UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14A-12
USP Real Estate Investment Trust
------------------------------------------------
(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:________
2) Aggregate number of securities to which transaction applies:___________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
_______________________________________________________________________
4) Proposed maximum aggregate value of transaction:_________
5) Total fee paid:_______
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: _______________________________________________
2) Form, Schedule or Registration Statement No.:
_______________________________________________________________________
3) Filing Party: _________________________________________________________
4) Date Filed: ___________________________________________________________
USP REAL ESTATE INVESTMENT TRUST
4333 EDGEWOOD ROAD N.E.
CEDAR RAPIDS, IOWA 52499-5441
__________, 2000
To the Shareholders of USP Real Estate Investment Trust:
USP Real Estate Investment Trust (the "Trust") has entered into a Real
Estate Sale and Purchase Contract (the "Purchase Agreement") with AEGON USA
Realty Advisors, Inc. ("AEGON Advisors"), the Trust's advisor and a subsidiary
of AEGON USA, Inc., the Trust's largest shareholder, to sell all of the real
estate assets of the Trust to AEGON Advisors for a total purchase price of
$33,500,000 in cash (the "Asset Sale"). Since AEGON Advisors' agreement to
purchase the real estate assets of the Trust is conditioned upon shareholder
approval of the Asset Sale, as well as shareholder approval of the subsequent
liquidation of the Trust and distribution of the proceeds of the Asset Sale to
the shareholders (the "Liquidation"), holders of record of shares of beneficial
interest of the Trust are cordially invited to attend a special meeting of
shareholders (the "Special Meeting") at which shareholders of the Trust will be
asked to consider and approve both the Asset Sale and the Liquidation.
Shareholder approval of the Liquidation of the Trust's assets will result in the
termination of the Trust.
The Board of Trustees has determined by a unanimous vote of a special
committee of disinterested Trustees established for the purpose of evaluating
this transaction (the "Special Committee"), and by a unanimous vote of all
Trustees, that the terms of the Asset Sale and the Liquidation are fair to, and
in the best interests of, our shareholders. In making this decision, the Special
Committee and the Board considered, among other things, the written opinion,
dated October 21, 1999, of Raymond James & Associates, Inc., to the effect that,
as of the date of the opinion and based upon and subject to certain matters
stated therein, the price received by the Trust in connection with the Asset
Sale is fair, from a financial point of view, to our shareholders. The written
opinion of Raymond James & Associates, Inc., dated October 21, 1999, is attached
as ANNEX B to the enclosed Proxy Statement and should be read carefully and in
its entirety. As a result of the foregoing, the Special Committee and Board have
approved the Asset Sale and the Liquidation. Additionally, holders of
approximately 46% of the outstanding shares (including AEGON USA, Inc.) have
advised the Trust that they approve of the Asset Sale and the Liquidation and
intend to vote in favor of both proposals at the Special Meeting. We urge you to
study the Proxy Statement carefully so as to make your own assessment of the
advisability of the proposed Asset Sale and the Liquidation.
THESE TRANSACTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
By the terms of the Purchase Agreement, the Asset Sale will not be
completed by AEGON Advisors unless both the Asset Sale and the Liquidation are
approved by the requisite vote of our shareholders. Approval of the Asset Sale
will require the affirmative vote of a majority of shares present at the Special
Meeting if a quorum representing 33.33% of the outstanding shares is present in
person or by proxy. Under the Trust's Declaration of Trust, however, the
Liquidation cannot be completed unless approved by the affirmative vote of
shareholders representing 66.67% of the outstanding shares. Neither the Asset
Sale nor the Liquidation will be consummated by the Trust unless both are
approved by the Trust's shareholders. Therefore, we have convened the Special
Meeting for our shareholders to vote on the Asset Sale and the Liquidation. The
Special Meeting will take place at the AEGON Financial Center, 4333 Edgewood
Road N.E., Cedar Rapids, Iowa on ____________, 2000 at _____ a.m. (local time).
The Board recommends that you vote "for" the Asset Sale and "for" the
Liquidation at the Special Meeting.
Your vote is very important. Whether or not you plan to attend the Special
Meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us.
Enclosed with this letter is a Notice of Special Meeting of Shareholders,
Proxy Statement and proxy card. If you have any questions concerning these
documents, please feel free to contact our Investor Relations Department at
(319) 398-8895. The Proxy Statement is provided by the Board of Trustees in
connection with the furnishing of proxies for use at the Special Meeting and at
any adjournments or postponements of the Special Meeting. The Proxy Statement
provides you with detailed information about the Asset Sale and the Liquidation.
You may obtain additional information about the Trust and AEGON Advisors from
documents filed with the United States Securities and Exchange Commission.
Sincerely,
Patrick E. Falconio
CHAIRMAN OF THE BOARD OF TRUSTEES AND CHIEF
EXECUTIVE OFFICER
USP REAL ESTATE INVESTMENT TRUST
4333 EDGEWOOD ROAD N.E.
CEDAR RAPIDS, IOWA 52499-5441
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ____________, ______________, 2000
To the Shareholders of USP Real Estate Investment Trust:
A Special Meeting of the shareholders of USP Real Estate Investment Trust
(the "Trust") will be held at the AEGON Financial Center, 4333 Edgewood Road
N.E., Cedar Rapids, Iowa on __________, __________, 2000 at _____ a.m. (local
time) and at any adjournment thereof for the following purposes:
1. To consider and vote upon a proposal to approve a Real Estate
Sale and Purchase Contract, dated January 20, 2000 (the
"Purchase Agreement"), between the Trust and AEGON USA Realty
Advisors, Inc. ("AEGON Advisors"), pursuant to which the Trust
has agreed to sell and transfer, and AEGON Advisors has agreed
to purchase, all of the Trust's real estate assets (the "Asset
Sale");
2. To consider and vote upon a proposal to approve the
liquidation and distribution of the Trust's assets and
termination of the Trust immediately following the closing of
the Asset Sale (the "Liquidation"); and
3. To transact such other business as may properly come before
the Special Meeting and any adjournments thereof.
Only shareholders of record at the close of business on _________, 2000
are entitled to notice of and to vote at the Special Meeting or at any
adjournment or postponement thereof.
Your attention is directed to the attached Proxy Statement for more
complete information regarding the Asset Sale and the Liquidation. There is also
enclosed a form of proxy. The Board of Trustees of the Trust extends a cordial
invitation to all shareholders to be present at and participate in the Special
Meeting. Whether or not you plan to attend the Special Meeting, please specify
your vote on the enclosed proxy card and sign, date and return it as promptly as
possible. No postage is required if the proxy card is mailed from within the
continental United States.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ASSET
SALE AND "FOR" THE APPROVAL OF THE LIQUIDATION OF THE TRUST.
FOR THE BOARD OF TRUSTEES
Maureen DeWald
Vice President and Secretary
Cedar Rapids, Iowa
_________, 2000
PLEASE DO NOT SEND YOUR SHARE CERTIFICATES AT THIS TIME. IF THE ASSET SALE IS
COMPLETED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR SHARE
CERTIFICATES.
USP REAL ESTATE INVESTMENT TRUST
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, ____________, 2000
QUESTIONS AND ANSWERS ABOUT THE ASSET SALE AND THE LIQUIDATION
Q: WHAT IS THE ASSET SALE?
A: On January 20, 2000, the Trust entered into a Real Estate Sale and
Purchase Contract with AEGON USA Realty Advisors, Inc. ("AEGON Advisors")
whereby AEGON Advisors will purchase all of the real estate assets of the Trust
for $33,500,000.
Q: WHAT IS THE LIQUIDATION?
A: Following the Asset Sale, the Trust will distribute the proceeds of the
Asset Sale, plus any other cash held by the Trust, less any cash retained to
satisfy creditors, to the Trust's shareholders and terminate the Trust. The
Asset Sale and the Liquidation are expected to result in a liquidating
distribution to shareholders in excess of $6.00 per share.
Q: WHEN AND WHERE WILL THE SPECIAL MEETING TAKE PLACE?
A: The Special Meeting is scheduled to take place at ______ a.m. local
time on ______________, 2000 at AEGON Financial Center, 4333 Edgewood Road,
N.E., Cedar Rapids, Iowa.
Q: CAN I ATTEND THE SPECIAL MEETING?
A: Holders of record of shares of beneficial ownership are entitled to
attend and vote at the Special Meeting either in person or by proxy.
Q: WHAT DO SHAREHOLDERS NEED TO DO NOW?
A: Whether or not you intend to attend the Special Meeting in person, you
should carefully review this Proxy Statement, indicate on the proxy card how you
wish to vote and sign and return the card in the enclosed return envelope as
soon as possible so that, if you do not attend personally, you will be
represented by proxy at the Special Meeting.
Approval of the Asset Sale requires the affirmative vote of a majority
of the shares present at the Special Meeting if a quorum representing 33.33% of
the outstanding shares is present in person or by proxy. Approval of the
Liquidation requires the affirmative vote of the holders of 66.67% of all
outstanding shares.
Q: WHAT DO SHAREHOLDERS WHO HAVE SENT IN A PROXY CARD DO IF THEY WANT TO
CHANGE THEIR VOTE?
A: Just mail a later-dated, signed proxy card or other instrument revoking
your proxy so that it is received by the time of the Special Meeting at the
executive offices of the Trust. Shareholders may also change their vote by
attending the Special Meeting and voting in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares of beneficial interest only if you
provide instructions on how to vote. You should instruct your broker how to vote
your shares by following the directions your broker provides to you. If you do
not provide instructions to your broker, your shares will not be voted and they
will have the same effect as votes against the proposals to approve the Asset
Sale and the Liquidation.
Q: SHOULD I SEND IN MY SHARE CERTIFICATES NOW?
A: No. If the Asset Sale is completed, you will receive written
instructions for surrendering your share certificates in connection with the
Liquidation.
Q: WHEN ARE THE ASSET SALE AND THE LIQUIDATION EXPECTED TO BE CONSUMMATED?
A: We intend to consummate the Asset Sale as quickly as possible following
shareholder approval of the
Asset Sale and the Liquidation, and hope to do so by ________, 2000; it is
possible, however, that the Asset Sale will not be completed until a later date.
An initial distribution of a majority of the proceeds from the Asset Sale is
expected to occur shortly after completion of the Asset Sale. The Trust expects
a second, and final, distribution to be made approximately one year after the
Asset Sale. This final distribution will be necessary to distribute any proceeds
of the Asset Sale which are initially set aside as a contingency reserve and
held in a liquidating trust but are not required to satisfy creditors following
the closing of the Asset Sale.
Q: WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ASSET SALE AND
THE LIQUIDATION TO ME?
A: The Asset Sale will have no direct U.S. federal income tax consequences
to you. Your receipt of your proportionate share of the funds distributed in the
Liquidation (including the funds transferred to the liquidating trust), less
your cost basis in your shares, will be taxable as capital gains (or loss),
assuming that you held your shares as a capital asset. The gain (or loss) will
be taxable as long-term capital gain (or loss) if you have held your shares more
than one year.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: For additional information about the Asset Sale and the Liquidation,
including information about how to complete and return your proxy card, please
contact the Trust's Investor Relations Department at (319) 398-8895.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
THIS PROXY STATEMENT, THE SCHEDULE 13E-3 TRANSACTION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND OTHER STATEMENTS MADE FROM TIME
TO TIME BY THE TRUST, AEGON ADVISORS OR THEIR REPRESENTATIVES CONTAIN
FORWARD-LOOKING STATEMENTS. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE TRUST, AEGON ADVISORS AND MEMBERS
OF THEIR RESPECTIVE MANAGEMENT TEAMS, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT OF THE TRUST AND AEGON ADVISORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS DETAILED
IN THIS PROXY STATEMENT AND THE SCHEDULE 13E-3 TRANSACTION STATEMENT, AND THOSE
FACTORS SET FORTH FROM TIME TO TIME IN REPORTS OF THE TRUST FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE PROTECTION FROM LIABILITY OF THE SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS CONTAINED IN THE PRIVATE SECURITIES REFORM
ACT OF 1995 IS NOT APPLICABLE TO THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT OR THE SCHEDULE 13E-3 TRANSACTION STATEMENT OR IN STATEMENTS
INCORPORATED BY REFERENCE IN EITHER DOCUMENT.
This Proxy Statement is first being sent to shareholders on or about
__________, 2000
TABLE OF CONTENTS
PAGE
SUMMARY OF THE PROXY STATEMENT ..............................................................1
THE SPECIAL MEETING .........................................................................7
Proposals to be Considered at the Special Meeting .......................................7
Record Date; Shareholder Approval .......................................................7
Proxies .................................................................................8
THE TRUST ...................................................................................8
General .................................................................................8
Administrative, Advisory and Acquisition Services .......................................8
Management Services .....................................................................9
Fees for Services Paid to AEGON .........................................................9
The Properties .........................................................................10
SELECTED FINANCIAL DATA ....................................................................11
PRO FORMA FINANCIAL INFORMATION ............................................................12
MARKET PRICE INFORMATION ...................................................................14
PROPOSAL NO. 1: THE ASSET SALE .............................................................15
SPECIAL FACTORS ............................................................................15
Background of the Asset Sale ...........................................................15
Purpose and Structure of the Asset Sale ................................................18
The Trust's Reasons for the Asset Sale .................................................18
Opinion of Financial Advisor ...........................................................20
Perspective of AEGON Advisors and its Affiliates on the Fairness of the Asset Sale .....26
Unsolicited Offers from Third Parties ..................................................26
Conflicts of Interest ..................................................................26
SUMMARY OF MATERIAL FEATURES OF THE ASSET SALE .............................................28
The Purchase Agreement .................................................................28
Anticipated Accounting Treatment .......................................................32
Financing of the Asset Sale; Source of Funds ...........................................33
Federal Income Tax Consequences ........................................................33
Absence of Appraisal Rights ............................................................34
Regulatory Approvals ...................................................................34
PROPOSAL NO. 2: THE LIQUIDATION ............................................................34
General ................................................................................34
Liquidation Procedure ..................................................................35
Liquidating Distributions ..............................................................36
Contingency Reserve; Liquidating Trust .................................................36
Final Record Date ......................................................................37
Listing and Trading of the Shares ......................................................37
-i-
MANAGEMENT OF THE TRUST AND AEGON ADVISORS .................................................38
Management of the Trust ................................................................38
Management of AEGON Advisors ...........................................................38
PRINCIPAL SHAREHOLDERS .....................................................................39
OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS ...............................................40
COST AND METHOD OF PROXY SOLICITATION ......................................................40
EXPENSES OF THE TRANSACTION ................................................................41
OTHER BUSINESS .............................................................................41
SHAREHOLDER PROPOSALS ......................................................................41
WHERE YOU CAN FIND MORE INFORMATION ........................................................41
-ii-
SUMMARY OF THE PROXY STATEMENT
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD
CAREFULLY READ THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS REFERRED TO FOR A
MORE COMPLETE UNDERSTANDING OF THE ASSET SALE AND THE LIQUIDATION. IN
PARTICULAR, YOU SHOULD READ THE DOCUMENTS ATTACHED TO THIS PROXY STATEMENT,
INCLUDING THE OPINION OF RAYMOND JAMES & ASSOCIATES, INC. AND THE PURCHASE
AGREEMENT, WHICH ARE ATTACHED AS ANNEXES B AND C, RESPECTIVELY.
THE PARTIES
USP REAL ESTATE INVESTMENT TRUST
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499-5441
(319) 398-8895
USP Real Estate Investment Trust is an equity-oriented real estate
investment trust organized under the laws of the State of Iowa pursuant to a
Declaration of Trust as amended and restated through April 23, 1984 (the
"Trust"). The Trust was formed on March 10, 1970 to provide its shareholders
with an opportunity to participate in the benefits of real estate investment and
at the same time enjoy the liquidity and marketability resulting from the
ownership of securities which are publicly traded. The Trust has elected to
qualify as a real estate investment trust (a "REIT") under the Internal Revenue
Code.
AEGON USA REALTY ADVISORS, INC.
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499-5441
(319) 398-8818
AEGON USA Realty Advisors, Inc., an Iowa corporation ("AEGON
Advisors"), is a wholly owned subsidiary of AEGON USA, Inc. ("AEGON USA"). AEGON
Advisors provides administrative, advisory, acquisition and divestiture services
to the Trust pursuant to an Administrative Agreement dated January 1, 1984.
AEGON Advisors also provides management services to the Trust pursuant to a
Management Agreement dated July 1, 1981. AEGON USA is the largest shareholder of
the Trust, beneficially owning approximately 30.86% of the Trust's outstanding
shares.
THE SPECIAL MEETING (See page ___)
This Proxy Statement is being furnished to the holders of the shares of
beneficial interest of the Trust in connection with the solicitation by the
Board of Trustees of the Trust of proxies to be voted at the Special Meeting of
Shareholders of the Trust to be held at the AEGON Financial Center, 4333
Edgewood Road N.E., Cedar Rapids, Iowa, on __________, __________, 2000 at _____
a.m. local time, and any adjournments or postponements thereof (the "Special
Meeting").
At the Special Meeting, the shareholders of the Trust will consider and
vote upon a proposal to approve and adopt a Real Estate Sale and Purchase
Contract, dated January 20, 2000 (the "Purchase Agreement"), by and between the
Trust and AEGON Advisors. Pursuant to the Purchase Agreement, the Trust has
agreed to sell and transfer, and AEGON Advisors has agreed to purchase and
assume, all of the Trust's real estate assets and certain of the Trust's
liabilities (the "Asset Sale"). If the Asset Sale is consummated, the Trust will
receive $33,500,000 in cash, subject to certain adjustments as described herein.
Shareholders will also be asked at the Special Meeting to consider and
approve a proposal to liquidate the Trust immediately following the consummation
of the Asset Sale, and to authorize and direct the officers of the Trust to
commence the immediate liquidation of the Trust, including the payment of
creditors, the distribution of the remaining
1
assets to the shareholders of the Trust and the filing of a notice of
termination of the Trust in the Office of the Recorder of Linn County, Iowa (the
"Liquidation").
PURPOSE OF THE ASSET SALE (See page ___)
The purpose of the Asset Sale is to enable AEGON Advisors to acquire
all of the real estate assets of the Trust which AEGON Advisors already manages
on a day-to-day basis and consolidate those real estate assets with and into its
existing real estate portfolio, thereby eliminating a level of administration,
regulatory reporting obligations and management peripheral to the core business
of AEGON Advisors and providing the shareholders of the Trust the opportunity to
liquidate the Trust and realize a premium over market prices for the Trust's
shares in effect immediately prior to the announcement of the Asset Sale.
The Asset Sale and the Liquidation are expected to result in a
liquidating distribution to shareholders in excess of $6.00 per share. Neither
the Asset Sale nor the Liquidation will be consummated by the Trust unless both
the Asset Sale and the Liquidation are approved by the shareholders.
SHAREHOLDER APPROVAL (See page ___)
One third of the shares entitled to vote, represented in person or by
proxy, will be required to constitute a quorum for the Special Meeting. Although
shareholder approval of a sale of the Trust's real estate assets normally is not
required under the Trust's Declaration of Trust, the agreement by AEGON Advisors
to purchase the real estate assets of the Trust is conditioned upon shareholder
approval of the Asset Sale and shareholder approval of the Liquidation. Approval
of the Asset Sale as submitted to the shareholders will require the affirmative
vote of a majority of shares present at the Special Meeting. Approval of the
termination of the Trust as part of the Liquidation requires the affirmative
vote of 66.67% of all outstanding shares.
Any shareholder entitled to vote at the Special Meeting may vote either
in person or by duly authorized proxy. All shares represented by properly
executed proxies received prior to or at the Special Meeting and not revoked at
or before the Special Meeting will be voted in accordance with the instructions
indicated in such proxies. A shareholder may revoke his or her proxy at any time
prior to its use at the Special Meeting by delivering to the President of the
Trust at the Trust's executive offices a signed notice of revocation or a later
dated and signed proxy or by attending the Special Meeting and voting in person.
Attendance at the Special Meeting will not in itself constitute the revocation
of a proxy. IF NO INSTRUCTIONS ARE INDICATED, SIGNED PROXIES WILL BE VOTED "FOR"
THE ASSET SALE AND "FOR" THE LIQUIDATION.
POTENTIAL DETRIMENTS AND BENEFITS OF THE ASSET SALE AND THE LIQUIDATION TO
UNAFFILIATED SHAREHOLDERS; BENEFITS TO INSIDERS
Detriments of the Asset Sale and the Liquidation to the Trust's
shareholders other than AEGON USA include:
* As a result of the Asset Sale, the unaffiliated shareholders
of the Trust will not be entitled to participate in future
earnings from the real estate assets sold to AEGON Advisors;
* The unaffiliated shareholders of the Trust might receive a
greater return if the Trust were to remain a public company,
although the amount of such return is impossible to predict;
* Although the Asset Sale will not in itself result in federal
income tax consequences to the unaffiliated shareholders of
the Trust, such shareholders may be required to recognize a
taxable gain from the Liquidation as a result of receiving
liquidating distributions from the Trust; and
2
* In the event the $400,000 contingency reserve set aside by
the Trust for payment of expenses and liabilities prior to
paying liquidating distributions to unaffiliated
shareholders is insufficient, each shareholder could be
held liable for the payment to the Trust's creditors of his
or her pro rata share of the excess, limited to the amounts
received by the shareholder through the liquidating
distributions.
The primary benefit of the Asset Sale and the Liquidation to the
Trust's shareholders other than AEGON USA is the opportunity to receive cash
distributions for their shares which represent a substantial premium over
historical trading prices. The purchase price of $33,500,000 for the real estate
assets of the Trust is expected to result in a liquidating distribution to
shareholders in excess of $6.00 per share, representing a premium at least 40%
over the closing market price for the Trust's shares on the day of the
announcement of the signing of a letter of intent to sell the real estate assets
to AEGON Advisors.
Upon completion of the Asset Sale, AEGON Advisors will own the real
estate assets of the Trust, and will receive all future income generated by
those real estate assets. Similarly, AEGON Advisors will also bear the risk of
any losses incurred in the operation of the real estate assets and any decrease
in value of the real estate assets. AEGON USA, as a shareholder of the Trust,
will also be entitled to receive its pro rata share of the liquidating
distributions from the Trust. The Trust believes that AEGON USA will be entitled
to receive in excess of $7,000,000 in the Liquidation. AEGON USA, however, may
also be required to recognize a taxable gain as a result of receiving
liquidating distributions, and could be held liable for payments to the Trust's
creditors if liquidating distributions exceed the Trust's liabilities and
expenses.
Like the other shareholders of the Trust, the officers and trustees
will have the right to receive liquidating distributions for their shares. The
officers and trustees of the Trust beneficially owned 578,699 shares as of
December 31, 1999 (excluding the shares owned by AEGON USA), representing an
expected cash payment in excess of $3,400,000.
RECOMMENDATION OF THE TRUST'S BOARD OF TRUSTEES
After careful consideration, the Trust's Board of Trustees has
determined that the Purchase Agreement and the Asset Sale are fair to and in the
best interests of the Trust and its shareholders, and has unanimously approved
the Purchase Agreement and the Asset Sale. Accordingly, the Board of Trustees
recommends that shareholders vote "FOR" the Asset Sale. Likewise, the Board of
Trustees has determined that the Liquidation is in the best interests of the
Trust and its shareholders, and has unanimously approved the Liquidation.
Accordingly, the Board of Trustees recommends that shareholders vote "FOR" the
Liquidation.
OPINION OF THE TRUST'S FINANCIAL ADVISOR (See page ___)
Raymond James & Associates, Inc., the Trust's financial advisor
("Raymond James"), delivered an opinion to the Board of Trustees on October 21,
1999 that, based upon and subject to the various considerations set forth in its
opinion, the price received by the Trust in connection with the Asset Sale is
fair from a financial point of view to the Trust's shareholders. The written
opinion of Raymond James constitutes a part of this Proxy Statement and is
attached hereto as ANNEX B.
CLOSING CONDITIONS (See page ___)
The Asset Sale will be consummated only if the Purchase Agreement and
the Liquidation are approved and adopted by the Trust's shareholders. The
closing of the Asset Sale also is subject to the satisfaction of certain other
conditions specified in the Purchase Agreement, unless such conditions are
waived. AEGON Advisors' obligation to buy the real estate assets is subject to,
among other things, satisfaction, or waiver by AEGON Advisors, of the following
conditions:
3
* AEGON Advisors obtaining a preliminary title report and a
commitment for an owner's policy of title insurance
satisfactory to AEGON Advisors from the Title Company with
respect to each of the real estate assets;
* AEGON Advisors obtaining certified surveys of the real estate
assets which reveal no new exceptions unacceptable to AEGON
Advisors;
* AEGON Advisors obtaining an environmental report or report
update concerning the real estate assets which does not show
or indicate any asbestos or any contamination of the real
estate assets above any level requiring a mediation or
clean-up by any applicable federal, state or local law, code
or ordinance except as otherwise agreed to by AEGON Advisors;
and
* the continued accuracy of the Trust's representations in the
Purchase Agreement without any change in the rent rolls or the
status of defaults of tenants which would be detrimental to
the value of any real estate assets.
As of the date of the mailing of this Proxy Statement, the first three of the
foregoing conditions had been met.
TERMINATION OF THE PURCHASE AGREEMENT (See page ___)
The Purchase Agreement is subject to termination under several
circumstances, including failure to obtain the requisite shareholder approval.
It shall terminate automatically if any of the closing conditions are not
satisfied, if AEGON Advisors defaults in its performance of the Purchase
Agreement, if the Trust defaults in its performance of the Purchase Agreement,
or the real estate assets become damaged by fire or other casualty in an amount
in excess of $1,000,000 or becomes the object of any condemnation proceedings
before the Closing.
LIQUIDATION PROCEDURE (See page ___)
In the event that the Liquidation is approved by the shareholders and
the Asset Sale is consummated, the officers of the Trust will be directed to
commence the immediate liquidation of the Trust. The Trust will cease to carry
on its business, except to the extent necessary for the winding up of the Trust.
The officers will proceed as soon as possible to collect or make provision for
the collection of all known debts due or owing to the Trust, pay or make
provision for the payment of all known debts, obligations, and liabilities of
the Trust according to their priorities, and will give notice to each creditor
of and claimant against the Trust. The officers will be authorized to sell,
transfer or otherwise dispose of all remaining property and assets of the Trust,
if any, and all tangible or intangible property, including money, remaining
after the discharge of, or after making adequate provision for the discharge of,
the debts, obligations and liabilities of the Trust will be distributed on a pro
rata basis to the shareholders. No further shareholder votes will be solicited.
The Board of Trustees has determined to establish a reserve of
approximately $400,000 which it believes will be sufficient to satisfy the
liabilities, expenses, and obligations of the Trust not otherwise paid, provided
for or discharged at or immediately after the closing of the Asset Sale.
Promptly following the closing of the Asset Sale and an initial
distribution to the shareholders, the Trust expects to transfer any remaining
assets to a liquidating trust. Assuming the expiration of all time periods
relating to payment of claims described above and assuming there are no pending
legal, administrative or arbitration proceedings by or against the Trust, a
notice will then be filed with the County Recorder of Linn County, Iowa. When
the notice of liquidation has been filed, the Trust will be terminated.
Concurrently with the termination of the Trust, the Trust will file appropriate
documentation with the Securities and Exchange Commission to terminate the
Trust's periodic report filing obligations under the Securities Exchange Act of
1934, as amended.
4
LIQUIDATING DISTRIBUTIONS (See page ___)
The Board has not established a firm timetable for distributions to
shareholders. If the closing of the Asset Sale takes place, the Board will,
subject to the requirements for maintaining adequate reserves to pay all of the
Trust's liabilities and obligations, make such distributions as promptly as
practicable consistent with maximizing shareholder value. Assuming the Asset
Sale closing occurs on or before ____________, 2000, the Board of Trustees
presently intends to pay an initial distribution of at least $6.00 per share to
shareholders on or before __________, 2000, provided that at that time the Board
is of the opinion that the expected $400,000 reserve is adequate to provide for
the Trust's obligations, liabilities (actual and contingent) and expenses. The
Trust expects a second, and final, distribution to shareholders will be made by
the liquidating trust approximately one year after establishing the liquidating
trust (the "Final Distribution").
FEDERAL INCOME TAX CONSEQUENCES (See page ___)
The Asset Sale will not in itself result in federal income tax
consequences to the holders of the shares. Upon receipt of the liquidating
distributions, however, shareholders will recognize gain or loss equal to the
difference between (i) the amount of cash distributed to them in the Liquidation
(and their pro rata share of the funds transferred by the Trust to the
liquidating trust), and (ii) their tax basis for their shares. Gain or loss
recognized by a shareholder will be capital gain or loss provided the shares are
held as capital assets. If the shares are held as capital assets and the
shareholder has held the shares for more than one year, the gain will be
long-term capital gain. Long-term capital gains of individuals, estates, and
trusts are currently taxed at a maximum rate of 20%. Long-term capital gains of
corporations are taxed at the same rates as ordinary income (at rates up to
35%). To determine the deductibility of capital losses, all capital gains and
losses incurred in the year must be totaled. Any capital losses are deductible
only to the extent of any capital gains plus, in the case of non-corporate
shareholders, ordinary income of up to $3,000.00 per year. Corporate
shareholders can use capital losses for a tax year only to offset capital gains
in that year. Individuals and other non-corporate shareholders may carry over a
net capital loss for an unlimited time until the loss is exhausted. Corporate
shareholders may carry back a capital loss to each of the three tax years
preceding the loss year to offset capital gain. Any excess may be carried
forward for five years following the loss year. After the close of its taxable
year, the Trust will provide shareholders and the IRS with a statement of the
amount of cash distributed to each of the shareholders during that year.
When the amount representing the contingency reserve is transferred to
the liquidating trust, shareholders will be treated for tax purposes as having
received their pro rata share of the property transferred to the liquidating
trust, reduced by the amount of known liabilities assumed by the liquidating
trust or to which the property transferred is subject. The liquidating trust
itself should not be subject to tax. After formation of the liquidating trust,
the shareholders must take into account for federal income tax purposes each
year their allocable portion of any income, expense, gain or loss recognized by
the liquidating trust. As a result of the transfer of property to the
liquidating trust and the possible receipt of income by the liquidating trust,
shareholders should be aware that they may be subject to tax, whether or not
they have received any actual distributions from the liquidating trust with
which to pay the tax. The final distribution from the liquidating trust to
shareholders will not have any further federal income tax consequences to
shareholders.
The Trust did not obtain an opinion of tax counsel with respect to the
Asset Sale or the Liquidation. THE TRUST RECOMMENDS THAT EACH SHAREHOLDER
CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, AND LOCAL TAX
CONSEQUENCES OF THE PROPOSED ASSET SALE AND THE LIQUIDATION.
ABSENCE OF APPRAISAL RIGHTS (See page ___)
Under the Declaration of Trust, which is governed by Iowa common law,
if the shareholders approve the Asset Sale and the Liquidation, the Asset Sale
and the Liquidation will not give rise to any rights of shareholders of the
Trust to seek a court appraisal of their shares, or any similar dissenters'
rights.
5
LISTING AND TRADING OF THE SHARES (See page ___)
Prior to a final record date established by the Trust, the Trust's
shares of beneficial interest will continue to be transferable and the Trust's
shareholders will continue to have such rights as applicable laws confer upon
shareholders. The Trust currently intends to close its books on such final
record date and at that time cease recording share transfers and issuing share
certificates (other than replacement certificates). Accordingly, it is expected
that trading in the shares will cease on that date.
6
THE SPECIAL MEETING
This Proxy Statement is being furnished to the holders of the shares of
beneficial interest of USP Real Estate Investment Trust, an Iowa common law
business trust, in connection with the solicitation by the Board of Trustees of
the Trust of proxies to be voted at the Special Meeting of Shareholders of the
Trust to be held at the AEGON Financial Center, 4333 Edgewood Road N.E., Cedar
Rapids, Iowa, on __________, __________, 2000 at _____ a.m. local time, and any
adjournments or postponements thereof. Shares represented by properly executed
proxies timely received by the Trust will be voted at the Special Meeting or any
adjournment or postponement thereof in accordance with the terms of such
proxies, unless such proxies are revoked. See "--Proxies" below.
PROPOSALS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Trust will consider and
vote upon a proposal to approve and adopt a Real Estate Sale and Purchase
Contract, dated January 20, 2000 (the "Purchase Agreement"), by and between the
Trust and AEGON USA Realty Advisors, Inc., an Iowa corporation and a subsidiary
of AEGON USA, the Trust's largest shareholder which owns approximately 30.86% of
the Trust's outstanding shares. Pursuant to the Purchase Agreement, the Trust
has agreed to sell and transfer, and AEGON Advisors has agreed to purchase and
assume, all of the Trust's real estate assets and certain of the Trust's
liabilities (the "Asset Sale"). If the Asset Sale is consummated, the Trust will
receive $33,500,000 in cash, subject to certain adjustments as described herein.
AEGON Advisors will assume certain liabilities including, subject to lender
consent, the lien of the first mortgage and related security instruments
encumbering the Yamaha Warehouse located in Cudahy, Wisconsin, which would be
offset against the purchase price. The Yamaha Warehouse debt is expected to
total approximately $1.4 million. Since the Asset Sale is contingent upon
shareholder approval of the Asset Sale and the subsequent liquidating
distribution of the proceeds of the Asset Sale and remaining assets of the Trust
to the shareholders, shareholders will also be asked at the Special Meeting to
consider and approve a proposal to liquidate the Trust immediately following the
consummation of the Asset Sale, and to authorize and direct the officers of the
Trust to commence the immediate liquidation of the Trust, including the payment
of creditors, the distribution of the remaining assets to the shareholders of
the Trust and the filing of a notice of termination of the Trust in the Office
of the Recorder of Linn County, Iowa (the "Liquidation"). The Asset Sale and the
Liquidation are expected to result in a liquidating distribution to shareholders
in excess of $6.00 per share. See "SUMMARY OF MATERIAL FEATURES OF THE ASSET
SALE" and "LIQUIDATION."
RECORD DATE; SHAREHOLDER APPROVAL
Only holders of record of the shares of beneficial interest at the
close of business on __________, 2000 are entitled to notice of and to vote at
the Special Meeting. Each share is entitled to one vote. One third of the shares
entitled to vote, represented in person or by proxy, will be required to
constitute a quorum for the Special Meeting. Although shareholder approval of a
sale of the Trust's real estate assets normally is not required under the
Trust's Declaration of Trust, the agreement by AEGON Advisors to purchase the
real estate assets of the Trust is conditioned upon shareholder approval of the
Asset Sale and shareholder approval of the Liquidation. Approval of the Asset
Sale as submitted to the shareholders will require the affirmative vote of a
majority of shares present at the Special Meeting. Approval of the termination
of the Trust as part of the Liquidation requires the affirmative vote of 66.67%
of all outstanding shares. Neither the Asset Sale nor the Liquidation will be
consummated by the Trust unless both the Asset Sale and the Liquidation are
approved by the shareholders. As a result, a vote against either the Asset Sale
or the Liquidation will have the effect of a vote against both the Asset Sale
and the Liquidation. Abstentions will be counted for the purpose of establishing
a quorum and will have the same effect as votes against the Asset Sale and the
Liquidation.
As of the date of this Proxy Statement, the Trust had 3,880,000 shares
of beneficial interest issued and outstanding held by approximately 1,837
holders of record. The officers and trustees of the Trust, representing 17,618
shares, or 0.45% of the outstanding shares entitled to vote (excluding shares
held by principal shareholders which may be deemed to be beneficially owned by
certain trustees), have agreed to vote "for" both the Asset Sale and the
Liquidation. The Trust also believes that the holders of an additional 45.31% of
the shares (including AEGON USA) intend to vote in favor of both the Asset Sale
and the Liquidation. Approval of the Asset Sale will not require the
7
affirmative vote of a majority of all outstanding shares held by persons
unaffiliated with AEGON Advisors, but approval of the Liquidation will require
the affirmative vote of a majority of unaffiliated shares. See "PRINCIPAL
SHAREHOLDERS" AND "OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS."
PROXIES
Any shareholder entitled to vote at the Special Meeting may vote either
in person or by duly authorized proxy. All shares represented by properly
executed proxies received prior to or at the Special Meeting and not revoked at
or before the Special Meeting will be voted in accordance with the instructions
indicated in such proxies. A shareholder may revoke his or her proxy at any time
prior to its use at the Special Meeting by delivering to the President of the
Trust at the Trust's executive offices a signed notice of revocation or a later
dated and signed proxy or by attending the Special Meeting and voting in person.
Attendance at the Special Meeting will not in itself constitute the revocation
of a proxy. IF NO INSTRUCTIONS ARE INDICATED, SIGNED PROXIES WILL BE VOTED "FOR"
THE ASSET SALE AND "FOR" THE LIQUIDATION.
THE TRUST
GENERAL
USP Real Estate Investment Trust is an equity-oriented real estate
investment trust organized under the laws of the State of Iowa pursuant to a
Declaration of Trust as amended and restated through April 23, 1984. The Trust
was formed on March 10, 1970 to provide its shareholders with an opportunity to
participate in the benefits of real estate investment and at the same time enjoy
the liquidity and marketability resulting from the ownership of securities which
are publicly traded. The Trust has elected to qualify as a real estate
investment trust (a "REIT") under the Internal Revenue Code. As a result of this
election, the Trust is not taxed on the portion of its income which is
distributed to shareholders, provided it distributes at least 95% of its taxable
income, has at least 75% of its assets in real estate investments and meets
certain other requirements for qualification as a REIT.
The Trust has no employees and has contracted with AEGON Advisors, a
subsidiary of AEGON USA, the Trust's largest shareholder which owns
approximately 30.86% of the Trust's outstanding shares, to provide
administrative, advisory, acquisition, divestiture and property management
services. Certain officers of AEGON Advisors serve as non-employee officers of
the Trust. A summary description of the relationships between AEGON USA and its
various subsidiaries and of such subsidiaries' agreements with the Trust
follows. The description of the agreements which follows is qualified in its
entirety by reference to the terms and provisions of such agreements, copies of
which are available from the Trust's filings with the Securities and Exchange
Commission (http://www.sec.gov) and from the Trust's Investor Relations
Department. See "WHERE YOU CAN FIND MORE INFORMATION."
ADMINISTRATIVE, ADVISORY AND ACQUISITION SERVICES
AEGON USA Realty Advisors, Inc. is a wholly owned subsidiary of AEGON
USA. AEGON Advisors provides administrative, advisory, acquisition and
divestiture services to the Trust pursuant to an Administrative Agreement dated
January 1, 1984. The term of the Administrative Agreement is for one year and is
automatically renewable each year for an additional year subject to the right of
either party to cancel the Administrative Agreement upon 90 days' written
notice. The performance of AEGON Advisors' duties and obligations under the
Administrative Agreement has been guaranteed by AEGON USA.
Under the Administrative Agreement, AEGON Advisors (a) provides
clerical, administrative and data processing services, office space, equipment
and other general office services necessary for the Trust's day-to-day
operations, (b) provides legal, tax and accounting services to maintain all
necessary books and records of the Trust and to ensure Trust compliance with all
applicable federal, state and local laws, regulatory reporting requirements and
tax codes, (c) arranges financing for the Trust, including but not limited to
mortgage financing for property acquisition, (d) obtains property management
services for the Trust's properties and supervises the activities of persons
performing such services, (e) provides monthly reports summarizing the results
of operations and financial conditions of the Trust, (f)
8
prepares and files all reports to shareholders and regulatory authorities on
behalf of the Trust, (g) prepares and files all tax returns of the Trust and (h)
provides the Trust with property acquisition and divestiture services.
MANAGEMENT SERVICES
AEGON Advisors provides management services to the Trust pursuant to a
Management Agreement dated July 1, 1981. The term of the Management Agreement is
for one year and is automatically renewable each year for an additional year
subject to the right of either party to cancel the Management Agreement upon 30
days' written notice. Under the Management Agreement, AEGON Advisors is
obligated to (a) procure tenants and execute leases with respect to Trust
properties which are not leased under net lease arrangements (the "Managed
Properties"), (b) maintain and repair (at the Trust's expense) the Managed
Properties, (c) maintain complete and accurate books and records of the
operations of the Managed Properties, (d) maintain the Managed Properties in
accordance with applicable government rules and regulations, licensing
requirements and building codes, (e) collect all rents and (f) carry (at the
Trust's expense) general liability, accident, fire and other property damage
insurance. These services were previously provided by AEGON USA Realty
Management, Inc., a wholly owned subsidiary of AEGON Advisors, which was merged
into AEGON Advisors in December 1998.
A more detailed description of the Trust's business and of certain
agreements and business relationships involving the Trust and AEGON Advisors are
contained in the Trust's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, which is attached hereto as ANNEX A and incorporated herein
by reference.
FEES FOR SERVICES PAID TO AEGON
AEGON Advisors receives fees for its administrative and advisory
services. These fees equal 0.625% of the average gross real estate investment
plus 0.25% of the monthly balance of mortgage loans receivable and an incentive
fee of 20% of annual adjusted cash flow from operations in excess of $0.72 per
share. If the annual adjusted cash flow from operations is less than $0.72 per
share, then the payment of up to 20% of the base fee is to be deferred so that
revised cash flow from operations will be equal to $0.72 per share. Any deferred
fees may be paid in subsequent years (subject to certain limits). Annual
adjusted cash flow from operations, as defined for purposes of the incentive
fee, includes the net realized gain (or loss) from the disposition of property,
adjusted to exclude accumulated depreciation (otherwise stated as gain in excess
of cost without reduction for allowable depreciation). The administrative fee is
limited to 1.5% of average quarterly net invested assets. In addition, AEGON
Advisors is paid a separately negotiated fee of not less than 2% nor more than
4% of the cost of each property acquired by the Trust as compensation for
acquisition services furnished by it to the Trust. For management services,
AEGON Advisors receives 5% of the gross income derived from the operation of the
Managed Properties.
The following table sets forth all amounts paid to AEGON Advisors under
the Administrative Agreement and Management Agreement during the last two
completed years and in 2000 through the date of this Proxy Statement. No
acquisition fees were paid in 1998 or 1999, or through the date of this Proxy
Statement. No other AEGON entity has received payments, other than normal
quarterly dividends paid to AEGON USA as a shareholder of the Trust.
1998 1999 2000
------------ ------------ ------------
Administrative fees $ 204,587 $ 173,831 $ 54,414
Management fees 241,877 203,500 50,486
------------ ------------ ------------
Total fees $ 446,464 $ 377,331 $ 104,900
============ ============ ============
THE PROPERTIES
The Trust has direct ownership of the following six commercial real
estate properties (the "Properties"), all of which AEGON Advisors proposes to
purchase from the Trust: (i) Kingsley Square Shopping Center located in
9
Orange Park, Florida; (ii) First Tuesday Mall located in Carrollton, Georgia;
(iii) Mendenhall Commons Shopping Center located in Memphis, Tennessee; (iv)
North Park Plaza Shopping Center located in Phoenix, Arizona; (v) Presidential
Drive Office Building located in Atlanta, Georgia; and (vi) Yamaha Warehouse
located in Cudahy, Wisconsin. Properties owned by the Trust are leased to
tenants either on a managed basis or under net lease arrangements. As the owner
of managed property the Trust receives gross rentals and incurs operating
expenses, such as property taxes, insurance, repairs, maintenance and common
area utilities. Under net lease arrangements, the tenant, rather than the Trust,
pays all operating expenses related to the leased premises. As of the date of
this Proxy Statement, five commercial properties were being leased on a managed
basis and the Yamaha Warehouse was leased on a net lease basis. The five managed
commercial properties consist of four shopping centers and one business park.
Managed commercial properties comprised 94% of the Trust's investment portfolio
in 1999 and 1998, compared to 95% in 1997. Managed commercial properties
provided 89% of the Trust's annual revenue in 1999, compared to 91% in 1998 and
89% in 1997. A more detailed description of the Trust's Properties is contained
in the Trust's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, which is attached hereto as ANNEX A and incorporated herein by reference.
10
SELECTED FINANCIAL DATA
We are providing the following financial information concerning the
Trust to aid you in your analysis of the financial aspects of the Asset Sale and
the Liquidation. The selected consolidated financial data set forth below have
been derived from the Trust's consolidated financial statements for the periods
indicated. Our audited consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States.
The information provided below is only a summary and should be read in
conjunction with our historical consolidated financial statements (and related
notes) contained in our annual reports and other information that we have filed
with the Securities and Exchange Commission (the "Commission"). See "WHERE YOU
CAN FIND MORE INFORMATION." In the opinion of the Trust's management, the
selected consolidated financial data contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the selected financial
data for such periods.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
Revenue $ 5,618,014 $ 5,217,313 $ 5,012,087 $ 5,331,955 $ 4,581,168
Earnings from Operations $ 1,100,149 946,230 637,129 943,975 1,061,376
Net Gain on Sale or Disposition of Property $ -- -- 259,157 528,282 --
Net Earnings $ 1,100,149 946,230 896,286 1,472,257 1,061,376
Distributions to Shareholders $ 1,202,800 1,241,600 1,241,600 1,241,600 931,200
Per share*
Earnings from Operations $ .28 .24 .16 .24 .27
Basic and Diluted Net Earnings $ .28 .24 .23 .38 .27
Distributions to Shareholders $ .31 .32 .32 .32 .24
Real Estate and Mortgage Loans Receivable $ 30,434,137 29,627,786 28,571,464 23,816,859 23,267,496
Total Assets $ 32,853,270 32,207,728 31,104,418 27,932,493 26,380,141
Mortgage Loans Payable $ 15,271,385 14,819,479 14,140,584 10,897,933 9,359,426
Total Liabilities $ 16,342,638 15,992,466 15,234,470 11,831,888 10,149,360
Shareholders' Equity $ 16,510,632 16,215,262 15,869,948 16,100,605 16,230,781
Book value per share $ 4.26 4.18 4.09 4.15 4.18
Ratio of Earnings to Fixed Charges 1.70 to 1 1.63 to 1 1.62 to 1 2.07 to 1 2.27 to 1
*Per share amounts for Earnings from Operations and Basic and Diluted Net
Earnings are based on the weighted average number of shares outstanding for each
period. Per share amounts for Distributions to Shareholders are based on the
actual number of shares outstanding on the respective record dates.
11
PRO FORMA FINANCIAL INFORMATION
The following pro forma consolidated balance sheet as of December 31,
1999, and the pro forma consolidated statement of operations for the year ended
December 31, 1999, give effect to the sale of the Properties. The adjustments
related to the pro forma consolidated balance sheet assume the transaction was
consummated at December 31, 1999, while the adjustments to the pro forma
condensed consolidated statement of operations assume the transaction was
consummated at the beginning of the period presented. These pro forma financial
statements are not necessarily indicative of the results that actually would
have occurred if the Asset Sale had been in effect as of and for the periods
presented or the results that may be achieved in the future.
USP REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1999
HISTORICAL PRO FORMA
FINANCIAL PRO FORMA FINANCIAL
STATEMENTS ADJUSTMENTS STATEMENTS
----------------- ------------------ ------------------
ASSETS
Real estate $ 34,617,710 (34,617,710) --
Less accumulated depreciation (11,350,214) 11,350,214 --
----------------- ------------------ ------------------
23,267,496 (23,267,496) --
Cash and cash equivalents 2,369,176 23,125,450 25,494,626
Rents and other receivables 499,810 (499,810) --
Prepaid and deferred expenses 243,659 (243,659) --
----------------- ------------------ ------------------
$ 26,380,141 (885,515) 25,494,626
================= ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans payable $ 9,359,426 (9,359,426) --
Accounts payable and accrued expenses 665,387 (665,387) --
Due to affiliates 31,935 (31,935) --
Tenant deposits 86,259 (86,259) --
Other 6,353 (6,353) --
----------------- ------------------ ------------------
$ 10,149,360 (10,149,360) --
----------------- ------------------ ------------------
Shareholders' Equity
Shares of beneficial interest,
$1 par value, 20,000,000
shares authorized, 3,880,000
shares issued and outstanding $ 3,880,000 -- 3,880,000
Additional paid-in capital 11,989,948 -- 11,989,948
Undistributed net earnings 360,833 9,263,845 9,624,678
----------------- ------------------ ------------------
$ 16,230,781 9,263,845 25,494,626
----------------- ------------------ ------------------
$ 26,380,141 (885,515) 25,494,626
================= ================== ==================
Book value per share $ 4.18 2.39 6.57
================= ================== ==================
NOTE: The pro forma adjustments represent amounts attributed to the Properties
and all related costs of the proposed Asset Sale and the Liquidation.
In connection with the proposed Asset Sale, AEGON Advisors will acquire all
the real estate assets for a purchase price of $33,500,000. In addition,
through prorations at closing, AEGON Advisors will purchase rents and other
receivables of $499,810 and assume liabilities of $2,176,780 (consisting of
total recorded liabilities of $10,149,360 less mortgage loans payable of
$7,972,580, which the Trust will pay at closing.)
The pro forma net proceeds resulting from the proposed Asset Sale are
$23,125,450, consisting of the purchase price of $33,500,000 plus rents and
other receivables purchased by AEGON Advisors of $499,810 less all recorded
liabilities of $10,149,360 (assumed by AEGON Advisors or paid at closing)
less transaction costs of $725,000.
12
USP REAL ESTATE INVESTMENT TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
HISTORICAL PRO FORMA PRO FORMA
FINANCIAL ADJUSTMENTS FINANCIAL
STATEMENTS STATEMENTS
----------------- ------------------ ------------------
REVENUE
Rents $ 4,441,073 (4,441,073) --
Interest 140,095 (140,095) --
----------------- ------------------ ------------------
4,581,168 (4,581,168) --
----------------- ------------------ ------------------
EXPENSES
Property expenses:
Real estate taxes 478,570 (478,570) --
Repairs and maintenance 507,444 (507,444) --
Utilities 112,716 (112,716) --
Management fee 203,500 (203,500) --
Insurance 29,884 (29,884) --
Other 129,620 (129,620) --
----------------- ------------------ ------------------
Property expenses, excluding depreciation 1,461,734 (1,461,734) --
Depreciation 658,551 (658,551) --
----------------- ------------------ ------------------
Total property expenses 2,120,285 (2,120,285) --
Interest 834,280 (834,280) --
Administrative fee 173,831 (173,831) --
Other administrative 391,396 (391,396) --
----------------- ------------------ ------------------
3,519,792 (3,519,792) --
----------------- ------------------ ------------------
Earnings from operations 1,061,376 (1,061,376) --
Net gain on sale of property -- 8,958,141 8,958,141
----------------- ------------------ ------------------
Net earnings $ 1,061,376 7,896,765 8,958,141
================= ================== ==================
Basic and diluted net earnings per share $ .27 2.04 2.31
================= ================== ==================
Average number of shares outstanding 3,880,000 3,880,000 3,880,000
Ratio of earnings to fixed charges 2.27 to 1 10.47 to 1 N/A
NOTE: The pro forma adjustments represent activity of the Trust for the year
1999, including an assumed sale of the Properties as of January 1, 1999, the
gain from which is net of all related costs for the proposed Asset Sale and the
Liquidation.
The pro forma net proceeds resulting from the proposed Asset Sale are
$23,125,450, consisting of the purchase price of $33,500,000 plus rents and
other receivables purchased by AEGON Advisors of $499,810 less all recorded
liabilities of $10,149,360 (assumed by AEGON Advisors or paid at closing)
less transaction costs of $725,000.
The pro forma net gain on sale of property is $8,958,141, consisting of the
purchase price of $33,500,000 less the real estate carrying value of
$23,816,859 and less transaction costs of $725,000.
13
MARKET PRICE INFORMATION
The common shares of beneficial interest for the Trust are quoted on
the Nasdaq SmallCap Market under the symbol "USPTS." The following table sets
forth the high and low sales prices per share of the shares as quoted on the
Nasdaq SmallCap Market for the periods indicated.
SHARES OF BENEFICIAL
INTEREST
-------------------------
HIGH LOW
----------- ----------
1998
Quarter ended March 31, 1998 $4.75 $4.125
Quarter ended June 30, 1998 5.00 4.313
Quarter ended September 30, 1998 7.50 3.875
Quarter ended December 31, 1998 6.25 3.75
1999
Quarter ended March 31, 1999 $4.25 $3.75
Quarter ended June 30, 1999 5.00 3.813
Quarter ended September 30, 1999 5.813 4.00
Quarter ended December 31, 1999 5.813 5.469
2000
Quarter ended March 31, 2000 $5.875 $5.625
Quarter ended June 30, 2000 (through ______, 2000) $_____ $_____
On August 16, 1999, the trading day on which the Trust announced it had
executed a letter of intent to sell all of its assets to AEGON Advisors, the
closing price of the shares was $4.25 per share as quoted on the Nasdaq SmallCap
Market. On January 19, 2000, the last trading day before public announcement of
the execution of the Purchase Agreement, the closing price of the shares was
$5.656 per share as quoted on the Nasdaq SmallCap Market. On _____________,
2000, the most recent practicable date prior to printing this Proxy Statement,
the closing price of the shares was $____ per share, as quoted on the Nasdaq
SmallCap Market. The Trust had 3,880,000 shares issued and outstanding held by
approximately 1,837 shareholders of record as of _______________, 2000.
The Trust is required to distribute at least 95% of its taxable income
to continue its qualification as a REIT. The Trust has paid quarterly dividends
totaling $0.32 per share in each of the last three completed fiscal years.
During 1999, the Trust made distributions of $0.08 per share on February 16 to
shareholders of record as of February 4, on May 24 to shareholders of record as
of May 13, on August 16 to shareholders of record as of August 6, and on
November 29 to shareholders of record as of November 16. The Trust has suspended
quarterly distributions for 2000, pending the outcome of the Special Meeting. If
the shareholders approve the Asset Sale and the Liquidation, the Trust expects
to discontinue quarterly distributions and will, instead, pay an initial
liquidating distribution as soon after the Asset Sale as is practical, with a
final distribution to follow approximately one year later. The Trust's dividend
reinvestment plan will also be terminated.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES.
14
PROPOSAL NO. 1: THE ASSET SALE
SPECIAL FACTORS
BACKGROUND OF THE ASSET SALE
In accordance with its Declaration of Trust, the Trust's primary
investment objective has been to invest in real estate which will provide the
best available cash flow and offer prospects for long-term appreciation in value
while conducting its business as a REIT. The principal source of funds for
investment by the Trust was $25 million in proceeds from its initial public
offering of shares. The Trust ceased the issuance of shares from this offering
in 1978. The Trust completed a secondary offering of its shares in 1988, raising
nearly $10 million. Since substantially all of the Trust's net income must be
distributed to shareholders in order to qualify as a REIT, the Trust has relied
primarily on cash generated from operations and property sales in excess of
shareholder distributions, along with borrowings secured by mortgages on
specific properties, to finance real estate investments. Additional real estate
investments could be financed through additional borrowings secured by mortgages
on the Trust's real estate properties. However, outstanding indebtedness of the
Trust may not, according to its Declaration of Trust, exceed four hundred
percent of the Trust's net assets (shareholders' equity plus accumulated
depreciation). The Trust currently has no commitments or arrangements for any
such financing, and there can be no assurance that suitable financing would be
available on terms satisfactory to the Trust in the future if the Asset Sale and
the Liquidation were not consummated.
On February 1, 1995, the Trust announced that it had begun exploring
strategic alternatives for maximizing shareholder value, including the
possibilities of a merger or a sale of the Trust's assets. Prior to making
this announcement the Board of Trustees had concluded that the Trust could
not operate efficiently as a publicly held, externally-managed REIT at its
present size and needed to grow its asset base. The Board had also concluded,
however, that the Trust would not be able to grow its assets through internal
means. Thus, the Board of Trustees began to explore the possibilities of a
business combination (with the Trust as either the surviving entity or
absorbed into a larger entity) or asset sale as a means to improve
shareholder value. From February 1995 to April 1997, the Trust used its
formal and informal contacts in the real estate owning and investing
community to try to identify possible business combination partners. Although
the Trust received a number of expressions of interest during this period
with respect to various strategic and financial transactions, none of these
contacts developed to the point of serious talks between the parties and no
letters of intent were executed.
In the Fall of 1996 the Board of Trustees decided to retain outside
professionals to assist it in identifying and negotiating an opportunity for
the Trust. In December 1996, the Trust retained Dorsey & Whitney LLP,
Minneapolis, Minnesota, to act as its special legal counsel in connection
with a possible merger or sale of assets transaction. On April 9, 1997,
Raymond James & Associates, Inc. was engaged as financial advisor to the
Trust to assist the Trust with its ongoing efforts to find an appropriate
transaction. Raymond James conducted a comprehensive review of the Trust's
assets and of the expressions of interest previously received by the Trust.
At a Board of Trustees meeting on July 23, 1997, Raymond James made a
presentation to the Board. The presentation included a valuation analysis of
the Trust, and a review of some of the expressions of interest previously
received by the Trust. Based on this presentation, the Board authorized Raymond
James to conduct a broad search for possible business combination partners
for either a strategic or a financial transaction with the Trust. Thereafter
Raymond James, on behalf of the Trust, explored various business combination
structures and identified and contacted a number of parties in the real
estate industry concerning their interest in engaging in a transaction with
the Trust.
At a Board of Trustees meeting on January 22, 1998, with
representatives of Dorsey & Whitney LLP and Raymond James in attendance, three
companies made presentations to the Board concerning possible business
combination transactions with the Trust. Shortly after this meeting, the Trust
and its legal and financial advisors entered into merger negotiations with one
of these companies. The Trust and this company also commenced a due diligence
investigation of their respective properties. Although the Trust and this
company engaged in these discussions for almost three months, they did not reach
agreement on the terms and conditions of any specific transaction and no letter
of intent was executed by the Trust and this company. On April 28, 1998, this
company informed the Trust that, based
15
on concerns it had with respect to the condition of the REIT market at that
time, it had determined not to pursue the proposed business combination any
further.
On January 28, 1999, the Trust became aware of an unsolicited offer
from a company identified as Sutter Opportunity Fund, LLC ("Sutter") to purchase
for cash up to 175,000 shares of the Trust (approximately 4.5% of the total
outstanding) for $3.25 per share, less any distributions paid after November 15,
1998 (including the $.08 distribution payable on November 29, 1999 to
shareholders of record as of November 16, 1999). The offer was made to banks and
brokerage firms, which then relayed the offer to individual shareholders. Sutter
made the offer on January 19, 1999, and advised that the offer would expire at
the close of business on February 19, 1999. The closing prices for the shares on
the Nasdaq SmallCap Market during the offer period ranged from a low of $3.875
to a high of $4.25. The Trust learned of the offer on January 28, 1999 and
immediately thereafter contacted Sutter Capital Management, an affiliate of
Sutter, to obtain more information concerning the offer. After reviewing the
terms of the offer and recent trading prices of the shares, the Trust encouraged
shareholders to reject the offer in a press release issued on February 3, 1999.
On March 8, 1999, the Trust received a proposal from AEGON Advisors for
the purchase of the Trust's real estate assets for a total purchase price of
$33,500,000, free and clear of mortgages and other encumbrances. Due to the
relationship between the Trust, AEGON Advisors and the non-employee officers of
the Trust who also are officers of, and employed by AEGON Advisors, the Board
determined that it was appropriate to first seek the advice of Dorsey & Whitney
LLP, its outside legal counsel, before responding to the proposal. See
"--Conflicts of Interests."
At a meeting of the Board of Trustees on April 8, 1999 and with a
representative of Dorsey & Whitney LLP in attendance, the Board reviewed the
proposal for the purchase of the assets by AEGON Advisors and discussed the
terms of the offer, as well as the need for an opinion of an investment bank
regarding the fairness of the transaction to the Trust's shareholders. The Board
also briefly discussed, and compared the offer from AEGON Advisors to, the
expressions of interest received by the Trust in prior years and to the
transaction negotiated in the Spring of 1998. Following a discussion of the
potential conflicts of interest faced by two members of the Board who were
previously employed by AEGON USA and by the officers of the Trust who are
employees of AEGON Advisors, the Board established a special committee of the
Board of Trustees unaffiliated with AEGON Advisors or any of its affiliates (the
"Special Committee") consisting of Richard Osborne and Samuel Kaplan, who have
no prior employment history or other relationship with AEGON Advisors or any of
its affiliates, to evaluate the AEGON Advisors proposal and to negotiate on
behalf of the Trust and its unaffiliated shareholders the terms of and enter
into definitive agreements with respect to the AEGON Advisors proposal. The
Special Committee was authorized to engage such legal, financial and other
advisors to advise the Special Committee as they deemed necessary. The Board
further determined that the approval by the Board of Trustees of any transaction
resulting from the offer by AEGON Advisors would be specifically conditioned
upon the prior approval of such transaction by the Special Committee. The
officers of the Trust were directed to cooperate with the Special Committee and
its advisors.
On April 30, 1999, Messrs. Kaplan and Osborne of the Special Committee
met with David Blankenship, Alan Fletcher and Maureen DeWald in their capacities
as officers of AEGON Advisors, not as officers of the Trust, to discuss the
proposal for the purchase of the assets. At this meeting, the members of the
Special Committee raised several questions concerning the details of the AEGON
offer.
On May 19, 1999, Mr. Kaplan received a letter from Mr. Blankenship
which outlined a revised proposal to be made by AEGON Advisors. The revised
proposal contemplated a purchase of the Trust's real estate assets for a total
purchase price of $33,500,000 free and clear of all mortgages and other
encumbrances except for the existing indebtedness on the Yamaha Warehouse. In
exchange for avoiding the prepayment penalty on the Yamaha Warehouse loan, the
Trust would pay the required loan transfer fee and reimburse AEGON Advisors for
the difference between the note rate and a market rate for the remaining term of
the Yamaha Warehouse loan. The revised proposal also provided that all
transaction costs would be borne by the Trust except for the cost of title
insurance, surveys and environmental reports, which would be borne by AEGON
Advisors.
16
On May 28, 1999, after some further discussions among Mr. Kaplan, Mr.
Osborne and Mr. Blankenship, the Special Committee received a revised proposal
letter from AEGON Advisors. The revised offer contemplated a purchase of the
Trust's real estate assets for a total purchase price of $33,500,000 free and
clear of all mortgages and other encumbrances except for the existing
indebtedness on the Yamaha Warehouse. The revised proposal also provided that
all transaction costs including the loan transfer fee would be borne by the
Trust, except for the cost of title insurance, surveys and environmental
reports, which would be borne by AEGON Advisors. The revised offer was
contingent upon the liquidation of the Trust, including the distribution to
AEGON USA, as a shareholder of the Trust, of its proportionate share of the
liquidating distributions.
On June 7, 1999, Mr. Kaplan of the Special Committee circulated the
revised proposal letter to the Board and suggested that a Board meeting be
called to discuss the revised proposal.
At a meeting of the Board of Trustees on June 21, 1999 with a
representative of Dorsey & Whitney LLP in attendance, the Special Committee gave
a report to the Board on its negotiations with AEGON Advisors concerning the
proposal to purchase the assets of the Trust. After reviewing the revised
proposal for the Board, the Special Committee recommended to the Board that it
authorize the execution of the letter of intent with AEGON Advisors. The Board
then discussed the revised proposal and draft letter of intent in detail, as
well as the need for a fairness opinion with respect to the sale and the terms
of its arrangements with Raymond James. At the conclusion of the meeting, the
Board adopted resolutions authorizing execution of the letter of intent with
AEGON Advisors and commencement of negotiation of the definitive agreements by
the Special Committee and Dorsey & Whitney LLP as counsel for the Trust.
Completion of the transaction was made subject to successful negotiation of the
definitive agreements by the Special Committee, receipt of shareholder approval
of the transaction and satisfactory arrangements for receipt of a fairness
opinion from Raymond James.
On June 22, 1999, AEGON Advisors provided a draft purchase agreement to
the Trust and its legal counsel. The Special Committee determined that it was
appropriate to continue the Trust's relationship with Raymond James as financial
advisor for purposes of this transaction, and continued to consult with Dorsey &
Whitney LLP, the Trust's outside legal counsel, in connection with their
negotiation with AEGON Advisors on behalf of the Trust's unaffiliated
shareholders.
During July 1999, Dorsey & Whitney, LLP, in consultation with the
Special Committee, engaged in negotiations with representatives of Raymond James
concerning the terms of Raymond James' engagement as financial adviser to the
Trust and for the delivery to the Board of a fairness opinion regarding the
Asset Sale. At a meeting of the Board of Trustees on July 27, 1999, Mr. Kaplan
of the Special Committee gave a report to the Board on the results of these
negotiations with Raymond James. After discussion of the Raymond James
engagement letter and the need for a fairness opinion in connection with the
Asset Sale, the Board approved an amendment to the Trust's engagement letter
with Raymond James under which the Trust agreed to pay Raymond James a fee of
$100,000 for the fairness opinion upon delivery of the opinion, and a
transaction fee of $150,000 upon the closing of the Asset Sale.
On Friday, August 13, 1999 the Trust executed the letter of intent with
AEGON Advisors. On Monday, August 16, 1999, the Trust issued a press release
announcing that it had executed a letter of intent to sell all of its assets to
AEGON Advisors, subject to negotiation of a definitive agreement and shareholder
approval. Commencing thereafter, representatives of AEGON Advisors and the
Special Committee, and their respective advisors and legal counsel, proceeded to
negotiate the terms of a definitive real estate sale and purchase agreement.
On October 21, 1999, the Special Committee and the Board of Trustees
jointly held a special meeting and considered the proposed Purchase Agreement
and the transactions contemplated thereby. Members of the Special Committee and
the Trust's legal counsel each made presentations to the Board concerning the
terms of the proposed transaction. Raymond James reviewed with the Special
Committee and the Board of Trustees the financial analyses performed by Raymond
James in connection with its evaluation of the purchase price and related terms.
Raymond James also rendered to the Special Committee and to the Board an oral
opinion (which opinion was subsequently confirmed by delivery of a written
opinion dated October 21, 1999) to the effect that, as of the date of such
opinion and based upon and subject to certain matters stated therein, the price
received by the Trust in connection with the Asset
17
Sale was fair, from a financial point of view, to the Trust's shareholders. The
written opinion of Raymond James constitutes a part of this Proxy Statement and
is attached hereto as ANNEX B. For a more detailed discussion of the written
opinion of Raymond James, see "SPECIAL FACTORS-Opinion of Financial Advisor." A
resolution to approve and authorize the Purchase Agreement and the Asset Sale
and to recommend the Asset Sale and the Liquidation to the Trust's shareholders
was adopted both by a unanimous vote of the Special Committee and by a unanimous
vote of all Trustees.
Commencing thereafter, legal counsel for the Trust, in consultation
with representatives of the Trust and AEGON Advisors, proceeded to prepare a
proxy statement and other documentation for the Asset Sale and the Liquidation.
On January 20, 2000, the Trust and AEGON Advisors executed the Purchase
Agreement and issued a joint press release announcing the execution of the
Purchase Agreement.
PURPOSE AND STRUCTURE OF THE ASSET SALE
The purpose of the Asset Sale is to enable AEGON Advisors to acquire
all of the real estate assets of the Trust including the Properties which AEGON
Advisors already manages on a day-to-day basis and consolidate those Properties
with and into its existing real estate portfolio, thereby eliminating a level of
administration, regulatory reporting obligations and management peripheral to
the core business of AEGON Advisors and providing the shareholders of the Trust
the opportunity to liquidate the Trust and realize a premium over market prices
for the Trust's shares in effect immediately prior to the announcement of the
Asset Sale.
The acquisition by AEGON Advisors of all of the real estate assets of
the Trust was structured as an asset sale rather than a stock sale or merger in
order to accommodate the desire of AEGON Advisors to ensure its acquisition of
the real estate assets without unnecessary risk or the burden of maintaining
another subsidiary. The Properties can easily be mixed into the AEGON real
estate portfolio. Ownership of the Trust as a subsidiary of AEGON Advisors would
not afford AEGON Advisors or AEGON USA with continued tax benefits of REIT
status currently provided to the Trust. A merger of the Trust with another
entity could involve complicated legal issues with limited guidance provided by
Iowa common law. The Trust wished to have its shareholders presented with a
simple transaction followed by liquidation as provided by the Trust's
Declaration of Trust.
THE TRUST'S REASONS FOR THE ASSET SALE
The Board of Trustees has determined, both by a unanimous vote of the
Special Committee and by a unanimous vote of all Trustees, that the Purchase
Agreement and the Asset Sale are fair to and in the best interests of the Trust
and its shareholders, including the unaffiliated shareholders of the Trust, and
has by such votes approved the Purchase Agreement and the Asset Sale.
Accordingly, the Board of Trustees recommends that shareholders vote "FOR" the
Asset Sale.
In reaching its determination, the Board of Trustees considered a
number of factors, including, without limitation, the following:
1. the effectiveness of the Asset Sale in implementing the
Trust's strategy of maximizing shareholder value through
strategic alternatives, as first announced by the Trust in
February 1995;
2. the present and anticipated environment of the REIT industry,
which has experienced a significant decline in stock market
prices for publicly-traded REITs during the past two years,
as well as a decline in real estate offerings in the public
equity markets and a decline in liquidity of the real estate
debt markets;
3. the current and historical market prices with respect to the
Trust's shares, including the fact that the expected
liquidating distributions to shareholders in excess of $6.00
per share represent a premium at least 40% over the closing
market price of $4.25 for the Trust's shares on the day of the
announcement of the signing of a letter of intent to sell the
Properties to AEGON Advisors. Net book
18
value per share at September 30, 1999 was $4.14. Net book
value per share at December 31, 1999 was $4.18.
4. the expectations of the Board of Trustees that the Trust would
not be able to operate efficiently as a publicly-held,
externally-managed REIT at its present size, nor be able to
raise the capital necessary to fund future growth through
acquisition of additional properties, as affected by the
depressed capital markets for REITs and the specific
requirements of distributing substantially all of the Trust's
net income and limitations on outstanding indebtedness as a
percentage of net assets in order to qualify as a REIT;
5. the terms and conditions of the Purchase Agreement, including
the amount and form of the consideration to be received by the
Trust, the limited conditions to the closing of the
transaction relating to the Properties, and the financial
ability of AEGON Advisors to complete the Asset Sale so that
the Asset Sale is not conditioned on financing, which led the
Trustees to conclude that there was a high probability that
the Asset Sale would be consummated; and
6. the financial presentation of Raymond James (which was
engaged by the Trust in 1997 to assist with the Trust's
ongoing efforts to find a suitable transaction) to the
Board of Trustees and the Special Committee, including
Raymond James' written opinion dated October 21, 1999, to
the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the
price received by the Trust in connection with the Asset
Sale is fair, from a financial point of view, to the
Trust's shareholders. In reaching its opinion as to the
fairness from a financial point of view, Raymond James
employed generally accepted valuation methods. These
methods included an analysis of the estimated value of the
Trust's real estate assets, which indicated a gross value
range from $28,976,000 to $32,752,000 as compared to the
offer price in the Purchase Agreement of $33,500,000; a
discounted cash flow analysis, which indicated a range of
gross value of the real estate assets from $29,142,000 to
$30,629,000 as compared to the offer price in the Purchase
Agreement of $33,500,000; an analysis of comparable public
company trading multiples; a comparable transactions
analysis, including an analysis of premiums paid; and an
analysis of the trading history of the Trust's shares.
These analyses are all described further under "-Opinion of
Financial Advisor." The Trust did not have the Properties
appraised in connection with the Asset Sale.
The foregoing discussion of the information and factors considered by
the Special Committee and the Board of Trustees is not meant to be exhaustive
but includes the material factors considered by the Special Committee and the
Board of Trustees. Neither the Special Committee nor the Board of Trustees
quantified or attached any particular weight to the various factors that they
considered in reaching their determination that the Purchase Agreement and the
Asset Sale are fair to and in the best interests of the Trust and its
shareholders, including the unaffiliated shareholders of the Trust. Rather, the
Board of Trustees viewed its recommendation as being based on its judgment, in
light of the totality of the information presented and considered, as summarized
in the reasons described above, and the overall effect of the Asset Sale and the
Liquidation on the Trust's shareholders compared to continuing the business of
the Trust in the ordinary course or seeking other potential parties to effect a
business combination.
In considering the recommendation of the Board of Trustees with
respect to the Asset Sale, shareholders should be aware that the interests of
certain trustees, officers and shareholders with respect to the Asset Sale
are or may be different from and in addition to the interests of the Trust
and its shareholders generally. The Special Committee and the Board of
Trustees were aware of these interests, and took these interests into account
in approving the Purchase Agreement and the transactions contemplated
thereby. See "--Conflicts of Interests." However, because the Liquidation
will require the approval of a majority of the unaffiliated shares, and
because a Special Committee of trustees who have never been affiliated with
either AEGON Advisors or its affiliates was established to negotiate the
Purchase Agreement, with full power to appoint its own advisors and counsel,
the Board of Trustees believes that the Asset Sale was negotiated on an
arm's-length basis and that the Asset Sale is procedurally fair, as well as
substantively fair, to the unaffiliated shareholders of the Trust.
19
ACCORDINGLY, THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE ASSET SALE.
OPINION OF FINANCIAL ADVISOR
In April, 1997, Raymond James & Associates, Inc. was retained by the
Trust to act as financial advisor in connection with potential business
combinations. Raymond James was selected by the Trust based on its
qualifications and expertise in the industry. At the October 21, 1999 meeting of
the Board, Raymond James rendered its oral opinion, subsequently confirmed in
writing, that, as of October 21, 1999 and based upon and subject to the various
considerations set forth in its opinion, the price received by the Trust in
connection with the Asset Sale is fair from a financial point of view to the
Trust's shareholders.
THE FULL TEXT OF THE RAYMOND JAMES WRITTEN OPINION DATED OCTOBER 21,
1999, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, MATTERS CONSIDERED AND THE LIMITATIONS ON THE SCOPE OF THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION
CAREFULLY AND IN ITS ENTIRETY. RAYMOND JAMES' OPINION IS DIRECTED TO THE SPECIAL
COMMITTEE AND THE BOARD OF TRUSTEES AND ADDRESSES ONLY THE FAIRNESS OF THE PRICE
RECEIVED BY THE TRUST IN CONNECTION WITH THE ASSET SALE FROM A FINANCIAL POINT
OF VIEW TO THE SHAREHOLDERS AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE ASSET
SALE NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW TO
VOTE AT THE MEETING. THE SUMMARY OF THE OPINION OF RAYMOND JAMES SET FORTH IN
THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In connection with rendering its opinion, Raymond James, among other
things:
* reviewed certain publicly available financial statements and
other information of the Trust;
* reviewed certain internal financial statements and other
financial and operating data concerning the real estate assets
and the Trust prepared by the management of the Trust;
* reviewed certain financial projections prepared by management
of the Trust;
* discussed the past and current operations and financial
condition and the prospects of the real estate assets and the
Trust with officers of the Trust;
* reviewed the reported prices and trading activity for the
Trust's common shares;
* compared the financial performance of the Trust and the prices
and trading activity of the common shares with that of certain
other comparable publicly-traded companies and their
securities;
* reviewed the financial terms, to the extent publicly
available, of certain comparable transactions;
* reviewed the draft Purchase Agreement dated as of October 14,
1999 and certain related documents; and
* reviewed offers made for the real estate assets and or the
Trust itself since April 1997.
In rendering its opinion, Raymond James assumed and relied upon,
without independent verification, the accuracy and completeness of the
information reviewed by Raymond James for the purposes of its opinion. With
respect to the financial projections provided by the Trust, Raymond James
assumed in its opinion that such projections had been reasonably prepared on a
basis reflecting the best available estimates and judgments of the management of
the Trust as to the future financial performance of the Trust. The opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to Raymond James as of, October 21, 1999.
The following is a summary of the material financial and comparative
analyses performed by Raymond James in connection with providing the opinion to
the Board of Trustees on October 21, 1999. Certain of these summaries of
financial analyses include information presented in tabular format. In order to
understand fully the financial analyses used by Raymond James, the tables must
be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
20
USP REAL ESTATE INVESTMENT TRUST
TRADING ACTIVITY AND PREMIUM ANALYSIS
ESTIMATED ASSET VALUE. Raymond James estimated the value of the Trust's
real estate assets based on a property- by-property analysis. In estimating the
value of each property, Raymond James applied a range of capitalization rates to
(1) projected net operating income for the 12 months ended December 31, 1999;
(2) net operating income based on the current leases in place; and (3) net
operating income for the 12 months ended September 30, 1999. A range of
capitalization rates were applied on an asset-by-asset basis and ranged from
8.75% to 11.5% based upon discussions with management, and other factors such as
the age, quality, location and growth projections of the assets. The gross value
of the real estate assets based on this analysis ranged from $28,976,000 to
$32,752,000 as compared to an offer price in the Purchase Agreement of
$33,500,000.
DISCOUNTED CASH FLOW. Raymond James performed a discounted cash flow
analysis of each of the real estate assets based on projections provided by the
Trust. Raymond James discounted all available free cash flow before interest and
dividends from each of the real estate assets for the years 2000 through 2002,
using discount rates ranging from 11.0 % to 13.0% and a terminal value for each
asset calculated by applying a capitalization rate to each of the properties
projected net operating income in 2003. The capitalization rate applied to each
of the assets in calculating the terminal value ranged from 9.0% to 11.0% based
on midpoint of the range used to calculate the net asset value for each asset as
set forth in "Estimated Asset Value" above. The range of discount rates was
selected based upon Raymond James' estimate of expected investor returns,
discussions with management and other factors such as the age, quality and
location of the assets. The combined gross value of the real estate assets based
on this analysis ranged from $29,142,000 to $30,629,000 as compared to an offer
price in the Purchase Agreement of $33,500,000.
ANALYSES OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. Raymond James
reviewed the trading statistics of selected comparable publicly traded retail
property REITs. The comparable companies selected included:
* Kimco Realty Corporation
* New Plan Excel Realty Trust
* Weingarten Realty Investors
* Developers Diversified Realty Corporation
* Federal Realty Investment Trust
* JDN Realty Corporation
* Regency Realty Corporation
* Bradley Real Estate, Inc.
* Pan Pacific Retail Properties, Inc.
* Burnham Pacific Properties, Inc.
* IRT Property Company
* Center Trust Retail Properties, Inc.
* Konover Property Trust, Inc.
* Western Investment Real Estate Trust
* First Washington Realty Trust, Inc.
* Saul Centers, Inc.
* Mid-Atlantic Realty Trust
* Kranzco Realty Trust
* Acadia Realty Trust
* Price Enterprises, Inc.
* Philips International Realty Corporation
* Ramco-Gershenson Properties Trust
* Equity One, Inc.
* Malan Realty Investors, Inc.
* Agree Realty Corporation
* Aegis Realty Incorporated
* United Investors Realty Trust
* Urstadt Biddle Properties, Inc.
Based on consensus security analyst estimates for 1999, as reported by
First Call, an industry service provider of earnings estimates based on an
average of earnings estimates published by various investment banking firms, and
October 19, 1999 closing share prices, the trading multiples of 1999 projected
FFO per share of the comparable companies ranged from 4.2x to 9.7x, with an
average of 8.3x for companies with a market cap over $500 million, 7.1x for
comparable companies with a market cap between $100 million and $500 million,
and 7.3x for comparable companies with a market cap less than $100 million. With
a market cap of $25 million and based on the net price per share estimated by
the Trust resulting from the Asset Sale and the Liquidation, the Trust would
have a trading multiple of 1999 projected FFO per share of 12.0x.
Based on the October 19, 1999 closing share prices of the comparable
companies, their dividend yields ranged from 6.9% to 14.9%, with an average of
8.8% for comparable companies with a market cap over $500 million, 10.6% for
comparable companies with a market cap between $100 million and $500 million,
and 11.1% for comparable
21
companies with a market cap less than $100 million, as compared to a dividend
yield of 5.0% for the Trust, based on the Trust's current annual dividend rate
of $0.32 per share divided by the net price per share estimated by the Trust
resulting from the Asset Sale and the Liquidation.
None of the comparable companies is identical to the Trust. In
evaluating the comparable companies, Raymond James made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Trust, such as the impact of competition on the Trust and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of the Trust or the industry or
in the financial markets in general.
ANALYSES OF SELECTED COMPARABLE TRANSACTIONS. Raymond James compared
the price to be received by the Trust in connection with the Asset Sale with
selected other comparable transactions. Raymond James analyzed two groups of
selected transactions: transactions in which a public REIT was acquired
(including certain public REIT transactions that have been announced, but not
yet closed) and transactions in which a REIT focused on the retail property
sector was acquired.
PUBLIC REIT TRANSACTIONS
(CLOSED)
DATE EFFECTIVE TARGET ACQUIROR
- ------------------------- ------------------------------------------ ------------------------------------
2/25/98 Value Property Trust Wellsford Real Properties
3/30/98 ASR Investments Corporation United Dominion Realty Trust
4/8/98 Oasis Residential Camden Property Trust
5/8/98 Ambassador Apartments AIMCO
6/2/98 Meridian Point Realty Trust EastGroup Properties
6/3/98 Avalon Properties Inc. Bay Apartment Communities
6/15/98 Horizon Group Prime Retail
6/19/98 Price REIT Inc. Kimco Realty Corp.
6/30/98 Security Capital Atlantic Security Capital Pacific Trust
8/3/98 American General Hospitality CapStar Hotel Company
8/6/98 Mid America Realty Investment Bradley Real Estate, Inc.
9/25/98 New Plan Realty Trust Excel Realty Trust
9/30/98 FAC Realty Trust Prometheus Southeast Retail
10/15/98 Capstone Capital Corp. HealthCare Realty Trust
10/20/98 Merry Land & Investment Co. Equity Residential Properties Trust
11/25/98 National Income Realty Trust Tarragon Realty Investors
2/5/99 Storage Trust Realty Public Storage Inc.
3/30/99 Meridian Industrial Trust Prologis Trust
5/24/99 Tower Realty Trust Reckson
6/8/99 Irvine Apartment Communities Irvine Company
7/2/99 Weeks Corp. Duke Realty Investments
10/1/99 Lexford Residential Trust Equity Residential Properties Trust
Based on the closing prices for the trading day prior to the public
announcement of each of the public REIT transactions, the average premium paid
by the surviving company for the company being acquired was 12.2% and ranged
from (12.6)% to 56.6% for the selected transactions. On the same computation
basis, the premium to be paid by AEGON Advisors pursuant to the Asset Sale is
51.7%, based on the Trust's estimate of its net asset value following the Asset
Sale. Based on the closing prices for the trading day four weeks prior to the
public announcement of each of the public REIT transactions, the average premium
paid by the surviving company for the company being acquired
22
was 15.2% and ranged from (12.9%) to 88.9% for the selected transactions. On the
same computation basis, the premium to be paid by AEGON Advisors pursuant to the
Asset Sale is 56.3%, based on the Trust's estimate of its net asset value
following the Asset Sale.
PUBLIC REIT TRANSACTIONS
(ANNOUNCED)
DATE ANNOUNCED TARGET ACQUIROR
- ------------------------- ------------------------------------------ ---------------------------------------
3/4/99 Berkshire Realty Aptco LLC
4/5/99 Sunstone Hotel Investors Investor Group
6/16/99 TriNet Corporate Realty Trust Starwood Financial Trust
8/31/99 Commercial Assets Inc. Asset Investors Corporation
9/24/99 Walden Residential Properties Olympus Real Estate Corporation
Based on the closing prices for the trading day prior to the public
announcement of each of the public REIT transactions which have been announced
but not yet closed, the average premium to be paid by the surviving company for
the company being acquired is 38.1% (18.7% excluding the TriNet Corporate Realty
transaction) and ranges from 0.0% to 115.8% for the selected transactions (a
maximum premium of 41.5% excluding the TriNet Corporate Realty transaction). On
the same computation basis, the premium to be paid by AEGON Advisors pursuant to
the Asset Sale is 51.7%, based on the Trust's estimate of its net asset value
following the Asset Sale. Based on the closing prices for the trading day four
weeks prior to the public announcement of each of the public REIT transactions
which have been announced but not yet closed, the average premium to be paid by
the surviving company for the company being acquired is 43.6% (20.7% excluding
the TriNet Corporate Realty transaction) and ranges from 2.3% to 135.3% for the
selected transactions (a maximum premium of 40.3% excluding the TriNet Corporate
Realty transaction). On the same computation basis, the premium to be paid by
AEGON Advisors pursuant to the Asset Sale is 56.3%, based on the Trust's
estimate of its net asset value following the Asset Sale.
PUBLIC RETAIL PROPERTY REIT TRANSACTIONS
(CLOSED)
DATE EFFECTIVE TARGET ACQUIROR
- ----------------------- ---------------------------------------- ----------------------------------
6/15/98 Horizon Group Prime Retail
6/19/98 Price REIT Inc. Kimco Realty Corp.
8/6/98 Mid America Realty Investments Bradley Real Estate, Inc.
9/25/98 New Plan Realty Trust Excel Realty Trust
9/30/98 FAC Realty Trust Prometheus Southeast Retail
Based on the closing prices for the trading day prior to the public
announcement of each of these transactions, the average premium paid by the
surviving company for the company being acquired in the public retail sector
REIT transactions was 8.3% and ranged from 2.7% to 13.5% for the selected
transactions. On the same computation basis, the premium to be paid by AEGON
Advisors pursuant to the Asset Sale is 51.7%, based on the Trust's estimate of
its net asset value following the Asset Sale. Based on the closing prices for
the trading day four weeks prior to the public announcement of each of the
public retail property REIT transactions, the average premium paid by the
surviving company for the company being acquired was 11.4% and ranged from
(7.9%) to 30.0% for the selected transactions. On the same computation basis,
the premium to be paid by AEGON Advisors pursuant to the Asset Sale is 56.3%,
based
23
on the Trust's estimate of its net asset value following the Asset Sale. The FFO
multiples for the acquired retail focused companies, calculated based on the
price per share offered divided by the FFO per share based on the most recently
reported trailing 12 month period, ranged from 7.7x to 15.5x with an average of
10.7x. The FFO multiple for the Trust is 14.5x based on the net price per share
estimated by the Trust from the Asset Sale divided by FFO of $0.44 for the 12
month period ended September 30, 1999.
No transaction utilized in a comparable transaction analysis is
identical to the Asset Sale and, accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
financial and operating characteristics of the Trust and other factors that
would affect the acquisition value of companies to which it is being compared.
In evaluating the selected comparable transactions, Raymond James made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Trust, such as the impact of competition on the Trust and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of the Trust or the industry or
in the financial markets in general.
STOCK TRADING HISTORY. Raymond James reviewed the daily closing prices
of the Trust's common shares from January 1, 1990 through October 19, 1999.
Raymond James also reviewed the premium obtained by computing the percentage
excess of the anticipated liquidating distributions to shareholders over the
high, low and average closing price of the common shares for the following
periods ended August 16, 1999, the date of the announcement of the signed letter
of intent with AEGON Advisors.
Estimated Distribution Amount Based on the Offer Price $6.45
RECENT USP PRICE PER SHARE
- ---------------------------------------------------
Price at Announcement (8/16/99)* 4.25
High Low Average
------------- ------------ -----------
One Month Prior $ 4.25 $ 4.00 $ 4.04
Three Months Prior $ 5.00 $ 4.00 $ 4.33
Six Months Prior $ 5.00 $ 3.75 $ 4.18
One Year Prior $ 6.38 $ 3.75 $ 4.59
Three Years Prior $ 6.38 $ 3.56 $ 4.41
OFFER PREMIUM
- ---------------------------------------------------
Price at Announcement (8/16/99)* 51.7%
High Low Average
------------- ------------ -----------
One Month Prior 51.7% 61.2% 59.5%
Three Months Prior 29.0% 61.2% 48.9%
Six Months Prior 29.0% 71.9% 54.2%
One Year Prior 1.1% 71.9% 40.6%
Three Years Prior 1.1% 81.0% 46.1%
*THE TRANSACTION WAS ANNOUNCED AFTER THE MARKET CLOSED ON 8/16/99.
The summary set forth above does not purport to be a complete
description of the analyses performed by Raymond James. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to a
partial analysis or summary description. Raymond James believes that its
analyses must be taken as a whole and that selecting portions of its analyses,
without considering all analyses, would create an incomplete view of the process
24
underlying the opinion. In addition, certain analyses or valuations may be more
or less relevant than other analyses or valuations, and may have assumptions
which are more or less probable than other assumptions, so that the ranges of
valuations resulting from a particular analysis described above should not be
taken to be Raymond James' view of the value of the real estate assets or the
common shares. In light of the number and variety of analyses, valuations and
assumptions considered, Raymond James did not assign relative weights to these
analyses, valuations and assumptions considered.
In performing its analyses, Raymond James assumed economic, market and
other conditions as in effect on, and the information made available to it as
of, October 21, 1999. The analyses performed by Raymond James are not
necessarily indicative of actual value, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely as
part of Raymond James' analysis of whether the price to be received pursuant to
the Purchase Agreement is fair from a financial point of view to the Trust, and
were conducted in connection with the delivery of the opinion by Raymond James
to the Board of Trustees. The analyses do not purport to be appraisals or to
reflect the prices at which the real estate assets or the Trust might actually
be sold. The Raymond James analyses described above should not be viewed as
determinative of the opinion of the Board of Trustees or the management of the
Trust with respect to the value of the Trust.
The opinion speaks as of October 21, 1999 and Raymond James is not
required to and does not intend to update the opinion. Among other things,
changes in industry performance, general business, economic, market and
financial conditions, as well as changes in the Trust's business or its
properties, may affect a future determination of fairness. In the event of a
material amendment to the Purchase Agreement, the Board of Trustees may request
Raymond James to update the opinion if such amendment would result in a material
change to the financial value of the transaction. If the Trust and AEGON
Advisors agreed to a material change to the transaction, the Trust will
redistribute revised proxy materials explaining the nature of, and the reasons
for, such change and resolicit your vote.
Raymond James is a full service broker-dealer engaged in most aspects
of securities distribution and investment banking. Raymond James is the largest
brokerage and investment firm headquartered in the State of Florida. It is a
member of the New York Stock Exchange, American Stock Exchange, Philadelphia
Stock Exchange, Boston Stock Exchange, Chicago Board Options Exchange, New York
Futures Exchange, Pacific Stock Exchange and Chicago Stock Exchange. It is also
a member of the Securities Industry Association, the National Association of
Securities Dealers (NASD), and the Securities Investors Protection Corporation
(SIPC). In the ordinary course of its trading, brokerage and financing
activities, Raymond James and its affiliates may, at any time, have a long or
short position in, and buy and sell the equity securities of, the Trust for its
account or the accounts of its customers.
The type and amount of consideration payable in connection with the Asset
Sale and Purchase Agreement was determined through negotiation between the
Special Committee and AEGON Advisors. Although Raymond James provided financial
advice to the Special Committee during the course of negotiations, the decision
to enter into the Asset Sale and Purchase Agreement was solely that of the Board
of Trustees and the Special Committee. Raymond James' advice, opinion and
financial analyses were only one of the many factors considered by the Board of
Trustees and the Special Committee in their evaluation of the proposed Asset
Sale and Purchase Agreement and should not be viewed as determinative of the
views of the Board of Trustees or the Special Committee with respect to the
consideration to be received by the Trust in connection with the Asset Sale and
Purchase Agreement.
Pursuant to an engagement letter dated April 9, 1997, as amended on August
9, 1999, the Trust paid Raymond James a $50,000 engagement fee and has paid a
$100,000 fee for its fairness opinion, and has agreed to pay Raymond James a
cash transaction fee of $150,000 upon the closing of the Asset Sale. The Trust
has also agreed to reimburse Raymond James for all expenses incurred in
connection with the services provided by Raymond James. As of the date of this
Proxy Statement, the Trust has paid Raymond James approximately $21,000 for
expenses incurred on behalf of the Trust.
25
PERSPECTIVE OF AEGON ADVISORS AND ITS AFFILIATES ON THE FAIRNESS OF THE ASSET
SALE
As discussed under "Special Factors--Background of the Asset Sale," the
determination of the purchase price for the Asset Sale resulted from extensive
arm's-length negotiation between the representatives of the Trust and AEGON
Advisors. At the conclusion of the negotiation process, AEGON Advisors offered
to acquire the real estate assets of the Trust for a price of $33,500,000.
AEGON Advisors and its affiliates believe that the Asset Sale is fair to
the unaffiliated shareholders of the Trust. Neither AEGON Advisors nor any of
its affiliates undertook any formal or informal evaluation of its own as to the
fairness of the Asset Sale to the shareholders of the Trust. Rather, AEGON
Advisors and its affiliates base their belief solely on (i) the factors cited by
the Board of Trustees of the Trust and its determination that the Asset Sale is
fair to, and in the best interest of, the shareholders of the Trust (see
"Special Factors--Reasons for the Asset Sale"), (ii) the fact that the expected
liquidating distributions to shareholders in excess of $6.00 per share represent
a premium at least 40% over the closing price for the Trust's shares on the day
of the announcement of the execution of the letter of intent with AEGON
Advisors, and (iii) their conclusion that the negotiation of the Purchase
Agreement was procedurally fair to the unaffiliated shareholders. AEGON Advisors
reached its conclusion as to the procedural fairness of the Asset Sale based
upon the fact that the terms of the Asset Sale and the Purchase Agreement were
negotiated on an arm's-length basis and approved by a Special Committee of
trustees unaffiliated with AEGON Advisors, and that the Trust obtained an
opinion from an independent financial advisor that the Purchase Agreement is
fair, from a financial point of view, to the Trust's shareholders. In concluding
that the terms of the Asset Sale are fair to the unaffiliated shareholders of
the Trust, neither AEGON Advisors nor its affiliates attach specific weight to
any factors in reaching its belief as to fairness.
UNSOLICITED OFFERS FROM THIRD PARTIES
As of the date of this Proxy Statement, the Trust has not received any
unsolicited offers from third parties for a merger or other business combination
involving the Trust or any unsolicited proposal or offer to acquire in any
manner a substantial equity interest in, a substantial portion of the voting
securities of, or a substantial portion of the assets of the Trust, other than
the transaction contemplated by the Purchase Agreement, since announcing the
signing of the letter of intent by the Trust and AEGON Advisors to commence
negotiations of the Asset Sale on August 16, 1999.
CONFLICTS OF INTEREST
In considering the recommendation of the Special Committee and the Board,
shareholders of the Trust should be aware that certain officers, trustees and
shareholders of the Trust may have interests in the Asset Sale that may be
different or in addition to the interests of shareholders of the Trust
generally. The Special Committee and the Board were aware of these interests and
considered them, among other factors, in approving the Asset Sale. The interests
are summarized below.
INTERESTS OF OFFICERS
The following four officers of AEGON Advisors currently serve as
non-employee officers of the Trust as part of the administrative services
provided by AEGON Advisors pursuant to the Administrative Agreement: David L.
Blankenship, Maureen DeWald, Alan F. Fletcher, and Roger L. Schulz (the
"Officers"). Mr. Blankenship has served as President of the Trust since 1985. He
has been employed by AEGON USA since 1977 in various administrative and
management positions related to real estate investment activities and is
Chairman of the Board and President of AEGON Advisors. Ms. DeWald has served as
Vice President of the Trust since 1986 and Secretary since 1985. She has been
employed by AEGON USA since 1983 as an attorney for real estate investment
activities and is Senior Vice President, Secretary and General Counsel of AEGON
Advisors. Mr. Fletcher has served as Treasurer of the Trust since 1986, as Vice
President since 1985, as Assistant Secretary since 1982 and as principal
financial officer since 1981. He has been employed by AEGON USA since 1981 in
various financial and administrative positions related to investment activities
and is Senior Vice President and Chief Financial Officer of AEGON Advisors. Mr.
Schulz has served as Controller and Assistant Secretary of the Trust since 1995.
He has been employed by AEGON USA since 1985 in various
26
accounting and financial reporting positions related to real estate investment
activities and is Manager--Financial Reporting for AEGON Advisors.
The Officers receive no cash or deferred compensation in their capacities
as such from the Trust. No separate fee is paid to AEGON Advisors for providing
officers for the Trust. The Officers are currently employed by AEGON USA, and
will remain employees of AEGON USA following the closing of the Asset Sale. In
order to avoid any real or apparent conflict of interest among the Officers
during the negotiation of the Purchase Agreement, the Board established the
Special Committee to negotiate, review the fairness of, and approve the Purchase
Agreement and the Asset Sale. The Officers were directed by the Board to
cooperate with the Special Committee and its advisors. The Officers beneficially
own 4,118 shares (excluding the shares owned by AEGON USA), and will thus be
entitled to receive 0.1% of the assets distributed in the Liquidation. However,
the shares beneficially owned by the Officers will be treated the same as shares
held by all other shareholders. See "OWNERSHIP OF SHARES BY TRUSTEES AND
OFFICERS."
INTERESTS OF TRUSTEES
The following four persons currently serve on the Board of Trustees:
Patrick E. Falconio, Edwin L. Ingraham, Samuel L. Kaplan and Richard M. Osborne.
Mr. Falconio has served as a Trustee and Chairman of the Board since 1988, and
retired on February 1, 1999 as Executive Vice President and Chief Investment
Officer of AEGON USA. He was also a director of AEGON Advisors and various other
subsidiaries of AEGON USA until his retirement. Mr. Ingraham has served as a
Trustee since 1984, and retired in 1988 as Executive Vice President, Treasurer
and Chief Investment Officer of AEGON USA. In order to avoid any real or
apparent conflict of interest among the Trustees approving the Asset Sale, the
Board established the Special Committee of trustees not affiliated with AEGON
Advisors or AEGON USA to negotiate, review the fairness of, and approve, the
Purchase Agreement and the Asset Sale.
The Trustees own in the aggregate 574,581 shares, and will thus be
entitled to receive 14.81% of the assets distributed in the Liquidation. Mr.
Falconio beneficially owns 2,000 shares through his wife; Mr. Ingraham owns
1,500 shares; Mr. Kaplan owns 8,500 shares, and beneficially owns 1,500
shares held in a profit sharing trust for his account; and Mr. Osborne
beneficially owns 561,081 shares through Turkey Vulture Fund XIII, Ltd., of
which he is the sole manager. However, the shares beneficially owned by the
Trustees will be treated the same as shares held by all other shareholders.
See "OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS." Mr. Falconio also owns
17,624 shares and options to purchase 65,250 shares of AEGON, N.V. Messrs.
Ingraham, Kaplan and Osborne do not own any shares of AEGON, N.V. The Asset
Sale and the Liquidation will be immaterial to AEGON, N.V. and are not
expected to have any impact on the share price of AEGON, N.V.
The Trust's Declaration of Trust provides that the Trust shall indemnify
each of its Trustees, officers, employees and agents against all liabilities and
expenses reasonably incurred in connection with the defense or disposition of
any action, suit or other proceeding in which they may be involved or with which
they may be threatened, while acting as a Trustee or as an officer, employee or
agent of the Trust or thereafter, by reason of being or having been a Trustee,
officer, employee or agent of the Trust, except with respect to any matter as to
which they shall have been found to have acted in bad faith or with willful
misconduct or reckless disregard of their duties or gross negligence or not to
have acted in good faith in the reasonable belief that their action was in the
best interests of the Trust. In connection therewith, the Trust maintains an
insurance policy to cover liability of the Trustees, which the Trust expects to
continue through tail coverage after the Asset Sale and the Liquidation.
INTERESTS OF AEGON USA
AEGON USA is the largest shareholder of the Trust, beneficially owning
approximately 30.86% of the Trust's outstanding shares. The Trust believes that
this share ownership will entitle AEGON USA to receive in excess of $7,000,000
in the Liquidation. In addition to its equity interest in the Trust, AEGON USA
has provided debt financing for certain of the Properties. On March 1, 1999, the
mortgage loans on Mendenhall Commons and North Park Plaza matured, requiring
principal repayment. On March 15, 1999, the Trust refinanced these mortgage
loans with Monumental Life Insurance Company, a wholly owned subsidiary of AEGON
USA. The new loans were for a period
27
of one year, and carried an initial interest rate of 7%, and could be prepaid
at any time without penalty. These loans were extended until August 1, 2000
on the same terms and conditions. If the Asset Sale is consummated, these
loans will be repaid by the Trust from the proceeds of the Asset Sale as part
of the Liquidation, prior to any liquidating distributions to shareholders.
See "PROPOSAL NO. 2: THE LIQUIDATION."
SUMMARY OF MATERIAL FEATURES OF THE ASSET SALE
THE PURCHASE AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF ALL MATERIAL PROVISIONS OF THE PURCHASE
AGREEMENT. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY THE PURCHASE AGREEMENT, WHICH IS ATTACHED TO THIS PROXY STATEMENT AS
ANNEX C. WE HAVE NOT FILED WITH THE COMMISSION ALL EXHIBITS OR OTHER AGREEMENTS
REFERRED TO IN THE PURCHASE AGREEMENT. CAPITALIZED TERMS USED HEREIN AND NOT
OTHERWISE DEFINED HEREIN HAVE THE MEANINGS ASCRIBED TO SUCH TERMS IN THE
PURCHASE AGREEMENT.
GENERAL
On January 20, 2000, the Trust and AEGON Advisors entered into the Purchase
Agreement pursuant to which the Trust has agreed to sell and transfer, and AEGON
Advisors has agreed to purchase and assume, subject to the terms and conditions
of the Purchase Agreement, including approval of the Trust's shareholders, all
of the Trust's real estate assets and certain liabilities for $33,500,000. The
Trust's real estate assets include the Properties and all Improvements, Personal
Property, Tenant Leases, Operating Agreements, Warranties, Plans and
Specifications, Licenses related thereto, as well as all rents, issues,
royalties and profits of the Properties, whether coming due before or after the
closing date of the Asset Sale. The Properties are being sold in fee simple
title, subject to certain Permitted Exceptions. The properties will be
transferred free and clear of mortgages and related liens, with the possible
exception of the Yamaha Warehouse, as described below. Both Mendenhall Commons
and North Park Plaza are subject to mortgage loans with Monumental Life
Insurance Company, a wholly owned subsidiary of AEGON USA, which will be repaid
by the Trust from the proceeds of the Asset Sale as part of the Liquidation. See
"PROPOSAL NO. 2: THE LIQUIDATION." The Trust estimates that the known
liabilities not assumed by AEGON Advisors will total approximately $8,000,000.
If AEGON Advisors assumes, subject to lender consent, the existing lien of
the first mortgage and related security instruments encumbering the Trust's
Yamaha Warehouse property (the "Yamaha Debt"), thereby avoiding a substantial
prepayment fee of approximately $42,000, the Trust will pay the Yamaha Lender an
assumption fee of 1% of the outstanding principal owing under the Yamaha Debt,
and the purchase price will be reduced by the outstanding principal and unpaid
interest owing under the Yamaha Debt as of the Closing Date. The Yamaha Debt is
expected to total approximately $1.4 million at the time of closing. If the
Yamaha Lender refuses to consent to the sale, the purchase price will not be
reduced, but the Trust will pay off the Yamaha mortgage at the closing of the
Asset Sale, pay the prepayment fee and deliver the Yamaha Warehouse property
free and clear of the mortgage and related liens. AEGON Advisors is obligated
under the Purchase Agreement to use reasonable efforts to obtain the Yamaha
Lender's consent to AEGON Advisors' assumption of the Yamaha Debt, and the Trust
intends to use its best efforts to ensure that such consent is obtained. If the
Yamaha Lender's consent is not obtained, however, the Trust expects that payment
of the prepayment fee will reduce the total distributions per share by less than
$.02.
Subject to the conditions contained in the Purchase Agreement, the closing
of the Asset Sale will take place at or be closed in escrow through the offices
of American Title Company promptly following the Special Meeting, or at such
other place or on such other date as may be mutually agreeable to the parties,
but in no event later than June 30, 2000. There can be no assurance that all
conditions of the Asset Sale will be satisfied.
REPRESENTATIONS AND WARRANTIES
The Purchase Agreement contains customary representations and warranties of
the Trust relating to, among other things:
28
* the Trust's status as a domestic entity under the Internal Revenue
Code;
* due authorization and approval of the Purchase Agreement and each
instrument or document required to be executed and delivered by
the Trust pursuant to the Purchase Agreement and the consummation
of the transactions contemplated thereby;
* the absence of any governmental or regulatory authorization,
consent or approval required to consummate the Asset Sale; and
* the absence of any contract or agreement in conflict with the
terms and conditions of the Purchase Agreement.
The Purchase Agreement also contains customary representations and
warranties of AEGON Advisors relating to, among other things:
* due authorization and approval of the Purchase Agreement and the
consummation of the transactions contemplated thereby;
* the absence of governmental or other regulations that would
restrict AEGON Advisors' proposed purchase of the Properties; and
* the absence of any conflict between the proposed Asset Sale and
AEGON Advisors' Articles of Incorporation or By-Laws.
The parties also jointly made certain statements concerning the condition
of the Properties, limited to their actual knowledge, regarding, among other
things:
* the absence, except as disclosed, of tenants in material default
under their leases;
* the absence of liens and encumbrances affecting the Properties,
other than Permitted Title Exceptions;
* material compliance of the Properties with all applicable laws,
codes and ordinances including those regulating zoning, building,
health, fire or other safety and environmental conditions;
* the status of insurance against fire and other hazards;
* the absence of plans for condemnation, or street or other
improvements which may result in special assessments against the
Properties;
* the absence of claims, suits or proceedings pending or threatened
against or affecting the Properties; and
* the absence of any damage to the Properties which has not been
repaired.
The parties further stated in the Purchase Agreement that neither the
execution and delivery of the Purchase Agreement, nor the consummation of the
contemplated transactions or compliance with the terms and provisions of the
Purchase Agreement, will violate any provision of law to which the Trust is
subject, or will conflict or result in any breach or default of, or result in
any lien or encumbrance upon the Properties pursuant to, any indenture,
mortgage, deed of trust, lease or other instrument to which the Trust is a party
or by which the Trust or any of the Properties is bound.
29
AEGON Advisors has acknowledged that it is purchasing the Properties on an AS-IS
condition, based upon its own inspections of the Properties and without the
benefit of any representation, warranty or disclosure from the Trust.
OPERATIONS OF THE TRUST PRIOR TO THE CLOSING
While the Closing is pending, the Trust has agreed to operate the
Properties in the ordinary course of business, by, among other things, complying
with the terms of all leases, mortgages, or other contractual obligations, and
performing regular, scheduled, or necessary maintenance and repair of the
Properties and related fixtures, furniture and equipment. The Trust has agreed
not to enter into any agreements or contracts affecting the Properties which
will survive the closing, or any new lease or modifications or terminations of
existing leases, without the consent of AEGON Advisors. Any contracts for tenant
improvements for certain Permitted Lease Transactions which are not completed
prior to Closing will be assigned to and assumed by AEGON Advisors. The Trust
will pay for the tenant improvement costs or allowances and leasing commissions
in approved or Permitted Lease Transactions to the extent necessary to maintain
gross rent levels, upon which AEGON advisors had based its purchase price.
AEGON Advisors is the asset manager for the Properties pursuant to a
Management Agreement dated July 1, 1981 and an Administrative Agreement dated
January 1, 1984 (together, the "Advisory Agreements"). See "THE
TRUST--Administrative, Advisory and Acquisition Services" and "--Management
Services." AEGON Advisors has agreed to continue to manage the Properties in the
best interests of the Trust pursuant to the Advisory Agreements in the same
manner as before the Purchase Agreement. All actions taken by the Trust in
regard to the Properties at the recommendation of AEGON Advisors as advisor will
be considered consented to by AEGON Advisors for purposes of the Purchase
Agreement. The Trust has directed AEGON Advisors to conduct operations at the
Properties in accordance with any applicable terms and conditions of the
Purchase Agreement. The Trust has also agreed that AEGON Advisors will have
access to the Properties to perform its due diligence and inspections allowed by
the Purchase Agreement in addition to its normal access to the Properties in its
capacity as advisor to the Trust. AEGON Advisors has agreed to indemnify the
Trust for any loss, cost, damage or liability caused by AEGON Advisors' conduct
of its due diligence review of the Properties.
The Trust has further agreed to call the Special Meeting to obtain the
approval of the shareholders for this transaction, which shall include the
approval of the shareholders in accordance with the Declaration of Trust that
the Trust be liquidated and the proceeds of the Asset Sale, together with other
liquid assets of the Trust, less costs and reserves, be promptly distributed to
the shareholders. The Trust agreed to recommend the Asset Sale, subject to
receipt of a favorable fairness opinion from Raymond James.
CLOSING CONDITIONS
The Asset Sale will be consummated only if the Purchase Agreement and the
Liquidation are approved and adopted by the Trust's shareholders. Although
shareholder approval of a sale of the Trust's real estate assets normally is not
required under the Trust's Declaration of Trust, the agreement by AEGON Advisors
to purchase the real estate assets of the Trust is conditioned upon shareholder
approval of the Asset Sale and shareholder approval of the Liquidation. Approval
of the Asset Sale as submitted to the shareholders will require the affirmative
vote of a majority of shares present at the Special Meeting. Approval of the
Liquidation, resulting in the termination of the Trust, requires the affirmative
vote of 66.67% of all outstanding shares the Trust. The Trust believes that the
holders of approximately 46% of the outstanding shares (including AEGON USA)
intend to vote in favor of the Asset Sale and the Liquidation. The Asset Sale is
also conditioned on the receipt of a favorable fairness opinion from Raymond
James. On October 21, 1999, the Board of Trustees received the written opinion
of Raymond James that the Asset Sale is fair, from a financial point of view, to
the Trust's shareholders.
The closing of the Asset Sale also is subject to the satisfaction of
certain other conditions specified in the Purchase Agreement, unless such
conditions are waived. AEGON Advisors' obligation to buy the Properties is
subject to, among other things, satisfaction, or waiver by AEGON Advisors, of
the following conditions:
30
* AEGON Advisors obtaining a preliminary title report and a
commitment for an owner's policy of title insurance satisfactory
to AEGON Advisors from the Title Company with respect to each of
the Properties;
* AEGON Advisors obtaining certified surveys of the Properties which
reveal no new exceptions unacceptable to AEGON Advisors;
* AEGON Advisors obtaining an environmental report or report update
concerning the Properties which does not show or indicate any
asbestos in the Improvements or any contamination of the
Properties above any level requiring a mediation or clean-up by
any applicable federal, state or local law, code or ordinance
except as otherwise agreed to by AEGON Advisors; and
* the continued accuracy of the Trust's representations in the
Purchase Agreement without any change in the rent rolls or the
status of defaults of tenants which would be detrimental to the
value of any Property.
As of the date of the mailing of this Proxy Statement, the first three of the
foregoing conditions had been met.
CLOSING PRORATIONS
AEGON Advisors will obtain its own insurance coverage for the Properties at
Closing. Rents and reimbursements due after Closing will be prorated at Closing
based upon estimates of such amounts. Property expenses, collected rents, and ad
valorem taxes on the Properties for the current year will be prorated at the
Closing, effective as of the Closing Date, utilizing the latest available
computations of such items. Except as otherwise agreed by the parties, the Trust
will be responsible for all property expenses incurred, undertaken, or
contracted for prior to Closing, and has agreed to indemnify and hold AEGON
Advisors harmless from any claim, cost, or cause of action arising from any such
expenses and liabilities. Charges under the continuing Operating Agreements
assumed by AEGON Advisors will be prorated between the parties at Closing.
Tenant security deposits in the possession of the Trust and prepaid rents will
be credited to AEGON Advisors. In addition to the Purchase Price, AEGON Advisors
will pay the Trust its pro rata share of all tenant delinquent rental accounts
at face value, but will only pay for accounts whose total delinquency is less
than ninety (90) days past due, and specifically shall not pay for the accounts
of any tenants in bankruptcy or state insolvency proceedings or any accounts
whose total delinquency is more than thirty (30) days past due if the tenant in
question has vacated the property. All other rental accounts will be transferred
to AEGON Advisors at Closing without additional charge. The Trust will cause all
utility meters to be read on the Closing Date and AEGON Advisors shall be
responsible for having utilities connected on such date in its own name.
RISK OF LOSS
Until Closing, all risk of loss of the Properties is on the Trust and if,
prior to Closing, the Properties, or any part thereof, become damaged by fire or
other casualty or become the object of any condemnation proceedings, AEGON
Advisors may, as its sole and exclusive remedy, elect to either (i) terminate
the Purchase Agreement, or (ii) proceed with the Closing and receive an
assignment in form acceptable to AEGON Advisors of all insurance proceeds or
awards for such taking, free and clear of all liens, claims and encumbrances,
and in the case of casualty, together with a cash payment by the Trust to AEGON
Advisors in the amount of the lesser of (a) any deductible under the Trust's
insurance, or (b) the cost of the repair of the damage. If the estimated cost of
repair is less than $1,000,000, AEGON Advisors has agreed to proceed to Closing.
REMEDIES
The Trust's sole remedy in the case of a default in AEGON Advisors'
performance under the Purchase Agreement is the receipt of the $200,000 in
earnest money paid into escrow by AEGON Advisors and termination of the Purchase
Agreement. Upon a default by the Trust under the Purchase Agreement, AEGON
Advisors may, as its
31
sole and exclusive remedies, elect to: (i) terminate the Purchase Agreement and
reclaim the earnest money; (ii) seek specific performance of the Purchase
Agreement; or (iii) sue the Trust for damages not to exceed the earnest money.
Except for failure to close on the specified Closing Date, in which case no
notice or cure period is required, prior to a declaration of default, the
parties have agreed to give written notice to each other specifying the default.
The defaulting party will have five business days from receipt of such notice to
cure the default. If the cure period extends beyond the scheduled date of
Closing, the Closing Date will be postponed to the last day of the cure period.
In the event either party to the Purchase Agreement employs an attorney and
commences legal action because of the other party's default, then the
non-prevailing party will pay to the prevailing party reasonable attorney's fees
incurred in the enforcement of the Purchase Agreement.
INDEMNIFICATION
The parties have agreed to indemnify and hold harmless each other with
respect to any loss arising from the inaccuracy of such party's representations
and warranties. AEGON Advisors has also agreed to indemnify and hold harmless
the Trust for any loss incurred by the Trust caused by AEGON Advisors' conduct
of its due diligence.
TERMINATION
The Purchase Agreement is subject to termination under several
circumstances, including failure to obtain the requisite shareholder approval.
It shall terminate automatically if any of the closing conditions are not
satisfied, if AEGON Advisors defaults in its performance of the Purchase
Agreement, if the Trust defaults in its performance of the Purchase Agreement,
or the Property becomes damaged by fire or other casualty or becomes the object
of any condemnation proceedings before the Closing. See " -Remedies" above for a
summary of the effect of termination of the Purchase Agreement prior to Closing.
No other fees are due upon termination of the Purchase Agreement.
AMENDMENT AND WAIVER
The Purchase Agreement may be amended, superseded, extended or modified
only in a written document executed by both AEGON Advisors and the Trust. If the
conditions to closing regarding the status of the Properties are not timely
satisfied, AEGON Advisors may elect to (i) waive such conditions and close, (ii)
terminate the Purchase Agreement, or (iii) reject the affected Property or
Properties by notice to the Trust, in which event the rejected Properties will
be deleted from the Purchase Agreement and the purchase price will be reduced by
the amount allocated to the deleted Properties.
FEES AND EXPENSES
The Trust will bear all costs and related expenses incurred in connection
with the Asset Sale and the Liquidation, including applicable transfer taxes,
with the exception of expenses related to the cost of title policies, surveys
and environmental reports and one-half of the Title Company escrow fees, if any,
which AEGON Advisors will bear. No fees or commissions will be paid to any
brokers, finders or other persons in connection with the Asset Sale or the
Liquidation except for the fees due Raymond James, whose fees shall be borne by
the Trust. See "SPECIAL FACTORS--Opinion of Financial Advisor." The Trust
expects the expenses it will incur in connection with the Asset Sale and the
Liquidation will total approximately $725,000. See "EXPENSES OF THE
TRANSACTION."
ANTICIPATED ACCOUNTING TREATMENT
The Asset Sale will be accounted for as a sale by the Trust, and as a
purchase by AEGON Advisors.
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FINANCING OF THE ASSET SALE; SOURCE OF FUNDS
AEGON Advisors has represented in the Purchase Agreement that it, together
with its affiliates, has sufficient capital resources necessary to perform its
obligations under the Purchase Agreement. AEGON Advisors intends to finance the
Asset Sale with working capital funds.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences to the Trust and its shareholders relevant to the Asset Sale and
the Liquidation, but is not intended to be a complete analysis of all the
potential tax effects. The Trust did not obtain an opinion of tax counsel with
respect to the Asset Sale or the Liquidation. The discussion below is based upon
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings, and judicial decisions
now in effect, all of which are subject to change at anytime. Any such changes
may be applied retroactively. The following discussion has no binding effect on
the IRS or the courts and assumes that the Trust will liquidate substantially in
accordance with the process described below under "PROPOSAL NO. 2: THE
LIQUIDATION." It is also assumed that all liquidating distributions by the Trust
to shareholders or to the liquidating trust will occur during the same taxable
year as the Asset Sale occurs, and that a final distribution from the
liquidating trust to shareholders will occur approximately one year after the
liquidating trust is established. No assurances can be given that the tax
treatment described herein will remain unchanged at the time of the
distributions.
CONSEQUENCES TO THE TRUST
Upon the Asset Sale, the Trust will generally recognize capital gain to the
extent the amount it realizes upon the sale of each real estate asset exceeds
its adjusted basis in that asset for federal income tax purposes at the time of
the sale. The Trust should not be subject to tax on the net capital gain that it
recognizes as a result of the Asset Sale if before the end of the taxable year
during which the Asset Sale occurs it makes liquidating distributions to
shareholders or to the liquidating trust in an amount at least equal to its
earnings and profits (as calculated for federal income tax purposes) for that
taxable year. Until the Liquidation is completed and the Trust ceases to exist,
the Trust will continue to be subject to tax on its taxable income.
CONSEQUENCES TO SHAREHOLDERS
The Asset Sale will not in itself result in federal income tax consequences
to the holders of the shares. Upon receipt of the liquidating distributions,
however, shareholders will recognize gain or loss equal to the difference
between (i) the amount of cash distributed to them in the Liquidation (and their
pro rata share of the funds transferred by the Trust to the liquidating trust),
and (ii) their tax basis for their shares. Gain or loss recognized by a
shareholder will be capital gain or loss provided the shares are held as capital
assets. If the shares are held as capital assets and the shareholder has held
the shares for more than one year, the gain will be long-term capital gain.
Long-term capital gains of individuals, estates, and trusts are currently taxed
at a maximum rate of 20%. Long-term capital gains of corporations are taxed at
the same rates as ordinary income (at rates up to 35%). To determine the
deductibility of capital losses, all capital gains and losses incurred in the
year must be totaled. Any capital losses are deductible only to the extent of
any capital gains plus, in the case of non-corporate shareholders, ordinary
income of up to $3,000.00 per year. Corporate shareholders can use capital
losses for a tax year only to offset capital gains in that year. Individuals and
other non-corporate shareholders may carry over a net capital loss for an
unlimited time until the loss is exhausted. Corporate shareholders may carry
back a capital loss to each of the three tax years preceding the loss year to
offset capital gain. Any excess may be carried forward for five years following
the loss year. After the close of its taxable year, the Trust will provide
shareholders and the IRS with a statement of the amount of cash distributed to
each of the shareholders during that year.
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THE LIQUIDATING TRUST
When the amount representing the Contingency Reserve hereinafter defined is
transferred to the liquidating trust, shareholders will be treated for tax
purposes as having received their pro rata share of property transferred to the
liquidating trust, reduced by the amount of known liabilities assumed by the
liquidating trust or to which the property transferred is subject. See "PROPOSAL
NO. 2: THE LIQUIDATION -- Contingency Reserve; Liquidating Trust." The
liquidating trust itself should not be subject to tax. After formation of the
liquidating trust, the shareholders must take into account for federal income
tax purposes each year their allocable portion of any income, expense, gain or
loss recognized by the liquidating trust. As a result of the transfer of
property to the liquidating trust and the possible receipt of income by the
liquidating trust, shareholders should be aware that they may be subject to tax,
whether or not they have received any actual distributions from the liquidating
trust with which to pay the tax. The final distribution from the liquidating
trust to shareholders will not have any further federal income tax consequences
to shareholders.
STATE AND LOCAL INCOME TAX CONSEQUENCES
Shareholders may also be subject to liability for state and local taxes
with respect to the receipt of liquidating distributions for their shares, as
well as their interests in the liquidating trust.
THE TRUST RECOMMENDS THAT EACH SHAREHOLDER CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES OF THE PROPOSED
ASSET SALE AND THE LIQUIDATION.
ABSENCE OF APPRAISAL RIGHTS
Under the Declaration of Trust, which is governed by Iowa common law, if
the shareholders approve the Asset Sale and the Liquidation, the Asset Sale and
the Liquidation will not give rise to any rights of shareholders of the Trust to
seek a court appraisal of their shares, or any similar dissenters' rights.
REGULATORY APPROVALS
The Trust believes that no regulatory approvals are or will be required in
connection with the Asset Sale or the Liquidation. At the completion of the
Liquidation, the Trust will file notice with the County Recorder of Linn County,
Iowa, thereby terminating the Trust.
PROPOSAL NO. 2: THE LIQUIDATION
GENERAL
If the shareholders approve the Purchase Agreement and the Asset Sale is
consummated, the assets of the Trust will consist of $33,500,000 in cash
proceeds from the Asset Sale, less approximately $1.4 million for repayment or
assumption of the Yamaha Debt and less such amount of proceeds necessary to pay
certain liabilities not assumed in the Asset Sale, including the outstanding
mortgage loans on Mendenhall Commons and North Park Plaza. The Trust's other
assets will consist of cash and cash equivalents. The Trust currently estimates
that liabilities not assumed will total approximately $8,000,000. See "SELECTED
FINANCIAL DATA." Accordingly, the Trust estimates that there will be
approximately $25,500,000 (less the costs of operation and professional fees
during liquidation, and less any unforseen liabilities asserted during
liquidation) available for distribution to shareholders in liquidation on a pro
rata basis. See "PRO FORMA FINANCIAL INFORMATION." As of the date of this Proxy
Statement, the Trust had 3,880,000 shares issued and outstanding. The Asset Sale
and the Liquidation are expected to result in total liquidating distributions to
shareholders in excess of $6.00 per share. No assurances can be given, however,
that, as a consequence of the Liquidation, holders of the Trust's shares will
receive aggregate cash distributions per share which exceed the prices at which
the Trust's shares have generally been traded.
34
Assuming the Closing of the Asset Sale occurs on or before ____________,
2000, the Board of Trustees presently intends to pay an initial cash
distribution of at least $6.00 per share to shareholders on or before
___________, 2000 (the "Initial Distribution") provided that the Board believes
at that time that the Contingency Reserve hereinafter defined is adequate to
provide for the Trust's obligations, liabilities (actual and contingent) and
expenses. Depending on their tax basis for their shares, shareholders may be
required to recognize gain for tax purposes upon receipt of distributions in
liquidation and upon the transfer of any undistributed assets to a liquidating
trust. See "--Liquidating Distributions," "SUMMARY OF MATERIAL FEATURES OF THE
ASSET SALE -- Federal Income Tax Consequences" and "PRO FORMA FINANCIAL
INFORMATION."
Liquidation resulting in termination of the Trust requires the affirmative
vote of 66.67% of the Trust's outstanding shares. Liquidation of the Trust will
not occur, however, unless the Asset Sale is also approved and consummated. The
Board of Trustees has determined, both by a unanimous vote of the Special
Committee and by a unanimous vote of all Trustees, that the Liquidation is in
the best interests of the Trust and its shareholders, and has by such votes
approved the Liquidation. In making its determination that the Liquidation is in
the best interests of the Trust and its shareholders, the Board of Trustees
considered a number of factors, including those factors described in "SPECIAL
FACTORS -- The Trust's Reasons for the Asset Sale." In particular, the Special
Committee and the entire Board of Trustees considered AEGON Advisors'
requirement under the Purchase Agreement that the Liquidation be approved by the
Trust's shareholders and that the Liquidation promptly follow the Asset Sale,
and the fact that the expected liquidating distributions to shareholders in
excess of $6.00 per share represent a premium at least 40% over the closing
market price for the Trust's shares on the day of announcement of the signing of
a letter of intent to sell the Properties to AEGON Advisors, which led the
Trustees to conclude that the Asset Sale and the Liquidation would provide an
opportunity for shareholders to receive a significant premium to current and
recent trading prices for the Trust's shares.
ACCORDINGLY, THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE LIQUIDATION.
LIQUIDATION PROCEDURE
In the event that the Liquidation is approved by the shareholders and the
Asset Sale is consummated, the officers of the Trust will be directed to
commence the immediate liquidation of the Trust. The Trust will cease to carry
on its business, except to the extent necessary for the winding up of the Trust.
The Advisory Agreements will be amended, providing for a reasonable and
customary fee to AEGON Advisors for its continued services until the liquidation
proceedings are completed or until a liquidating trust is established. The Trust
does not expect the fee for such services to exceed the fee historically paid to
AEGON Advisors under the parties' agreements. The legal existence of the Trust
will continue to the extent necessary to wind up the affairs of the Trust until
the liquidation proceedings described below are completed and a notice is filed
with the County Recorder of Linn County, Iowa.
The officers will proceed as soon as possible to collect or make provision
for the collection of all known debts due or owing to the Trust, pay or make
provision for the payment of all known debts, obligations, and liabilities of
the Trust according to their priorities, and will give notice to each creditor
of and claimant against the Trust. A notice of the pending liquidation will be
published in a newspaper. All claims must be received within 120 days of
publishing or giving written notice, as applicable. The Trust may accept or
reject the claim by giving written notice to the person submitting it. The
officers will be authorized to sell, transfer or otherwise dispose of all
remaining property and assets of the Trust, if any, and all tangible or
intangible property, including money, remaining after the discharge of, or after
making adequate provision for the discharge of, the debts, obligations and
liabilities of the Trust will be distributed on a pro rata basis to the
shareholders of record on the Final Record Date selected by the Board for the
distributions. No further shareholder votes will be solicited. The Trust will
indemnify its officers, trustees, employees, agents, and representatives for
actions taken in connection with the Asset Sale and the winding up of the
affairs of the Trust. The Trust's obligations to indemnify such persons may also
be satisfied out of assets of the liquidating trust established hereunder.
35
The Board of Trustees has determined to establish a Contingency Reserve of
approximately $400,000 which it believes will be sufficient to satisfy the
liabilities, expenses, and obligations of the Trust not otherwise paid, provided
for or discharged at or immediately after the Closing. The net balance, if any,
of the Contingency Reserve remaining (including interest earned on cash in the
Contingency Reserve) after payment, provision or discharge of all liabilities,
expenses and obligations, also will be distributed to the Trust's shareholders
pro rata or to the liquidating trust. Although the Trust presently intends to
pay the Initial Distribution on or before ____________, 2000 (assuming the
closing of the Asset Sale occurs on or before ______________, 2000), no
assurances can be given that available cash at that time together with the
Contingency Reserve will be adequate in the Board's judgment to provide for the
Trust's obligations, liabilities, expenses and claims as well as to fund the
distribution. See "--Liquidating Distributions," "--Contingency Reserve;
Liquidating Trust" and "PRO FORMA FINANCIAL INFORMATION."
Promptly following the closing of the Asset Sale and the Initial
Distribution, the Trust expects to transfer any remaining assets (including any
remaining Contingency Reserve) to a liquidating trust. Assuming the expiration
of all time periods relating to payment of claims described above and assuming
there are no pending legal, administrative or arbitration proceedings by or
against the Trust, a notice will then be filed with the County Recorder of Linn
County, Iowa. When the notice of liquidation has been filed, the Trust will be
terminated. Currently with the termination of the Trust, the Trust will file
appropriate documentation with the Securities and Exchange Commission to
terminate the Trust's periodic report filing obligations under the Securities
Exchange Act of 1934, as amended. Once the liquidating trust is established, the
Trust will distribute pro rata to the shareholders beneficial interests in the
liquidating trust ("Interests"). It is anticipated that the Interests will not
be freely tradeable; hence, although the recipients of the Interests in the
liquidating trust will be treated for tax purposes as having received their pro
rata share of property transferred to the liquidating trust and will thereafter
take into account for tax purposes their allocable portion of any income,
expense, gain or loss realized by the liquidating trust, the recipients of the
Interests will not realize the value of the Interests unless and until the
liquidating trust distributes cash or other assets to them.
LIQUIDATING DISTRIBUTIONS
The Board has not established a firm timetable for distributions to
shareholders. If the closing of the Asset Sale takes place, the Board will,
subject to the requirements for maintaining adequate reserves to pay all of the
Trust's liabilities and obligations, make such distributions as promptly as
practicable consistent with maximizing shareholder value. Assuming the Asset
Sale closing occurs on or before ____________, 2000, the Board of Trustees
presently intends to pay an Initial Distribution of at least $6.00 per share to
shareholders on or before __________, 2000, provided that at that time the Board
is of the opinion that the Contingency Reserve is adequate to provide for the
Trust's obligations, liabilities (actual and contingent) and expenses. The Trust
expects a second, and final, distribution to shareholders will be made by the
liquidating trust approximately one year after establishing the liquidating
trust (the "Final Distribution"). The actual amount and timing of, and Final
Record Date for, all distributions will be determined by the Board of Trustees,
in its sole discretion, and will depend upon the amounts deemed necessary by the
Board to pay or provide for all of the Trust's liabilities and obligations.
However, the ultimate amount of liabilities cannot be determined with certainty,
which makes it impracticable to predict the aggregate net amount ultimately
distributable to shareholders. Claims, liabilities and expenses from operations
will continue to accrue following approval of the Asset Sale and the Liquidation
and closing of the Asset Sale, and the Trust anticipates that expenses for
professional fees and other expenses of liquidation will be significant. See
"EXPENSES OF THE TRANSACTION." These expenses will reduce the amount of assets
available for ultimate distribution to shareholders. While the Trust does not
believe that a precise estimate of those expenses can presently be made, the
Board believes that available cash, interest income and the amounts which will
be received upon the closing of the Asset Sale will be adequate to provide for
the Trust's obligations, liabilities, expenses and claims (including contingent
liabilities) and to make cash distributions to shareholders. However, no
assurance can be given as to the foregoing. See "PRO FORMA FINANCIAL
INFORMATION."
CONTINGENCY RESERVE; LIQUIDATING TRUST
The Board of Trustees has determined to establish a Contingency Reserve of
approximately $400,000 which it currently believes will be sufficient to operate
the Trust until termination, and which it believes it will be sufficient
36
to satisfy the liabilities, expenses and obligations of the Trust not otherwise
paid, provided for or discharged at or immediately after the closing of the
Asset Sale. The actual size of the Contingency Reserve is based upon estimates
and opinions of management derived from consultations with outside experts and
review of the Trust's estimated operating expenses and liabilities (actual and
contingent) and obligations. There can be no assurance that the Contingency
Reserve will be sufficient.
Assuming the Closing of the Asset Sale occurs on or before __________,
2000, and the Initial Distribution occurs on or before ________, 2000, the Trust
expects to transfer the remaining assets (including any remaining Contingency
Reserve) to a liquidating trust. The sole purpose of the liquidating trust will
be to liquidate any remaining assets of the Trust on terms satisfactory to the
liquidating trustees and, after paying any remaining liabilities of the Trust,
distribute the proceeds of such assets to the Trust's shareholders. The
liquidating trust will be obligated to pay any expenses and liabilities of the
Trust which remain unsatisfied. If the Contingency Reserve transferred to the
liquidating trust is exhausted, such expenses and liabilities will be satisfied
out of the liquidating trust's other unsold assets, if any. The Trust expects a
Final Distribution to be made by the liquidating trust approximately one year
after establishing the liquidating trust.
The Board of Trustees will appoint one or more individuals or corporate
persons to act as trustee or trustees on such terms and conditions as the Board
of Trustees determines.
In the event the Trust fails to create an adequate Contingency Reserve for
payment of its expenses and liabilities, or should the Contingency Reserve and
the assets held by the liquidating trust be exceeded by the amount ultimately
found payable in respect of expenses and liabilities, each shareholder could be
held liable for the payment to creditors of his or her pro rata share of the
excess, limited to the amounts theretofore received by the shareholder by way of
distributions from the Trust or the liquidating trust.
If a court determines at any time that the Trust has failed to make
adequate provision for its expenses and liabilities or if the amount ultimately
required to be paid in respect of such liabilities exceeds the amount available
from the Contingency Reserve and the assets of the liquidating trust, a creditor
of the Trust could seek an injunction against the making of distributions to
shareholders on the ground that the amounts to be distributed are needed to
provide for the payment of the Trust's expenses and liabilities. Any such action
could delay or substantially diminish the cash distributions to be made to
shareholders.
FINAL RECORD DATE
The share transfer books of the Trust will be closed on the close of
business on the record date fixed by the Board of Trustees for the Initial
Distribution, and thereafter no further transfers will be recorded on the
Trust's books, and no further share certificates will be issued, other than
replacement certificates. It is anticipated that no further trading of the
Trust's shares will occur after that date (the "Final Record Date"). See
"--Listing and Trading of the Shares and Interests in the Liquidating Trust"
below. When making the Initial Distribution on or after the Final Record Date,
the Trust will require shareholders to surrender certificates representing their
shares in order to receive the distribution. Shareholders should not forward
their share certificates before receiving instructions to do so. All
distributions otherwise payable by the Trust or the liquidating trust, if any,
to shareholders who have not surrendered their share certificates may be held in
trust for those shareholders, without interest, until the surrender of their
certificates (subject to the requirements of state "escheat" laws requiring
transfer of unclaimed property to the states).
LISTING AND TRADING OF THE SHARES
Prior to the Final Record Date, the Trust's shares of beneficial interest
will continue to be transferable and the Trust's shareholders will continue to
have such rights as applicable laws confer upon shareholders. The Trust
currently intends to close its books on the Final Record Date and at that time
cease recording share transfers and issuing share certificates (other than
replacement certificates). Accordingly, it is expected that trading in the
shares will cease on that date.
37
MANAGEMENT OF THE TRUST AND AEGON ADVISORS
MANAGEMENT OF THE TRUST
Information concerning the management of the Trust, the names, principal
occupations and employment history of the trustees and officers of the Trust, is
provided in the Trust's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 that is incorporated by reference in this Proxy Statement and
attached hereto as ANNEX A. See "WHERE YOU CAN FIND MORE INFORMATION." All of
the trustees and officers of the Trust are citizens of the United States. The
business address of each trustee and officer of the Trust is listed in footnote
(1) to the table under "OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS."
MANAGEMENT OF AEGON ADVISORS
AEGON Advisors is a wholly owned subsidiary of AEGON USA, an Iowa
corporation which is an indirect, wholly-owned subsidiary of AEGON N.V., a
holding company organized under the laws of the Netherlands which is controlled
by Vereniging AEGON, an association organized under the laws of the Netherlands.
AEGON USA's business address is 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499. AEGON N.V.'s business address is 50 Mariahoeveplein, 2501 CE The
Hague, The Netherlands.
AEGON ADVISORS. The names, positions and five years of employment history
of the directors of AEGON Advisors are listed below. Unless otherwise specified
below, the directors are United States citizens, have held the positions listed
below since at least five years prior to the date of this Proxy Statement, and
their business addresses are 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.
David L. Blankenship is Chairman of the Board and President of AEGON
Advisors. Douglas C. Kolsrud has been Executive Vice President, Asset Allocation
and Risk Management, of AEGON USA since 1998 and, prior to that, was Corporate
Actuary of AEGON USA. Brenda K. Clancy has been Senior Vice President &
Treasurer, Information and Finance of AEGON USA since 1997 and, prior to that,
was Corporate Controller of AEGON USA.
AEGON USA. The names, positions and five years of employment history of the
directors of AEGON USA are listed below. Unless otherwise specified below, the
directors are United States citizens, have held the positions listed below since
at least five years prior to the date of this Proxy Statement, and their
business addresses are 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.
Frank C. Herringer is Chairman of the Board of AEGON USA, and Chairman
of the Board, President and Chief Executive Officer of Transamerica
Corporation. Irving W. Bailey, II, is Vice Chairman of the Board of AEGON
USA, President of Bailey Capital Corporation and former Chairman and Chief
Executive Officer of Providian Corporation. Donald J. Shepard is President
and Chief Executive Officer of AEGON USA. Leslie B. Disharoon is Chairman of
Caves Valley Club and retired as Chairman of the Board and President of
Monumental Corporation. Edward K. Dunn, Jr., has been Chairman of the Board
of Mercantile Mortgage Corporation since 1997 and, prior to that, was
President of Mercantile-Safe Deposit & Trust Company. William H. Foster, a
British citizen, retired in 1996 and is a former member of the Executive
Board of AEGON N.V. Kornelis J. Storm, a Dutch citizen, is Chairman of the
Executive Board of AEGON N.V. E. Kirby Warren is Professor of Management at
Columbia University.
AEGON N.V. The names, positions and five years of employment history of the
directors of AEGON N.V. are listed below. Unless otherwise specified below, the
directors are Dutch citizens, have held the positions listed below since at
least five years prior to the date of this Proxy Statement, and their business
addresses are 50 Mariahoeveplein, 2501 CE The Hague, The Netherlands.
Kornelis J. Storm is Chairman of the Executive Board of AEGON N.V. Paulus
van de Geijn is Chairman of the Management Board of AEGON Nederland N.V. Frank
C. Herringer, a United States citizen, has been Chairman of the Board of AEGON
USA since July 1999 and is Chairman, President and Chief Executive Officer of
Transamerica
38
Corporation. Donald J. Shepard, a United States citizen, is President and Chief
Executive Officer of AEGON USA. Hendrik B. van Wijk is responsible for Group
staff functions as Finance, Treasury, Actuary, Legal and Fiscal department of
AEGON N.V.
VERENIGING AEGON. The names, positions and five years of employment history
of the directors of Vereniging AEGON are listed below. Unless otherwise
specified below, the directors are Dutch citizens, have held the positions
listed below since at least five years prior to the date of this Proxy
Statement, and their business addresses are 50 Mariahoeveplein, 2501 CE The
Hague, The Netherlands.
Paul P. Kohnstamm is Chairman of the Executive Committee of Vereniging
AEGON, Director of Kohnstamm Real Estate Advisors, Professor in Real Estate
Economy at the University of Amsterdam and a former member of the Executive
Board of Wilma Real Estate Company. Johannes L. Bouma is Vice Chairman of the
Executive Committee of Vereniging AEGON and a Professor in Business Economics at
the State University of Groningen, The Netherlands. Petrus J. Idenburg is
Professor in Strategic Aspects of Technology and Management at the Technological
University of Delft. Jan M. Boll is a Member of the State Council of The
Netherlands. Hendrikus de Ruiter is retired and a former Managing Director of
N.V. Koninklijke Nederlandsche Petroleum Mij. and Group Managing Director.
Gerard van Schaik is retired and former Chairman of the Executive Board of
Heineken N.V. Kornelis J. Storm is Chairman of the Executive Board of AEGON N.V.
Hendrik B. van Wijk is a Member of the Executive Board of AEGON N.V.
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to each person and
group (as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934) known by the Trust to be the beneficial owner of more than five percent
of the outstanding shares as of December 31, 1999.
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
AEGON USA, Inc. (1) 1,197,260 30.86%
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Turkey Vulture Fund XIII, Ltd. (2) 561,081 14.46%
c/o Kohrman Jackson & Krantz P.L.L.
1375 East 9th Street
Cleveland, Ohio 44114
- ----------------------
(1) AEGON USA, Inc., an Iowa corporation, is an indirect, wholly owned
subsidiary of AEGON N.V., a holding company organized under the laws of
the Netherlands which is controlled by Vereniging AEGON, an association
organized under the laws of the Netherlands. AEGON USA has sole voting
and investment powers with respect to the number of shares set forth
next to its name.
(2) Turkey Vulture Fund XIII, Ltd. (the "Fund") is an Ohio limited
liability company, of which Richard M. Osborne is the sole manager. As
sole manager of the Fund, with sole power to vote, or to direct the
voting of, and the sole power to dispose or to direct the disposition
of, any shares owned by the Fund, Mr. Osborne may be deemed to
beneficially own all of the shares of beneficial interest of the Trust
owned by the Fund.
39
OWNERSHIP OF SHARES BY TRUSTEES AND OFFICERS
The following table sets forth the number of shares beneficially owned
as of December 31, 1999 by each Trustee and officer and by all trustees and
officers as a group (8 persons). Except as otherwise indicated by footnote, the
individuals have direct ownership of, and sole voting and investment power with
respect to, any shares beneficially owned by them. Under rules adopted by the
Commission, transactions in shares are reportable by trustees and officers on
specified forms, and the Trust is required to disclose any known delinquent
filings. The Trust is not aware of any delinquent filings by its current
trustees and officers, except that Richard Osborne inadvertently failed to
report on a Form 4 Statement of Changes of Beneficial Ownership of Securities a
purchase of 10,000 shares in December 1998.
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER(1) OF BENEFICIAL OWNERSHIP OF CLASS
Patrick E. Falconio(2) 2,000 *
Edwin L. Ingraham 1,500 *
Samuel L. Kaplan(3) 10,000 *
Richard M. Osborne(4) 561,081 14.46%
David L. Blankenship(5) 1,199,078 30.90%
Maureen DeWald 0 *
Alan F. Fletcher(6) 2,200 *
Roger L. Schulz 100 *
Trustees and officers as a group 1,775,959 45.77%
- ----------------------
(1) The address of Messrs. Falconio, Blankenship, Fletcher, Schulz and Ms.
DeWald is 4333 Edgewood Road, N.E. Cedar Rapids, Iowa 52499. The
address of Mr. Ingraham is 2063 Woodstone Court, Victoria, Minnesota
55386. The address of Mr. Kaplan is 5500 Norwest Center, 90 South
Seventh Street, Minneapolis, Minnesota 55402. The address of Mr.
Osborne is c/o Kohrman Jackson & Krantz P.L., 1375 East 9th Street,
Cleveland, Ohio 44114.
(2) Mr. Falconio may be deemed to be the beneficial owner of 2,000 shares
owned by his wife.
(3) Mr. Kaplan is the direct owner of 8,500 shares and may be deemed to be
the beneficial owner of 1,500 shares held in a profit sharing trust for
his account.
(4) Mr. Osborne may be deemed to be the beneficial owner of 561,081 shares
beneficially owned by Turkey Vulture Fund XIII, Ltd., an Ohio limited
liability company, of which Mr. Osborne is the sole manager.
(5) Mr. Blankenship may be deemed to be the beneficial owner of 1,197,260
shares beneficially owned by AEGON USA with respect to which he shares
voting and investment powers (see "PRINCIPAL SHAREHOLDERS"). Mr.
Blankenship disclaims beneficial ownership of such shares. He may also
be deemed to be the beneficial owner of 1,818 shares held in custodial
accounts for his children.
(6) Mr. Fletcher is the direct owner of 600 shares and is the beneficial
owner of 1,600 shares held in an individual retirement account.
* Such holdings represent less than one percent of the outstanding shares.
COST AND METHOD OF PROXY SOLICITATION
The cost of preparing, assembling and mailing the proxy materials and
of soliciting proxies by the Board of Trustees will be borne by the Trust. In
addition to the use of mails, proxies may be solicited on behalf of the Board by
personal interview, telephone and telegram by certain trustees or employees of
AEGON Advisors who will not be separately compensated for such services. The
Trust does not presently intend to use specially engaged employees or paid
solicitors for the solicitation of proxies, but has retained Boston EquiServe,
L.P., a subsidiary of State Street Bank and Trust Company, for proxy tabulation.
The Trust has made arrangements with brokerage houses and nominees to send proxy
materials to their principals and the Trust will reimburse them for their
reasonable out-of-pocket expenses incurred in doing so.
40
EXPENSES OF THE TRANSACTION
The aggregate fees and expenses paid and estimated to be paid by the
Trust in connection with the Asset Sale and the Liquidation are as follows:
Investment Banking Fee ................................... $ 250,000(1)
Legal and Accounting ..................................... 175,000
Printing and Distribution ................................ 65,000
Real Estate Closing Costs ................................ 125,000
Insurance Expenses ....................................... 75,000
SEC and Regulatory Filings ............................... 6,700
Miscellaneous Liquidation Expenses ....................... 28,300
-----------
Total .................................................... $ 725,000
===========
- ---------------
(1) In addition to this fee, Raymond James is entitled to reimbursement of
out-of-pocket expenses incurred in connection with its engagement
(including fees and expenses of counsel).
OTHER BUSINESS
The Board is not aware of any other business that will come before the
Special Meeting. If any other business should come before the Special Meeting,
the persons named in the enclosed proxy will vote on it according to their best
judgment.
SHAREHOLDER PROPOSALS
The Trust anticipates approval and consummation of the Asset Sale and
the Liquidation and therefore does not currently intend to hold a 2000 Annual
Meeting. If the Asset Sale and the Liquidation are not approved and consummated,
however, shareholder proposals intended to be presented at the 2000 Annual
Meeting will be included in the Trust's proxy statement and form of proxy for
the 2000 Annual Meeting only if they were received no later than November 24,
1999. Shareholder proposals not presented in a timely manner for inclusion in
the Trust's proxy statement will be subject to the exercise of discretionary
authority granted in proxies executed in connection with the 2000 Annual Meeting
against such proposals unless such proposals are presented no later than
February 6, 2000.
WHERE YOU CAN FIND MORE INFORMATION
The Trust files annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K and other information with the Commission.
You may read and copy any reports, statements or other information that the
Trust files at the Commission's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. Such
filings are also available to the public from commercial document retrieval
services. Copies of such material also can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, Washington,
D.C. 20549. In addition, the Trust is required to file electronic versions of
such material with the Commission through the Commission's Electronic Data and
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Trust's shares are quoted on the Nasdaq
SmallCap Market under the symbol "USPTS." The Commission allows us to
"incorporate by reference" information into this Proxy Statement. This means
that in lieu of providing certain information in this Proxy Statement, we have
instead referred you to another document previously filed with the Commission
containing such information. This Proxy Statement refers you in particular to
the documents set forth below that we have previously filed with the Commission.
These documents contain important information about the Trust.
41
Annual Report on Form 10-K for the year ended December 31, 1999
Current Report on Form 8-K filed on February 1, 2000
We are also incorporating by reference additional documents that we may
file with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act between the date of this Proxy Statement and the date of the
Special Meeting.
The information incorporated by reference is deemed to be part of this
Proxy Statement. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this Proxy Statement will be deemed modified,
superseded or replaced for purposes of this Proxy Statement to the extent that a
statement contained herein or in any subsequently filed document that also is or
is deemed to be incorporated by reference herein modifies, supersedes or
replaces such statement. Any statement so modified, superseded or replaced will
not be deemed, except as so modified, superseded or replaced, to constitute
apart of this Proxy Statement.
The Trust has supplied all information contained or incorporated by
reference in this Proxy Statement relating to the Trust. Documents that we refer
to above are available from us without charge, excluding all exhibits unless we
have specifically made reference to an exhibit in this Proxy Statement.
Shareholders may obtain such documents by requesting them in writing or by
telephone at the following addresses:
USP Real Estate Investment Trust
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499-5441
Attention: Investor Relations
If you would like to request documents from us, please do so by
___________ __, 2000 to receive them before the Special Meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE MATTERS BROUGHT BEFORE THE
SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY
STATEMENT IS DATED ___________ __, 2000. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THE PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN SUCH DATE, AND NEITHER THE MAILING OF THE PROXY STATEMENT TO THE
SHAREHOLDERS NOR THE CONSUMMATION OF THE ASSET SALE SHALL CREATE ANY IMPLICATION
TO THE CONTRARY.
FOR THE BOARD OF TRUSTEES
Patrick E. Falconio
Chairman of the Board
Cedar Rapids, Iowa
_____________, 2000
42
ANNEX A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 Commission file number 0-7589
USP REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Iowa 42-6149662
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4333 Edgewood Road N.E., Cedar Rapids, IA 52499
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 398-8975
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, $1 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting shares of the registrant held by
non-affiliates at March 15, 2000 was $12,288,920.
The number of shares of beneficial interest of the registrant outstanding at
March 15, 2000 was 3,880,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I.
ITEM I. BUSINESS
The Trust
USP Real Estate Investment Trust ("USP" or the Trust") is an equity-oriented
real estate investment trust organized under the laws of the State of Iowa
pursuant to a Declaration of Trust as amended and restated through April 23,
1984. The Trust was formed on March 10, 1970 to provide its shareholders with
an opportunity to participate in the benefits of real estate investment and
at the same time enjoy the liquidity and marketability resulting from the
ownership of securities which are publicly-traded.
USP has elected to qualify as a real estate investment trust ("REIT") under
the Internal Revenue Code. As a result of this election, the Trust is not
taxed on the portion of its income which is distributed to shareholders,
provided it distributes at least 95% of its taxable income, has at least 75%
of its assets in real estate investments and meets certain other requirements
for qualification as a real estate investment trust.
The Trust has no employees as all services necessary to conduct the
day-to-day operations are performed by AEGON USA Realty Advisors, Inc.
("AEGON Advisors") and its affiliates. (See Note 6 to the Financial
Statements.)
Investment Policy
The Trust's primary investment objective is to invest in real estate which
will provide the best available cash flow and offer prospects for long-term
appreciation in value. The Trust selectively sells property when it is
determined that a sales transaction will economically benefit the Trust
through the realization of capital gains. The Trust does not acquire property
with a view to realizing appreciation from short-term sales.
The Trust has sought to achieve its investment objectives by investing
principally in the direct ownership of real estate. Short-term cash
investments are made in high-quality commercial paper, money market funds and
certificates of deposit.
Source of Funds and Financing
The principal source of funds for investment by USP was $25 million in
proceeds from its initial public offering of shares. The Trust ceased the
issuance of shares from this offering in 1978. The Trust completed a
secondary offering of its shares in 1988, raising nearly $10 million. Since
substantially all of the Trust's net income must be distributed to
shareholders in order to qualify as a real estate investment trust, USP has
relied primarily on cash generated from operations and property sales in
excess of shareholder distributions, along with borrowings secured by
mortgages on specific properties, to finance real estate investments.
Outstanding indebtedness of USP may not, according to the Declaration of
Trust, exceed four hundred percent of the Trust's net assets (shareholders'
equity plus accumulated depreciation). The aggregate principal amounts of
mortgage indebtedness and net assets of the Trust as of December 31, 1999
were $9,359,426 and $27,580,995, respectively.
The Trust may finance future real estate investments through additional
borrowings secured by mortgages on the Trust's real estate properties. USP
currently has no commitments or arrangements for any such financing and there
can be no assurance that suitable financing will be available on terms
satisfactory to the Trust in the future.
2
Competition
USP's portfolio competes with other similar properties in its respective
markets, some of which are newer than the USP properties. A strong U.S.
economy, a low level of commercial real estate construction, and strong
leasing efforts were factors resulting in a strong occupancy of Trust
properties during the last three years. Overall leased occupancy for the
entire portfolio was 94% at December 31, 1999, compared to 96% at December
31, 1998 and 87% at December 31, 1997.
Sale of Assets
In January 2000, the Trust signed a contract to sell all of its real estate
assets to AEGON Advisors, the Trust's advisor and a subsidiary of AEGON USA,
Inc., the Trust's largest shareholder which owns approximately 30.86% of the
Trust's outstanding shares, for a total purchase price of $33,500,000. The
sale of the real estate assets of the Trust is conditioned upon shareholder
approval of the sale, as well as shareholder approval of the subsequent
liquidation of the Trust and distribution of the proceeds of the sale to the
shareholders. A notice of a special meeting of the shareholders and a proxy
statement containing details of the proposed transaction will be sent to all
shareholders pending a filing with the Securities and Exchange Commission.
The transaction is anticipated to be completed in the second quarter of 2000,
resulting in an expected liquidating distribution in excess of $6.00 per
share. Shareholder approval of the liquidation of the Trust will result in
termination of the Trust. Neither the sale of assets nor the liquidation will
occur unless both are approved at the special meeting.
ITEM 2. PROPERTIES
Real Estate Investments
The Trust has direct ownership of six commercial real estate properties.
These real estate investments are diversified geographically with 69% of the
portfolio located in the Southeast, 25% in the Southwest and 6% in the Great
Lakes Region based on the cost of the properties.
Properties owned by the Trust are leased to tenants either on a managed basis
or under net lease arrangements. As the owner of managed property the Trust
receives gross rentals and incurs operating expenses, such as property taxes,
insurance, repairs, maintenance and common area utilities. Under net lease
arrangements, the tenant, rather than the Trust, pays all operating expenses
related to the leased premises. At December 31, 1999, five commercial
properties were being leased on a managed basis and one property was leased
on a net lease basis.
The five managed commercial properties consisted of four shopping centers and
one business park. Managed commercial properties comprised 94% of the Trust's
investment portfolio in 1999 and in 1998, compared to 95% in 1997. Managed
commercial properties provided 89% of USP's annual revenue in 1999, compared
to 91% in 1998 and 89% in 1997. All managed properties have at least one
tenant representing 19% or more of the revenue from that property. Safeway at
North Park Plaza in Phoenix, Arizona and Kroger Company at Mendenhall Commons
in Memphis, Tennessee each represent approximately 16% and 14%, respectively,
of the total revenue of the Trust under leases expiring in 2018 and 2012,
respectively.
The net leased property is the Yamaha office/warehouse in Cudahy, Wisconsin,
which represented approximately 6% of the Trust's investment portfolio in
1999 and 1998, compared to 5% in 1997, and generated 8% of the Trust's annual
revenue in 1999 compared to 7% in 1998 and 1997. Trust properties and
operations are summarized in the table on the next page.
The Trust's real estate investments are not expected to be substantially
affected by current federal, state or local laws and regulations establishing
ecological or environmental restrictions on the development and operations of
such property. However, the enactment of new provisions or laws may reduce
the Trust's ability to fulfill its investment objectives.
3
The trust's properties and operations are summarized in the table below.
Real Estate
Cost at
December 31, 1999 1999 Revenue Largest Tenant
------------------- ------------------ --------------------------------------------------------------
Percent of Percent of
Name of Lease Property Trust
Amount Percent Amount Percent Tenant Expiration Revenue Revenue Revenue
- --------------------------------------------------------------------------------------------------------------------------------
MANAGED
Kingsley Square
Orange Park, Florida $5,743,758 17% $627,373 14% OfficeMax 2012 $128,485 20% 3%
First Tuesday Mall
Carrollton, Georgia 7,184,057 21 892,196 19 Winn Dixie 2004 187,450 21 4
Mendenhall Commons
Memphis, Tennessee 8,795,032 25 1,022,472 22 Kroger 2012 638,501 62 14
North Park Plaza
Phoenix, Arizona 8,680,330 25 1,159,993 21 Safeway 2018 739,592 64 16
Presidential Drive
Atlanta, Georgia 2,016,596 6 389,330 8 Atlanta Dental Supply 2004 75,216 19 2
----------- ---- ---------- ---- ---------- ---
32,419,773 94 4,091,364 89 1,769,244 39
NET LEASED
Yamaha Warehouse
Cudahy, Wisconsin 2,197,937 6 371,100 8 Yamaha Motor Corp. 2000 371,100 100 8
Properties sold -- -- (21,391) --
Trust operations -- -- 140,095 3
----------- ---- ---------- ----
$34,617,710 100% $4,581,168 100% $2,140,344 47%
=========== ==== ========== ==== ========== ===
Recent Transactions
At Kingsley Square in Orange Park, Florida, the Trust has a lease with Publix
Super Markets for 34,400 square feet. In 1997 the Trust received written
notice from Publix that they planned to close their store and move to a new
location. In April 1999 Publix vacated their space. The Trust continued to
receive rent from Publix through its lease expiration in February 2000. The
Trust is attempting to secure a new tenant for this space. OfficeMax, a
current tenant at Kingsley square, has a lease provision that allows them to
pay rent based on their sales in the event an anchor tenant vacates. As a
result of Publix vacating their space, the Trust will be receiving
significantly less rent from OfficeMax.
Also at Kingsley Square, the Trust has a lease with Eckerd Drugs for 10,080
square feet. The Trust has received notice from Eckerd's stating their intent
to close the store on or about March 25, 2000. The Trust anticipates
receiving rent from Eckerd's for the remainder of the lease term, which
expires in February 2005.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential
Drive Business Park. The prepayment amount, including a 1% prepayment fee of
$7,065 to the lender, was $713,548. On February 5, 1999, the Trust prepaid
the mortgage loan on First Tuesday Mall. The prepayment amount, including a
1% prepayment fee of $4,637 to the lender, was $468,281.
On March 1, 1999, the mortgage loans payable on Mendenhall Commons and North
Park Plaza matured, with remaining principal balances of $3,930,120 and
$3,944,537, respectively. The Trust refinanced these properties with
Monumental Life Insurance Company, an affiliate of AEGON Realty Advisors. The
loan amount for Mendenhall was $3,925,000 with monthly debt service of
$30,430. The loan amount for North Park was $3,940,000 with monthly debt
service of $30,547. Debt service on both loans include principal amortization
over twenty years and interest at an initial rate of 7%, which is adjusted
quarterly based on three month LIBOR plus 2%. The loans originally matured on
March 1, 2000, but have been extended until May 1, 2000, and may be prepaid
at any time without penalty.
The Yamaha Warehouse facility in Cudahy, Wisconsin has a lease with Yamaha
Motor Corporation, its sole tenant. In March 1998, Yamaha exercised both of
their remaining one-year options in order to renew their lease for two more
years. The lease expires in June 2000. As of March 15, 2000, Yamaha has not
indicated their intent to renew.
4
The operating results and financial condition of the Trust greatly depend
upon all tenants continuing to pay rent, and the Trust's ability to renew
expiring tenant leases and obtain new leases at competitive rental rates.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
The Trust is not a party to any pending legal proceedings which, in the
opinion of management, are material to the Trust's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Distribution Information
The Trust is required to distribute at least 95% of its taxable income to
continue its qualification as a real estate investment trust. During 1999,
the Trust made distributions of $.08 per share on February 16 to shareholders
of record as of February 4, on May 24 to shareholders of record as of May 13,
on August 16 to shareholders of record as of August 6, and on November 29 to
shareholders of record as of November 16. Due to the pending transaction to
sell all of the Trust's real estate assets to AEGON Advisors, regular
quarterly distributions have been suspended. In connection with the proposed
sale of assets to AEGON Advisors, the Board of Trustees has adopted a plan of
liquidation. As a result, if the shareholders approve the sale of the real
estate assets to AEGON Advisors and the liquidation of the Trust at the
special meeting, all future distributions to shareholders will be considered
liquidating dividends.
5
Identification of Market and Price Range
At March 15, 2000, the Trust had 3,880,000 shares of beneficial interest
issued and outstanding to 1,837 shareholders of record. The Trust's shares of
beneficial interest are traded over-the-counter on the Nasdaq SmallCap Market
under the symbol USPTS. At March 15, 2000, the Trust's per share high and low
sales prices were $5.844 and $5.813, respectively, as obtained from
Wedbush/Morgan Securities, Inc., Newport Beach, California, Stifel Nicolaus,
St. Louis, Missouri, and Herzog, Heine, Geduld, Inc., New York, New York, the
principal market makers for shares of the Trust. These prices reflect
quotations between dealers without adjustment for retail mark-up, mark-down
or commission and do not necessarily represent actual transactions.
Market Price Range
OVER-THE-COUNTER SALES PRICES
QUARTER ENDED HIGH LOW CLOSE
- --------------------------- ------------ ----------- -----------
1999
----
March 31 4 1/4 3 3/4 3 7/8
June 30 5 3 13/16 4 1/4
September 30 5 13/16 4 5 15/32
December 31 5 13/16 5 15/32 5 21/32
1998
----
March 31 4 3/4 4 1/8 4 1/2
June 30 5 4 5/16 4 5/8
September 30 7 1/2 3 7/8 5 5/8
December 31 6 1/4 3 3/4 3 7/8
Income Tax Information
The percentages indicated below, multiplied by the amount of distributions
received or reinvested during the year, result in the amount to be reported
for income tax purposes. A Form 1099 is mailed to shareholders at the end of
each year reflecting the distributions paid by the Trust in that year.
Dividend Character
1999 1998 1997
- -----------------------------------------------------------------------------
Ordinary Income 83.77% 76.21% 50.75%
Capital Gains 16.23% 23.79% --
Return of Capital -- -- 49.25%
- -----------------------------------------------------------------------------
Total 100.00% 100.00% 100.00%
Distributions paid, per share $.32 $.32 $.32
6
Advisor
AEGON USA Realty Advisors, Inc.
Cedar Rapids, Iowa
Stock Transfer and Dividend Reinvestment Agent
USP Real Estate Investment Trust
c/o Boston EquiServe, L.P.
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
7
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $ 4,581,168 5,331,955 5,012,087 5,217,313 5,618,014
- ---------------------------------------------------------------------------------------------------------------------------
Earnings from Operations $ 1,061,376 943,975 637,129 946,230 1,100,149
Net Gain on Sale or Disposition of Property $ -- 528,282 259,157 -- --
------------------------------------------------------------------------
Net Earnings $ 1,061,376 1,472,257 896,286 946,230 1,100,149
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders $ 931,200 1,241,600 1,241,600 1,241,600 1,202,800
- ---------------------------------------------------------------------------------------------------------------------------
Per Share*
Earnings from Operations $ .27 .24 .16 .24 .28
Basic and Diluted Net Earnings $ .27 .38 .23 .24 .28
Distributions to Shareholders $ .24 .32 .32 .32 .31
- ---------------------------------------------------------------------------------------------------------------------------
Real Estate and Mortgage
Loans Receivable $23,267,496 23,816,859 28,571,464 29,627,786 30,434,137
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $26,380,141 27,932,493 31,104,418 32,207,728 32,853,270
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage Loans Payable $ 9,359,426 10,897,933 14,140,584 14,819,479 15,271,385
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities $10,149,360 11,831,888 15,234,470 15,992,466 16,342,638
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity $16,230,781 16,100,605 15,869,948 16,215,262 16,510,632
- ---------------------------------------------------------------------------------------------------------------------------
*Per share amounts for Earnings from Operations and Basic and Diluted Net
Earnings are based on the weighted average number of shares outstanding for
each period. Per share amounts for Distributions to Shareholders are based on
the actual number of shares outstanding on the respective record dates.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion that follows should be read in the general context of the
discussion in "Item 1. Business" and "Item 2. Properties," particularly the
description of "Recent Transactions" in Item 2.
Results of Operations
The Trust owns shopping centers, an office park and an office warehouse
facility in six U.S. cities. The Trust's properties continue to compete with
centers and office buildings of similar size, tenant mix and location. As of
December 31, 1999, the combined leased occupancy of the Trust's six
properties was 94%. Operating results in the forthcoming year will be
influenced by the ability of current tenants to continue paying rent, and the
Trust's ability to renew expiring tenant leases and obtain new leases at
competitive rental rates.
8
1999 COMPARED TO 1998
The Trust's net earnings for the year ended December 31, 1999 were $1,061,376
($.27 per share) compared to $1,472,257 ($.38 per share) for the year ended
December 31, 1998. The net earnings for 1998 include a net gain on sale of
$528,282 ($.14 per share) from the sale of Geneva Square Shopping Center in
December 1998. (All per share amounts are on a basic and diluted basis.)
Rental income was $4,441,073 in 1999 compared to $5,218,707 in 1998. This
decrease of $777,634 was primarily attributed to the sale of Geneva Square.
Rental income for properties owned in both years increased by $45,901.
Interest income was $140,095 in 1999 compared to $113,248 in 1998, an
increase of $26,847 due to a larger balance of funds available for investment.
Property expenses before depreciation were $1,461,734 in 1999 compared to
$1,634,237 in 1998, representing 33% of rental income for 1999 and 31% of
rental income for 1998. As a percentage of rental income, such expenses
increased primarily because rents declined more than expenses. Expenses for
properties owned in both years increased by $59,606 primarily attributed to
repairs and maintenance for parking lots at several properties and tenant
remodeling expenses. The decrease in other expenses is due to fewer lease
commissions and lower advertising expenses. In 1998, an unamortized lease
commission of approximately $46,000 was written off when a tenant defaulted
on its lease. Advertising decreased from 1998 as the Trust incurred
approximately $30,000 in promoting Martin's Family Clothing which began
occupancy at First Tuesday Mall in 1998.
Depreciation expense decreased by $172,781 due to the sale of Geneva Square.
Interest expense declined by $540,751 due to the sale of Geneva Square and
due to the Trust prepaying the mortgage loans in February 1999 on
Presidential Drive Business Park and First Tuesday Mall. The administrative
fee, which is primarily based on the Trust's gross real estate investments,
decreased by $30,756 due to the sale of Geneva Square. Other administrative
expenses increased by $48,603 due to a $100,000 fairness opinion incurred in
connection with the anticipated transaction to sell all of the real estate
assets to AEGON Advisors.
1998 COMPARED TO 1997
The Trust's net earnings for the year ended December 31, 1998 were $1,472,257
($.38 per share) compared to $896,286 ($.23 per share) for the year ended
December 31, 1997. The net earnings for 1998 include a net gain on sale of
$528,282 ($.14 per share) from the sale of Geneva Square Shopping Center in
December 1998. The net earnings for 1997 include a net gain of $259,157 ($.07
per share) realized from a previously deferred installment sale. (All per
share amounts are on a basic and diluted basis.) The increase in net earnings
is primarily due to the gain from the sale of Geneva Square and rent
settlements collected in 1998 from two previous tenants at Geneva Square.
Rental income was $5,218,707 in 1998 compared to $4,802,974 in 1997. This
increase of $415,733 was primarily due to the receipt of settlements in the
amount of $333,000 from two previous tenants at Geneva Square. Rental income
increased by $175,415 at Kingsley Square in Orange Park, Florida due to
OfficeMax, which began paying rent in May 1997. Rents at North Park Plaza
Shopping Center in Phoenix, Arizona increased by $86,519 but was offset by a
$78,228 decrease at First Tuesday Mall in Carrollton, Georgia.
Interest income was $113,248 in 1998 compared to $209,113 in 1997, a decrease
of 46% due a lower balance of funds available for investment.
Property expenses before depreciation were $1,634,237 in 1998 compared to
$1,705,298 in 1997, representing 31% of rental income for 1998 and 36% of
rental income for 1997. Real estate taxes decreased by 8% as all properties
experienced a reduction in property taxes. Repairs and maintenance expenses
decreased by $102,978 or 19% due to tenant improvements made in 1997. Other
property expenses increased by $66,132 or 43% primarily due to an increase in
lease commissions, particularly at First Tuesday where unamortized lease
commissions pertaining to Luria's, a former tenant, were written off in 1998.
9
Interest expense declined by $68,306 from 1997 to 1998 due to the normal
amortization of mortgage loans payable and due to the underlying mortgage
loan on College Square, which was assigned in December 1997. Other
administrative expenses increased by $128,517 in 1998 primarily due to legal
fees in connection with the Trust's efforts to maximize shareholder value. As
previously reported, the Board of Trustees has been exploring various
strategic alternatives with the intent to maximize shareholder value. Raymond
James & Associates, Inc. has been engaged as financial advisor to assist the
Trust with these ongoing efforts.
Cash Flow and Funds from Operations
The Trust has for several years used "funds from operations" as a measurement
of operating performance. Funds from operations is defined by the Trust as
earnings from operations plus depreciation expense. Funds from operations
does not represent operating income or cash flows from operations as defined
by accounting principles generally accepted in the United States, and should
not be construed as an alternative to operating income as an indicator of
operating performance or to cash flows as a measure of liquidity. Management
generally considers funds from operations to be a useful financial
performance measure which, together with earnings, cash flows and other
information, may be used by investors to evaluate the Trust. Funds from
operations as presented by the Trust may not be comparable to similarly
titled measures reported by other companies. The Trust's funds from
operations for the three years ended December 31, 1999 and other property
information are presented on the next page.
Sale of Assets
In January 2000, the Trust signed a contract to sell all of its real estate
assets to AEGON Advisors, the Trust's advisor and a subsidiary of AEGON USA,
Inc., the Trust's largest shareholder which owns approximately 30.86% of the
Trust's outstanding shares, for a total purchase price of $33,500,000. The
sale of the real estate assets of the Trust is conditioned upon shareholder
approval of the sale, as well as shareholder approval of the subsequent
liquidation of the Trust and distribution of the proceeds of the sale to the
shareholders. A notice of a special meeting of the shareholders and a proxy
statement containing details of the proposed transaction will be sent to all
shareholders pending a filing with the Securities and Exchange Commission.
The transaction is anticipated to be completed in the second quarter of 2000,
resulting in an expected liquidating distribution in excess of $6.00 per
share. Shareholder approval of the liquidation of the Trust will result in
termination of the Trust. Neither the sale of assets nor the liquidation will
occur unless both are approved at the special meeting.
10
SQ. FT.
SIZE LEASE EXPIRING FUNDS FROM OPERATIONS*
NAME AND LOCATION (SQ. FT.) EXPIRATION IN 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
MANAGED
Kingsley Square, Orange Park, Florida 115,025 2000-2012 40,745 $ 309,825 456,334 211,012
First Tuesday Mall, Carrollton, Georgia 180,371 2000-2008 5,650 533,326 443,774 594,006
Mendenhall Commons, Memphis, Tennessee 80,184 2000-2012 1,100 406,496 256,895 320,796
North Park Plaza, Phoenix, Arizona 100,748 2000-2018 5,409 446,147 337,055 273,077
Presidential Drive Business Park, Atlanta, Georgia 62,581 2000-2006 18,880 250,888 153,081 124,227
------- ------- ---------- --------- ---------
538,909 71,784 1,946,682 1,647,139 1,523,118
NET LEASED
Yamaha Warehouse, Cudahy, Wisconsin 140,040 2000 140,040 226,245 217,383 208,134
------- ------- ---------- --------- ---------
Total 678,949 211,824 2,172,927 1,864,522 1,731,252
======= =======
Properties sold (27,867) 334,837 (58,464)
Non-property Trust operations, net (425,133) (424,052) (229,326)
---------- --------- ---------
Funds from operations $1,719,927 1,775,307 1,443,462
========== ========= =========
*Earnings from operations plus depreciation
Liquidity and Capital Resources
The Trust's capital resources consist of its current equity in real estate
investments. The Trust maintains its properties in good condition and
provides adequate insurance coverage. Liquidity is represented by cash and
cash equivalents ($2,369,176 at December 31, 1999) and the continued
operation of the Trust's real estate portfolio. This liquidity is considered
sufficient to meet current obligations, which include capital expenditures.
Net cash provided by operating activities, as shown in the Statements of Cash
Flows, was $1,810,891 for the year ended December 31, 1999. Major
applications of cash in 1999 included $1,241,600 for distributions to
shareholders and $1,538,507 in principal payments on mortgage loans payable.
The Trust's debt service commitments for mortgage loans payable are described
in Note 7 to the Financial Statements.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential
Drive Business Park. The prepayment amount, including a 1% prepayment fee of
$7,065 to the lender, was $713,548. On February 5, 1999, the Trust prepaid
the mortgage loan on First Tuesday Mall. The prepayment amount, including a
1% prepayment fee of $4,637 to the lender, was $468,281.
The Board of Trustees continues to monitor occupancy, leasing activity, cash
flow, overall Trust operations, liquidity, and financial condition in
determining quarterly distributions to shareholders. In January 2000, the
Board of Trustees suspended quarterly distributions pending the sale of
assets to AEGON Advisors.
Inflation
Low to moderate levels of inflation during the past few years have favorably
impacted the Company's operation by stabilizing operating expenses. At the
same time, low inflation has the indirect effect of reducing the Company's
ability to increase tenant rents. The Trust's properties have tenants whose
leases include expense reimbursements and other provisions to minimize the
effect of inflation. These factors, in the long run, are expected to result
in more attractive returns from the Trust's real estate portfolio compared to
short-term investment vehicles.
11
Impact of Year 2000
The Trust does not own or use any information technology directly, because
all services necessary to conduct the day-to-day operations of the Trust are
performed by AEGON Advisors and its affiliates. In late 1999, AEGON Advisors
completed its remediation and testing of systems. As a result of AEGON
Advisors' planning and implementation efforts, the Trust experienced no
significant disruptions in mission critical information technology and
non-information technology systems, and believes those systems successfully
responded to the Year 2000 date change. In addition, the Trust has not been
adversely affected by computer systems, as well as certain embedded
technology, used by tenants, vendors, financial institutions and other third
parties as a result of systems not properly processing or calculating
date-related information and data from and after January 1, 2000. The Trust
did not incur any direct costs associated with Year 2000 issues.
Forward Looking Information
This Form 10-K Annual Report contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent our expectations or beliefs relating to anticipated
financial performance, business prospects and our plans for future
operations, which are subject to various risks and uncertainties. When used
in this Form 10-K and in future filings by the Trust with the Securities and
Exchange Commission, in our press releases, presentations to securities
analysts or investors, in oral statements made by or with the approval of an
executive officer of the Trust, the words or phrases "believes," "may,"
"will," "expects," "should," "continue," "anticipates," "intends," "will
likely result," "estimates," "projects," or similar expressions and
variations thereof are intended to identify such forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for these types of statements. In order to comply with the terms of the safe
harbor, the Trust notes that a variety of factors could cause the Trust's
actual results and experiences to differ materially from the anticipated
results or other expectations expressed in the Trust's forward-looking
statements. The risks and uncertainties that may affect the operations,
performance, and results of the Trust's business, in addition to those
identified under "Impact of Year 2000" and "Sale of Assets" include but are
not limited to the following:
* The Trust's ability to renew expiring tenant leases and obtain new
leases at competitive rental rates.
* Changes in interest rates which will affect the amount of interest
paid on mortgage loans.
* The Trust's ability to refinance mortgage loans which require
balloon payments.
* The ability to complete the anticipated sale of real estate assets
to AEGON Advisors.
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Trust is interest rate risk on its
mortgage loans payable. The Trust does not hedge interest rate risk using
financial instruments nor is the Trust subject to foreign currency risk.
The following table sets forth the Trust's long term debt obligations,
principal cash flows by scheduled maturity, weighted average interest rates
and estimated fair market value ("FMV") at December 31, 1999:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002 Total FMV
------------ ------------ --------- ------------ ------------
Long Term Debt:
Fixed Rate $ 169,083 $ 1,438,920 $ 2,015 $ 1,610,018 $1,652,733
Variable Rate $7,749,408 -- -- $ 7,749,408 $7,762,119
Average Interest Rate 9.08% 10.00% 10.00% 10.00%
The fair value of the Trust's mortgage loans payable is estimated based on
the discounting of future cash flows at interest rates that management
believes reflects the risks associated with mortgage loans payable at similar
risk and duration.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance Sheets
December 31
1999 1998
- ----------------------------------------------------------------------------------------------------
ASSETS
Real estate
Land $ 9,189,243 9,189,243
Buildings and improvements 25,428,467 25,319,279
- ----------------------------------------------------------------------------------------------------
34,617,710 34,508,522
Less accumulated depreciation (11,350,214) (10,691,663)
- ----------------------------------------------------------------------------------------------------
23,267,496 23,816,859
Cash and cash equivalents 2,369,176 3,423,296
Rents and other receivables 499,810 397,822
Prepaid and deferred expenses 243,659 275,653
Taxes held in escrow -- 18,863
- ----------------------------------------------------------------------------------------------------
$ 26,380,141 27,932,493
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans payable $ 9,359,426 10,897,933
Accounts payable and accrued expenses 665,387 418,204
Due to affiliates 31,935 115,722
Distribution declared -- 310,400
Tenant deposits 86,259 78,701
Other 6,353 10,928
- ----------------------------------------------------------------------------------------------------
10,149,360 11,831,888
- ----------------------------------------------------------------------------------------------------
Shareholders' Equity
Shares of beneficial interest, $1 par value,
20,000,000 shares authorized, 3,880,000
shares issued and outstanding 3,880,000 3,880,000
Additional paid-in capital, net of cumulative
distributions in excess of earnings
of $16,411,501 in 1999 and 1998 11,989,948 11,989,948
Undistributed net earnings 360,833 230,657
- ----------------------------------------------------------------------------------------------------
16,230,781 16,100,605
- ----------------------------------------------------------------------------------------------------
$ 26,380,141 27,932,493
====================================================================================================
See the accompanying notes to financial statements.
14
Statements of Earnings
Year Ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
REVENUE
Rents $4,441,073 5,218,707 4,802,974
Interest 140,095 113,248 209,113
- -----------------------------------------------------------------------------------------------------------
4,581,168 5,331,955 5,012,087
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Property expenses:
Real estate taxes 478,570 561,818 610,322
Repairs and maintenance 507,444 446,787 549,765
Utilities 112,716 113,939 122,754
Management fee 203,500 241,877 221,935
Insurance 29,884 50,299 47,137
Other 129,620 219,517 153,385
- -----------------------------------------------------------------------------------------------------------
Property expenses, excluding depreciation 1,461,734 1,634,237 1,705,298
Depreciation 658,551 831,332 806,333
- -----------------------------------------------------------------------------------------------------------
Total property expenses 2,120,285 2,465,569 2,511,631
Interest 834,280 1,375,031 1,443,337
Administrative fee 173,831 204,587 205,714
Other administrative 391,396 342,793 214,276
- -----------------------------------------------------------------------------------------------------------
3,519,792 4,387,980 4,374,958
- -----------------------------------------------------------------------------------------------------------
Earnings from operations 1,061,376 943,975 637,129
Net gain on sale of property --- 528,282 259,157
- -----------------------------------------------------------------------------------------------------------
Net earnings $1,061,376 1,472,257 896,286
===========================================================================================================
Basic and diluted net earnings per share $ .27 .38 .23
===========================================================================================================
Distributions to shareholders $ 931,200 1,241,600 1,241,600
===========================================================================================================
Distributions to shareholders per share $ .24 .32 .32
===========================================================================================================
See the accompanying notes to financial statements.
15
Statements of Cash Flows
Years Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Rents collected $ 4,331,090 5,219,180 4,825,238
Interest received 140,095 113,248 216,650
Payments for operating expenses (1,829,379) (2,139,822) (2,283,645)
Interest paid (830,915) (1,371,666) (1,439,972)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,810,891 1,820,940 1,318,271
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from property sales, net of closing costs -- 4,479,835 --
Capital expenditures (109,188) (28,280) (1,010,937)
Principal collections on mortgage loans receivable -- -- 28,094
Principal repayment on mortgage loans receivable -- -- 1,298,008
Other, net 24,284 28,625 (34,135)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (84,904) 4,480,180 281,030
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal portion of scheduled mortgage loan payments (368,380) (438,861) (484,914)
Principal prepayment on mortgage loans payable (1,170,127) (2,803,790) --
Distributions paid to shareholders (1,241,600) (1,241,600) (1,241,600)
- ------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (2,780,107) (4,484,251) (1,726,514)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,054,120) 1,816,869 (127,213)
Cash and cash equivalents at beginning of year 3,423,296 1,606,427 1,733,640
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,369,176 3,423,296 1,606,427
==================================================================================================================
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 1,061,376 1,472,257 896,286
Gain on sale of property -- (528,282) (259,157)
- ------------------------------------------------------------------------------------------------------------------
Earnings from operations 1,061,376 943,975 637,129
Add (deduct) reconciling adjustments:
Depreciation 658,551 831,332 806,333
Amortization 3,365 3,365 3,365
Decrease (increase) in rents and other receivables (105,408) 33,823 26,608
Decrease (increase) in prepaid and deferred expenses 15,323 32,106 (80,011)
Decrease (increase) in taxes held in escrow 18,863 134,153 (6,145)
Increase (decrease) in accounts payable and accrued expenses 247,183 (142,713) (123,228)
Increase (decrease) in due to affiliates (83,787) 18,249 51,027
Increase (decrease) in advance rents (4,575) (33,350) 3,193
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,810,891 1,820,940 1,318,271
==================================================================================================================
See the accompanying notes to financial statements.
16
Statements of Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------------
Shares of Additional Undistributed Total
Beneficial Paid-In Net Shareholders'
Interest Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 $3,880,000 12,018,890 316,372 16,215,262
Net earnings -- -- 896,286 896,286
Distributions to shareholders -- (28,942) (1,212,658) (1,241,600)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $3,880,000 11,989,948 -- 15,869,948
Net earnings -- -- 1,472,257 1,472,257
Distribution to Shareholders -- -- (1,241,600) (1,241,600)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $3,880,000 11,989,948 230,657 16,100,605
Net earnings -- -- 1,061,376 1,061,376
Distribution to Shareholders -- -- (931,200) (931,200)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $3,880,000 11,989,948 360,833 16,230,781
=========================================================================================================================
See the accompanying notes to financial statements.
17
Notes to Financial Statements
1. Accounting Policies
The Trust is predominantly in the business of investing in real estate.
Investments in real estate are stated at cost. The Trust provides an
allowance for valuation of real estate when it is determined that the values
have permanently declined below recorded book value.
The Trust records impairment losses when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by the real estate
are less than their carrying amount. If real estate is considered to be
impaired, its carrying amount is written down to fair value and recognized as
a net loss on property in the statement of earnings.
Expenditures for repairs and maintenance which do not add to the value or
extend the useful life of property are expensed when incurred. Additions to
existing properties, including replacements, improvements and expenditures
which do add to the value or extend the useful life of property, are
capitalized. Depreciation is calculated using the straight-line method over
the estimated useful lives of the respective assets.
The Trust follows the operating method of accounting for leases, whereby
scheduled rental income is recognized on a straight-line basis over the lease
term. Contingent rental income is recognized in the period in which it
arises. Interest on mortgage loans receivable and amortization of discounts
are recognized as income over the period the respective loans are
outstanding. The Trust provides for possible losses on mortgage loans, rents
and other receivables when it is determined that collection of such
receivables is doubtful. Rents and other receivables are stated net of an
allowance for uncollectible accounts of $185,494 in 1999 and $224,938 in
1998. Cash equivalents include investments with original maturities of three
months or less.
Gains on real estate sales are recognized for financial accounting purposes
in accordance with Statement of Financial Accounting Standard No. 66,
ACCOUNTING FOR SALES OF REAL ESTATE. Deferred gains are recognized as income
using the installment method.
Since the Trust has no potentially dilutive securities outstanding, basic and
diluted net earnings per share in accordance with Statement of Financial
Accounting Standard No. 128, EARNINGS PER SHARE, are the same.
During 1997, the Financial Accounting Standards Board issued Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
Statement No. 131 establishes standards for reporting information about
operating segments, products and markets. Generally, Statement No. 131
requires financial information to be reported on the basis on which it is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement, which was required to be
adopted by the Trust during 1998, had no impact on the financial statements
as the Trust has only one operating segment, which involves the direct
ownership of commercial real estate properties substantially on a managed
basis.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. The actual results of the Trust
could differ as a result of those estimates.
18
2. Fair Values of Financial Instruments
Statement of Financial Accounting Standard No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information
about financial instruments.
The following methods and assumptions were used by the Trust in estimating
its fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and cash equivalents
approximates their fair values.
MORTGAGE LOANS PAYABLE: The fair values of mortgage loans payable are
estimated utilizing discounted cash flow analysis, using interest rates
reflective of current market conditions and the risk characteristics of the
loans.
The following sets forth a comparison of the fair values and carrying values
of the Trust's financial instruments subject to the provisions of Statement
of Financial Accounting Standard No. 107:
1999 1998
---------------------------- -----------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------------------------- -----------------------------
Assets
Cash and cash equivalents $2,369,176 2,369,176 3,423,296 3,423,296
Liabilities
Mortgage loans payable $9,359,426 9,414,852 10,897,933 11,265,751
3. Real Estate
Investments in real estate consist entirely of managed and net leased
commercial property. Information regarding the Trust's investment in each
property is presented in the Schedule of Real Estate and Accumulated
Depreciation below.
Schedule of Real Estate and Accumulated Depreciation
GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO TRUST DECEMBER 31, 1999
--------------------- -----------------------------
SUBSEQUENT
AMOUNT OF BUILDINGS & COST BUILDINGS & ACCUMULATED
PROPERTY DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION
- -----------------------------------------------------------------------------------------------------------------------------
MANAGED
Kingsley Square $223,171 450,000 3,311,660 1,982,098 450,000 5,293,758 5,743,758 2,734,366
Orange Park, FL
First Tuesday Mall -- 595,000 4,347,697 2,241,360 600,392 6,583,665 7,184,057 3,839,951
Carrollton, GA
Mendenhall Commons 3,867,315 3,134,692 5,597,340 63,000 3,134,692 5,660,340 8,795,032 1,533,865
Memphis, TN
North Park Plaza 3,882,094 4,635,147 4,018,353 26,830 4,633,382 4,046,948 8,680,330 1,091,233
Phoenix, AZ
Presidential Drive -- 344,58 1,424,30 247,714 344,582 1,672,014 2,016,59 694,533
Atlanta, GA
-------------------------------------------------------------------------------------------------------
7,972,580 9,159,421 18,699,350 4,561,002 9,163,048 23,256,725 32,419,773 9,893,948
NET LEASED
Yamaha Warehouse 1,386,846 26,19 755,756 1,415,986 26,19 2,171,742 2,197,93 1,456,266
Cudahy, WI
-------------------------------------------------------------------------------------------------------
Total $9,359,426 9,185,616 19,455,106 5,976,988 9,189,243 25,428,467 34,617,710 11,350,214
=======================================================================================================
LIFE ON
WHICH
DEPRECIATION
DATE DATE IS COMPUTED
PROPERTY DESCRIPTION BUILT ACQUIRED (IN YEARS)
- ---------------------------------------------------------
MANAGED
Kingsley Square 1975-76 7/79 10-40
Orange Park, FL
First Tuesday Mall 1975-78 7/79 10-40
Carrollton, GA
Mendenhall Commons 1987 2/89 10-40
Memphis, TN
North Park Plaza 1963 2/89 10-40
Phoenix, AZ
Presidential Drive 1980 12/84 10-35
Atlanta, GA
NET LEASED
Yamaha Warehouse 1971 2/72 15-40
Cudahy, WI
Total
The above properties are all shopping centers except for Presidential Drive
which is a business park and Yamaha Warehouse which is an office/warehouse.
19
The activity in real estate and related depreciation for the three years ended
December 31, 1999 is summarized in the table below.
REAL ESTATE YEARS ENDED DECEMBER 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------
COST
Beginning of year $ 34,508,522 40,694,216 39,683,279
Additions during year
Improvements 109,188 28,280 1,010,937
Deductions during year
Property sales -- (6,213,974) --
- --------------------------------------------------------------------------------------------------
End of year $ 34,617,710* 34,508,522 40,694,216
- --------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION
Beginning of year $ 10,691,663 12,122,752 11,316,419
Additions during year
Depreciation expense 658,551 831,332 806,333
Deductions during year
Property sales -- (2,262,421) --
- --------------------------------------------------------------------------------------------------
End of year $ 11,350,214 10,691,663 12,122,752
- --------------------------------------------------------------------------------------------------
*The aggregate cost for federal income tax purposes is $34,751,420.
Wholly owned managed properties with an aggregate cost of $32,419,773 are
leased to tenants pursuant to lease agreements under which the Trust incurs
normal real estate operating expenses associated with ownership. Yamaha
Warehouse, a wholly-owned property with an aggregate cost of $2,197,937 is
leased under a net lease agreement which requires the lessee to pay cash
rental, property taxes and other expenses incurred in connection with the
operation of the property.
In 1999, the Trust incurred capital expenditures of $109,188. The
improvements consisted of $93,714 for tenant build-outs at Presidential Drive
Business Park and $15,474 for roof repairs at First Tuesday Mall. In 1998,
the Trust incurred capital expenditures of $28,280 for parking lot
improvements at First Tuesday Mall.
On December 22, 1998, the Trust sold Geneva Square, a 143,676 square foot
shopping center located in Lake Geneva, Wisconsin. The sale price was
$4,500,000 from which the Trust paid selling expenses of $20,165 and retired
mortgage indebtedness on the property of $2,803,790. Gain on the sale was
$528,282.
20
4. Mortgage Loans Receivable
Mortgage loans receivable consisted of notes received from financing property
sales and were secured by the properties sold, subject to any underlying
mortgage loans payable. The Trust received mortgage loans receivable of
$1,650,000 as part of the consideration for the sales of Hickory Hills and
College Square in 1990 and retained a mortgage payable on the property.
Accordingly, the gain on this sale was deferred. The mortgage loans
receivable matured on December 20, 1997 and had yielded 9.5% to the Trust.
Upon maturity of these mortgage loans receivable, the Trust assigned the
underlying mortgage loan payable on College Square to the mortgagee. As a
result of the assignment, the proceeds from the College Square mortgage loan
receivable were reduced by the outstanding mortgage loan payable of $193,981.
The activity in mortgage loans receivable for the year ended December 31,
1997 (there was no activity in 1998 or 1999) is summarized in the table below.
MORTGAGE LOANS RECEIVABLE
DECEMBER 31,
1997
- -------------------------------------------------------------------------
PRINCIPAL
Beginning of year $ 1,520,083
Deductions during year
Principal collections (28,094)
Principal repayment (1,491,989)
- -------------------------------------------------------------------------
Balance at end of year $ --
- -------------------------------------------------------------------------
5. Cash and Cash Equivalents
At December 31, 1999, cash and cash equivalents consisted of cash of $1,333
and a money market fund of $2,367,843. At December 31, 1998, cash and cash
equivalents consisted of cash of $548 and a money market fund of $3,422,748.
6. Transactions With Affiliates
The Trust has contracted with AEGON USA Realty Advisors, Inc. ("AEGON
Advisors") to provide administrative services for a base fee of 5/8% of the
average gross real estate investment plus 1/4% of the monthly balance of
mortgage loans receivable and an incentive fee of 20% of annual adjusted cash
flow from operations in excess of $.72 per share. If the annual adjusted cash
flow from operations is less than $.72 per share, then the payment of so much
of the base fee is to be deferred so that revised cash flow from operations
will be equal to $.72 per share; provided, however, in no event shall the
amount deferred exceed 20% of the previously determined base fee. Any
deferred fees may be paid in subsequent years (subject to certain limits).
Annual adjusted cash flow from operations, as defined for purposes of the
incentive fee, includes the net realized gain (or loss) from the disposition
of property, adjusted to exclude accumulated depreciation (otherwise stated
as gain in excess of cost without reduction for allowable depreciation). The
administrative fee is limited to 1 1/2% of average quarterly net invested
assets. The administrative agreement is for a one-year term, automatically
renewed annually and cancelable by either party upon 90 days written notice.
Amounts paid to AEGON Advisors for administrative services were: $173,831 for
1999, $204,587 for 1998, and $205,714 for 1997. No incentive fees were paid
in 1999, 1998 or 1997.
AEGON Advisors also provides real estate acquisition and disposition services
for the Trust. A negotiated fee of 2% to 4% of the cost is charged for
properties acquired. No separate fee is charged for property dispositions.
There were no acquisition fees paid in 1999, 1998 or 1997.
21
AEGON USA Realty Management, Inc. ("AEGON Realty Management"), a wholly-owned
subsidiary of AEGON Advisors, provided property management services to the
Trust for a fee of 5% of the gross income of each managed property. The
property management agreement is for a one-year term, automatically renewed
annually and cancelable upon a 30-day written notice from either party. On
December 31, 1998, AEGON Realty Management was merged with and into AEGON
Advisors and the property management agreement was assumed by AEGON Advisors.
Amounts paid for property management services were $203,500 for 1999,
$241,877 for 1998, and $221,935 for 1997.
AEGON Advisors previously provided dividend disbursement, stock certificate
preparation, recordkeeping and other shareholder services to the Company for
a quarterly fee of $1.25 per shareholder account, $.75 per shareholder
account for distributions processed, $.50 per shareholder account for proxy
tabulation, and such other compensation for services performed as from time
to time agreed to by the parties. The Trust paid AEGON Advisors $21,376 and
$21,658 in shareholder service fees for 1998 and 1997, respectively. AEGON
Advisors had subcontracted with Boston EquiServe, L.P., a subsidiary of State
Street Bank and Trust Company, for delivery of these services. Effective
January 1, 1999, the Trust contracted directly with Boston EquiServe, L.P.
and terminated the agreement with AEGON Advisors.
The mortgage loan on the Trust's Presidential Drive property was with AUSA
Life Insurance Company, Inc., an affiliate of AEGON Advisors. Interest paid
on the mortgage was $13,124 in 1999, $74,575 in 1998, and $77,779 in 1997.
This mortgage loan was prepaid on February 1, 1999. (See Note 7.) In
addition, the mortgage loan on Geneva Square was with PFL Life Insurance
Company, an affiliate of AEGON Advisors. Interest paid on the mortgage was
$228,562 in 1998 and $235,842 in 1997. Geneva Square was sold in December
1998.
On March 1, 1999, the mortgage loans on Mendenhall Commons and North Park
Plaza matured at which time the Trust obtained financing from Monumental Life
Insurance Company ("Monumental"), an affiliate of AEGON Advisors, for these
properties. (See Note 7.) Interest paid on the mortgage loans was $229,163 in
1999 for Mendenhall Commons and $230,039 in 1999 for North Park Plaza.
On January 20, 2000, the Trust entered into a Real Estate Sale and Purchase
Contract to sell all of the real estate assets of the Trust to AEGON Advisors
for a total purchase price of $33,500,000. (See Note 11.)
AEGON Advisors is an indirect wholly-owned subsidiary of AEGON USA, Inc.
which, through other wholly-owned subsidiaries, beneficially owns
approximately 30.86% of the outstanding shares of the Trust at December 31,
1999.
7. Mortgage Loans Payable
Mortgage loan obligations, secured by the real estate owned, carry annual
interest rates ranging from 8.115% to 10.125%.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential
Drive Business Park. The prepayment amount, including a 1% prepayment fee of
$7,065 to the lender, was $713,548. The annual debt service on this mortgage
was $107,604, including interest at 10.25%. On February 5, 1999, the Trust
prepaid the mortgage loan on First Tuesday Mall. The prepayment amount,
including a 1% prepayment fee of $4,637 to the lender, was $468,281. The
annual debt service on this mortgage was $115,128, including interest at
9.25%.
On March 1, 1999, the mortgage loans on Mendenhall Commons and North Park
Plaza matured, requiring principal repayments of $3,930,120 and $3,944,537,
respectively. On March 15, 1999, the Trust refinanced these mortgage loans
with Monumental. The loan amount for Mendenhall Commons was $3,925,000 with
monthly debt service of $30,430. The loan amount for North Park Plaza was
$3,940,000 with monthly debt service of $30,547. Information regarding each
mortgage is presented in the Schedule of Mortgage Loans on Real Estate below.
Schedule of Mortgage Loans on Real Estate
22
PERIODIC PAYMENT TERMS
-----------------------------------------
ANNUAL CARRYING
STATED FINAL PRINCIPAL BALLOON PREPAYMENT FACE AMOUNT AMOUNT OF
DATE OF INTEREST MATURITY AND PAYMENT AT PENALTY OF MORTGAGE MORTGAGE AT
PROPERTY DESCRIPTION NOTE RATE DATE INTEREST MATURITY PROVISIONS* AT ACQUISITION DEC. 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
MANAGED
Kingsley Square 2/77 10% 2/02 $76,370 $ -- Feb. 99 to Feb. 00 $ 700,00 $ 139,568
Orange Park, FL penalty is 5.0%,
(two loans) declining .5% per
year to 4% thereafter
8/75 10% 8/00 163,650 -- 5.0% 1,500,000 83,603
Mendenhall Commons 3/99 8.115% *** 3/00 ** 365,166 3,858,737 None 3,925,000 3,867,315
Memphis, TN
North Park Plaza 3/99 8.115% *** 3/00 ** 366,561 3,873,483 None 3,940,000 3,882,094
Phoenix, AZ
---------------------- --------------------------
971,747 7,732,220 10,065,000 7,972,580
NET LEASED
Yamaha Warehouse 12/90 10.125% 1/01 159,627 1,366,721 Excess of loan rate 1,500,000 1,386,846
Cudahy, WI over U.S. Treasury
Bill rate
---------------------- --------------------------
$1,131,374 $9,098,941 $11,565,000 $9,359,426
====================== ==========================
* Percentages are of the principal amount at time of prepayment.
** Loan extended through May 1, 2000 under original terms.
*** Variable loan rate adjusted quarterly equal to 3 month LIBOR plus 2%.
23
The activity in mortgage loans payable for the three years ended December 31,
1999 is summarized in the table below.
Mortgage Loans Payable
YEARS ENDED DECEMBER 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
Beginning of year $10,897,933 14,140,584 14,819,479
Additions during year
New mortgage loans on refinancing 7,865,000 -- --
Deductions during year
Principal payments (368,380) (438,861) (484,914)
Prepayments and maturities (9,035,127) (2,803,790) (193,981)
- ----------------------------------------------------------------------------------------------------
Balance at end of year $9,359,426 10,897,933 14,140,584
- ----------------------------------------------------------------------------------------------------
Scheduled monthly payments will substantially amortize the principal balances
of the mortgage loans over their respective terms with the exception of
balloon payments at maturity. Amortized payments on the outstanding balances
due, including balloon repayments at maturity, are summarized as follows:
AMORTIZED PAYMENTS
YEAR PAYMENTS AT MATURITY
- -----------------------------------------------------
2000 $186,271 $7,732,220
2001 72,199 1,366,721
2002 2,015 --
24
8. Leased Assets
The Trust is lessor of various properties as described in Note 3. Certain
properties are leased to tenants under long-term, non-cancelable operating
lease agreements. Future minimum lease rentals to be received under the terms
of these lease agreements are as follows:
YEAR AMOUNT
- -----------------------------------------
2000 $3,053,873
2001 2,550,264
2002 2,185,604
2003 2,089,728
2004 1,641,237
2005-2018 10,732,689
Contingent rentals included in income received in connection with operating
leases were $38,268, $136,446, and $134,343 for the years ended December 31,
1999, 1998 and 1997, respectively. Such rentals are based principally on
tenant sales in excess of stipulated minimums. In 1999, 1998, and 1997, the
Trust derived 10% or more of its revenue from Kroger Company at Mendenhall
Commons and from Safeway at North Park Plaza. The revenue from these tenants
was $638,501 and $739,592 in 1999, $644,083 and $625,034 in 1998, and
$587,097 and $581,028 in 1997, respectively.
In April 1999, Publix Supermarkets closed its store at Kingsley Square. When
Publix vacated, Office Max exercised its right under the terms of its lease
to go to percentage rents.
9. Federal Income Taxes
The Trust conducts its operations so as to qualify as a real estate
investment trust under the Internal Revenue Code which requires, among other
things, that at least 95% of the Trust's taxable income be distributed to
shareholders. The Trust has historically distributed all of its taxable
income. Distributions made in 1999 were used to meet the Internal Revenue
Code distribution requirements for 1999. Accordingly, no provision has been
made for federal income taxes since the Trust did not have taxable income
after the deductions allowed for distributions to shareholders.
Certain property acquisitions have resulted in the basis of those properties
being determined differently for financial accounting purposes than for
income tax purposes. The differing methods of determination of basis in these
transactions have resulted in the tax basis of certain properties being
higher or lower than the financial basis. At December 31, 1999 the tax basis
of real estate was $133,710 in excess of the financial basis.
10. Legal Proceedings
The Trust is not a party to any pending legal proceedings which, in the
opinion of management, are material to the Trust's financial position.
11. Subsequent Event
In January 2000, the Trust signed a contract to sell all of its real estate
assets to AEGON Advisors, the Trust's advisor and a subsidiary of AEGON USA,
Inc., the Trust's largest shareholder which owns approximately 30.86% of the
Trust's outstanding shares, for a total purchase price of $33,500,000. The
sale of the real estate assets of the Trust is conditioned upon shareholder
approval of the sale, as well as shareholder approval of the subsequent
liquidation of the Trust and distribution of the proceeds of the sale to the
shareholders. The transaction is anticipated to be completed in the second
quarter of 2000.
25
12. Selected Quarterly Financial Data (Unaudited)
QUARTER ENDED
-------------------------------------------------------------
YEAR ENDED
YEAR 3/31 6/30 9/30 12/31 12/31
- ---------------------------------------------------------------------------------------------------------------------
1999
REVENUE $1,235,691 1,145,054 1,089,484 1,110,939 4,581,168
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS $ 359,078 286,357 258,682 157,259(1) 1,061,376
NET GAIN ON SALE OF PROPERTY -- -- -- -- --
-------------------------------------------------------------------------------
NET EARNINGS $ 359,078 286,357 258,682 157,259(1) 1,061,376
- ---------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET
EARNINGS PER SHARE $ .09 .07 .07 .04 .27
- ---------------------------------------------------------------------------------------------------------------------
1998
Revenue $1,622,786(2) 1,266,703 1,230,616 1,211,850 5,331,955
- ---------------------------------------------------------------------------------------------------------------------
Earnings from operations $ 512,257 108,264 112,875 210,579 943,975
Net gain on sale of property -- -- -- 528,282 528,282
-------------------------------------------------------------------------------
Net earnings $ 512,257(2) 108,264 112,875 738,861 1,472,257
- ---------------------------------------------------------------------------------------------------------------------
Basic and diluted net
earnings per share $ .13 .03 .03 .19 .38
- ---------------------------------------------------------------------------------------------------------------------
1997
Revenue $1,277,422 1,236,318 1,250,455 1,247,892 5,012,087
- ---------------------------------------------------------------------------------------------------------------------
Earnings from operations $ 163,220 166,302 66,105 241,502 637,129
Net gain on sale of property -- -- -- 259,157 259,157
-------------------------------------------------------------------------------
Net earnings $ 163,220 166,302 66,105 500,659 896,286
- ---------------------------------------------------------------------------------------------------------------------
Basic and diluted net
earnings per share $ .04 .04 .02 .13 .23
- ---------------------------------------------------------------------------------------------------------------------
(1) Administrative expenses for the fourth quarter of 1999 included $100,000
due to the fairness opinion related to the potential sale of the Trust's real
estate assets to AEGON Advisors.
(2) Revenues and net income for the first quarter of 1998 included a final
settlement of $248,000 for a claim as an unsecured creditor under a Chapter
11 reorganization plan and an $85,000 settlement for the termination of a
lease by a tenant in 1997.
26
Report of Independent Auditors
The Board of Trustees and Shareholders
USP Real Estate Investment Trust
We have audited the accompanying balance sheets of USP Real Estate Investment
Trust as of December 31, 1999 and 1998, and the related statements of
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 financial position of USP Real Estate Investment
Trust at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 25, 2000
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information About Directors (referred to herein as "Trustees")
Certain information about the Trustees appears below. (See "Item 13. Certain
Relationships and Related Transactions" for a description of the Trust's
relationship with AEGON USA Realty Advisors, Inc. and other subsidiaries of
AEGON USA, Inc.)
PATRICK E. FALCONIO, age 58, has served as a Trustee and Chairman of the
Board since 1988. He retired on February 1, 1999 as an Executive Vice
President of AEGON USA, Inc. (insurance and financial services), Cedar
Rapids, Iowa, where he had been employed since 1987. He was also a Director
of AEGON USA Realty Advisors, Inc. and various other subsidiaries of AEGON
USA, Inc. until his retirement.
EDWIN L. INGRAHAM, age 73, has served as a Trustee of the Trust since 1984,
and as Vice Chairman of the Board of Trustees since 1990. He retired in 1988
as Executive Vice President, Treasurer and Chief Investment Officer of AEGON
USA, Inc., where he had been employed since 1982. Mr. Ingraham is a member of
the Audit Committee.
SAMUEL L. KAPLAN, age 63, has served as a Trustee of the Trust since 1983. He
has been engaged in the practice of law in Minneapolis, Minnesota as a member
of the firm of Kaplan, Strangis and Kaplan, P.A. since 1978. Mr. Kaplan is a
member of the Audit Committee.
RICHARD M. OSBORNE, age 54, has served as a Trustee of the Trust since
January 1999. He is President and Chief Executive Officer of OsAir, Inc., a
company he founded in 1963. OsAir, Inc. is a manufacturer of industrial gases
for pipeline delivery and a real property developer. Mr. Osborne is the sole
Manager of Turkey Vulture Fund XIII, Ltd. which acquires, holds, sells or
otherwise invests in all types of securities and other instruments. Mr.
Osborne is a Director and Chairman of the Board of Liberty Self-Stor, Inc., a
publicly-held real estate investment trust, a Director of Ceres Group, Inc.,
a publicly-held insurance holding company, a Director and Chairman of the
Board of Pacific Gateway Properties, Inc., a publicly-held real estate
company and a Director and Vice Chairman of the Board of GLB Bancorp, Inc., a
bank holding company.
Information About Executive Officers
Certain information about the executive officers of the Trust appears below.
(See "Item 13. Certain Relationships and Related Transactions" for a
description of the Trust's relationship with AEGON USA Realty Advisors, Inc.
and other subsidiaries of AEGON USA, Inc.)
DAVID L. BLANKENSHIP, age 49, has served as President of the Trust since
1985. He has been employed by AEGON USA, Inc. since 1977 in various
administrative and management positions related to real estate investment
activities and is Chairman of the Board and President of AEGON USA Realty
Advisors, Inc.
MAUREEN DEWALD, age 49, has served as Vice President of the Trust since 1986
and Secretary since 1985. She has been employed by AEGON USA, Inc. since 1983
as an attorney for real estate investment activities and is Senior Vice
President, Secretary and General Counsel of AEGON USA Realty Advisors, Inc.
ALAN F. FLETCHER, age 50, has served as Treasurer of the Trust since 1986, as
Vice President since 1985, as Assistant Secretary since 1982 and as principal
financial officer since 1981. He has been employed by AEGON
28
USA, Inc. since 1981 in various financial and administrative positions
related to investment activities and is Senior Vice President and Chief
Financial Officer of AEGON USA Realty Advisors, Inc.
ROGER L. SCHULZ, age 38, has served as Controller and Assistant Secretary of
the Trust since 1995. He has been employed by AEGON USA, Inc. since 1985 in
various accounting and financial reporting positions related to real estate
investment activities and is Manager - Financial Reporting for AEGON USA
Realty Advisors, Inc.
ITEM 11. EXECUTIVE COMPENSATION
During 1999, each Trustee received an annual fee of $6,000 plus $750 for each
regular or special meeting attended, as well as $400 per day for inspecting
properties owned by the Trust and $400 for attendance at each committee
meeting as a member, unless held in conjunction with a meeting of the Board
of Trustees. Total fees paid to all Trustees as a group were $37,500 for 1999.
The executive officers of the Trust are not employees of the Trust and
receive no cash or deferred compensation in their capacities as such.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to each person and
group (as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934) known by the Trust to be the beneficial owner of more than five
percent (5%) of the outstanding shares of the Trust as of March 15, 2000.
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- -------------------- ----------------------- ----------
AEGON USA, Inc. (1) 1,197,260 30.86%
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Turkey Vulture Fund XIII, Ltd. (2) 561,081 14.46%
c/o Kohrman Jackson & Krantz P.L.L.
1375 East 9th Street
Cleveland, Ohio 44114
(1) AEGON USA, Inc., an Iowa Corporation, is an indirect, wholly owned
subsidiary of AEGON N.V., a holding company organized under the laws of The
Netherlands which is controlled by Vereninging AEGON, an association
organized under the laws of The Netherlands. AEGON USA, Inc. has sole voting
and investment powers with respect to the above shares.
(2) Turkey Vulture Fund XIII, Ltd. (the "Fund") is an Ohio limited liability
company, of which Richard M. Osborne is the sole Manager. As sole Manager of
the Fund, with sole power to vote, or to direct the voting of, and the sole
power to dispose or to direct the disposition of, any shares owned by the
Fund, Mr. Osborne may be deemed to beneficially own all of the Shares of
beneficial interest of USP owned by the Fund.
29
Security Ownership of Management
The following table sets forth the number of shares beneficially owned as of
March 15, 2000 by each Trustee and officer and by all Trustees and officers
as a group (8 persons). Except as otherwise indicated by footnote, the
individuals have direct ownership of, and sole voting and investment power
with respect to, any shares beneficially owned by them. Under rules adopted
by the Securities and Exchange Commission, transactions in shares of the
Trust are reportable by Trustees and officers on specified forms, and the
Trust is required to disclose any known delinquent filings. The Trust is not
aware of any delinquent filings by its current trustees and officers, except
that Richard Osborne inadvertently failed to report on a Form 4 Statement of
Changes of Beneficial Ownership of Securities a purchase of 10,000 shares in
December 1998.
NAME OF AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
Patrick E. Falconio(1) 2,000 *
Edwin L. Ingraham 1,500 *
Samuel L. Kaplan(2) 10,000 *
Richard M. Osborne(3) 561,081 14.46%
David L. Blankenship(4) 1,199,078 30.90%
Maureen DeWald 0 *
Alan F. Fletcher(5) 2,200 *
Roger L. Schulz 100 *
Trustees, nominees and officers as a group 1,775,959 45.77%
(1) Mr. Falconio may be deemed to be the beneficial owner of 2,000 shares
owned by his wife.
(2) Mr. Kaplan is the direct owner of 8,500 shares and may be deemed to
be the beneficial owner of 1,500 shares held in a profit sharing
trust for his account.
(3) Mr. Osborne may be deemed to be the beneficial owner of 561,081 shares
beneficially owned by Turkey Vulture Fund, XIII, Ltd., an Ohio limited
liability company, of which Mr. Osborne is the sole Manager.
(4) Mr. Blankenship may be deemed to be the beneficial owner of 1,197,260
shares beneficially owned by AEGON USA, Inc. with respect to which he
shares voting and investment powers (see "Security Ownership of
Certain Beneficial Owners" and "Information About Executive
Officers"). Mr. Blankenship disclaims beneficial ownership of such
shares. He may also be deemed to be the beneficial owner of 1,818
shares held in custodial accounts for his children.
(5) Mr. Fletcher is the direct owner of 600 shares and is the beneficial
owner of 1,600 shares held in an individual retirement account.
*Such holdings represent less than one percent of the outstanding Shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Trust has no employees and has contracted with AEGON Advisors, a
subsidiary of AEGON USA, Inc., the Trust's largest shareholder, to provide
administrative, advisory, acquisition, divestiture, and property management
services. Certain officers of AEGON Advisors serve as non-employee officers
of the Trust. A description of the relationships between AEGON USA, Inc. and
its various subsidiaries and of such subsidiaries' agreements with the Trust
follows. The description of the agreements which follows is qualified in its
entirety by reference to the terms and provisions of such agreements, copies
of which are available from the Trust's filings with the Securities and
Exchange Commission and from the Trust's Investor Relations department. (See
"Item 12. Security Ownership of Certain Beneficial Owners and Management" for
a description of the relationship between AEGON USA, Inc. and AEGON N.V.)
30
Administrative, Advisory and Acquisition Services
AEGON Advisors is a wholly owned subsidiary of AEGON USA, Inc. AEGON Advisors
provides administrative, advisory, acquisition and divestiture services to
the Trust pursuant to an Administrative Agreement dated January 1, 1984. The
term of the Administrative Agreement is for one (1) year and is automatically
renewable each year for an additional year subject to the right of either
party to cancel the Agreement upon 90 days written notice. The performance of
AEGON Advisors' duties and obligations under the Administrative Agreement has
been guaranteed by AEGON USA, Inc.
Under the Administrative Agreement, AEGON Advisors (a) provides clerical,
administrative and data processing services, office space, equipment and
other general office services necessary for the Trust's day-to-day
operations, (b) provides legal, tax and accounting services to maintain all
necessary books and records of the Trust and to ensure Trust compliance with
all applicable federal, state and local laws, regulatory reporting
requirements and tax codes, (c) arranges financing for the Trust, including
but not limited to mortgage financing for property acquisition, (d) obtains
property management services for the Trust's properties and supervises the
activities of persons performing such services, (e) provides monthly reports
summarizing the results of operations and financial conditions of the Trust,
(f) prepares and files all reports to shareholders and regulatory authorities
on behalf of the Trust, (g) prepares and files all tax returns of the Trust
and (h) provides the Trust with property acquisition and divestiture services.
AEGON Advisors receives fees for its administrative and advisory services as
follows: (a) a base fee, payable monthly, equal to 0.625% per annum of the
average monthly gross real estate investments of the Trust plus 0.25% per
annum of the monthly outstanding principal balance of mortgage loans
receivable; and (b) an incentive fee, payable annually, equal to 20% of the
annual adjusted cash flow from operations in excess of $.72 per share. If the
annual adjusted cash flow from operations is less than $.72 per share, then
the payment of so much of the base fee is to be deferred so that revised cash
flow from operations will be equal to $.72 per share; provided, however, in
no event shall the amount deferred exceed 20% of the previously determined
base fee. Any deferred fees may be paid in a subsequent year, up to a maximum
of 30% of that year's revised cash flow from operations in excess of $.72 per
share. Annual adjusted cash flow from operations, as defined for purposes of
the incentive fee, includes the net realized gain (or loss) from the
disposition of property, adjusted to exclude accumulated depreciation
(otherwise stated as gain in excess of cost without reduction for allowable
depreciation). Notwithstanding the foregoing, the combined base and incentive
fees cannot exceed the amount permitted by the limitation on operating
expenses as provided in the Trust's Declaration of Trust, which limitation is
essentially 1.5% of the Trust's average quarterly invested assets, net of
depreciation. In addition, AEGON Advisors is to be paid a separately
negotiated fee of not less than 2% nor more than 4% of the cost of each
property acquired by the Trust as compensation for acquisition services
furnished by it to the Trust. Administrative fees paid to AEGON Advisors for
1999 were $173,831. No acquisition fees were paid in 1999.
Management Services
AEGON Advisors provides management services to the Trust pursuant to a
Property Management Agreement dated July 1, 1981. The term of the Agreement
is for one (1) year and is automatically renewable each year for an
additional year subject to the right of either party to cancel the Management
Agreement upon 30 days written notice. Under the Management Agreement, AEGON
Advisors is obligated to (a) procure tenants and execute leases with respect
to Trust properties which are not leased under net lease arrangements (the
"Managed Properties"), (b) maintain and repair (at the Trust's expense) the
Managed Properties, (c) maintain complete and accurate books and records of
the operations of the Managed Properties, (d) maintain the Managed Properties
in accordance with applicable government rules and regulations, licensing
requirements and building codes, (e) collect all rents and (f) carry (at the
Trust's expense) general liability, accident, fire and other property damage
insurance. For these services, AEGON Advisors receives 5% of the gross income
derived from the operation of the Managed Properties. Management fees paid to
AEGON Advisors for 1999 were $203,500. These services were previously
provided by AEGON USA Realty Management, Inc., a wholly owned subsidiary of
AEGON Advisors, which was merged into AEGON Advisors in December 1998.
31
Other
On December 31, 1993, the mortgage loan on the Trust's Presidential Drive
property was acquired from the lender by AUSA Life Insurance Company, Inc., a
wholly-owned subsidiary of AEGON USA, Inc., as part of a large transaction
involving the transfer of loans and securities. The terms of the mortgage
loan remained the same. On February 1, 1999, the Trust prepaid the mortgage
loan on Presidential Drive Business Park. The prepayment amount, including a
1% prepayment fee of $7,065 to the lender, was $713,548. In February 1994,
the Trust refinanced the existing mortgage loan on its Geneva Square property
with a new mortgage loan from PFL Life Insurance Company ("PFL"), a
wholly-owned subsidiary of AEGON USA, Inc. This $3,000,000 loan was obtained
by the Trust on commercially competitive terms at a fixed interest rate of 8%
and a 1% origination fee ($30,000) was paid to PFL in connection with the
loan. The loan matured on March 1, 1996, and the Trust exercised an option to
extend the loan for eight years at 8.30% based on commercially competitive
terms offered for comparable loans by PFL. On December 22, 1998, the Trust
sold Geneva Square and the mortgage balance of $2,803,790 was repaid. On
March 1, 1999, the mortgage loans on Mendenhall Commons and North Park Plaza
matured, requiring principal repayment. On March 15, 1999, the Trust
refinanced these mortgage loans with Monumental Life Insurance Company, a
wholly owned subsidiary of AEGON USA, Inc. The new loans are for a period of
one year, carry an initial interest rate of 7%, and may be prepaid at any
time without penalty. The maximum principal amount of the Mendenhall Commons
and North Park Plaza mortgage indebtedness outstanding during 1999 was
$7,865,000. The Trust paid $115,592 in principal and $459,202 in interest on
such mortgage indebtedness for 1999.
Sale of Assets
In January 2000, the Trust signed a contract to sell all of its real estate
assets to AEGON Advisors, the Trust's advisor and a subsidiary of AEGON USA,
Inc., the Trust's largest shareholder which owns approximately 30.86% of the
Trust's outstanding shares, for a total purchase price of $33,500,000. The
sale of the real estate assets of the Trust is conditioned upon shareholder
approval of the sale, as well as shareholder approval of the subsequent
liquidation of the Trust and distribution of the proceeds of the sale to the
shareholders. A notice of a special meeting of the shareholders and a proxy
statement containing details of the proposed transaction will be sent to all
shareholders pending a filing with the Securities and Exchange Commission.
The transaction is anticipated to be completed in the second quarter of 2000,
resulting in an expected liquidating distribution in excess of $6.00 per
share. Shareholder approval of the liquidation of the Trust will result in
termination of the Trust. Neither the sale of assets nor the liquidation will
occur unless both are approved at the special meeting.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents
The following financial statements are included in Item 8:
1. Financial Statements.
Balance Sheets, December 31, 1999 and 1998.
Statements of Earnings, Years Ended December 31, 1999, 1998, and 1997.
Statements of Cash Flows, Years Ended December 31, 1999, 1998, and 1997.
Statements of Shareholders' Equity, Years Ended December 31, 1999, 1998, and
1997.
Notes to Financial Statements.
Report of Independent Auditors.
2. Financial Statement Schedules.
Financial Statement Schedules. (Included in Notes to Financial Statements)
(III) Schedule of Real Estate and Accumulated Depreciation. Note 3
(IV) Schedule of Mortgage Loans on Real Estate. Note 4
All other schedules have been omitted because they are not required, or because
the required information, where material, is included in the financial
statements or accompanying notes.
33
PART IV (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
(a) List of Documents (continued)
3. Exhibits.
(2) Real Estate Sale and Purchase Contract, dated January 20,
2000, by and between the Trust and AEGON USA Realty
Advisors, Inc. Filed herewith.
(2.1) Plan of Liquidation, adopted by the Board of Trustees on
October 21, 1999. Filed herewith.
(3) Second Amended and Restated Declaration of Trust currently
in effect, dated October 5, 1972, as amended December 18,
1972, March 3, 1975 and April 23, 1984, incorporated herein
by reference to Item 14(a)3, Exhibit (3) of Form 10-K for
the year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19, 1997,
incorporated herein by reference to Item 14(a)3, Exhibit
(3.1) of Form 10-K for the year ended December 31, 1997.
(4) Articles II and III of the Second Amended and Restated
Declaration of Trust currently in effect, dated October 5,
1972, as amended December 18, 1972, March 3, 1975 and April
23, 1984, incorporated herein by reference to Item 14(a)3,
Exhibit (3) of Form 10-K for the year ended December 31,
1984.
(10) Administrative Agreement currently in effect, dated January
1, 1984, incorporated herein by reference to Item 5,
Exhibit (28) of Form 8-K dated January 1, 1984.
(10.1) Property Management Agreement currently in effect, dated
July 1, 1981, as amended November 4, 1982, incorporated
herein by reference to Item 14(a)3, Exhibit (10) of Form
10-K for the year ended December 31, 1982.
(10.2) Shareholder Services Agreement, currently in effect, dated
January 1, 1991, as amended January 1, 1992 and assigned
January 28, 1992, incorporated herein by reference to Item
14(a)3, Exhibit (10.2) of Form 10-K for the year ended
December 31, 1991.
(b) No reports on Form 8-K were filed during the fourth quarter of 1999.
(c) The required exhibits applicable to this section are listed in
Item 14(a)3.
(d) There are no required financial statement schedules applicable to this
section.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
USP REAL ESTATE INVESTMENT TRUST
/s/ Patrick E. Falconio /s/ Alan F. Fletcher
- ----------------------------------- -------------------------------------
Patrick E. Falconio Alan F. Fletcher
Chairman of the Board Vice President and Treasurer
(principal executive (principal financial officer)
officer)
/s/ Roger L. Schulz
-------------------------------------
Roger L. Schulz
Controller
(principal accounting officer)
March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
/s/ Patrick E. Falconio /s/ Samuel L. Kaplan
- ----------------------------------- -------------------------------------
Patrick E. Falconio Samuel L. Kaplan
Trustee Trustee
/s/ Edwin L. Ingraham /s/ Richard M. Osborne
- ----------------------------------- -------------------------------------
Edwin L. Ingraham Richard M. Osborne
Trustee Trustee
March 30, 2000
35
EXHIBIT INDEX
Exhibit
Item Title or Description
- -------- --------------------
(2) Real Estate Sale and Purchase Contract, dated January 20,
2000, by and between the Trust and AEGON USA Realty Advisors,
Inc. Filed herewith.
(2.1) Plan of Liquidation, adopted by the Board of Trustees on
October 21, 1999. Filed herewith.
(3) Second Amended and Restated Declaration of Trust currently in
effect, dated October 5, 1972, as amended December 18, 1972,
March 3, 1975 and April 23, 1984, incorporated herein by
reference to Item 14(a)3, Exhibit (3) of Form 10-K for the
year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19, 1997,
incorporated herein by reference to Item 14(a)3, Exhibit (3.1)
of Form 10-K for the year ended December 31, 1997.
(4) Articles II and III of the Second Amended and Restated
Declaration of Trust currently in effect, dated October 5,
1972, as amended December 18, 1972, March 3, 1975 and April
23, 1984, incorporated herein by reference to Item 14(a)3,
Exhibit (3) of Form 10-K for the year ended December 31, 1984.
(10) Administrative Agreement currently in effect, dated January 1,
1984, incorporated herein by reference to Item 5, Exhibit (28)
of Form 8-K dated January 1, 1984.
(10.1) Property Management Agreement currently in effect, dated July
1, 1981, as amended November 4, 1982, incorporated herein by
reference to Item 14(a)3, Exhibit (10) of Form 10-K for the
year ended December 31, 1982.
(10.2) Shareholder Services Agreement dated January 1, 1991, as
amended January 1, 1992 and assigned January 28, 1992,
incorporated herein by reference to Item 14(a)3, Exhibit
(10.2) of Form 10-K for the year ended December 31, 1991.
All Exhibit Items are omitted from this report, but a copy will be furnished
upon payment of $33.00, representing a charge of fifty cents ($.50) per page,
accompanying a written request to Roger L. Schulz, Controller, USP Real
Estate Investment Trust, 4333 Edgewood Road N.E., Cedar Rapids, IA 52499.
36
ANNEX B
October 21, 1999
The Board of Trustees
The Special Committee of the Board of Trustees
USP Real Estate Investment Trust
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of USP Real Estate Investment Trust (the "Trust")
of the price to be received by the Trust in connection with the sale of all
the real estate assets (the "Assets") of the Trust to AEGON USA Realty
Advisors, Inc. ("AEGON Advisors") (the "Asset Sale") pursuant and subject to
the Real Estate Sale and Purchase Contract between the Trust and AEGON
Advisors substantially in the form of the draft dated as of October 14, 1999
(the "Purchase Agreement"). The consideration to be offered by AEGON Advisors
in the Asset Sale will be $33,500,000 in cash subject to certain adjustments.
In connection with our review of the proposed Asset Sale and the preparation
of our opinion herein, we have, among other things:
1. reviewed certain publicly available financial statements and other
information of the Trust;
2. reviewed certain internal financial statements and other financial and
operating data concerning the Assets and the Trust prepared by the
management of the Trust;
3. reviewed certain financial projections prepared by the Trust;
4. discussed the past and current operations and financial condition and
the prospects of the Assets and the Trust with officers of the Trust;
5. reviewed the reported prices and trading activity for the Trust's
shares;
6. compared the financial performance of the prices and trading activity of
the Trust's shares with that of certain other comparable publicly-traded
companies and their securities; and
7. reviewed offers made for the Assets and/or the Trust itself since
April, 1997.
B-1
Board of Trustees
USP Real Estate Investment Trust
October 21, 1999
Page 2
We have assumed and relied upon the accuracy and completeness of all
information supplied or otherwise made available to us by the Trust and have
not attempted to verify independently any of such information. We have not
made or obtained an independent appraisal of the assets or liabilities
(contingent or otherwise) of the Trust. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or
discussed with us, we have assumed that such forecasts and other information
and data have been reasonably prepared in good faith on bases reflecting the
best currently available estimates and judgments of the Trust's management,
and we have relied upon the Trust to advise us promptly if any information
previously provided became inaccurate or was required to be updated during
the period of our review.
Our opinion is based upon market, economic, financial and other circumstances
and conditions existing and disclosed to us as of the date hereof and any
material change in such circumstances and conditions would require a
reevaluation of this opinion, which we are under no obligation to undertake.
We express no opinion as to the underlying business decision to effect the
Asset Sale, or the structure or tax consequences of the Purchase Agreement.
We did not structure the Asset Sale or negotiate the final terms of the
Purchase Agreement. Our opinion is limited to the fairness, from a financial
point of view, of the gross sales price of $33,500,000 to be received by the
Trust in connection with the Asset Sale. We express no opinion with respect
to any other reasons, legal, business, or otherwise, that may support the
decision of the Special Committee or Board of Trustees to approve or
consummate the Asset Sale.
In conducting our investigation and analyses and in arriving at our opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed relevant,
including the review of (i) historical and projected operating earnings of
the Assets; (ii) the current and projected financial position and results of
operations of the Trust; (iii) the historical market prices and trading
activity of the shares of the Trust; (iv) information concerning selected
business combinations which we deemed comparable in whole or in part; and (v)
other proposals made to the Trust since April, 1997.
In arriving at this opinion, Raymond James did not attribute any particular
weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, Raymond James believes that its analyses must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying this opinion.
Raymond James & Associates, Inc. ("Raymond James") is actively engaged in the
investment banking business and regularly undertakes the valuation of
investment securities in connection with public offerings, private
placements, business combinations and similar transactions.
B-2
Board of Trustees
USP Real Estate Investment Trust
October 21, 1999
Page 3
Raymond James has been engaged to render financial advisory services to the
Trust in connection with the proposed Asset Sale and will receive a fee for
such services, which fee is contingent upon consummation of the Asset Sale.
Raymond James will also receive a fee in connection with the delivery of this
opinion. In addition, the Trust has agreed to indemnify us against certain
liabilities arising out of our engagement.
In the ordinary course of our business, Raymond James may trade in the
securities of the Trust for our own account or for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is for the information of the Special
Committee and the Board of Trustees of the Trust in evaluating the proposed
Asset Sale and does not constitute a recommendation to any shareholder of the
Trust regarding how said shareholder should vote on the proposed Asset Sale.
This opinion is not to be quoted or referred to, in whole or in part, without
our prior written consent, which will not be unreasonably withheld; provided
that, this opinion letter may be included in its entirety in the Proxy
Statement of the Trust relating to the proposed Asset Sale.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the price received by the Trust in connection with the Asset
Sale is fair, from a financial point of view, to the holders of the Trust's
outstanding shares.
Very truly yours,
/s/ RAYMOND JAMES & ASSOCIATES, INC.
B-3
ANNEX C
REAL ESTATE SALE AND PURCHASE CONTRACT
THIS CONTRACT ("Contract") is made and entered into as of the 20th
day of January, 2000 (hereinafter referred to as the date hereof), by and
between USP Real Estate Investment Trust, an Iowa common law business trust
(hereinafter referred to as "Seller"), and AEGON USA Realty Advisors, Inc.,
an Iowa corporation (hereinafter referred to as "Purchaser").
The parties hereto agree as follows:
1. AGREEMENT TO PURCHASE AND SELL.
A. Seller agrees to sell to Purchaser and Purchaser agrees to
purchase from Seller, subject to the terms and conditions of this Contract,
the six properties (the "Properties") described as follows:
(i) Kingsley Square Shopping Center located in Orange
Park, Florida, and legally described on Exhibit "A-1" attached hereto;
(ii) First Tuesday Mall located in Carrollton, Georgia,
and legally described on Exhibit "A-2" attached hereto;
(iii) Mendenhall Commons Shopping Center located in
Memphis, Tennessee, and legally described on Exhibit "A-3" attached hereto;
(iv) North Park Plaza Shopping Center located in Phoenix,
Arizona, and legally described on Exhibit "A-4" attached hereto;
(v) Presidential Drive Office Building located in
Atlanta, Georgia, and legally described on Exhibit "A-5" attached hereto;
(vi) Yamaha Warehouse located in Cudahy, Wisconsin, and
legally described on Exhibit "A-6" attached hereto.
The Properties are being sold together with:
(vii) All buildings, improvements, structures and
fixtures, placed, constructed, installed, or located on the Properties,
together with the parking facilities related thereto, and all other
improvements situated on, over and under the lands legally described above
(the "Improvements");
C-1
(viii) All of the furniture, furnishings, fixtures,
fittings, appliances, apparatus, equipment, tools, supplies and machinery, if
any, owned by Seller and located on the Properties (the "Personal Property");
(ix) Seller's interest as landlord under all leases of
space of and within any part of the Properties, including, without
limitation, any renewals thereof and any options to renew the same, together
with any and all third party guarantees of the obligations of tenants under
such leases (hereinafter referred to as the "Tenant Leases:");
(x) All contract agreements, if any, affecting the
operation of the Improvements as fully developed commercial properties,
including without limitation, all service contracts, maintenance agreements,
equipment leases, advertising contracts, and the like, to the extent
assignable, (hereinafter together referred to as the "Operating Agreements");
(xi) To the extent assignable, all guarantees and
warranties given, made, or issued by any contractors, subcontractors,
servicers, suppliers, manufacturers, installers, and the like, relating to or
with respect to the construction, repair, or maintenance of the Improvements
or Personal Property and the workmanship, materials, components, appliances,
and equipment forming a part of or installed on or included within or upon
the Improvements (hereinafter referred to as the "Warranties");
(xii) All development, construction, and engineering
plans, specifications, drawings, survey materials or other written materials
or matters in the possession of Seller which pertain to the planning,
development, construction, maintenance and repair of the Improvements,
including, without limitation all "working" drawings and all "as-built"
drawings and surveys, compliance reports, engineering reports, soil,
geological, and environmental reports (hereinafter referred to as the "Plans
and Specifications");
(xiii) All licenses, permits, authorizations, and
certificates of occupancy affecting the Improvements as fully operational
commercial rental properties (hereinafter referred to as the "Licenses"),
including without limitation the right to use the names of the Properties set
forth above, to the extent Seller has any ownership or proprietary rights to
use such names; and
(xiv) All rents, issues, royalties, and profits of the
Properties, whether coming due before or after the Closing Date, including
all refunds or rebates of any nature concerning the Property which are made
on or
C-2
after the Closing Date and including all rights to insurance proceeds or
other recoveries for damage to the Properties (or any part thereof) which is
not repaired by the date of Closing.
The Properties, together with all other rights and properties set
forth in (i) through (xiv) above are collectively sometimes referred to
herein as the "Property".
2. PURCHASE PRICE AND METHOD OF PAYMENT.
A. The total purchase price for the Property to be paid by
Purchaser is Thirty-Three Million Five Hundred Thousand Dollars
($33,500,000.00), payable in cash by Purchaser at Closing. The purchase price
will be reduced in accordance with paragraph 10C hereof if the mortgage on
the Yamaha Warehouse is assumed by Purchaser. The allocation of purchase
price between the Properties for purposes of title insurance coverage and
transfer tax or other legally required declarations shall be as set forth on
Exhibit "B".
B. Within three (3) business days after the date hereof,
Purchaser shall deliver to American Title Company, 3131 Turtle Creek Blvd.,
Suite 101, Dallas, TX 75219 Attention: Bo Feagin (hereinafter referred to as
the "Title Company") earnest money (the "Deposit") in the amount of Two
Hundred Thousand Dollars ($200,000.00). The Deposit shall be placed by the
Title Company in an interest bearing account with all interest earned thereon
to be for the benefit of the Purchaser. The Deposit shall be held during the
pendency of this Contract and disbursed in accordance with the terms hereof.
In the event the transactions covered hereby shall close, at Closing the
Deposit shall be credited towards the Purchase Price.
3. PERMITTED TITLE EXCEPTIONS.
The Properties are being sold in fee simple title, subject to the
following exceptions:
A. Zoning and building laws or ordinances;
B. The liens of real estate taxes which are not yet due and
payable;
C. Those matters set forth on the Seller's title polices
concerning the Properties which are identified on Exhibit "C" attached
hereto, except for liens or encumbrances (subject to subparagraph F below)
and expired Tenant Leases or other expired exceptions, which shall be
discharged by Seller at or prior to Closing;
D. Rights of tenants in possession;
E. Those matters set forth on the existing surveys of the
Properties identified on Exhibit "D" attached hereto; and
C-3
F. Subject to paragraph 10C, the lien of the first mortgage
and related security instruments encumbering the Yamaha Warehouse in the
current principal amount of approximately One Million Three Hundred
Ninety-Six Thousand One Hundred Seventy-Three Dollars ($1,396,173.00) held by
Wisconsin National Life Insurance Company (hereinafter referred to as the
"Yamaha Lender").
G. Such other easements or reservations of title as shall be
approved by Purchaser after Purchaser's examination of the title binders and
updated surveys for the Property as hereinafter required.
(A through G above are hereinafter collectively referred to as
"Permitted Exceptions").
4. CLOSING.
Consummation of the transactions contemplated by this Contract (the
"Closing") will be held at or closed in escrow through the offices of the
Title Company on a day and at a time mutually agreeable to the parties, after
all conditions precedent have been satisfied, but in any case on or before
June 30, 2000. In the absence of a different specified date in accordance
with this paragraph, the Closing shall take place at 9:00 A.M., March 30,
2000 (hereinafter referred to as the "Closing Date").
5. PURCHASER'S CONDITIONS PRECEDENT.
Purchaser's obligations to purchase the Property hereunder are
contingent upon satisfaction of the following conditions precedent
("Purchaser's Conditions Precedent") within forty-five (45) days of the date
hereof (the "Purchaser's Condition Period"):
A. Unless this Condition is waived by Purchaser within the
Purchaser's Condition Period, Purchaser agrees to obtain a preliminary title
report and commitment to insure title covering each Property issued by the
Title Company. It is a condition precedent to Purchaser's obligations to
purchase the Property that the Title Company agree to issue an owner's policy
of title insurance to Purchaser for each Property in an amount equal to the
purchase price set forth on Exhibit "B" and in ALTA Extended Owner's Form
B-1970 or the equivalent thereof as used in the applicable state. The Title
Company shall agree to delete from the final policies any exceptions for
mechanic's or materialman's liens, and for discrepancies, conflicts in
boundary lines, lack of access, shortages in area, encroachments, or other
facts a current survey or inspection of the Property would disclose. Seller
agrees to execute those affidavits and/or furnish other documentation
reasonably requested by the Title Company to make such deletions and to
reflect the current status of rights pursuant to Tenant Leases as of the
Closing Date. Purchaser shall
C-4
have until expiration of its Conditions Period to examine the title to the
Properties and to notify Seller in writing of any defects in or encumbrances
upon Seller's title to the Properties (other than the Permitted Exceptions)
that are unacceptable to Purchaser. Any objection not timely made by
Purchaser shall be deemed to be waived, and all such matters shown as
exceptions to title in the commitments (but not including items shown in
requirements sections) shall be Permitted Exceptions.
Seller shall have until Closing to cure all such defects. If any
defects (other than Permitted Title Exceptions) are not cured or otherwise
removed in a manner reasonably satisfactory to Purchaser by the scheduled
date of Closing, Purchaser shall have the remedies set forth in subparagraph
F below.
B. Unless this Condition is waived by Purchaser within the
Purchaser's Condition Period, Purchaser agrees to obtain certified surveys of
the Properties certified by the surveyor to Purchaser and to the Title
Company. It is a Condition Precedent to Purchaser's obligations hereunder
that the surveys reveal no new exceptions to title that are unacceptable to
Purchaser. Any such matters shall be reported to Seller and dealt with in
accordance with the procedure for other title exceptions as set forth in
subparagraph 5A above.
C. Purchaser acknowledges receipt of the environmental reports
on the Properties identified in Exhibit "E" attached hereto and agrees to
accept the Properties in the environmental condition as reflected therein,
provided, however, any new or additional information concerning the
environmental condition of any Property shall be subject to Purchaser's
approval, in Purchaser's sole discretion and except that, prior to Closing,
Purchaser shall receive evidence of proper closure or removal of underground
tanks as noted in the report concerning Northpark Shopping Center.
D. The Mutual Representations as set forth herein in paragraph
7 hereof and Seller's representations as set forth in paragraph 8 hereof
shall be true and correct as of the Closing Date without any change in the
rent rolls or the status of defaults of tenants which would be detrimental to
the value of any Property. Each party agrees to promptly notify the other of
any matter coming to the knowledge of such party which would render any of
the Mutual Representations or Seller's Representations untrue in any material
respect. Seller agrees to use reasonable efforts to correct any such matter
prior to Closing, but shall not be obligated to expend any money or to incur
any liability to effect any such cure.
C-5
E. The parties acknowledge that Purchaser is the asset manager
for the Properties pursuant to a Management Agreement dated July 1, 1981 and
an Administrative Agreement dated January 1, 1984 (together the "Advisory
Agreements"). Purchaser shall continue to manage the Property in the best
interests of the Seller pursuant to the Advisory Agreements in the same
manner as prior to this Contract. All actions taken by Seller in regard to
the Property at the recommendation of Purchaser as Advisor shall be
considered consented to by Purchaser pursuant to this Contract. Seller hereby
directs Purchaser to conduct operations at the Properties in accordance with
any applicable terms and conditions of this Contract. Seller agrees that
Purchaser shall have access to the Property pending Closing to perform its
due diligence and inspections allowed by this Contract in addition to
Purchaser's access to the Property in its capacity as Advisor. Purchaser
agrees to indemnify and hold Seller harmless from any loss, cost, damage, or
liability caused by Purchaser's conduct of the due diligence set forth
herein. This indemnity shall survive the Closing or earlier termination of
this Contract.
F. If the Purchaser's Conditions Precedent set forth in this
paragraph 5 are not timely satisfied, then Purchaser may elect to (i) waive
such condition(s) and close, by giving written notice to Seller such that
Seller receives the notice no later than sixty (60) days after the date
hereof in the event of a failure of conditions to be satisfied within
Purchaser's Condition Period, or no later than the date scheduled for Closing
in the event of a failure of the conditions to be met prior to Closing
(hereinafter referred to in this paragraph as "Timely Notice"), or (ii)
terminate this Contract by Timely Notice to Seller. Upon a termination of
this Contract in accordance herewith, Purchaser's Deposit shall be promptly
refunded and neither party shall have any further rights or obligations
hereunder. In the absence of any written notice from Purchaser, Purchaser
shall be deemed to have elected to terminate this Contract.
6. ADDITIONAL CONDITIONS PRECEDENT.
The parties obligations to purchase and sell the Property hereunder
are conditioned upon the following:
A. Seller obtaining a favorable vote for this transaction from
its holders of beneficial interest in accordance with Seller's Declaration of
Trust. Seller agrees to hold a special meeting for such purpose on or before
June 15, 2000 and to comply with its Declaration of Trust and all applicable
laws, codes, ordinances, and regulations in the holding of such meeting and
vote.
C-6
B. Seller agrees to recommend the sale contemplated by this
Contract for shareholder approval at or prior to the special meeting held for
such purpose. It is a condition precedent to Purchaser's obligations
hereunder that the shareholder approval of this transaction contain a further
mandatory provision satisfactory to Purchaser that the Trust be liquidated
and that the proceeds of this sale, together with other liquid assets of the
Trust, less costs and reserves, be promptly distributed to the holders of
beneficial interests of Seller.
C. Seller's obligations hereunder are subject to the
Purchaser's representations as set forth in paragraph 9 hereof being true and
correct on the Closing Date. Each party agrees to notify the other of any
matter which would render any of Purchaser's representations and warranties
untrue in any material respect. Purchaser agrees to utilize its best efforts
to cure such matters, but shall not be obligated to expend any money or incur
any liability to effect such cure.
E. If any of the Additional Conditions Precedent are not
timely satisfied, unless the parties mutually agree to extend the time for
satisfaction of the conditions, this Contract shall be terminated, the
Purchaser's Deposit shall be promptly returned, and neither party shall have
any further rights or obligations hereunder.
7. MUTUAL REPRESENTATIONS.
The parties, to their actual knowledge, each make to the other the
following statements concerning the condition of the Property (hereinafter
referred to as the "Mutual Representations"):
A. Attached hereto as Exhibits "F-1" through "F-6" are true
and complete rent rolls of the Properties as of the date set forth thereon,
and except as set forth on Exhibits "F-1" through "F-6", no tenant is in
material default under its lease, nor has Seller received any notice that it
is in default as landlord thereunder.
B. All of the Property is, or on the Closing Date will be,
owned by Seller free and clear of liens and encumbrances, other than the
Permitted Title Exceptions.
C. Each of the Properties is in material compliance with all
applicable laws, codes, and ordinances including those regulating zoning,
building, health, fire, or other safety and environmental condition.
D. The Properties are insured against fire and other hazards
as described in Exhibit "G" attached hereto.
E. There are no plans for condemnation of all or any part of
the Properties.
C-7
F. There are no planned street or other improvements which may
result in special assessments against the Properties or any part thereof, or
which may alter or disrupt ingress and egress from the Properties.
G. There are no claims, actions, suits, or proceedings
pending, threatened against, or affecting the Property.
H. There are, and on the date of Closing there will be no
damage to the Property which has not been repaired. Subject to the provisions
of paragraph 15, all damage occurring to the Property prior to Closing shall
be repaired by Seller at Seller's expense. All mechanical equipment for which
Seller is responsible pursuant to the terms of Tenant Leases, including, but
not limited to the plumbing, air conditioning and heating and electrical
systems will be in good and serviceable operating condition.
I. At the time of Closing, any work required to be performed
by the Seller under the terms of the Tenant Leases or the Operating
Agreements or other agreements in connection with the Property will have been
completed in accordance with the plans and specifications therefor, if any,
and fully paid for by Seller, except for tenant finish work incident to new
leases entered into between the date hereof and Closing, which shall be
governed by the provisions of paragraph 10.
J. Neither the execution and delivery of this Contract or the
other documents called for hereunder, nor the consummation of any of the
transactions herein or therein contemplated, nor compliance with the terms
and provisions hereof, or with the terms and provisions thereof, will
contravene any provision of law, statute, rule, or regulation to which Seller
is subject, or will conflict to be inconsistent with, or result in any breach
of any of the terms, conditions, covenants, or provisions of, or constitute a
default under or result in the creation or imposition of any lien, security
interest, charge, or encumbrance upon the Property pursuant to the terms of
any indenture, mortgage, deed of trust, lease, or other instrument to which
Seller is a party, or by which Seller or any Property may be bound. Except as
set forth in Exhibit "L", no person or entity has any right to acquire the
Property or any interest or part thereof.
K. There are no Operating Agreements that are either not
assignable or non-cancelable on thirty (30) days prior notice.
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L. Except for the Permitted Exceptions and except as otherwise
disclosed herein and in Exhibits "C" and "D" attached hereto, there are no
material liens or encumbrances against the Properties or other exceptions to
fee simple title which would materially adversely affect the value of the
Properties.
M. For purposes of this Contract, the actual knowledge of
Seller shall mean the actual knowledge of the Trustees, and the actual
knowledge of Purchaser shall mean the actual knowledge of David Blankenship,
Alan Fletcher, Roger Schulz, Dennis Roland, and Maureen DeWald.
8. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller represents and warrants the following:
A. Seller is not a foreign person, foreign corporation,
foreign partnership, foreign trust, or foreign estate as defined in the
Internal Revenue Code and Regulations.
B. The execution and delivery of this Contract and each
instrument or document required to be executed and delivered by Seller
pursuant hereto and the consummation of the transactions contemplated hereby,
upon execution, delivery, and consummation thereof, will be duly authorized
and approved by all requisite Trust actions and no other authorization or
approval, whether of governmental bodies or otherwise, will be necessary in
order to enable Seller to enter into or to perform this Contract, subject to
the Conditions Precedent. Seller is not a party to any contract or agreement,
other than through Purchaser as Advisor, which would violate the
representations contained in subparagraph J above.
9. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser represents and warrants that it has taken all necessary
action to authorize the execution and delivery of this Contract and to
consummate the purchase of the Property as herein contemplated. The officer
executing this Contract on behalf of Purchaser has been duly authorized to do
so pursuant to proper action by Purchaser's Board of Directors. Purchaser is
not subject to any governmental or other regulations that would restrict this
purchase, nor is this purchase in contravention of any term or provision of
Purchaser's Articles of Incorporation or By-Laws.
10. COVENANTS AND AGREEMENTS.
Between the date hereof and the Closing:
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A. Seller shall not enter into any agreements or contracts
affecting the Properties which survive Closing, nor shall Seller enter into
any new lease or modify or terminate any existing Tenant Lease without the
prior written consent of Purchaser, which consent shall not be unreasonably
withheld or delayed. Notwithstanding the foregoing, Seller may enter the
pending lease transactions described on Exhibit "H" ("Permitted Lease
Transactions"). The parties agree to pursue, approve, and enter new leases in
the ordinary course of business. The parties shall pay for the tenant
improvement costs or allowances and leasing commissions in Permitted or
hereafter approved Lease Transactions entered between the date hereof and
Closing in accordance with Exhibit "H". Nothing in this Contract shall be
deemed to require Seller to enter into any new lease, lease modification, or
operating agreement. Any contracts for tenant improvements for the Permitted
Lease Transactions which are not completed prior to Closing shall be assigned
to and assumed by Purchaser as an Operating Contract pursuant to paragraph
11A(2) hereof, subject to any appropriate prorations for the costs thereof in
accordance with this paragraph.
B. Seller shall operate the Property in the ordinary course of
business, including without limitation, compliance with the terms of all
leases, mortgages, or other contractual obligations relating to the Property
and doing regular, scheduled, or necessary maintenance and repair of the
Properties, and of the fixtures, furniture, and equipment, so that the
Property will be in the condition required herein on the Closing Date.
Discretionary repairs and maintenance shall be performed in accordance with
the budget for such matters as approved by the Seller.
C. The Purchaser shall use reasonable efforts to obtain the
Yamaha Lender's consent to the Purchaser's purchase of Yamaha Warehouse
subject to its mortgage. If such consent is obtained, the purchase price
shall be reduced by the principal balance of the mortgage at Closing and
accrued interest on the mortgage debt will be pro rated between the parties
with Purchaser responsible for interest on and after the date of Closing.
Seller agrees to pay the assumption fee to the Yamaha Lender in the amount of
one percent (1%) of the principal balance of the loan. If the Yamaha Lender
refuses to consent to the sale, then the purchase price will not be reduced,
Seller will pay off the Yamaha mortgage at Closing and deliver the Property
free and clear of the mortgage and related liens.
11. ITEMS TO BE DELIVERED AT THE CLOSING.
A. At Closing, Seller shall cause to be delivered the following:
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(1) A Special Warranty Deed for each Property in the
form attached hereto as Exhibit "I" (modified as necessary to comply with
state, local law, or recording requirements), conveying to Purchaser fee
simple title to the Properties, subject only to the Permitted Exceptions.
(2) A blanket conveyance, bill of sale and assignment
for each Property (the "Bill of Sale"), conveying and assigning title with
covenants of general warranty to Purchaser, free and clear of all liens and
encumbrances, (other than the Permitted Exceptions); the Personal Property
and the Tenant Leases, the Operating Agreements, the Warranties, and the
Licenses, such instrument to be in form attached hereto as Exhibit "J".
(3) A rent roll (the "Rent Roll") for each Property,
certified by Seller and Purchaser to be true, complete and correct as of the
Closing Date and reflecting the status of tenant delinquencies, if any,
existing as of the Closing Date.
(4) All keys in Seller's possession or control to all
locks on the Property.
(5) To the extent they are in Seller's possession, the
executed originals of all Tenant Leases, together with copies of all
correspondence relating to the Leases and such accounting information
relating to the Leases as Purchaser may reasonably require.
(6) A certificate in the form attached hereto as
Exhibit "K", certifying that Seller is a non-foreign entity.
(7) Possession of the Property subject to the Permitted
Exceptions.
(8) Notices to Tenants of sale, in a form acceptable to
Purchaser and Seller.
(9) To the extent they are in Seller's possession, all
original Operating Agreements, Warranties, and Plans and Specifications.
(10) Proper documentation showing the good standing or
other authorization of Seller and the authorization of all persons executing
documents on behalf of Seller. Seller shall also execute and/or deliver all
documents required by the Title Company to issue the title policies in the
form required by this Contract, provided that disclosures, if any, required
to be certified by the Trust shall be either (i) certified to the knowledge
of the Trustees, or (ii) Purchaser as Advisor shall give the same
certifications to Seller, which certifications may be limited to the officers
of USP.
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B. Action at the Closing by Purchaser.
On the date of Closing, Purchaser shall deliver the
purchase price to Seller by wire transfer in the amount required by paragraph
2 hereof, subject to prorations and credits as contemplated herein. Purchaser
shall execute and deliver to Seller at Closing the Bills of Sale evidencing
Purchaser's assumption of the Tenant Leases and Operating Agreements. The
parties shall execute "Notices to Tenants" advising tenants of the sale and
Purchaser agrees to deliver, or cause to be delivered, such notices to each
tenant after Closing.
12. CLOSING PRORATIONS.
Purchaser shall obtain its own insurance coverage for the Property
at Closing. Property expenses, including charges under the continuing
Operating Agreements assumed by Purchaser, collected rents, and ad valorem
taxes on the Property shall be prorated at the Closing, effective as of the
Closing date, using the latest available computations of such items.
Utilities shall be prorated between the parties at Closing. Purchaser shall
have all utilities in Seller's name transferred to Purchaser's name promptly
following the Closing. All expenses which are prorated at Closing (exclusive
of any unknown claims related thereto, which shall remain the responsibility
of Seller) shall be deemed a final proration and Purchaser shall be
responsible for payment of such items when due. Except as prorated between
the parties at Closing or as otherwise agreed by the parties in accordance
with this paragraph and paragraph 10A, Seller shall be responsible for all
property expenses incurred, undertaken, or contracted for prior to Closing,
and agrees to indemnify and hold Purchaser harmless from any claim, cost, or
cause of action arising from any such expenses and liabilities, including
court costs and attorney's fees in the defense thereof or in the enforcement
of this indemnity. Tenant security deposits in the possession of Seller and
prepaid rents shall be credited to Purchaser. Included in this sale are all
delinquent rental accounts and all rents, issues, and profits of the
Properties due or which may become due after Closing relating to periods
occurring prior to Closing. In addition to the purchase price, Purchaser
shall pay Seller for Seller's prorata share of delinquent tenant rental
accounts, exclusive of late charges and/or interest, at face value, but
specifically excluding payment for delinquent accounts of tenants in Material
Default (hereinafter defined), as of the Closing Date. Purchaser shall also
pay Seller at Closing for Seller's prorata share of tenant reimbursements for
CAM and real estate taxes due after Closing based upon the most recent
estimate of such amounts as used in Seller's ledgers to accrue for such
items, specifically excluding any payment for reimbursables of tenants in
Material Default as of the Closing Date. As used in this paragraph, Material
Default
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shall mean any tenant (i) whose rental account is more than ninety (90) days
delinquent, (ii) who is in bankruptcy or insolvency proceedings, (iii) has
vacated the Property and is delinquent in payment of rent for more than
thirty (30) days, or (iv) has indicated in writing its inability or refusal
to pay its account. Subject only to the payments and prorations set forth in
this paragraph, all rent issues and profits of the Properties of every nature
due or paid after Closing shall be the property of Purchaser.
13. CLOSING COSTS.
Purchaser shall pay the cost of the title policies, surveys, and
environmental reports. Seller shall pay for the applicable transfer taxes.
The parties shall each pay one-half of the Title Company escrow fees, if any.
Each party shall bear its own attorney's fees.
14. REMEDIES UPON DEFAULT.
IF PURCHASER SHALL DEFAULT IN ITS PERFORMANCE OF THIS CONTRACT,
PURCHASER AND SELLER AGREE IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT TO
FIX THE DAMAGES WHICH SELLER MAY SUFFER. THEREFORE, PURCHASER AND SELLER
HEREBY AGREE A REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT SELLER WOULD
SUFFER IN THE EVENT PURCHASER DEFAULTS AND FAILS TO COMPLETE THE PURCHASE OF
THE PROPERTIES ARE AND SHALL BE, AS SELLER'S SOLE AND EXCLUSIVE REMEDY
(WHETHER AT LAW OR IN EQUITY), AN AMOUNT EQUAL TO THE EARNEST MONEY. SAID
AMOUNT SHALL BE THE FULL, AGREED AND LIQUIDATED DAMAGES FOR THE BREACH OF
THIS CONTRACT BY PURCHASER, ALL OTHER CLAIMS TO DAMAGES OR REMEDIES BEING
HEREIN EXPRESSLY WAIVED BY SELLER. THE PAYMENT OF SUCH AMOUNT AS LIQUIDATED
DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY, BUT IS INTENDED TO
CONSTITUTE LIQUIDATED DAMAGES TO SELLER. UPON SUCH DEFAULT BY PURCHASER, THIS
AGREEMENT SHALL BE TERMINATED AND NEITHER PARTY SHALL HAVE ANY FURTHER RIGHTS
OR OBLIGATIONS HEREUNDER, EACH TO THE OTHER EXCEPT FOR THE RIGHT OF SELLER TO
RECEIVE SUCH LIQUIDATED DAMAGES FROM THE TITLE COMPANY.
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If Seller shall default in its performance of this Contract, the
Purchaser may, as its sole and exclusive remedies elect to either (i)
terminate this Contract and receive a refund of the Deposit, or (ii) sue
Seller for damages, which damages the parties agree shall be limited to an
amount not to exceed the Deposit.
Except for failure to close on the specified Closing Date, for which
default no notice or cure period is required, prior to a declaration of
default, the declaring party shall give the defaulting party written notice
specifying the default. The defaulting party shall have five (5) business
days from receipt of such notice to cure the default. If the cure period
extends beyond the scheduled date of Closing, the Closing Date shall be
postponed to the last day of the cure period.
In the event either party hereto employs an attorney and commences
legal action because of the other party's default, then the non-prevailing
party shall pay to the prevailing party reasonable attorney's fees incurred
in the enforcement of this Contract.
15. RISK OF LOSS.
Until Closing, all risk of loss of the Property is on the Seller and
if, prior to Closing, the Property, or any part thereof, shall become damaged
by fire or other casualty or become the object of any condemnation
proceedings, Purchaser may, as its sole and exclusive remedy, elect to either
(i) terminate this Contract, or (ii) proceed with the Closing and receive an
assignment in form acceptable to Purchaser of all insurance proceeds or
awards for such taking, free and clear of all liens, claims and encumbrances,
and in the case of casualty, together with a cash payment by Seller to
Purchaser in the amount of the lesser of (a) any deductible under Seller's
insurance, or (b) the cost of the repair of the damage. If the estimated cost
of repair is less than One Million Dollars ($1,000,000.00), Purchaser agrees
to proceed to Closing in accordance with (ii) above. Any election allowed
hereunder shall be made in writing no later than the earlier of (i) the
scheduled date of Closing, or (ii) ten (10) days after a party's receipt of
notice of such damage or proceeding.
16. NOTICES.
All notices and demands herein required shall be in writing.
Whenever any notice, demand or request is required or permitted hereunder,
such notice, demand or request shall be hand-delivered personally or by
express mail, courier service (both with delivery receipt), or electronically
verifiable facsimile transmission or sent by United States Mail (registered
or certified) postage prepaid, to the addresses set forth below.
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As to Seller: Patrick E. Falconio, Chairman of the Board of Trustees
USP Real Estate Investment Trust
111 Cottage Grove SE, #501
Cedar Rapids, IA 52403
Fax: 319/298-1910
With a copy to: Timothy Hearn
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
Fax Number: (612) 340-2868
As to Purchaser: AEGON USA Realty Advisors, Inc.
4333 Edgewood Road N.E.
Cedar Rapids, IA 52499
Attention: Maureen DeWald
Fax Number (319) 369-2188
Any notice, demand or request which shall be given in the manner
aforesaid shall be deemed sufficiently given for all purposes hereunder (1)
at the time such notices, demands or requests are hand-delivered (which shall
be deemed to include delivery by express mail or courier service or
transmission by telefax facsimile) or (2) the day such notices, demands or
requests are posted, postage prepaid, in the United States Mail in accordance
with the preceding portion of this paragraph, provided however, time for
response to any such notice shall commence upon receipt at the address
specified. Notice by telefax transmission shall be given on a non-banking
holiday weekday between the hours of 9:00 a.m. to 5:00 p.m. (at the
destination) or shall be deemed received on the next such day and time.
17. TIME OF ESSENCE.
Time is of the essence of this Contract.
18. REAL ESTATE BROKERS.
Purchaser and Seller covenant and represent to each other that,
there is no party entitled to a real estate commission, finder's fee,
cooperation fee, or brokerage-type fee or similar compensation in connection
with this Contract and the transactions contemplated herein, except for a fee
due Raymond James & Associates, Inc. for rendering the fairness opinion
requested by Seller herein, and whose fee shall be paid by Seller pursuant to
a separate agreement. Each party agrees to hold the other harmless from and
against any claim for a commission or fee from
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any other broker or agent claiming by or through the indemnifying party.
Seller warrants that Raymond James & Associates, Inc. has waived any right to
claim a commission or transaction fee on this sale.
19. ENTIRE AGREEMENT.
This Contract contains all of the agreements, representations and
warranties of the parties hereto and supersedes all other discussions,
understandings or agreements in respect to the subject matter hereof. All
prior discussions, understandings and agreements are merged into this
Contract, which alone fully and completely expresses the agreements and
understandings of the parties hereto. This Contract may be amended,
superseded, extended or modified only by an instrument in writing referring
hereto signed by both parties.
20. EXHIBITS A PART OF THIS CONTRACT.
All Exhibits referred to in this Contract and attached hereto are
incorporated into this Contract by reference and are hereby made a part
hereof.
21. NO BENEFIT TO OTHER PARTIES.
Except as otherwise provided herein, none of the provisions hereof
shall inure to the benefit of any party other than the parties hereto and
their respective successors and permitted assigns, or be deemed to create any
rights, benefits or privileges in favor of any other party except the parties
hereto.
22. NO AGENCY, PARTNERSHIP OR JOINT VENTURE.
Nothing herein shall be construed to establish an agency
relationship, a partnership or a joint venture between Seller and Purchaser
for any purpose.
23. CAPTIONS.
The captions and headings contained in this Contract are for
reference purposes only and shall not in any way affect the meaning or
interpretation hereof.
24. GOVERNING LAW.
This Contract shall be governed, construed and enforced in
accordance with the laws of the State of Iowa.
25. NO WAIVER.
The waiver by one party of the performance of any covenant or
condition herein shall not invalidate this Contract, nor shall it be
considered to be a waiver by such party of any other covenant or condition
herein. The waiver by either or both parties of the time for
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performing any act shall not constitute a waiver of the time for performing
any other act or an identical act required to be performed at a later time.
Except as otherwise specifically restricted herein, the exercise of any
remedy provided by law and the provisions of this Contract shall not exclude
other available remedies.
26. AS-IS CONDITION.
Purchaser acknowledges that it is purchasing the Property on an
AS-IS condition, based upon its own inspections thereof and without benefit
of any representation, warranty or disclosure from Seller, either express or
implied or in the nature of fitness for any particular purpose, except as
specifically set forth herein. Seller agrees to maintain the Properties in
their current physical condition to the Closing Date, normal wear and tear
excepted.
27. SURVIVAL OF REPRESENTATIONS.
The representations and warranties made by Seller in paragraph 8 of
this Contract and by Purchaser in paragraph 9 (the parties "Separate
Representations and Warranties") shall survive the Closing and delivery of
deeds and other conveyance documents. Each party agrees to indemnify and hold
the other harmless from and against any loss, cost, liability, claim, or
cause of action arising from the inaccuracy of such parties Separate
Representations and Warranties, including court costs and attorney's fees
incurred by such indemnified party in the defense of any such claim and in
the enforcement of this indemnity. All indemnities contained in this Contract
shall survive the Closing. The Mutual Representations in paragraph 7 are
given for the sole purpose of establishing the Purchaser's Conditions
Precedent to Closing contained in paragraph 5D and shall not survive the
Closing; the sole remedy for breach of the Mutual Representations being as
set forth in paragraph 5F. Provided, however, notwithstanding the provisions
of the prior sentence to the contrary, the breach of any of the Mutual
Representations by Purchaser that results in a claim against Seller by
Purchaser under or pursuant to any representations or warranties of Seller
contained in the conveyance documents delivered by Seller at Closing, shall
survive for the sole benefit of Seller and for the sole use as a defense
against any such claim by Purchaser and/or its successors or assigns in
interest to the Properties.
28. ACCESS TO FILES.
For a period of three (3) years after Closing, Purchaser agrees to
grant to Seller, its successors or assigns, access to Tenant Lease and
Property files delivered to Purchaser at Closing, subject to reasonable
advance written notice.
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29. PACKAGE SALE.
The purchase price provided herein is based upon a group sale of the
Properties, and except as provided in paragraph 5F, no Property or Properties
may be purchased or sold individually hereunder without the prior written
consent of Purchaser and Seller, which consent may be withheld in the sole
discretion of either party.
30. ASSIGNMENT.
Purchaser shall have the right to assign this Contract, in whole or
in part, to one or more affiliated entities, provided written notice shall be
given to Seller of such assignment no later than ten (10) days prior to
Closing. Any such assignment shall not terminate any liability hereunder
unless so released in writing by Seller.
31. BUSINESS DAYS.
In the event that any time period under this Contract expires on a
day that is not a business day, such time period shall be deemed extended to
the first business day following such date. "Business day" as used herein
shall mean any day other than Saturday, Sunday or a legal holiday on which
business is transacted by federally insured national banking institutions in
Cedar Rapids, Iowa.
32. COUNTERPARTS.
This Contract may be signed in counterparts, each of which is deemed
an original. This Contract shall be null and void unless it shall be executed
by Purchaser and one copy returned to Seller on or before January 20, 2000.
WHEREFORE, the parties have hereunto affixed their hands and seals as of the
date set hereof.
SELLER: PURCHASER:
USP Real Estate Investment Trust AEGON USA Realty Advisors, Inc.
By: /s/ Patrick E. Falconio By: /s/ David L. Blankenship
---------------------------------- -------------------------------
Patrick E. Falconio, Trustee David L. Blankenship, President
Chairman of the Board of Trustees
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