As filed with the Securities and Exchange Commission on August 11, 1999
Registration Statement No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
Wellington Properties Trust
(Name of Small Business Issuer in its Charter)
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<S> <C> <C>
Maryland 6798 39-6594066
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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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 Philip T. Colton
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. [ ]
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CALCULATION OF REGISTRATION FEE
=========================================== ===================== ===================== ==================== ==================
Proposed Maximum Proposed Maximum
Title Of Each Class Of Amount To Be Offering Price Aggregate Offering Amount of
Securities To Be Registered Registered Per Share (1) Price (1) Registration Fee
- ------------------------------------------- --------------------- --------------------- -------------------- ------------------
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Class A Cumulative Convertible Preferred
Shares, $0.01 par value per share,
together with a sufficient number of 1,380,000 Shares (2) $10.00 $13,800,000 $3,836.40
shares of Common Shares, $0.01 par value
per share, into which they are convertible
- ------------------------------------------- --------------------- --------------------- -------------------- ------------------
(1) Calculated in accordance with Rule 457(i) under the Securities Act of
1933, as amended.
(2) Includes 180,000 shares issuable upon exercise of an option granted to
the Underwriters to cover overallotments.
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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.
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THE INFORMATION IN THIS 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 August 11, 1999)
1,200,000 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 on the Nasdaq SmallCap Market sm
under the symbol "WLPT." No public market currently exists for our Class A
Preferred Shares, but we plan to list our Class A Preferred Shares on the Nasdaq
National Market sm under the symbol "WLPTA" upon the closing of this 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
9 of this prospectus.
The Offering Per Share Total
---------------------------------------------- ------------ -------------
Public offering price $10.00 $12,000,000
Underwriting discount $ 0.80 $ 960,000
Proceeds to us (before deduction of other
offering expenses) $ 9.20 $11,040,000
We are also offering our underwriters a 45-day option to purchase up to
180,000 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, up to a maximum of $250,000, as payment for
expenses they incur. We will also issue the underwriters' representative a
warrant to purchase a number of Class A Preferred Shares equal to 10% of the
total number of Class A Preferred Shares sold in this offering.
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]
______________________, 1999
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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
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o the seller maintains autonomy and entrepreneurial focus.
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.
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).
3
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The Offering
Class A Preferred Shares offered..... 1,200,000 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 180,000 Class A
Preferred Shares solely to cover
overallotments.
Trading symbols...................... Our common shares are listed for
quotation on the Nasdaq SmallCap Market
sm under the symbol "WLPT."
Upon the closing of the offering, we
expect that the Class A Preferred Shares
will be listed for quotation on the
Nasdaq National Market sm under the
symbol "WLPTA."
Equity to be outstanding after
the offering......................... 1,352,361 of our common shares (not
including (1) 261,773 shares
subject to outstanding
warrants and share options,
(2) an estimated 2,327,273
shares issuable upon
conversion of the Class A
Preferred Shares, (3) an
estimated 678,400 shares
issuable upon conversion of
our Class B Junior Cumulative
Convertible Preferred Shares,
and (4) 1,719,335 shares
issuable upon conversion of
units of our operating
partnership);
1,200,000 Class A Preferred Shares (not
including warrants we will
issue to our underwriters'
representative to purchase up
to 120,000 Class A Preferred
Shares);
180,000 additional Class A Preferred
Shares if the underwriters'
overallotment option is
exercised in full (not
including additional warrants
we would issue to our
underwriters' representative
to purchase up to 18,000 Class
A Preferred Shares);
349,800 of our Class B Junior
Cumulative Convertible
Preferred Shares;
1,214,086 common units of our operating
partnership;
505,249 Class B common units of our
operating partnership;
1,200,000 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 1,380,000
Class A preferred units if our
underwriters' overallotment
option is exercised in full);
and
349,800 Class B preferred units of our
operating partnership.
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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 $4.6875
on July 30, 1999, we estimate that each
Class A Preferred Share will initially
entitle its holder to approximately 1.94
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.
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
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.
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 $____.
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Redemption........................... 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.
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.
6
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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.
Wellington Properties Trust
(Dollars in thousands, except per share data)
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Six Months Year Ended December 31,
Ended June 30, -----------------------------------------------------
Pro Pro
Forma Historical(d) Forma Historical(d)
-------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
1999(a) 1999 1998 1998(a) 1998 1997 1996 1995 1994
------- ---- ---- ------- ---- ---- ---- ---- ----
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Operating Data:
Revenue:
Rental revenue $ 2,153 $3,414 $1,517 $4,229 $ 3,488 $ 2,981 $ 2,557 $ 1,209 $ 196
Other 374 31 - 765 21 199 9 12 1
------- -------- ------- ------ ------- ------- ------- ------ ------
Total Revenue 2,527 3,445 1,517 4,994 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 (59) (4,071) (148 384 (2,006) (276) (713) (370) (27)
Loss allocated to minority
interests 445 2,664 - 615 1,065 - - - -
------- -------- ------- ------ ------- ------- ------- ------- ------
Net income (loss) 386 (1,407) (148 999 (941) (276) (713) (370) (27)
Net income allocated to
Preferred Shares (736) - - (1,472) - - - - -
------- -------- ------- ------ ------- ------- ------- -------
Net loss allocated to
Common Shares $ (350) $(1,407) $ (148) $ (473) $ (941) $ (276) $ (713) $ (370) $ (27)
======= ======== ======= ====== ======= ======= ======= ======= ======
Net loss per Common Share $ (0.26) $ (1.04) $ (0.13 $(0.36) $ (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 48,361 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 7,292 8,755 - 12,248 - - - -
Shareholders' equity 19,316 3,662 3,201 4,758 3,477 3,897 3,175 848
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Wellington Properties Trust
(Dollars in thousands, except property data)
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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
------- ---- ---- ------- ---- ---- ---- ---- ----
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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)
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 60.
(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>
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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 have declared but not paid dividends of $0.11 per common share for
each of the first and second quarters of 1999. We expect to derive funds to pay
these dividends from the sale or refinancing of one of our investment
properties. However, we cannot be certain that we will be able to complete a
transaction that will allow us to pay those outstanding 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 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.
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
9
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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 26.8% of our common shares as of July 31, 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.
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
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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.
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.
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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.
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, which preferences and rights may be
superior to those of the Class A Preferred
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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 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.
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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 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
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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.
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
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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.
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
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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.
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.
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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, we might not
be able to meet Nasdaq's 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 $10,390,000 from the sale of our
Class A Preferred Shares, approximately $12,046,000 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. 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 1,200,000 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.
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------------------------
Historical Proforma
---------- --------
<S> <C> <C>
Mortgage loans payable $ 32,049,000 $ 19,369,000
Minority interests 8,755,000 7,292,000
SHAREHOLDERS' EQUITY:
Preferred Shares:
$0.01 par value: 10,000,000 authorized, no shares
issued and outstanding on a historical basis, -- --
1,200,000 Class A Cumulative Convertible
Preferred Shares issued and
outstanding on a pro forma basis -- 12,000
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 24,406,000
Accumulated deficit (5,422,000) (5,119,000)
---------------- ----------------
Total shareholders' equity 3,662,000 19,316,000
---------------- ----------------
Total capitalization $ 44,466,000 $ 45,977,000
================ ================
</TABLE>
21
<PAGE>
PRICE RANGE OF COMMON SHARES AND DIVIDENDS
Our common shares are listed on the Nasdaq SmallCap Market sm under the
symbol WLPT. 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 (1)
Second Quarter............................. 4.75 4.38 0.1100 (1)
Third Quarter (through July 30, 1999)...... 4.69 3.68
- ------------------------------
(1) Indicates that declared dividends have not been paid as of the date of
this prospectus. The failure to pay these dividends when they were
declared is the result of insufficient available funds, due principally
to substantial costs incurred in connection with 30 proposed property
acquisitions in the fourth quarter of 1998 and our failure to close 27 of
them due to changed market conditions. We expect to derive funds to pay
these declared dividends with proceeds from the sale or refinancing of
one of our investment properties. For more information about the
potential sale of our Madison, Wisconsin apartment community, please see
page 34 of this prospectus.
The last reported sale price of our common shares on the Nasdaq SmallCap
Market sm as of July 30, 1999 was $4.6875 per share. As of July 30, 1999, there
were 310 holders of record of our common shares.
22
<PAGE>
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 60) 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 $2,527,000 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 $279,000 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
$59,000, 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
$350,000 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 $4,994,000 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 $559,000 related to our investment of expected net cash proceeds
received from our issuance of the Class A
23
<PAGE>
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 $384,000 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 $473,000 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
24
<PAGE>
resulting from our new structure following our 1998 acquisitions, as well as the
other factors described above.
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 1,200,000 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 $10,390,000 (approximately $12,046,000 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
25
<PAGE>
cash proceeds, on a pro forma basis, to be $2,437,000. The closing of the sale
of the Maple Grove property (which we describe more fully on page 34 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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
Pro Forma
------------------------------------------
Year Ended Six-Month Period Ended
December 31, 1998 June 30, 1999
---------------- ------------
<S> <C> <C>
Income (loss) before minority interests $ 384,000 $ (59,000)
Less: net income allocated to preferred shares (1,472,000) (736,000)
Add: real estate related depreciation and
amortization 721,000 359,000
Funds from operations - basic $ (367,000) $ (436,000)
================ ==============
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.
</TABLE>
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.
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
27
<PAGE>
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.
28
<PAGE>
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,
29
<PAGE>
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 1,200,000 Class A preferred units (up to
1,380,000 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
30
<PAGE>
rate will be adjusted appropriately in the event of a share split, share
dividend or similar event. No fewer 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 1,200,000 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
31
<PAGE>
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 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
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<PAGE>
operating a public real estate company; (3) our 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 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 REITPLUSK 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 REITPLUSK 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.
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<PAGE>
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 REITPLUSK affiliates in the development of new
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.
If we complete the sale of the Maple Grove property in the near future, we
intend to use a portion of the net proceeds to pay the dividends we have
declared on our common shares for the first and second quarters of 1999.
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
REITPLUSK affiliates. We intend that the depth of the REITPLUSK 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 REITPLUSK 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
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<PAGE>
monitor accounting elements such as receivables, payables, rent roll status and
budget compliance through the system.
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
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<PAGE>
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.
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.
Ft. $18.55 $13.45 $10.53 $14.46
Tenants Leasing 10% Cold Spring Granite BRW, Inc.(48%) - Wakata Design
or More of Rentable (55%) - 4/02; Central 7/01; Search Institute Systems (19%) -
SquareFootage as of MN ECSU (14%) - (16%) - 8/02 3/02; Quickdraw
July 1, 1999 and 9/02; First American Design, Inc.
Lease Expiration Bank (17%) - 4/05 (30%) - 8/02;
Date 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>
37
<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. -- 7.9% 5.1% 69.6% -- -- 17.4% -- -- -- -- 100%
Ft.
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 -- 4.3% 6.7% 66.8% -- -- 22.2% -- -- -- -- 100%
Expiring Leases
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>
39
<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. -- -- -- 49.2% -- 50.8% -- -- -- -- -- 100%
Ft.
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 -- -- -- 44.7% -- 55.3% -- -- -- -- -- 100%
Expiring Leases
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>
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
--------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- -----
Thresher Square West
Square Footage of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Expiring Leases -- 686 33,378 21,781 -- -- -- -- -- -- -- 55,845
Percentage of
Total Leased Sq. -- 1.2% 59.8% 39.0% -- -- -- -- -- -- -- 100%
Ft.
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 -- 1.6% 53.0% 45.4% -- -- -- -- -- -- -- 100%
Expiring Leases
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>
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
- --------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- -----
Thresher Square East
Square Footage of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Expiring Leases 8,090(4) 4,216 27,508 13,787 10,419 -- -- -- -- -- -- 64,020
Percentage of
Total Leased Sq. 12.6% 6.6% 43.0% 21.5% 16.3% -- -- -- -- -- -- 100%
Ft.
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 4.2% 5.8% 39.9% 26.0% 24.1% -- -- -- -- -- -- 100%
Expiring Leases
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>
42
<PAGE>
<TABLE>
<CAPTION>
2009
and
Year of Lease there-
Expiration 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 after Total
------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- -----
Property Information
- --------------------
Consolidated Totals for All Commercial Properties
Square Footage of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
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<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 (including the payment of
declared but unpaid dividends on our common shares for the first two quarters of
1999), and (2) our belief that other investment opportunities may provide a
better return on capital.
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<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.
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%.
45
<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>
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<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
----------- ------------ ------------ ------- ---- -------- -------
Property Location
<S> <C> <C> <C> <C> <C> <C> <C>
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>
47
<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 REITPLUSK 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
48
<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.
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
49
<PAGE>
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.
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.
50
<PAGE>
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.
51
<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 July 31, 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............ 46 Trustee
Peter Ogden................ 40 Trustee
Robert P. Ripp............. 72 Trustee
Robert D. Salmen........... 44 Trustee
Duane H. Lund.............. 35 Chief Executive Officer and Treasurer
Robert F. Rice............. 48 President and Secretary
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 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).
52
<PAGE>
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.
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 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.
53
<PAGE>
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. Ripp and Ogden have executed written agreements to resign as members of
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.
54
<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 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.
Options/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Common Percentage of Total
Shares Underlying Options Granted to Exercise Expiration
Name and principal position Options Granted Employees in Fiscal Year Price 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% $5.37 5-26-08
</TABLE>
55
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
# of Securities
Common Underlying Value of unexercised in-the-
Shares Options/SARs at money options/SARs at Fiscal
Acquired on Value Fiscal year End Year End ($)
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 become 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 December 31, 2000, but
only if we meet specified financial goals for the preceding periods.
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 except for such trustee's
misfeasance, malfeasance or negligence. In addition, pursuant to Maryland law, a
trustee shall not be liable for any claims or damages that may result from his
or her acts in the discharge of any duty imposed or power conferred upon him or
her by us, if, in the exercise of ordinary care, such trustee acted in good
faith and in reliance upon the written opinion of any of our attorneys.
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<PAGE>
Our declaration of trust provides 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, reasonably believed that his or her conduct was in our
best interests (or, in certain cases, not opposed to our best interests) 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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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table describes the beneficial ownership of our voting
shares at July 31, 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 July 31, 1999 July 31, 1999
- --------------------------------------------------- ------------------------- --------------------------
Number(1) Percent(1) Number(2)
--------- ---------- ---------
<S> <C> <C> <C>
Arnold K. Leas (3)(4)(5)........................... 190,624 14.0% 95,000
Steven B. Hoyt (3)(4)(6).......................... 166,666 12.3% 254,800
Paul T. Lambert (3)(4)(7).......................... 166,666 12.3% 254,800
Duane H. Lund (2)(3)(4)(8)......................... 166,666 12.3% 254,800
American Real Estate Equities, LLC (4)(9).......... 166,666 12.3% 254,800
Lambert Equities II, LLC (4)(10)................... 166,666 12.3% 254,800
WLPT Funding, LLC (4)(11).......................... 166,666 12.3% 254,800
Wellington Management Corporation (4)(12).......... 143,767 10.6% 95,000
Esor and Company (13).............................. 70,693 5.2% 0
Peter Ogden (3)(14)................................ 3,167 * 0
Robert P. Ripp (3)(15)............................. 4,148 * 0
Robert D. Salmen (3)............................... 0 * 0
Robert F. Rice (3)(4)(16).......................... 9,500 * 0
All trustees and current executive officers as a
group (8 persons) (17)........................ 373,795 27.2% 349,800
- ------------------------------------
* Indicates less than one percent.
(1) Based on 1,352,361 common shares outstanding as of July 31, 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 July 31,
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.
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<PAGE>
(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.
(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 July 31, 1999. Also includes 143,767 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. 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) 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.
(8) 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.
(9) The business address for American Real Estate Equities, LLC is 300 First
Avenue North, Suite 115, Minneapolis, Minnesota 55401.
(10) 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.
(11) 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.
(12) The business address for Wellington Management Corporation is 18650 W.
Corporate Drive, Suite 300, P.O. Box 0919, Brookfield, Wisconsin 53045.
(13) The business address for Esor and Company is 1100 W. Wells Street,
Milwaukee, Wisconsin 53233.
(14) Consists solely of options to purchase common shares exercisable within
60 days of July 31, 1999.
(15) Includes options to purchase 3,167 common shares exercisable within 60
days of July 31, 1999.
(16) Includes options to purchase 7,917 common shares exercisable within 60
days of July 31, 1999.
(17) Includes options to purchase an aggregate of 23,651 common shares
exercisable within 60 days of July 31, 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.
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:
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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;
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
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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 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.
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 June 30, 1999, the
deferral amounted to $68,750 as to Mr. Lund and $50,000 as to Mr. Rice. Of the
total amount deferred by Mr. Rice, Wellington Management has advanced $37,500 to
Mr. Rice. We intend to
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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,
1,200,000 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.............................
---------
Total 1,200,000
=========
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 8% 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, up to $250,000 in
total.
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
180,000 of our Class A Preferred Shares at the public offering price, less the
8% 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 up to 120,000
Class A Preferred Shares (up to 138,000 Class A Preferred Shares if the
underwriters' overallotment option is exercised in full). 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 1,200,000 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
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underwriters may bid for, and purchase our Class A Preferred Shares in the open
market. Finally, the 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, 1,549,800 preferred shares will be issued and
outstanding, or 1,729,800 shares if our underwriters' overallotment option is
exercised in full.
Firstar Trust Company 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 68), 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 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 up to
120,000 Class A Preferred Shares (up to 138,000 shares if the underwriters'
overallotment option is exercised in full) 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
additional 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.
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 1,200,000 Class A preferred units (up to 1,380,000 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 Nasdaq National Market sm on the trading
day immediately preceding the relevant date, or if not then reported on the
Nasdaq National Market sm, the last reported sales price of such shares on the
trading day immediately preceding the relevant date as reported on any exchange
or quotation system over which such shares may be traded, or if not then traded
over 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 this 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
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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 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 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 established
by a final judgment as being material to the cause of action. Our declaration of
trust contains such a provision which eliminates liability of our trustees and
officers to the maximum extent permitted by the Maryland REIT law.
Our bylaws require us to indemnify, without requiring a preliminary
determination of the ultimate entitlement to indemnification, (1) any present of
former trustee, officer or shareholder who has been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by reason
of such status, against reasonable expenses incurred by him in connection with
the proceeding; (2) any present of 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 (3) 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
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indemnification and then only for expenses. In addition, our bylaws require us
to 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 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.
Our bylaws also (1) permit us, with the approval of our trustees, to provide
indemnification and payment or reimbursement of expenses to a present or former
trustee, officer or shareholder who served a predecessor of ours in such
capacity, and to any of our employees or agents or those of our predecessors,
(2) provide that any indemnification or payment or reimbursement of the expenses
permitted by our bylaws shall be furnished in accordance with the procedures
provided for indemnification and payment or reimbursement of expenses under
Maryland law and (3) permit us to provide further indemnification or payment or
reimbursement of expenses as may be permitted by Maryland law.
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 qualifications 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:
o that is managed by one or more trustees;
o the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest;
o that would be taxable as a domestic corporation but for the REIT
section of the Internal Revenue Code;
o that is neither a financial institution nor an insurance company
within the meaning of certain provisions of the Internal Revenue
Code;
o the beneficial ownership of which is held by 100 or more persons;
o 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
o 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.
Income Tests. There are three percentage tests relating to the sources of
our gross income.
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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 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
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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.
78
<PAGE>
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
79
<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.
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
80
<PAGE>
reports, proxy and information statements and
other information regarding registrants that file public documents
electronically.
81
<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 Month Period 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 1,200,000 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 10,390 -- -- 12,925
Escrowed cash 681 (254) -- -- -- 427
Deferred costs, net 816 (119) -- -- -- 697
Other assets 171 -- -- -- -- 171
-------- -------- -------- -------- -------- --------
Total Assets $ 51,016 $(13,045) $ 10,390 $ -- $ -- $ 48,361
======== ======== ======== ======== ======== ========
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 -- -- -- (1,463) 7,292
Shareholders' equity
Common shares of beneficial interest 14 -- -- -- -- 14
Preferred shares of beneficial interest -- -- 12 3 -- 15
Additional paid in capital 9,070 -- 10,378 3,495 1,463 24,406
Accumulated deficit (5,422) 303 -- -- -- (5,119)
-------- -------- -------- -------- -------- --------
Total shareholders' equity 3,662 303 10,390 3,498 1,463 19,316
-------- -------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $ 51,016 $(13,045) $ 10,390 $ -- $ -- $ 48,361
======== ======== ======== ======== ======== ========
</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>
Historical 1998 Acquired Maple Issuance of
Consolidated Properties Grove Apartments Preferred Shares Pro Forma Pro Forma
(A) (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) 559 - 765
----------- ------------ ----------- ---------- ---------- ------------
Total revenue 3,509 3,392 (2,466) 559 - 4,994
----------- ------------ ----------- ---------- ---------- ------------
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) 143 203 559 1,485 384
Minority interests in
(income) loss 1,065 - - - (450) (G) 615
----------- ------------ ----------- ---------- ---------- ------------
Net income (loss) (941) 143 203 559 1,035 999
Net income allocated to
Preferred Shares - - - - (1,472) (G) (1,472)
----------- ------------ ----------- ---------- ---------- ------------
Net income (loss) allocated to
Common Shares $ (941) $ 143 $ 203 $ 559 $ (437) $ (473)
=========== ============ =========== ========== ========== ==============
Net loss per share: Basic
and diluted $ (0.80) $ (0.36)
=========== ==============
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 Issuance of
Consolidated Properties Grove Apartments Preferred Shares Pro Forma Pro Forma
(A) (B) (C) (D) Adjustments Consolidated
Revenue:
<S> <C> <C> <C> <C> <C> <C>
Rental revenue $ 3,414 $ - $ (1,261) (i) $ - $ - $ 2,153
Other 31 - 64 (ii) 279 - 374
------------- --------- ------------ ----------- ----------- -----------
Total revenue 3,445 - (1,197) 279 - 2,527
------------- --------- ------------ ----------- ----------- -----------
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) - 170 279 3,563 (59)
Minority interests in
(income) loss 2,664 - - - (2,219) (G) 445
------------- --------- ------------ ----------- ----------- -----------
Net income (loss) (1,407) - 170 279 1,344 386
Net income allocated to
Preferred Shares - - - - (736) (G) (736)
------------- --------- ------------ ----------- ----------- -----------
Net income (loss) allocated
to Common Shares $ (1,407) $ - $ 170 $ 279 $ 608 $ (350)
============ ========= ============ =========== =========== ===========
Net loss per share:
Basic and diluted $ (1.04) $ (0.26)
============ ===========
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 1,200,000 Class A Preferred Shares, at an offering price of $10.00
per share, net of underwriting discounts and offering expenses
aggregating approximately $1,610.
(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 $ - $ 7,292 91.2% $ 7,292
Shareholders' equity (2)
Common Shares 3,114 703 8.8% 3,817
--------- ---------- -------- ---------
$ 3,114 $ 7,995 100.0% $ 11,109
========= ========== ======== =========
(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 $15,499.
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 June
December 31, 1998 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 June
December 31, 1998 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 Six
For the Year Month Period
Ended Ended
December 31, 1998 June 30, 1999
Income (loss) before
minority interests $ 384 $ (59)
Net income allocated to
Preferred Shares (1,472) (736)
------------ ------------
Net income (loss) allocated to
Units and Common Shares $ (1,088) $ (795)
============ ============
Pro forma minority share
1,719,335 Units for the year ended
December 31, 1998 and the six month
period ended June 30, 1999 $ (615) $ (445)
=========== ============
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 $ (473) $ (350)
=========== ===========
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 1,200,000 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.
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 to
sell, or a solicitation. Neither the
delivery of this prospectus nor any
sale 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. 1,200,000 Shares
Class A Cumulative Convertible
Preferred Shares
TABLE OF CONTENTS
Prospectus Summary.................2
Risk Factors.......................9
Use of Proceeds...................19
Dividend Policy...................20
Capitalization....................21
Price Range of Common
Shares and Dividends.............22
Management Discussion and
Analysis of Financial WELLINGTON PROPERTIES TRUST
Condition and Results of
Operations.......................23
Business..........................29
Management........................52
Principal Shareholders............58
Certain Relationships and
Related Transactions.............60
Underwriting......................63
Description of Securities.........65
Certain Provisions of Maryland
Law and of Our Declaration
of Trust and Bylaws..............70
Federal Income Tax Consequences...73
Legal Matters.....................79
Experts...........................79
Additional Information............79
Financial Statements.............F-1
Until ______, 1999 (25 days after
the date of this prospectus), all
dealers effecting transactions in [logo of R.J. Steichen & Company]
the Class A Preferred Shares,
whether or not participating in this
distribution, may be required to ________________, 1999
deliver a current 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.
==================================== =========================================
<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
Nasdaq 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.
II-1
<PAGE>
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.
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 registration
statement to be signed on its behalf by the undersigned, in the City of
Minneapolis, State of Minnesota, on August 6, 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. Each person whose signature appears below
constitutes and appoints Duane H. Lund and Robert F. Rice, and each of them
individually, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and his name, place and stead, in
any and all capacities, to sign any and all amendments and any and all
post-effective amendments and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
/s/ Duane H. Lund Chief Executive Officer August 6, 1999
Duane H. Lund (Principal Executive Officer)
/s/ Robert F. Rice President August 6, 1999
- --------------------------
Robert F. Rice
/s/ Arnold K. Leas Chairman of the Board August 6, 1999
- --------------------------
Arnold K. Leas
/s/ Steven B. Hoyt Trustee August 6, 1999
- --------------------------
Steven B. Hoyt
/s/ Paul T. Lambert Trustee August 6, 1999
- --------------------------
Paul T. Lambert
/s/ Peter Ogden Trustee August 6, 1999
Peter Ogden
/s/ Robert P. Ripp Trustee August 6, 1999
- --------------------------
Robert P. Ripp
/s/ Robert D. Salmen Trustee August 6, 1999
- --------------------------
Robert D. Salmen
II-3
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
1 Underwriting Agreement
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 (filed as Exhibit E with the Company's Schedule
14A on November 6, 1998 and incorporated herein by
reference)
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
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
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)
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)
II-4
<PAGE>
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 Share 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.
21* List of subsidiaries
23.1 Consent of Grant Thornton LLP
23.2 Consent of Foley & Lardner (Included in Exhibit 5 hereto)
24 Power of Attorney. (Included on the signature page hereof)
- -------------
* To be filed by amendment
II-5
1,200,000 SHARES
SERIES A CUMULATIVE CONVERTIBLE PREFERRED SHARES
WELLINGTON PROPERTIES TRUST
UNDERWRITING AGREEMENT
_________________, 1999
R. J. Steichen & Company
One Financial Plaza
120 South Sixth Street
Minneapolis MN 55402
Dear Ladies and Gentlemen:
Wellington Properties Trust, a Maryland Business Trust hereby confirms its
agreement, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters"), for which
R. J. Steichen & Company is acting as the representative (in such capacity, the
"Representative"), an aggregate of 1,200,000 Shares of Series A Cumulative
Convertible Preferred Stock, $.01 par value, of Wellington Properties Trust (the
"Firm Shares") and up to 180,000 additional Shares upon the request of the
Underwriters solely for the purpose of covering overallotments (the "Option
Shares"). The Firm Shares and the Option Shares, which aggregate 1,380,000
Shares, are collectively referred to herein as the "Shares." Further, the
Company hereby confirms its agreement to issue to the Underwriter warrants for
the purchase of up to 138,000 Shares as described in Section 5 hereof (the
"Underwriter's Warrants"), assuming purchase by the Underwriter of the Firm
Shares. The Shares issuable upon exercise of the Underwriter's Warrants are
referred to as the "Warrant Shares." Except as the context may otherwise
require, Wellington Properties Trust and its operating partnership, Wellington
Properties Investment, L.P., are referred to herein collectively as the
"Company." The Shares will be in the form and contain such rights and terms as
described in the Prospectus.
The Company hereby confirms the arrangements with respect to the purchase,
severally and not jointly, by each of the Underwriters the number of the Firm
Shares set forth opposite their respective names in Schedule I, plus their pro
rata portion of the Option Shares purchased if the overallotment option is
exercised in whole or in part. The Company has been advised and hereby
acknowledges that R. J. Steichen & Company has been duly authorized to act as
the representative of the Underwriters. As used in this Agreement, the term
"Underwriter" refers to any individual member of the underwriting syndicate and
includes any party substituted for an Underwriter under Section 9 hereof.
<PAGE>
1. Representations and Warranties of the Company. The Company represents
and warrants to and agrees with each of the several Underwriters as follows:
(a) A registration statement on Form SB-2 with respect to the Shares,
and as a part thereof a preliminary Prospectus has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933,
as amended (the "1933 Act") and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "SEC")
thereunder and has been filed with the SEC under the 1933 Act. The Company
has filed such amendments to the registration statement and such amended
preliminary prospectuses as may have been required to be filed to the date
hereof. If the Company has elected not to rely upon Rule 430A, the Company
has prepared and will promptly file an amendment to the registration
statement and an amended prospectus (provided the Underwriters have
consented to such filing). If the Company has elected to rely upon Rule
430A, it will prepare and timely file a prospectus pursuant to Rule 424(b)
that discloses the information previously omitted from the prospectus in
reliance upon Rule 430A. Copies of such registration statement and each
pre-effective amendment thereto, and each related preliminary prospectus
have been delivered by the Company to the Underwriters. Such registration
statement, as amended or supplemented, including all prospectuses included
as a part thereof, financial schedules, exhibits, the information (if any)
deemed to be part thereof pursuant to Rules 430A and 434 under the 1933 Act
and any registration statement filed pursuant to Rule 462 under the 1933
Act, is herein referred to as the "Registration Statement." The term
"Prospectus" as used herein shall mean the final prospectus, as amended or
supplemented, included as a part of the Registration Statement on file with
the SEC when it becomes effective; provided, however, that if a prospectus
is filed by the Company pursuant to Rules 424(b) and 430A or a term sheet
is filed by the Company pursuant to Rule 434 under the 1933 Act, the term
"Prospectus" as used herein shall mean the prospectus so filed pursuant to
Rules 424(b) and 430A and the term sheet so filed pursuant to Rule 434. The
term "Preliminary Prospectus" as used herein means any prospectus, as
amended or supplemented, used prior to the Effective Date (as defined in
Section 4(a) hereof) and included as a part of the Registration Statement,
including any prospectus filed with the SEC pursuant to Rule 424(a).
(b) Neither the SEC nor any state securities division has issued any
order preventing or suspending the use of any Preliminary Prospectus, or
issued a stop order with respect to the offering of the Shares or requiring
the recirculation of a Preliminary Prospectus and, to the best knowledge of
the Company, no proceeding for any such purpose has been initiated or
threatened. Each part of the Registration Statement, when such part became
or becomes effective, each Preliminary Prospectus, on the date of filing
with the SEC, and the Prospectus and any amendment or supplement thereto,
on the date of filing thereof with the SEC and on any Closing Date (as
defined in Section 3 hereof), as the case may be, conformed or will conform
in all material respects with the requirements of the 1933 Act and the
Rules and Regulations and the securities laws ("Blue Sky laws") of the
states where the Shares are to be sold (the "States") and contained or will
contain all statements that are required to be stated therein in accordance
with the 1933 Act, the Rules and Regulations and the Blue Sky laws of the
2
<PAGE>
States. When the Registration Statement became or becomes effective and
when any post-effective amendments thereto shall become effective, the
Registration Statement did not and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Neither any
Preliminary Prospectus, on the date of filing thereof with the SEC, nor the
Prospectus or any amendment or supplement thereto, on the date of filing
thereof with the SEC and on the First and Second Closing Dates, contained
or will contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this Subsection
1(b) shall apply to statements in, or omissions from, the Registration
Statement, Preliminary Prospectus or the Prospectus, or any amendment
thereof or supplement thereto, which are based upon and conform to written
information furnished to the Company by the Underwriters, as identified in
Section 12 herein, specifically for use in the preparation of the
Registration Statement, Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto. There is no contract or other document of
the Company of a character required by the 1933 Act or the Rules and
Regulations to be described in the Registration Statement or Prospectus, or
to be filed as an exhibit to the Registration Statement, that has not been
described or filed as required. The descriptions of all such contracts and
documents or references thereto are correct and include the information
required under the 1933 Act and the Rules and Regulations.
(c) The Company has been duly organized and is validly existing in
good standing under the laws of the State of Maryland, with full corporate
power and authority, to own, lease and operate its properties and conduct
its business as described in the Registration Statement and Prospectus. The
Company is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership or lease of its properties, or the
conduct of its business, requires such qualification and in which the
failure to be qualified or in good standing would have a material adverse
effect on the business of the Company. The Company has all necessary and
material authorizations, approvals and orders of and from all governmental
regulatory officials and bodies to own its properties and to conduct its
business as described in the Registration Statement and Prospectus, and is
conducting its business in substantial compliance with all applicable
material laws, rules and regulations of the jurisdictions in which it is
conducting business. The Company holds all material licenses, certificates,
permits, authorizations, approvals and orders of and from all state,
federal and other governmental regulatory officials and bodies necessary to
own its properties and to conduct its business as described in the
Registration Statement and Prospectus, or has obtained waivers from any
such applicable requirements from the appropriate state, federal or other
regulatory authorities. All such licenses, permits, approvals,
certificates, consents, orders and other authorizations are in full force
and effect, and the Company has not received notice of any proceeding or
action relating to the revocation or modification of any such license,
permit, approval, certificate, consent, order or other authorization which,
individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might materially and adversely affect the
conduct of the business or the condition, financial or otherwise, or the
earnings, affairs or business prospects of the Company.
3
<PAGE>
(d) The Company has no subsidiaries and is not affiliated with any
other Company or business entity, except as disclosed in the Prospectus.
(e) The Company is not in violation of its Declaration of Trust or
Bylaws. The Company is not in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which the Company or its
properties are bound, and there does not exist any state of facts which
constitutes an event of default on the part of the Company or which, with
notice or lapse of time or both, would constitute such an event of default.
The Company is not, to the best of its knowledge, in violation of any law,
order, rule, regulation, writ, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign, which violation
is material to the business of the Company.
(f) The Company has full requisite power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and will be a valid and binding agreement on the
part of the Company, enforceable in accordance with its terms, if and when
this Agreement shall have become effective in accordance with Section 8,
except as enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific performance
and except as the enforceability of the indemnification or contribution
provisions hereof may be affected by applicable federal or state securities
laws. The performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation
of any of the terms and provisions of, or constitute a default under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note, agreement
or other evidence of indebtedness, lease, contract or other agreement or
instrument to which the Company is a party or by which the property or
assets of the Company is bound, (ii) the Company's Declaration of Trust or
Bylaws or (iii) any statute or any order, rule or regulation of any court,
governmental agency or body having jurisdiction over the Company. No
consent, approval, authorization or order of any court, governmental agency
or body is required for the consummation by the Company of the transactions
on its part herein contemplated, except such as may be required under the
1933 Act, the Rules and Regulations, the Blue Sky laws, the rules and
regulations of the National Association of Securities Dealers, Inc.
("NASD") and the rules and regulations of Nasdaq.
(g) Except as is otherwise expressly stated in the Registration
Statement or Prospectus, there are no actions, suits or proceedings pending
before any court or governmental agency, authority or body to which the
Company is a party or of which the business or property of the Company is
the subject which might result in any material adverse change in the
condition (financial or otherwise), business or prospects of the Company,
materially and adversely affect its properties or assets or prevent
consummation of the transactions contemplated by this Agreement; and, to
the best of the Company's knowledge, no such actions, suits or proceedings
are threatened except as is
4
<PAGE>
otherwise expressly stated in the Registration Statement or Prospectus. The
Company is not aware of any facts which would form the basis for the
assertion of any material claim or liability which are not disclosed in the
Registration Statement or the Prospectus or adequately reserved for in the
financial statements which are a part thereof, except for such claims or
liabilities which are not currently expected to have a material adverse
effect on the condition (financial or otherwise) or the earnings, affairs
or business prospects of the Company. All pending legal or governmental
proceedings to which the Company is a party or to which any of its property
is subject, which are not described in the Registration Statement and the
Prospectus, including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material to the Company.
(h) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus. The outstanding Common Stock of
the Company is duly authorized, validly issued, fully paid and
nonassessable. The Shares and authorized securities of the Company conform
in substance to all statements relating thereto contained in the
Registration Statement and Prospectus. The securities to be sold by the
Company hereunder and the shares of Common Stock issuable upon conversion
of the Shares have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable and will conform to the description thereof contained in the
Prospectus. No preemptive rights or similar rights of any security holders
of the Company exist with respect to the issuance and sale of the Shares by
the Company. Except as disclosed in the Prospectus, the Company has no
agreement with any security holder which gives such security holder the
right to require the Company to register under the 1933 Act any securities
of any nature owned or held by such person either in connection with the
transactions contemplated by this Agreement or after a demand for
registration by such holder. Upon payment for and delivery of the Shares
pursuant to this Agreement, the Underwriters will acquire the Shares, free
and clear of all liens, encumbrances or claims. The certificates evidencing
the Shares will comply as to form with all applicable provisions of the
laws of the State of Maryland. Except as set forth in any part of the
Registration Statement, the Company does not have outstanding any options
to purchase, or any rights or warrants to subscribe for, or any securities
or obligations convertible into, or any contracts or commitments to issue
or sell, any Common Stock or other securities of the Company, or any such
warrants, convertible securities or obligations.
(i) The Underwriters' Warrants, and the Shares issuable upon exercise
or conversion thereof (the "Warrant Shares") have been duly authorized. The
Underwriters' Warrants, when issued and delivered to the Underwriters, will
constitute valid and binding obligations of the Company in accordance with
their terms, except as enforceability may be limited by the application of
bankruptcy, insolvency, moratorium or similar laws affecting the rights of
creditors generally and by judicial limitations on the right of specific
performance. The Warrant Shares when issued in accordance with the terms of
the Underwriters' Warrants, will be validly issued, fully paid and
nonassessable and subject to no preemptive rights or similar rights on the
part of an person or entity. A sufficient number of Shares have been
reserved for issuance by the Company upon exercise of the Underwriters'
Warrants and a sufficient number of shares of Common
5
<PAGE>
Stock have been reserved for issuance by the Company upon conversion of the
Warrant Shares.
(j) Grant Thornton, whose reports appear in the Registration Statement
and Prospectus, are independent accountants within the meaning of the 1933
Act and the Rules and Regulations. The financial statements of the Company,
together with the related notes, forming part of the Registration Statement
and Prospectus (the "Financial Statements"), fairly present the financial
position and the results of operations of the Company at the respective
dates and for the respective periods to which they apply. The Financial
Statements are accurate, complete and correct and have been prepared in
accordance with the 1933 Act, the Rules and Regulations and generally
accepted accounting principles ("GAAP"), consistently applied throughout
the periods involved, except as may be otherwise stated therein. The
summaries of the Financial Statements and the other financial and
statistical data and related notes set forth in the Registration Statement
and the Prospectus are (i) accurate and correct and fairly present the
information purported to be shown thereby as of the dates and for the
periods indicated on a basis consistent with the audited financial
statements of the Company and (ii) in compliance in all material respects
with the requirements of the 1933 Act and the Rules and Regulations. The
Financial Statements are based upon and consistent with the financial
statements and other reports filed by the Company with the SEC, except for
inconsistencies attributable solely to differences between GAAP and
regulatory accounting principles.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and at any Closing Date,
except as is otherwise disclosed in the Registration Statement or
Prospectus, there has not been:
(i) any change in the capital stock or long-term debt (including
any capitalized lease obligation), or except in the ordinary course of
business increase in the short-term debt of the Company;
(ii) any issuance of options, warrants, convertible securities or
other rights to purchase the capital stock of the Company;
(iii) any material adverse change, or any development involving a
material adverse change, in or affecting the business, business
prospects, properties, assets, patents or patent applications
(including those of the Company and those relating to devices or
technologies licensed to the Company), management, financial position,
stockholders' equity, results of operations or general condition of
the Company;
(iv) any material transaction entered into by the Company;
(v) any material obligation, direct or contingent, incurred by
the Company, except obligations incurred in the ordinary course of
business that, in the aggregate, are not material; or
6
<PAGE>
(vi) any dividend or distribution of any kind declared, paid or
made on the Company's capital stock.
(l) Except as is otherwise disclosed in the Registration Statement or
Prospectus, the Company has good and marketable title to all of the
property, real and personal, described in the Registration Statement or
Prospectus as being owned by the Company, free and clear of all liens,
encumbrances, equities, charges or claims, except as do not materially
interfere with the uses made and to be made by the Company of such property
or as disclosed in the Financial Statements. Except as is otherwise
disclosed in the Registration Statement or Prospectus, the Company has
valid and binding leases to the real and personal property described in the
Registration Statement or Prospectus as being under lease to the Company,
except as to those leases which are not material to the Company or the lack
of enforceability of which would not materially interfere with the use made
and to be made by the Company of such leased property.
(m) The Company has filed all necessary federal and state income and
franchise tax returns and paid all taxes shown as due thereon. The Company
is not in default in the payment of any taxes and has no knowledge of any
tax deficiency which might be asserted against it which would materially
and adversely affect the Company's business or properties.
(n) No labor disturbance by the employees of the Company exists or, to
the best of the Company's knowledge, is imminent which could reasonably be
expected to have a material adverse effect on the conduct of the business,
operations, financial condition or income of the Company.
(o) Except as disclosed in the Prospectus:
(i) The Company owns or possesses the unrestricted rights to use
all patents, copyrights, trademarks, trade secrets and proprietary
rights or information necessary for the development, manufacture,
operation and sale of all products and services sold or proposed to be
sold by the Company and for the conduct of its present or intended
business as described in the Prospectus. There are no pending legal,
governmental or administrative proceedings relating to patents,
copyrights, trademarks or proprietary rights or information to which
the Company is a party or to which any property of the Company is
subject and no such proceedings are, to the best of the Company's
knowledge, threatened or contemplated against the Company by any
governmental agency or authority or others. The Company has not
received any notice of conflict with asserted rights of others. The
Company is not using any confidential information or trade secrets of
any third party without such party's consent.
(ii) The Company does not infringe upon the right or claimed
rights of any person under or with respect to any of the intangible
rights listed in the preceding subsection. The Company is not
obligated or under any liability whatsoever to make any payments by
way of royalties, fees or otherwise to any owner of, licensor of, or
other claimant to, any patent, trademark, trade name,
7
<PAGE>
copyright or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise, except
as disclosed in the Registration Statement.
(p) The Company intends to apply the proceeds from the sale of the
Shares by it to the purposes and substantially in the manner set forth in
the Prospectus.
(q) The Company has no defined benefit pension plan or other pension
benefit plan, except for its 401(K) Plan which has no benefit obligations
and has not been funded, which is intended to comply with the provisions of
the Employee Retirement Income Security Act of 1974 as amended from time to
time, except as disclosed in the Registration Statement.
(r) To the best of the Company's knowledge, no person is entitled,
directly or indirectly, to compensation from the Company or the
Underwriters for services as a finder in connection with the transactions
contemplated by this Agreement.
(s) The conditions for use of a Registration Statement on Form SB-2
for the distribution of the Shares have been satisfied with respect to the
Company.
(t) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its directors,
officers, stockholders, or others) which has constituted or is designed to,
or which might reasonably be expected to, cause or result in stabilization
or manipulation, as defined in the Securities Exchange Act of 1934, as
amended (the "1934 Act") or otherwise, of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(u) The Company has not sold any securities in violation of Section
5(a) of the 1933 Act.
(v) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts adequate for its business and in
line with the insurance maintained by similar companies and businesses.
(w) The Company hereby represents that it has complied and will comply
with all provisions of Florida Statutes Section 517.075 (Ch. 92-198 and
Rule 3EER92-1 of the Rules of the Florida Department of Banking and
Finance, Division of Securities) copies of which are attached hereto.
Neither the issuer, nor any affiliate thereof, does business with the
government of Cuba or with any person or affiliate located in Cuba.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations
and (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP.
(y) All material transactions between the Company and its shareholders
who beneficially own more than 5% of any class of the Company's voting
securities have been accurately disclosed in the Prospectus, and the terms
of each such transaction are
8
<PAGE>
fair to the Company and no less favorable to the Company than the terms
that could have been obtained from unrelated parties.
(z) The Company has obtained a written agreement from each of the
officers and directors of the Company and certain other shareholders of the
Company determined by the Underwriters that such person will not, without
the prior written consent of the Underwriters, during the 180-day period
commencing on the effective date of the Registration Statement (the "Lockup
Period) (i) sell, transfer or otherwise dispose of, or agree to sell,
transfer or otherwise dispose of any Securities of the Company beneficially
held by the officer or director during the Lockup Period, (ii) sell,
transfer or otherwise dispose of or agree to sell, transfer or otherwise
dispose of any options, rights, warrants or other securities exercisable or
convertible into Shares of Common Stock of the Company beneficially held by
the officer or director during the Lockup Period, or (iii) sell or grant,
or agree to sell or grant, options, rights, warrants or other securities
exercisable or convertible into any such Shares of Common Stock; provided,
however, that the foregoing does not prohibit gifts by donees who agree to
be bound by the restrictions set forth in the lockup agreement or transfers
by will or the laws of descent.
(aa) The Shares have been approved by Nasdaq for trading on its
National Market System following effectiveness of the Registration
Statement subject to official notice of issuance. The Company's shares of
Common Stock are traded on the NASDAQ Small Cap Market.
(bb) The Company has timely filed all documents and amendments to
previously filed documents required to be filed by it pursuant to the 1934
Act and the rules and regulations of the SEC thereunder. Each such document
conformed in all material respects with the requirements of the 1934 Act
and contained all information required to be stated therein in accordance
with the 1934 Act. No part of any such document contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. True copies of each of the documents incorporated by reference,
if any, into each Preliminary Prospectus and the Prospectus have been
delivered by the Company to the Representative. To the best of the
Company's knowledge, the executive officers and directors of the Company
and stockholders who hold more than 5% of the Company's outstanding Common
Stock, have made, and are current with, all filings, if any, that are
required under the 1934 Act.
2. Purchase, Sale, Delivery and Payment.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company agrees to issue and sell to the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase from the
Company, the Firm Shares at $9.20 per Unit. The respective amount of Firm
Shares set forth such Underwriter's name in Schedule I hereto. The
obligation of the Underwriters will collectively purchase all of the Firm
Shares if any are purchased.
9
<PAGE>
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriters to purchase the Option
Shares (not to exceed an aggregate of fifteen percent (15%) of the total
number of Firm Shares) at the same purchase price as the Firm Shares for
use solely in covering any overallotments made by the Underwriters in the
sale and distribution of the Firm Shares. The option granted hereunder may
be exercised at any time (but not more than once) within forty-five (45)
days after the Effective Date (as defined in Section 4(a) hereof) upon
notice (confirmed in writing) by the Representative to the Company setting
forth the aggregate number of Option Shares as to which the Underwriters
are exercising the option and the date on which certificates for such
Option Shares are to be delivered. The option granted hereby may be
canceled by the Representative as to the Option Shares for which the option
is unexercised at any time prior to the expiration of the forty-five (45)
day period upon notice to the Company.
(c) The Company will deliver the Firm Shares to the Representative at
the offices of Maun & Simon, PLC, unless some other place is agreed upon,
at 10:00 A.M., Minneapolis time, against payment of the purchase price at
the same place, on the third full business day after trading the Shares has
commenced (but not more than the third (3rd) full business day after the
date the Registration Statement is declared effective), or such earlier
time as may be agreed upon between the Representative and the Company. Such
time and place is herein referred to as the "First Closing Date."
(d) The Company will deliver the Option Shares being purchased by the
Underwriters to the Representative at the offices of Maun & Simon, PLC, set
forth in Section 2(c) above, unless some other place is agreed upon, at
10:00 A.M., Minneapolis time, against payment of the purchase price at the
same place, on the date determined by the Representative and of which the
Company has received notice as provided in Section 2(b), which shall not be
earlier than two nor later than three (3) full business days after the
exercise of the option as set forth in Section 2(b), or at such other time
not later than ten (10) full business days thereafter as may be agreed upon
by the Representative and the Company, such time and date being herein
referred to as the "Second Closing Date." The First and Second Closing
Dates are collectively referred to herein as the "Closing Date."
(e) Certificates for the Shares to be delivered will be registered in
such names and issued in such denominations as the Underwriters shall
request of the Company at least two (2) full business days prior to the
First Closing Date or the Second Closing Date, as the case may be. The
certificates will be made available to the Underwriters in definitive form
for the purpose of inspection and packaging at least 24 hours prior to each
respective Closing Date.
(f) Payment for the Shares shall be made, against delivery to the
Representative or its designated agent, of certificates for the Shares by
wire transfer to a designated account of the Company.
(g) The Underwriters will make a public offering of the Shares
directly to the public (which may include selected dealers who are members
in good standing with the
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NASD or foreign dealers not eligible for membership in the NASD but who
have agreed to abide by the interpretation of the NASD's Board of
Governor's with respect to free-riding and withholding) as soon as the
Underwriters deem practicable after the Registration Statement becomes
effective at the Price to Public set forth in the Prospectus, subject to
the terms and conditions of this Agreement and in accordance with the
Prospectus. Such concessions from the public offering price may be allowed
selected dealers of the NASD as the Underwriters determines, and the
Underwriters will furnish the Company with such information about the
distribution arrangements as may be necessary for inclusion in the
Registration Statement. It is understood that the public offering price and
concessions may vary after the initial public offering. The Underwriters
shall offer and sell the Shares only in jurisdictions in which the offering
of Shares has been duly registered or qualified, or is exempt from
registration or qualification, and shall take reasonable measures to effect
compliance with applicable state and local securities laws.
(h) It is understood that the Representative, individually and not as
a Representative, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for the Shares to be purchased by
such Underwriter or Underwriters. No such payment by the Representative
shall relieve such Underwriter or Underwriters from any of its or their
other obligations hereunder.
3. Further Agreements of the Company. The Company hereby covenants and
agrees with the Underwriters as follows:
(a) If the Registration Statement has not become effective prior to
the date hereof, the Company will use its best efforts to cause the
Registration Statement and any subsequent amendments thereto to become
effective as promptly as possible. The Company will notify the
Representative promptly, after the Company shall receive notice thereof, of
the time when the Registration Statement, or any subsequent amendment
thereto, has become effective or any supplement to the Prospectus has been
filed. Following the execution and delivery of this Agreement, the Company
will prepare, and timely file or transmit for filing with the SEC in
accordance with Rules 430A, 424(b) and 434, as applicable, copies of the
Prospectus, or, if necessary, a post-effective amendment to the
Registration Statement (including the Prospectus), in which event, the
Company will take all necessary action to have such post-effective
amendment declared effective as soon as possible. The Company will notify
the Representative promptly upon the Company's obtaining knowledge of the
issuance by the SEC of any stop order suspending the effectiveness of the
Registration Statement or of the initiation or threat of any proceedings
for that purpose and will use its best efforts to prevent the issuance of
any stop order and, if a stop order is issued, to obtain as soon as
possible the withdrawal or lifting thereof. The Company will promptly
prepare and file at its own expense with the SEC any amendments of, or
supplements to, the Registration Statement or the Prospectus which may be
necessary in connection with the distribution of the Shares by the
Underwriters. During the period when a Prospectus relating to the Shares is
required to be delivered under the 1933 Act, the Company will promptly file
any amendments of, or supplements to, the Registration Statement or the
Prospectus which may be necessary to correct any untrue statement of a
material fact or any omission to state any material
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fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company will
notify the Representative promptly of the receipt of any comments from the
SEC regarding the Registration Statement or Prospectus or request by the
SEC for any amendment thereof or supplement thereto or for any additional
information. The Company will not file any amendment of, or supplement to,
the Registration Statement or Prospectus, whether prior to or after the
Effective Date, which shall not previously have been submitted to the
Representative and its counsel a reasonable time prior to the proposed
filing or to which the Representative shall have reasonably objected.
(b) The Company has used and will continue to use its best efforts to
register or qualify the Shares for sale under the securities laws of such
jurisdictions as the Representative may designate and the Company will file
such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification. In each
jurisdiction in which the Shares shall have been registered or qualified as
above provided, the Company will continue such registrations or
qualifications in effect for so long as may be required for purposes of the
distribution of the Shares; provided, however, that in no event shall the
Company be obligated to qualify to do business as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action
which would subject it to the service of process in suits, other than those
arising out of the offering or sale of the Shares in any jurisdiction where
it is not now so subject. In each jurisdiction where any of the Shares
shall have been so qualified, the Company will file such statements and
reports as are or may be reasonably required by the laws of such
jurisdiction to continue such qualification in effect. The Company will
notify the Representative immediately of, and confirm in writing, the
suspension of qualification of the Shares or the threat of such action in
any jurisdiction. The Company will use its best efforts to qualify or
register its securities for sale in nonissuer transactions under (or obtain
exemptions from the application of) the securities laws of such states
designated by the Representative (and thereby permit market-making
transactions and secondary trading in its securities in such states), and
will comply with such securities laws and will continue such
qualifications, registrations and exemptions in effect for a period of five
(5) years after the date hereof.
(c) The Company will furnish to the Representative, as soon as
available, copies of the Registration Statement (one of which will be
signed and which shall include all exhibits), each Preliminary Prospectus,
the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section
10(a)(3) of the 1933 Act, all in such quantities as the Representative may
from time to time reasonably request prior to the printing of each such
document. The Company specifically authorizes the Underwriters and all
dealers to whom any of the Shares may be sold by the Underwriters to use
and distribute copies of such Preliminary Prospectuses and Prospectuses in
connection with the sale of the Shares as and to the extent permitted by
the federal and applicable state and local securities laws.
(d) For as long as the Company has more than 100 beneficial owners,
but in no event more than five (5) years after the Effective Date, the
Company will mail as soon as practicable to the holders of its securities
substantially the following documents, which
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documents shall be in compliance with this Section if they are in the form
prescribed by the 1934 Act:
(i) within sixty (60) days after the end of the first three
quarters of each fiscal year, copies of the quarterly unaudited
statement of profit and loss and quarterly unaudited balance sheets of
the Company and any material subsidiaries; and
(ii) within one hundred twenty (120) days after the close of each
fiscal year, appropriate financial statements as of the close of such
fiscal year for the Company and any material subsidiary which shall be
certified to by a nationally recognized firm of independent certified
public accountants in such form as to disclose the Company's financial
condition and the results of its operations for such fiscal year.
(e) For as long as the Company has more than 100 beneficial owners,
but in no event more than five (5) years after the Effective Date, the
Company will furnish to the Representative (i) concurrently with furnishing
such reports to its security holders, the reports described in Section 4(d)
hereof; (ii) as soon as they are available, copies of all other reports
(financial or otherwise) mailed to security holders; and (iii) as soon as
they are available, copies of all reports and financial statements
furnished to, or filed with, the SEC, the NASD, any securities exchange or
market or any state securities commission by the Company. During such
period, the foregoing financial statements shall be on a consolidated basis
to the extent that the accounts of the Company and any subsidiary or
subsidiaries are consolidated and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(f) The Company will not, without the prior written consent of the
Representative, which consent shall not be unreasonably withheld, sell or
otherwise dispose of any capital stock or securities convertible or
exercisable into capital stock of the Company (other than pursuant to
existing option plans, director compensation plans or currently outstanding
options and warrants) during the 180-day period following the Effective
Date. So long as the Shares remain outstanding, the Company will not,
without the prior written consent of the Representative, which consent
shall not be unreasonably withheld, sell any capital stock ranking superior
to the Shares in liquidation priority. Prior to the Closing Date, the
Company will not repurchase or otherwise acquire any of its capital stock
or declare or pay any dividend not in the ordinary course of business or
make any other distribution on any class of its capital stock.
(g) Subject to the proviso set forth below, the Company shall be
responsible for and pay all costs and expenses incident to the performance
of the obligations of the Company under this Agreement including, without
limiting the generality of the foregoing, (i) all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments thereof or supplements
to any of the foregoing; (ii) the issuance and delivery of the Shares,
including taxes, if any; (iii) the cost of all certificates representing
the Shares; (iv) the fees and expenses of
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the Transfer Agent for the Shares; (v) the fees and disbursements of
counsel for the Company; (vi) all fees and other charges of the independent
public accountants of the Company; (vii) the cost of furnishing and
delivering to the Underwriters and dealers participating in the offering
copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectuses, the Prospectus and any amendments of, or
supplements to, any of the foregoing; (viii) the NASD filing and quotation
fees; and (ix) the fees and disbursements, including filing fees and all
accountable fees and expenses of counsel for the Company incurred in
registering or qualifying the Shares for sale under the laws of such
jurisdictions upon which the Representative and the Company may agree; and
(x) the non-accountable expenses of the Representative in an amount equal
to 2.0% of the gross proceeds of the Offering. The Representative hereby
acknowledges receipt of a $50,000.00 advance from the Company against the
non-accountable expense allowance referred to in the preceding sentence. In
the event this Agreement is terminated by the Representative pursuant to
Section 8 or for any reason beyond the Representative's control or through
no fault of the Representative or by the Company, the Company shall be
obligated to pay, to the Underwriter the greater of the $50,000.00 deposit
paid at the time of the execution of the letter of intent or all of its
actual accountable out-of-pocket expenses, including fees of its counsel,
not to exceed ______. In the event this Agreement is terminated by the
Company or the Underwriter for any reason within its control, including but
not limited to, an opinion of the NASD regarding the compensation
arrangement of the Underwriter, the Company shall be obligated to pay the
Underwriter only the $50,000.00 deposit paid at the time of the execution
of the letter of intent.
(h) The Company will not take, and will use its best efforts to cause
each of its officers and directors not to take, directly or indirectly, any
action designed to or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(i) The Company will maintain the quotation of its Common Stock on the
Nasdaq SmallCap MarketSM and obtain and maintain the quotation of the
Shares on the NASDAQ National Market System.
(j) For a period of at least three (3) years after the Effective Date,
the Company will continue to file with the SEC all reports and other
documents as may be required by the 1933 Act, the Rules and Regulations and
the 1934 Act.
(k) The Company will apply the proceeds from the sale of the Shares
substantially in the manner set forth in the Prospectus.
(l) Prior to or as of the First Closing Date, the Company shall have
performed each condition to closing required to be performed by it pursuant
to Section 4 hereof.
(m) Other than as permitted by the 1933 Act and the Rules and
Regulations, the Company will not distribute any prospectus or other
offering material in connection with the Offering.
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(n) The Company will, for a period of two (2) years after the
Effective Date, furnish directly to you, quarterly profit and loss
statements, reports of the Company's cash flow, and statements of
application of the proceeds of the offering contained in reports or
statements filed by the Company with the Commission.
(o) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than eighteen (18)
months after the effective date of the Registration Statement, a statement
of earnings of the Company (which need not be audited) complying with
Section 11(a) of the 1933 Act and the Rules and Regulations of the
Commission thereunder (including at the option of the Company Rule 158).
(p) The Company authorizes the Underwriters and all dealers to whom
any of the Shares may be sold by the Underwriters in connection with the
distribution of the Shares to use the Prospectus as from time to time
amended or supplemented in connection with the offering and sale of the
Shares and in accordance with the applicable provisions of the Act and the
applicable Rules and Regulations and applicable state Blue Sky or
securities laws.
(q) The Company shall not request an Effective Date nor allow the
Registration Statement to be declared effective without the prior approval
of the Representative.
(r) Within the time during which the Prospectus is required to be
delivered under the Act, the Company will comply, at its own expense, with
all requirements imposed upon it by the 1933 Act, by the Rules and
Regulations, by the Exchange Act, and by any order of the Commission, so
far as necessary to permit the continuance of sales or dealing in the
Shares.
(s) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
conversion of the Shares or the Underwriter's Warrant during the term of
the Shares and the Underwriter's Warrant.
(t) Prior to the Closing Date, no discussions will be held by
officers, directors or any other affiliate or associate of the Company with
any member of the news media and no news release or other publicity about
the Company will be permitted without prior approval of the Company's and
the Representative's respective legal counsel.
(u) The Company shall have obtained a CUSIP number for the Shares (and
its components) prior to the effective date of the Registration Statement
under the Act.
(v) The Company shall supply to the Representative and its legal
counsel, at the Company's cost, one complete bound volume of all of the
documents relating to the public offering, within a reasonable time after
the Closing Date, not to exceed four (4) months. The volume shall be hard
cover bound in book format
(w) The Company will apply the proceeds from the sale of the Shares by
it to the purposes and in the manner set forth in the Registration
Statement and, pending such
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<PAGE>
application, shall invest such net proceeds only in one or more of the
following, except as otherwise provided by prior written consent of the
Underwriter: (i) interest-bearing obligations issued by the United States
Government or issued by an agency or instrumentality of the United States
Government and guaranteed by the United States Government and having a
maturity not in excess of one year, (ii) interest-bearing domestic
commercial paper having a maturity of not more than three hundred
sixty-five (365) days and, at the time of purchase by the Company, rated
investment grade by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, (iii) interest-bearing certificates of deposit issued by a
commercial bank chartered by the United States Government or by any state
of the United States having shareholders' equity of at least $500,000,000
except that the foregoing notwithstanding, the Company may invest no more
than $100,000 of such net proceeds in certificates of deposit issued by any
such commercial bank regardless of shareholders' equity, and (iv) shares or
other Shares of interest in a registered open-ended investment company the
assets of which aggregate at leas $200,000,000 and are invested solely in
so-called "money market" obligations.
4. Conditions of the Underwriters' Obligations. The respective obligation
of the several Underwriters to purchase and pay for the Shares as provided
herein shall be subject to the accuracy of the representations and warranties of
the Company, in the case of the Firm Shares as of the date hereof and the First
Closing Date (as if made on and as of the First Closing Date) and in the case of
the Option Shares, as of the date hereof and the Second Closing Date (as if made
on and as of the Second Closing Date), to the performance by the Company of its
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the First Closing Date in the case of the Firm Shares
and on or before the Second Closing Date in the case of the Option Shares:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. Minneapolis time, on the first full business day following
the date of this Agreement, or such later date as shall be consented to in
writing by the Representative (the "Effective Date"). If the Company has
elected to rely upon Rule 430A, the information concerning the price of the
Shares and price-related information previously omitted from the effective
Registration Statement pursuant to Rule 430A shall have been transmitted to
the SEC for filing pursuant to Rule 424(b) within the prescribed time
period, and prior to the Closing Date the Company shall have provided
evidence satisfactory to the Representative of such timely filing (or a
post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the 1933 Act and
the Rules and Regulations). No stop order suspending the effectiveness
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or, to the knowledge of the Company or the
Representative, threatened by the SEC or any state securities commission or
similar regulatory body. Any request of the SEC for additional information
(to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Underwriters and their legal counsel. The NASD, upon review of the terms of
the Offering, shall not have objected to the terms of the Underwriters'
participation in the Offering.
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(b) The Representative shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, contains any untrue statement of a fact which is
material or omits to state a fact which is material and is required to be
stated therein or is necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that this Section 4(b) shall not apply to statements in,
or omissions from, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, which are based upon and conform
to written information furnished to the Company by any of the Underwriters
specifically for use in the preparation of the Registration Statement or
the Prospectus, or any such amendment or supplement.
(c) Subsequent to the date as of which information is given the
Registration Statement and Prospectus, there shall not have occurred any
change, or any development involving a prospective change, which materially
and adversely affects the business or properties of the Company and which,
in the reasonable opinion of the Representative, materially and adversely
affects the market for the Shares.
(d) The Representative shall have received the opinion of Foley &
Lardner, counsel for the Company, dated as of such respective Closing Date
and satisfactory in form and substance to the Representative and its
counsel, to the effect that:
(i) The Company and each of its subsidiaries has been duly
organized and is validly existing in good standing under the laws of
the State of organization with the requisite power to own, lease and
operate their properties and conduct their business as described in
the Prospectus; and are duly qualified to do business in good standing
in all jurisdictions where the ownership or leasing of its properties
or the conduct of their business requires such qualification and in
which the failure to be so qualified or in good standing would have a
material adverse effect on its business and the activities of the
Company or the respective subsidiary.
(ii) The number of authorized and, to the best of such counsel's
knowledge, the number of issued and outstanding shares of capital
stock of the Company are as set forth in the Prospectus, and all such
capital stock has been duly authorized and is validly issued, fully
paid and nonassessable. Upon delivery of and payment for the Shares
hereunder, the Underwriters will acquire the Shares free and clear of
all liens, encumbrances or claims. To the best knowledge of such
counsel's knowledge, no preemptive rights, contractual or otherwise,
of securities holders of the Company or others exist with respect to
the issuance or sale of the Shares by the Company pursuant to this
Agreement or to the issuance of Warrant Shares upon exercise of the
Underwriters' Warrants. To the best of such counsel's knowledge, no
rights to require registration of Shares of Common Stock or other
securities of the Company exist which may be exercised in connection
with the filing of the Registration Statement. The Shares,
Underwriters' Warrants and Warrant Shares conform as to matters of law
in all material respects to the description of these securities made
in the Prospectus and
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such description accurately sets forth the material legal provisions
thereof required to be set forth in the Prospectus.
(iii) The shares of Common Stock issuable upon conversion of the
Shares have been duly authorized and reserved for issuance and when
issued, sold and delivered in accordance with the terms of the Shares,
will be validly issued, fully paid and nonassessable. The issuance,
sale and delivery of the Underwriter's Warrant has been duly
authorized and the Warrant Shares issuable upon the exercise thereof
have been reserved for issuance upon such exercise. The Warrant
Shares, when issued, sold and delivered in accordance with the terms
of the Underwriter's Warrant, will be validly issued, fully paid and
nonassessable. No preemptive rights of, or rights of refusal in favor
of, shareholders of the Company exist with respect to the Shares (or
any component thereof), the Underwriter's Warrant or the Warrant
Shares, or the issue and sale thereof, pursuant to the Company's
Declaration of Trust or Bylaws.
(iv) The authorized securities of the Company conform as to legal
matters in all material respects to the description thereof set forth
in the Prospectus under the caption "Description of Securities." The
certificates representing the Shares are in proper form under the
Maryland Trust Statute.
(v) The Registration Statement and the Prospectus comply as to
form in all material respects with the requirements of the 1933 Act
and with the Rules and Regulations, except the financial statements,
the notes thereto and the related schedules and other financial and
statistical data contained therein, as to which such counsel need not
express an opinion.
(vi) Counsel knows of no contracts, leases or documents that are
required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement that are not so described or filed.
(vii) The Underwriting Agreement, the underlying common stock and
the Underwriter's Warrant have been duly authorized by all requisite
corporate action, executed and delivered by the Company and constitute
the valid and binding obligations of the Company enforceable in
accordance with their respective terms.
(viii) The execution and delivery of the Underwriting Agreement
and the issue and sale of the Underwriter's Warrant, the Shares and
the Warrant Shares will not violate or conflict with the
organizational documents or the Bylaws of the Company or any material
provision of any material contract or instrument to which the Company
is a party or by which the Company is bound, or any law of the United
States or the State of Maryland, any rule or regulation of any
governmental authority or regulatory body of the United States or the
State of Maryland, or any judgment, order or decree known by such
counsel and applicable to the Company of any court or governmental
authority.
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(ix) No holders of capital stock of the Company, or securities
convertible into capital stock of the Company, have the right to cause
the Company to include such holder's capital stock in the Registration
Statement pursuant to the Company's organizational documents or Bylaws
or any contract or agreement.
(x) No consent, approval, authorization or order of, and no
notice to or filing with, any governmental agency or body or any court
is required to be obtained or made by the Company for the issue and
sale of the Shares pursuant to the Underwriting Agreement, except such
as may be required and obtained under the 1933 Act or under state or
other securities laws in connection with the purchase and distribution
of the Shares by the Underwriter.
(xi) The Underwriter's Warrants has been duly authorized,
executed and delivered by the Company and are the valid and binding
obligations of the Company, enforceable in accordance with their
terms, except as enforceability may be limited by the application of
bankruptcy, insolvency, moratorium, or other laws of general
application affecting the rights of creditors generally and by
judicial limitations on the right of specific performance and other
equitable remedies, and except as the enforceability of
indemnification or contribution provisions hereof may be limited by
federal or state securities laws. The Warrant Shares when issued in
accordance with the terms of this and the Underwriter's Warrants will
be validly issued, fully paid and nonassessable. A sufficient number
of shares of Common Stock has been reserved for issuance upon exercise
of the Underwriter's Warrants.
(xii) The Registration Statement has become and is effective
under the 1933 Act, the Prospectus has been filed as required by Rule
424(b), if necessary and, to the best knowledge of such counsel, no
stop orders suspending the effectiveness of the Registration Statement
have been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act. The
registration of the Company's securities on Form 8-A has become
effective under the Securities Exchange Act of 1934, as amended, and
no stop order suspending the effectiveness of such registration, and,
to such counsel's knowledge, no proceedings for that purpose have been
instituted or are pending by the Commission.
(xiii) To the best of such counsel's knowledge, there are no
material legal or governmental proceedings of a character required by
the 1933 Act and the Rules and Regulations to be described or referred
to in the Registration Statement or Prospectus that are not described
or referred to therein. All pending legal or governmental proceedings,
if any, to which the Company is a party or to which any of its
property is subject which are not described in the Registration
Statement and the Prospectus, including ordinary routine litigation
incidental to the business, are, considered in the aggregate, not
material to the Company.
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(xiv) To the best of such counsel's knowledge, there are no
material legal or governmental proceedings of a character required by
the 1933 Act and the Rules and Regulations to be described or referred
to in the Registration Statement or Prospectus that are not described
or referred to therein. All pending legal or governmental proceedings,
if any, to which the Company is a party or to which any of its
property is subject which are not described in the Registration
Statement and the Prospectus, including ordinary routine litigation
incidental to the business, are, considered in the aggregate, not
material to the Company.
(xv) The Registration Statement, when it became effective, the
Prospectus and any amendments thereof or supplements thereto, (other
than the financial statements and supporting financial and statistical
data included or incorporated therein, as to which such counsel need
express no opinion) on the date of filing or the date thereof,
complied as to form in all material respects with the requirements of
the 1933 Act and the Rules and Regulations.
(xvi) This Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as enforceability may
be limited by the application of bankruptcy, insolvency, moratorium or
similar laws affecting the rights of creditors generally and judicial
limitations on the right of specific performance and except as the
enforceability of indemnification or contribution provisions hereof
may be limited by federal or state securities laws.
(xvii) To the best of such counsel's knowledge, the execution,
delivery and performance of this Agreement and the consummation of the
transactions described herein will not result in a violation of, or a
default under, the terms or provisions of (A) any material bond,
debenture, note, contract, lease, license, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which the Company or
any of its properties are bound, or (B) any material law, order, rule,
regulation, writ, injunction, or decree known to such counsel of any
government, governmental agency or court having jurisdiction over the
Company or any of its properties.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper, upon
certificates of public officials and of the officers of the Company, provided
that copies of such officers' certificates are attached to the opinion.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that, although such counsel cannot guarantee the
accuracy, completeness or fairness of any of the statements contained in the
Registration Statement, Prospectus, or any amendment thereof or supplement
thereto in connection with such counsel's representation, investigation and due
inquiry of the Company in the preparation of the Registration Statement,
Prospectus and any amendment thereof or supplement thereto, nothing has come to
the attention of such counsel which causes them to believe that the Registration
Statement, Prospectus and any amendment thereof or supplement
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<PAGE>
thereto (other than the financial statements and supporting financial and
statistical data included or incorporated therein, as to which such counsel need
express no opinion) contains an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; provided, however, that such opinion of counsel does not require any
statement concerning statements in, or omissions from, the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto, which are
based upon and conform to written information furnished to the Company by any of
the Underwriters specifically for use in the preparation of the Registration
Statement, Prospectus, or any such amendment or supplement.
(e) The Representative shall have received from Maun & Simon, PLC, its
counsel, such opinion or opinions as the Underwriters may reasonably
require, dated as of each closing date and satisfactory in form and
substance to the Representative, with respect to the sufficiency of
corporate proceedings and other legal matters relating to this Agreement
and the transactions contemplated hereby, and the Company shall have
furnished to said counsel such documents as they may have requested for the
purpose of enabling them to pass upon such matters. In connection with such
opinion, as to matters of fact relevant to conclusions of law, such counsel
may rely, to the extent that they deem proper, upon representations or
certificates of public officials and of responsible officers of the
Company.
(f) The Representative and the Company shall have received letters,
dated the date hereof and as of each closing date, from Grant Thornton,
independent public accountants, substantially similar to the form set forth
in the Appendix A hereto.
(g) The Representative shall have received from the Company a
certificate, dated as of each closing date, of the principal executive
officer and the principal financial or accounting officer of the Company to
the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of each closing
date. The Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at, or
prior to, such date.
(ii) Neither the Registration Statement nor the Prospectus nor
any amendment thereof or supplement thereto included any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented prospectus which has not been so set forth;
provided, however, that such certificate does not require any
representation concerning statements in, or omissions from, the
Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, which are based upon and conform to written
information, as identified in Section 12 herein, furnished to the
Company by any
21
<PAGE>
of the Underwriters specifically for use in the preparation of the
Registration Statement or the Prospectus, or any such amendment or
supplement.
(iii) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as contemplated or referred to in the Prospectus, no event has
occurred that should have been set forth in an amendment or supplement
to Registration Statement or the Prospectus which has not been so set
forth and the Company has not incurred any direct or contingent
liabilities or obligations material to the Company, or entered into
any material transactions, except liabilities, obligations or
transactions in the ordinary course of business, and there has not
been any change in the capital stock or long-term debt of the Company,
(including any capitalized lease obligations), any material increase
in the short-term debt of the Company, any material adverse change in
the financial position, net worth or results of operations of the
Company or declaration or payment of any dividend.
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company
has not sustained any material loss of, or damage to, its properties,
whether or not insured.
(v) There are no material actions, suits or proceedings pending
before any court or governmental agency, authority or body, or, to the
best of their knowledge, threatened, to which the Company is a party
or of which the business or property of the Company is the subject.
(h) The Representative shall have received, dated as of each closing
date, from the Secretary of the Company a certificate of incumbency
certifying the names, titles and signatures of the officers authorized to
execute the resolutions of the Board of Trustees of the Company authorizing
and approving the execution, delivery and performance of this Agreement, a
copy of such resolutions to be attached to such certificate, certifying
that such resolutions and the organizational documents of the Company and
the Bylaws of the Company have been validly adopted and have not been
amended or modified.
(i) In addition, at each closing, the Company shall have delivered to
the Underwriters an opinion, satisfactory to the Underwriters, of either
Foley & Lardner or Grant Thornton, dated as such respective Closing Date,
and satisfactory in form and substance to the Representative and its
counsel, to the effect that under the existing federal income tax laws and
regulations, assuming the Company acts as described in the "Federal Income
Tax Considerations" section of the Prospectus and the Company timely filed
the requisite elections, Foley & Lardner or Grant Thornton is of the
opinion that the Company has been organized in conformity with the
requirements for qualification as a REIT beginning with its taxable year
ending December 31, 1996, and its method of operation (as described in the
Prospectus and represented by management) will enable it to satisfy the
REIT Requirements (as defined in the Prospectus).
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper,
upon certificates of public
22
<PAGE>
officials and of the officers of the Company, provided that copies of such
officers' certificates are attached to the opinion.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot
guarantee the accuracy, completeness or fairness of any of the statements
regarding intellectual property matters contained in the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto in
connection with such counsel's representation of the Company in connection
with intellectual property matters and in preparation of the intellectual
property portions of the Registration Statement, Prospectus, or any
amendment thereof or supplement thereto, nothing has come to the attention
of such counsel which causes them to believe that the Intellectual property
portions of the Registration Statement, Prospectus, or any amendment
thereof or supplement thereto (other than the financial statements and
supporting financial and statistical data included or incorporated therein,
as to which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided,
however, that such opinion of counsel does not require any statement
concerning statements in, or omissions from, the Registration Statement,
Prospectus, or any amendment thereof or supplement thereto, which are based
upon and conform to written information furnished to the Company by the
Underwriters specifically for use in the preparation of the Registration
Statement, Prospectus, or any such amendment or supplement.
(j) The Representative shall have received a written agreement from
each of the officers and directors of the Company and certain other
shareholders of the Company determined by the Representative that such
person will not, without the prior written consent of the Representative
during the Lockup Period (i) sell, transfer or otherwise dispose of, or
agree to sell, transfer or otherwise dispose of any Shares of Common Stock
of the Company beneficially held by such person during the Lockup Period,
(ii) sell, transfer or otherwise dispose of or agree to sell, transfer or
otherwise dispose of any options, rights, warrants or other securities
exercisable or convertible into Shares of Common Stock of the Company
beneficially held by the officer or director during the Lockup Period, or
(iii) sell or grant, or agree to sell or grant, options, rights, warrants
or other securities exercisable or convertible into to any such Shares of
Common Stock; provided, however, that the foregoing does not prohibit gifts
to donees who agree to be bound by the restrictions set forth in the lockup
agreement or transfers by will or the laws of descent, and the Underwriters
will not unreasonably withhold consent to a sale of Shares of Common Stock
if necessary to pay federal or state taxes.
(k) The Company shall not have failed to have performed any of its
agreements herein contained and required to be performed at or prior to the
First Closing Date or the Second Closing Date, as the case may be.
(l) The Shares shall have been registered or qualified for sale or
exempt from such registration or qualification under the securities laws of
such jurisdictions as designated by the Underwriters such qualifications or
exemptions shall continue in effect to and including the First Closing Date
or the Second Closing Date, as the case may be.
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<PAGE>
(m) The Company shall have furnished to the Underwriters, dated as of
the date of the Closing Date, such further certificates and documents as
the Underwriters shall have reasonably required.
(n) All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to the Underwriters and its legal counsel. All statements
contained in any certificate, letter, or other document delivered pursuant
hereto by, or on behalf of, the Company shall be deemed to constitute
representations and warranties of the Company.
(o) The Underwriters may waive in writing the performance of any one
or more of the conditions specified in this Section 4 or extend the time
for their performance.
(p) If any of the conditions specified in this Section 4 shall not
have been fulfilled when and as required by this Agreement to be fulfilled,
this Agreement and all obligations of the Underwriters hereunder may be
canceled at, or at any time prior to, each Closing Date by the
Representative. Any such cancellation shall be without liability of the
Underwriters to the Company and shall not relieve the Company of its
obligations under Section 3(g) hereof. Notice of such cancellation shall be
given to the Company at the address specified in Section 11 hereof in
writing, or by telegraph or telephone confirmed in writing.
5. Underwriters' Warrants. On the First Closing Date, the Company shall
sell and deliver to the Representative for $50 the Underwriters' Warrants, which
shall first become exercisable one year after the Effective Date and shall
remain exercisable for a period of four (4) years thereafter. The Underwriters'
Warrants shall be subject to certain transfer restrictions and shall be in
substantially the form filed as an exhibit to the Registration Statement and
attached as Appendix B hereto.
6. Indemnification.
(a) The Company hereby agrees to indemnify and hold harmless the
Underwriters and each person, if any, who controls the Underwriters within
the meaning of Section 15 of the 1933 Act against any losses, claims,
damages or liabilities, joint or several, to which the Underwriters or each
such controlling person may become subject, under the 1933 Act, the 1934
Act, the common law or otherwise, insofar as such losses, claims, damages
or liabilities (or judicial or governmental actions or proceedings in
respect thereof) arise out of, or are based upon, (i) any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, or the omission or alleged
omission to state in the Registration Statement or any amendment thereof a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus if used prior to
the Effective Date of the Registration Statement or in the Prospectus (as
amended or as supplemented, if the Company shall have filed with the SEC
any amendment thereof or supplement thereto),
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<PAGE>
or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; or (iii) any untrue statement or alleged untrue statement of a
material fact contained in any application or other statement executed by
the Company or based upon written information furnished by the Company
filed in any jurisdiction in order to qualify the Shares under, or exempt
the Shares or the sale thereof from qualification under, the securities
laws of such jurisdiction, or the omission or alleged omission to state in
such application or statement a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and the Company will reimburse
the Underwriters, and each such controlling person for any legal or other
expenses reasonably incurred by the Underwriters, or controlling person
(subject to the limitation set forth in Section 6(c) hereof) in connection
with investigating or defending against any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of, or is based upon, an untrue statement, or alleged
untrue statement, omission or alleged omission, made in reliance upon and
in conformity with written information furnished to the Company by, or on
behalf of, the Underwriters specifically for use in the preparation of the
Registration Statement or any such post-effective amendment thereof, any
such Preliminary Prospectus or the Prospectus or any such amendment thereof
or supplement thereto, or in any application or other statement executed by
the Company or the Underwriters filed in any jurisdiction in order to
qualify the Shares under, or exempt the Shares or the sale thereof from
qualification under, the securities laws of such jurisdiction; and provided
further that the foregoing indemnity agreement is subject to the condition
that, insofar as it relates to any untrue statement, alleged untrue
statement, omission or alleged omission made in any Preliminary Prospectus
but eliminated or remedied in the Prospectus, such indemnity agreement
shall not inure to the benefit of the Underwriters if the person asserting
any loss, claim, damage or liability purchased the Shares from the
Underwriters which are the subject thereof (or to the benefit of any person
who controls the Underwriters), if a copy of the Prospectus was not sent or
given to such person with, or prior to, the written confirmation of the
sale of such Shares to such person. This indemnity agreement is in addition
to any liability which the Company may otherwise have.
(b) The Underwriters severally, but not jointly, agrees to indemnify
and hold harmless the Company, each of the Company's directors, each of the
Company's officers who has signed the Registration Statement and each
person who controls the Company within the meaning of Section 15 of the
1933 Act against any losses, claims, damages or liabilities to which the
Company or any such director, officer, or controlling person may become
subject, under the 1933 Act, the 1934 Act, the common law, or otherwise,
insofar as such losses, claims, damages, or liabilities (or judicial or
governmental actions or proceedings in respect thereof) arise out of, or
are based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, or the omission or alleged omission to state in the Registration
Statement or any amendment thereof, a material fact required to be stated
therein or necessary to make the statements therein not misleading; (ii)
any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus if
25
<PAGE>
used prior to the Effective Date of the Registration Statement or in the
Prospectus (as amended or as supplemented, if the Company shall have filed
with the SEC any amendment thereof or supplement thereto), or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact contained
in any application or other statement executed by the Company or by the
Underwriters and filed in any jurisdiction in order to qualify the Shares
under, or exempt the Shares or the sale thereof from qualification under,
the securities laws of such jurisdiction, or the omission or alleged
omission to state in such application or statement a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; in each
case to the extent, but only the extent, that such untrue statement,
alleged untrue statement, omission or alleged omission, was made in
reliance upon and in conformity with written information furnished to the
Company by, or on behalf of, the Underwriters specifically for use in the
preparation of the Registration Statement or any such post effective
amendment thereof, any such Preliminary Prospectus or the Prospectus or any
such amendment thereof or supplement thereto, or in any application or
other statement executed by the Company or by the Underwriters and filed in
any jurisdiction; and the Underwriters will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending against
any such loss, claim, damage, liability or action. This indemnity agreement
is in addition to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against any indemnifying party
under this Section 7, notify in writing the indemnifying party of the
commencement thereof. The omission so to notify the indemnifying party will
not relieve it from any liability under this Section 7 as to the particular
item for which indemnification is then being sought, unless such omission
so to notify prejudices the indemnifying party's ability to defend such
action. In case any such action is brought against any indemnified party
and the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel who shall be reasonably satisfactory to such indemnified
party; and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party under this Section 7 for
any legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of
the indemnified party, it is advisable for such parties and controlling
persons to be represented by separate counsel, any indemnified party shall
have the right to employ separate counsel to represent it and all other
parties and their controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriters against the Company or by the Company against the Underwriters
hereunder, in which event the fees and expenses of such separate counsel
shall
26
<PAGE>
be borne by the indemnifying party and paid as incurred. Any such
indemnifying party shall not be liable to any such indemnified party on
account of any settlement of any claim or action effected without the prior
written consent of such indemnifying party.
7. Contribution.
(a) If the indemnification provided for in Section 7 is unavailable
under applicable law to any indemnified party in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
the Underwriters from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company
and the Underwriters in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The Company and the Underwriters
agree that contribution determined by per capita allocation would not be
equitable. The respective relative benefits received by the Company, on the
one hand, and the Underwriters, on the other hand, shall be deemed to be in
the same proportion (A) in the case of the Company, as the total price paid
to the Company for the Shares by the Underwriters (net of underwriting
discount received but before deducting expenses) bears to the aggregate
public offering price of the Shares, (B) in the case of the Underwriters,
as the aggregate underwriting discount received by them bears to the
aggregate public offering price of the Shares, in each case as reflected in
the Prospectus. The relative fault of the Company and the Underwriters
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The amount paid or payable by a party as a result of the
losses, claims, damages and liabilities referred to above shall be deemed
to include any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
Notwithstanding the provisions of this Section 8, the Underwriters shall
not be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by it were offered to the
public exceeds the amount of any damages which the Underwriters has
otherwise been required to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person who controls the Underwriters
within the meaning of the 1933 Act or the 1934 Act shall have the same
rights to contribution as the Underwriters, each person who controls the
Company within the meaning of the 1933 Act or the 1934 Act shall have the
same rights to contribution as the Company and each
27
<PAGE>
officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as
the Company.
(b) Promptly after receipt by a party to this Agreement of notice of
the commencement of any action, suit or proceeding, such person will, if a
claim for contribution in respect thereof is to be made against another
party (the "Contributing Party"), notify the Contributing Party of the
commencement thereof, but the omission so to notify the Contributing Party
will not relieve the Contributing Party from any liability which it may
have to any party other than under this Section 8, unless such omission so
to notify prejudices the Contributing Party's ability to defend such
action. Any notice given pursuant to Section 7 hereof shall be deemed to be
like notice hereunder. In case any such action, suit or proceeding is
brought against any party, and such person notifies a Contributing Party of
the commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing
Party similarly notified.
8. Effective Date of This Agreement and Termination.
(a) This Agreement shall become effective when the Underwriters
releases the initial public offering of the Firm Shares for sale to the
public. The Underwriters shall notify the Company immediately after any
action has been taken which causes this Agreement to become effective.
Until this Agreement is effective, it may be terminated by the Company or
the Underwriters by giving notice as hereinafter provided, except that the
provisions of Section 3(g) and Sections 6, 7 and 9 shall at all times be
effective. For purposes of this Agreement, the release of the initial
public offering of the Firm Shares for sale to the public shall be deemed
to have been made when the Underwriters releases, by facsimile or
otherwise, firm offers of the Firm Shares to securities dealers or release
for publication a newspaper advertisement relating to the Firm Shares,
whichever occurs first.
(b) Until the First Closing Date, this Agreement may be terminated by
the Underwriters, at its option, by giving notice to the Company, if (i)
the Company shall have sustained a loss by fire, flood, accident or other
calamity which is material with respect to the business of the Company; the
Company shall have become a party to material litigation, not disclosed in
the Registration Statement or the Prospectus; or the business or financial
condition of the Company shall have become the subject of any material
litigation, not disclosed in the Registration Statement or the Prospectus;
or there shall have been, since the respective dates as of which
information is given in the Registration Statement or the Prospectus, any
material adverse change in the general affairs, business, key personnel,
capitalization, financial position or net worth of the Company, whether or
not arising in the ordinary course of business, which loss or change, in
the reasonable judgment of the Underwriters, shall render it inadvisable to
proceed with the delivery of the Shares, whether or not such loss shall
have been insured; (ii) trading in securities generally on the New York
Stock Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq
SmallCap Market or the over-the-counter market shall have been suspended or
minimum prices shall have been established on such exchange by the SEC or
by such exchanges or markets; (iii) a general banking moratorium shall have
been declared by federal, New York or Minnesota authorities; (iv)
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<PAGE>
there shall have been such a material adverse change in general economic,
monetary, political or financial conditions, or the effect of international
conditions on the financial markets in the United States shall be such
that, in the judgment of the Underwriters, makes it inadvisable to proceed
with the delivery of the Shares; (v) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or
order of either of any court or other governmental authority which, in the
judgment of the Underwriters, materially and adversely affects or will
materially and adversely affect the business or operations of the Company;
(vi) there shall be a material outbreak of hostilities or material
escalation and deterioration in the political and military situation
between the United States and any foreign power, or a formal declaration of
war by the United States of America shall have occurred; (vii) the Company
shall have failed to comply with any of the provisions of this Agreement on
its part to be performed on or prior to such date or if any of the
conditions, agreements, representations or warranties of the Company shall
not have been fulfilled within the respective times provided for in this
Agreement; or (viii) the Company is no longer registered under the 1934
Act. Any such termination shall be without liability of any party to any
other party, except as provided in Sections 6 and 7 hereof; provided,
however, that the Company shall remain obligated to pay costs and expenses
to the extent provided in Section 3(g) hereof.
(c) If the Underwriters elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 8, it
shall notify the Company promptly by telegram or telephone, confirmed by
letter sent to the address specified in Section 11 hereof. If the Company
shall elect to prevent this Agreement from becoming effective, it shall
notify the Underwriters promptly by telegram or telephone, confirmed by
letter sent to the address specified in Section 11 hereof.
9. Default of Underwriter. If any Underwriter or Underwriters default in
their obligation to purchase the Firm Shares hereunder and the aggregate amount
of Firm Shares which such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total amount of Firm Shares, the
other Underwriters shall be obligated, severally, in proportion to their
respective commitments hereunder, to purchase the Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed to purchase. If any
Underwriter or Underwriters so defaults and the aggregate amount of Firm Shares
with respect to which such default or defaults occur is more than 10% of the
total number of Firm Shares and arrangements satisfactory to the Representative
and the Company for purchase of such Firm Shares by other persons (who may
include one or more of the nondefaulting Underwriters, including the
Representative) are not made within 48 hours after such default, this Agreement
will terminate without liability on the part of any nondefaulting Underwriter or
the Company except for the provisions of Sections 6 and 7 hereof. In any such
case, either the Representative or the Company shall have the right to postpone
the Closing Date, but in no event for more than seven days, in order that any
required changes, not including a reduction in the number of Firm Shares, to the
Registration Statement and the Prospectus of any other documents or arrangements
may be effected. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 9. Nothing herein shall
relieve a defaulting Underwriter from liability for its default.
10. Survival of Indemnities, Contribution Agreements, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and
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<PAGE>
the Underwriters contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Sections 1 hereof
respectively and the covenants of the Company set forth in Section 3 hereof
shall remain operative and in full force and effect, regardless of any
investigation made by, or on behalf of, the Underwriters, the Company, any of
its officers and directors, or any controlling person referred to in Sections 7
and 8, and shall survive the delivery of and payment for the Shares. The
aforesaid indemnity and contribution agreements shall also survive any
termination or cancellation of this Agreement. Any successor of any party or of
any such controlling person, or any legal representative of such controlling
person as the case may be, shall be entitled to the benefit of the respective
indemnity and contribution agreements.
11. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and, if sent to
Underwriters or any of the Underwriters, shall be mailed, delivered or
telegraphed and confirmed, to R. J. Steichen & Company, One Financial Plaza, 120
South Sixth Street, Minneapolis, Minnesota 55402 Attention: John E. Feltl,
President, with a copy to Philip T. Colton, Esq., Maun & Simon, PLC, 2000
Midwest Plaza Building West, 801 Nicollet Mall, Minneapolis, Minnesota 55402;
or, if sent to the Company, shall be mailed, delivered or telegraphed and
confirmed, to Wellington Properties Trust, 11000 Prairie Lakes Drive, Suite 610,
Minneapolis, Minnesota 55344 (612) 826-6968. Attention: Duane Lund CEO.
12. Information Furnished by the Underwriters. The statements set forth in
the last paragraph on the cover page, the stabilization legend on the inside
front cover and the statements under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the only written
information furnished by, or on behalf of, the Underwriters specifically for use
with reference to the Underwriters referred to in Section 1(b) and Section 6
hereof.
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the Underwriters and the Company, their respective successors and assigns,
and the officers, directors and controlling persons referred to in Sections 7
and 8. Nothing expressed in this Agreement is intended or shall be construed to
give any person or corporation, other than the parties hereto, their respective
successors and assigns, and the controlling persons, officers and directors
referred to in Sections 7 and 8 any legal or equitable right, remedy, or claim
under, or in respect of, this Agreement or any provision herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors, assigns and such controlling
persons, officers and directors, and for the benefit of no other person or
corporation. No purchaser of any Shares from the Underwriters shall be construed
a successor or assign merely by reason of such purchase.
14. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
15. Counterparts. This Agreement may be execute in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one Agreement.
30
<PAGE>
If the foregoing is in accordance with the Underwriters' understanding of
this agreement, kindly sign and return to the Company the enclosed counterpart
of this Agreement, whereupon it will become a binding agreement between the
Company and the Underwriters in accordance with its terms.
Very truly yours,
WELLINGTON PROPERTIES TRUST
By:________________________________________
Its:_____________________________________
Confirmed as of the date hereof
at Minneapolis, Minnesota
R.J. STEICHEN & COMPANY
By:________________________________
________________________________
Its:_______________________________
31
<PAGE>
APPENDIX A
FORM OF COMFORT LETTER OF GRANT THORNTON
(1) They are independent public accountants with respect to the Company
within the meaning of the Securities Act of 1933, as amended (the "1933 Act").
(2) In their opinion, the financial statements of the Company included in
the Registration Statement which are stated therein to have been examined by
them comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the related published rules and regulations.
(3) On the basis of specified procedures (but not an audit in accordance
with generally accepted auditing standards), including inquiries of certain
officers of the Company responsible for financial and accounting matters as to
transactions and events subsequent to the date of the financial statements
included in the Prospectus, a reading of minutes of meetings of the stockholders
and directors of the Company since the date of the financial statements included
in the Prospectus and other procedures as specified in such letter, nothing came
to their attention which caused them to believe that (a) at a specified date not
more than five (5) days prior to the date thereof in the case of the first
letter and not more than two (2) business days prior to the date thereof in the
case of the second and third letters, there was any change in the capital stock,
long-term debt, or short-term debt (other than normal payments) of the Company,
or any material decrease in net current assets or stockholders' equity, as
compared with amounts shown on the latest balance sheet of the Company included
in the Registration Statement; or (b) for the period from the date of such
balance sheet to a date not more than five (5) days prior to the date thereof in
the case of the first letter and not more than two (2) business days prior to
the date thereof in the case of the second letter, there were any material
decreases in working capital, long-term debt or total stockholders' equity,
except for changes or decreases which the Prospectus discloses, have occurred or
may occur, or which are set forth in such letter.
(4) They have carried out specified procedures, which have been agreed to
by the Underwriters, with respect to certain information in the Prospectus
specified by the Underwriters, and on the basis of such procedures, they have
found such information to be in agreement with the accounting records of the
Company or with material derived from such records.
<PAGE>
SCHEDULE I
Name of Underwriter Number of Firm Shares
- ------------------- ---------------------
1. R.J. Steichen & Company
2. [Name]
3. [Name]
4. [Name]
5. [Name]
6. [Name]
7. [Name]
8. [Name]
9. [Name]
10. [Name]
11. [Name]
12. [Name]
13. [Name]
14. [Name]
15. [Name] ___________________
TOTAL
Warrant No.
I. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED
FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
SUCH LAWS COVERING SUCH SECURITIES, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT,
OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
_______, 1999
WARRANT
-------
TO PURCHASE SHARES OF SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK
OF
WELLINGTON PROPERTIES TRUST
THIS CERTIFIES THAT, for good and valuable consideration, R. J. Steichen &
Company (the "Underwriter"), or its registered assigns, is entitled to subscribe
for and purchase from Wellington Properties Trust, a Maryland business trust
(the "Company"), at any time after __________, 2000 to and including
________________, 2004, _______________________________________________________
(______________) fully paid and nonassessable Shares of the Company's Series A
Cumulative Convertible Preferred Stock at the price of $10.00 per Share (the
"Warrant Exercise Price"), subject to the antidilution provisions of this
Warrant. Reference is made to this Warrant in the Underwriting Agreement dated ,
1999, as amended, by and between the Company and the Underwriter. The Shares
which may be acquired upon exercise of this Warrant are referred to herein as
the "Warrant Shares." The term "Share" shall mean one share of the Company's
Series A Cumulative Convertible Preferred Stock. As used herein, the term
"Holder" means the Underwriter, any party who acquires all or a part of this
Warrant as a registered transferee of the Underwriter, or any record holder or
holders of the Warrant Shares issued upon exercise, whether in whole or in part,
of the Warrant. As used herein, the term "Common Stock" means and includes the
Company's presently authorized common stock, $.01 par value, and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the Holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution, or winding up of the
Company.
This Warrant is subject to the following provisions, terms and conditions:
<PAGE>
1. Exercise: Transferability.
-------------------------
A. The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional Share), by
written notice of exercise (in the form attached hereto) delivered to the
Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant
along with a check in payment of the Warrant Exercise Price for such
Shares.
B. Except where (i) directed by a court of competent jurisdiction
pursuant to the dissolution, (ii) liquidation of a corporate holder hereof,
(iii) by will, pursuant to the laws of descent and distribution, or (iv) by
the operation of law, and in each case subject to Section 7, for one (1)
year from the date hereof, title to this Warrant may be transferred only to
a person who is an officer and employee of the Underwriter, who are also
shareholders of the Underwriter, or to a successor (or an officer or
employee of the successor who are also shareholders) in interest to the
business of the Underwriter, by endorsement (by the holder hereof executing
the form of assignment attached hereto) and delivery in the same manner as
in the case of a negotiable instrument transferable by endorsement and
delivery.
2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
------------------------------
A. The Company agrees that the Shares purchased hereby shall be and
are deemed to be issued to the Holder as of the close of business on the
date on which this Warrant shall have been surrendered and the payment made
for such Warrant Shares as aforesaid. Subject to the provisions of the next
section, certificates for the Warrant Shares so purchased shall be
delivered to the Holder within a reasonable time, not exceeding fifteen
(15) days after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing
the right to
2
<PAGE>
purchase the number of Warrant Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to the
Holder within such time.
B. Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of
this Warrant except in accordance with exemptions from the applicable
securities registration requirements or registrations under applicable
securities laws. Such Holder shall also provide the Company with written
representations from the Holder and the proposed transferee satisfactory to
the Company regarding the transfer or, at the election of the Company, an
opinion of counsel reasonably satisfactory to the Company to the effect
that the proposed transfer of this Warrant or disposition of Shares may be
effected without registration or qualification (under any Federal or State
law) of this Warrant or the Warrant Shares. Upon receipt of such written
notice and either such representations or opinion by the Company, such
Holder shall be entitled to transfer this Warrant, or to exercise this
Warrant in accordance with its terms and dispose of the Warrant Shares, all
in accordance with the terms of the notice delivered by such Holder to the
Company, provided that an appropriate legend, if any, respecting the
aforesaid restrictions on transfer and disposition may be endorsed on this
Warrant or the certificates for the Warrant Shares. Nothing herein,
however, shall obligate the Company to effect registrations under federal
or state securities laws, except as provided in Section 9. If registrations
are not in effect and if exemptions are not available when the Holder seeks
to exercise the Warrant, the Warrant exercise period will be extended, if
need be, to prevent the Warrant from expiring, until such time as either
registrations become effective or exemptions are available, and the Warrant
shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to
execute such documents and make such representations, warranties, and
agreements as may be required solely to comply with the exemptions relied
upon by the Company, or the registrations made, for the issuance of the
Warrant Shares.
C. The Shares issuable upon exercise or conversion of this Warrant
shall have the terms and conditions of the Company's Series A Cumulative
Convertible Preferred Stock, whether or not such Shares have been redeemed
or converted prior to exercise or conversion of the Warrant.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares and shares issuable upon exercise of the Warrant Shares will,
upon issuance, be duly authorized and issued, fully paid, nonassessable, and
free from all taxes, liens, and charges with respect to the issue thereof except
for all taxes, liens and changes imposed by the Holder. The Company further
covenants and agrees that during the period within which the rights represented
by this Warrant may be exercised, the Company will at all times have authorized
and reserved for the purpose of issue or transfer upon exercise of the
subscription rights evidenced by this Warrant a sufficient number of Shares and
shares of Common Stock to provide for the exercise of the rights represented by
this Warrant included therein.
5. Antidilution Adjustments. If the Company shall at any time hereafter
subdivide or combine its outstanding Shares or shares of Common Stock, or
declare a dividend payable in
3
<PAGE>
Shares or shares of Common Stock, or declare a dividend payable in Shares or
shares of Common Stock, the exercise price in effect immediately prior to the
subdivision, combination or record date for such dividend payable in Shares or
shares of Common Stock shall forthwith be proportionately increased, in the case
of combination, or proportionately decreased, in the case of subdivision or
declaration of a dividend payable in Shares or shares of Common Stock, and the
number of Shares purchasable upon exercise of this Warrant, immediately
preceding such event, shall be changed to the number determined by dividing the
then current exercise dividend payable in Shares or shares of Common Stock and
against the number of Shares purchasable upon the exercise of this Warrant
immediately preceding such event, so as to achieve an exercise price and number
of Shares purchasable after such event proportional to such exercise price and
number of Shares purchasable immediately preceding such event. No adjustment in
exercise price shall be required unless such adjustment would require an
increase or decrease of at least five cents ($0.05) in such price; PROVIDED,
HOWEVER, that any adjustments which are not required to be so made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations hereunder shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
No fractional Shares are to be issued upon the exercise of the Warrant, but
the Company shall pay a cash adjustment in respect of any fraction of a Share
which would otherwise be issuable in an amount equal to the same fraction of the
market price per share of Share's on the day of exercise as determined in good
faith by the Company.
In case of any capital reorganization or any reclassification of the Shares
or shares of Common Stock of the Company, or in the case of any consolidation
with or merger of the Company into or with another corporation, or the sale of
all or substantially all of its assets to another corporation, which is effected
in such a manner that the holders of Shares or shares of Common Stock shall be
entitled to receive stock, securities or assets with respect to or in exchange
for Shares or shares of Common Stock, then, as a part of such reorganization,
reclassification, consolidation, merger or sale, as the case may be, lawful
provision shall be made so that the holder of the Warrant shall have the right
thereafter to receive, upon the exercise hereof, the kind and amount of shares
of stock or other securities or property which the holder would have been
entitled to receive if, immediately prior to such reorganization,
reclassification, consolidation, merger or sale, the holder had held the number
of Shares which were then purchasable upon the exercise of the Warrant. In any
such case, appropriate adjustment (as determined in good faith by the Board of
Trustees of the Company) shall be made in the application of the provisions set
forth herein with respect to the rights and interest thereafter of the holder of
the Warrant, to the end that the provisions set forth herein (including
provisions with respect to adjustments of the exercise price) shall thereafter
be applicable, as nearly as reasonably may be, in relation to any shares of
stock or other property thereafter deliverable upon the exercise of the Warrant.
When any adjustment is required to be made in the exercise price, initial
or adjusted, the Company shall forthwith determine the new exercise price, and
A. Prepare and retain on file a statement describing in reasonable
detail the method used in arriving at the new exercise price; and
4
<PAGE>
B. Cause a copy of such statement to be mailed to the holder of the
Warrant as of a date within ten (10) days after the date when the
circumstances giving rise to the adjustment occurred.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
-------------------------------------------------------------
A. Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance
hereof, agrees to give written notice to the Company before transferring
this Warrant or transferring any Warrant Shares of such Holder's intention
to do so, describing briefly the manner of any proposed transfer. Promptly
upon receiving such written notice, the Company shall present copies
thereof to the Company's counsel and to counsel to the original purchaser
of this Warrant. If in the opinion of each such counsel the proposed
transfer may be effected without registration or qualification (under any
federal or state securities laws), the Company, as promptly as practicable,
shall notify the Holder of such opinion, whereupon the Holder shall be
entitled to transfer this Warrant or to dispose of Warrant Shares received
upon the previous exercise of this Warrant, all in accordance with the
terms of the notice delivered by the Holder to the Company; provided that
an appropriate legend may be endorsed on this Warrant or the certificates
for such Warrant Shares respecting restrictions upon transfer thereof
necessary or advisable in the opinion of counsel to the Company and
satisfactory to the Company to prevent further transfers which would be in
violation of Section 5 of the Securities Act of 1933, as amended (the "1933
Act") and applicable state securities laws; and provided further that the
prospective transferee or purchaser shall execute such documents and make
such representations, warranties, and agreements as may be required solely
to comply with the exemptions relied upon by the Company for the transfer
or disposition of the Warrant or Warrant Shares.
B. If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such
Warrant Shares described in the written notice given pursuant to this
Section 7 may not be effected without registration or qualification of this
Warrant or such Warrant Shares the Company shall promptly give written
notice thereof to the Holder, and the Holder will limit its activities in
respect to such as, in the opinion of both such counsel, are permitted by
law.
8. Fractional Shares. Fractional Shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional Share, the Company shall, upon the exercise of this Warrant for the
largest number of whole Shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Fair Market Value (as defined in Section
10(d)) of such fractional Share over the proportional part of the Warrant
Exercise Price represented by such fractional Share, plus (b) the proportional
part of the Warrant Exercise Price represented by such fractional Share.
5
<PAGE>
9. Registration Rights.
-------------------
A. If at any time prior to the expiration of seven (7) years from the
date hereof, the Company proposes to file any Registration Statement under
the 1933 Act covering a public offering of any of the Company's securities
(except by a Form S-4 or Form S-8 Registration Statement or any successor
forms thereto), it will give written notice to all Holders of this Warrant,
any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and
any securities issuable upon exercise of this Warrant or securities
issuable upon conversion thereof of its intention to do so and, on the
written request of any such Holder given within twenty (20) days after
receipt of any such notice (which request shall specify the interest in
this Warrant or the securities issuable upon exercise of this Warrant or
conversion of the Warrant Shares intended to be sold or disposed of by such
Holder and describe the nature of any proposed sale or other disposition
thereof), the Company will use its best efforts to cause all such
securities, the Holders of which shall have requested the registration or
qualification thereof, to be included in such registration statement
proposed to be filed by the Company; provided, however, that nothing herein
shall prevent the Company from, at any time, abandoning or delaying any
registration. If any registration pursuant to this Section 9(a) is
underwritten in whole or in part, the Company may require that the
securities requested for inclusion pursuant to this Section 9(a) be
included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters. If a greater
number of securities is offered for participation in the proposed offering
than in the reasonable opinion of the managing underwriter of the proposed
offering can be accommodated without adversely affecting the proposed
offering, then the amount of securities proposed to be offered by such
Holders for registration, as well as the number of securities of any other
selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
B. Further, at any time prior to the expiration of this Warrant, and
provided that a registration statement on Form S-3 (or any successor form
thereto) is then available to the Company, and on a one-time basis only,
upon request by the Holder or Holders of a majority in interest of any
securities originally issuable under this or any warrant issued to the
Underwriter or any affiliate in connection with the sale of shares pursuant
to the Underwriter Agreement (whether or not then issued) the Company will
promptly take all necessary steps to register or qualify, under the 1933
Act and the securities laws of such states as the Holders may reasonably
request, such number of securities issued and to be issued upon conversion
of the Shares requested by such Holders in their request to the Company. In
addition, upon the receipt of such request, the Company shall promptly give
written notice to all other record Holders of the securities not
theretofore registered under the Securities Act and sold that such
registration is to be effected. The Company shall include in such
registration statement such securities for which it has received written
requests to register by such other record Holders within 30 days after the
delivery of the Company's written notice to such other record Holders. The
Company shall be obligated to prepare, file and cause to become effective
only one registration statement pursuant to this Section 9(b) and to pay
the costs and expenses associated with such registration statement to the
extent provided in Section 9(c). The Company shall keep effective and
maintain any registration, qualification, notification, or approval
specified
6
<PAGE>
in this Paragraph (b) for a period of one hundred twenty (120) days or the
date on which all securities are sold, whichever is earlier.
C. With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following
fees, costs, and expenses: all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if the Company is required to bear such
fees and disbursements), all internal expenses, the premiums and other
costs of policies of insurance for the benefit of the Company and/or its
directors and officers against liability arising out of the public
offering, and legal fees and disbursements and other expenses of complying
with state securities laws of any jurisdictions in which the securities to
be offered are to be registered or qualified. Fees and disbursements of
special counsel and accountants for the selling Holders, underwriting
discounts and commissions, and transfer taxes for selling Holders shall be
borne by the selling Holders.
D. The Company hereby indemnifies each of the Holders of this Warrant
and of any securities issued upon exercise thereof or the Shares, and the
officers and directors, if any, who control such Holders, within the
meaning of Section 15 of the 1933 Act, against all losses, claims, damages,
and liabilities caused by (1) any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus (and as amended or supplemented if the Company shall have
furnished any amendments thereof or supplements thereto), any Preliminary
Prospectus or any state securities law filings; (2) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading except insofar as
such losses, claims, damages, or liabilities are caused by any untrue
statement or omission contained in information furnished in writing to the
Company by such Holder expressly for use therein; and each such Holder by
its acceptance hereof severally agrees that it will indemnify and hold
harmless the Company, each of its officers who signs such Registration
Statement, and each person, if any, who controls the Company, within the
meaning of Section 15 of the 1933 Act, with respect to losses, claims,
damages, or liabilities which are caused by any untrue statement or alleged
untrue statement, omission or alleged omission contained in information
furnished in writing to the Company by such Holder expressly for use
therein.
10. Additional Right to Convert Warrant.
-----------------------------------
A. The Holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after
it is exercisable, but prior to its expiration, into Shares as provided for
in this Section 10. Upon exercise of the Conversion Right, the Company
shall deliver to the Holder (without payment by the Holder of any exercise
price) that number of Shares equal to the quotient obtained by dividing (x)
the value of the Warrant at the time the Conversion Right is exercised
(determined by subtracting the aggregate exercise price for the Warrant in
effect immediately prior to the exercise of the Conversion Right from the
aggregate Fair Market Value (as determined below) for the Warrant
immediately prior to the exercise of the Conversion Right) by (y) the Fair
Market Value of one share of Company Class A
7
<PAGE>
Cumulative Convertible Preferred Stock immediately prior to the exercise of
the Conversion Right. No fractional shares shall be issuable upon exercise
of the Conversion Right, and if the number of Shares to be issued in
accordance with the foregoing formula is other than a whole number, the
Company shall pay to the holder of this Warrant an amount in cash equal to
the fair market value of the resulting fractional share.
B. The Conversion Right may be exercised by the Holder, at any time or
from time to time after this Warrant is exercisable, prior to its
expiration, on any business day by delivering a written notice in the form
attached hereto (the "Conversion Notice") to the Company at the offices of
the Company exercising the Conversion Right and specifying (i) the total
number of shares of Class A Cumulative Convertible Preferred Stock the
Holder will purchase pursuant to such conversion and (ii) a place and date
not less than one or more than 20 business days from the date of the
Conversion Notice for the closing of such purchase.
C. At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Class A
Cumulative Convertible Preferred Stock issuable upon such conversion,
together with cash, in lieu of any fraction of a share, and (iii) the
Company will deliver to the Holder a new Warrant representing the number of
Shares, if any, with respect to which the Warrant shall not have been
converted.
D. Fair Market Value of a share of Class A Cumulative Convertible
Preferred Stock as of a particular date (the "Determination Date") shall
mean:
(i) If the Company's Class A Cumulative Convertible Preferred
Stock are traded on an exchange or is quoted on the Nasdaq National
Market System, then the average closing or last sale prices,
respectively, reported for the ten (10) business days immediately
preceding the Determination Date,
(ii) If the Company's Class A Cumulative Convertible Preferred
Stock is not traded on an exchange or on the Nasdaq National Market
System but is traded on the Nasdaq SmallCap Market or other
over-the-counter market, then the average closing bid and asked prices
reported for the ten (10) business days immediately preceding the
Determination Date, and
(iii) If the Company's Class A Cumulative Convertible Preferred
Stock is not traded on an exchange or on the Nasdaq National Market,
Nasdaq SmallCap Market or other over-the-counter market, then the
price established in good faith by the Company's Board of Trustees.
11. Miscellaneous. Whenever reference is made herein to the issue or sale
of shares of Common Stock, the term "Common Stock" shall include any stock of
any class of the Company other than preferred stock with a fixed limit on
dividends and a fixed amount payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company.
8
<PAGE>
The Company will not, by amendment of its Declaration of Trust or Bylaws or
through reorganization, consolidation, merger, dissolution or sale of assets, or
by any other voluntary act or deed, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company, but will, at all times in good faith,
assist, insofar as it is able, in the carrying out of all provisions hereof and
in the taking of all other action which may be necessary in order to protect the
rights of the Holder hereof against dilution.
The Company agrees to provide Underwriter with detailed quarterly and
annual financial statements as soon as available, in a form reasonably
satisfactory to Underwriter, as well as any other documents as Underwriter or
its counsel may reasonably request in a form satisfactory to Underwriter, so
long as this Warrant or any Warrant Shares are outstanding and unregistered.
Upon written request of the Holder of this Warrant, the Company will
promptly provide such Holder with a then current written list of the names and
addresses of all Holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. References to the "holder of" include the
immediate holder of shares purchased on the exercise of this Warrant, and the
word "holder" shall include the plural thereof. This Common Stock Purchase
Warrant shall be interpreted under the laws of the State of Minnesota.
All shares of Common Stock or other securities issued upon the exercise of
the Warrant shall be validly issued, fully paid and non-assessable, and the
Company will pay all taxes due and payable by the issuer in respect of the
issuance thereof.
Notwithstanding anything contained herein to the contrary, the holder of
this Warrant shall not be deemed a Shareholder of the Company for any purpose
whatsoever until and unless this Warrant is duly exercised.
Neither this Warrant nor any term hereof may be changed, waived, discharged
or terminated orally but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
9
<PAGE>
IN WITNESS WHEREOF, Wellington Properties Trust has caused this Warrant to
be signed by its duly authorized officer and this Warrant to be dated
________________, 1999.
"Company"
WELLINGTON PROPERTIES TRUST
By________________________________________
Its_______________________________________
10
<PAGE>
TO: WELLINGTON PROPERTIES TRUST
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in
Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, __________________ of the Shares issuable upon the exercise
of such Warrant, and requests that certificates for such Shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
------------------------------------------
(Print Name)
Please insert social security
or other identifying number
of registered Holder of
certificate (_____________) Address:
------------------------------------------
------------------------------------------
Date: ____________ __________________________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
11
<PAGE>
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto _______________________________ the right to purchase the securities of
Wellington Properties Trust to which the within Warrant relates and appoints
______________________, attorney, to transfer said right on the books of
Wellington Properties Trust with full power of substitution in the premises.
Dated:___________ _____________________________________
(Signature)
Address:
-------------------------------------
-------------------------------------
12
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
TO: WELLINGTON PROPERTIES TRUST
The undersigned hereby irrevocably elects a cashless exercise of the right
of purchase represented by the within Warrant Certificate for, and to purchase
thereunder, _______________ shares of Series A Cumulative Convertible Preferred
Stock, as provided for in Section 10 therein.
Please issue a certificate or certificates for such Series A Cumulative
Convertible Preferred Stock or shares of Common Stock in the name of, and pay
any cash for any fractional share to:
Name______________________________
(Please print name)
Address___________________________________
Social Security No._______________
Signature_________________________________
NOTE: The above signature should correspond exactly with the name on the
first page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares is not all of the shares purchasable under the
within Warrant, a new Warrant is to be issued in the name of said undersigned
for the balance remaining of the shares purchasable thereunder rounded up to the
next higher number of shares.
13
Exhibit 5
F O L E Y & L A R D N E R
CHICAGO FIRSTAR CENTER SACRAMENTO
DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO
JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO
LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE
MADISON FACSIMILE (414) 297-4900 TAMPA
MILWAUKEE WASHINGTON, D.C.
ORLANDO WEST PALM BEACH
August 8, 1999
Wellington Properties Trust
18650 West Corporate Drive
Brookfield, Wisconsin 53008-0916
Ladies and Gentlemen:
We have acted as counsel for Wellington Properties Trust, a Maryland
real estate investment trust (the "Company"), with respect to the preparation of
a Registration Statement of Form SB-2 (the "Registration Statement"), including
the prospectus constituting a part thereof (the "Prospectus"), filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), relating to 1,200,000 shares of the
Company's Class A Cumulative Convertible Preferred Shares, $0.01 par value per
share (the "Class A Preferred Shares"), together with up to 180,000 Class A
Preferred Shares being registered to cover an over-allotment option granted to
the underwriters and a sufficient number of shares of the Company's common
stock, $0.01 par value per share, into which the Class A Preferred Shares are
convertible (the "Common Shares").
In connection with our representation, we have examined: (a) the
Registration Statement, including the Prospectus; (b) the Declaration of Trust
and Bylaws of the Company, as amended to date; (c) resolutions of the Company's
Board of Trustees relating to the authorization of the issuance of the
securities covered by the Registration Statement; and (d) such other
proceedings, documents and records as we have deemed necessary to enable us to
render this opinion.
Based on the foregoing, we are of the opinion that:
1. The Company is a real estate investment trust validly existing under
the laws of the State of Maryland.
2. The Class A Preferred Shares covered by the Registration Statement,
when issued and paid for in the manner contemplated in the Registration
Statement and Prospectus,
<PAGE>
Foley & Lardner
Wellington Properties Trust
August 8, 1999
Page 2
and the Common Shares into which the Class A Preferred Shares are convertible
when issued pursuant to such conversion, will be validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the references to our firm therein. In giving our consent, we
do not admit that we are "experts" within the meaning of Section 11 of the
Securities Act or within the category of persons whose consent is required by
Section 7 of the Securities Act.
Very truly yours,
[DRAFT]
FOLEY & LARDNER
PURCHASE AGREEMENT
THIS AGREEMENT is entered into this 2nd day of July, 1999, by and between
Maple Grove Apartment Home, Inc., a Wisconsin corporation (hereafter referred to
as the "Seller"), and The Shelard Group, Inc., a Minnesota corporation, or its
designee, (the "Buyer"), upon the basis of the following facts, understandings
and intentions of Seller and Buyer.
RECITALS:
1. Seller is the fee owner of a parcel of property ("Land") currently
improved with fifteen (15) residential apartment buildings containing in the
aggregate three hundred four (304) residential apartment units (hereafter in the
aggregate the "Buildings") together with miscellaneous improvements to the Land
("Miscellaneous Improvements") commonly known as the "Maple Grove Apartments"
located at 3019 Maple Valley Drive, City of Madison, County of Dane, Wisconsin
and legally described in Exhibit A hereto attached;
2. Buyer desires to purchase the Land, the Buildings, the Miscellaneous
Improvements, and all licenses, trade names (including the name "Maple Grove
Apartments" and variations thereof), permits, equipment, fixtures and
furnishings and all other personal property, tangible or intangible, owned by
Seller and physically located on the Land and used in the operation and
maintenance of the foregoing and any computer programs which are transferable
and all data bases on any type of computer or computer related storage used in
the operation of the foregoing (hereafter said licenses, trade names, permits,
equipment, fixtures, furnishings and other personal property and computer
programs, data bases and computer related storage items shall be referred to in
the aggregated as "Personal Property," and hereafter the Land, the Buildings,
the Miscellaneous Improvements, and Personal Property is sometimes referred to
in the aggregate as the "Property") in accordance with the terms and conditions
hereinafter set forth; and
3. Seller is willing to grant and extend to Buyer such purchase right.
NOW, THEREFORE, in consideration of the agreements hereinafter provided and
other good and valuable consideration, Seller agrees to sell and Buyer agrees to
purchase from Seller the Property, together with and including all
hereditaments, appurtenances, easements and right of ways thereunto belonging or
in any way appertaining and also the right, title and interest (if any) of
Seller in and to the bounding and abutting streets, alleys and highways, subject
to and upon the following terms and conditions:
<PAGE>
SECTION I.
PURCHASE PRICE
It is hereby agreed that the Purchase Price of the Property shall be
Sixteen Million Seven Hundred Thousand and no/100 Dollars ($16,700,000.00) (the
"Purchase Price"), which shall be paid by Buyer to Seller as follows:
(a) $100,000.00 earnest money to be paid into escrow as provided for
in Section II below;;
(b) Approximately $12,680,000.00 by Buyer agreeing to assume and pay
according to its terms that certain existing first mortgage on the Property
("Mortgage") and
(c) By Buyer paying at closing in cash the difference between the
unpaid portion of the Purchase Price and the remaining unpaid principal amount
of the Mortgage as of the date of closing being approximately $16,600,000.00
less $12,680,000.00 or $3,920,000.00 subject to adjustments and prorations at
closing as described herein.
SECTION II.
EARNEST MONEY DEPOSIT
Currently with the execution of this Agreement, Buyer shall deposit in
escrow with First American Title Insurance Company (the "Escrow Agent") and
(sometimes hereafter "Title") the sum of $100,000.00 and any additional earnest
money sums paid herein by Buyer (collectively referred to as "Deposit") which
shall be retained by the Escrow Agent for the benefit of Seller and Buyer in
accordance with the provisions of this Agreement. The parties hereby agree to
execute such documentation, if any, reasonably required by the Escrow Agent in
connection with the disbursement of the Deposit and establishment of said
Deposit account referenced above.
SECTION III.
INVESTMENT AND DISBURSEMENT OF DEPOSIT
The Escrow Agent is hereby directed to invest the Deposit in a segregated
interest-bearing money market bank deposit with an established local bank.
The Deposit shall be disbursed by the Escrow Agent as follows:
(a) Except as provided for in (b) below, in the event Buyer fails to
terminate this Purchase Agreement pursuant to Section IV hereof within 14 days
after Buyer has received a fully executed copy of this Purchase Agreement
executed by Seller as well as Buyer, ("Early Termination Date"), the Deposit
shall be delivered to Seller upon the termination of this Agreement.
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<PAGE>
(b) The Deposit shall be delivered to Buyer in the event Buyer
terminates this Agreement pursuant to Section IV (d), (e), (f), (g) or (h) or
Sections VI, XVI and XVII or if Buyer terminates this Agreement prior to the
Early Termination Date pursuant to any other subsections of Section IV.
(c) In the event Buyer proceeds to closing, the Deposit shall be
delivered to Seller at closing as part payment of the Purchase Price.
(d) Upon the disbursement of the Deposit, any interest earned thereon
shall be paid to Buyer.
SECTION IV.
CONDITIONS PRECEDENT
Seller agrees that this Agreement shall be conditioned upon Buyer
satisfying himself, in his sole and absolute judgment, that the following
contingencies with respect to the Property are met:
(a) Buyer's inspection and approval of the Land, the completed
Buildings, the completed Miscellaneous Improvements, Personal Property, Leases
(as hereafter defined), the Other Agreements (as hereafter defined) and all
other information required herein to be provided to Buyer by Seller, all during
regular weekday business hours. Seller agrees to allow buyer and its agents the
right of any ingress or egress over and through the Property for the purpose of
inspecting and testing the same and making other observations as Buyer deems
reasonably necessary. Buyer agrees to indemnify and hold Seller harmless from
all injury, death or property damage or claims of any kind whatsoever arising
out of or in any way incidental to Buyer's presence on the Property for the
purposes aforesaid. The parties acknowledge that Buyer has not had an
opportunity to examine the items relating to the Property prior to execution of
this Agreement. Seller hereby agrees to provide Buyer with the following items
within five (5) days from the execution of this Agreement and to supplement the
same on a monthly basis between the date of execution of this Agreement and the
closing:
(i) Complete Plans and Specifications, blueprints, operating
manuals, and licenses used to construct and to operate the Buildings and the
remainder of the Property;
(ii) Complete copies of all leases and rental agreement and
amendments thereto relating to the operation of the Building ("Leases");
(iii) Complete copies of all contracts or other agreements of any
kind or nature currently affecting the Property ("Other Agreements") including
management agreements with resident or non-resident managers, if any, service
contracts, title policies or opinions by Seller's attorneys as to the title,
copies of all insurance polices insuring the Property and any parking or
cross-parking agreements;
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<PAGE>
(iv) A copy of the rent roll as of the last day of the month
preceding the date hereof showing all delinquencies, including a current summary
of any and all other tenant defaults under the Leases and further containing the
following information: (i) the space occupied; (ii) the name of the tenant;
(iii) the term of the Lease; (iv) the monthly rental, escalations or
pass-throughs; (v) whether rental includes utilities or other services; (vi) the
security or other deposit collected and/or applied; (vii) the amount of prepaid
rent, if any; and (viii) any provisions concerning concessions, extensions,
offsets, expansion rights, termination rights, allowances, options or any other
extraordinary provision;
(v) Copies of all certificates and policies of insurance held by
Seller with respect to the Property;
(vi) Copies of all permits or authorizations required to be
issued by any governmental body having jurisdiction in connection with any state
of facts or activity presently existing or being carried on with respect to the
Property;
(vii) Copies of all warranties and guaranties which pertain to
the Property or any portion thereof ("Warranties");
(viii) A complete statement of operating income and expenses for
the Property for the last three (3) years. Said financial statements shall
include those statements used in preparation of the tax returns filed with the
Internal Revenue Service;
(ix) Inventory of the Personal Property owned by the Seller and
located on the Land and used in connection with the operation of the Property
including, but not limited to, appliances located in the apartments, licenses,
permits and equipment;
(x) A complete vendor and supplier list containing the names,
addresses and telephone numbers of all vendors and suppliers and a list of
products or services which they each furnish;
(xi) Copies of real estate tax statements for the Property for
taxes due and payable in 1999 ("1999 Real Estate Tax Statements") along with
copies of statements of assessed value for taxes due and payable in the years
1998 and 1997;
(xii) Copies of the Mortgage and the underlying debt instruments
and related collateral documents.
(b) Buyer may use the Property for residential apartment purposes
("Current Uses") without being in violation of any zoning classification, land
use classification, environmental requirement, or any other use classification
or building classification or requirement established by any entity or authority
having legal jurisdiction or authority thereof.
(c) All utilities, including but not limited to electricity, gas,
water (fire and domestic) storm and sanitary sewer, are available on site,
through valid and adequate
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<PAGE>
public or private easements for Current Uses; provided that in the case of
private easements, they are appurtenant to the Property, or on the Property's
side of abutting streets of size and capacity sufficient to serve the Current
Uses.
(d) That none of the encumbrances set forth on Exhibit B attached (the
"Permitted Encumbrances") interfere with the Current Uses.
(e) Buyer obtaining, as provided in Section V(A) hereof, a hazardous
waste report for the Property from Buyer's approved environmental consultant and
certified in favor of buyer showing the absence of hazardous substance,
pollutants and trash thereon, and also showing the absence of asbestos or other
materials that may create a health risk together with a certificate from
Seller's architect certified in favor of Buyer certifying that the Plans and
Specifications for the Building and the Miscellaneous Improvements did not
require in the construction thereof, the use of asbestos or other products that
are presently considered a health risk.
(f) Written approval of the assumption of the Mortgage by Buyer and
the sale of the Property to Buyer by the holder of the Mortgage, which approval
shall be obtained by Seller. All costs and expenses including, but not limited
to, the payment to such holder of any "assumption fee" or similar fees that may
be charged by such holder shall be paid at the closing fifty percent (50%) by
the Seller and fifty percent (50%) by the Buyer.
(g) Buyer concluding that the Property is not in violation of the Fair
Housing Act (42 U.S.C.ss.3601, etc.).
(h) All of Seller's warranties contained herein are true and correct
now and as of the date of closing.
The conditions precedent enumerated above shall be deemed not found to
exist to the satisfaction of Buyer, and this Agreement shall be deemed
terminated unless Buyer gives written notice hereunder to Seller that Buyer
affirmatively satisfies or waives in writing the conditions precedent prior to
the Early Termination Date with respect to subparagraphs (a), (b) and (c) above
and prior to closing, as hereafter defined, with respect to subparagraphs (d),
(e), (f), (g) and (h). Upon termination of this Agreement as a result of Buyer's
not waiving these conditions precedent, all parties hereto shall be released
from all duties and obligations to each other contained herein.
SECTION V.
ENVIRONMENTAL AUDITS AND SURVEY
A. Environmental Audits. Buyer shall obtain, at Buyer's sole cost and
expense, a "Phase One and/or Phase Two" environmental audit(s) done currently
certified to Buyer.
Notwithstanding the foregoing, Buyer shall have the right to do additional
environmental audits and/or soil tests regardless of the cost as long as Buyer
pays for all of
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<PAGE>
such costs. Buyer agrees to indemnify and hold Seller harmless from all
mechanic's liens liability and other costs and expenses arising from Buyer's
doing such additional environmental audits and/or soil tests.
B. Survey. Buyer shall as promptly as possible after the date hereof obtain
a current "as built" survey of the Property currently certified to Buyer and
Title as legally described in Exhibit A meeting such as the requirements of an
ALTA/ACSM Land Title Survey as Buyer deems appropriate.
C. Copies of Seller's Documents. Seller shall promptly deliver to Buyer
copies of all soil tests, environmental audits, surveys and other documents
relating to the physical properties of the Property which are within Seller's
control.
SECTION VI.
TITLE EVIDENCE
A. Buyer shall as soon as possible, at Buyer's expense, obtain a
commitment(s) (the "Commitment") for an Owner's Policy of Title Insurance for
the Property issued by Title. Buyer shall pay at closing the cost of the actual
title insurance policy, if any, to be purchased by Buyer in the amount of the
Purchase Price. The Commitment shall bear a date subsequent to the date hereof,
shall include legible copies of all documents, maps, or plats set forth therein
as affecting the Property and shall be issued through the Title in its capacity
as a title insurance company by its local office or by its local agent situated
in a County where the Property is located. The Commitment shall identify the
Property and easements appurtenant thereto by the legal description(s) set forth
on the Survey. The Commitment shall, at Buyer's option, contain endorsements
guaranteeing: (i) all parcels shown in Exhibit A which comprise the Property to
be contiguous; (ii) the zoning classification of the Property; (iii) that the
Property abuts the public street(s) immediately adjacent thereto and has direct
and valid access thereto; and (iv) such other endorsements as Buyer shall
reasonably request.
B. Within twenty (20) business days after receipt of both the Commitment in
the form specified above and the Survey to be obtained by Buyer pursuant to
Section V hereof, Buyer shall deliver to Seller a written statement containing
any objection Buyer has to title. If such statement is not delivered within the
twenty (20) business day period, title shall be deemed approved by Buyer. If
such statement is so delivered, Seller shall use its best efforts and all due
diligence to cure or remove all such objections prior to closing. If any
objection is not cured or removed within one hundred twenty (120) days of the
receipt by Seller of the aforesaid written statement containing objection of
Buyer to title, Buyer, at its option, may either: (i) accept title as it is,
subject to the right to deduct from the Purchase Price liens or encumbrances
securing a definite or ascertainable amount; (ii) cure such objections itself at
Seller's expense and proceed to closing, in which case Seller agrees to escrow
with the Title Company such reasonably estimated expenses and attorneys' fees
needed to cure such objections and be responsible for any deficiencies in the
escrowed amount; or (iii) terminate this Agreement. Upon any such termination
all parties shall be released from all duties or
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<PAGE>
obligations contained herein and the Deposit returned to Buyer as provided for
in Section II hereof.
SECTION VII.
1031 EXCHANGE
At either party's request, the other party agrees to cooperate with the
requesting party in a deferred or simultaneous ss. 1031 like kind exchange of
the Property as long as the other party is not required to take title to any
other property or to incur any further cost, expense, liability or delay.
SECTION VIII.
INTENTIONALLY LEFT BLANK
SECTION IX.
WARRANTIES
Seller warrants and represents to Buyer that the following statements are
now, and will at the closing, be true and accurate:
(a) Seller will have marketable and insurable record title to the
Property as of closing subject only to the Permitted Encumbrances listed on
Exhibit B attached hereto and made a part hereof.
(b) The information supplied to Buyer pursuant to Section IV(a) hereof
is complete and materially correct and has been duly supplemented including, but
not limited to, any new Other Agreements;
(c) At closing Seller shall: (i) convey to Buyer by Warranty Deed the
Property; (ii) convey by Warranty Bill of Sale the Personal Property to Buyer
free of all leases, conveyances or other transfers or encumbrances on the
Property or any portion thereof except for Permitted Encumbrances and other
matters approved by Buyer pursuant to Sections IV, VI or VII or as otherwise
provided herein; (iii) shall assign all of Seller's interest in the Leases and,
to the extent requested by Buyer and to the extent they are assignable, all of
Seller's interest in the "Other Agreements," (iv) shall execute an
Indemnification Agreement ("Indemnification Agreement") with Buyer in the form
of Exhibit C hereto attached; and (v) shall assign to Buyer all of Seller's
interest, if an, in the name "Maple Grove Apartments" or variations thereof;
(d) Seller has not received any notice nor are they aware of any
pending action to take by eminent domain or by deed in lieu thereof all or any
portion of the Property;
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<PAGE>
(e) Seller shall be solely responsible for and shall pay on the date
of closing any deferred tax or assessment, catch-up or adjustment in future
taxes due as a result of the Property having been classified under any
designation authorized by law to obtain a special low ad valorem tax rate or
receive either an abatement or deferment of ad valorem taxes;
(f) Seller is not a "foreign persons" as contemplated by Section 1445
of the Internal Revenue Code, and that at the closing Seller will deliver to
Buyer a certificate so stating, in a form complying with the Federal tax law;
(g) Seller has the full right, power and authority to enter into this
Agreement and to carry out the terms and provisions hereof including, but not
limited to, compliance with all appropriate procedures to authorize the
execution and delivery or this Agreement;
(h) The Property has not been used for storage or disposal of, nor
does it contain, any hazardous substance or high concentrations or pollutants or
contaminants, including but not limited to, those defined in any federal or
state environmental law nor has the Property been used for the dumping or trash
or other waste products; and Seller has no knowledge or belief that any other
person has so used the Property. Any asbestos or other health endangering
elements or chemicals are either absent from the Property or are properly
encapsulated and do not present any health risk;
(i) No unrecorded condition, restriction, obligation or agreement
shall exist which shall materially and adverse affect the Property or Buyer's
ability to use the Property for the Current Uses;
(j) No portion of the Property is located within an area designated as
a "floodplain" or "flood prone area" under any statute, regulation, or
ordinance. The Property is free from any use or occupancy restrictions, except
those imposed by zoning laws and regulations, and no part is dedicated or has
been used as a cemetery or burial ground;
(k) To the best of Seller's knowledge, no fact or condition exists
which would result in the termination of the current access to the Property from
any presently existing streets and roads adjoining or situated on the Property
or to any existing sewer or other utility Facilities servicing, adjoining or
situated on the Property. All utilities needed for Current Uses are available to
the Property.
(l) There is no default under the Mortgage, Seller has paid in full
for all labor and materials which have been furnished to the Property and there
is no litigation at law or in equity, and no proceedings of any administrative
or regulatory authority pending or threatened against the Seller or affecting
the Property;
(m) All required foreign, federal and state tax returns, reports and
estimates have been correctly prepared and filed by Seller for all of the years
and periods for which any returns, reports or estimates were due, and all taxes,
interests and penalties payable have been paid by Seller so there is and shall
be no claim or lien or charge for taxes asserted
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<PAGE>
against the Property. All contributions required to be paid by Seller to any
unemployment, workers compensation or other governmentally administrated
programs have been paid as and when due and there are no deficiencies in
Seller's said account with respect to the Property. Seller will terminate all of
its employees and Seller will pay, prior to or on the date of closing, to all of
their employees all wages, fringe benefits, all accrued sick and vacation pay
through the date of closing.
(n) Seller warrants that there are no material defects or structural
defects in the assets being transferred hereunder including, but not limited to,
water leakage, flooding, seepage or drainage problems with the Property and
there are no outstanding citations or notices of violations of any statutes,
ordinances or regulations of any kind, nor has Seller ever been so cited or
noticed with respect to the Property except Seller has received a letter of
inquiry from the United States Department of Justice attempting to determine
whether the Property complies with the Fair Housing Act, 42 U.S.C. ss. 3601,
etc.
(o) The Property is zoned for the Current Uses and the Property
complies with the parking, setback and other requirements of the applicable
zoning ordinances;
(p) All instruments, other documents and written information delivered
to Buyer by or on behalf of Seller shall be complete and correct in all respects
as of the date of delivery to Buyer and as of the closing date. Seller has not
knowingly withheld from Buyer any documents or other information material to the
Property or the transactions contemplated in this Agreement;
(q) The Property contains no individual sewage treatment system nor
does it contain any wells and the Property does not contain any underground
storage tanks containing fuel, oil or any other hazardous materials.
Seller agrees to indemnify and hold Buyer harmless from all claims,
expenses and liabilities (including reasonable attorney's fees)
incurred by Buyer as a result of Seller's breach of any of the
foregoing warranties. Seller further agrees to defend, indemnify and
hold harmless Buyer and all other persons and entities subsequently
owning and/or possessing the Property or any portion thereof and from
any and all liabilities (including but not limited to attorney's fees),
claims, demands, actions, causes of action, in law or in equity,
whether past, present or future, known or unknown, liquidated or
unliquidated, whether in tort, contact, statutory cause of action or
administrative agency proceeding or otherwise, whether for personal
injury, property damage, clean-up, remedial or response costs, wrongful
death, or loss of consortium or support which arise out of or in any
way relate to activities which Seller has conducted on the Property.
SECTION X.
CLOSING
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<PAGE>
Subject to any extension as hereafter provided or agreed to in writing by
the parties, the closing of this transaction shall take place in the office of
Title on or before August 6, 1999. Notwithstanding anything hereunder to the
contrary and except for the 120-day period given to Seller to cure title defects
in Section VI B, if in the event that the closing of the transactions
contemplated by this Agreement have not occurred on or prior to September 1,
1999, any party hereto shall have the unilateral right to elect to terminate
this Agreement. If such an election to terminate occurs, no party hereunder
shall have any liability whatsoever to any other party hereunder. Possession of
the Property shall be deemed to have been given by Seller to Buyer coincident
with the closing. The following procedure shall govern the closing:
(a) Prior to the closing, Seller shall deliver to Buyer and the Title
Company a copy of the proposed general Warranty Deed (the "Deed") which shall be
in recordable form and shall convey good and marketable record title to the
Property (using the legal descriptions set forth on the survey provided by
Seller) to Buyer, subject only to current real estate taxes, the Permitted
Encumbrances and other matters approved by buyer. If the form of the deed does
not comply with the provisions set forth above, the Seller shall promptly
correct the same upon notice from either buyer or the Title Company;
(b) On or before the closing, Seller shall deliver to the Title
Company or Buyer the following:
(i) the Deed, properly executed and acknowledged along with the
Deposit and a standard form Seller's Affidavit;
(ii) current real estate tax statements;
(iii) any applicable owner's duplicate certificates of title to
the Property;
(iv) any applicable abstracts of title;
(v) a warranty of bill of sale properly executed for all Personal
Property including all of Seller's supply of lease forms, advertising material
and other business forms;
(vi) properly executed assignments of all Seller's interest in
and to the Leases and the original copies of all the Leases then in force and
effect on the Property as of the closing and Other Agreements and the original
copies of the Other Agreements (to the extent Buyer has requested the same and
to the extent they are assignable), together with a current rent roll for
tenants of the Property, and al security deposits and accrued statutory interest
thereon, prepaid rents and other deposits made by tenants of the Property;
(vii) a properly executed Indemnification Agreement;
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<PAGE>
(viii) the Plans and Specifications for the improvements to the
Property;
(ix) an assignment of the warranties and any other documents
required by this Agreement;
(x) any other documentation reasonably requested by the Title
Company in order to confirm the authority of the Seller to consummate this
transaction or to permit the Title Company to issue to Buyer, upon completion of
the closing, its Owner's Title Insurance Policy in an amount equal to the
Purchase Price, subject only to those matters shown on the Commitment which were
approved by buyer (the "Title Policy"); provided, however, that the foregoing
shall not be construed to obligate Seller to provide any indemnity or to pay any
sums not otherwise required to be paid by Seller hereunder;
(xi) such funds may be required by Seller to pay closing costs or
charges properly allocable to Seller;
(c) On or before the closing Buyer shall deliver to the Title Company
or Seller the following:
(i) a properly executed Indemnification Agreement;
(ii) such additional funds as may be required of Buyer to pay the
Purchase Price, closing costs or charges properly allocable to Buyer.
(d) After the Title Company has received all of the items to be
deposited with it, and when it is in a position to issue the Title Policy
reflected by the approved Commitment, the Title Company shall;
(i) record the Deed instructing the Recorder's Office to return
the same to Buyer;
(ii) record any other instruments executed by the parties, or
either of them, which are contemplated by this Agreement to be placed of record,
instructing the Recorder's Office to return the same to the beneficiary thereof;
(iii) issue to Buyer its Title Policy and deliver to Buyer all
other documents to be herein deliver by Seller to the Title Company pursuant to
this Agreement;
(iv) charge Buyer for the cost of the title policy and survey,
the recording cost of the Deed and the closing fee less abstracting charges
and/or the cost of the title commitment which shall be charged to Seller;
(v) charge Seller for the cost of recording any documents
clearing title to the Property, any abstracting costs and/or the cost of the
title commitment, and the cost, if any, of Buyer assuming the Other Agreements;
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<PAGE>
(vi) charge Seller for the full cost of any deed transfer,
revenue or similar tax with respect to the sale of the Property;
(vii) 1998 real estate taxes and for prior years shall be paid by
Seller and 1999 real estate taxes shall be prorated as of the date of closing.
Seller shall pay all real estate taxes for 1998. All special assessments, levied
or pending, including interest thereon, against the Property on the closing
date, including, without limitation, trunk area charges and charges for lateral
benefit from truck which remain unpaid in respect of the Property for sanitary
sewer and storm sewer shall be paid for by Seller. If year 1999 real estate
taxes are not available, then a proration shall be made based on the preceding
years amount, and the amount of such taxes shall be adjusted when the current
amount becomes known;
(viii) all revenues and income, in connection with the operation
of the Property (unless specifically otherwise allocated herein), shall all be
prorated between the parties on the calendar year as of the closing date. Any
income from rentals due but not paid as of closing date shall be forwarded to
Seller if actually collected and received by buyer subsequent to the closing
date; however, the parties agree that from and after the closing date, any
monies received from any tenant shall be allocated first towards rental then
currently due from such tenant, prior to allocation of past rentals due and
owing from such tenant to Seller;
(ix) all bills for services, labor, materials, capital
improvements or other charges of any kind or nature rendered to Seller or the
Property prior to the closing date shall be borne by and paid by Seller;
(x) all tenant security deposits and any prepaid rent received by
Seller for periods after the closing date shall be credited or paid to Buyer and
charged to Seller and Buyer shall receive as a credit any accrued but unpaid
interest on the Mortgage and a credit for the broker's fee of $410,000.00 as
referenced in Section XIV hereof;
(xi) all such proration of revenues and expenses shall be
adjusted to the extent known on the closing date. Any such items unknown as of
the closing date shall be adjusted after the closing date when such items become
known; and
(xii) prepare closing statements for Seller and Buyer,
respectively, indicating deposits, credits and charges (including allocation of
current real property taxes) and deliver the same, together with a disbursement
of funds, to any appropriate party;
Any supplemental closing instructions given by any party shall also be followed
by the Title Company provided the same do not conflict with any instructions set
forth herein.
SECTION XI.
DEFAULT BY BUYER
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<PAGE>
In the event the transactions contemplated hereby fail to close as a result
of a material default by buyer of any of the terms of this Agreement, and such
failure to close continues for a period of ten (10) days after Seller notifies
Buyer of such event, Seller's sole and exclusive remedy for such default shall
be the right to cancel and terminate this Agreement as provided for by law.
Except for the provision of Section III, upon such termination each party shall
be released from all duties and obligations contained herein, it being
understood and agreed that Seller is hereby releasing and/or waiving any right
it might have to either specifically enforce this Agreement or sue for damages.
SECTION XII.
DEFAULT BY SELLER
If Seller refuses to perform any of its obligations as set forth herein and
such failure to perform continues for a period of ten (10) days after Buyer
notifies Seller of such event, Buyer may, at its option, elect one of the
following remedies:
(a) To terminate this Agreement by notice to Seller, in which event,
except for the provision of Section III, neither party shall have any further
rights or obligations hereunder; or
(b) to enforce specific performance of Seller's obligations hereunder,
including specifically the conveyance of the Property in the condition required
hereby.
SECTION XIII.
EXPENSE OF ENFORCEMENT
If either party brings an action at law or in equity to enforce or
interpret this Agreement, the prevailing party in such action shall be entitled
to recover reasonable attorney's fees and court costs in addition to any other
remedy granted.
SECTION XIV.
BROKERS
Seller warrants to Buyer that except for a brokerage commission due to the
Buyer in the amount of $410,000.00, and a commission equal to three percent (3%)
of the Purchase Price due to Wellington Realty, Inc. which Seller agrees to pay
at the closing, Seller has not taken any action which would result in any real
estate broker's fee being due or payable to any party in connection with this
transaction. Buyer warrants to Seller that except for the foregoing fee, Buyer
has not taken any action which would result in any real estate broker's fee,
finder's fee or other fee being due or payable to any party in connection with
this transaction. Except for the foregoing commission payable to Buyer, Seller
and Buyer respectively agree to indemnify, defend and hold harmless the other
from and against any and all other claims, fees, commissions and suits of any
real estate broker or agent with respect to
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<PAGE>
services claimed to have been rendered for or on behalf of such party in
connection with the execution of this Agreement or the transaction set forth
herein.
SECTION XV.
NOTICE
All notices, demands and requests required or permitted to be given under
this Agreement must be in writing and shall be deemed to have been properly
given or served either by personal delivery or by depositing the same in the
United States Mail, addressed to Seller or to Buyer, as the case may be, prepaid
and registered or certified mail, return receipt requested, at the following
addresses:
TO SELLER: Maple Grove Apartment Home, Inc.
18650 W. Corporate Drive, #300
Brookfield, WI 53045
Attn: Robert F. Rice
WITH COPY TO: __________________________________
__________________________________
__________________________________
Attn:_____________________________
TO BUYER: The Shelard Group, Inc.
c/o Century Bank, N.A.
11455 Viking Drive, Suite 100
Eden Prairie, Minnesota 55344
Attn: Sheldon Z. Wert
WITH COPY TO: Maun & Simon, PLC
2000 Midwest Plaza Building West
801 Nicollet Mall
Minneapolis, Minnesota 55402
Attn: Charles Bans
Rejection or refusal to accept or the inability to deliver notice hereunder
because of changed address of which no notice was given shall be deemed to be
receipt of the notice, demand or request. Any party shall have the right from
time to time and at any time upon the last ten (10) days' written notice
thereof, to change their respective addresses, and each shall have the right to
specify as its address any other address within the United States of America.
SECTION XVI.
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<PAGE>
CONDEMNATION
In the event any portion of the Property is condemned or access thereto
shall be taken, or in either case threatened, prior to the closing, and Buyer
concludes that the taking renders the land remaining unsuitable for the Current
Uses contemplated and Buyer notifies Seller in writing of such conclusion within
thirty (30) days after written notice to Buyer of such condemnation action, then
this Agreement shall terminate.
If the Agreement is not terminated pursuant to the preceding sentence, the
Purchase Price of the Property shall not be affected, it being agreed that if
the award is paid prior to the closing of this transaction, such amount, insofar
as it pertains to the Property, shall be held in escrow and delivered to Buyer
at the time of closing; and if the award has not been paid prior to the closing
of this transaction, then at the closing Seller shall assign to Buyer all of its
right, title and interest with respect to such award and shall further execute
any other instrument requested by Buyer to assure that such award is paid to
Buyer.
If Buyer does not terminate this Agreement, it shall have the right to
contest the condemnation and/or the award resulting therefrom.
SECTION XVII.
DAMAGE OCCURRING PRIOR TO CLOSING
If, prior to the closing date, all or any part of the Property is
substantially damaged by fire, casualty, the elements or any other cause, Seller
shall immediately give notice to Buyer of such fact and at Buyer's option (to be
exercised with ten (10) days after Seller's notice), this Agreement shall
terminate, in which event neither party will have any further obligations under
this Agreement. If Buyer fails to elect to terminate despite such damage, Seller
shall promptly commence to repair such damage or destruction to mitigate further
damages. If such damage shall be completely repaired prior to the closing date,
then there shall be no reduction in the Purchase Price and Seller shall retain
the proceeds of all insurance related to such damage. If such damage shall not
be completely repaired prior to the closing date, Seller shall assign to Buyer
all right to receive the proceeds of all insurance related to such damage, less
costs incurred by Seller in mitigating damage or making repairs that are
reimbursable by insurance then in force, and the Purchase Price shall remain the
same. For purposes of this Section, the words "substantially damaged" mean
damage that would cost $50,000.00 or more to repair.
SECTION XVIII.
EMPLOYEE MATTERS
This Agreement does not include and there shall not be assigned to or
assumed by Buyer, by any provision of this Agreement nor by any other Agreement
between Seller and Buyer, any obligations of Seller under labor agreements,
pension plans, health and welfare plans, group insurance plans, tax, worker's or
employer's compensation, contribution of
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<PAGE>
funding requirements and other contracts of commitment of Seller to its
employees or former employees, whether with respect to the Property, its
improvements thereon or otherwise. Buyer hereby does not agree to, and this
Agreement shall not obligate Buyer to continue the employment of any employees
or former employees of Seller. Seller shall indemnify and hold Buyer harmless
from any loss, damage, claim or liability to employees and former employees of
Seller of Seller arising from their employment by Seller, and termination of
said employment by Seller with respect to the Property, its improvements thereon
or otherwise.
SECTION XIX.
CONTINUATION OF BUSINESS
Seller hereby agrees that during the period between the execution of this
Agreement and the closing date it will continue to actively and aggressively
retain existing tenants, enforce all leases and seek tenants for vacant space,
in accordance with their past business practices.
SECTION XX.
MERGER/BINDING AGREEMENT
All previous negotiations and understandings between Seller and Buyer or
their respective agents and employees with respect to the transaction set forth
herein are merged in this Agreement which alone fully and completely expresses
the parties' rights, duties and obligations. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, assigns, heirs and personal representatives, it being understood and
agreed that the warranties, representations and/or indemnities and hold harmless
agreements made and expressed herein shall survive the closing of this
transaction and shall not be merged therein.
SECTION XXI.
EFFECTIVE DATE
The Effective Date of this Agreement shall be the date of the last party's
execution; provided, however, that if the last party does not execute this
Agreement and deliver a duly executed counterpart of the same to the first
signing party within ten (10) days of the first party's execution date, then the
offer or commitment to be bound hereby by the first executing party shall
automatically be revoked and withdrawn, whereupon neither party shall be bound
hereto.
SECTION XXII.
GOVERNING LAW
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<PAGE>
This Agreement shall be deemed to be a contract made under the laws of the
State of Wisconsin and for all purposes shall be governed and construed in
accordance with the laws of said State.
SECTION XXIII.
ASSIGNMENT
Buyer may assign effective at closing its rights under this Purchase
Agreement, provided it gives Seller notice of such assignment.
IN WITNESS WHEREOF, the parties hereto have executed these presents
intending to be bound by the provisions herein contained.
SELLER: BUYER:
MAPLE GROVE APARTMENT HOME, INC. THE SHELARD GROUP, INC.
By:/s/ By:/s/
----------------------------- ----------------------------------
Its:____________________________ Its:______________________________
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<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Units One (1), Two (2), Three (3), Four (4), Five (5), Six (6), Seven (7),
Eight (8), Nine (9), Ten (10), Eleven (11), Twelve (12), Thirteen (13), and
Fourteen (14), Maple Grove Apartment Homes, a Condominium, in the City of
Madison, Dane County, Wisconsin.
Being a part of Lot 140, Maple Grove First Addition, recorded in Volume
56-68B of Plats on pages 201-202, Dane County Registry, and Lot 154, Maple Grove
Second Addition, recorded in Volume 56-100A of Plats on page 291, Dane County
Registry, located in the Southeast 1/4 of the Southwest 1/4 of Section 1, Town 6
North, Range 8 East, in the City of Madison, Dane County, Wisconsin, to-wit:
Commencing at the South 1/4 corner of said Section 1, thence North 00 degrees
30' 36" East, 60.01 feet to the point of beginning; thence South 89 degrees 27'
19" West, 469.82 feet; thence North 00 degrees 32' 41" West, 188.66 feet; thence
North 89 degrees 26' 47" West, 230.22 feet to the start of a curve; thence
Northwesterly on a curve to the left which has a radius of 183.00 feet and a
chord which bears North 30 degrees 23' 03" West, 182.11 feet; thence North 60
degrees 13' 25" West, 100.00 feet to a point of curve; thence Northwesterly on a
curve to the right which has a radius of 117.00 feet and a chord which bears
North 29 degrees 50' 06" West, 118.37 feet; thence North 00 degrees 33' 13" East
245.86 feet; thence South 89 degrees 26' 47" East 186.93 feet, thence North 80
degrees 26' 25" East, 110.04 feet; thence North 67 degrees 18' 45" East; 102.57
feet; thence North 54 degrees 38' 53" East 102.57 feet; thence North 43 degrees
53' 58" East, 71.62 feet; thence North 39 degrees 28' 58" East, 139.54 feet;
thence North 44 degrees 52' 12" West, 17.15 feet; thence North 46 degrees 29'
30" West, 108.20 feet; thence North 39 degrees 28' 58" East, 30.07 feet; thence
South 46 degrees 29' 30" East, 110.31 feet to a point of curve; thence
Southeasterly on a curve to the right which has a radius of 333.00 feet and a
chord which bears South 22 degrees 59' 27" East 265.58 feet; thence South 00
degrees 30' 36" West, 358.90 feet; thence South 89 degrees 29' 24" East, 220.00
feet; thence South 00 degrees 30' 36" West, 444.99 feet to the point of
beginning.
<PAGE>
EXHIBIT B
PERMITTED ENCUMBRANCES
1. Leases
<PAGE>
EXHIBIT C
INDEMNIFICATION AGREEMENT
This Agreement entered into this ____ day of ___________, 1999 by and
between Maple Grove Apartment Home, Inc. (hereinafter referred to as the
"Seller") and _______________________, (the "Buyer").
RECITALS:
1. Seller, simultaneously with the execution of this Indemnification
Agreement, has sold to Buyer pursuant to a Purchase Agreement dated
______________________, 1999 ("Purchase Agreement") a parcel of land ("Land")
located in Dane County, State of Wisconsin, legally described as ______________
______________________________________________________.
2. The Land is improved with ______________________ (_________) residential
apartment buildings contained in the aggregate three hundred four (304)
residential apartment units ("Improvements").
3. The property purchased by Buyer from Seller includes not only the Land
and the Improvements, but also all licenses, permits, equipment, fixtures and
furnishings and certain other personal property, tangible and intangible, owned
by the Seller and used in the operation and maintenance of the Improvements
(hereafter said licenses, permits, equipment, fixtures, furnishings and other
personal property, together with the Land and the Improvements, shall be
referred to in the aggregate as the "Property").
4. Pursuant to the Purchase Agreement, the parties have agreed to execute
this Indemnification Agreement relating to the Property.
NOW, THEREFORE, in consideration of the foregoing and of the terms and
conditions hereafter set forth, the parties agree as follows:
1. All risks, losses and liabilities incurred or accruing through the
ownership or operation of the Property on or before the date hereof, shall be
borne by Seller, including without limitation all liabilities which are
presently unknown, undetermined or the subject of court litigation.
2. All risks, losses and liabilities arising from ownership or operation of
the Property subsequent to the date hereof shall be borne by Buyer.
3. Seller hereby agrees to indemnify and hold Buyer harmless from all
claims, liabilities, costs, expenses and attorneys' fees which accrue through
the ownership or operation of the Property on or before the date hereof,
including, but not
<PAGE>
limited to, all claims or liabilities arising out of Leases (as defined in the
Purchase Agreement) or the Other Agreements (as defined in the Purchase
Agreement).
4. Seller further agrees to defend, indemnify and hold harmless Buyer from
any and all liabilities (including but not limited to attorneys' fees), claims,
demands, actions, causes of action, in law or in equity, whether past, present
or future, known or unknown, liquidated or unliquidated, whether in tort,
contract, statutory cause of action or administrative agency proceeding or
otherwise, whether for personal injury, property damage, clean-up, remedial or
response costs, wrongful death, or loss of consortium or support which arise out
of or in any way relate to activities ("Activities") which Seller had conducted
on the Property.
5. Seller agrees to indemnify and hold Buyer harmless from all claims,
expenses and liabilities (including reasonable attorneys' fees) incurred by
Buyer as a result of Seller's breach of any of the warranties contained in the
Purchase Agreement.
6. Buyer hereby agrees to indemnify and hold Seller harmless from all
claims, liabilities, costs and expenses and attorneys' fees which accrue through
the ownership or operation of the Property after the date hereof, including, but
not limited to, claims or liabilities and expenses arising out of Leases (as
defined in the Purchase Agreement) and the Other Agreements which accrue after
the date hereof and including all liabilities (including but not limited to
attorneys' fees), claims, demands, actions, causes of action, in law or in
equity, whether past, present or future, known or unknown, liquidated or
unliquidated, whether in tort, contract, statutory cause of action or
administrative agency proceeding or otherwise, whether for personal injury,
property damage, clean-up, remedial or responses costs, wrongful death, or loss
of consortium or support which arise out of or in any way relate to activities
("Activities") which Buyer has conducted on the Property.
7. Nothing in this Agreement shall be deemed to supersede or abrogate any
terms of conditions of the Purchase Agreement, but rather the terms and
conditions of this Agreement shall be deemed to supplement the terms and
conditions of the Purchase Agreement.
8. This Agreement shall be construed according to the laws of the State of
Minnesota and shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns.
SELLER: BUYER:
MAPLE GROVE APARTMENT HOME, INC. THE SHELARD GROUP, INC.
By:/s/ By:/s/
----------------------------- ----------------------------------
Its:____________________________ Its:_________________________________
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EXHIBIT 23.1
We have issued our reports dated April 9, 1999, accompanying the consolidated
financial statements of Wellington Properties Trust and Subsidiaries contained
in the Prospectus. We consent to the use of the aforementioned reports in the
Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ GRANT THORNTON LLP
Fond du Lac, Wisconsin
August 10, 1999
