of shareholders, (a) the record date for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day upon which the notice
of meeting is mailed or the 30th day before the day of the meeting, whichever is
the closer date to the meeting; and (b) the record date for the determination of
shareholders entitled to receive payment of a dividend or an allotment of any
other rights shall be the close of business on the day upon which the resolution
of the Trustees, declaring the dividend or allotment of rights is adopted.
When a determination of Shareholders entitled to vote at any
meeting of shareholders has been made as provided in this Section 4, such
determination shall apply to any adjournment thereof, except where the
determination has been made through the closing of the transfer books and the
stated period of closing has expired.
SECTION 5. Stock Ledger. The Trust shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
Shareholder and the number of Shares of each class held by such Shareholder.
SECTION 6. Fractional Shares; Issuance of Units. The Trustees may cause
the Trust to issue fractional shares or provide for the issuance of scrip, all
on such terms and under such conditions as they may determine. Notwithstanding
any other provision of the Declaration or these Bylaws, the Trustees may cause
the Trust to issue units consisting of different securities issued by the Trust.
Any security issued in a unit shall have the same characteristics as any
identical security issued by the Trust, except that the Trustees may provide
that, for a specified period, securities of the Trust issued in such unit may be
transferred on the books of the Trust only in such unit.
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ARTICLE VIII
DISTRIBUTIONS
SECTION 1. Declaration. Distributions on the Shares of the Trust may be
declared by the Trustees, subject to the provisions of law and of the
Declaration. Distributions may be paid in cash, property or shares of the Trust,
subject to the provisions of law and of the Declaration.
SECTION 2. Contingencies. Before payment of any distributions, there
may be set aside out of any funds of the Trust available for distribution such
sum or sums as the Trustees may from time to time, in their absolute discretion,
deem proper as a reserve fund for contingencies, for equalizing distributions,
for repairing or maintaining any property of the Trust or for such other purpose
or purposes as the Trustees shall determine to be in the best interest of the
Trust, and the Trustees may modify or abolish any such reserve in the manner in
which it was created.
ARTICLE IX
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the
Declaration or these Bylaws, or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not duly and lawfully called or convened.
ARTICLE X
ACCOUNTING YEAR
The fiscal year of the Trust shall be the calendar year or such
other fiscal year as the Trustees may determine from time to time.
ARTICLE XI
SEAL
SECTION 1. Seal. The Trustees may authorize the adoption of a seal by
the Trust. The seal shall have inscribed thereon the name of the Trust, Maryland
as the state of organization and the year of its organization. The Trustees may
authorize one or more duplicate seals and provide for the custody thereof.
SECTION 2. Affixing Seal. Whenever the Trust is required to affix its
seal to a document, it shall be sufficient to meet the requirements of any law,
rule or regulation relating
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to a seal to place the word "(SEAL)" adjacent to the signature of the person
authorized to execute the document on behalf of the Trust.
ARTICLE XII
PROHIBITED INVESTMENTS AND ACTIVITIES
The investment policies of the Trust shall be set forth in the
Declaration and as prescribed by the Trustees from time to time.
ARTICLE XIII
INDEMNIFICATION
To the maximum extent permitted by Maryland law, the Trust shall
indemnify every Eligible Indemnitee, without requiring a preliminary
determination of the ultimate entitlement to indemnification, against all
judgments, penalties, fines, amounts paid in settlement and reasonable expenses
actually incurred by such Eligible Indemnitee in connection with any proceeding
in which such Eligible Indemnitee has, is or is threatened to be named as
defendant or respondent or to be called as a witness, by reason of his or her
serving or having served the Trust. For purposes of these provisions, an
"Eligible Indemnitee" is (1) any of the Trust's present or former trustees or
officers, (2) any person who, while serving in any of such capacities, served at
the Trust's request as a trustee, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of another trust or other
enterprise, (3) any person nominated or designated by the Trustees or any
committee thereof to serve in any of the capacities referred to in the preceding
clauses (1) or (2), and (4) any employee of Wellington Realty, Inc. providing
services to the Trust. The Trust shall further indemnify each Shareholder or
former Shareholder of the Trust against any claim or responsibility to which he
or she may be subject by virtue of such status as a Shareholder or former
Shareholder.
In addition, the Trust shall pay or reimburse, in advance of final
disposition of a proceeding, reasonable expenses incurred by a present or former
Trustee, officer or Shareholder made a party to a proceeding by reason of his or
her status as a Trustee, officer or Shareholder, provided that, in the case of a
Trustee or officer, the Trust shall have received (1) a written affirmation of
the Trustee or officer of his or her good faith belief that he or she has met
the applicable standard of conduct necessary for indemnification as authorized
by these Bylaws and (2) a written undertaking by him or her, or on his or her
behalf, to repay the amount paid or reimbursed by the Trust if it shall
ultimately be determined that the applicable standard of conduct was not met.
ARTICLE XIV
AMENDMENT OF BYLAWS
The Trustees shall have the exclusive power to adopt, alter, or
repeal any provision of these Bylaws or to make new Bylaws.
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NOTE
$400,000.00 August 20, 1999
FOR VALUE RECEIVED, Maple Grove Apartment Homes, Inc., having its
principal place of business at 18650 W. Corporate Drive, Suite 300, Brookfield,
Wisconsin 53045 (hereinafter referred to as "Maker"), promises to pay to the
order of The Shelard Group, Inc., a Minnesota corporation, at its principal
place of business at 11455 Viking Drive, Eden Prairie, Minnesota 55344
(hereinafter referred to as "Holder"), or at such other place as the Holder
hereby may from time to time designate in writing, the principal sum of Four
Hundred Thousand and no/100 Dollars ($400,000.00), in lawful money of the United
States of America together with interest thereon to be computed from the date of
this Note at ten percent (10%) per annum as follows:
(i) Interest payments shall be paid monthly commencing on the 1st day
of September, 1999 and on the 1st day of each month thereafter.
(ii) The entire principal balance together with all accrued but unpaid
interest shall be paid in full on or before the earlier of (a) the
date Maker consummates the sale of the property commonly known as
Maple Grove Apartments in Madison, Wisconsin to Holder or its
designee or (b) October 30, 2000.
(iii) In the event this Note is not paid in full on or before October
31, 1999 all excess cash flow from the property owned by Maker
known as Maple Grove Apartments in Madison, Wisconsin shall be
paid on or before the 5th day of each calendar month commencing
November 5, 1999 and due on the same day of each month thereafter
to Holder. "Excess cash flow" shall be funds available after
payment of all operating expenses and debt service, including
reserves required by the first mortgage. After October 31, 1999
property management fees shall be deferred until this Note is paid
in full.
(iv) All payments shall first be applied to accrued interest and the
balance to principal.
The whole of the principal sum of this Note, together with all interest
accrued and unpaid thereon and all other sums due under this Note (all such sums
hereinafter collectively referred to as the "Debt") shall without notice become
immediately due and payable at the option of Holder if any payment required in
this Note is not paid within ten (10) days of the date when due or on the
happening of any other default. In the event that it should become necessary for
Holder to employ counsel to collect the Debt, Maker also agrees to pay
reasonable attorneys' fees for the services of such counsel whether or not suit
be brought.
This Note is prepayable at any time without penalty.
This Note is subject to the express condition that at no time shall
Maker be obligated or required to pay interest on the principal balance due
hereunder at a rate which could subject Holder to either civil or criminal
liability as a result of being in excess of the maximum interest rate which
Maker is permitted by applicable law to contract or agree to pay. If by the
terms of this Note, Maker is at any time required or obligated to pay interest
on the principal balance due hereunder at a rate in excess of such maximum rate,
the interest rate herein provided shall be deemed to be immediately reduced to
such maximum rate and all previous payments in excess of the maximum rate shall
be deemed to have been payments in reduction of principal and not on account of
the interest due hereunder.
If any sum payable under this Note is not paid within ten (10) days
after the date on which it is due, Maker shall pay to Holder upon demand an
amount equal to the lesser of five percent (5%) of such unpaid sum or the
maximum amount permitted by applicable law to defray the expenses incurred by
Holder in handling and processing such delinquent payment and to compensate
Holder for the loss of the use of such delinquent payment.
This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
Maker or Holder, but only by an agreement in writing signed by the party against
whom enforcement of any modification, amendment, waiver, extension, change,
discharge or termination is sought.
If Maker consists of more than one person or party, the obligations and
liabilities of each such person or party shall be joint and several.
Maker and all others who may become liable for the payment of all or
any part of the Debt do hereby severally waive presentment and demand for
payment, notice of dishonor, protest and notice of protest and non-payment. No
release of any security for the Debt or extension of time for payment of this
Note or any installment hereof, and no alteration, amendment or waiver of any
provision of this Note made by agreement between Holder and any other person or
party shall release, modify, amend, waive, extend, change, discharge, terminate
or affect the liability of maker, and any other who may become liable for the
payment of all or any part of the Debt, under this Note.
Maker (and the undersigned representative Maker, if any) represents
that Maker has full power, authority and legal rights to execute and deliver
this Note, and that this Note constitutes valid and binding obligations of
Maker.
This Note shall be governed and construed in accordance with the laws
of the State of Minnesota.
IN WITNESS WHEREOF, Maker has duly executed this Note the day and year
first above written.
Maple Grove Apartment Homes, Inc.
By: /s/ Arnold K. Leas
Arnold K. Leas, President