-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mp5435L1msWpeUxSdKP77M9epHv/CpdGnY7zp7yOpqRLcutdjLUI5QtGuDODHHbW nSsc/KlMg//AMjRenLEA5Q== 0000897069-99-000413.txt : 19990812 0000897069-99-000413.hdr.sgml : 19990812 ACCESSION NUMBER: 0000897069-99-000413 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLINGTON PROPERTIES TRUST CENTRAL INDEX KEY: 0000928953 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 396594066 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-84953 FILM NUMBER: 99684155 BUSINESS ADDRESS: STREET 1: 18650 W CORPORATE DRIVE CITY: BROOKFIELD STATE: WI ZIP: 53045 BUSINESS PHONE: 4147928930 MAIL ADDRESS: STREET 1: 18650 W CORPORATE DRIVE STREET 2: SUITE 300 CITY: BROOKFIELD STATE: WI ZIP: 53045 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on August 11, 1999 Registration Statement No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ Wellington Properties Trust (Name of Small Business Issuer in its Charter)
Maryland 6798 39-6594066 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Organization) Classification Code Number) Identification No.)
18650 West Corporate Drive, Suite 300 P.O. Box 0919 Brookfield, Wisconsin 53008-0919 (414) 792-8900 (Address and telephone Number of Principal Executive Offices) -------------------------- Robert F. Rice President 18650 West Corporate Drive P.O. Box 0919 Brookfield, Wisconsin 53008-0919 (414) 792-8900 (Name, Address, and Telephone number of agent for service) Copies to: Jay O. Rothman Philip T. Colton Foley & Lardner Maun & Simon PLC 777 East Wisconsin Avenue 2000 Midwest Plaza Building West Milwaukee, Wisconsin 53202 801 Nicollet Mall (414) 271-2400 Minneapolis, Minnesota 54402 (612) 904-7400 Approximate date of commencement of proposed sale to the Public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE =========================================== ===================== ===================== ==================== ================== Proposed Maximum Proposed Maximum Title Of Each Class Of Amount To Be Offering Price Aggregate Offering Amount of Securities To Be Registered Registered Per Share (1) Price (1) Registration Fee - ------------------------------------------- --------------------- --------------------- -------------------- ------------------ Class A Cumulative Convertible Preferred Shares, $0.01 par value per share, together with a sufficient number of 1,380,000 Shares (2) $10.00 $13,800,000 $3,836.40 shares of Common Shares, $0.01 par value per share, into which they are convertible - ------------------------------------------- --------------------- --------------------- -------------------- ------------------ (1) Calculated in accordance with Rule 457(i) under the Securities Act of 1933, as amended. (2) Includes 180,000 shares issuable upon exercise of an option granted to the Underwriters to cover overallotments.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion - Dated August 11, 1999) 1,200,000 Class A Cumulative Convertible Preferred Shares ----------------------- WELLINGTON PROPERTIES TRUST ----------------------- We are a real estate investment trust, formed to acquire, develop, own and operate investment real estate, principally office buildings, light industrial facilities, community shopping centers and apartment communities. This prospectus relates to the public offering of our Class A Cumulative Convertible Preferred Shares (the "Class A Preferred Shares"), on which dividends will accrue at an annual rate of 9.5%. The Class A Preferred Shares may be converted by the holder into our common shares at any time. Our common shares are currently listed on the Nasdaq SmallCap Market sm under the symbol "WLPT." No public market currently exists for our Class A Preferred Shares, but we plan to list our Class A Preferred Shares on the Nasdaq National Market sm under the symbol "WLPTA" upon the closing of this offering. The public offering price of our Class A Preferred Shares will be $10.00 per share. An investment by you in our Class A Preferred Shares involves a high degree of risk. Before making an investment decision, you should carefully consider the risks described under the heading "Risk Factors," beginning on page 9 of this prospectus. The Offering Per Share Total ---------------------------------------------- ------------ ------------- Public offering price $10.00 $12,000,000 Underwriting discount $ 0.80 $ 960,000 Proceeds to us (before deduction of other offering expenses) $ 9.20 $11,040,000 We are also offering our underwriters a 45-day option to purchase up to 180,000 additional shares, solely to cover any overallotments. In addition to the underwriters' discount, we will pay the underwriters an aggregate of 2% of total proceeds of this offering, up to a maximum of $250,000, as payment for expenses they incur. We will also issue the underwriters' representative a warrant to purchase a number of Class A Preferred Shares equal to 10% of the total number of Class A Preferred Shares sold in this offering. In considering an investment in our Class A Preferred Shares, you should rely only on the information in this prospectus. We have not authorized anyone to provide you with information that is different. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of our Class A Preferred Shares or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. [logo of R. J. Steichen & Company] ______________________, 1999 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and financial statements contained in this prospectus. All information in this prospectus has been adjusted, where appropriate, to reflect a common share split on March 24, 1999, whereby every holder of our common shares was issued 4.75 shares for each 3 shares held. The Trust Wellington Properties Trust is a self-administered real estate investment trust or "REIT" formed on March 15, 1994 under Maryland law. In November 1998, we became an umbrella partnership REIT when we formed an operating partnership called Wellington Properties Investments, L.P., of which we are the sole general partner. Through the operating partnership and our subsidiaries, we acquire, develop, own and operate our investment properties. We seek to develop a diversified portfolio of investment real estate, including office buildings, light industrial facilities, community shopping centers and apartment communities. Our operating partnership or our subsidiaries currently own five properties: o a 119,722 square-foot office building in Minneapolis, Minnesota; o a 77,533 square-foot office building in St. Cloud, Minnesota; o a 50,291 square-foot light industrial facility in Burnsville, Minnesota; o a 304-unit apartment community in Madison, Wisconsin; and o a 72-unit apartment community in Schofield, Wisconsin. Our Madison, Wisconsin apartment community is currently subject to sale under a land purchase agreement. Currently, each of our investment properties are managed by one of our REITPLUS sm affiliates. We developed our REITPLUS sm strategy to create a unique investment partnership with potential sellers of real estate properties in order to expand our operations and attract quality properties from real estate owners. REITPLUS sm provides potential sellers with traditional benefits of an umbrella partnership REIT or "UPREIT," such as capital access, diversification and tax deferral, PLUS it creates an entrepreneurial opportunity uncommon in our industry, in that the sellers retain management and leasing responsibility of the property, and participate in the equity appreciation of our properties. Organizations looking to sell, but not "sell out," will be incented to complete UPREIT transactions as a means to diversify holdings and form strategic alliances. We designed the REITPLUS sm ownership and management structure to attract these organizations and to provide them with the following benefits: o the seller becomes a partner, not an employee; o the seller retains franchise value and name recognition of its existing organization; o the seller realizes benefits of our REIT tax status; o the seller aligns itself with a publicly-traded entity, with access to public capital markets; and 2 o the seller maintains autonomy and entrepreneurial focus. Key elements of the REITPLUS sm program include: o REITPLUS sm Investment Strategies (External Growth). Our investment strategy is to enter new markets and increase our penetration in existing markets by procuring REITPLUS sm affiliates with a significant market presence and operating history. Typically, our REITPLUS sm investments include the issuance of our common shares or operating partnership units, thereby creating an ongoing incentive for our REITPLUS sm affiliates to maximize long-term shareholder value. We believe we have certain advantages which will enhance our ability to identify and capitalize on REITPLUS sm opportunities, including: (1) our management's multiple-market expertise in identifying, structuring and closing acquisitions; (2) management's experience in successfully growing and operating a public real estate company; (3) management's long-standing relationship with customers, real estate brokers and institutional and other owners of real estate assets, which collectively help us identify investment opportunities; and (4) our ability to offer tax deferred consideration to REITPLUS sm affiliates. o REITPLUS sm Operating Strategies (Internal Growth). Our operating strategy is to serve the real estate needs of our existing customers and expand our customer base. We intend to implement proactive property management and leasing programs, achieve operating efficiencies through increasing economies of scale, and complete ongoing maintenance and value enhancement improvements. We believe our operating strategy will provide increasing cash flow from our properties through rental increases and expense savings. As we make future acquisitions of investment properties, including through the application of the proceeds of this offering, we intend to diversify our portfolio of investment real estate by acquiring properties throughout the United States and by targeting, as opportunities present themselves, each of the office, light industrial, retail and residential market segments. Our principal offices are located at 18650 W. Corporate Drive, Suite 300, Brookfield, Wisconsin 53045 and 11000 Prairie Lakes Drive, Suite 610, Minneapolis, Minnesota 55344. The telephone numbers of our offices are (414) 792-8900 (Brookfield) and (612) 826-6968 (Minneapolis). 3 The Offering Class A Preferred Shares offered..... 1,200,000 of our Class A Cumulative Convertible Preferred Shares, $0.01 par value per share. Underwriters' overallotment option... The underwriters of this offering will have an option to purchase and sell up to an additional 180,000 Class A Preferred Shares solely to cover overallotments. Trading symbols...................... Our common shares are listed for quotation on the Nasdaq SmallCap Market sm under the symbol "WLPT." Upon the closing of the offering, we expect that the Class A Preferred Shares will be listed for quotation on the Nasdaq National Market sm under the symbol "WLPTA." Equity to be outstanding after the offering......................... 1,352,361 of our common shares (not including (1) 261,773 shares subject to outstanding warrants and share options, (2) an estimated 2,327,273 shares issuable upon conversion of the Class A Preferred Shares, (3) an estimated 678,400 shares issuable upon conversion of our Class B Junior Cumulative Convertible Preferred Shares, and (4) 1,719,335 shares issuable upon conversion of units of our operating partnership); 1,200,000 Class A Preferred Shares (not including warrants we will issue to our underwriters' representative to purchase up to 120,000 Class A Preferred Shares); 180,000 additional Class A Preferred Shares if the underwriters' overallotment option is exercised in full (not including additional warrants we would issue to our underwriters' representative to purchase up to 18,000 Class A Preferred Shares); 349,800 of our Class B Junior Cumulative Convertible Preferred Shares; 1,214,086 common units of our operating partnership; 505,249 Class B common units of our operating partnership; 1,200,000 Class A preferred units of our operating partnership that we will receive when we contribute the net proceeds of this offering to the operating partnership (up to 1,380,000 Class A preferred units if our underwriters' overallotment option is exercised in full); and 349,800 Class B preferred units of our operating partnership. 4 Voting rights........................ Each of our Class A Preferred Shares will be entitled, at all meetings of our shareholders, to the number of votes equal to the number of common shares into which they are then convertible. Based on a closing bid price of $4.6875 on July 30, 1999, we estimate that each Class A Preferred Share will initially entitle its holder to approximately 1.94 votes. Holders of our Class A Preferred Shares will generally vote together with holders of our common shares and holders of our Class B Junior Cumulative Convertible Preferred Shares as a single class. However, on matters directly affecting the rights and preferences of the Class A Preferred Shares, the holders of our Class A Preferred Shares will vote as a single class. Liquidation.......................... In the event of our dissolution or liquidation, holders of our Class A Preferred Shares will be entitled to receive $10.00 per share, plus any accrued but unpaid dividends on the Class A Preferred Shares, before we make any distributions to holders of any other existing class of our shares. Dividends............................ A dividend on our Class A Preferred Shares equal to $0.475 per share will accrue and be payable every six months, beginning six months after the initial closing date of this offering. Dividends that we pay to you as a holder of Class A Preferred Shares, to the extent of our current and accumulated earnings and profits for federal income tax purposes, will be taxable to you as ordinary dividend income. Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of your basis in the Class A Preferred Shares to the extent thereof, and thereafter as taxable gain. Such distributions will have the effect of deferring taxation until the sale of your Class A Preferred Shares. If, at any time, we fail to declare or pay a dividend on the Class A Preferred Shares as it accrues, such dividend will be cumulative, without interest, with future dividends. If, at any time, we should fail to pay a full year's accrued dividends on the Class A Preferred Shares, then the holders of the Class A Preferred Shares will be entitled, voting as a class, to elect a majority of the members of our board of trustees, who will then serve on the board for so long as a full year's dividends remain unpaid. Conversion........................... Each of our Class A Preferred Shares will be convertible at any time, at the option of the holder, into a number of our common shares equal to the quotient obtained by dividing (1) $10.00, plus any dividends then accrued but unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares, or $____. 5 Redemption........................... Class A Preferred Shares (in whole or in part) at a per-share price equal to $10.00, plus any dividends then accrued but unpaid. However, we will not have the right to redeem the Class A Preferred Shares until two years after the initial closing of this offering and only if the closing bid price of our common shares equals or exceeds 150% of the then effective conversion price for 20 consecutive trading days before the date of the redemption notice. Use of proceeds of this offering..... We intend to contribute all of the proceeds from the sale of our Class A Preferred Shares in this offering to our operating partnership, principally to finance acquisitions of additional investment properties or equity securities of other real estate investment entities. A portion of the proceeds may be used for general working capital purposes. Tax Status of the Trust We are and currently intend to remain a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code. As a result, we are generally not subject to federal income tax if we distribute at least 95% of our taxable income (excluding net capital gains) to our shareholders. REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. We have received a written opinion of Grant Thornton LLP that we are qualified as a REIT under the Internal Revenue Code. 6 SUMMARY CONSOLIDATED FINANCIAL INFORMATION We have set forth in the table below certain of our summary consolidated financial information for the periods and at the dates indicated. Historical data for the years 1994 through 1998 have been derived from our audited consolidated financial statements for those years. Since this information is only a summary, you should read such data in conjunction with our financial statements, including the accompanying notes, and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. Wellington Properties Trust (Dollars in thousands, except per share data)
Six Months Year Ended December 31, Ended June 30, ----------------------------------------------------- Pro Pro Forma Historical(d) Forma Historical(d) ------------------------------------------- (Unaudited) (Unaudited) (Unaudited) 1999(a) 1999 1998 1998(a) 1998 1997 1996 1995 1994 ------- ---- ---- ------- ---- ---- ---- ---- ---- Operating Data: Revenue: Rental revenue $ 2,153 $3,414 $1,517 $4,229 $ 3,488 $ 2,981 $ 2,557 $ 1,209 $ 196 Other 374 31 - 765 21 199 9 12 1 ------- -------- ------- ------ ------- ------- ------- ------ ------ Total Revenue 2,527 3,445 1,517 4,994 3,509 3,180 2,566 1,221 197 ------- -------- ------- ------ ------- ------- ----- ------- ------ Expenses: Interest 770 1,295 634 1,657 1,417 1,398 1,339 580 103 Depreciation and amortization 430 681 294 773 694 606 552 236 34 Property expenses 1,007 1,589 589 1,840 1,555 1,278 1,200 671 70 General and administrative 379 388 148 340 289 174 188 104 17 Other nonrecurring - 2,613 - - 1,010 - - - - Provision for uncollectible advance related party - - - - 240 - - - - Termination of advisory agreement - 950 - - 310 - - - - ------- -------- ------- ------ ------- ------- ------- ------- ------ Total expenses 2,586 7,516 1,665 4,610 5,515 3,456 3,279 1,591 224 ------- -------- ------- ------ ------- ------- ------- ------- ------ Income (loss) before minority interests (59) (4,071) (148 384 (2,006) (276) (713) (370) (27) Loss allocated to minority interests 445 2,664 - 615 1,065 - - - - ------- -------- ------- ------ ------- ------- ------- ------- ------ Net income (loss) 386 (1,407) (148 999 (941) (276) (713) (370) (27) Net income allocated to Preferred Shares (736) - - (1,472) - - - - - ------- -------- ------- ------ ------- ------- ------- ------- Net loss allocated to Common Shares $ (350) $(1,407) $ (148) $ (473) $ (941) $ (276) $ (713) $ (370) $ (27) ======= ======== ======= ====== ======= ======= ======= ======= ====== Net loss per Common Share $ (0.26) $ (1.04) $ (0.13 $(0.36) $ (0.80) $ (0.24) $ (0.68) $ (0.71) $(0.23) ======= ======== ======= ======= ======= ======= ======= ======= ====== Cash dividends/distributions declared $ 298 $ 253 $ 534 $ 543 $ 571 $ 259 $30 ======== ======= ======= ======= ======= ======= ====== Cash dividends/distributions per share $ 0.22 $ 0.22 $ 0.44 $ 0.49 $ 0.54 $ 0.52 $ 0.13 ======== ======= ======= ======= ======= ======= ====== Balance Sheet Data (as of period end): Real estate investments, net of accumulated depreciation $34,141 $ 49,250 $18,964 $49,747 $19,193 $21,249 $13,713 $1,704 Total assets 48,361 51,016 19,919 53,527 19,785 21,871 14,679 2,201 Mortgages payable 19,369 32,049 15,840 32,505 14,666 9,376 7,550 1,313 Total liabilities 21,753 38,599 16,718 36,522 16,308 17,974 11,504 1,353 Minority interests 7,292 8,755 - 12,248 - - - - Shareholders' equity 19,316 3,662 3,201 4,758 3,477 3,897 3,175 848
7 Wellington Properties Trust (Dollars in thousands, except property data)
Six Months Ended June 30, Year Ended December 31, ---------------------------- --------------------------------------------------------- Pro Pro Forma Historical(d) Forma Historical(d) ----------------- ----- ------------------------------------------------- (Unaudited) (Unaudited) (Unaudited) 1999(a) 1999 1998 1998(a) 1998 1997 1996 1995 1994 ------- ---- ---- ------- ---- ---- ---- ---- ---- Other Data: Cash flows provided (used in): Operating activities (b) $ 520 $ 129 (b) $(1,187) $ (5) $ 68 $225 $ 47 Investing activities (b) (20) (86) (b) (662) 1,814 (992) (8,921) (1) Financing activities (b) (555) (188) (b) 1,889 (1,894) 504 8,820 449 Funds from operations (c) Weighted average shares outstanding (in thousands) 1,351 1,351 1,145 1,322 1,175 1,129 1,050 520 116 Property Data (as of period end): Number of properties owned 4 5 2 4 5 2 3 3 1 Total rentable square feet Owned (in thousands) 247 247 - 247 247 - - - - Total apartment units owned 72 376 376 72 376 376 410 398 34 - -------------------- (a) The pro forma data reflects the effect, for the periods indicated, of the offering of the Class A Preferred Shares, the proposed sale of our Madison, Wisconsin apartment community and the various transactions described elsewhere in this prospectus, beginning at page 60. (b) Pro forma information relating to cash flows from operating, investing and financing activities has not been included because we believe that the information would not be meaningful, due to the number of assumptions required in order to calculate this information. (c) The White Paper on Funds from Operations ("FFO") approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after all adjustments for unconsolidated partnerships and joint ventures. We believe that FFO is helpful to investors as a measure of the financial performance of an equity REIT because, along with the cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. We compute FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. FFO does not represent cash generated from operating activities determined in accordance with generally accepted accounting principles and should not be considered as an alternative to net income (determined in accordance with generally accepted accounting principles) as an indication of our financial performance or to cash flow from operating activities (determined in accordance with generally accepted accounting principles) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. (d) The historical summary consolidated financial information was derived from our audited financial statements, unless otherwise specifically noted.
8 RISK FACTORS In deciding whether to purchase our Class A Preferred Shares in this offering, you should consider all information in this prospectus, including particularly each of the following risk factors: We may be unable to pay accrued dividends on the Class A Preferred Shares If our properties do not generate revenue sufficiently in excess of operating expenses, our cash flow and our ability to make distributions to our shareholders, including to holders of our Class A Preferred Shares, may be adversely affected. Our properties are subject to all operating risks common to real estate investment properties and a number of risks specific to us, including the other factors described below, each of which could adversely affect our revenues or costs and our ability to pay dividends. We have declared but not paid dividends of $0.11 per common share for each of the first and second quarters of 1999. We expect to derive funds to pay these dividends from the sale or refinancing of one of our investment properties. However, we cannot be certain that we will be able to complete a transaction that will allow us to pay those outstanding dividends. We do not own all of our investment properties directly Each of our Minnesota properties is owned by our operating partnership, Wellington Properties Investments, L.P., in which we currently own approximately a 8.8% of the common units and 349,800 Class B preferred units, or its subsidiaries. We also anticipate that future investment properties will be acquired by the operating partnership or its subsidiaries. To enable such acquisitions, we will deliver all of the net proceeds of this offering to the operating partnership as an additional capital contribution. While our status as the sole general partner of the operating partnership gives us management and investment control over the operating partnership, we will likely retain only a minority equity interest in the operating partnership for the foreseeable future. In part, this means that, while we will be able to sell individual investment properties from time to time, the sale of substantially all of our properties in a single transaction would require the approval of a majority of the limited partners of the operating partnership. In addition, if the operating partnership were to be liquidated, its assets would be distributed among its partners generally, not among our shareholders. Our future investments have not been identified We intend to invest a substantial portion of the proceeds of this offering in additional properties, and we have not yet identified specific acquisition targets. We may face significant competition from other investors in attempting to acquire properties. We cannot be certain that attractive properties will be available, that such properties may be acquired on terms favorable to us or that any properties we ultimately acquire will perform to our expectations. If, during this offering, we identify likely material acquisitions, we will supplement this prospectus to discuss such properties. You should not rely on the initial disclosure of any proposed investment in a supplement as an assurance that we will ultimately consummate the proposed transaction or that the information provided concerning the proposed investment will not change between the date of the supplement and the actual investment. We have a history of losses We have reported net losses for each year since our inception. We had an accumulated deficit of approximately $5.4 million at June 30, 1999. While we have implemented a strategy to increase revenues 9 and control costs through improved efficiency, there can be no assurance that we will become profitable in the future. Dependence on External Sources of Capital As with many other REITs, but unlike corporations generally, our ability to reduce our debt and finance growth must be funded largely by external sources of capital because we generally will have to distribute to our shareholders 95% of our taxable income from the operation of our properties in order to qualify as a REIT. Our access to external capital will depend upon a number of factors, including the market's perception of our growth potential, our current and potential future cash distributions and the market price of our equity securities. The failure to obtain future sources of capital would have an adverse effect on our ability to grow in accordance with our business strategy and pay dividends on the Class A Preferred Shares as they become due. We are dependent on our REITPLUS sm affiliates Each of our current investment properties and some or all of our future acquisitions will be managed on a day-to-day basis by our REITPLUS sm affiliates. Therefore, the revenues and costs associated with our business will remain largely out of our immediate control. The bankruptcy or failure to perform to our expectations of any of these affiliates could have a material adverse effect on the results of our operations and our ability to pay distributions to our shareholders, including periodic dividends on our Class A Preferred Shares. We are dependent on our key personnel Our ability to achieve our strategic business objectives and operate profitably is dependent on identifying, attracting and retaining qualified key management personnel. In particular, our strategic growth and operating results will depend on the performance and retention of Duane H. Lund, our chief executive officer, and Robert F. Rice, our president. Shareholders' Agreement may make management changes more difficult A number of our affiliated shareholders have entered into a shareholders' agreement that expires in November 2008. The parties to the agreement own or control an aggregate of 26.8% of our common shares as of July 31, 1999 and assuming conversion of exercisable share options held by them. The parties to the agreement also own or control 349,800 of our Class B Preferred Shares. Under the terms of the agreement, each of the signing shareholders agrees to vote his or her shares to cause Paul T. Lambert and Steven B. Hoyt to remain members of our board of trustees, to fill vacancies on the board with persons mutually selected by Wellington Management Corporation and American Real Estate Equities, LLC, and to cause the board of trustees to retain Arnold K. Leas as our chairman of the board, Duane H. Lund as our chief executive officer and Robert F. Rice as our president. This agreement could make changes in our management less likely, even if such changes might be in the best interests of our business and shareholders. Delays in investing proceeds will have an adverse effect Upon the closing of this offering, the proceeds we receive may not be invested in real estate for some time as we identify and negotiate suitable acquisitions. A delay in investing the proceeds from this offering will delay the receipt of any returns from such investments. Moreover, until we invest in properties, our investment returns will be limited to the rates of return available on short-term, highly liquid investments that provide appropriate safety of principal. We expect these rates of return, which affect the amount of cash available to make distributions to our shareholders, to be considerably lower than we would 10 receive from property investments and considerably lower than the periodic dividend that will accrue on the Class A Preferred Shares. We are currently dependent on the Wisconsin and Minnesota markets All of our existing properties are located in Wisconsin or Minnesota. While we intend to seek acquisition targets in other regions of the United States, our financial performance is currently dependent upon economic conditions in these states in general and the specific local markets where our existing properties are located. A decline in the economy in these markets generally could adversely affect our ability to pay accrued dividends to holders of our Class A Preferred Shares and the value of the common shares into which our Class A Preferred Shares are convertible. In addition, the degree to which we can achieve geographical diversification will depend on the funds available to us for acquisitions. Real estate investments entail particular risks Effect of Economic and Real Estate Conditions. Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If our properties do not generate revenues sufficiently in excess of operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected. An investment property's revenues and value may be adversely affected by a number of factors, including: o the national economic climate; o the local economic climate (which may be adversely impacted by plant closings, local industry slowdowns and other factors); o local real estate conditions (such as an oversupply of or a reduced demand for rental properties); o the perceptions by prospective tenants of the safety, convenience and attractiveness of properties; o our ability to provide adequate management, maintenance and insurance; and o increased operating costs (including real estate taxes). Fixed expenses. Certain significant expenditures associated with each equity investment (such as mortgage payments, if any, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. If we mortgage a property to secure payments of indebtedness, and if we are unable to meet our mortgage payments, a loss could be sustained as a result of foreclosure on the property by the mortgagee. Market Illiquidity. Equity real estate investments are relatively illiquid. Such illiquidity will limit our ability to alter our portfolio, whether necessary to sell our properties, to raise capital, or in response to changes in economic or other conditions. In addition, the Internal Revenue Code discourages REITs from selling properties held for a short period of time, which may affect our ability to sell properties and to pay distributions to holders of our Class A Preferred Shares and may adversely affect the value of the common shares issuable upon conversion of our Class A Preferred Shares. Operating Risks. Our properties will be subject to all operating risks common to investment real estate properties in general, all of which might adversely affect occupancy or rental rates of our properties. 11 In addition, increases in our operating costs due to inflation and other factors may not necessarily be offset by increased rents. Nor can we be assured that our tenants will be able and willing to pay increased rent or that rent control laws or other laws regulating rental properties will not be adopted in our markets. Renewals. The profitable operation of our investment properties will depend, in part, on our ability to renew leases as they expire and to relet commercial and residential space as it becomes available. Acquisition Risks. Acquisitions of investment properties entail risks that unforeseen liabilities will be assumed or that our investments will fail to perform in accordance with expectations. In addition, improvements to acquired properties will be costly and may not result in increases in revenue or profits. Competition. Our present and future properties will compete with other rental and ownership properties in attracting occupants. In addition, many of our competitors for acquisitions and development projects have far greater management, financial and other resources than we do. Our acquisition activities entail special risks We will incur special risks associated with our acquisition of investment properties, including the risks that: o we may assume unanticipated liabilities; o occupancy rates and rents at an acquired property may not be sufficient to make the property profitable; o we may not be able to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy and other governmental and utility company authorizations; o the relevant market may experience an economic downturn; o financing may not be available on favorable terms; and o lease-ups (if any) may not be completed on schedule, resulting in increased debt service expense and construction costs. Advantageous transactions may be prevented General. Certain provisions contained in our declaration of trust and bylaws and under federal and Maryland laws may have the effect of discouraging a third party from making any acquisition proposal for us. For example, such provisions may o deter attractive tender offers for our shares, or o deter purchases of large blocks of our shares, thereby limiting the opportunity for our shareholders (including the holders of our Class A Preferred Shares) to receive a premium for their shares over then-prevailing market prices. Preferred Shares. In addition to our Class A Preferred Shares being offered in this offering and our existing Class B Junior Cumulative Convertible Preferred Shares, our declaration of trust authorizes our board of trustees to issue up to 8,132,200 preferred shares and to establish the preferences and rights of any preferred shares issued, which preferences and rights may be superior to those of the Class A Preferred 12 Shares. The authority of our board of trustees to issue additional series of preferred shares could also be used by the board to further deter takeovers. Ownership Limit. In order for us to maintain our qualification as a REIT, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals. Further, no person may own more than 9.9% of our outstanding common shares. However, AREE is subject to a separate contractual ownership limitation of 32.0%. Our debt service obligations will entail additional risks We will continue to be subject to the risks normally associated with debt financing, including the risk that our funds from operations will be insufficient to meet required payments of principal and interest, or, even if sufficient to service our debt, will be insufficient to pay dividends on the Class A Preferred Shares as they accrue, the risk that existing indebtedness on our properties (which in most cases will not have been fully amortized at maturity) will not be able to be refinanced or that the terms of such refinancing will not be as favorable as the terms of the existing indebtedness. Our existing properties secure approximately $32.0 million of outstanding aggregate mortgage indebtedness, of which $24.6 million is fixed at a weighted average annual rate of 7.7% and $7.4 million is variable at a weighted average annual rate of 9.6%. Present and future variable rate financing and the need to refinance our holdings from time to time subjects us to the risk that fluctuations in prevailing interest rates may increase our debt service obligations beyond current expectations. We do not have any presently defined source of refinancing upon the maturity of our existing debt. We are also likely to acquire additional debt that requires balloon payments and there is no limit as to the amount of the debt our board of trustees can approve or the ratio of debt to total market capitalization that we must maintain. Typically only a small portion of the principal of our indebtedness may be repaid prior to maturity and we may not have sufficient funds on hand to repay such indebtedness, in which case it will be necessary for us to refinance such debt, either through additional debt financing secured by individual properties or groups of properties, by unsecured private or public debt offerings or additional equity offerings. If prevailing interest rates on refinancing exceed their current rates, interest expense would increase, which would adversely affect our funds from operations and our ability to pay dividends to holders of our shares, including our Class A Preferred Shares. In addition, in the event that we are unable to secure refinancing of our indebtedness on acceptable terms, we might be forced to dispose of properties upon disadvantageous terms, which could result in losses and might adversely affect cash flow available for distribution as dividends. Further, if a property or properties are mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, such property could be foreclosed upon by or otherwise transferred to the mortgagee with a consequent loss of income and asset value to us. Prevailing interest rates could also have a dramatic effect on our financial condition and the price of our shares Because we intend to maintain a leveraged position following the closing of the offering and because $7.4 million of our outstanding debt obligations is subject to variable interest rates, increases in interest rates could increase our interest expense, which could adversely affect our funds from operations and our ability to pay dividends to our shareholders. An increase in market interest rates may also lead prospective holders of our shares to demand a higher anticipated annual yield than ownership of our shares offers. Such an increase in the required anticipated distribution yield may adversely affect the market price of our Class A Preferred Shares and of our common shares. 13 Conflicts of interest Wellington Management Corporation. Arnold K. Leas, the chairman of our board of trustees, owns, together with his affiliates, 41.8% of the outstanding stock of Wellington Management Corporation and Mr. Leas serves as its president and chief executive officer. In connection with a series of acquisitions that we intended to complete in November 1998, Wellington Management agreed to terminate an agreement we had with them for advisory services and to transfer ownership of the office building housing our executive offices in Brookfield, Wisconsin. In exchange, we agreed to (1) pay Wellington Management $1.6 million for the termination of the advisory agreement, (2) pay $2.5 million in cash and 745,098 common units of our operating partnership for the Brookfield office building, and to assume the existing mortgage obligations on the property, (3) hire Robert F. Rice, who was then our executive vice president and a vice president of Wellington Management, as our president, (4) contract with Wellington Realty, Inc., a wholly-owned subsidiary of Wellington Management, for day-to-day management of our Wisconsin apartment communities, and (5) issue a warrant to Wellington Management allowing it to purchase up to 791,667 of our common shares. Due to the failure to close many of the related acquisitions with third parties and our inability to finance the $2.5 million cash payment on favorable terms, we agreed with Wellington Management that (1) the advisory agreement would be terminated, but that Wellington would receive only cash payments of $550,000 we made in 1998 and 95,000 of our Class B Junior Cumulative Convertible Preferred Shares, (2) we would not acquire the Brookfield property at that time, (3) we would retain Mr. Rice to serve as our president, (4) Wellington Realty, Inc. would manage our existing Wisconsin properties for 5% of the gross revenues those properties generate, a fee we believe is consistent with norms in the industry, and (5) Wellington Management would return the warrant to purchase common shares to us for cancellation. Since we maintain a small corporate staff, we have contracted with Wellington Management Corporation for accounting and certain other administrative systems and services at fees which we believe are no greater than an unaffiliated third party would be likely to charge. We have in the past and may continue to contract with Wellington Realty, Inc., a wholly-owned subsidiary of Wellington Management Corporation, for real estate brokerage services. Under such agreements, Wellington Realty will be entitled to receive real estate brokerage commissions. Currently, we have entered into a listing agreement with Wellington Realty for the sale of our Maple Grove and Lake Pointe apartment communities. Under the listing agreement, we would pay Wellington Realty 3% of the sale price as a commission upon sale. Typically, real estate brokerage commissions are paid by the seller of a property, but some or all of such costs may be reflected in higher sale prices. Though we are not actively marketing the Lake Pointe property at this time, the Maple Grove apartment community is currently subject to a sale contract. Based on the terms of the Maple Grove contract, Wellington would receive a commission of approximately $501,000 upon closing. From time to time, we may also purchase insurance from another wholly-owned subsidiary of Wellington Management Corporation, Wellington Insurance Services, Inc. If we do so, Wellington Insurance would be entitled to a commission from the insurance companies of 15% of the premium we pay. American Real Estate Equities, LLC. American Real Estate Equities, LLC is owned in equal thirds by WLPT Funding, LLC, Lambert Equities II, LLC and Steven B. Hoyt. Duane Lund, our chief executive officer, owns 100% of WLPT Funding and is its sole manager. Paul T. Lambert, one of our trustees, is a majority owner and sole manager of Lambert Equities. Steven Hoyt is also one of our trustees. In November 1998, our shareholders approved a transaction whereby American Real Estate Equities would purchase 166,666 of our common shares for $1,000,000, or $6.00 per share and would 14 contribute certain assets, principally our Cold Springs office center in St. Cloud, Minnesota and contracts for the purchase of 29 other real estate investment properties (some of which Mr. Hoyt had an ownership interest in), to our operating partnership. As consideration for such assets, we agreed to (1) hire Mr. Lund as our chief executive officer and nominate Mr. Lambert and Mr. Hoyt for election to our board of trustees; (2) issue 4,933,233 units of beneficial interest in our operating partnership to American Real Estate Equities or its members; (3) issue an additional 9,934,663 operating partnership units to the owners of the properties to be acquired (including 4,510,671 units to Mr. Hoyt and his affiliates); (4) pay cash to the owners of the properties to be acquired and assume all third-party mortgage indebtedness on the properties to be acquired; (5) issue to American Real Estate Equities a warrant to purchase 791,667 of our common shares; and (6) reimburse certain of American Real Estate Equities' costs, including costs they incurred in obtaining the contractual rights contributed to the operating partnership, upon the completion of the transaction. When most of the property acquisitions were not completed due to increased financing costs, we and American Real Estate Equities consummated a much smaller transaction pursuant to which the operating partnership acquired only the Cold Springs office center and two other investments properties in Minnesota. We still agreed to hire Mr. Lund as our chief executive officer and Mr. Lambert and Mr. Hoyt were elected to our board of trustees. Subsequently, American Real Estate Equities returned the warrant to us for cancellation and we paid no cash to American Real Estate Equities in reimbursement of the $1,356,000 they spent in connection with the proposed transactions; instead, we issued them, in the third quarter of 1999, 135,600 of our Class B Junior Cumulative Convertible Preferred Shares, which we may redeem after two years for $1 if we fail to meet certain financial goals. Among the units our operating partnership issued to sellers of the acquired properties, Mr. Hoyt and his wife received a total of 860,107 common units in consideration of their ownership interests in those properties. Apart from the foregoing transactions, American Real Estate Equities advanced us an aggregate of $1,392,000 during the summer and fall of 1998 for working capital purposes. We have since issued 119,200 of our Class B Junior Cumulative Convertible Preferred Shares to them in discharge of $1,192,000 of the repayment obligation. If we complete the sale of our Madison, Wisconsin apartment community, which is currently subject to a sale contract, we plan to use a portion of the proceeds of the sale to repay the $200,000 balance. Hoyt Properties Inc. Steven B. Hoyt, one of our trustees, is the controlling stockholder of Hoyt Properties Inc., whom we have retained to manage our existing commercial properties in Minnesota. As with Wellington Realty, this agreement was not negotiated at arm's length, but we believe that the stipulated management fee of 5% of gross income from the managed properties is consistent with industry norms for similar properties. Future Acquisitions. We anticipate that we will enter into property management arrangements like those described above with new REITPLUS sm affiliates in connection with future acquisitions and may also agree to nominate principals of our new REITPLUS sm affiliates for election to our board of trustees. Failure to continue to qualify as a REIT We believe that we are a qualified REIT under the Internal Revenue Code and currently intend to maintain such qualification, although no assurance can be given that we will be able to remain qualified as a REIT in the future and our board of trustees could elect, without the approval of our shareholders, to discontinue such qualification at any time. Qualification under the Internal Revenue Code as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT in the future. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay distributions to our shareholders aggregating annually at least 95% of 15 our REIT income (excluding net capital gains). In addition, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. If we were to fail to qualify as a REIT in the future, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under certain statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, the funds available for distribution to our shareholders, including holders of our Class A Preferred Shares, would be reduced for each of the years involved. In such a circumstance, we could even be required to borrow funds or to liquidate certain of our investments to pay the applicable tax. For our 1996 and 1997 taxable years, we unintentionally failed to demand certain share ownership information of our shareholders as required in order to meet the share ownership tests for REITs. As a consequence of that failure, the IRS could contend that we did not qualify as a REIT for 1996 and 1997, even though we did not (but for the failure to send the demand letters) fail the share ownership tests. The IRS has given no indication that it intends to challenge our qualification as a REIT for failure to send such letters. If the IRS were successfully to challenge our status as a REIT, it could require us to pay tax on our income as a regular corporation, and deny our ability to re-elect REIT status until possibly as late as 2002. Given that we would have reported a net taxable loss for 1996 and 1997 as an ordinary corporation, we believe that the requirement to pay tax for those years on income as a regular corporation would be of little consequence. Our inability to reelect status as a REIT until 2002, however, could adversely affect our ability to pay scheduled dividends to holders of our Class A Preferred Shares and could adversely affect the value of the common shares into which our Class A Preferred Shares are convertible. We are subject to possible environmental liabilities Under various federal, state and local environmental laws, ordinances, and regulations, we may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at property we currently own or previously owned, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by such parties in connection with the contamination. Such laws typically impose cleanup responsibility and liability without regard to whether the owner knows of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several among potentially responsible parties unless the harm is devisable and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of hazardous or toxic substances may be very substantial, and the presence of such substances, or the failure to properly remediate such property, could adversely affect our ability to sell or rent such property or to borrow using such property as collateral. Some environmental laws can create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not the person owns or operates the facility. Also, the owner of a site may be subject to common law claims by third parties based on damages resulting from environmental contamination emanating from a site. Other federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials when they are in poor condition or in the event of building remodeling, renovation or demolition. These laws may impose liability for release of asbestos and may allow third parties to seek recovery from owners or operators of real properties for personal injury 16 associated with asbestos. In connection with our ownership and operation of our properties, we may be liable for such costs. Our limited assessments of our existing properties have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, nor are we aware of any such environmental liability. We also intend to condition future acquisitions on satisfactory environmental assessments. Nevertheless, it is possible that our past and future assessments will not reveal all environmental liabilities or that there are existing or future material environmental liabilities of which we will be unaware. Compliance with applicable laws, rules and regulations, including the Americans with Disabilities Act, can be costly All places of public accommodation are required to meet certain federal requirements, including but not limited to those associated with the Americans with Disabilities Act. A number of additional federal, state and local laws exist which also may require modifications to our present and future properties or restrict certain further renovations thereof, with respect to access by disabled persons. For example, the Fair Housing Amendments Act of 1988 requires apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the Americans with Disabilities Act or the Fair Housing Amendments Act could result in the imposition of fines or an award of damages to private litigants. While we believe that our existing properties are substantially in compliance with present requirements, we have received notice of a Department of Justice investigation of the architect and developer of our Maple Grove apartment community in Madison, Wisconsin. In the event of a determination of noncompliance, we may have some responsibility with respect to the last 60 units constructed there, for which we acted as the developer, though we cannot presently determine the costs of any actions that may ultimately be required of us. We have entered into an agreement to sell the Maple Grove property. However, the closing of the sale is subject to a number of conditions, including the buyer's satisfactory completion of its due diligence review. Liability or the threat of liability to remediate conditions at the property in order to comply with the Americans With Disabilities Act could have the effect of delaying or preventing the sale, or forcing us to make price or other concessions to the buyer. Future legislation may impose additional burdens or restrictions on owners with respect to access by disabled persons. Although the costs of compliance with any additional legislation are not currently ascertainable, the costs could be substantial. Limitations or restrictions on the completion of certain renovations may also limit application of our investment strategy in certain instances or reduce overall returns on our investments. Uninsured losses could occur We expect to continue to carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of our properties, with policy specifications, insured limits and deductibles that we believe are customarily carried for similar properties. There are, however, certain types of losses (such as losses arising from wars) that are not generally insured because insurance is unavailable or unavailable at a reasonable cost. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the affected property, as well as the anticipated future revenues from such property and could continue to be obligated on any mortgage indebtedness or other obligation related to the property. 17 The offering price of the Class A Preferred Shares is arbitrary While we have based the public offering price for the Class A Preferred Shares on an assessment of current market conditions and have tied the conversion ratio of the Class A Preferred Shares to prevailing trading prices for our common shares, the offering price is arbitrary and does not reflect the prices at which the Class A Preferred Shares or our common shares will trade following the closing of this offering. There is no prior public market for our Class A Preferred Shares Prior to this offering, there has been no public market for our Class A Preferred Shares and there can be no assurance that an active trading market will develop or be sustained or that our Class A Preferred Shares may ever be resold at or above the offering price. The market value of our Class A Preferred Shares and the common shares into which they are convertible could be substantially affected by all of the foregoing risk factors. While the common shares into which the Class A Preferred Shares are convertible are currently listed on the Nasdaq SmallCap Market sm, we might not be able to meet Nasdaq's continued listing qualifications in the future. In addition, trading volumes in our common shares have typically been very low, which is typical of equity securities of comparable REITs. As a result, investors may have difficulty in selling our common shares at generally prevailing prices. We make forward-looking statements in this prospectus which may prove to be inaccurate This prospectus contains "forward-looking statements" within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created by those laws. You can generally identify these forward-looking statements because we use words such as we "believe," "anticipate," "expect" or similar words when we make them. These statements include our plans and objectives for future operations, including plans and objectives relating to future growth. These forward-looking statements are based on current expectations that involve numerous risks and uncertainties, including changes in interest rates, our ability to borrow necessary investment capital, changes in demand for commercial and residential space, tenant creditworthiness, possible declines in property values or occupancy rates, changes in general economic conditions and changes in the federal or state tax laws affecting REITs. You should be aware that assumptions relating to our forward-looking statements also involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to accurately predict and many of which are beyond our control. Although we believe the assumptions underlying our forward-looking statements in this prospectus, and the forward-looking statements themselves are reasonable, circumstances could change and any of our assumptions could prove to be inaccurate and actual results may differ materially from our forward-looking statements. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. 18 USE OF PROCEEDS After deducting the underwriters' discount, as well as our other offering expenses, we expect to receive approximately $10,390,000 from the sale of our Class A Preferred Shares, approximately $12,046,000 if the underwriters' overallotment option is exercised in full. We intend to contribute all of the net proceeds of this offering to our operating partnership for use in obtaining additional investment properties or equity securities of other real estate investment entities. While we review prospective investment opportunities on a continual basis, we have not entered into agreements or begun negotiations toward the acquisition of any specific properties at this time. Until our operating partnership uses the proceeds from this offering as described above, we intend to cause our operating partnership to invest the proceeds in short-term, interest-bearing securities, including money market funds. 19 DIVIDEND POLICY Dividends on our shares are declared from time to time by our board of trustees in their discretion. However, as a qualified REIT, we are required to distribute no less than 95% of our REIT taxable income (excluding net capital gains) to our shareholders. Under the terms of the Class A Preferred Shares, we will not be able to make distributions to holders of our common shares or holders of our Class B Junior Cumulative Convertible Preferred Shares until first paying a cumulative dividend of $0.95 per share per year on the Class A Preferred Shares. Dividends on the Class A Preferred Shares will accrue and be payable in equal semi-annual installments, beginning with a first dividend six months after the initial closing of the offering. Assuming dividends on the Class A Preferred Shares and on our Class B Junior Cumulative Convertible Preferred Shares are paid when accrued, our board of trustees may declare dividends on our common shares in which our existing classes of preferred shares will not participate. Dividends that we pay to you as a holder of Class A Preferred Shares, to the extent of our current and accumulated earnings and profits for federal income tax purposes, will be taxable to you as ordinary dividend income. Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of your basis in the Class A Preferred Shares to the extent thereof, and thereafter as taxable gain. Such distributions will have the effect of deferring taxation until the sale of your Class A Preferred Shares. If, at any time, we fail to declare or pay a dividend on the Class A Preferred Shares as it accrues, such dividend will be cumulative, without interest, with future dividends. If we should fail to pay a full year's accrued dividends on the Class A Preferred Shares ($0.95), then the holders of the Class A Preferred Shares will be entitled, voting as a class, to elect a majority of the members of our board of trustees, who will then serve on the board for so long as a full year's dividends remain unpaid. 20 CAPITALIZATION The following table sets forth, at June 30, 1999: o our actual capitalization; and o our capitalization as it would have been, giving effect to (1) the sale of 1,200,000 Class A Preferred Shares at a price of $10.00 per share and the receipt of the proceeds from such sale, net of underwriters' discount and other estimated offering expenses, (2) the issuance of 349,800 Class B Junior Cumulative Preferred Shares in satisfaction of certain liabilities to related parties and (3) the sale of the Maple Grove apartment property and application of a portion of the proceeds to the related mortgage loans payable. You should read the following table in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements, including the accompanying notes, appearing elsewhere in this prospectus. The following table is based on the number of our common shares outstanding as of June 30, 1999. It therefore does not reflect common shares issuable upon the exercise of outstanding warrants and share options or upon conversion of our Class A Preferred Shares, Class B Junior Cumulative Preferred Shares or operating partnership units.
As of June 30, 1999 --------------------------------------- Historical Proforma ---------- -------- Mortgage loans payable $ 32,049,000 $ 19,369,000 Minority interests 8,755,000 7,292,000 SHAREHOLDERS' EQUITY: Preferred Shares: $0.01 par value: 10,000,000 authorized, no shares issued and outstanding on a historical basis, -- -- 1,200,000 Class A Cumulative Convertible Preferred Shares issued and outstanding on a pro forma basis -- 12,000 349,800 Class B Junior Cumulative Convertible Preferred Shares issued and outstanding on a pro forma basis -- 3,000 Common Shares, $0.01 par value; 100,000,000 authorized; 1,351,935 issued and outstanding 14,000 14,000 Additional paid-in capital 9,070,000 24,406,000 Accumulated deficit (5,422,000) (5,119,000) ---------------- ---------------- Total shareholders' equity 3,662,000 19,316,000 ---------------- ---------------- Total capitalization $ 44,466,000 $ 45,977,000 ================ ================
21 PRICE RANGE OF COMMON SHARES AND DIVIDENDS Our common shares are listed on the Nasdaq SmallCap Market sm under the symbol WLPT. The following table sets forth, for the periods indicated, the high and low bid prices per share for our common shares and dividends declared on our common shares: 1997 High Low Dividend ---- ---- --- -------- First Quarter.............................. $6.45 $4.59 $0.1345 Second Quarter............................. 6.01 4.59 0.1345 Third Quarter.............................. 5.85 4.59 0.1108 Fourth Quarter............................. 5.78 4.51 0.1103 1998 First Quarter.............................. 5.62 3.96 0.1105 Second Quarter............................. 10.60 4.59 0.1108 Third Quarter.............................. 6.80 5.54 0.1108 Fourth Quarter............................. 6.25 4.19 0.1108 1999 First Quarter.............................. 6.33 3.48 0.1100 (1) Second Quarter............................. 4.75 4.38 0.1100 (1) Third Quarter (through July 30, 1999)...... 4.69 3.68 - ------------------------------ (1) Indicates that declared dividends have not been paid as of the date of this prospectus. The failure to pay these dividends when they were declared is the result of insufficient available funds, due principally to substantial costs incurred in connection with 30 proposed property acquisitions in the fourth quarter of 1998 and our failure to close 27 of them due to changed market conditions. We expect to derive funds to pay these declared dividends with proceeds from the sale or refinancing of one of our investment properties. For more information about the potential sale of our Madison, Wisconsin apartment community, please see page 34 of this prospectus. The last reported sale price of our common shares on the Nasdaq SmallCap Market sm as of July 30, 1999 was $4.6875 per share. As of July 30, 1999, there were 310 holders of record of our common shares. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview As of June 30, 1999, we owned a portfolio of two residential and three commercial properties. Our residential properties are located in Wisconsin and contain an aggregate of 376 units. Our commercial properties are located in Minnesota and contain an aggregate of 247,546 square feet of rental space. Our interest in the commercial properties is held through our operating partnership. We are the sole general partner of the operating partnership and, as of June 30, 1999, we held a 8.8% interest in the operating partnership. The pro forma information below reflects the effect of the offering of the Class A Preferred Shares, the proposed sale of our Madison, Wisconsin apartment community and the various transactions described elsewhere (beginning on page 60) in this prospectus. It may be helpful as you read this section to refer to our summary financial information and consolidated financial statements, including the notes thereto, included elsewhere in this prospectus. Results of Operations Pro Forma Operating Results Comparison of the Six Months Ended June 30, 1999 on a Pro Forma Basis to the Six Months Ended June 30, 1999 on a Historical Basis. Our pro forma revenue was approximately $2,527,000 for the six months ended June 30, 1999 as compared to $3,445,000 total historical revenue for the six months ended June 30, 1999. The decrease results from our exclusion of pro forma revenue related to the anticipated sale of our Maple Grove property of $1,197,000 offset in part by an increase in interest income of $279,000 related to our investment of cash we would have received from our issuance of the Class A Preferred Shares. Our pro forma expenses for the six months ended June 30, 1999 were approximately $2,586,000 as compared to approximately $7,516,000 total historical expenses for the six months ended June 30, 1999. The decrease is due primarily to our exclusion of pro forma expenses totaling $1,367,000 relating to the sale of our Maple Grove property and our exclusion of costs relating to the termination of our advisory agreement with Wellington Management and other nonrecurring expenses aggregating $3,563,000, since such costs are not expected to have a continuing impact. As a result of the above, our pro forma net loss before minority interests for the six-month period ended June 30, 1999 was approximately $59,000, as compared to historical net loss before minority interest of $4,071,000, and our pro forma net loss allocated to our common shares was $350,000 as compared to historical net loss allocated to common shares of $1,407,000. Comparison of the Year Ended December 31, 1998 on a Pro Forma Basis to the Year Ended December 31, 1998 on a Historical Basis. Our pro forma revenue was approximately $4,994,000 for the year ended December 31, 1998 as compared to $3,509,000 total historical revenue for the year ended December 31, 1998. The increase results from the following items: (1) our inclusion of pro forma revenue of $3,392,000 from our acquisitions of the commercial properties in Minnesota, and (2) inclusion of interest income totaling $559,000 related to our investment of expected net cash proceeds received from our issuance of the Class A 23 Preferred Shares, partially offset by (3) our exclusion of pro forma revenue totaling $2,466,000 from the sale of our Maple Grove property. Our pro forma expenses for the year ended December 31, 1998 were approximately $4,610,000 as compared to approximately $5,515,000 total historical expenses for the year ended December 31, 1998. The decrease is due primarily to: (1) our exclusion of pro forma expenses totaling $2,669,000 relating to our sale of the Maple Grove property, and (2) our exclusion of costs relating to the termination of the advisory agreement with Wellington Management and other nonrecurring expenses aggregating $1,560,000, since such costs are not expected to have a continuing impact, partially offset by (3) our inclusion of pro forma expenses of $3,249,000 relating to our acquisitions of the commercial properties in Minnesota, and (4) our inclusion of additional pro forma general and administrative expenses totaling $75,000 relating to our acquisitions. As a result of the above, our pro forma net income before minority interests for the year ended December 31, 1998 was approximately $384,000 as compared to a historical net loss before minority interest of $2,006,000, and our pro forma net loss allocated to common shares was $473,000 as compared to historical net loss allocated to common shares of $941,000. Historical Operating Results Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June 30, 1998. Our rental revenue increased by approximately $1,897,000 or 125% for the six-month period ended June 30, 1999 compared to the six-month period ended June 30, 1998. The increased revenue was primarily a result of our acquisitions in 1998. Interest and other income increased by $31,000 during these same periods, primarily due to interest earned on escrowed funds relating to our acquisitions in 1998. Our total expenses increased from $1,665,000 for the six-month period ended June 30, 1998 to $7,516,000 for the six-month period ended June 30, 1999, an increase of $5,851,000 of which $3,563,000 represents non-recurring charges related to the termination of our advisory agreement and write-off of deferred costs associated with our 1998 acquisition efforts. The remaining $2,288,000 was attributable to increased property expenses of $904,000, increased management fees of $96,000, increased depreciation and amortization of $387,000, increased interest expense of $661,000, and increased general and administrative expenses of $240,000, primarily as a result of our 1998 acquisition efforts. Our depreciation and amortization increased from $294,000 for the six-month period ended June 30, 1998 to $681,000 for the comparable period in 1999, an increase of 132%, as a result of our acquisitions in 1998. Our interest expense increased from $634,000 for the six-month period ended June 30, 1998 to $1,295,000 for the comparable period in 1999, an increase of 104%, primarily as a result of additional borrowings associated with our acquisitions in 1998. Our general and administrative expenses increased from $148,000 for the six-month period ended June 30, 1998 to $388,000 for the comparable period in 1999, an increase of 162%. In November 1998, we converted from an externally managed REIT to a self-administered REIT and commenced administrative operations and, as a result, incurred payroll expenses of $150,000 for the six-month period ended June 30, 1999 not incurred in the previous comparable period. As a result of the above, our net loss before minority interests increased from $148,000 for the six-month period ended June 30, 1998 to a loss of $4,071,000 for the six-month period ended June 30, 1999. Our net loss increased from $148,000 for the six-month period ended June 30, 1998 to $1,407,000 for the six-month period ended June 30, 1999, attributable primarily to the existence of minority interests 24 resulting from our new structure following our 1998 acquisitions, as well as the other factors described above. Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. Our rental revenue increased by approximately $507,000 or 17.0% for the year ended December 31, 1998 compared to the year ended December 31, 1997. The increased revenue was primarily a result of our acquisitions in 1998. Our interest and other income decreased by $178,000 or 89.5%, during these same periods, primarily due to our gain on the sale of a residential property during the second quarter of 1997. Our total expenses increased from $3,456,000 for the year ended December 31, 1997 to $5,515,000 for the year ended December 31, 1998, an increase of 59.6%, of which $1,560,000 represented non-recurring charges related to the abandonment of certain potential transactions associated with our 1998 acquisitions, the provision for uncollectible advances, and our termination of the advisory agreement with Wellington Management. The remaining $499,000 was attributable to increased property expenses of $277,000, increased depreciation and amortization of $88,000, increased interest expense of $19,000 and increased general and administrative expenses of $115,000, primarily as a result of our 1998 acquisitions. Our depreciation and amortization increased from $606,000 in 1997 to $694,000 in 1998, an increase of 14.5%, as a result of our acquisitions in 1998. Interest expenses increased from $1,398,000 in 1997 to $1,417,000 in 1998, an increase of 1.3%, primarily as a result of additional borrowings associated with our acquisitions in 1998. Our general and administrative expenses increased from $174,000 in 1997 to $289,000 in 1998, an increase of 66.1%. During 1998, we converted from an externally managed REIT to a self-administered REIT and commenced administrative operations and incurred payroll expenses of $92,000 not incurred in previous years. As a result of the above factors, our net loss before minority interests increased from $276,000 for the year ended December 31, 1997 to a loss of $2,006,000 for the year ended December 31, 1998. Our net loss increased from $276,000 for 1997 to $941,000 for 1998, attributable primarily to the existence of minority interests resulting from our new structure following our 1998 acquisitions, as well as the other factors described above. Liquidity and Capital Resources Short-Term and Long-Term Liquidity Cash provided by operations and borrowings from affiliates and lending institutions have generally provided the primary sources of our liquidity. Historically, we have used these sources to fund operating expenses, satisfy debt service obligations and fund distributions to shareholders. In connection with the offering, we expect to sell 1,200,000 Class A Preferred Shares. We expect the net cash proceeds to us from the offering, after estimated underwriting discounts and commissions and estimated expenses of the offering, to be approximately $10,390,000 (approximately $12,046,000 if the underwriter's over-allotment option is exercised in full). Our Maple Grove apartment community is presently under contract for sale to an independent third party. The contract is subject to certain closing conditions and contingencies and provides for a purchase price of $16,700,000, to be paid by assuming the first mortgage of approximately $12,680,000 and paying the balance in cash at closing. After costs associated with the sale, we expect net 25 cash proceeds, on a pro forma basis, to be $2,437,000. The closing of the sale of the Maple Grove property (which we describe more fully on page 34 of this prospectus) is contingent on certain conditions, including the satisfactory resolution of the U.S. Department of Justice's investigation of the property for compliance with laws regarding accessibility by disabled persons. No assurance can be given that the sale of the Maple Grove property will be consummated and, if consummated, that it will be on terms described above. Currently, we have no contractual obligations for property acquisition or material capital expenditures, other than tenant improvements in the ordinary course of business. We expect to meet our long-term capital needs through a combination of cash from operations, net cash proceeds from sales of real estate, additional borrowings, additional equity issuances of common or preferred shares, and/or units of our operating partnership. Cash Flows Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June 30, 1998. During the six-month period ended June 30, 1999, we generated $520,000 in cash flows from operating activities and $163,000 from decreased escrowed cash reserves. These cash flows were used primarily for (1) repayments of debt obligations aggregating $465,000; (2) payment of cash dividends, net of our dividend reinvestment plan, totaling $90,000; (3) investment in real estate ventures aggregating $90,000; and (4) additions to fixed assets totaling $93,000. As a result, our cash balances decreased by $55,000 to $99,000 at June 30, 1999 from $154,000 at December 31, 1998. Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. During the year ended December 31, 1998, we generated approximately $4,494,000 in net proceeds from borrowings and $1,246,000 from the issuance of common shares. These cash flows were used primarily for (1) repayments of debt obligations and financing costs aggregating $3,345,000; (2) payment of cash dividends aggregating approximately $506,000; (3) payment of costs associated with new ventures aggregating $98,000; (4) payment of costs associated with our 1998 acquisitions aggregating $564,000; and (5) cash used in operating activities of approximately $1,187,000. As a result, our cash balances increased by approximately $40,000 to $154,000 at December 31, 1998 from $114,000 at December 31, 1997. Funds from Operations We consider funds from operations ("FFO") to be meaningful to investors as a measure of the financial performance of an equity REIT when considered with the financial data presented under generally accepted accounting principles. Under the National Association of Real Estate Investment Trusts' definition, FFO means net income (loss) computed using generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Further, if the conversion of securities into common shares is dilutive, we exclude any income allocated to these securities in computing FFO. The FFO we present may not be comparable to the FFO of other REITs, since they may interpret this definition of FFO differently or they may use another definition of FFO. FFO is not the same as cash generated from operating activities or net income determined in accordance with generally accepted accounting principles. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing when evaluating our liquidity or ability to make cash distributions or pay debt service. 26 Our FFO, on a pro forma basis for the year ended December 31, 1998 and the six months ended June 30, 1999, is summarized in the following table.
Pro Forma ------------------------------------------ Year Ended Six-Month Period Ended December 31, 1998 June 30, 1999 ---------------- ------------ Income (loss) before minority interests $ 384,000 $ (59,000) Less: net income allocated to preferred shares (1,472,000) (736,000) Add: real estate related depreciation and amortization 721,000 359,000 Funds from operations - basic $ (367,000) $ (436,000) ================ ============== Weighted average number of shares and units: basic(1) 3,041,378 3,070,065 ================ ============== - ---------------------- (1) Assumes exchange of all units, calculated on a weighted average basis for common shares.
Year 2000 Issues Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, this could result in a system failure or miscalculations causing disruption of operations, including a temporary inability to process transactions, prepare financial statements, send invoices or engage in similar normal business activities. We rely on information technology systems of Wellington Management Corporation, Wellington Realty, Inc. and Hoyt Properties Inc. on a contract basis. Wellington Management Corporation and Wellington Realty, whose systems we rely on for corporate and Wisconsin property management, completed installation and testing of new hardware and software that is certified as Year 2000 ready by their manufacturers in November 1998. Hoyt Properties, whose systems we rely on for the management of our Minnesota properties, completed installation and testing of hardware and software that is certified as Year 2000 ready by their manufacturers in July 1999. Accordingly, we do not anticipate material problems in processing the billing and collection of revenue, the payment of expenditures, the recording of financial transactions, the preparation of financial statements and maintaining and generating system-driven managerial information. Our property management team has been evaluating the impact of the Year 2000 issue on the various facets of property operating systems since July 1998. Based on the current status of this evaluation process, we do not anticipate any material adverse consequences of the Year 2000 on property operations. However, we rely on third-party suppliers for a number of key services. Interruption of supplier operations due to the Year 2000 issue could affect our operations. We also are dependent upon our tenants for revenue and cash flow. Interruptions in tenant operations due to the Year 2000 issue could result in reduced revenue, increased receivable levels and cash flow reductions. Inflation Inflation has historically not had a significant impact on our business because of the relatively low rates of inflation in the markets in which we have operated. We do not anticipate that inflation will have a direct, material negative impact on our results of operations in the future, because residential tenants typically enter into short-term leases and because most commercial leases provide that 27 tenants must pay their share of operating expenses. An increase in prevailing inflation rates could, however, have a very dramatic impact on mortgage interest rates and the yields of alternative investments, with the effect of increasing our finance costs and adversely impacting real estate markets and the market for our debt and equity securities. 28 BUSINESS Introduction We are a self-administered real estate investment trust or "REIT" formed March 15, 1994 pursuant to Maryland law to acquire, own and operate investment real estate. We operate under the direction of our board of trustees. Our chief executive officer and our president have day-to-day management responsibilities, including identifying prospective property acquisitions, marketing, finance, overseeing third-party managers and general administrative responsibilities. In November 1998, we converted to an umbrella partnership REIT structure by forming an operating partnership, Wellington Properties Investments, L.P., of which we are the sole general partner. On November 20, 1998, the operating partnership acquired its initial three properties. We expect future acquisitions to be made through the operating partnership. Our operating partnership and our other subsidiaries currently own five properties: o a 119,722 square-foot office building in Minneapolis, Minnesota, o a 77,533 square-foot office building in St. Cloud, Minnesota, o a 50,291 square-foot light industrial facility in Burnsville, Minnesota, o a 304-unit apartment community in Madison, Wisconsin, and o a 72-unit apartment community in Schofield, Wisconsin. Currently, our REITPLUS sm affiliates manage each of our investment properties. Our Madison, Wisconsin apartment community is currently subject to sale under a land purchase agreement. We first qualified as a REIT for federal income tax purposes for the taxable year ended December 31, 1996. Our principal offices are located at 18650 W. Corporate Drive, Suite 300, Brookfield, Wisconsin 53045 and 11000 Prairie Lakes Drive, Suite 610, Minneapolis, Minnesota 55344, and our telephone numbers are (414) 792-8900 (Brookfield) and (612) 826-6968 (Minneapolis). The Operating Partnership and Operating Partnership Agreement Our interests and those of all limited partners in the operating partnership are represented by partnership units. Currently, the operating partnership has issued ordinary common units (which are economically equivalent to our common shares) and Class B common units, which have no current economic value, but which will automatically convert to ordinary common units upon the determination of our board of trustees that our funds from operations (as defined by the National Association of Real Estate Investment Trusts) equal or exceed $0.55 per share, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. If necessary, however, the number of Class B units that will convert to ordinary common units will be limited so that the current holder of the operating partnership's outstanding Class B units, American Real Estate Equities, 29 LLC, will not become a greater than 10% owner, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. The operating partnership has also issued 349,800 Class B preferred units to us, which are economically equivalent to our Class B Junior Cumulative Convertible Preferred Shares. Upon the closing of this offering and our contribution of our net proceeds to the operating partnership, the operating partnership will also issue us 1,200,000 Class A preferred units (up to 1,380,000 Class A preferred units if our underwriters exercise their overallotment option in full), which will be economically equivalent to the Class A Preferred Shares. The operating partnership may also issue additional classes or series of preferred units on such terms as we, as sole general partner, may determine. Management. The operating partnership was formed on July 28, 1998 as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. We are the sole general partner of the operating partnership and expect to own only a minority interest in the operating partnership for the foreseeable future. We will use the proceeds from the sale of the Class A Preferred Shares to make an additional capital contribution to the operating partnership in exchange for an equal number of Class A preferred units of the operating partnership. As sole general partner, we have the exclusive power and authority to conduct the business of the operating partnership, subject to the consent of the limited partners in certain limited circumstances. Limited partners have no right or authority to act for or to bind the operating partnership. No limited partner may take part in the conduct or control of the business or affairs of the operating partnership by virtue of being a holder of units. In particular, the limited partners expressly acknowledge in the operating partnership agreement that we, as sole general partner, are acting on behalf of the operating partnership's limited partners and our shareholders, collectively, and are under no obligation to consider the tax consequences to limited partners when making decisions for the benefit of the operating partnership. The limited partners further agree that, in the event of a conflict between the interests of our shareholders and the limited partners, we, as sole general partner, will discharge our fiduciary duties to the limited partners by acting in the best interests of our shareholders. Removal of the General Partner. The operating partnership agreement provides that the limited partners may not remove us, with or without cause, as general partner of the operating partnership. In addition, we may not transfer any of our interests as general partner in the operating partnership, except in connection with a merger or sale of all or substantially all of our assets. Redemption, Exchange and Conversion of Units. Subject to certain limitations in the operating partnership agreement and, in the case of any preferred units, following the conversion of such preferred units into common units, holders of common units generally will have the right to require the redemption of their common units at any time one year after the original issuance date of such units. Limited partners that hold preferred units will have the right to convert such preferred units into common units at a conversion rate established at the time any particular class or series of preferred units is established. Once the conversion has occurred, a converted preferred limited partner will also have a right to require redemption of its common units. Unless we elect to assume and perform the operating partnership's obligation with respect to redemption of common units, a limited partner demanding redemption will receive cash from the operating partnership in an amount equal to the market value of the units to be redeemed. The market value of a unit, for this purpose, will be equal to the average of the closing bid and ask prices of our common shares for the ten trading days before the day on which the redemption notice was given. Instead of the operating partnership acquiring the units for cash, we will have the right to elect to acquire the units directly from a limited partner demanding redemption, in exchange for either cash or an equal number of our common shares, and, upon such acquisition, we will become the owner of such units. This one-for-one conversion 30 rate will be adjusted appropriately in the event of a share split, share dividend or similar event. No fewer than 1,000 units (or all remaining units owned by the limited partner if less than 1,000 units) must be redeemed or exchanged each time units are redeemed. We will always reserve a sufficient number of our authorized but unissued common shares, solely for the purpose of unit redemptions. As of the date of this prospectus, our operating partnership had outstanding 1,214,086 common units, 505,249 Class B common units and 349,800 Class B preferred units. When we contribute the net proceeds of this offering to the operating partnership (assuming no exercise of the underwriters' overallotment option), the operating partnership will issue us 1,200,000 Class A preferred units. If a limited partner receives common shares upon redemption of units, the limited partner will receive registration rights for the common shares in accordance with our master registration rights agreement. Under the agreement, every time the operating partnership issues units, we agree to register the common shares issuable in exchange for the units within one year and to use commercially reasonable efforts to register those shares for public resale by the former unit holder. Holders of partnership units also have the right under the agreement, subject to certain limitations, to include common shares they receive in exchange for units in registrations we may make for other purposes. Sales of Assets. Under the operating partnership agreement, we, as sole general partner, have the exclusive authority to determine whether, when and on what terms the assets of the operating partnership will be sold. However, a sale of all or substantially all of the assets of the operating partnership or a merger of the operating partnership with another entity generally requires an affirmative vote of the holders of a majority of the outstanding units held by limited partners. Conduct of Our Business and Distributions. Unless we first get the consent of the limited partners, we may not enter into or conduct any business other than in connection with managing the business of the operating partnership. Generally, we and the operating partnership will make distributions of cash to partners and our common shareholders, respectively, at the same time and in equal per-share amounts, subject, of course, to the dividend preferences of our preferred shares. To do so, we may be required to borrow funds from the operating partnership from time to time. Reimbursement; Transactions with Affiliates. We will not receive any compensation for our services as general partner of the operating partnership. We will, however, as a partner in the operating partnership, have the same right to allocations and distributions as other partners holding common units. In addition, the operating partnership will reimburse us for all our expenses incurred in connection with our activities as general partner, our continued existence and qualification as a REIT, and all other liabilities incurred by us in connection with the pursuit of our business and affairs as they may relate to the operating partnership. Except as expressly permitted by the operating partnership agreement, our affiliates will not engage in any transactions with the operating partnership, except on terms that are fair and reasonable and no less favorable to the operating partnership than terms that would be obtained from an unaffiliated third party. Issuance of Additional Units. We have broad discretion to cause the operating partnership to issue additional units to the limited partners or others (including us) for such consideration and on such terms and conditions as we, as sole general partner, deem appropriate. However, if we issue common shares, we must contribute the net proceeds to the operating partnership, and the operating partnership must issue a number of common units to us equal to the number of common shares we issued. The operating partnership agreement also allows the operating partnership to issue preferred units of different classes and series, having rights, preferences and other privileges, variations and designations as we may determine. Any such preferred units may have terms, provisions and rights which are preferential to the terms, provisions and 31 rights of the common units and existing preferred units. Preferred units, however, may be issued to us only in connection with an offering of our securities having the same terms and rights as the preferred units and the contribution by us to the operating partnership of the net proceeds of the offering. No limited partner of the operating partnership has preemptive, preferential or other similar rights with respect to additional capital contributions or loans to the operating partnership or the issuance or sale of any units. Capital Contributions. No partner of the operating partnership will be required to make additional capital contributions to the operating partnership, except that we are generally required to contribute net proceeds of the sale of our equity securities to the operating partnership. Except in the case of certain limited partners who may agree to contribute capital to restore any deficits in their respective capital accounts at liquidation, no limited or general partner will be required to pay to the operating partnership any deficit or negative balance which may exist in its capital account. Exculpation and Indemnification. The operating partnership agreement generally provides that we, as sole general partner, will incur no liability to the operating partnership or any limited partner for losses sustained, liabilities incurred, or benefits not derived as a result of errors in judgment or for anything that we may do or refrain from doing in connection with the business and affairs of the operating partnership if we carried out our duties in good faith. We also have no liability for the loss of any limited partner's capital and are not responsible for any misconduct, negligent act or omission of any consultant, contractor, or agent that we select in good faith. The operating partnership agreement also requires the operating partnership to indemnify us, our trustees and officers against any loss or damage, including reasonable legal fees and court costs, incurred by such person by reason of anything it may do or refrain from doing for or on behalf of the operating partnership, or in connection with its business or affairs, unless: (1) the act or omission either was committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified person actually received an improper personal benefit in money, property or services; or (3) the indemnified person had reasonable cause to believe that the act or omission was unlawful. Any such indemnification claims must be satisfied only out of the assets of the operating partnership, and any applicable insurance proceeds. Amendment of the Operating Partnership Agreement. Amendments to the operating partnership agreement may be proposed by us or by limited partners owning at least 25% of the then outstanding units. Generally, the operating partnership agreement can only be amended with our approval, and a majority of all outstanding units. Our Business Objectives and Operating Strategies Our primary business objective is to grow our company by strategically deploying and implementing our proprietary REITPLUS sm program. We believe that our REITPLUS sm program provides the capital, legal and tax advantages of the REIT structure, plus preserves the entrepreneurial opportunities required to attract and retain talented, local real estate operators. Key elements of the REITPLUS sm program include o REITPLUS sm Investment Strategies (External Growth). Our investment strategy is to enter new markets and increase our penetration in existing markets by procuring REITPLUS sm affiliates with a significant market presence and operating history. Typically, our REITPLUS sm investments include the issuance of our common shares or operating partnership units, thereby creating an ongoing incentive for our REITPLUS sm affiliates to maximize long-term shareholder value. We believe we have certain advantages which will enhance our ability to identify and capitalize on REITPLUS sm opportunities including: (1) our multiple-market expertise in identifying, structuring and closing acquisitions; (2) our experience in successfully growing and 32 operating a public real estate company; (3) our long-standing relationship with customers, real estate brokers and institutional and other owners of real estate assets, which collectively help us identify investment opportunities; and (4) our ability to offer tax deferred consideration to REITPLUS sm partners. o REITPLUS sm Operating Strategies (Internal Growth). Our operating strategy is to serve the real estate needs of our existing customers and expand our customer base. We intend to implement proactive property management and leasing programs, achieve operating efficiencies through increasing economies of scale, and complete ongoing maintenance and value enhancement improvements. We believe our operating strategy will provide increasing cash flow from our properties through rental increases and expense savings. Whenever possible, we intend to use our operating partnership to acquire properties. For many acquisitions, we anticipate that a portion of the purchase price will be paid in operating partnership units. The initial operating partnership transaction consisted of the acquisition of two office buildings and a light industrial building. Prior to that transaction, we owned only apartment communities. We also intend to continue to utilize the marketing and management expertise of our trustees, our property managers and their affiliates. We will continue to conduct market studies to identify tenant preferences and acquisition and development opportunities. In the future, we will likely continue to incur or guarantee indebtedness in connection with the development and acquisition of real estate assets. We currently intend to maintain a debt-to-total-market-capitalization ratio of approximately 70%, although this is subject to change based on market conditions. The amount of leverage will vary among investment properties that we own. Our current leverage is approximately 65%. Acquisition and Development Strategy Directly and through our REITPLUSK partners, we have established a network of relationships with real estate owners, developers, brokers, lenders, insurance companies, governmental agencies, and other institutions. We hope that this network and our independent research will provide us with access to acquisition opportunities before they become widely marketed. We seek to invest in properties with one or more of the following characteristics: o ownership by potential REITPLUSK affiliates with considerable expertise in local markets; o location in regions where geographic factors or governmental policies restrict or reduce competition; and o a history of poor management and/or occupancy and financial problems. In general, we seek to acquire properties that are not more than 10 years old and offer above average amenities. One of our goals is to provide a diversified portfolio of investment properties that will resist market fluctuations. We believe that by creating a portfolio of properties that is diverse as to type and location, we will be better insulated against fluctuations within specific market segments. Specifically, we will consider investment opportunities in office buildings, light industrial properties, multi-family housing, well-anchored shopping centers, community-based residential facilities and other types of investment real estate. 33 With respect to new construction projects, we believe that, on a selective basis, we may have an opportunity to achieve rental rates that justify the risks associated with new development. We believe that expertise procured through joint ventures with our REITPLUSK affiliates in the development of new properties may provide us with a competitive advantage as the value of existing properties approaches replacement cost and new development becomes more attractive. In the ordinary course of our business, we and our agents engage in preliminary discussions with potential sellers and buyers of investment properties on a continual basis. At the present time, we do not have any properties under contract but are engaged in preliminary discussions with potential sellers. Our Maple Grove apartment community is presently under contract for sale to an independent third party. The contract provides for a purchase price of $16,700,000 to be paid by assuming the first mortgage of approximately $12,680,000 and the balance being paid in cash at closing. The contract is subject to closing conditions and contingencies including: o approval and consent of the holder of the first mortgage; o our ability to deliver clear title; o the purchaser inspecting the property; and o a satisfactory resolution of the issues raised by the United States Department of Justice concerning our compliance with fair housing laws as they relate to access by disabled persons. If we complete the sale of the Maple Grove property in the near future, we intend to use a portion of the net proceeds to pay the dividends we have declared on our common shares for the first and second quarters of 1999. Property Management We intend to contract for management of our properties through the staff of professionals and support personnel, including certified property managers, apartment managers, apartment maintenance technicians and leasing agents of our REITPLUSK affiliates. We intend that the depth of the REITPLUSK affiliates will enable us to deliver quality services on an uninterrupted basis, thereby promoting tenant satisfaction and improving tenant retention. Each of our properties will be operated by a staff specifically selected by us, based on the size, location, age, management plan and marketing plan of the individual property. We seek personnel that are carefully trained in their appropriate areas of expertise, such as property management, marketing, leasing, resident relations, income generation, curb appeal and maintenance. Our Minnesota office buildings and light industrial facility are currently managed by Hoyt Properties Inc. and our Wisconsin apartment communities are managed by another REITPLUSK affiliate, Wellington Realty, Inc. Our established policies and procedures specify reporting requirements and management guidelines to be applied at each of our properties. The computer network we use through our services agreement with Wellington Management Corporation, using customized and conventional software programs, has the capacity to connect our corporate headquarters with each property manager, providing management with rapid access to all marketing and accounting information. With respect to the apartment properties, on-site managers prepare weekly marketing reports of each property's occupancy, lease expiration, prospective resident traffic, unit availability, renewal, rental rate and tenant profile information. We also regularly 34 monitor accounting elements such as receivables, payables, rent roll status and budget compliance through the system. We have designed our marketing and leasing activities and procedures with the intent of complying with all established federal, state and local laws and regulations. We seek to offer leases of appropriate terms, consistent with individual property marketing plans structured to respond to local market conditions. We establish qualifying standards for prospective tenants to comply with the Fair Housing Amendments Act and the Americans with Disabilities Act and attempt to stabilize service levels and income streams through lower tenant turnover. None of our existing properties are currently subject to rent control or rent stabilization regulations. Each of our property managers receives a property management fee no greater than 5% of gross rental income collected in connection with the operation of our properties, a fee rate we believe is consistent with prevailing market rates. Property Marketing Through our property managers, we conduct certain marketing and leasing activities for our properties. Several of our officers and property managers actively participate in various owners' organizations, including the Building Owners and Managers Association, the Institute of Real Estate Management, the National Apartment Association and the International Council of Shopping Centers. Such organizations regularly provide market information and rent studies which we use to supplement our own studies. The Properties The properties that we currently own are: Name & Location Type Units/Square Feet - --------------- ---- ----------------- Cold Spring Center Office 77,533 square feet St. Cloud, MN Thresher Square East/West Office 119,722 square feet Minneapolis, MN Nicollet VI Light Industrial 50,291 square feet Burnsville, MN Lake Pointe Apartments 72 units Schofield, WI Maple Grove Apartments 304 units Madison, WI We describe each of the above properties and their locations in greater detail below. Minnesota Properties Cold Spring Center 35 Our Cold Spring Center is a 77,533 square-foot office building located in St. Cloud, Minnesota. The Class A, five-story building was built in 1990 and is 100% leased. The property also has a surface parking lot which holds 318 cars. St. Cloud is located in central Minnesota, approximately 60 miles northwest of the Minneapolis/St. Paul metropolitan area. St. Cloud is the largest municipality in the St. Cloud Standard Metropolitan Statistical Area which is comprised of three central Minnesota counties with a combined population of 191,000. The city of St. Cloud is located at the junction of the three counties and serves as the regional commerce centers for central Minnesota and is one of the fastest growing municipalities in Minnesota, with a population of approximately 60,000. Cold Spring Center is located approximately 2.5 miles west of the central business district of St. Cloud. The St. Cloud office market is currently experiencing stable overall vacancy rates and it is difficult to find large blocks of contiguous space. No new development is expected over the next couple of years and, therefore, we believe that the market will be experiencing an increase in rents. Nicollet VI Nicollet Business Center VI is a 50,291 square-foot office/warehouse building located in Burnsville, Minnesota. The property is currently 100% leased and was built in 1997. Burnsville is a suburb of Minneapolis/St. Paul, located approximately 15 miles south of Minneapolis. The property is located in the southeastern portion of central Minnesota. The Twin Cities are ranked the 15th largest metropolitan area and the eighth fastest growing area in the United States, with an overall annual growth rate of 1.4%. As of 1996, the Twin Cities metropolitan population was approximately 2.8 million, with 58% of the state's population residing in the Twin Cities area. The Twin Cities have approximately 284 million square feet of industrial space with an availability rate of 5.27%. Overall availability in the Twin Cities has averaged less than 5% over the last five years. The overall industrial market in the Twin Cities is comprised of 40% office/warehouse, 30% manufacturing, 20% bulk warehouse and 10% office showroom. Thresher Square East/West Thresher Square, which is located in Minneapolis, consists of two buildings which are separated by a common wall with interior access between the buildings on each floor. The seven-story East building was built in 1904 and contains 64,020 square feet. The West building was built in 1900 and contains 55,845 square feet. The buildings were renovated in the mid 1990's, are currently 100% occupied and are on the National Register of Historic Places. Thresher Square is located in Minneapolis' central business district and is characterized by the real estate industry as a Class B office building. As of the first quarter 1999, the metropolitan area had an overall vacancy rate of 6.25% and an office base of 53.76 million square feet. The Minneapolis central business district contains 38% of that total square footage and has a current vacancy rate of 4.38%. 36 Commercial Property Tables The following tables present additional information related to commercial properties in Minnesota:
TOTALS OR Light WEIGHTED Office Properties Industrial Property AVERAGE --------------------------------------------------------- ------------------- --------- Cold Springs Thresher Square Office Center East/West Nicollet Business VI St. Cloud, MN Minneapolis, MN Burnsville, MN Year Acquired 1998 1998 1998 Year Built/ Renovated 1990 1900/1987 1997 Rentable Square Feet 77,533 119,722 N/A 197,255 GLA N/A N/A 50,291 50,291 Sq. Ft. % Leased (as of July 1, 1999) 100% 100% 100% 100% Annual Total Rental Revenue(1) $1,438,190 $1,610,431 $529,777 $3,578,398 Annual Total Rental Revenue Per Rentable Sq. Ft. $18.55 $13.45 $10.53 $14.46 Tenants Leasing 10% Cold Spring Granite BRW, Inc.(48%) - Wakata Design or More of Rentable (55%) - 4/02; Central 7/01; Search Institute Systems (19%) - SquareFootage as of MN ECSU (14%) - (16%) - 8/02 3/02; Quickdraw July 1, 1999 and 9/02; First American Design, Inc. Lease Expiration Bank (17%) - 4/05 (30%) - 8/02; Date Xata Corporation (41%) - 6/04 - ------------------- (1) Total rental revenue is the monthly contractual base rent as of July 31, 1999, multiplied by 12, plus the estimated annualized expense reimbursements under existing leases.
37 Tenants We currently lease our Minnesota properties to approximately 25 tenants that engage in a variety of businesses. The following table sets forth information regarding leases with the 5 largest tenants of our Minnesota properties, based upon annualized base rent for the relevant properties as of July 31, 1999:
% of Remaining Aggregate % of Aggregate Number of Lease Term Net Rentable Aggregate Annualized Annualized Tenant Name Leases in Months Sq. Ft. Leased leased Sq. Ft. Base Rent Base Rent - ----------- ------ --------- -------------- -------------- --------- --------- Cold Spring Granite 1 34 42,394 54.68% $ 540,523 61.66% BRW, Inc.(1) 4 24 55,443 46.25% $ 436,322 40.79% Xata Corp 1 60 25,388 50.80% $ 185,328 55.3% Search Institute 2 38 21,781 39.00% $ 241,718 51.36% First American Bank 1 70 13,520 17.44% $ 195,548 22.31% TOTALS 9 158,526 64.08%(2) $1,599,439 44.70%(2) = ======= ======= ========== ====== - ------------------- (1) Space is leased in Thresher Square East and Thresher Square West. (2) Figures are as to all of our Minnesota commercial properties, taken as a whole.
38 Lease Expirations The following table sets forth detailed lease expiration information for each of our Minnesota properties for leases in place as of July 31, 1999, assuming that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations.
2009 Year of Lease Expiration and Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total -------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Cold Springs Office Center -------------------------- Square Footage of Expiring Leases -- 6,145 3,980 53,605 -- -- 13,520 -- -- -- -- 77,250 Percentage of Total Leased Sq. -- 7.9% 5.1% 69.6% -- -- 17.4% -- -- -- -- 100% Ft. Final Annual Base Rent Under Expiring Leases(2) -- $37,463 $58,307 $585,367 -- -- $195,548 -- -- -- -- $876,685 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) -- $6.10 $14.65 $10.92 -- -- $14.46 -- -- -- -- $11.35 Percentage of Total Final Annual Base Rent Represented by -- 4.3% 6.7% 66.8% -- -- 22.2% -- -- -- -- 100% Expiring Leases Number of Leases Expiring -- 2 1 2 -- -- 1 -- -- -- -- 6 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases.
39
2009 Year of Lease Expiration and Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total -------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Nicollet Business VI Square Footage of Expiring Leases -- -- -- 24,586 -- 25,388 -- -- -- -- -- 49,974 Percentage of Total Leased Sq. -- -- -- 49.2% -- 50.8% -- -- -- -- -- 100% Ft. Final Annual Base Rent Under Expiring Leases(2) -- -- -- $149,748 -- $185,328 -- -- -- -- -- $335,076 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) -- -- -- $ 6.09 -- $ 7.30 -- -- -- -- -- $ 6.71 Percentage of Total Final Annual Base Rent Represented by -- -- -- 44.7% -- 55.3% -- -- -- -- -- 100% Expiring Leases Number of Leases Expiring -- -- -- 2 -- 1 -- -- -- -- -- 3 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases.
40
2009 Year of Lease Expiration and Property Information. 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total --------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Thresher Square West Square Footage of Expiring Leases -- 686 33,378 21,781 -- -- -- -- -- -- -- 55,845 Percentage of Total Leased Sq. -- 1.2% 59.8% 39.0% -- -- -- -- -- -- -- 100% Ft. Final Annual Base Rent Under Expiring Leases(2) -- $7,546 $249,462 $213,625 -- -- -- -- -- -- -- $470,633 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) -- $11.00 $ 7.47 $ 9.81 -- -- -- -- -- -- -- $8.43 Percentage of Total Final Annual Base Rent Represented by -- 1.6% 53.0% 45.4% -- -- -- -- -- -- -- 100% Expiring Leases Number of Leases Expiring -- 1 2 2 -- -- -- -- -- -- -- 5 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases.
41
2009 Year of Lease Expiration and Property Information. 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total - --------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Thresher Square East Square Footage of Expiring Leases 8,090(4) 4,216 27,508 13,787 10,419 -- -- -- -- -- -- 64,020 Percentage of Total Leased Sq. 12.6% 6.6% 43.0% 21.5% 16.3% -- -- -- -- -- -- 100% Ft. Final Annual Base Rent Under Expiring Leases(2) $25,169 $34,798 $238,932 $155,775 $144,301 -- -- -- -- -- -- $598,975 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) $ 3.11 $ 8.25 $ 8.69 $11.3 $13.85 -- -- -- -- -- -- $ 9.36 Percentage of Total Final Annual Base Rent Represented by 4.2% 5.8% 39.9% 26.0% 24.1% -- -- -- -- -- -- 100% Expiring Leases Number of Leases Expiring 17 3 5 4 2 -- -- -- -- -- -- 31 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases. (4) Includes month-to-month tenants and storage leases.
42
2009 and Year of Lease there- Expiration 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 after Total ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- Property Information - -------------------- Consolidated Totals for All Commercial Properties Square Footage of Expiring Leases 8,090(4) 11,047 64,866 113,759 10,419 25,388 13,520 -- -- -- -- 247,089 Percentage of Total Leased Sq. Ft. 3.3% 4.5% 26.3% 46.0% 4.2% 10.3% 5.4% -- -- -- -- 100% Final Annual Base Rent Under Expiring Leases(2) $25,169 $ 79,807 $546,701 $1,104,515 $144,301 $185,328 $195,548 -- -- -- -- $2,281,369 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) $ 3.11 $ 7.22 $ 8.43 $ 9.71 $ 13.85 $ 7.30 $ 14.46 -- -- -- -- $ 9.23 Percentage of Total Final Annual Base Rent Represented by Expiring Leases 1.1% 3.5% 24.0% 48.4% 6.3% 8.1% 8.6% -- -- -- -- 100% Number of Leases Expiring 17 6 8 10 2 1 1 -- -- -- -- 45 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases. (4) Includes month-to-month leases and storage leases.
43 Wisconsin Properties Lake Pointe Lake Pointe is located on a point of land at the confluence of the Eau Claire River and Lake Wausau, in Schofield, Wisconsin. Schofield is a southern suburb of Wausau, Wisconsin and is considered a part of the Wausau urban area. The City of Wausau is situated in north central Wisconsin approximately 140 miles north of Madison, 150 miles east of Minneapolis and 180 miles northwest of Milwaukee. Wausau, located in Marathon County, is the retail, industrial and business hub of north central Wisconsin. While much of the county is home to productive dairy and crop farms, the local economy is diversified, including industries such as insurance, wood products and paper mills. The greater Wausau area, with a population of over 115,000, is an attractive site for new business and industry, aided by incentives such as affordable industrial land, revolving loan funds offering lower than market rates, job training funds, and an industrial mall complete with a laser lab. There are two industrial parks in the Wausau area. One is on the west side and the other is in the City of Schofield. Major industrial employers include Weyerhauser Paper Company, Wausau Paper Mills and Land O' Lakes, Inc. Lake Pointe has a unique location on a point, with Lake Wausau on the west and the Eau Claire River on the east. A private marina is immediately adjacent to the entrance to the property. The apartment community is situated on a peninsula of approximately 4.13 acres and consists of 72 units with 72 garages, plus 72 additional parking spaces. It was built in 1990. The property's 26 boat slips offer opportunities for power boating, sailing and water skiing. The sunning deck offers a place to relax and socialize with neighbors. Lake Pointe won the Wausau Chamber of Commerce's Beautification Award in 1991. The buildings at Lake Pointe are of a soft, contemporary design with a light grey vinyl and white aluminum trim exterior. The property is extensively landscaped and has an underground sprinkling system, picnic area and community deck. Each building is equipped with elevators and laundry facilities on every floor. All units have a water view, patio or balcony, garage and fully-equipped kitchen. Each unit has been professionally decorated with color coordinated carpeting, drapes and mini blinds, oak wood trim, European-style cabinetry and individual air conditioning and heating units. Some individual units have walk-in closets and have a sink and mirror in the bedroom. Maple Grove Maple Grove is a 304-unit apartment community located in Madison, Wisconsin. It was constructed in phases between 1991 and 1996. There are 144 two-bedroom apartments and 160 one-bedroom apartments. Maple Grove is presently under contract for sale to an independent third party. The contract provides for a purchase price of $16,700,000 to be paid by assuming the first mortgage of approximately $12.7 million and paying the balance in cash at closing. While we did not solicit offers to buy the Maple Grove property, we think that the proposed transaction is in our best interests because of (1) our near-term capital requirements (including the payment of declared but unpaid dividends on our common shares for the first two quarters of 1999), and (2) our belief that other investment opportunities may provide a better return on capital. 44 The contract is subject to closing conditions and contingencies including: o approval and consent of the holder of the first mortgage; o our ability to deliver clear title; o the purchaser inspecting the property; and o a resolution of the issues raised by the United States Department of Justice concerning our compliance with fair housing laws as they relate to access by disabled persons. Maple Grove is located in southwestern Madison and is approximately 10 minutes from downtown Madison. It is situated on a 13.23-acre parcel in a neighborhood which includes single family homes, duplexes, senior housing, a commercial site, a day care center and a neighborhood shopping center. It has 14 buildings. Nine of the buildings include underground parking. There is a club house with a swimming pool, enclosed whirlpool, exercise facility and party rooms. The average size of the one-bedroom units is 756 square feet and the two-bedroom units average 1,059 square feet. The units offer superior amenities with many including fireplaces, two balconies, whirlpool tubs, creative floor plans, oversized closets and in-unit washers and dryers. Madison is located in Dane County, Wisconsin and is the state's capital and second largest city. Madison is located approximately 140 miles from Chicago, 80 miles from Milwaukee and 250 miles from Minneapolis. Overall, Madison's economy is weighted heavily to government and services. This tends to provide stability in economic cycles. Employment levels, building activity, and consumer demand all tend to be rather stable compared to cities more dependent upon industrial employment. According to a study conducted by the Madison Gas and Electric Company, occupancy of rental units in the area during the first three months of 1999 was 93.6%. 45 Apartment Property Tables The following table presents additional information concerning our apartment properties:
Property and Location --------------------- Maple Grove, Lake Pointe Madison, Wisconsin Schofield, WI Totals/Weighted Average Year Acquired 1995-1996 1996 N/A Number of Units 304 72 376 Approximate Rentable Area (Sq. Ft.) 276,496 65,184 341,680 Total Acreage 13.23 4.13 17.36 Year Placed in Service 1991-1996 1990 N/A Average Unit Size (Sq. Ft.) 910 905 909 1998 Average Occupancy 91.1% 97.2% 92.3% Occupancy at July 1, 1999 98.6% 100% 98.9% 1998 Average Monthly Rental Rates - - Per Unit $735 $602 $710 1998 Average Monthly Rental Rates - - Per Sq. Ft. $0.81 $0.66 $0.78
46 Mortgage Indebtedness The following chart summarizes the mortgage indebtedness of each of our properties.
Principal Interest Rate Amount Face Amount Balance as of At Amortization Maturity Due at Prepayment of Mortgage July 1, 1999 July 1, 1999 (Years) Date Maturity Penalty ----------- ------------ ------------ ------- ---- -------- ------- Property Location Nicollet Business VI $2,350,000 $2,317,794 7.0% 30 2/8/08 $2,012,720 Yield Burnsville, MN Maintenance Thresher Square East $4,335,000 $3,955,000 5.5% 19 5/1/15 $0 Minneapolis, MN Thresher Square West $3,805,000 $2,965,000 6.5% 18 6/1/10 $0 June 1, 2000 Minneapolis, MN @ 101%; June 1, 2000 @ 100.5%; June 2002 @ par Cold Springs Office $7,500,000 $7,408,491 9.25% on 20 9/30/00 $7,285,826 $20,000 Cntr., St. Cloud, MN $5,533,491(1); 10.75% on $1,875,000(1) Maple Grove $12,900,700 $12,680,308 8.1% 30 6/01/04 $11,960,225 Yield Madison, WI Maintenance Lake Pointe $ 2,750,000 $ 2,722,891 7.6% 30 3/11/28 $0 Yield Schofield, WI Maintenance TOTAL/WEIGHTED AVERAGE % $33,640,000 $32,049,484 7.9% - ------------------- (1) Represents a variable-rate mortgage.
47 Employees We intend to maintain a small corporate staff. At the present time, our only employees are our chief executive officer, Duane H. Lund, and our president, Robert F. Rice. Currently, we have contracted with Wellington Management Corporation for accounting services for a fee of $500.00 per month. As we acquire additional assets, we expect to hire additional staff to provide accounting services internally. We have entered into a property management agreement with Wellington Realty, Inc. with respect to our Wisconsin properties and with Hoyt Properties Inc. with respect to our Minnesota properties. Each of these agreements provides for the payment of management fees equal to 5% of gross rental income, which we believe is consistent with prevailing market rates. We anticipate that, as we add new REITPLUSK affiliates, we will enter into similar property management agreements. Competition Our office building properties compete with numerous alternatives for tenants in the local markets in which they are located. The apartment community properties compete directly with other multifamily properties and single family homes that are available for rent in the markets in which our properties are located. The apartment community properties also compete for tenants with the new and existing home market. Other office buildings, community shopping centers, light industrial facilities and residential communities that we may acquire in the future will also compete for tenants with other similar properties in the same local markets. In addition, we compete with other investors for acquisitions and development projects, and many such competitors have greater resources than we do, including greater cash resources, greater access to debt and equity markets and greater management and leasing resources and expertise. Legal Proceedings Neither we, nor any of our properties, are presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us or our properties, other than routine litigation arising in the ordinary course of business and which is expected to be covered by liability insurance. We have received notice of a Department of Justice investigation of the architect and developer of our Maple Grove apartment community related to handicap accessibility. If our Maple Grove property is not in compliance with applicable laws, we may be responsible for any deficiencies. Though we expect that our liability, if any, would be limited to the last 60 units constructed, as to which we acted as the developer, we cannot presently determine the costs of any actions that may ultimately be required of us. Regulation General. Apartment community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. We believe that, under present laws, ordinances and regulations, each of our existing properties has the permits and approvals necessary to operate. Commercial and other properties are also subject to regulation. Community-based residential facilities are extensively regulated and are generally licensed by the state in which they are located. Americans with Disabilities Act. All of our properties, as well as any newly developed or acquired properties, must comply with the Americans with Disabilities Act to the extent that the properties are "public accommodations" and/or "commercial facilities" as defined by the statute. Compliance with the Americans with Disabilities Act requirements could require removal of structural barriers to handicapped access in certain public areas of our properties where such removal is readily achievable. The act does not, however, consider residential properties, such as multifamily properties or community-based residential 48 facilities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as a leasing office, are open to the public. Commercial properties, such as shopping centers or office buildings are considered public accommodations. To the extent possible through leases, we intend to require that our commercial tenants comply with the Americans with Disabilities Act. We will, of course, remain responsible for compliance with respect to common areas in commercial properties. Although we believe that each of our existing properties substantially complies with all present requirements under the Americans with Disabilities Act and applicable state laws, final regulations under the Act have not yet been promulgated. Noncompliance could result in imposition of fines or an award of damages to private litigants. If required changes involve greater expenditures than we currently anticipate, or if the changes must be made on a more accelerated basis than we anticipate, our ability to pay accrued dividends could be adversely affected. We believe that our competitors face similar costs to comply with the requirements of the Americans with Disabilities Act. Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act requires multifamily properties first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the act could result in the imposition of fines or an award of damages to private litigants. While we believe that our existing properties are substantially in compliance with present requirements under the Fair Housing Amendments Act, we have received notice of a Department of Justice investigation of the architect and developer of our Maple Grove apartment community in Madison, Wisconsin. If our Maple Grove property is not in compliance with applicable laws, we believe that we may be responsible for any deficiencies. Though we expect that our liability, if any, should be limited to the last 60 units constructed, as to which we acted as the developer, we cannot presently determine the costs of any actions that may ultimately be required of us. Rent Control Legislation. State and local rent control laws in certain jurisdictions limit a property owner's ability to increase rents and to recover from tenants increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in some jurisdictions, although none of the jurisdictions in which we presently operate has adopted such laws. We do not presently intend to develop or acquire multifamily properties in markets that are either subject to rent control or in which rent limiting legislation exists. Environmental Matters Under various federal, state, and local environmental laws, regulations, and ordinances, a current or previous owner of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by such parties in connection with the contamination. Such laws typically impose cleanup responsibility without regard to whether the owner or operator knew of, or caused the presence of the contaminants. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect an owner's ability to sell or rent such real estate or to borrow using such real estate as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances may be held liable for the costs of investigation, remediation, or removal of such hazardous or toxic substances at or from the disposal or treatment facility, regardless of whether such facility is owned or operated by such person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials when such materials are in poor condition or in the event of building remodeling, renovation or demolition. Such laws may impose liability for the release of such 49 materials and may provide for third parties to seek recovery from owners or operators of real estate for personal injury associated with asbestos. In connection with our ownership and operation of our properties, we may be potentially liable for costs in connection with these matters. All of our properties were subject to Phase I environmental assessments at the time we acquired them in order to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. The Phase I assessments included a historical review, a public records review, a preliminary investigation of the site and surrounding properties, screening for the presence of asbestos and equipment containing polychlorinated biphenyls ("PCBs"), and underground storage tanks and the preparation and issuance of a written report, but did not include soil sampling or subsurface investigations. In addition, we conducted a Phase II environmental assessment of our historical Thresher Square office buildings, which were constructed between 1900 and 1904, at the time we acquired them. None of our original environmental assessments have revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, and our lenders have not requested additional environmental assessments. Nevertheless, it is possible that these assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, no assurances can be given that: (1) future laws, ordinances or regulations will not require or impose any material expenditures or liabilities in connection with environmental conditions by or on us or our properties, (2) the current condition of properties in the vicinity of our properties (such as the presence of underground storage tanks) may not impact us adversely, or (3) prior owners of our properties did not create environmental problems of which we are not aware. We believe that our properties are each in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties. Insurance We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of our properties, with policy specifications, insured limits and deductibles customarily carried for similar properties. There are, however, certain types of losses (such as losses arising from wars) that are not generally insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the affected property, as well as the anticipated future revenues from such property and could also continue to be obligated on any mortgage indebtedness or other obligations related to the property. Certain Property Tax Information Tenants of apartment communities generally are not required to pay their proportionate share of any real estate taxes; tenants of commercial properties do generally pay their proportionate share of real estate taxes. 50 The 1998 property taxes for our properties were as follows: Cold Springs $ 241,270 Thresher Square East/West $ 296,571 Nicollet VI $ 49,439 (1) Maple Grove $ 371,990 Lake Pointe $ 72,985 - ---------------------- (1) The Nicollet VI property should be fully assessed in 2000. 51 MANAGEMENT Board of Trustees The following biographical descriptions set forth certain information with respect to our trustees and executive officers, based on information furnished to us by them. The following information is as of July 31, 1999, unless otherwise specified. Name Age Title(s) - ---- --- ------- Arnold K. Leas............. 65 Chairman of the Board of Trustees Steven B. Hoyt............. 47 Trustee Paul T. Lambert............ 46 Trustee Peter Ogden................ 40 Trustee Robert P. Ripp............. 72 Trustee Robert D. Salmen........... 44 Trustee Duane H. Lund.............. 35 Chief Executive Officer and Treasurer Robert F. Rice............. 48 President and Secretary Class I Trustees - Terms to Expire in 2001 Paul T. Lambert, has been a trustee since November 1998. Mr. Lambert has been a private investor since 1995. He served on the board of directors and was the chief operating officer of First Industrial Realty Trust, Inc., from its initial public offering in June 1994 to the end of 1995. Mr. Lambert was one of the largest contributors to the formation of First Industrial and one of its founding shareholders. Prior to forming First Industrial, Mr. Lambert was managing partner of the Midwest region for The Shidler Group, a national private real estate investment company. Prior to joining Shidler, Mr. Lambert was a commercial real estate developer with Dillingham Corporation and, prior to that, was a consultant with The Boston Consulting Group. Mr. Lambert was also a founding stockholder of CGA Group, Ltd., a holding company whose subsidiary is a AAA-rated financial guarantor based in Bermuda. Arnold K. Leas, our chairman of the board of trustees, served as our original president/chief executive officer from our inception in 1994 until November 1998. Mr. Leas has also served as a director, chief executive officer and president of Wellington Management Corporation since its inception in 1988. Wellington Management and its subsidiary, Wellington Investment Services Corp., currently manage over $100 million dollars of investors' funds. From 1984 to 1988, Mr. Leas was executive vice president of Decade Securities, Inc., a Milwaukee, Wisconsin-based company that was involved primarily in the syndication of multi-family apartment communities throughout the United States. Mr. Leas has transacted real estate acquisitions and sales, directly or indirectly, in excess of $200,000,000. Mr. Leas is on the board of directors of the Metropolitan Milwaukee Association of Commerce Council of Small Business Executives and is a graduate of the Realtors Institute. Class II Trustees - Terms to Expire in 2000 Steven B. Hoyt became a trustee in November 1998. He has served as managing general partner of Hoyt Development (from 1979 to 1989) and chief executive officer of Hoyt Properties Inc. (from 1989 to present). Hoyt Properties currently owns over 1,000,000 square feet of industrial and office property in Minnesota and has developed over 5,000,000 square feet of commercial property since its inception. From 1994 to 1995, Mr. Hoyt served as a senior regional director of First Industrial Realty Trust, Inc. Mr. Hoyt is a member of the board of directors of the Better Business Bureau and has served in numerous state and national positions for the National Association of Industrial and Office Parks (NAIOP). 52 Robert P. Ripp has served as one of our trustees since our inception in 1994. Mr. Ripp is the owner of RESI Realtor, a Milwaukee-based real estate brokerage firm. Prior to forming RESI Realtor in 1985, Mr. Ripp was the vice president/general sales manager for Wauwatosa Realty, a real estate brokerage firm with 27 offices in the State of Wisconsin. Class III Trustees - Terms to Expire in 1999 Peter Ogden has been a trustee since our inception in 1994. Mr. Ogden has served as the president and owner of Ogden & Company since 1990 and the vice president, treasurer and owner of Ogden Development Group, Inc. since 1986, both of which are Milwaukee-based providers of real estate brokerage, leasing and property management services and which together manage over 2,500 apartment and condominium units, in addition to shopping centers and office, industrial and mixed-use buildings. Robert D. Salmen joined our board of trustees in August 1999. Mr. Salmen founded Equity Financial Services in 1993. While continuing to operate Equity Financial's investment services company, he co-founded Equity Commercial Services in 1996 to incorporate leasing and then property management services for Equity Financial and currently serves as its president. Prior to founding Equity Financial Services, Mr. Salmen was vice president of institutional investment sales with Welsh Companies for eight years. He established the Institutional Investment division at Welsh Companies in 1985. From its inception through 1992, he directed Welsh's sales marketing force. Prior to joining Welsh, Mr. Salmen spent over nine years with Towle Real Estate. Mr. Salmen is a graduate of the University of Minnesota. Executive Officers Duane H. Lund has been our chief executive officer since November 1998. Mr. Lund was a founding stockholder of First Industrial Realty Trust, Inc. and served as a senior regional director of First Industrial from 1994 to June 1998. In such capacity, Mr. Lund acquired and managed over 11,000,000 square feet of commercial property with a value in excess of $750 million. From 1989 to 1994, Mr. Lund was an acquisition partner with The Shidler Group, where he was involved in coordinating the underwriting and due diligence for over $200 million of commercial property. Mr. Lund was a tax consultant with Peat Marwick Main & Company from 1986 until 1988. Mr. Lund is a member of the boards of directors of the Wisconsin Real Estate Alumni Association and National Association of Industrial and Office Properties, Minnesota Chapter and is a member of the advisory boards of the Midwest Real Estate News, the Minnesota Real Estate Journal and the KPMG Peat Marwick Alumni Association. Robert F. Rice, our president and corporate secretary, has served as secretary since our inception in 1994 and as executive vice president from May 1997 until becoming president in November 1998. Prior to November 1998, Mr. Rice served as vice president and general counsel to Wellington Management Corporation beginning in November 1993. From 1989 to October 1993, Mr. Rice provided advice with respect to Resolution Trust Corporation matters through Resource Alternatives, Inc., a provider of legal and consulting services to the real estate industry. From 1984 to 1989, Mr. Rice served as a director, officer and general counsel for various affiliates of St. Francis Bank, F.S.B. Mr. Rice graduated from Marquette University Law School in 1976. Our board of trustees held seven meetings during 1998. Each of the trustees attended at least 75% of the total meetings of the board of trustees and the committees of the board of trustees on which he served. There are no familial relationships among any of our trustees or executive officers. 53 We are currently seeking to identify and retain additional qualified candidates with national commercial real estate and capital markets expertise and experience to serve as non-employee members of our board of trustees. Messrs. Ripp and Ogden have executed written agreements to resign as members of board of trustees once we have identified candidates that would be willing to serve in their stead on the board. In accordance with our bylaws, the remaining members of the board of trustees may fill the vacancies created by such resignations without submission of the matter to a vote of our shareholders. Committees of the Board of Trustees Our board of trustees has appointed an Audit Committee and a Compensation Committee. Audit Committee. Our Audit Committee, which held one meeting during 1998, currently consists of Messrs. Ogden and Salmen. The committee reviews related party transactions, makes recommendations concerning the engagement of independent public accountants, reviews with our independent public accountants the plans and results of our audit engagement, approves professional services provided by our independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees that we pay to our independent accountants and reviews the adequacy of the our internal accounting controls. Compensation Committee. Our Compensation Committee, which held one meeting during 1998, currently consists of Messrs. Leas, Hoyt and Lambert. The committee makes recommendations and exercises all powers of the board of trustees in connection with certain compensation matters, including incentive compensation and benefit plans. The Compensation Committee administers and has authority to grant awards under our 1998 stock incentive plan. Trustee Compensation Our trustees receive a fee of $250 for each board or committee meeting attended, plus the reimbursement of all reasonable out-of-pocket expenses incurred in connection with such attendance. Shareholders' Agreement In November 1998, we entered into a ten-year shareholders' agreement with each of American Real Estate Equities, LLC, Duane H. Lund, WLPT Funding, Paul T. Lambert, Lambert Equities II, LLC, Steven B. Hoyt, Wellington Management Corporation, Robert F. Rice, Arnold K. Leas, Rose Marie Leas and Gregory S. Leas. Under the shareholders' agreement, the signing shareholders have agreed to take whatever actions are necessary (including, but not limited to, the voting of all shares owned, from time to time, by each of them, whether directly or indirectly) in order to: (1) cause Messrs. Lambert and Hoyt to be, and to continue to be, elected to our board of trustees; (2) cause our board of trustees to fill any vacancies on the board with a person mutually selected by American Real Estate Equities and Wellington Management Corporation; and (3) cause the board of trustees to elect Mr. Lund as our chief executive officer, Mr. Rice as our president, and Mr. Leas as our chairman of the board of trustees. 54 Executive Compensation Summary Compensation From its inception in 1994 through the year ended December 31, 1997, we were externally managed and paid no compensation to any of executive officers. In 1998 the following compensation was paid: Name and Principal Securities Underlying Position Year Salary Options -------- ---- ------ ------- Duane H. Lund 1998 $18,750(1) -- Chief Executive Officer Robert F. Rice 1998 $62,500(2) 7,917(3) President and Secretary Arnold K. Leas 1998 -- 9,500(3) Chairman of the Board - --------------- (1) Amount reflects base annual salary of $150,000. Mr. Lund became our chief executive officer on November 20, 1998. (2) Amount reflects base annual salary of $150,000. Mr. Rice was paid commencing August 1, 1998. (3) All options were granted on May 27, 1998 and have an exercise price of $5.37 per common share, which was the fair market value per share on the date of grant. All such options are currently exercisable. Options/SAR Grants in Last Fiscal Year
Number of Common Percentage of Total Shares Underlying Options Granted to Exercise Expiration Name and principal position Options Granted Employees in Fiscal Year Price Date - --------------------------- --------------- ------------------------ ----- ---- Duane H. Lund Chief Executive Officer -- -- -- Robert F. Rice President and Secretary 7,917 18.98% $5.37 5-26-08 Arnold K. Leas Chairman of the Board 9,500 22.77% $5.37 5-26-08
55 Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values
# of Securities Common Underlying Value of unexercised in-the- Shares Options/SARs at money options/SARs at Fiscal Acquired on Value Fiscal year End Year End ($) Name and principal position Exercise Realized Exercisable(1) Exercisable/Unexercisable(2) - --------------------------- -------- -------- -------------- ---------------------------- Duane H. Lund -- -- -- -- Chief Executive Officer Robert F. Rice -- -- 7,917 $0/-- President and Secretary Arnold K. Leas -- -- 9,500 $0/-- Chairman of the Board - --------------- (1) All of the options held by the named executive officers are currently exercisable. (2) Calculations are based upon the closing bid price of $4.30 per share as of December 31, 1998.
Employment Agreements We have entered into new employment agreements with Duane H. Lund, our chief executive officer, and Robert F. Rice, our president. The employment agreements, which become effective as of October 1, 1999, each provide for an initial base salary of $80,000 and, if we achieve progressive annual targets of earnings per share, our board of trustees may elect to award Mr. Lund and Mr. Rice a bonus of up to 100% of base salary. In addition, each employment agreement provides that the officers shall receive those health, life and disability and other benefits extended by the board of trustees to other similarly situated executives. Each of the employment agreements extends through December 31, 2000, subject to our right to terminate the agreement at any time. In the event that we terminate either officer's employment without cause or in the event such person's employment discontinues upon the expiration of the employment agreement or following a change in control, we or, in the case of a change in control, our successor, will be obligated to pay to such officer an amount equal to one year's base salary and continue his benefits for one year. In connection with the approval of the new employment agreements, we also issued each of Mr. Lund and Mr. Rice options to purchase 80,000 of our common shares at a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. These options will become exercisable as to 40,000 shares on December 31, 1999 and December 31, 2000, but only if we meet specified financial goals for the preceding periods. Indemnification and Insurance Our trustees are accountable to us and our shareholders as fiduciaries and consequently must exercise good faith and integrity in handling company affairs. Pursuant to Maryland law and our organizational documents, no trustee shall be liable to us for any act, omission, loss, damage or expense arising from the performance of his or her duty as trustee except for such trustee's misfeasance, malfeasance or negligence. In addition, pursuant to Maryland law, a trustee shall not be liable for any claims or damages that may result from his or her acts in the discharge of any duty imposed or power conferred upon him or her by us, if, in the exercise of ordinary care, such trustee acted in good faith and in reliance upon the written opinion of any of our attorneys. 56 Our declaration of trust provides that we will indemnify every eligible indemnitee against all judgements, penalties, fines, amounts paid in settlement and reasonable expenses actually incurred by the indemnitee in connection with any proceeding in which such indemnitee was, is or is threatened to be named as defendant or respondent or called as a witness, by reason of his or her serving or having served us if it is determined that the indemnitee conducted himself or herself in good faith, reasonably believed that his or her conduct was in our best interests (or, in certain cases, not opposed to our best interests) and, in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. For purposes of these provisions, an "eligible indemnitee" is (1) any of our present or former trustees or officers, (2) any person who, while serving in any of such capacities, served at our request as a trustee, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another trust or other enterprise, (3) any person nominated or designated by our board of trustees or any committee thereof to serve in any of the capacities referred to in the preceding clauses (1) or (2), and (4) any employee of Wellington Realty, Inc. providing services to us. It is the position of the Securities and Exchange Commission that indemnification for liabilities arising under the Securities Act of 1933 is contrary to public policy and therefore unenforceable. 57 PRINCIPAL SHAREHOLDERS The following table describes the beneficial ownership of our voting shares at July 31, 1999 by: o each person that we know beneficially owns more than 5% of our outstanding voting shares; o each of our trustees; o our chief executive officer and president; and o all of our trustees and executive officers as a group. Except as described in the notes to the table, each person named has sole voting and investment power with respect to all shares beneficially owned.
Class B Junior Common Shares Cumulative Convertible Beneficially Owned Preferred Shares Owned as of as of Name July 31, 1999 July 31, 1999 - --------------------------------------------------- ------------------------- -------------------------- Number(1) Percent(1) Number(2) --------- ---------- --------- Arnold K. Leas (3)(4)(5)........................... 190,624 14.0% 95,000 Steven B. Hoyt (3)(4)(6).......................... 166,666 12.3% 254,800 Paul T. Lambert (3)(4)(7).......................... 166,666 12.3% 254,800 Duane H. Lund (2)(3)(4)(8)......................... 166,666 12.3% 254,800 American Real Estate Equities, LLC (4)(9).......... 166,666 12.3% 254,800 Lambert Equities II, LLC (4)(10)................... 166,666 12.3% 254,800 WLPT Funding, LLC (4)(11).......................... 166,666 12.3% 254,800 Wellington Management Corporation (4)(12).......... 143,767 10.6% 95,000 Esor and Company (13).............................. 70,693 5.2% 0 Peter Ogden (3)(14)................................ 3,167 * 0 Robert P. Ripp (3)(15)............................. 4,148 * 0 Robert D. Salmen (3)............................... 0 * 0 Robert F. Rice (3)(4)(16).......................... 9,500 * 0 All trustees and current executive officers as a group (8 persons) (17)........................ 373,795 27.2% 349,800 - ------------------------------------ * Indicates less than one percent. (1) Based on 1,352,361 common shares outstanding as of July 31, 1999. Also assumes exercise by only the shareholder or group named in each row of all options and warrants for the purchase of our common shares held by such shareholder or group and exercisable within 60 days of July 31, 1999. (2) Our Class B Cumulative Convertible Preferred Shares are each convertible, at the option of the holder, into a number of our common shares equal to the quotient obtained by dividing (a) $10.00, plus any dividends then accrued but unpaid on the Class B preferred shares, by (b) a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. As a result, the number of common shares into which the Class B preferred shares will be convertible cannot be determined at this time. (3) The business address for each of our current trustees and executive officers is 18650 W. Corporate Drive, Suite 300, Brookfield, Wisconsin 53045. 58 (4) All of these parties have entered into a ten-year agreement providing for the election of trustees and certain other matters. Each such party disclaims beneficial ownership of our common shares owned by each other party. (5) Includes 990 common shares held by a trust for the benefit of Mr. Leas' wife and options to purchase 9,500 common shares exercisable within 60 days of July 31, 1999. Also includes 143,767 common shares held by Wellington Management Corporation, of which Mr. Leas is the president and chief executive officer and with respect to which Mr. Leas, members of his immediate family and trusts for the benefit of such persons own approximately 41.8% of the outstanding capital stock. The Class B Junior Cumulative Convertible Preferred Shares indicated are also owned of record by Wellington Management. Mr. Leas disclaims beneficial ownership of common shares held for the benefit of his wife. (6) Does not reflect 691,690 ordinary common units and 168,417 Class B common units of our operating partnership held by Mr. Hoyt or members of his immediate family. The common shares and the Class B Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Mr. Hoyt is a member. (7) Does not reflect 168,416 Class B common units of our operating partnership held by Lambert Equities II, LLC, of which Mr. Lambert is the controlling majority member and sole manager. The common shares and the Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Lambert Equities II, LLC is a member. (8) Does not reflect 375,666 ordinary common units and 168,416 Class B common units of our operating partnership held by WLPT Funding, LLC, of which Mr. Lund is the owner and the sole manager. The common shares and the Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Mr. Lund is the president and of which WLPT Funding, LLC is a member. (9) The business address for American Real Estate Equities, LLC is 300 First Avenue North, Suite 115, Minneapolis, Minnesota 55401. (10) The business address from Lambert Equities II, LLC is 4155 East Jewel, Suite 103, Denver, Colorado 80222. Figures indicated do not reflect ownership of 168,416 Class B common units of our operating partnership. The common shares and Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Lambert Equities II, LLC is a member. (11) The business address for WLPT Funding, LLC is c/o Golden Acres Incorporated, 15315 Masons Pointe, Eden Prairie, Minnesota 55347. Figures do not reflect 375,666 ordinary common units and 168,416 Class B common units of our operating partnership. The common shares and Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which WLPT Funding, LLC is a member. (12) The business address for Wellington Management Corporation is 18650 W. Corporate Drive, Suite 300, P.O. Box 0919, Brookfield, Wisconsin 53045. (13) The business address for Esor and Company is 1100 W. Wells Street, Milwaukee, Wisconsin 53233. (14) Consists solely of options to purchase common shares exercisable within 60 days of July 31, 1999. (15) Includes options to purchase 3,167 common shares exercisable within 60 days of July 31, 1999. (16) Includes options to purchase 7,917 common shares exercisable within 60 days of July 31, 1999. (17) Includes options to purchase an aggregate of 23,651 common shares exercisable within 60 days of July 31, 1999. Figures do not reflect an aggregate of 1,067,356 common units and 505,249 Class B common units of our operating partnership.
59 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS American Real Estate Equities, LLC. American Real Estate Equities, LLC is owned in equal thirds by WLPT Funding, LLC, Lambert Equities II, LLC and Steven B. Hoyt. Duane Lund, our chief executive officer, owns 100% of WLPT Funding and is its sole manager. Paul T. Lambert, one of our trustees, is a majority owner and sole manager of Lambert Equities. Steven Hoyt is also one of our trustees. In November 1998, our shareholders approved a transaction whereby American Real Estate Equities would purchase 166,666 of our common shares for $1,000,000, or $6.00 per share, and would contribute certain assets, principally our Cold Springs office center in St. Cloud, Minnesota and contracts for the purchase of 29 other real estate investment properties (some of which Mr. Hoyt had an ownership interest in), to our operating partnership, Wellington Properties Investments, L.P. As consideration for such assets, we agreed to: o hire Mr. Lund as our chief executive officer and nominate Mr. Lambert and Mr. Hoyt for election to our board of trustees; o issue 4,933,233 common units of our operating partnership to American Real Estate Equities or its members; o issue an additional 9,934,663 common units to the owners of the properties to be acquired (including 4,510,671 units to Mr. Hoyt and his affiliates); o assume $64.0 million in third-party mortgage indebtedness on the properties to be acquired; o pay $31.2 million in cash to the owners of the properties to be acquired (none of which was to be paid to Mr. Hoyt); o issue to American Real Estate Equities a warrant to purchase 791,667 of our common shares at a price of $5.37 per share with respect to 395,833 shares, $6.47 with respect to 197,917 shares, $7.74 per share with respect to 118,750 shares and $9.32 per share with respect to 79,167 shares; and o reimburse certain of American Real Estate Equities' costs, including costs in obtaining the contractual rights contributed to the operating partnership, upon the completion of the transaction. Following shareholder approval of the proposed arrangement in November 1998, due principally to increased financing costs, we and American Real Estate Equities consummated a much smaller transaction pursuant to which the operating partnership acquired only the Cold Springs office center and two other investments properties in Minnesota. Under the final terms of the smaller transaction we negotiated: o we issued 2,557,707 units of our operating partnership; o we assumed only $17.1 million in third-party mortgage indebtedness on the properties acquired; o we paid no cash to the owners of the properties acquired; and o we hired Mr. Lund as our chief executive officer and Mr. Lambert and Mr. Hoyt were elected to our board of trustees. During the second quarter of 1999, we entered into further discussions with American Real Estate Equities because the original contemplated transactions could not be consummated. As a result of these discussions: 60 o Mr. Lund remained our chief executive officer and Mr. Lambert and Mr. Hoyt remained on our board of trustees; o the recipients of the operating partnership units returned 838,372 units to us for cancellation; of the 1,719,335 operating partnership units still outstanding after the cancellation, 1,214,086 units are ordinary common units and 505,249 are Class B common units, which have no direct economic value, but which will convert to ordinary common units upon the determination of our board of trustees that our funds from operations equal or exceed $0.55 per share, assuming the exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares; o only 1,719,335 operating partnership units remain outstanding with the owners of the three properties acquired (including only 860,107 units to Mr. Hoyt and his affiliates); o American Real Estate Equities returned the warrant covering 791,667 of our common shares to us for cancellation; and o we paid no cash to American Real Estate Equities in reimbursement of the $1,356,000 it spent in connection with the transaction; instead, we issued American Real Estate Equities, in the third quarter of 1999, 135,600 of our Class B Junior Cumulative Convertible Preferred Shares (generally having the same rights, terms and preferences as the Class A Preferred Shares, but ranking junior as to payment of dividends and distributions upon our liquidation), all of which we have the right to redeem for $1 if we do not have total assets in excess of $150,000,000 or have not achieved funds from operations equal to at least $0.55 per share (on a fully-diluted basis) prior to June 30, 2002. Apart from the foregoing transactions, American Real Estate Equities advanced us an aggregate of $1,392,000 during the summer and fall of 1998 for working capital purposes. Pursuant to the an agreement with American Real Estate Equities, we have issued 119,200 of our Class B Junior Cumulative Convertible Preferred Shares to them in discharge of $1,192,000 of the repayment obligation. Wellington Management Corporation. Our chairman of the board, Arnold Leas, is the president and chief executive officer of Wellington Management Corporation and owns, together with certain members of his family and family trusts, 41.8% of Wellington Management Corporation's outstanding stock. Our president, Robert Rice, was a vice president and general counsel of Wellington Management before joining us. Mr. Rice has no ownership interest in Wellington Management Corporation. In connection with the contemplated American Real Estate Equities transactions of November 1998 described above, we also entered into a number of agreements with Wellington Management Corporation pursuant to which: o Mr. Rice would be appointed our president; o Wellington Management would contribute the office building housing our executive offices in Brookfield, Wisconsin to our operating partnership in exchange for $2.5 million in cash, the assumption of $7.3 million in mortgage indebtedness on the property, and 745,098 operating partnership units; o we would issue to Wellington Management a warrant to purchase 791,667 of our common shares at a price of $5.37 per share with respect to 395,833 shares, $6.47 with respect to 197,917 shares, $7.74 per share with respect to 118,750 shares and $9.32 per share with respect to 79,167 shares; o we would terminate our obligations to Wellington Management under certain advisory fee arrangements in exchange for $1.6 million; and 61 o our operating partnership would enter into a property management agreement with Wellington Realty, Inc., a wholly-owned subsidiary of Wellington Management Corporation, whereby Wellington Realty would manage the day-to-day operations of our current apartment community properties in Wisconsin for a management fee equal to 5% of gross income from such properties. Subsequent to November 1998, we and Wellington Management agreed that the transfer of Brookfield office building could not occur because we were unable to arrange financing to provide the stipulated $2.5 million cash payment on acceptable terms. In connection with the discussions described previously, we entered into an agreement during the second quarter of 1999 with Wellington Management whereby: o Mr. Rice remained our president; o Wellington Management returned the warrant covering 791,667 of our common shares to us for cancellation; o the advisory fee arrangement was still terminated, but we agreed that Wellington Management would retain cash payments received in 1998 totaling $550,000 and that we would issue, in the third quarter of 1999, 95,000 Class B Junior Cumulative Convertible Preferred Shares as consideration for the termination; and o we entered into the new property management agreement with Wellington Realty, Inc. on the terms contemplated by the original agreement. In January 1998, we also entered into a listing agreement with Wellington Realty, Inc. whereby we agreed to pay 3% of the sale price of our Maple Grove and Lake Pointe apartment communities in the event of a sale. Though we are not presently marketing the Lake Pointe property, we have entered into a sale contract with respect to the Maple Grove property. In connection with the pending contract for the sale of Maple Grove Apartments, Wellington Realty, Inc., is expected to receive a fee totaling $501,000 upon consummation of the sale. From time to time, we may purchase insurance through another affiliate of Wellington Management Corporation, Wellington Insurance Services, Inc., which will receive a commission of those sales equal to 15% of scheduled premiums. Hoyt Properties Inc. Steven Hoyt, one of our trustees is the principal of Hoyt Properties Inc. On November 20, 1998, our operating partnership entered into a property management agreement with Hoyt Properties. Under this agreement, Hoyt Properties manages the day-to-day operations of our current commercial properties in Minnesota for a management fee equal to 5% of gross income from such properties, a fee we believe is consistent with industry norms. As mentioned above, Steven Hoyt also owns a one-third membership interest in American Real Estate Equities, LLC. Additional advances of working capital. In April 1999, our operating partnership borrowed $50,000 from each of American Real Estate Equities, LLC and Wellington Management Corporation for working capital purposes under term loans that are currently due December 31, 1999. An interest rate of 10% per year accrues on the principal balance of each of these loans until repayment. Deferred Salaries. As a result of our completion of only a small number of the acquisitions proposed in November 1998, our chief executive officer and our president have agreed to defer their salaries. As of June 30, 1999, the deferral amounted to $68,750 as to Mr. Lund and $50,000 as to Mr. Rice. Of the total amount deferred by Mr. Rice, Wellington Management has advanced $37,500 to Mr. Rice. We intend to 62 pay salaries in arrears and reimburse Wellington Management with a portion of the proceeds of the Maple Grove sale. If, for any reason, the sale of Maple Grove is prevented or delayed, we will not use any of the proceeds of the offering of the Class A Preferred Shares to pay any deferred salaries or to repay Wellington Management for any related advances. 63 UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated __________, 1999, our underwriters, for whom R.J. Steichen & Company will act as representative, have agreed to purchase from us on a firm-commitment basis, 1,200,000 Class A Preferred Shares for resale to the public. Our underwriting agreement provides that the underwriters will be obligated to purchase all of those shares if any are purchased. The underwriters have agreed severally, but not jointly, to purchase the numbers of Class A Preferred Shares set forth opposite their respective names: Underwriter Number of Shares ---------- R.J. Steichen & Company............................. --------- Total 1,200,000 ========= The underwriters have reserved the right to reoffer the Class A Preferred Shares to selected securities dealers at the offering price set forth on the cover page of this prospectus, less customary concessions. We have agreed to pay the underwriters a discount of 8% of the gross proceeds of this offering, including the gross proceeds from the sale of any overallotment shares. In addition, we have agreed to pay to the underwriters a non-accountable expense allowance of 2% of the gross proceeds of the offering, including proceeds from the sale of overallotment shares, up to $250,000 in total. We have granted to the underwriters an overallotment option, exercisable for 45 days from the date of this prospectus, to purchase up to an additional 180,000 of our Class A Preferred Shares at the public offering price, less the 8% underwriting discount. The underwriters may exercise this option solely to cover overallotments in the sale of the Class A Preferred Shares being offered by this prospectus. At the closing of the offering, we will sell to the underwriters' representative, for nominal consideration, warrants to purchase up to 120,000 Class A Preferred Shares (up to 138,000 Class A Preferred Shares if the underwriters' overallotment option is exercised in full). The underwriters' warrants will become exercisable one year after the effective date of the registration statement covering the Class A Preferred Shares and will be exercisable for a period of four years thereafter at a price of $10.00. The underwriter's warrants will contain provisions for (1) "cashless exercise," whereby the underwriters may forfeit a portion of the warrants at the time of exercise in lieu of the cash payment of the exercise price, (2) appropriate adjustment in the event of a merger, consolidation, recapitalization, reclassification, share dividend, share split or similar transaction, (3) a one-time right to demand registration of the common shares underlying the warrants under the Securities Act of 1933, and (4) participation of the common shares underlying such warrant, on a "piggy-back" basis, in specified registrations by us during the duration of the underwriters' warrant and for two years thereafter. In order to facilitate the offering of our Class A Preferred Shares, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our Class A Preferred Shares. Specifically, the underwriters may sell or allot more Class A Preferred Shares than the 1,200,000 shares we have agreed to sell them. This overallotment would create a short position in our Class A Preferred Shares for the account of the underwriters. To cover any overallotments or to stabilize the price of our Class A Preferred Shares, the 64 underwriters may bid for, and purchase our Class A Preferred Shares in the open market. Finally, the underwriters may reclaim selling concessions allowed to dealers for distributing our Class A Preferred Shares in the offering, if the underwriters repurchase previously distributed Class A Preferred Shares in transactions to cover short positions, in stabilization transactions or otherwise. The underwriters have reserved the right to reclaim selling concessions in order to encourage dealers to distribute our Class A Preferred Shares for investment, rather than for short-term speculation. Increasing the proportion of the offering held for investment may reduce the supply of our Class A Preferred Shares available for short-term trading. Any of these activities may stabilize or maintain the market price of our Class A Preferred Shares above independent market levels. The underwriter is not required to engage in these activities, and may end any of these activities at any time. The underwriters have conditioned their performance under the underwriting agreement on receipt of agreements from certain of our officers, trustees and other shareholders prohibiting market sales of our securities by such persons for a period of 180 days following the initial closing of this offering. We have agreed to indemnify the underwriters against any costs or liabilities incurred by the underwriter by reason of misstatements or omissions to state material facts in connection with the statements made in the registration statement we filed and this prospectus. The underwriters have, in turn, agreed to indemnify us against any costs or liabilities by reason of misstatements or omissions to state material facts in connection with the statements made in the registration statement filed and this prospectus, based on information relating to the underwriters and provided by them. To the extent that these provisions may purport to provide exculpation from possible liabilities arising under the federal securities laws, in the opinion of the Securities and Exchange Commission, such indemnification is contrary to public policy and therefore unenforceable. For a more complete description of the underwriting arrangements for this offering, you should read the underwriting agreement included as an exhibit to the registration statement of which this prospectus is a part. 65 DESCRIPTION OF SECURITIES General Our declaration of trust provides that we may issue up to 110,000,000 shares of beneficial interest, consisting of 100,000,000 common shares, par value $0.01 per share, and 10,000,000 preferred shares, par value $0.01 per share. After this offering, 1,549,800 preferred shares will be issued and outstanding, or 1,729,800 shares if our underwriters' overallotment option is exercised in full. Firstar Trust Company is the transfer agent for our common shares and will be the transfer agent for the Class A Preferred Shares following the closing of this offering. The Class A Preferred Shares We have designated 1,518,000 of our preferred shares as Class A Cumulative Convertible Preferred Shares, $0.01 par value per share. Subject to the provisions of our declaration of trust regarding "excess shares" (as described under the heading "Restrictions on Transfer" beginning on page 68), a dividend on each Class A Preferred Shares equal to $0.475 will accrue and be payable every six months, beginning six months after the initial closing date of the offering. We may pay no dividends on any other existing class or series of our shares unless we have paid all dividends then accrued on the Class A Preferred Shares. The Class A Preferred Shares will not participate in dividends declared on our common shares. Upon our liquidation, no distribution of our assets will be made to holders of any other existing class or series of our shares until we have first paid the holders of the Class A Preferred Shares $10.00 per share, plus the amount of all dividends on the Class A Preferred Shares that are then accrued but unpaid. Subject to the provisions of our declaration of trust regarding excess shares, each of the Class A Preferred Shares will be entitled to the number of votes at all meetings of our shareholders equal to the number of our common shares into which they are then convertible. Holders of Class A Preferred Shares will generally vote together with holders of our common shares and holders of our Class B Junior Cumulative Convertible Preferred Shares as a single class, provided that holders of Class A Preferred Shares will vote as a separate class on proposals specifically affecting the relative rights and privileges of the Class A Preferred Shares. Each of our Class A Preferred Shares will be convertible at any time, at the option of the holder, into a number of common shares equal to the quotient obtained by dividing (1) $10.00, plus any dividends then accrued but unpaid on the Class A Preferred Shares; by (2) a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares, or $____. We will have the option to redeem the Class A Preferred Shares at a per-share price equal to the public offering price, plus any dividends then accrued but unpaid, after 30 days' notice, any time after two years following the initial closing of the offering if the closing bid price of our common shares exceeds 150% of the then effective conversion price of the Class A Preferred Shares for 20 consecutive trading days. If, at any time, we fail to declare or pay a dividend on the Class A Preferred Shares as it accrues, such dividend will be cumulative, without interest, with future dividends. If we should fail to pay a full year's accrued dividends on the Class A Preferred Shares, then the holders of the Class A Preferred Shares will be entitled, voting as a class, to elect a majority of the members of our board of trustees, who will then serve on the board for so long as a full year's dividends remain unpaid. When issued, the Class A Preferred Shares will be legally issued, fully-paid and nonassessable. 66 The Class B Junior Cumulative Convertible Preferred Shares We have designated 349,800 of our preferred shares as Class B Junior Cumulative Convertible Preferred Shares, $0.01 par value per share, all of which are issued and outstanding. The terms of the Class B preferred shares are identical to those of the Class A Preferred Shares as to rights to dividends, rights to distributions upon liquidation, voting rights, optional conversion and redemption. The Class B preferred shares, however, rank junior to the Class A Preferred Shares as to dividends and distributions upon liquidation, so that we may not pay dividends on the Class B shares unless all dividends on the Class A Preferred Shares then accrued have been paid, and we will not distribute assets to the holders of Class B shares upon our liquidation until the full amount of the liquidation preference on the Class A Preferred Shares has been paid in full. The Class B Junior Cumulative Convertible Preferred Shares also differ from the Class A Preferred Shares in that their holders will not be entitled to elect a majority of our board of trustees in the event that a full year's dividends are not paid when accrued. Holders of Class B shares will vote as a separate class only on proposals specifically affecting the relative rights and privileges of the Class B shares. The Common Shares Subject to the preferential rights of our preferred shares (including the Class A Preferred Shares offered by this prospectus and our Class B Junior Cumulative Convertible Preferred Shares) or any other class or series of shares and to the provisions of our declaration of trust regarding "excess shares," holders of our common shares are entitled to receive distributions on such shares if, as and when authorized and declared by the board of trustees out of assets legally available therefor and to share ratably in our assets legally available for distribution to shareholders in the event of liquidation, dissolution or winding up after payment of, or adequate provision for, all of our known debts and liabilities. We have generally paid quarterly distributions on our common shares, though the amount of dividends and the timing of payment have varied. Subject to the provisions of our declaration of trust regarding excess shares, each outstanding common share entitles the holder to one vote on all matters on which our shareholders are entitled to vote, including the election of trustees, and, except as otherwise required by law or except as provided with respect to any other class or series of shares, the holders of such shares will possess the exclusive voting power. There is no cumulative voting in the election of trustees, which means that the holders of a majority of our outstanding common shares can elect all of the trustees then standing for election and the holders of our remaining shares are not able to elect any trustees. Warrants to Purchase Our Shares In connection with prior transactions, we issued warrants to purchase 47,500 of our common shares. These warrants are currently exercisable have an exercise price of $5.37 per share. In connection with the offering of the Class A Shares, we have also agreed to issue our underwriters' representative a warrant to purchase up to 120,000 Class A Preferred Shares (up to 138,000 shares if the underwriters' overallotment option is exercised in full) at a price of $10.00 per share. The underwriters' representatives warrant will become exercisable one year after the effective date of the registration statement covering the Class A Preferred Shares and will be exercisable for a period of four years thereafter. The warrants will contain provisions for "cashless exercise," whereby the underwriters may forfeit a portion of the warrants at the time of exercise in lieu of the cash payment of the exercise price and will also provide for customary adjustments in the event of a merger, consolidation, recapitalization, reclassification, share dividend, share split or similar transaction. 67 Employee Share Options We have issued options to purchase a total of 214,273 common shares to certain of our employees under our 1998 stock incentive plan. A total of 54,273 of these outstanding options are all currently exercisable. The weighted average exercise price of all our options is approximately $5.21 per share. The incentive plan is designed to attract and retain competent personnel and to provide to officers and other key employees long-term incentives for high levels of performance by providing them with a means to acquire a proprietary interest in our success. A total of 2,952,393 common shares may be subject to additional awards under the plan, which may include incentive or non-qualified options. Dividend Reinvestment Plan Since 1996, we have maintained a dividend reinvestment plan whereby holders of our common shares may automatically reinvest cash dividends we pay in additional common shares. Under the plan, investors may also make optional cash payments on a quarterly basis to acquire even more shares. The price of shares sold under the plan is the average of the high and low sale prices of our common shares on the scheduled date of reinvestment. Operating Partnership Units Our interests and those of all limited partners in the operating partnership are represented by partnership units. Currently, the operating partnership has issued ordinary common units, which are economically equivalent to our common shares and Class B common units, which have no direct economic value, but which will automatically convert to ordinary common units upon the determination of our board of trustees that our funds from operations (as defined by the National Association of Real Estate Investment Trusts) equal or exceed $0.55 per share, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. If necessary, however, the number of Class B units that will convert to ordinary common units will be limited so that the current holder of the operating partnership's outstanding Class B units, American Real Estate Equities, LLC, will not become a greater than 10% owner, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. The operating partnership has also issued Class B preferred units to us, which are economically equivalent to our Class B Junior Cumulative Convertible Preferred Shares. Upon the closing of this offering and our contribution of our net proceeds to the operating partnership, the operating partnership will also issue us 1,200,000 Class A preferred units (up to 1,380,000 Class A preferred units if our underwriters exercise their overallotment option in full), which will be economically equivalent to the Class A Preferred Shares. The operating partnership may also issue additional classes or series of preferred units on such terms as we, as sole general partner, may determine. Subject to certain limitations in our operating partnership agreement and, in the case of any preferred units, following the conversion of such preferred units into common units, holders of common units generally have the right to require the redemption of their common units at any time one year after the original issuance date of such units. Unless we elect to assume and perform the operating partnership's obligation with respect to redemption of common units, a limited partner demanding redemption will receive cash from the operating partnership in an amount equal to the market value of the units to be redeemed. Instead of the operating partnership acquiring the units for cash, we will have the right to elect to acquire the units directly from a limited partner demanding redemption, in exchange for either cash or an equal number of our common shares, and, upon such acquisition, we will become the owner of such units. This one-for-one conversion rate will be adjusted appropriately in the event of a share split, share dividend or similar event. 68 Registration Rights On March 5, 1998, we entered into a registration rights agreement in connection with the issuance to Credit Suisse First Boston of a warrant to purchase up to 47,500 of our common shares at a price of $5.37 per share. Under the agreement, the holders of a majority of the shares represented by the Credit Suisse First Boston warrant have the right to require us to prepare and file one or more registration statements, under certain circumstances, with respect to our common shares purchasable under the Credit Suisse First Boston warrant and all other common shares owned by Credit Suisse First Boston or the then-holder(s) of the Credit Suisse First Boston warrant. Every holder of our operating partnership units also has registration rights, under our master registration rights agreement, with respect to the common shares that we might issue in exchange for the units. Under the agreement, every time the operating partnership issues units, we agree to register the common shares issuable in exchange for the units within one year and to use commercially reasonable efforts to register those shares for public resale by the former unit holder. Holders of partnership units also have the right under the agreement, subject to certain limitations, to include common shares they receive in exchange for units in registrations we may make for other purposes. The underwriters' representative's warrant will provide for a one-time right to demand registration of the shares underlying the warrants under the Securities Act of 1933, and participation of the common shares issuable upon conversion of the Class A Preferred Shares underlying such warrant, on a "piggy-back" basis, in specified registrations by us during the duration of the warrant and for two years thereafter. Restrictions on Transfer General. For us to continue to qualify as a REIT under the Internal Revenue Code, our common shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of our issued and outstanding shares, including the Class A Preferred Shares, may be owned, directly or indirectly, by five or fewer individuals during the last half of a taxable year or during a proportionate part of a shorter taxable year. Because our board of trustees believes it is essential for us to qualify as a REIT, our declaration of trust, subject to certain exceptions, provides that no holder may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.9% of the value of our issued and outstanding shares. The board of trustees, upon receipt of a ruling from the Internal Revenue Service, an opinion of counsel or other evidence satisfactory to the board of trustees and upon such other conditions as the board of trustees may direct, may exempt a proposed transferee from the 9.9% ownership limit. As a condition of such exemption, the intended transferee must give written notice to us of the proposed transfer no later than the 50th day prior to any transfer which, if consummated, would result in the intended transferee owning shares in excess of the 9.9% ownership limit. The board of trustees may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure our status as a REIT. Any transfer of shares that would (1) create a direct or indirect ownership of shares of shares in excess of the 9.9% ownership limit, (2) result in our shares being owned by fewer than 100 persons, or (3) result in our being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code, shall be null and void, and the intended transferee will acquire no rights to the shares. The foregoing restrictions on transferability and ownership will not apply if our board of trustees determines that it is no longer in our best interests to continue to qualify as a REIT. Any purported transfer of shares that would result in a person owning shares in excess of the 9.9% ownership limit or cause us to become "closely held" under Section 856(h) of the Internal Revenue Code that is not otherwise permitted as provided above will constitute "excess shares," which will be transferred by operation of law to us as trustee for the exclusive benefit of the person or persons to whom the excess shares are ultimately transferred, until such time as the intended transferee retransfers the excess shares. While these excess shares are held in trust, they will not be entitled to vote or to share in any distributions (except upon 69 liquidation). Subject to the 9.9% ownership limit, the excess shares may be retransferred by the intended transferee to any person (if the excess shares would not be excess shares in the hands of such person) at a price not to exceed the price paid by the intended transferee (or, if no consideration was paid, fair market value), at which point the excess shares will automatically be exchanged for the shares to which the excess shares are attributable. In addition, such excess shares held in trust are subject to purchase by us at a purchase price equal to the price paid for the shares by the intended transferee or, if no consideration was paid, fair market value as reflected in the last reported sales price reported on the Nasdaq National Market sm on the trading day immediately preceding the relevant date, or if not then reported on the Nasdaq National Market sm, the last reported sales price of such shares on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which such shares may be traded, or if not then traded over any exchange or quotation system, then the market price of such shares on the relevant date as determined in good faith by our board of trustees. From and after the intended transfer to the intended transferee of the excess shares, the intended transferee shall cease to be entitled to distributions (except upon liquidation), voting rights and other benefits with respect to such shares, except the right to payment of the purchase price for the shares or the retransfer of shares as provided above. Any distribution paid to a proposed transferee on account of excess shares prior to the discovery by us that such shares have been transferred in violation of the provisions of the declaration of trust shall be repaid to us upon demand. If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any excess shares may be deemed, at our option, to have acted as an agent on our behalf in acquiring such excess shares and to hold such excess shares on our behalf. All certificates representing our shares, including the Class A Preferred Shares, will bear a legend that references the restrictions described above. All persons who own, directly or by virtue of the attribution provisions of the Internal Revenue Code, more than 5% (or such other percentage between 1/2 of 1% and 5%, as provided in the rules and regulations promulgated under the Internal Revenue Code) of the number or value of our then outstanding shares must give a written notice to us by January 31 of each year. In addition, each shareholder shall, upon demand, be required to disclose to us in writing such information with respect to the direct, indirect and constructive ownership of our shares as the board of trustees deems reasonably necessary to comply with the provisions of the Internal Revenue Code applicable to a REIT, to comply with the requirements of any taxing authority or governmental agency or determine any such compliance. These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the Class A Preferred Shares might receive a premium for their shares over the then prevailing market price or which such holders might otherwise believe to be in their best interest. 70 CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF TRUST AND BYLAWS The following summary highlights certain provisions of Maryland law, our declaration of trust and our bylaws. It is not complete and is subject to and qualified in its entirety by reference to Maryland law, the declaration of trust and our bylaws for complete information. Number of Trustees Our declaration of trust provides that the number of trustees may be established by the board of trustees, but may not be fewer than three nor more than fifteen. Any vacancy of the board of trustees may be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining trustees. Removal of Trustees Our declaration of trust provides that a trustee may be removed only by the affirmative vote of at least a majority of the votes entitled to be cast in the election of trustees. Amendment to the Declaration of Trust With certain exceptions, our declaration of trust, including its provisions on removal of trustees, may be amended only by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter. Dissolution of the Trust The voluntary dissolution of the trust must be approved by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter or the written consent of all holders of shares entitled to vote on this matter. Business Combinations Under Maryland law, certain "business combinations" (including certain mergers, consolidations, share exchanges, or, in certain circumstances, asset transfers or issuances or reclassifications of equity securities) between a Maryland real estate investment trust and an "interested shareholder" or an affiliate of the interested shareholder are prohibited for 5 years after the most recent date on which the interested shareholder becomes an interested shareholder. An interested shareholder includes a person who beneficially owns, and an affiliate or associate of the trust who, at any time during the two-year period prior to the date in question, who was the beneficial owner of ten percent of more of the voting power of the trust's then outstanding voting shares. Thereafter, any such business combination must be: (a) recommended by the trustees of such trust and (b) approved by the affirmative vote of at least: (1) 80% of the votes entitled to be cast by holders of 71 outstanding voting shares of beneficial interest of the trust; and (2) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest other than shares held by the interested shareholder with whom (or with whose affiliate or associate) the business combination is to be effected, unless, among other conditions, the trust's common shareholders receive a minimum price (as defined under Maryland law) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of trustees of the trust prior to the time that the interested shareholder becomes an interested shareholder. An amendment to a Maryland REIT's declaration of trust electing not to be subject to the foregoing requirements must be approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest of the trust, voting together as a single voting group, and two-thirds of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest other than shares of beneficial interest held by interested shareholders. Any such amendment shall not be effective until 18 months after the vote of shareholders and will not apply to any business combination of the trust with an interested shareholder on the date of the shareholder vote. Maryland's business combination statute could have the effect of delaying, deferring or preventing offers to acquire us and of increasing the difficulty of acting on any such offer. Control Share Acquisitions Maryland law, as applicable to Maryland REITs, provides that "control shares" of a Maryland real estate investment trust acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter by shareholders, excluding shares owned by the acquiror, by officers or by trustees who are employees of the trust in question. "Control shares" are voting shares of beneficial interest which, if aggregated with all other shares previously acquired by such acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise the voting power in the election of trustees within one of the following ranges of voting power: (a) one-fifth or more but less than one-third, (b) one-third or more but less than a majority, or (c) a majority or more of all voting power. Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval. A "control share acquisition" generally means the acquisition of control shares. Advance Notice of Trustee Nominations and New Business Our bylaws provide that (1) with respect to an annual meeting of shareholders, nominations of persons for election to the board of trustees and the proposal of business to be considered by shareholders may be made only (a) pursuant to our notice of the meeting, (b) by the board of trustees, or (c) by a shareholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our bylaws, and (2) with respect to special meetings of shareholders, only the business specified in our notice of meeting may be brought before the meeting of shareholders, and nominations of persons for election to the board of trustees may be made only (a) pursuant to our notice of the meeting, (b) by the board of trustees, or (c) provided that the board of trustees has determined that trustees shall be elected at such meeting, by a shareholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in our bylaws. Limitation of Liability and Indemnification The Maryland REIT law permits a Maryland REIT to include in its declaration of trust a provision limiting the liability of its trustees and officers to the trust and its shareholders for money damages, except for liability resulting from (1) actual receipt of an improper benefit or profit in money, property or services or (2) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our declaration of trust contains such a provision which eliminates liability of our trustees and officers to the maximum extent permitted by the Maryland REIT law. Our bylaws require us to indemnify, without requiring a preliminary determination of the ultimate entitlement to indemnification, (1) any present of former trustee, officer or shareholder who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of such status, against reasonable expenses incurred by him in connection with the proceeding; (2) any present of former trustee or officer against any claim or liability to which he may become subject by reason of such status unless it is established that (a) his act or omission was committed in bad faith or was the result of active and deliberate dishonesty, (b) he actually received an improper personal benefit in money, property or services or (c) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful; and (3) each shareholder or former shareholder against any claim or liability to which he may be subject by reason of such status as a shareholder or former shareholder. However, under Maryland law, we may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received unless, in either case, a court orders 72 indemnification and then only for expenses. In addition, our bylaws require us to pay or reimburse, in advance of final disposition of a proceeding, reasonable expenses incurred by a present or former trustee, officer or shareholder made a party to a proceeding by reason of his status as a trustee, officer or shareholder provided that, in the case of a trustee or officer, we shall have received (1) a written affirmation by the trustee or officer of his good faith belief that he has met the applicable standard of conduct necessary for indemnification as authorized by the bylaws and (2) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by us if it shall ultimately be determined that the applicable standard of conduct was not met. Our bylaws also (1) permit us, with the approval of our trustees, to provide indemnification and payment or reimbursement of expenses to a present or former trustee, officer or shareholder who served a predecessor of ours in such capacity, and to any of our employees or agents or those of our predecessors, (2) provide that any indemnification or payment or reimbursement of the expenses permitted by our bylaws shall be furnished in accordance with the procedures provided for indemnification and payment or reimbursement of expenses under Maryland law and (3) permit us to provide further indemnification or payment or reimbursement of expenses as may be permitted by Maryland law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our trustees and officers, we have been advised that, although the validity and scope of the governing statute has not been tested in court, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy and is, therefore, unenforceable. In addition, indemnification may be limited by state securities laws. Maryland Asset Requirements To maintain our qualification as a Maryland REIT, the Maryland REIT law requires that we hold, either directly or indirectly, at least 75% of the value of our assets in real estate assets, mortgages or mortgage related securities, government securities, cash and cash equivalent items. The Maryland REIT law also prohibits us from using or applying land for farming, agricultural, horticultural or similar purposes. 73 FEDERAL INCOME TAX CONSIDERATIONS We currently intend to continue to operate so as to meet the Internal Revenue Code requirements for qualification as a REIT. However, no assurance can be given that we will continue to meet such requirements. Such qualification depends upon our ability to meet the various requirements imposed under the Internal Revenue Code through actual operating results and actions taken, as discussed below. The following is a general summary of the Internal Revenue Code provisions governing the federal income tax treatment of REITs and is not tax advice. These provisions are highly technical and complex, and this summary is qualified in its entirety by the applicable Internal Revenue Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. Moreover, this summary does not deal with all tax aspects that might be relevant to you in light of your personal circumstances; nor does it deal with particular types of shareholders that are subject to special treatment under the Internal Revenue Code, such as tax-exempt organizations, insurance companies, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO YOUR SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE PURCHASE, HOLDING AND SALE OF THE CLASS A PREFERRED SHARES. Taxation of the Trust as a Real Estate Investment Trust General. As a REIT, in general we are not subject to federal corporate income taxes on that portion of our ordinary income or capital gain that is currently distributed to shareholders. The REIT provisions of the Internal Revenue Code generally allow a REIT to deduct distributions paid to its shareholders. This deduction for distributions paid to shareholders substantially eliminates the federal "double taxation" on earnings (once at the corporate level and once again at the shareholder level) that generally results from investment in a corporation. We are subject to federal income tax, however, as follows: o First, we are taxed at regular corporate rates on our undistributed REIT taxable income, including undistributed net capital gains. o Second, under certain circumstances, we are subject to the "alternative minimum tax" on our items of tax preference to the extent that the tax exceeds our regular tax. o Third, if we have net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. o Fourth, any net income that we have from prohibited transactions (which are, in general, certain sales or other dispositions of property other than foreclosure property held primarily for sale to customers in the ordinary course of business) is subject to a 100% tax. Losses from prohibited transactions may not offset gains in computing the 100% tax. Such losses, however, may offset taxable REIT income. o Fifth, if we should fail to satisfy either the 75% or 95% gross income tests (as discussed below), and have nonetheless maintained our qualifications as a REIT because certain other requirements have been met, we will be subject to a 100% tax on the net income attributable to the greater of the amount by which we fail the 75% or 95% test, multiplied by a fraction intended to reflect our profitability. 74 o Sixth, if we fail to distribute, during each year, at least the sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT capital gain net income for such year, and (3) any undistributed taxable income from preceding periods, we will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. o Seventh, if an election is made pursuant to IRS Notice 88-19 and during the 10-year period (1) commencing on the first day of the first taxable year that we qualified as a REIT, we recognize a gain from the disposition of an asset held by us at the beginning of such period, or (2) commencing on the day on which an asset acquired by us from a C corporation in a transaction in which we inherit the tax basis of the asset from the C corporation, we recognize a gain from the disposition of such asset, then we will be subject to tax at the highest regular corporate rate on the excess, if any, or the fair market value over the adjusted basis of any such asset as of the beginning of its recognition period. Requirements for Qualification To qualify as a REIT, we must continue to meet the requirements, discussed below, relating to our organization, sources of income, nature of assets and distributions of income to shareholders. The Internal Revenue Code defines a REIT as a corporation, trust, or association: o that is managed by one or more trustees; o the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; o that would be taxable as a domestic corporation but for the REIT section of the Internal Revenue Code; o that is neither a financial institution nor an insurance company within the meaning of certain provisions of the Internal Revenue Code; o the beneficial ownership of which is held by 100 or more persons; o during the last half of each taxable year not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, through the application of certain attribution rules, by five or fewer individuals (as defined in the Internal Revenue Code to include certain business entities); and o which meets certain other tests, described below, regarding the nature of its income and assets. The Internal Revenue Code provides that conditions (1) through (4), inclusive, must be met during the entire taxable year and that condition (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. For purposes of conditions (5) and (6), pension funds and certain other tax-exempt entities are treated as individuals. However, a trust described in section 401(a) of the Internal Revenue Code and exempt from tax under section 501(a) is not generally treated as a single individual for purposes of the five or fewer requirement. Rather, beneficiaries of such trust are treated as holding shares in the REIT in proportion to their interests in the trust. Our declaration of trust includes certain restrictions regarding transfer of our shares, which restrictions are intended (among other things) to assist us in continuing to satisfy the share ownership requirements described in (5) and (6) above. Income Tests. There are three percentage tests relating to the sources of our gross income. 75 o First, at least 75% of our gross income (excluding gross income from certain sales of property held primarily for sale) must be directly or indirectly derived each taxable year from investments relating to real property or mortgages on real property or certain temporary investments. o Second, at least 95% of our gross income (excluding gross income from certain sales of property held primarily for sale) must be directly or indirectly derived each taxable year from any of the sources qualifying for the 75% test and from distributions, interest, and gain from the sale or disposition of shares or securities. In applying these tests, if we invest in a partnership, such as our operating partnership, we will be treated as realizing our share of the income and bearing our share of the loss of the partnership (using special rules for determining a REIT's share for this purpose), and the character of such income or loss, as well as other partnership items, will be determined at the partnership level. Rents received by us will qualify as "rents from real property" for purposes of satisfying the gross income tests for a REIT only if several conditions are met: o First, the amount of rent must not be based, in whole or in part, on the income or profits of any person, although rents generally will not be excluded merely because they are based on a fixed percentage of receipts or sales. o Second, rents received from a tenant will not qualify as "rents from real property" if the REIT, or an owner of 10% or more of the REIT, directly or constructively owns 10% or more of such tenant. o Third, if rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." o Finally, for rents to qualify as "rents from real property," a REIT generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an independent contractor from whom the REIT derives no revenue, except that a REIT may directly perform services which are "usually or customarily rendered" in connection with the rental of space for occupancy, other than services which are considered to be rendered to the occupant of the property. However, a REIT is currently permitted to earn up to one percent of its gross income from tenants, determined on a property-by-property basis, by furnishing services that are non customary or provided directly to the tenants, without causing the rental income to fail to qualify as rents from real property. The term "interest" generally does not include any amount if the determination of such amount depends, in whole or in part, on the income or profits of any person, although an amount generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage of receipts or sales. The term "prohibited transaction" means a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of the taxpayer's trade or business. Any gross income derived from a prohibited transaction is subject to a 100% tax. We may wish to occasionally dispose of selected rental property assets. We believe such assets will not be considered as held primarily for sale to customers and that the occasional sale of such assets should not be considered to be in the ordinary course of our business. Whether property is held "primarily for sale to customers in the ordinary course of the taxpayer's trade or business" depends, however, on the facts and circumstances in effect from time to time, including those relating to a particular property. As a result, complete assurance cannot be given that we can avoid being deemed to own property that the IRS later characterizes as property held "primarily for sale to customers in the ordinary course of its trade or business." The Internal Revenue Code provides a limited safe harbor pursuant to which certain sales by a REIT of real estate assets held for at least four years will not 76 constitute prohibited transactions. There can be no assurance, however, that a sale of rental property will qualify for this safe harbor. The determination of whether a sale not qualifying for the safe harbor constitutes a prohibited transaction will be made under the general rule described above. To the extent that we determine that it is beneficial to sell properties that we have held for less than four years, such dispositions will not qualify for the prohibited transaction safe harbor described above. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for such year if we are eligible for relief under certain provisions of the Internal Revenue Code. These relief provisions will be generally available if our failure to meet such tests is due to reasonable cause and not due to willful neglect, we attach a schedule of the sources of our income to our return, and any incorrect information on our schedule was not due to fraud with intent to evade tax. It is not now possible to determine the circumstances under which we may be entitled to the benefit of these relief provisions. For example, if we fail to satisfy the gross income tests because non-qualifying income that we intentionally incur exceeds the limits on such income, the Internal Revenue Service could conclude that our failure to satisfy the tests was not due to reasonable cause. If these relief provisions apply, a 100% tax is imposed on the net income attributable to the greater of the amount by which we failed the 75% test or the 95% test, multiplied by a fraction intended to reflect our profitability. Asset Tests. At the close of each quarter of our taxable year, we must also satisfy several tests relating to the nature and diversification of our assets. o First, at least 75% of the value of our total assets must be represented by real estate assets, cash, cash items (including receivables arising in the ordinary course of our operation) and government securities. o Second, not more than 25% of our total assets may be represented by securities other than those includible in the 75% asset class. o Third, the value of any one issuer's securities owned by us may not exceed 5% of our total assets. o Finally, we may not own more than 10% of any one issuer's outstanding voting securities. For purposes of the asset tests, we will be treated as owning our share of the assets of any partnership in which we invest. After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reasons of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of any quarter as may be required to cure any noncompliance. Annual Distribution and Information Requirements. In order to qualify as a REIT, we are required to make distributions (other than capital gain distributions) to our shareholders in an amount at least equal to (1) the sum of (a) 95% of our "real estate investment trust taxable income" (computed without regard to the distributions-paid deduction and our net capital gain) and (b) 95% of the after-tax net income, if any, from foreclosure property, minus (2) the sum of certain items of non-cash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and if paid on or before the date of the first regular distribution payment after such declaration. To the extent that we do not distribute all of our net capital gain or distribute at least 95%, but less than 100%, of our "real estate investment trust taxable income," as adjusted, we will be subject to tax thereon at regular corporate tax rates. In order for us to qualify as a REIT, we are also required to keep certain records and to demand, by January 30 of each year, certain information from our shareholders of record. 77 In addition, during our recognition period, if applicable, we dispose of any asset subject to the built-in gain rules, we will be required, pursuant to guidance issued by the Internal Revenue Service, to distribute at least 95% of the built-in gains (after tax), if any, recognized on the disposition of the asset. Moreover, if we should fail to distribute, during each calendar year, at least the sum of (1) 85% of our REIT ordinary income for that year, (2) 95% of our REIT capital gain net income for that year, and (3) any undistributed taxable income from prior periods, we would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. We intend to make timely distributions sufficient to satisfy this annual distribution requirement. It is possible that we, from time to time, may not have sufficient cash or other liquid assets to meet the 95% distribution requirement, or to distribute such greater amount as may be necessary to avoid income and excise taxation, due to (among other reasons) timing differences between (1) the actual receipt of income and actual payment of deductible expenses, and (2) the inclusion of such income and deduction of such expenses in arriving at our taxable income. In the event that such timing differences occur, we may find it necessary to arrange for borrowings or, if possible, pay taxable distributions in order to meet the distribution requirement. Under certain circumstances, if as a result of a deficiency determined by the Internal Revenue Service, we may be able to rectify a resulting failure to meet the distribution requirement for a year by paying "deficiency distributions" to shareholders in a later year, which may be included in our deduction for distributions paid for the earlier year. Thus, although we may be able to avoid being taxed on amounts distributed as deficiency distributions, we will be required to pay interest (and penalties, if any) based upon the amount of any deduction taken for deficiency distributions. Failure to Qualify as a Real Estate Investment Trust Our election to be treated as a REIT will be automatically terminated if we fail to meet the requirements described above. In that event, we will be subject to tax (including any applicable minimum tax) on our taxable income at regular corporate rates, and our distributions to shareholders will not be deductible. All distributions to shareholders will be taxable as ordinary income to the extent of current and accumulated earnings and profits and will be eligible for the 70% distributions-received deduction for corporate shareholders. We will not be eligible again to elect REIT status until the fifth taxable year which begins after the year for which our election was terminated unless we did not willfully fail to file a timely return with respect to the termination taxable year, inclusion of any incorrect information in such return was not due to fraud with intent to evade tax, and we establish that failure to meet the requirement was due to reasonable cause and not willful neglect. Failure to qualify for even one year could result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes. Federal Taxation of Shareholders General. As long as we qualify for taxation as a REIT, distributions made to our shareholders out of current or accumulated earnings and profits (and not designated as capital gain distributions) will be includible by you as ordinary income for federal income tax purposes. The distributions will not be eligible for the distributions-received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits will not be taxable to you to the extent that they do not exceed the adjusted basis of your shares. You will be required to reduce the tax basis of your shares by the amount of such distributions until such basis has been reduced to zero, after which such distributions will generally be taxable as capital gain. The tax basis, as so reduced, will be used in computing the capital gain or loss, if any, realized upon sale of your shares. Any loss upon a sale or exchange of your shares held for six months or less (after applying certain holding period rules) will generally be treated as a long-term capital loss to the extent you previously received capital gain distributions with respect to such shares. 78 Capital Gain Distributions. Distributions to our U.S. shareholders that are properly designated by us as capital gain distributions will be treated as long-term capital gains (to the extent they do not exceed our actual net capital gain for the taxable year), without regard to the period for which such shareholder has held his or her shares. Capital gain distributions are also not eligible for the distributions-received deduction for corporations. In addition, corporate shareholders may be required to treat up to 20% of certain capital gain distributions as ordinary income. In addition, we may elect to retain and pay income tax on our net long-term capital gains. If we so elect, each shareholder will take into income the shareholder's share of the retained capital gain as long-term capital gain and will receive a credit or refund for that shareholder's share of the tax paid by us. The shareholder will increase the basis of such shareholder's shares by an amount equal to the excess of the retained capital gain included in the shareholder's income over the tax deemed paid by such shareholder. You may not include in your individual federal income tax returns any of our net operating losses or capital losses. In addition, any distribution declared by us in October, November or December of any year payable to you on a specified date in any such month shall be treated as both paid by us and received by you on December 31 of such year, provided that the distribution is actually paid by us no later than January 31 of the following year. We may be required to withhold a portion of capital gain distributions to you if you fail to certify your non-foreign status to us. Passive Activity Loss and Investment Interest Limitations. Distributions from us and gain from the disposition of our shares will not be treated as passive activity income, and therefore, you will not be able to apply any "passive activity losses" against such income. Distributions from us (to the extent they do not constitute a return of capital or capital gain distributions) will generally be treated as investment income for purposes of the rule limiting the deduction of investment interest to investment income. Backup Withholding. We will report to you and the Internal Revenue Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, you may be subject to backup withholding at the rate of 31% with respect to distributions paid unless you (1) are a corporation or come within certain other exempt categories and, when required, demonstrate this fact, or (2) have provided a correct taxpayer identification number, certify as to no loss of exemption from backup withholding, and otherwise comply with applicable requirements of the backup withholding rules. If you do not provide us with a correct taxpayer identification number, you may also be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding will be credited against your income tax liability. Tax-Exempt Shareholders. The Internal Revenue Service has ruled that amounts distributed by a REIT to a tax exempt pension trust did not constitute unrelated business taxable income ("UBTI"). Although rulings are merely interpretations of law by the Internal Revenue Service and may be revoked or modified, based on this analysis, indebtedness incurred by us in connection with the acquisition of an investment should not cause any income derived from the investment to be treated as UBTI to a tax exempt entity. A tax exempt entity that incurs indebtedness to finance its purchase of shares, however, will be subject to UBTI by virtue of the acquisition indebtedness rules. The Internal Revenue Code requires qualified trusts that hold more than 10% of the shares of a REIT to treat a percentage of REIT distributions as UBTI for taxable years beginning after December 31, 1993. The requirement applies only if (1) the qualification of the REIT depends upon the application of a "look-through" exception to the restriction on REIT shareholdings by five or fewer individuals, including qualified trusts, and (2) the REIT is "predominantly held" by qualified trusts. A REIT is predominantly held if either (1) a single qualified trust held more than 25% by value of the interests in the REIT or (2) one or more qualified trusts, each owning more than 10% by value, held, in the aggregate, more than 50% of the interests in the REIT. The percentage of any distribution paid (or treated as paid) to the qualified trust that would be treated as UBTI is determined by the amount of UBTI earned by the REIT (treating the REIT as if it were a qualified trust, and therefore subject to tax on UBTI) as a percentage of the total gross income of the REIT. A de minimis exception applies where the percentage determined under the preceding sentence is less than 5%. For purposes 79 of these provisions, the term "qualified trust" means any trust described at ss.401(a) and exempt from tax under ss.501(a) of the Internal Revenue Code. Conversion of Series A Preferred Shares to Common Shares. Assuming that Series A Preferred Shares will not be converted at a time when there are distributions in arrears, in general, no gain or loss will be recognized for federal income tax purposes upon the conversion of the Series A Preferred Shares at the option of the holder solely into common shares. The basis that a holder will have for tax purposes in the common shares received will be equal to the adjusted basis the holder had in the Series A Preferred Shares so converted and, provided that the Series A Preferred Shares were held as a capital asset, the holding period for the common shares received will include the holding period for the Series A Preferred Shares converted. If a conversion occurs when there is a dividend arrearage on the Series A Preferred Shares and the fair market value of the common shares exceeds the issue price of the Series A Preferred Shares, a portion of the common shares received might be treated as a dividend distribution, taxable as ordinary income. State and Local Taxation We as well as you may be subject to state or local taxation in various state or local jurisdictions, including those in which we or you transact business or reside. Consequently, you should consult your own tax advisors regarding the effect of state and local tax laws on an investment in the Class A Preferred Shares. LEGAL MATTERS On our behalf, Foley & Lardner, Milwaukee, Wisconsin, will pass upon the validity of the issuance of the securities being offered by this prospectus. Maun & Simon PLC, Minneapolis, Minnesota, will pass upon certain matters for our underwriters. EXPERTS The financial statements included in this prospectus, to the extent and for the periods indicated in their reports, have been audited by Grant Thornton LLP, independent accountants, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. In addition, Grant Thornton has provided us their written opinion that we are a qualified REIT for purposes of the Internal Revenue Code. ADDITIONAL INFORMATION We have filed a registration statement on Form SB-2 under the Securities Act of 1933 with the Securities and Exchange Commission in Washington, D.C. with respect to the Class A Preferred Shares and the common shares that may be issued upon conversion of the Class A Preferred Shares. This prospectus, which is part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information about us and the securities offered by this prospectus, you should refer to the registration statement and the exhibits and schedules filed with it. Statements contained in this prospectus as to the contents of any agreement or any other document referred to are not necessarily complete, and in each instance, if such agreement or document is filed as an exhibit, you should refer to the copy of the agreement or document filed as an exhibit to the registration statement, each such statement being qualified in all respects by reference to the exhibit. The registration statement, including exhibits and schedules thereto, may be inspected and copied at the principal office of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of materials may also be obtained at prescribed rates from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, we are required to file electronic versions of these documents with the Securities and Exchange Commission through its Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Securities and Exchange Commission maintains a World Wide Web site at http://www.sec.gov that contains 80 reports, proxy and information statements and other information regarding registrants that file public documents electronically. 81 WELLINGTON PROPERTIES TRUST INDEX TO FINANCIAL STATEMENTS I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Introduction to Pro Forma Condensed Consolidated Financial Information F-2 Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999 F-4 Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 1998 and the Six Month Period Ended June 30, 1999 F-5 Notes and Management's Assumptions to Unaudited Pro Forma Condensed Consolidated Financial Statements F-7 II.CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY Report of Independent Certified Public Accountants F-12 Consolidated Balance Sheet as of December 31, 1998 F-13 Consolidated Statements of Operations for the Years Ended December 31, 1998 and December 31, 1997 F-14 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998 and December 31, 1997 F-15 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and December 31, 1997 F-17 Notes to Consolidated Financial Statements F-19 Unaudited Consolidated Balance Sheet as of June 30, 1999 F-25 Unaudited Consolidated Statements of Operations for the Six Month Period Ended June 30, 1999 and June 30, 1998 F-26 Unaudited Consolidated Statements of Cash Flows for the Six Month Period Ended June 30, 1999 and June 30, 1998 F-28 Notes to Consolidated Financial Statements F-29 F-1 WELLINGTON PROPERTIES TRUST I. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following sets forth the unaudited pro forma condensed consolidated balance sheet of Wellington Properties Trust (the "Company") and its consolidated affiliates, including Wellington Properties Investments, L.P. (the "Operating Partnership") as of June 30, 1999, and the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1998 and the six-month period ended June 30, 1999. In November 1998, the Operating Partnership acquired three commercial properties (the "1998 Acquisition Properties") in exchange for (a) issuance by the Operating Partnership of 2,557,707 limited partnership units ("Units") (convertible, under certain circumstances, on a one-for-one basis such that one Unit is convertible into one Common Share, as defined below); and (b) the assumption of debt aggregating $17,066,000. In connection with the 1998 Acquisition Properties, the Company issued 166,666 common shares of beneficial interest (the "Common Shares") to American Real Estate Equities, LLC ("AREE"), or representatives thereof, in exchange for $1,000,000 in cash and the Company received 166,666 Units from the Operating Partnership in exchange for contributing $1,000,000 in cash. Simultaneous with the 1998 Acquisition Properties, Wellington Management Corporation ("WMC") received a termination fee and the advisory agreement between the Company and WMC was terminated. (The above transactions are collectively referred to herein as the "1998 Transactions.") The 1998 Transactions are reflected in the Company's historical consolidated balance sheet as of June 30, 1999 for balance sheet purposes, and are included in the pro forma condensed consolidating statements of operations as if they occurred on January 1, 1998. The pro forma condensed consolidating financial information is presented as if the following transactions have been consummated on June 30, 1999 for balance sheet purposes, and at the beginning of the period presented for purposes of the statements of operations: o The future disposition of Maple Grove Apartments for $16,700,000. o The future issuance of 1,200,000 Class A Cumulative Preferred Shares ("Class A Preferred Shares") to the public ("Preferred Offering"). The Class A Preferred Shares will bear a liquidation value of $10.00 per share and will accrue a dividend equal to $0.475 per share, with such dividend payable every six months. The Class A Preferred Shares will be convertible into the number of Common Shares equal to the quotient obtained by dividing (1) $10.00 plus any dividends then accrued but unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the average closing bid price of Common Shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. The Company will have the right to redeem the Class A Preferred Shares, under certain circumstances, after the two year anniversary date of the initial closing of the Preferred Offering. o The agreement in the second quarter of 1999 between the Company and AREE whereby: o AREE returned a warrant covering 791,667 Common Shares to the Company for cancellation. o Recipients of 838,372 Units returned such Units to the Company for cancellation. o The Company agreed to the future issuance of 254,800 Class B Cumulative Preferred Shares ("Class B Preferred Shares") to AREE. F-2 o The Class B Preferred Shares will bear the same rights, terms and preferences as the Class A Preferred Shares, but will rank junior as to payment of dividends and distributions upon liquidations. o The agreement in the second quarter of 1999 between the Company and WMC whereby, as consideration for termination of the advisory agreement: o WMC returned a warrant covering 791,667 Common Shares to the Company for cancellation. o The Company agreed to the future issuance of 95,000 Class B Preferred Shares to WMC and WMC will retain cash payments of $550,000 received during 1998. This pro forma condensed consolidated financial information should be read in conjunction with the historical financial statements of the Company included elsewhere in this prospectus. In management's opinion, all adjustments necessary to reflect the effects of the above transactions have been made. This pro forma condensed consolidated financial information is unaudited and is not necessarily indicative of what the actual financial position would have been at June 30, 1999, nor does it purport to represent the future financial position and the results of operations of the Company. F-3 Wellington Properties Trust Pro Forma Condensed Consolidated Balance Sheet As of June 30, 1999 (Unaudited) (Dollars in thousands, except per share data)
Issuance of Issuance of Adjustment to Historical Maple Grove Class A Class B Minority Consolidated Apartments Preferred Preferred Interests Pro Forma (A) (B) Shares Shares (E) Consolidated (C) (D) Assets Net investments in real estate $ 49,250 $(15,109) $ -- $ -- $ -- $ 34,141 Cash and cash equivalents 98 2,437 10,390 -- -- 12,925 Escrowed cash 681 (254) -- -- -- 427 Deferred costs, net 816 (119) -- -- -- 697 Other assets 171 -- -- -- -- 171 -------- -------- -------- -------- -------- -------- Total Assets $ 51,016 $(13,045) $ 10,390 $ -- $ -- $ 48,361 ======== ======== ======== ======== ======== ======== Liabilities and shareholders' equity Liabilities Mortgage loans payable $ 32,049 $(12,680) $ -- $ -- $ -- $ 19,369 Other liabilities 6,550 (668) -- (3,498) -- 2,384 -------- -------- -------- -------- -------- -------- Total liabilities 38,599 (13,348) -- (3,498) -- 21,753 -------- -------- -------- -------- -------- -------- Minority Interests 8,755 -- -- -- (1,463) 7,292 Shareholders' equity Common shares of beneficial interest 14 -- -- -- -- 14 Preferred shares of beneficial interest -- -- 12 3 -- 15 Additional paid in capital 9,070 -- 10,378 3,495 1,463 24,406 Accumulated deficit (5,422) 303 -- -- -- (5,119) -------- -------- -------- -------- -------- -------- Total shareholders' equity 3,662 303 10,390 3,498 1,463 19,316 -------- -------- -------- -------- -------- -------- Total liabilities and shareholders' equity $ 51,016 $(13,045) $ 10,390 $ -- $ -- $ 48,361 ======== ======== ======== ======== ======== ========
See accompanying notes to pro forma financial statements F-4 Wellington Properties Trust Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 1998 (Unaudited) (Dollars in thousands, except per share data)
Historical 1998 Acquired Maple Issuance of Consolidated Properties Grove Apartments Preferred Shares Pro Forma Pro Forma (A) (B) (C) (D) Adjustments Consolidated Revenue: Rental revenue $ 3,488 $ 3,335 (i) $ (2,594)(i) $ - $ - $ 4,229 Other 21 57 (i) 128(ii) 559 - 765 ----------- ------------ ----------- ---------- ---------- ------------ Total revenue 3,509 3,392 (2,466) 559 - 4,994 ----------- ------------ ----------- ---------- ---------- ------------ Expenses: Property operating 1,564 1,404 (i) (1,128)(i) - - 1,840 General and administrative 280 - (15)(i) - 75 (E) 340 Interest expense 1,417 1,275 (ii) (1,035)(i) - - 1,657 Depreciation and amortization 694 570 (iii) (491)(i) - - 773 Nonrecurring expenses 1,560 - - - (1,560) (F) - ----------- ------------ ----------- ---------- ---------- ------------ Total expenses 5,515 3,249 (2,669) - (1,485) 4,610 ----------- ----------- ----------- --------- ---------- ------------ Income (loss) before minority interests (2,006) 143 203 559 1,485 384 Minority interests in (income) loss 1,065 - - - (450) (G) 615 ----------- ------------ ----------- ---------- ---------- ------------ Net income (loss) (941) 143 203 559 1,035 999 Net income allocated to Preferred Shares - - - - (1,472) (G) (1,472) ----------- ------------ ----------- ---------- ---------- ------------ Net income (loss) allocated to Common Shares $ (941) $ 143 $ 203 $ 559 $ (437) $ (473) =========== ============ =========== ========== ========== ============== Net loss per share: Basic and diluted $ (0.80) $ (0.36) =========== ============== Weighted average number of shares: Basic and diluted 1,175,438 1,322,043 =========== ==============
See accompanying notes to pro forma financial statements F-5 Wellington Properties Trust Pro Forma Condensed Consolidated Statement of Operations For the Six Month Period Ended June 30, 1999 (Unaudited) (Dollars in thousands, except per share data)
Historical 1998 Acquired Maple Issuance of Consolidated Properties Grove Apartments Preferred Shares Pro Forma Pro Forma (A) (B) (C) (D) Adjustments Consolidated Revenue: Rental revenue $ 3,414 $ - $ (1,261) (i) $ - $ - $ 2,153 Other 31 - 64 (ii) 279 - 374 ------------- --------- ------------ ----------- ----------- ----------- Total revenue 3,445 - (1,197) 279 - 2,527 ------------- --------- ------------ ----------- ----------- ----------- Expenses: Property operating 1,590 - (583) (i) - - 1,007 General and administrative 387 - (8) (i) - - 379 Interest expense 1,295 - (525) (i) - - 770 Depreciation and amortization 681 - (251) (i) - - 430 Nonrecurring expenses 3,563 - - - (3,563) (F) - ------------- --------- ------------ ----------- ----------- ----------- Total expenses 7,516 - (1,367) - (3,563) 2,586 ------------- --------- ----------- ---------- ----------- ----------- Income (loss) before minority interests (4,071) - 170 279 3,563 (59) Minority interests in (income) loss 2,664 - - - (2,219) (G) 445 ------------- --------- ------------ ----------- ----------- ----------- Net income (loss) (1,407) - 170 279 1,344 386 Net income allocated to Preferred Shares - - - - (736) (G) (736) ------------- --------- ------------ ----------- ----------- ----------- Net income (loss) allocated to Common Shares $ (1,407) $ - $ 170 $ 279 $ 608 $ (350) ============ ========= ============ =========== =========== =========== Net loss per share: Basic and diluted $ (1.04) $ (0.26) ============ =========== Weighted average number of shares: Basic and diluted 1,350,730 1,350,730 ============= ===========
See accompanying notes to pro forma financial statements F-6 WELLINGTON PROPERTIES TRUST NOTES AND MANAGEMENT'S ASSUMPTIONS TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1. Basis of Presentation: The Company is a self-administered Maryland real estate investment trust. As of June 30, 1999, the Company owned a portfolio of two residential and three commercial properties. The residential properties are located in Wisconsin and contain an aggregate of 376 units. The commercial properties are located in Minnesota and contain an aggregate of 247,546 square feet. The Company is the sole general partner of and, as of June 30, 1999, holds an approximately 8.8% interest in the Operating Partnership which holds the commercial properties. Because the Company controls the Operating Partnership, the Company consolidates the net assets of the Operating Partnership with the Company. These pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and notes thereto of the Company included elsewhere in this prospectus. In management's opinion, all adjustments necessary to reflect the effects of the consummated 1998 Transactions and the transactions to be consummated have been made. 2. Adjustments to Pro Forma Condensed Consolidated Balance Sheet: (A) Reflects the historical consolidated balance sheet of the Company as of June 30, 1999. (B) Reflects the sale of the Maple Grove Apartments based upon a gross sales price of $16,700 net of $1,169 used for costs associated with the sale and $12,680 used to pay off the mortgage loan payable on the property. In connection with the sale, escrowed cash reserves released total $254 and general liabilities satisfied in connection with the property total $668. Gain recognized on the sale is estimated to be $422 and is calculated as net sales proceeds less basis of the property of $15,109. Additionally in connection with the sale of the property, deferred costs of $119 are written off. (C) Reflects the proceeds of the Preferred Offering, based upon an offering of 1,200,000 Class A Preferred Shares, at an offering price of $10.00 per share, net of underwriting discounts and offering expenses aggregating approximately $1,610. (D) Reflects the issuance of 95,000 Class B Preferred Shares to WMC and 254,800 Class B Preferred Shares to AREE at a price of $10.00 per share. (E) Reflects the adjustment to minority interests. After giving effect to the transactions to be consummated, the Company will hold an approximately 8.8% interest in the Operating Partnership, calculated as follows: F-7 Company Transaction (1) Consolidated Minority interests Common Units $ - $ 7,292 91.2% $ 7,292 Shareholders' equity (2) Common Shares 3,114 703 8.8% 3,817 --------- ---------- -------- --------- $ 3,114 $ 7,995 100.0% $ 11,109 ========= ========== ======== ========= (1) Reflects the impact of all effects of the 1998 Transactions and the transactions to be consummated to minority interests and total shareholders' equity. (2) Excludes Class A Preferred Shares and Class B Preferred Shares aggregating $15,499. 3. Adjustments to Pro Forma Condensed Consolidated Statements of Operations: (A) Reflects the historical consolidated operations of the Company. (B) Reflects the combined operations of the 1998 Acquisition Properties. For the Year For the Six Month Ended Period Ended December 31, 1998 June 30, 1999 (i) Reflects the combined historical operations of the 1998 Acquisition Properties for the period January 1, 1998 through date of acquisition, November 20, 1998: Rental revenue $ 3,335 $ - ============= ============== Other revenue 57 - ============= ============== Property operating expense 1,404 - ============= ============== (ii) Reflects the increase in interest expense resulting from the debt assumed in connection with the 1998 Acquisition Properties which debt bears interest at an average rate of 8.3% per annum. $ 1,275 $ - ============= ============== F-8 For the Year For the Six Month Ended Period Ended June December 31, 1998 30, 1999 (iii) Reflects the increase in depreciation and amortization expense as follows: Depreciation of buildings acquired over a 40-year useful life (allocating 20% to land and 80% to depreciable basis), net of historical depreciation expense of the 1998 Acquisition Properties. $ 555 $ - Amortization of deferred financing fees related to debt assumed in connection with the 1998 Acquisition Properties, net of historical amortization expense of the 1998 Acquisition Properties. 15 - ------------- ------------- $ 570 $ - ============= ============= (C) Reflects the adjustments as a result of the sale of the Maple Grove Apartments. For the Year For the Six Month Ended Period Ended June December 31, 1998 30, 1999 (i)Reflects the historical operations of Maple Grove Apartments: Rental revenue $ (2,594) $ (1,261) ============= ============= Property operating expense (1,128) (583) ============= ============= General and administrative expense (15) (8) ============= ============= Interest expense (1,035) (525) ============= ============= Depreciation and amortization expense (491) (251) ============= ============= (ii) Reflects the increase in interest income from the investment of net cash proceeds resulting from the sale of Maple Grove Apartments at an assumed rate of 5.25% per annum (which rate approximates that earned on United States Treasury Bonds maturing in August 2000). $ 128 $ 64 ============= ============= (D) Reflects the increase in interest income from the investment of net cash proceeds resulting from the Preferred Offering at an assumed rate of 5.25% per annum (which rate approximates that earned on United States Treasury Bonds maturing in August 2000). (E) Reflects additional pro forma general and administrative costs expected to be incurred as a result of the 1998 Transactions. Such costs are expected to have a continuing impact on the Company. F-9 (F) In connection with the 1998 Transactions and the settlements between the Company and AREE and the Company and WMC, the Company incurred nonrecurring costs totaling $1,560 and $3,563 during the year ended December 31, 1998 and the six month period ended June 30, 1999, respectively. Such costs represent a combination of the aggregate termination fee paid to WMC for the termination of the advisory contract between the Company and WMC and costs incurred in connection with the 1998 Transactions. Such adjustments have been omitted from the pro forma condensed consolidated statements of operations for the year ended December 31, 1998 and for the six month period ended June 30, 1999 as the events are not expected to have a continuing impact on the Company. (G) Minority interest in income (loss) has been reflected, on a pro forma basis, in accordance with the Operating Partnership Agreement. Consolidated income or loss is allocated between the Company and the remaining partners pari passu based upon total weighted average Common Shares and Units. The adjustments to record the income (loss) effect of the minority interest share of income (loss) in the pro forma statements of operations were computed as follows: For the Six For the Year Month Period Ended Ended December 31, 1998 June 30, 1999 Income (loss) before minority interests $ 384 $ (59) Net income allocated to Preferred Shares (1,472) (736) ------------ ------------ Net income (loss) allocated to Units and Common Shares $ (1,088) $ (795) ============ ============ Pro forma minority share 1,719,335 Units for the year ended December 31, 1998 and the six month period ended June 30, 1999 $ (615) $ (445) =========== ============ Net loss allocated to Common Shareholders 1,322,043 Common Shares for the year ended December 31, 1998 and 1,350,730 Common Shares for the six months ended June 30, 1999 $ (473) $ (350) =========== =========== F-10 WELLINGTON PROPERTIES TRUST II. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY F-11 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Trustees Wellington Properties Trust and Subsidiaries We have audited the accompanying consolidated balance sheet of Wellington Properties Trust and Subsidiaries as of December 31, 1998, and the related consolidated statements of operations, equity and cash flows for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellington Properties Trust and Subsidiaries as of December 31, 1998, and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Fond du Lac, Wisconsin April 9, 1999 F-12 Wellington Properties Trust and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 1998 ASSETS Real estate property - at cost (notes A2, C, D and F) Land and land improvements $ 9,013,206 Buildings 41,540,244 Appliances and equipment 924,353 ------------ 51,477,803 Accumulated depreciation 1,730,601 ------------ 49,747,202 Cash 153,901 Accounts receivable 15,861 Advance-related party, net of reserve of $240,000 (note F) -- Prepaid expenses 111,751 Property tax and other escrow 843,868 Deferred costs (note A4) 1,748,255 Organization costs and loan fees, net of accumulated amortization of $231,995 (note A3) 906,241 ------------ Total Assets $ 53,527,079 ============ LIABILITIES AND EQUITY Mortgage loans payable (note C) $ 32,505,152 Line of credit (note D) 200,000 Related party payable (note F) 1,744,423 Accounts payable 166,127 Tenant security deposits 156,373 Deferred rental revenue 65,372 Accrued liabilities 1,241,239 Dividends/distributions payable 443,018 ------------ 36,521,704 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 12,247,574 EQUITY Common shares-authorized, 100,000,000 shares of $.01 par value; issued 13,392 and outstanding 1,339,210 shares Preferred shares-authorized, 10,000,000 shares of $.01 par value; no shares issued or outstanding Common share warrants 1,510,000 Additional paid-in capital 7,497,426 Accumulated deficit (4,263,017) ------------ 4,757,801 ------------ Total Liabilities and Equity $ 53,527,079 ============ The accompanying notes are an integral part of this statement. F-13 Wellington Properties Trust and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 1998 1997 Revenues (note A5) Rental revenue $ 3,488,481 $ 2,980,800 Gain on sale of real estate property -- 166,753 Interest and other 20,955 33,443 ----------- ----------- 3,509,436 3,180,996 Expenses Property, operating and maintenance 738,972 656,591 Advertising and promotion 66,968 68,491 Property taxes and insurance 568,905 430,057 Depreciation and amortization 694,366 606,388 Interest Expense 1,417,194 1,398,457 General and administrative 287,871 174,200 Management fees (note F) 180,889 122,391 Other nonrecurring 1,010,154 -- Provision for uncollectible advance- related party (note F) 240,000 -- Termination of advisory agreement (note F) 310,000 -- ----------- ----------- 5,515,319 3,456,575 ----------- ----------- Net loss before minority interest in net loss of consolidated subsidiary (2,005,883) (275,579) Minority interest in net loss of consolidated subsidiary 1,064,501 -- ----------- ----------- NET LOSS ALLOCATED TO COMMON SHARES $ (941,382) $ (275,579) =========== =========== Loss per common share Net loss-Basic and diluted $ (0.80) $ (0.24) =========== =========== Weighted average number of common shares outstanding(note A7) 1,175,438 1,129,061 =========== =========== The accompanying notes are an integral part of these statements. F-14 Wellington Properties Trust and Subsidiaries Consolidated Statement of Equity Years Ended December 31, 1998 and 1997
Excess of purchase price over Common Additional affiliate's Common share Paid-in basis in Accumulated Treasury shares warrants Capital property acquired deficit shares Total Balance at January 1, 1997 $ 6,848 $ -- $ 6,018,071 $ (152,615) $(1,968,930) $ (6,818) $ 3,896,556 Cash dividends declared -- -- -- -- (543,482) -- (543,482) Issuance of common shares in connection with dividend reinvestments 307 -- 274,793 -- -- -- 275,100 Release of the excess of purchase price over affiliate's basis in property acquired due to Forest Downs sale -- -- -- 152,615 -- -- 152,615 Retirement of 1,080 shares of common shares in treasury (7) -- (6,811) -- -- 6,818 -- Cost of 4,750 shares of common shares acquired for treasury -- -- -- -- -- (27,764) (27,764) Net loss -- -- -- -- (275,579) -- (275,579) --------- ------- ----------- ----------- ----------- --------- ----------- Balance at December 31, 1997 7,148 -- 6,286,053 -- (2,787,991) (27,764) 3,477,446
The accompanying notes are an integral part of this statement. F-15 Wellington Properties Trust and Subsidiaries Consolidated Statement of Equity-Continued Years ended December 31, 1998 and 1997
Excess of purchase price over Common Additional affiliate's Common share Paid-in basis in Accumulated Treasury shares warrants Capital property acquired deficit shares Total Balance at January 1, 1998 $ 7,148 $ -- $ 6,286,053 $ -- $(2,787,991) $ (27,764) $ 3,477,446 Cash dividends declared -- -- -- -- (533,644) -- (533,644) Issuance of common shares in connection with dividend reinvestments 257 -- 245,453 -- -- -- 245,710 Issuance of common shares to AREE 1,053 -- 998,947 -- -- -- 1,000,000 Issuance of warrants (note E) -- 1,510,000 -- -- -- -- 1,510,000 Cost of 66 common shares acquired for treasury -- -- -- -- -- (329) (329) Retirement of 4,816 shares of common shares in treasury -- -- (28,093) -- -- 28,093 -- Net loss -- -- -- -- (941,382) -- (941,382) Reclassification due to effect of common share split 4,934 -- (4,934) -- -- -- -- -------- ----------- ----------- ------------ ----------- --------- ----------- Balance at December 31, 1998 $ 13,392 $ 1,510,000 $ 7,497,426 $ -- $(4,263,017) $ -- $ 4,757,801 ======== =========== =========== ============ =========== ========= ===========
The accompanying notes are an integral part of this statement. F-16 Wellington Properties Trust and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31, 1998 1997 ---- ---- Cash flows from operating activities: Net loss $ (941,382) $ (275,579) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 694,366 606,388 Gain on sale of real estate property -- (166,753) Minority interest (1,064,501) -- (Increase) decrease in accounts receivable 4,084 (11,460) Increase in prepaid expenses (75,268) (30,047) (Increase) decrease in property tax and other escrow (192,081) 147,137 Increase (decrease) in accounts payable 106,216 (205,223) Increase (decrease) in tenant security deposits 34,913 (9,470) Decrease in deferred rental revenue (25,624) (4,591) Increase (decrease) in accrued liabilities 271,835 (55,582) ----------- ----------- (246,060) 270,399 ----------- ----------- Net cash used in operating activities (1,187,442) (5,180) Cash flows from investing activities: Proceeds from sale of real estate property -- 1,898,962 Acquisitions of and additions to real estate properties (563,413) (84,548) Increase in deferred costs-net (98,437) -- ----------- ----------- Net cash provided by (used in) investing activities (661,850) 1,814,414 The accompanying notes are an integral part of these statements. F-17 Wellington Properties Trust and Subsidiaries Consolidated Statements of Cash Flows - Continued Year ended December 31, 1998 1997 ---- ---- Cash flows from financing activities: Proceeds from mortgage loans payable $ 2,750,000 $ 12,900,700 Proceeds from line of credit -- 815,270 Proceeds from related party payable 1,744,423 -- Repayments of mortgage loans payable (1,978,038) (7,610,011) Repayments of line of credit (600,000) (800,000) Repayments on land contract and business note obligations -- (6,676,911) Payment of financing costs (766,550) (205,958) Issuance of Common Shares 1,245,710 275,100 Cash dividends paid-common shares (505,968) (564,421) Purchase of treasury shares (329) (27,764) ------------ ------------ Net cash provided by (used in) financing activities 1,889,248 (1,893,995) ------------ ------------ NET INCREASE (DECREASE) IN CASH 39,956 (84,761) Cash at beginning of year 113,945 198,706 ------------ ------------ Cash at end of year $ 153,901 $ 113,945 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,326,606 $ 1,509,569 ============ ============ Supplemental non-cash investing and financing activities: The Trust has dividends/distributions payable of $443,018 and $124,571 as of December 31, 1998 and 1997, respectively. On November 20, 1998, the Trust through its subsidiary, Wellington Properties Investments, L.P., acquired two office properties and one light industrial property for $30,797,781 plus direct costs of acquisition. The acquisition were financed by the assumption of various long-term debt in the amount of $17,066,935 and by issuing $13,730,846 of Wellington Properties Investments, L.P. units (note B). On November 16, 1998, the Trust issued warrants to acquire up to 791,667 Common shares to each of American Real Estate Equities, LLC and Wellington Management Corporation. These warrants were valued at $1,510,000 (note E). The accompanying notes are an integral part of this statement. F-18 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998 and 1997 NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Wellington Properties Trust (Trust) is a real estate investment trust organized under the laws of the state of Maryland. It was formed on March 15, 1994 to acquire, develop, own and operate investment real estate. The Trust owns two residential and three commercial properties as of December 31, 1998. The Trust is also the general partner and owns an approximately 6.1% interest, as of December 31, 1998, of Wellington Properties Investments, L.P. (WPI), a Delaware limited partnership formed in 1998. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The consolidated financial statements include all the accounts of Wellington Properties Trust, its wholly-owned subsidiaries, Maple Grove Apartment Homes, Inc. and Lake Pointe Apartment Homes, Inc. and WPI. Because the Trust controls WPI, the Trust has consolidated the accounts of WPI with the Trust. Minority interest consists of limited partnership interests in WPI. All intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements. 2. Real Estate Property Real estate property is recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over a 40-year estimated life for buildings and seven-year estimated life for appliances and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and significant renovations and improvements that improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. A combination of straight-line and accelerated methods is used for income tax purposes. 3. Organization Costs and Loan Fees The costs incurred in connection with the formation of the Trust are amortized on a straight-line basis for over a period of fifteen years. Costs incurred in obtaining and securing financing for mortgage notes or bonds payable are amortized over the life of the respective loan using the straight-line method. 4. Deferred Costs The Trust has incurred costs in connection with the potential purchase of properties by WPI. These costs, which total approximately $1,748,000 as of December 31, 1998 consist primarily of legal and accounting fees and warrant costs (note E), and are expected to be allocated among the properties purchased and capitalized as part of the cost of the property. 5. Revenue Recognition Rental income attributable to leases is recorded when due from tenants and interest income is recorded on an accrual basis. F-19 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 6. Income Taxes The Trust has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 1996. As a REIT, the Trust generally will not be subject to Federal income tax if it distributes at least 95% of its REIT taxable income (excluding capital gains) to its shareholders. All dividends distributions for 1998 and 1997 were return of capital. 7. Loss Per Share Net loss per share is computed based on the weighted average number of shares of common shares outstanding for the period. Common share equivalents, to include outstanding warrants and stock options, are not included in fully diluted earnings per share as they would be anti-dilutive. 8. Financial Instruments The carrying amount of financial instruments at December 31, 1998 approximates fair value. 9. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - ACQUISITION OF PROPERTIES On November 20, 1998, the Trust through WPI, acquired two office properties and one light industrial property in the Minneapolis, Minnesota metropolitan area. The combined purchase price of such properties totaled approximately $30.8 million, excluding closing costs. Such purchase price was funded through the issuance of an aggregate of 2,557,707 limited partnership units ("Units") in WPI (valued at $5.37 per Unit, or an aggregate value of approximately $13.7 million) and the assumption of certain third-party indebtedness of approximately $17.1 million secured by such properties. The Units are exchangeable, under certain circumstances, on a one-for-one basis for common shares of beneficial interest, $.01 par value per share from and after the one-year anniversary of the date of issuance. The following represents certain pro forma information for 1998 as if these properties were acquired effective January 1, 1998. Total revenue $ 7,007,000 Net loss before minority interest in net loss of consolidated subsidiary (431,000) Net loss allocated to common shares (148,000) Net loss per common share-basic and diluted $ (0.11) F-20 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 NOTE C - LONG-TERM DEBT Long-term debt consists of the following at December 31, 1998: 8.095% mortgage note payable to American Property Financing, Inc. in monthly installments of $95,517 including interest; final balloon payment due June 1, 2004; collateralized by the Maple Grove Apartment Complex and an assignment of rents and security agreement $ 12,738,783 7.600% mortgage note payable to First Union National Bank in monthly installments of $19,417 including interest; final balloon payment due March 11, 2008; collateralized by the Lake Pointe Apartment Complex and an assignment of rents and security agreement 2,734,512 7.000% mortgage note payable to GMAC Commercial Mortgage Corporation in monthly installments of $15,635 including interest; final balloon payment due February 1, 2008; collateralized by the Nicollet Business Campus VI Complex and an assignment of rents and security agreement 2,330,224 Commercial Development Revenue Refunding Bonds-Series 1996A issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 5.25% to 7.25%; principal payable annually on or before May 1 in amounts ranging from $140,000 to $395,000 with a final payment due May 1, 2015; collateralized by a letter of credit, the Thresher Square East Office Complex, equipment and an assignment of rents 4,095,000 Commercial Development Revenue Refunding Bonds - dated October 1, 1992 issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 6.50% to 7.60%; principal payable annually on or before June 1 in amounts ranging from $170,000 to $375,000 with a final payment due June 1, 2010; collateralized by a letter of credit, the Thresher Square West Office Complex and an assignment of rents and security agreement 3,135,000 Note payable to Bremer Bank, N.A. in monthly installments of $51,518 including interest at a variable rate (effective rate of 8.75% at December 31, 1998) with a final balloon payment due on October 1, 2000; collateralized by the Cold Springs Office Complex and fixtures 5,596,633 Note payable to Bremer Business Financial Corp., interest payments due monthly at a variable interest rate (effective rate of 10.75% at December 31, 1998) with principal balance due on September 30, 2000; collateralized by the Cold Springs Office Complex and fixtures 1,875,000 ----------- $ 32,505,152 =========== F-21 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 Aggregate maturities on long-term debt after December 31, 1998 are as follows: 1999 $ 575,856 2000 7,884,414 2001 551,249 2002 592,284 2003 634,634 Thereafter 22,266,715 ---------- $ 32,505,152 ========== NOTE D - LINE OF CREDIT During 1998, the Trust obtained a line of credit for $300,000 with Milwaukee Western Bank. Interest-only payments are due monthly with an interest rate of .5% above the bank's reference rate (effective rate at December 31, 1998 of 8.25%). At December 31, 1998 the outstanding balance was $200,000. The due date of this line of credit is March 31, 1999. The line of credit is collateralized by the guarantee of WMC. NOTE E - EQUITY During 1998, the Trust entered into agreements with American Real Estate Equities, LLC (AREE) and Wellington Management Corporation (WMC). Pursuant to the agreements the Trust entered into transactions with AREE and WMC related to issuance of warrants, issuance of Common Shares and contribution agreements for various properties (note B). The Trust issued warrants to acquire up to 791,667 Common Shares to each of AREE and WMC. The Warrants will become exercisable one year after the date of issuance (November 16, 1999) and will be exercisable for a nine-year period thereafter, at an exercise price of $5.37 per Common Share with respect to 395,833 Warrants held by each of AREE and WMC, $6.47 per Common Share with respect to 197,917 Warrants held by each of AREE and WMC, $7.74 per Common Share with respect to 118,750 Warrants held by each of AREE and WMC and $9.32 per Common Share with respect to 79,167 Warrants held by each of AREE and WMC. A value of $0.954 per warrant (based on a modified Black Scholes calculation) for a total of $1,510,000 has been recognized at December 31, 1998. The Trust issued 166,666 Common Shares to AREE in exchange for $1,000,000 during 1998. In March 1998, in connection with the refinancing of debt, the Trust entered into an agreement with Credit Suisse First Boston Mortgage Capital LLC which provides for the granting of warrants to purchase 47,500 Common Shares on any date through March 5, 2008 at a price of $3.949 per share. The warrants were not exercised during the year ended December 31, 1998. The value attributable to the detachable warrants was not material as of and for the year ended December 31, 1998. The Trust has a stock option plan (the "Old Plan") which provides for the granting of share options to officers, trustees and employees at a price determined by a formula in the Plan agreement. There are F-22 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 54,387 options outstanding as of December 31, 1998. There were no options exercised under the plan during the year ending December 31, 1998. In November 1998, the Trust's shareholders approved a Share Option Plan (the "New Plan") which provides for the granting of share options to officers, trustees and employees at a price determined by a formula in the Plan agreement. The options are exercisable over a period of time determined by the Plan Committee, but no longer than ten years after the date they are granted. Compensation resulting from the share options is initially measured at grant date based on fair market value of the shares. The Plan was adopted as of November 16, 1998, and there are 54,387 options outstanding as of December 31, 1998. There were no options exercised under the Plan during the year ending December 31, 1998. The Trust has elected to implement the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation" in its financial statements. SFAS 123 requires that if not implemented, the impact be disclosed in the footnotes to the financial statements on a pro-forma basis. The impact of SFAS 123 on the net loss and loss per share of the Trust was not material as of and for the year ended December 31, 1998. NOTE F - RELATED PARTY TRANSACTIONS Management Fees The Trust has entered into Property Management Agreements with WMC Realty, Inc. (WRI), a wholly-owned subsidiary of Wellington Management Corporation (WMC), an affiliate of the Trust in which Arnold Leas (Chairman of the Board of Trustees) is President and Chief Executive Officer, and Hoyt Properties, Inc. (Hoyt), an entity controlled by Steve Hoyt (a trustee of the Trust) to serve as Property Managers of properties owned by the Trust. The Property Managers will manage the day to day operations of properties owned by the Trust and will receive a management fee for this service. Management fees consisted of $31,503 to Hoyt and $149,386 to WRI for the year ended December 31, 1998 and $122,391 to WRI for the year ended December 31, 1997. Advisor Fees On August 2, 1994, the Trust contracted to retain WMC to serve as Advisor to the Trust. In payment for these services, the Advisor receives a fee equal to 5% of the gross proceeds of the public share offering. Advisor fees for the years ended December 31, 1998 and 1997 were $0. In addition, the Advisor is entitled to receive an Incentive Advisory Fee equal to 10% of the realized gain with respect to each sale or refinancing of property owned by the Trust. In the event a property is sold at a loss, no incentive advisory fees will be paid until the amount of the loss has been offset by gains from other sales. Incentive advisory fees for the years ended December 31, 1998 and 1997 were $0 and $18,265, respectively. In addition, the Advisor is entitled to recover certain expenses including travel, legal, accounting and insurance. These expenses totaled $149,178 and $114,133 for the years ended December 31, 1998 and 1997, respectively. Fees for services, such as legal and accounting, provided by the Advisor's employees, in the opinion of the Advisor may not exceed fees that would have been charged by independent third parties. Termination Fees In connection with the purchase of properties by WPI (note B), the Trust terminated the advisory agreement with WMC on November 20, 1998. The termination fee, payable to WMC, is determined by taking 1% of the first $150,000,000 of the aggregate gross purchase price for properties acquired by WPI plus .25% of the aggregate gross purchase price for properties acquired in excess of $150,000,000. F-23 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 Termination fees paid to WMC, which are expensed as incurred, amounted to $310,000 and $0 for the years ended December 31, 1998 and 1997, respectively. Reimbursement of Certain Expenses by Related Parties WPI is in negotiations with AREE regarding the reimbursement by WPI to AREE of certain expenses incurred by AREE in the potential acquisition of properties and certain administrative expenses. The accompanying consolidated financial statements reflect all expenses incurred by AREE on behalf of WPI in connection with the acquisitions, with a corresponding liability to AREE totaling $1,504,423. In the event that the negotiations result in reimbursement of certain expenses at a later date, that recovery will then be reflected in the financial statements. In connection with the negotiation by the Trust of the contribution agreement between AREE and WPI, a $240,000 advance was paid to WMC by AREE for the benefit of WPI. This amount was reflected as an advance to related party in accompanying financial statements, with a related liability recorded due to AREE. Under the terms of the contribution agreement, the advance was to be repaid to AREE in the event certain transactions closed before December 31, 1998. In connection with the negotiations discussed above, WMC management has stated that the advance from WPI represents reimbursement from WPI for services rendered by WMC in the organization of WPI and the acquisition of properties. WMC management has stated that it does not intend to reimburse WPI for the $240,000 advance. Due to the uncertainty of the collectibility of this advance, the entire amount has been reserved as uncollectible in the accompanying financial statements. NOTE G - OPERATING LEASES The Trust and its subsidiaries lease residential and commercial space to individual and corporate tenants. These leases expire at various times through 2005. The following is a schedule by year of minimum operating lease receipts under such operating leases. Year 1999 $3,733,271 2000 2,197,655 2001 1,923,698 2002 995,421 2003 426,689 Thereafter 358,477 ---------- TOTAL $9,635,211 ========== One of the commercial properties has one primary tenant who leases 55% of the property's rentable square footage. The future minimum operating lease receipts from this tenant represent approximately 19% of the above total. NOTE H - SUBSEQUENT EVENT In March 1999, the Trust declared a Common Share split of 4.75 shares for 3 shares. All Common Share amounts in the accompanying financial statements have been restated to reflect the Common Share split. F-24 Wellington Properties Trust Consolidated Balance Sheet June 30, 1999 (Unaudited) Assets Real Estate Property Land $ 9,009,936 Building 41,540,143 Tenant improvements 43,809 Appliances and equipment 976,096 ------------ 51,569,984 Accumulated depreciation (2,319,925) ------------ 49,250,059 Cash 98,397 Escrowed cash 680,511 Accounts receivable 32,458 Prepaid expenses 23,550 Investment in unconsolidated subsidiary 90,000 Deferred financing costs, net 815,662 Other assets 25,000 ------------ Total Assets $ 51,015,637 ============ Liabilities and shareholders' equity Liabilities Mortgage loans payable $ 32,049,484 Line of credit 190,000 Accounts payable and accrued liabilities 1,336,559 Related party payable 3,926,878 Deferred rental revenue 66,648 Tenant security deposits 158,744 Dividends/distributions payable 871,100 ------------ Total liabilities 38,599,413 ------------ Minority interests in consolidated subsidiary 8,755,376 Shareholders' equity Common shares - 100,000,000 authorized; 1,351,935 shares issued and outstanding; par value $0.01 13,519 Preferred Stock - 10,000,000 authorized; no shares issued and outstanding; par value $0.01 --- Additional paid in capital 9,069,682 Accumulated deficit (5,422,353) ------------ Total shareholders' equity 3,660,848 ------------ Total liabilities and shareholders' equity $ 51,015,637 ============ The accompanying notes are an integral part of these statements. F-25 Wellington Properties Trust Consolidated Statements of Operations (Unaudited) For the Six Month Period Ended June 30, 1999 June 30, 1998 Revenue: Rental revenue and tenant reimbursements $ 3,414,376 $ 1,516,511 Interest and other 30,513 273 ----------- ----------- Total revenue 3,444,889 1,516,784 ----------- ----------- Expenses: Property operating and maintenance 822,468 295,608 Real estate taxes and insurance 596,233 219,290 Depreciation and amortization 681,103 293,879 Interest expense 1,295,213 633,928 General and administrative 387,480 147,745 Management fees 170,015 74,515 Termination of advisory agreement 950,000 -- Nonrecurring expenses 2,613,383 -- ----------- ----------- Total expenses 7,515,895 1,664,965 ----------- ----------- Loss before minority interests (4,071,006) (148,181) Less: Minority interests 2,664,093 -- ----------- ----------- Loss allocated to Common Shares $(1,406,913) $ (148,181) =========== =========== Loss per share: Basic and diluted $ (1.04) $ (0.13) =========== =========== Weighted average number of shares: Basic and diluted 1,350,730 1,144,793 =========== =========== The accompanying notes are an integral part of these statements. F-26 Wellington Properties Trust Consolidated Statements of Operations (Unaudited) For the Three Month Period Ended June 30, 1999 June 30, 1998 Revenue: Rental revenue and tenant reimbursements $ 1,756,158 $ 750,581 Interest and other 16,076 210 ----------- ----------- Total revenue 1,772,234 750,791 ----------- ----------- Expenses: Property operating and maintenance 450,153 135,118 Real estate taxes and insurance 279,368 109,645 Depreciation and amortization 357,526 148,283 Interest expense 650,225 319,511 General and administrative 192,721 74,598 Management fees 87,390 36,907 Termination of advisory agreement 950,000 -- Nonrecurring expenses 2,613,383 -- ----------- ----------- Total expenses 5,580,766 824,062 ----------- ----------- Loss before minority interests (3,808,532) (73,271) Less: Minority interests 2,491,018 -- ----------- ----------- Loss allocated to Common Shares $(1,317,514) $ (73,271) =========== =========== Loss per share: Basic and diluted $ (0.97) $ (0.06) =========== =========== Weighted average number of shares: Basic and diluted 1,351,891 1,144,793 =========== =========== The accompanying notes are an integral part of these statements. F-27 Wellington Properties Trust Consolidated Statements of Cash Flows (Unaudited) For the Six Month Period Ended
June 30, 1999 June 30, 1998 Cash flows from operating activities: Net Loss $(4,071,006) $ (148,181) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 681,103 293,879 Changes in assets and liabilities: Decrease (increase) in accounts receivable and prepaid expenses 71,604 (50,861) Decrease in deferred costs 1,723,255 -- Decrease in accounts payable and accrued liabilities (70,809) (13,423) Increase in accounts payable related party 2,182,455 41,883 Increase in tenant security deposits and deferred rents 3,409 5,308 ----------- ----------- Net cash provided by operating activities $ 520,011 $ 128,605 ----------- ----------- Cash flows from investing activities: Capital expenditures paid (93,380) (40,806) Investment in unconsolidated subsidiary (90,000) -- Decrease (increase) in escrowed cash 163,357 (45,137) ----------- ----------- Net cash flow used in investing activities (20,023) (85,943) ----------- ----------- Cash flows from financing activities: Proceeds from mortgage loans payable -- 2,750,000 Loan fees -- (436,285) Payments on mortgage note (455,668) (2,376,180) Payments on line of credit (10,000) -- Dividends paid (89,824) (125,794) ----------- ----------- Net cash flow used in financing activities (555,492) (188,259) ----------- ----------- Net decrease in cash (55,504) (145,597) Cash at beginning of period 153,901 113,945 ----------- ----------- Cash at end of period $ 98,397 $ (31,652) =========== =========== Supplemental Data: Interest paid $ 1,318,972 $ 641,035 Dividends paid through issuance of Common Shares $ (62,383) $ (124,287) Issuance of Common Shares $ 62,383 $ 124,287 ----------- ----------- $ -- $ -- =========== ===========
The accompanying notes are an integral part of these statements. F-28 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) NOTE A - ORGANIZATION Wellington Properties Trust ("Company") is a real estate investment trust ("REIT") organized in the state of Maryland. The Company was formed on March 15, 1994 to acquire, develop, own and operate investment real estate. As of June 30, 1999, the Company owned two residential and three commercial properties that contain a total of 376 apartment units and 247,546 commercial rentable square feet. The Company's interest in the commercial properties is held through Wellington Properties Investments, LP (the "Operating Partnership"), a Delaware limited partnership formed in 1998. The Company is the general partner of, and as of June 30, 1999, owns an approximately 8.8% interest in the Operating Partnership. On March 4, 1999, the Company acquired an 8% interest in Highlander Acquisition Company, LLC ("Highlander") which owns a 154 unit apartment community. NOTE B - BASIS OF PRESENTATION The consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the included disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring matters, except with respect to the nonrecurring expense) necessary to fairly present the financial position of the Company as of June 30, 1999, the results of its operations for the six month periods and three month periods ended June 30, 1999 and 1998, and its cash flows for the six month periods ended June 30, 1999 and 1998 have been included. During the second quarter of 1999, the Company concluded that costs incurred and deferred in 1998 in connection with the potential acquisition of 27 properties had no future value because such potential acquisitions would not occur. Such costs approximated $2.6 million and were expensed in the second quarter along with the costs to terminate the advisory agreement of $950,000 (See Note H). The results of operations for such interim periods are not necessarily indicative of the results for a full year. For further information, refer to the Company's consolidated financial statements and footnotes included in the Annual Report of Form 10-KSB/Amendment No. 1 for the year ended December 31, 1998. NOTE C - ACQUISITION OF PROPERTIES On March 4, 1999, the Company acquired an 8% interest in Highlander at a cost of $90,000 funded in cash. The Company believes that cost approximates fair value. On November 20, 1998, the Company through the Operating Partnership, acquired two office properties and one light industrial property in the Minneapolis, Minnesota metropolitan area. The combined purchase price of such properties totaled approximately $31.1 million, including closing costs. Such purchase price was funded through the issuance of an aggregate of 2,557,707 limited partnership units ("Units") in the Operating Partnership (valued at $5.37 per Unit, or an aggregate value of approximately $13.7 million) and the assumption of certain third-party indebtedness of approximately $17.1 million secured by such properties. The Units are exchangeable, under certain circumstances, on a one-for-one basis for common shares of beneficial interest, $.01 par value per share from and after the one-year anniversary of the date of issuance. (See Note H). F-29 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE D - MORTGAGE NOTES PAYABLE AND OTHER FINANCING Maple Grove The mortgage payable with respect to Maple Grove is collateralized by Maple Grove and an assignment of rents and had a principal balance as of June 30, 1999 of $12,680,308. The interest rate is fixed at 8.095%. Payments are due in monthly installments of principal and interest of $95,517 with a final balloon payment due June 1, 2004. (See Note I.) Lake Pointe As of June 30, 1999, the Company was liable on a mortgage note payable of $2,722,891. The note requires monthly payments of $19,417 including interest at 7.6%. The mortgage is due March 2008 and is secured by Lake Pointe and an assignment of rents. Thresher Square East The financing consists of Commercial Development Revenue Refunding Bonds - Series 1996A issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 5.25% to 7.25%; principal payable annually on or before May 1 in amounts ranging from $140,000 to $395,000 with a final payment due May 1, 2015; collateralized by a letter of credit, the Thresher Square East Office Complex, equipment and an assignment of rents. As of June 30, 1999 the principal balance was $3,955,000. Thresher Square West The financing consists of Commercial Development Revenue Refunding Bonds - dated October 1, 1992 issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 6.50% to 7.60%; principal payable annually on or before June 1 in amounts ranging from $170,000 to $375,000 with a final payment due June 1, 2010; collateralized by a letter of credit, the Thresher Square West Office Complex and an assignment of rents and security agreement. As of June 30, 1999 the principal balance was $2,965,000. Cold Springs The financing consists of a note payable to Bremer Bank, N.A. in monthly installments of $51,518 including interest at a variable rate (effective rate of 9.25% at June 30, 1999) with a final balloon payment due on October 1, 2000; and collateralized by the Cold Springs Office Complex and fixtures. As of June 30, 1999 the principal balance was $5,533,491. Additionally there is a note payable to Bremer Business Financial Corp., interest payments due monthly at a variable interest rate (effective rate of 10.75% at June 30, 1999) with principal balance due on September 30, 2000; and collateralized by the Cold Springs Office Complex and fixtures. As of June 30, 1999 the principal balance was $1,875,000. F-30 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE D - MORTGAGE NOTES PAYABLE AND OTHER FINANCING - Continued Nicollet VI The financing consists of a 7.000% mortgage note payable to GMAC Commercial Mortgage Corporation in monthly installments of $15,635 including interest; final balloon payment due February 1, 2008; and collateralized by the Nicollet Business Campus VI Complex and an assignment of rents and security agreement. As of June 30, 1999 the principal balance was $2,317,794. Line of Credit During 1998, the Company obtained a line of credit for $300,000 with Milwaukee Western Bank. Payments of $5,000 of principal plus interest are due monthly with the final principal payment due on September 30, 1999. The interest rate is at 0.5% above the bank's reference rate (effective rate at June 30, 1999 of 8.75%). At June 30, 1999, the outstanding balance was $190,000. The line of credit is collateralized by the guarantee of Wellington Management Corporation ("WMC"). NOTE E - EQUITY During 1998, the Company entered into agreements with American Real Estate Equities, LLC ("AREE") and WMC. Pursuant to the agreements the Company entered into transactions with AREE and WMC related to issuance of warrants, issuance of Common Shares and contribution agreements for various properties. On November 16, 1998, the Company issued warrants to acquire up to 791,667 Common Shares to each of AREE and WMC. The Warrants were to become exercisable one year after the date of issuance (November 16, 1999) and would be exercisable for a nine-year period thereafter, at an exercise price of $5.37 per Common Share with respect to 395,833 Warrants held by each of AREE and WMC, $6.47 per Common Share with respect to 197,917 Warrants held by each of AREE and WMC, $7.74 per Common Share with respect to 118,750 Warrants held by each of AREE and WMC and $9.32 per Common Share with respect to 79,167 Warrants held by each of AREE and WMC. Effective June 30, 1999, all such warrants were returned to the Company and canceled. (See Note H). F-31 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE F - DISTRIBUTIONS On March 16, 1999, the Board of Trustees declared a split of 4.75 Common Shares for each 3.00 Common Shares effective on March 24, 1999 to shareholders of record as of March 22, 1999 ("Stock Split"). The Operating Partnership simultaneously declared a split of 4.75 Units for each 3.00 Units effective on March 24, 1999 to unitholders of record as of March 22, 1999. All amounts herein have been adjusted to give effect to the Stock Split. On March 30, 1999, the Board of Trustees declared a cash distribution of $0.11 per share totaling approximately $148,679 to shareholders of record as of March 31, 1999. The Operating Partnership simultaneously declared a $0.11 per unit cash distribution to holders of Units. Such distribution totals $189,127. (See Note H.) On July 15, 1999, the Board of Trustees declared a cash distribution of $0.11 per share totaling approximately $148,679 to shareholders of record as of June 30, 1999. The Operating Partnership simultaneously declared a $0.11 per unit cash distribution to holders of Units. Such distribution totals $189,127. (See Note H.) The Board of Trustees further voted to defer payment of both 1999 cash distributions. NOTE G - LOSS PER COMMON SHARE Net loss per Common Share is computed based on the weighted average number of Common Shares outstanding for the period. Common share equivalents, consisting of outstanding warrants and options, are not included in the diluted loss per Common Share as they would be anti-dilutive. NOTE H - RELATED PARTY TRANSACTIONS Reimbursement of Certain Expenses by Related Parties The Operating Partnership has been in negotiations with AREE regarding the reimbursement by the Operating Partnership to AREE of certain expenses incurred by AREE in the potential acquisition of properties and certain administrative expenses. In connection with the negotiations during 1998 by the Company of the contribution agreement between AREE and the Operating Partnership, a $240,000 advance was paid to WMC by AREE for the benefit of the Operating Partnership. As of December 31, 1998, this amount was reflected as an advance to related party in accompanying financial statements, with a related liability recorded due to AREE. Under the terms of the contribution agreement, the advance was to be repaid to AREE in the event certain transactions closed before December 31, 1998. Due to the uncertainty of the collectibility of this advance, the entire amount was reserved as uncollectible as of December 31, 1998 and in connection with the agreement discussed below, has been written off as of June 30, 1999. Of the 30 properties to be acquired, three properties have been acquired as of June 30, 1999. Further, in connection with the agreements discussed below, WMC will retain cash received totaling $550,000 as partial consideration for termination of the advisory agreement. F-32 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 Management Fees The Company has entered into Property Management Agreements with WMC Realty, Inc. ("WRI"), a wholly-owned subsidiary of WMC, an affiliate of the Company in which Arnold Leas (Chairman of the Board of Trustees) is President and Chief Executive Officer, and Hoyt Properties Inc. ("Hoyt"), an entity controlled by Steve Hoyt (a trustee of the Company) to serve as Property Managers of properties owned by the Company. The Property Managers manage the day to day operations of properties owned by the Company and receive a management fee for this service. Management fees for the period January 1, 1999 through June 30, 1999 totaled $95,112 to Hoyt and $74,903 to WRI. Management fees for the period January 1, 1998 through June 30, 1998 totaled $0 to Hoyt (management agreement commenced November 1998) and $74,515 to WRI. Advisor Fees On August 2, 1994, the Company contracted to retain WMC to serve as Advisor to the Company. In payment for these services, the Advisor receives a fee equal to 5% of the gross proceeds of the public offering of common shares, which terminated October 1995. No advisor fees have been paid during 1999. In addition, the Advisor is entitled to receive an Incentive Advisory Fee equal to 10% of the realized gain with respect to each sale or refinancing of property owned by the Company. In the event a property is sold at a loss, no Incentive Advisory Fees will be paid until the amount of the loss has been offset by gains from other sales. No Incentive Advisory Fees have been paid during 1999. In addition, the Advisor is entitled to recover certain expenses including travel, legal, accounting, and insurance. Fees for services, such as legal and accounting, provided by the Advisor's employees, in the opinion of the Advisor, may not exceed fees that would have been charged by independent third parties. The initial term of the agreement ended on December 31, 1995 and had been renewed automatically each year. The agreement was subject to termination without cause, by either party, on 60 days written notice and by the Company for cause immediately upon written notice. Termination of Advisory Agreement In connection with the purchase of properties by the Operating Partnership, the Company terminated the advisory agreement with WMC on November 20, 1998. The termination fee, payable to WMC, was estimated at $1.6 million and was to be determined by taking 1% of the first $150,000,000 of the aggregate gross purchase price for properties acquired by the Operating Partnership plus 0.25% of the aggregate gross purchase price for properties acquired in excess of $150,000,000. See agreement as of June 30, 1999 discussed below. F-33 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE H - RELATED PARTY TRANSACTIONS - Continued Agreements: June 30, 1999 In the second quarter of 1999, due principally to the fact that the Operating Partnership was able to acquire only three properties since November 1998, the Company entered into discussion with AREE and WMC. As a result of these discussions, effective as of June 30, 1999: o Recipients of 838,372 Units, received in the November 1998 acquisitions as described in Note C, have returned such Units to the Company for cancellation. o AREE has returned the warrant covering 791,667 Common Shares to the Company. Further, the Company has agreed to issue 254,800 Class B Junior Cumulative Convertible Preferred Shares ("Class B Preferred Shares") to AREE in the third quarter of 1999 as consideration for an aggregate of $2,548,000 representing advances to the Company for working capital purposes and costs incurred in connection with the 1998 Transactions. The Class B Preferred Shares will bear the same rights, terms and preferences as the Class A Preferred Shares (defined below), but will rank junior as to payment of dividends and distributions upon liquidations. Of the total Class B Preferred Shares to be issued to AREE, 135,600 will be redeemable by the Company for $1.00 if certain conditions are not met prior to June 30, 2002. o As consideration for the Termination of the Advisory Agreement between the Company and WMC, WMC has returned the warrant covering 791,667 Common Shares to the Company, the Company has agreed to issue 95,000 Class B Preferred Shares to WMC in the third quarter of 1999 and WMC will retain cash payments of $550,000 received during 1998. The obligation by the Company to issue the Class B Preferred Shares has been reflected as a liability aggregating $3,498,000 on the Company's balance sheet as of June 30, 1999. Listing Agreement In January 1998, the Company entered into a listing agreement with WRI. The agreement provides that WRI would receive a fee equal to 3% of the sales price in the event of a sale of either of the Company's residential properties. In connection with the pending contract for the sale of Maple Grove Apartments, discussed below, WRI is expected to receive a fee totaling $501,000 upon consummation of the sale. NOTE I - SUBSEQUENT EVENTS The Company anticipates filing a Preliminary Registration Statement in August 1999 under the Securities Act of 1933 on Form SB-2 in order to commence the sale of 1,200,000 Class A Cumulative Convertible Preferred Shares ("Class A Preferred Shares") to the public ("Preferred Offering"). The Class A Preferred Shares will bear a liquidation value of $10.00 per share and will accrue a dividend equal to $0.475 per share, with such dividend payable every six months. The Class A Preferred Shares will be convertible into the number of Common Shares equal to the quotient obtained by dividing (1) $10.00 plus any dividends then accrued but unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the average closing bid price of Common Shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. The Company F-34 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE I - SUBSEQUENT EVENTS - Continued will have the right to redeem the Class A Preferred Shares, under certain circumstances, after the two year anniversary date of the initial closing of the Preferred Offering. The Company expects to use the net proceeds from the Preferred Offering to fund the continued growth of the Company. Maple Grove is presently under contract for sale to an independent third party. The contract is subject to normal closing conditions and contingencies and provides for a purchase price of $16,700,000 to be paid by assuming the first mortgage of approximately $12,680,000 and paying the balance in cash at closing. No assurance can be given that the Preferred Offering or the sale of Maple Grove will be consummated and if consummated, would be on terms described above or otherwise. F-35 ==================================== ======================================== No dealer, salesperson or other individual has been authorized to give any information or make any representation not contained in this prospectus in connection with the offering covered by this prospectus. If given or made, such information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell, or a solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has not been any change in the facts set forth in this prospectus or in our affairs since the date hereof. 1,200,000 Shares Class A Cumulative Convertible Preferred Shares TABLE OF CONTENTS Prospectus Summary.................2 Risk Factors.......................9 Use of Proceeds...................19 Dividend Policy...................20 Capitalization....................21 Price Range of Common Shares and Dividends.............22 Management Discussion and Analysis of Financial WELLINGTON PROPERTIES TRUST Condition and Results of Operations.......................23 Business..........................29 Management........................52 Principal Shareholders............58 Certain Relationships and Related Transactions.............60 Underwriting......................63 Description of Securities.........65 Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws..............70 Federal Income Tax Consequences...73 Legal Matters.....................79 Experts...........................79 Additional Information............79 Financial Statements.............F-1 Until ______, 1999 (25 days after the date of this prospectus), all dealers effecting transactions in [logo of R.J. Steichen & Company] the Class A Preferred Shares, whether or not participating in this distribution, may be required to ________________, 1999 deliver a current prospectus with respect to those Class A Preferred Shares to purchasers thereof prior to or concurrent with the receipt of the confirmation of the sale of those Class A Preferred Shares. ==================================== ========================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. The Declaration of Trust and the Bylaws of the Trust provide that the Trust may indemnify officers, directors, employees and agents of the Trust to the fullest extent permitted by Maryland law. Pursuant to Maryland law, the Trust generally has the power to indemnify its present and former directors, officers, agents and employees, or persons serving as such in another entity at the Trust's request, against expenses (including attorneys' fees) and liabilities incurred by them in any action, suit, or proceeding to which they are, or are threatened to be made, a party by reason of their serving in such positions, so long as they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Trust, or in the case of a criminal proceeding, had no reasonable cause to believe their conduct was unlawful. In respect of suits by or in the right of the Trust, the indemnification is generally limited to expenses (including attorneys' fees) and is not available in respect of any claim where such person is adjudged liable to the Trust, unless the court determines that indemnification is appropriate. To the extent such person is successful in the defense of any suit, action or proceeding, indemnification against expenses (including attorneys' fees) is mandatory. The Trust has the power to purchase and maintain insurance for such persons and indemnification. The indemnification provided by Maryland law is not exclusive of other rights to indemnification which any person may otherwise be entitled under any bylaw, agreement, shareholder or disinterested director vote, or otherwise. Item 25. Other Expenses of Issuance and Distribution. The estimated expenses payable by the Trust in connection with the offering described in this Registration Statement (other than underwriters' discounts and expenses) are as follows: SEC registration fee $ 3,836 Nasdaq filing fee 33,750 NASD filing fee 1,880 Printing, engraving & Edgar expenses Legal fees and expenses Accounting fees and expenses 37,500 Transfer agent's fees Other ---------- Total $ Item 26. Recent Sales of Unregistered Securities. In the third quarter of 1999, the Registrant issued 95,000 of its Class B Junior Cumulative Convertible Preferred Shares to Wellington Management Corporation ("WMC") as partial consideration for termination of an agreement retaining WMC to provide certain advisory services to the Registrant. Such issuance was exempt from registration under the Securities Act pursuant to Section 4(2) thereof. In November 1998, the Registrant sold 166,666 of its Common Shares to American Real Estate Equities, LLC ("AREE") for $6.00 per share. In a related transaction, AREE contributed certain real estate and contractual rights to acquire certain other real estate to an operating partnership of which the Registrant is the sole general partner in exchange for 135,600 of the Registrant's Class B Junior Cumulative Convertible Preferred Shares. All such issuances were exempt from registration under the Securities Act pursuant to Section 4(2) thereof. II-1 In the third quarter of 1999, pursuant to a cost-sharing agreement with AREE, the Registrant also issued 119,200 shares of its Class B Junior Cumulative Convertible Preferred Shares. Such issuance was exempt from registration under the Securities Act pursuant to Section 4(2) thereof. On November 20, 1998, the Registrant issued to certain investors, upon their contribution of real estate assets to the Registrant's operating partnership, 1,214,086 Units of the Registrant's operating partnership, which Units may be converted under certain circumstances, at the option of the Registrant, into the Registrant's Common Shares. All such issuances were exempt from registration under the Securities Act pursuant to Section 4(2) thereof. On March 5, 1998, the Registrant issued a warrant to purchase 47,500 of its Common Shares to Credit Suisse First Boston in partial consideration of the extension of credit to the Registrant. Such issuance was exempt from registration under the Securities Act pursuant to Section 4(2) thereof. Item 27. Exhibits. The exhibits to this Registration Statement appear on the Index to Exhibits hereto. Item 28. Undertakings. The Registrant hereby undertakes that it will: (1) file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) of this chapter (ss. 230.424(b) of this chapter) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) include any additional or changed material information on the plan of distribution. (2) for determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Minneapolis, State of Minnesota, on August 6, 1999. WELLINGTON PROPERTIES TRUST By: /s/ Duane H. Lund Duane H. Lund Chief Executive Officer (Principal Executive Officer) In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated. Each person whose signature appears below constitutes and appoints Duane H. Lund and Robert F. Rice, and each of them individually, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any and all amendments and any and all post-effective amendments and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Duane H. Lund Chief Executive Officer August 6, 1999 Duane H. Lund (Principal Executive Officer) /s/ Robert F. Rice President August 6, 1999 - -------------------------- Robert F. Rice /s/ Arnold K. Leas Chairman of the Board August 6, 1999 - -------------------------- Arnold K. Leas /s/ Steven B. Hoyt Trustee August 6, 1999 - -------------------------- Steven B. Hoyt /s/ Paul T. Lambert Trustee August 6, 1999 - -------------------------- Paul T. Lambert /s/ Peter Ogden Trustee August 6, 1999 Peter Ogden /s/ Robert P. Ripp Trustee August 6, 1999 - -------------------------- Robert P. Ripp /s/ Robert D. Salmen Trustee August 6, 1999 - -------------------------- Robert D. Salmen II-3 INDEX TO EXHIBITS Exhibit Description 1 Underwriting Agreement 2 Amended and Restated Contribution Agreement between the Company, the Operating Partnership, AREE and other limited partnership Unit recipients dated as of August 31, 1998 (filed as Exhibit A with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 3.1 Articles of Amendment and Restatement of the Declaration of Trust (filed as Exhibit E with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 3.2* Amended and Restated Bylaws of the Company. 4.1 Common Stock Purchase Warrant by the Company to Credit Suisse First Boston Mortgage Capital LLC, dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 4.2 Form of Class A Preferred Stock Purchase Warrant to be issued to underwriters pursuant to the Underwriting Agreement included as Exhibit 1 to this Registration Statement 4.3* Shareholders' Agreement, dated as of November 16, 1998 between the Company and the shareholders identified on the signature page thereto. 5 Opinion Letter of Foley & Lardner 8* Tax Opinion Letter of Grant Thornton LLP 10.1 Agreement of Limited Partnership of the Operating Partnership dated as of August 31, 1998 (filed as Exhibit C with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 10.2 Master Registration Rights Agreement dated as of August 31, 1998 (filed as Exhibit E of Exhibit C with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 10.3 Business Credit Agreement between Milwaukee Western Bank and the Company dated as of March 6, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998, and incorporated herein by reference) 10.4 Guaranty by the Company for the benefit of Credit Suisse First Boston Mortgage Capital LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.5 Promissory Note for $2,750,000 by Lake Pointe Apartment Homes, Inc., to Credit Suisse First Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.6 Mortgage, Assignment of Leases and Rents and Security Agreement between Lake Pointe Apartment Homes, Inc. to Credit Suisse First Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) II-4 10.7 Registration Rights Agreement between the Company and Credit Suisse First Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.8 Note between Maple Grove Apartment Homes, Inc. and American Property Financing, Inc. dated as of May 6, 1997 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.9 Mortgage, Assignment of Leases and Rents and Security Agreement between Maple Grove Apartment Homes, Inc. and American Property Financing, Inc., dated as of May 6, 1997 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.10 Wellington Properties Trust 1998 Share Option Plan (filed as Exhibit F with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 10.11 Wellington Properties Trust Dividend Reinvestment and Share Purchase Plan (filed with the Company's Registration Statement on Form S-3 on January 3, 1996 and incorporated herein by reference) 10.12* Subscription Agreement, dated as of June 30, 1999, between the Company and Wellington Management Corporation 10.13* Subscription Agreement, dated as of June 30, 1999, between the Company and American Real Estate Equities, LLC 10.14* Employment Agreement, dated as of November 16, 1998, between the Company and Duane H. Lund. 10.15* Employment Agreement, dated as of November 16, 1998, between the Company and Robert F. Rice. 10.16 Purchase Agreement, dated as of July 2, 1999, between Maple Grove Apartment Home, Inc. and The Shelard Group, Inc. 21* List of subsidiaries 23.1 Consent of Grant Thornton LLP 23.2 Consent of Foley & Lardner (Included in Exhibit 5 hereto) 24 Power of Attorney. (Included on the signature page hereof) - ------------- * To be filed by amendment II-5 EX-1 2 UNDERWRITITNG AGREEMENT 1,200,000 SHARES SERIES A CUMULATIVE CONVERTIBLE PREFERRED SHARES WELLINGTON PROPERTIES TRUST UNDERWRITING AGREEMENT _________________, 1999 R. J. Steichen & Company One Financial Plaza 120 South Sixth Street Minneapolis MN 55402 Dear Ladies and Gentlemen: Wellington Properties Trust, a Maryland Business Trust hereby confirms its agreement, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters"), for which R. J. Steichen & Company is acting as the representative (in such capacity, the "Representative"), an aggregate of 1,200,000 Shares of Series A Cumulative Convertible Preferred Stock, $.01 par value, of Wellington Properties Trust (the "Firm Shares") and up to 180,000 additional Shares upon the request of the Underwriters solely for the purpose of covering overallotments (the "Option Shares"). The Firm Shares and the Option Shares, which aggregate 1,380,000 Shares, are collectively referred to herein as the "Shares." Further, the Company hereby confirms its agreement to issue to the Underwriter warrants for the purchase of up to 138,000 Shares as described in Section 5 hereof (the "Underwriter's Warrants"), assuming purchase by the Underwriter of the Firm Shares. The Shares issuable upon exercise of the Underwriter's Warrants are referred to as the "Warrant Shares." Except as the context may otherwise require, Wellington Properties Trust and its operating partnership, Wellington Properties Investment, L.P., are referred to herein collectively as the "Company." The Shares will be in the form and contain such rights and terms as described in the Prospectus. The Company hereby confirms the arrangements with respect to the purchase, severally and not jointly, by each of the Underwriters the number of the Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares purchased if the overallotment option is exercised in whole or in part. The Company has been advised and hereby acknowledges that R. J. Steichen & Company has been duly authorized to act as the representative of the Underwriters. As used in this Agreement, the term "Underwriter" refers to any individual member of the underwriting syndicate and includes any party substituted for an Underwriter under Section 9 hereof. 1. Representations and Warranties of the Company. The Company represents and warrants to and agrees with each of the several Underwriters as follows: (a) A registration statement on Form SB-2 with respect to the Shares, and as a part thereof a preliminary Prospectus has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "1933 Act") and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "SEC") thereunder and has been filed with the SEC under the 1933 Act. The Company has filed such amendments to the registration statement and such amended preliminary prospectuses as may have been required to be filed to the date hereof. If the Company has elected not to rely upon Rule 430A, the Company has prepared and will promptly file an amendment to the registration statement and an amended prospectus (provided the Underwriters have consented to such filing). If the Company has elected to rely upon Rule 430A, it will prepare and timely file a prospectus pursuant to Rule 424(b) that discloses the information previously omitted from the prospectus in reliance upon Rule 430A. Copies of such registration statement and each pre-effective amendment thereto, and each related preliminary prospectus have been delivered by the Company to the Underwriters. Such registration statement, as amended or supplemented, including all prospectuses included as a part thereof, financial schedules, exhibits, the information (if any) deemed to be part thereof pursuant to Rules 430A and 434 under the 1933 Act and any registration statement filed pursuant to Rule 462 under the 1933 Act, is herein referred to as the "Registration Statement." The term "Prospectus" as used herein shall mean the final prospectus, as amended or supplemented, included as a part of the Registration Statement on file with the SEC when it becomes effective; provided, however, that if a prospectus is filed by the Company pursuant to Rules 424(b) and 430A or a term sheet is filed by the Company pursuant to Rule 434 under the 1933 Act, the term "Prospectus" as used herein shall mean the prospectus so filed pursuant to Rules 424(b) and 430A and the term sheet so filed pursuant to Rule 434. The term "Preliminary Prospectus" as used herein means any prospectus, as amended or supplemented, used prior to the Effective Date (as defined in Section 4(a) hereof) and included as a part of the Registration Statement, including any prospectus filed with the SEC pursuant to Rule 424(a). (b) Neither the SEC nor any state securities division has issued any order preventing or suspending the use of any Preliminary Prospectus, or issued a stop order with respect to the offering of the Shares or requiring the recirculation of a Preliminary Prospectus and, to the best knowledge of the Company, no proceeding for any such purpose has been initiated or threatened. Each part of the Registration Statement, when such part became or becomes effective, each Preliminary Prospectus, on the date of filing with the SEC, and the Prospectus and any amendment or supplement thereto, on the date of filing thereof with the SEC and on any Closing Date (as defined in Section 3 hereof), as the case may be, conformed or will conform in all material respects with the requirements of the 1933 Act and the Rules and Regulations and the securities laws ("Blue Sky laws") of the states where the Shares are to be sold (the "States") and contained or will contain all statements that are required to be stated therein in accordance with the 1933 Act, the Rules and Regulations and the Blue Sky laws of the 2 States. When the Registration Statement became or becomes effective and when any post-effective amendments thereto shall become effective, the Registration Statement did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Neither any Preliminary Prospectus, on the date of filing thereof with the SEC, nor the Prospectus or any amendment or supplement thereto, on the date of filing thereof with the SEC and on the First and Second Closing Dates, contained or will contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this Subsection 1(b) shall apply to statements in, or omissions from, the Registration Statement, Preliminary Prospectus or the Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by the Underwriters, as identified in Section 12 herein, specifically for use in the preparation of the Registration Statement, Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto. There is no contract or other document of the Company of a character required by the 1933 Act or the Rules and Regulations to be described in the Registration Statement or Prospectus, or to be filed as an exhibit to the Registration Statement, that has not been described or filed as required. The descriptions of all such contracts and documents or references thereto are correct and include the information required under the 1933 Act and the Rules and Regulations. (c) The Company has been duly organized and is validly existing in good standing under the laws of the State of Maryland, with full corporate power and authority, to own, lease and operate its properties and conduct its business as described in the Registration Statement and Prospectus. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the ownership or lease of its properties, or the conduct of its business, requires such qualification and in which the failure to be qualified or in good standing would have a material adverse effect on the business of the Company. The Company has all necessary and material authorizations, approvals and orders of and from all governmental regulatory officials and bodies to own its properties and to conduct its business as described in the Registration Statement and Prospectus, and is conducting its business in substantial compliance with all applicable material laws, rules and regulations of the jurisdictions in which it is conducting business. The Company holds all material licenses, certificates, permits, authorizations, approvals and orders of and from all state, federal and other governmental regulatory officials and bodies necessary to own its properties and to conduct its business as described in the Registration Statement and Prospectus, or has obtained waivers from any such applicable requirements from the appropriate state, federal or other regulatory authorities. All such licenses, permits, approvals, certificates, consents, orders and other authorizations are in full force and effect, and the Company has not received notice of any proceeding or action relating to the revocation or modification of any such license, permit, approval, certificate, consent, order or other authorization which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might materially and adversely affect the conduct of the business or the condition, financial or otherwise, or the earnings, affairs or business prospects of the Company. 3 (d) The Company has no subsidiaries and is not affiliated with any other Company or business entity, except as disclosed in the Prospectus. (e) The Company is not in violation of its Declaration of Trust or Bylaws. The Company is not in default in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which the Company or its properties are bound, and there does not exist any state of facts which constitutes an event of default on the part of the Company or which, with notice or lapse of time or both, would constitute such an event of default. The Company is not, to the best of its knowledge, in violation of any law, order, rule, regulation, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, which violation is material to the business of the Company. (f) The Company has full requisite power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and will be a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, if and when this Agreement shall have become effective in accordance with Section 8, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance and except as the enforceability of the indemnification or contribution provisions hereof may be affected by applicable federal or state securities laws. The performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, (i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note, agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which the Company is a party or by which the property or assets of the Company is bound, (ii) the Company's Declaration of Trust or Bylaws or (iii) any statute or any order, rule or regulation of any court, governmental agency or body having jurisdiction over the Company. No consent, approval, authorization or order of any court, governmental agency or body is required for the consummation by the Company of the transactions on its part herein contemplated, except such as may be required under the 1933 Act, the Rules and Regulations, the Blue Sky laws, the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD") and the rules and regulations of Nasdaq. (g) Except as is otherwise expressly stated in the Registration Statement or Prospectus, there are no actions, suits or proceedings pending before any court or governmental agency, authority or body to which the Company is a party or of which the business or property of the Company is the subject which might result in any material adverse change in the condition (financial or otherwise), business or prospects of the Company, materially and adversely affect its properties or assets or prevent consummation of the transactions contemplated by this Agreement; and, to the best of the Company's knowledge, no such actions, suits or proceedings are threatened except as is 4 otherwise expressly stated in the Registration Statement or Prospectus. The Company is not aware of any facts which would form the basis for the assertion of any material claim or liability which are not disclosed in the Registration Statement or the Prospectus or adequately reserved for in the financial statements which are a part thereof, except for such claims or liabilities which are not currently expected to have a material adverse effect on the condition (financial or otherwise) or the earnings, affairs or business prospects of the Company. All pending legal or governmental proceedings to which the Company is a party or to which any of its property is subject, which are not described in the Registration Statement and the Prospectus, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material to the Company. (h) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus. The outstanding Common Stock of the Company is duly authorized, validly issued, fully paid and nonassessable. The Shares and authorized securities of the Company conform in substance to all statements relating thereto contained in the Registration Statement and Prospectus. The securities to be sold by the Company hereunder and the shares of Common Stock issuable upon conversion of the Shares have been duly authorized and, when issued and delivered pursuant to this Agreement, will be validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus. No preemptive rights or similar rights of any security holders of the Company exist with respect to the issuance and sale of the Shares by the Company. Except as disclosed in the Prospectus, the Company has no agreement with any security holder which gives such security holder the right to require the Company to register under the 1933 Act any securities of any nature owned or held by such person either in connection with the transactions contemplated by this Agreement or after a demand for registration by such holder. Upon payment for and delivery of the Shares pursuant to this Agreement, the Underwriters will acquire the Shares, free and clear of all liens, encumbrances or claims. The certificates evidencing the Shares will comply as to form with all applicable provisions of the laws of the State of Maryland. Except as set forth in any part of the Registration Statement, the Company does not have outstanding any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any Common Stock or other securities of the Company, or any such warrants, convertible securities or obligations. (i) The Underwriters' Warrants, and the Shares issuable upon exercise or conversion thereof (the "Warrant Shares") have been duly authorized. The Underwriters' Warrants, when issued and delivered to the Underwriters, will constitute valid and binding obligations of the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance. The Warrant Shares when issued in accordance with the terms of the Underwriters' Warrants, will be validly issued, fully paid and nonassessable and subject to no preemptive rights or similar rights on the part of an person or entity. A sufficient number of Shares have been reserved for issuance by the Company upon exercise of the Underwriters' Warrants and a sufficient number of shares of Common 5 Stock have been reserved for issuance by the Company upon conversion of the Warrant Shares. (j) Grant Thornton, whose reports appear in the Registration Statement and Prospectus, are independent accountants within the meaning of the 1933 Act and the Rules and Regulations. The financial statements of the Company, together with the related notes, forming part of the Registration Statement and Prospectus (the "Financial Statements"), fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply. The Financial Statements are accurate, complete and correct and have been prepared in accordance with the 1933 Act, the Rules and Regulations and generally accepted accounting principles ("GAAP"), consistently applied throughout the periods involved, except as may be otherwise stated therein. The summaries of the Financial Statements and the other financial and statistical data and related notes set forth in the Registration Statement and the Prospectus are (i) accurate and correct and fairly present the information purported to be shown thereby as of the dates and for the periods indicated on a basis consistent with the audited financial statements of the Company and (ii) in compliance in all material respects with the requirements of the 1933 Act and the Rules and Regulations. The Financial Statements are based upon and consistent with the financial statements and other reports filed by the Company with the SEC, except for inconsistencies attributable solely to differences between GAAP and regulatory accounting principles. (k) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus and at any Closing Date, except as is otherwise disclosed in the Registration Statement or Prospectus, there has not been: (i) any change in the capital stock or long-term debt (including any capitalized lease obligation), or except in the ordinary course of business increase in the short-term debt of the Company; (ii) any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company; (iii) any material adverse change, or any development involving a material adverse change, in or affecting the business, business prospects, properties, assets, patents or patent applications (including those of the Company and those relating to devices or technologies licensed to the Company), management, financial position, stockholders' equity, results of operations or general condition of the Company; (iv) any material transaction entered into by the Company; (v) any material obligation, direct or contingent, incurred by the Company, except obligations incurred in the ordinary course of business that, in the aggregate, are not material; or 6 (vi) any dividend or distribution of any kind declared, paid or made on the Company's capital stock. (l) Except as is otherwise disclosed in the Registration Statement or Prospectus, the Company has good and marketable title to all of the property, real and personal, described in the Registration Statement or Prospectus as being owned by the Company, free and clear of all liens, encumbrances, equities, charges or claims, except as do not materially interfere with the uses made and to be made by the Company of such property or as disclosed in the Financial Statements. Except as is otherwise disclosed in the Registration Statement or Prospectus, the Company has valid and binding leases to the real and personal property described in the Registration Statement or Prospectus as being under lease to the Company, except as to those leases which are not material to the Company or the lack of enforceability of which would not materially interfere with the use made and to be made by the Company of such leased property. (m) The Company has filed all necessary federal and state income and franchise tax returns and paid all taxes shown as due thereon. The Company is not in default in the payment of any taxes and has no knowledge of any tax deficiency which might be asserted against it which would materially and adversely affect the Company's business or properties. (n) No labor disturbance by the employees of the Company exists or, to the best of the Company's knowledge, is imminent which could reasonably be expected to have a material adverse effect on the conduct of the business, operations, financial condition or income of the Company. (o) Except as disclosed in the Prospectus: (i) The Company owns or possesses the unrestricted rights to use all patents, copyrights, trademarks, trade secrets and proprietary rights or information necessary for the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company and for the conduct of its present or intended business as described in the Prospectus. There are no pending legal, governmental or administrative proceedings relating to patents, copyrights, trademarks or proprietary rights or information to which the Company is a party or to which any property of the Company is subject and no such proceedings are, to the best of the Company's knowledge, threatened or contemplated against the Company by any governmental agency or authority or others. The Company has not received any notice of conflict with asserted rights of others. The Company is not using any confidential information or trade secrets of any third party without such party's consent. (ii) The Company does not infringe upon the right or claimed rights of any person under or with respect to any of the intangible rights listed in the preceding subsection. The Company is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, 7 copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, except as disclosed in the Registration Statement. (p) The Company intends to apply the proceeds from the sale of the Shares by it to the purposes and substantially in the manner set forth in the Prospectus. (q) The Company has no defined benefit pension plan or other pension benefit plan, except for its 401(K) Plan which has no benefit obligations and has not been funded, which is intended to comply with the provisions of the Employee Retirement Income Security Act of 1974 as amended from time to time, except as disclosed in the Registration Statement. (r) To the best of the Company's knowledge, no person is entitled, directly or indirectly, to compensation from the Company or the Underwriters for services as a finder in connection with the transactions contemplated by this Agreement. (s) The conditions for use of a Registration Statement on Form SB-2 for the distribution of the Shares have been satisfied with respect to the Company. (t) The Company has not taken and will not take, directly or indirectly, any action (and does not know of any action by its directors, officers, stockholders, or others) which has constituted or is designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation, as defined in the Securities Exchange Act of 1934, as amended (the "1934 Act") or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Shares. (u) The Company has not sold any securities in violation of Section 5(a) of the 1933 Act. (v) The Company maintains insurance, which is in full force and effect, of the types and in the amounts adequate for its business and in line with the insurance maintained by similar companies and businesses. (w) The Company hereby represents that it has complied and will comply with all provisions of Florida Statutes Section 517.075 (Ch. 92-198 and Rule 3EER92-1 of the Rules of the Florida Department of Banking and Finance, Division of Securities) copies of which are attached hereto. Neither the issuer, nor any affiliate thereof, does business with the government of Cuba or with any person or affiliate located in Cuba. (x) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. (y) All material transactions between the Company and its shareholders who beneficially own more than 5% of any class of the Company's voting securities have been accurately disclosed in the Prospectus, and the terms of each such transaction are 8 fair to the Company and no less favorable to the Company than the terms that could have been obtained from unrelated parties. (z) The Company has obtained a written agreement from each of the officers and directors of the Company and certain other shareholders of the Company determined by the Underwriters that such person will not, without the prior written consent of the Underwriters, during the 180-day period commencing on the effective date of the Registration Statement (the "Lockup Period) (i) sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of any Securities of the Company beneficially held by the officer or director during the Lockup Period, (ii) sell, transfer or otherwise dispose of or agree to sell, transfer or otherwise dispose of any options, rights, warrants or other securities exercisable or convertible into Shares of Common Stock of the Company beneficially held by the officer or director during the Lockup Period, or (iii) sell or grant, or agree to sell or grant, options, rights, warrants or other securities exercisable or convertible into any such Shares of Common Stock; provided, however, that the foregoing does not prohibit gifts by donees who agree to be bound by the restrictions set forth in the lockup agreement or transfers by will or the laws of descent. (aa) The Shares have been approved by Nasdaq for trading on its National Market System following effectiveness of the Registration Statement subject to official notice of issuance. The Company's shares of Common Stock are traded on the NASDAQ Small Cap Market. (bb) The Company has timely filed all documents and amendments to previously filed documents required to be filed by it pursuant to the 1934 Act and the rules and regulations of the SEC thereunder. Each such document conformed in all material respects with the requirements of the 1934 Act and contained all information required to be stated therein in accordance with the 1934 Act. No part of any such document contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. True copies of each of the documents incorporated by reference, if any, into each Preliminary Prospectus and the Prospectus have been delivered by the Company to the Representative. To the best of the Company's knowledge, the executive officers and directors of the Company and stockholders who hold more than 5% of the Company's outstanding Common Stock, have made, and are current with, all filings, if any, that are required under the 1934 Act. 2. Purchase, Sale, Delivery and Payment. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, the Firm Shares at $9.20 per Unit. The respective amount of Firm Shares set forth such Underwriter's name in Schedule I hereto. The obligation of the Underwriters will collectively purchase all of the Firm Shares if any are purchased. 9 (b) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters to purchase the Option Shares (not to exceed an aggregate of fifteen percent (15%) of the total number of Firm Shares) at the same purchase price as the Firm Shares for use solely in covering any overallotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within forty-five (45) days after the Effective Date (as defined in Section 4(a) hereof) upon notice (confirmed in writing) by the Representative to the Company setting forth the aggregate number of Option Shares as to which the Underwriters are exercising the option and the date on which certificates for such Option Shares are to be delivered. The option granted hereby may be canceled by the Representative as to the Option Shares for which the option is unexercised at any time prior to the expiration of the forty-five (45) day period upon notice to the Company. (c) The Company will deliver the Firm Shares to the Representative at the offices of Maun & Simon, PLC, unless some other place is agreed upon, at 10:00 A.M., Minneapolis time, against payment of the purchase price at the same place, on the third full business day after trading the Shares has commenced (but not more than the third (3rd) full business day after the date the Registration Statement is declared effective), or such earlier time as may be agreed upon between the Representative and the Company. Such time and place is herein referred to as the "First Closing Date." (d) The Company will deliver the Option Shares being purchased by the Underwriters to the Representative at the offices of Maun & Simon, PLC, set forth in Section 2(c) above, unless some other place is agreed upon, at 10:00 A.M., Minneapolis time, against payment of the purchase price at the same place, on the date determined by the Representative and of which the Company has received notice as provided in Section 2(b), which shall not be earlier than two nor later than three (3) full business days after the exercise of the option as set forth in Section 2(b), or at such other time not later than ten (10) full business days thereafter as may be agreed upon by the Representative and the Company, such time and date being herein referred to as the "Second Closing Date." The First and Second Closing Dates are collectively referred to herein as the "Closing Date." (e) Certificates for the Shares to be delivered will be registered in such names and issued in such denominations as the Underwriters shall request of the Company at least two (2) full business days prior to the First Closing Date or the Second Closing Date, as the case may be. The certificates will be made available to the Underwriters in definitive form for the purpose of inspection and packaging at least 24 hours prior to each respective Closing Date. (f) Payment for the Shares shall be made, against delivery to the Representative or its designated agent, of certificates for the Shares by wire transfer to a designated account of the Company. (g) The Underwriters will make a public offering of the Shares directly to the public (which may include selected dealers who are members in good standing with the 10 NASD or foreign dealers not eligible for membership in the NASD but who have agreed to abide by the interpretation of the NASD's Board of Governor's with respect to free-riding and withholding) as soon as the Underwriters deem practicable after the Registration Statement becomes effective at the Price to Public set forth in the Prospectus, subject to the terms and conditions of this Agreement and in accordance with the Prospectus. Such concessions from the public offering price may be allowed selected dealers of the NASD as the Underwriters determines, and the Underwriters will furnish the Company with such information about the distribution arrangements as may be necessary for inclusion in the Registration Statement. It is understood that the public offering price and concessions may vary after the initial public offering. The Underwriters shall offer and sell the Shares only in jurisdictions in which the offering of Shares has been duly registered or qualified, or is exempt from registration or qualification, and shall take reasonable measures to effect compliance with applicable state and local securities laws. (h) It is understood that the Representative, individually and not as a Representative, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for the Shares to be purchased by such Underwriter or Underwriters. No such payment by the Representative shall relieve such Underwriter or Underwriters from any of its or their other obligations hereunder. 3. Further Agreements of the Company. The Company hereby covenants and agrees with the Underwriters as follows: (a) If the Registration Statement has not become effective prior to the date hereof, the Company will use its best efforts to cause the Registration Statement and any subsequent amendments thereto to become effective as promptly as possible. The Company will notify the Representative promptly, after the Company shall receive notice thereof, of the time when the Registration Statement, or any subsequent amendment thereto, has become effective or any supplement to the Prospectus has been filed. Following the execution and delivery of this Agreement, the Company will prepare, and timely file or transmit for filing with the SEC in accordance with Rules 430A, 424(b) and 434, as applicable, copies of the Prospectus, or, if necessary, a post-effective amendment to the Registration Statement (including the Prospectus), in which event, the Company will take all necessary action to have such post-effective amendment declared effective as soon as possible. The Company will notify the Representative promptly upon the Company's obtaining knowledge of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceedings for that purpose and will use its best efforts to prevent the issuance of any stop order and, if a stop order is issued, to obtain as soon as possible the withdrawal or lifting thereof. The Company will promptly prepare and file at its own expense with the SEC any amendments of, or supplements to, the Registration Statement or the Prospectus which may be necessary in connection with the distribution of the Shares by the Underwriters. During the period when a Prospectus relating to the Shares is required to be delivered under the 1933 Act, the Company will promptly file any amendments of, or supplements to, the Registration Statement or the Prospectus which may be necessary to correct any untrue statement of a material fact or any omission to state any material 11 fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company will notify the Representative promptly of the receipt of any comments from the SEC regarding the Registration Statement or Prospectus or request by the SEC for any amendment thereof or supplement thereto or for any additional information. The Company will not file any amendment of, or supplement to, the Registration Statement or Prospectus, whether prior to or after the Effective Date, which shall not previously have been submitted to the Representative and its counsel a reasonable time prior to the proposed filing or to which the Representative shall have reasonably objected. (b) The Company has used and will continue to use its best efforts to register or qualify the Shares for sale under the securities laws of such jurisdictions as the Representative may designate and the Company will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification. In each jurisdiction in which the Shares shall have been registered or qualified as above provided, the Company will continue such registrations or qualifications in effect for so long as may be required for purposes of the distribution of the Shares; provided, however, that in no event shall the Company be obligated to qualify to do business as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action which would subject it to the service of process in suits, other than those arising out of the offering or sale of the Shares in any jurisdiction where it is not now so subject. In each jurisdiction where any of the Shares shall have been so qualified, the Company will file such statements and reports as are or may be reasonably required by the laws of such jurisdiction to continue such qualification in effect. The Company will notify the Representative immediately of, and confirm in writing, the suspension of qualification of the Shares or the threat of such action in any jurisdiction. The Company will use its best efforts to qualify or register its securities for sale in nonissuer transactions under (or obtain exemptions from the application of) the securities laws of such states designated by the Representative (and thereby permit market-making transactions and secondary trading in its securities in such states), and will comply with such securities laws and will continue such qualifications, registrations and exemptions in effect for a period of five (5) years after the date hereof. (c) The Company will furnish to the Representative, as soon as available, copies of the Registration Statement (one of which will be signed and which shall include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the 1933 Act, all in such quantities as the Representative may from time to time reasonably request prior to the printing of each such document. The Company specifically authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the Underwriters to use and distribute copies of such Preliminary Prospectuses and Prospectuses in connection with the sale of the Shares as and to the extent permitted by the federal and applicable state and local securities laws. (d) For as long as the Company has more than 100 beneficial owners, but in no event more than five (5) years after the Effective Date, the Company will mail as soon as practicable to the holders of its securities substantially the following documents, which 12 documents shall be in compliance with this Section if they are in the form prescribed by the 1934 Act: (i) within sixty (60) days after the end of the first three quarters of each fiscal year, copies of the quarterly unaudited statement of profit and loss and quarterly unaudited balance sheets of the Company and any material subsidiaries; and (ii) within one hundred twenty (120) days after the close of each fiscal year, appropriate financial statements as of the close of such fiscal year for the Company and any material subsidiary which shall be certified to by a nationally recognized firm of independent certified public accountants in such form as to disclose the Company's financial condition and the results of its operations for such fiscal year. (e) For as long as the Company has more than 100 beneficial owners, but in no event more than five (5) years after the Effective Date, the Company will furnish to the Representative (i) concurrently with furnishing such reports to its security holders, the reports described in Section 4(d) hereof; (ii) as soon as they are available, copies of all other reports (financial or otherwise) mailed to security holders; and (iii) as soon as they are available, copies of all reports and financial statements furnished to, or filed with, the SEC, the NASD, any securities exchange or market or any state securities commission by the Company. During such period, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and any subsidiary or subsidiaries are consolidated and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (f) The Company will not, without the prior written consent of the Representative, which consent shall not be unreasonably withheld, sell or otherwise dispose of any capital stock or securities convertible or exercisable into capital stock of the Company (other than pursuant to existing option plans, director compensation plans or currently outstanding options and warrants) during the 180-day period following the Effective Date. So long as the Shares remain outstanding, the Company will not, without the prior written consent of the Representative, which consent shall not be unreasonably withheld, sell any capital stock ranking superior to the Shares in liquidation priority. Prior to the Closing Date, the Company will not repurchase or otherwise acquire any of its capital stock or declare or pay any dividend not in the ordinary course of business or make any other distribution on any class of its capital stock. (g) Subject to the proviso set forth below, the Company shall be responsible for and pay all costs and expenses incident to the performance of the obligations of the Company under this Agreement including, without limiting the generality of the foregoing, (i) all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), Preliminary Prospectuses and the Prospectus and any amendments thereof or supplements to any of the foregoing; (ii) the issuance and delivery of the Shares, including taxes, if any; (iii) the cost of all certificates representing the Shares; (iv) the fees and expenses of 13 the Transfer Agent for the Shares; (v) the fees and disbursements of counsel for the Company; (vi) all fees and other charges of the independent public accountants of the Company; (vii) the cost of furnishing and delivering to the Underwriters and dealers participating in the offering copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectuses, the Prospectus and any amendments of, or supplements to, any of the foregoing; (viii) the NASD filing and quotation fees; and (ix) the fees and disbursements, including filing fees and all accountable fees and expenses of counsel for the Company incurred in registering or qualifying the Shares for sale under the laws of such jurisdictions upon which the Representative and the Company may agree; and (x) the non-accountable expenses of the Representative in an amount equal to 2.0% of the gross proceeds of the Offering. The Representative hereby acknowledges receipt of a $50,000.00 advance from the Company against the non-accountable expense allowance referred to in the preceding sentence. In the event this Agreement is terminated by the Representative pursuant to Section 8 or for any reason beyond the Representative's control or through no fault of the Representative or by the Company, the Company shall be obligated to pay, to the Underwriter the greater of the $50,000.00 deposit paid at the time of the execution of the letter of intent or all of its actual accountable out-of-pocket expenses, including fees of its counsel, not to exceed ______. In the event this Agreement is terminated by the Company or the Underwriter for any reason within its control, including but not limited to, an opinion of the NASD regarding the compensation arrangement of the Underwriter, the Company shall be obligated to pay the Underwriter only the $50,000.00 deposit paid at the time of the execution of the letter of intent. (h) The Company will not take, and will use its best efforts to cause each of its officers and directors not to take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (i) The Company will maintain the quotation of its Common Stock on the Nasdaq SmallCap MarketSM and obtain and maintain the quotation of the Shares on the NASDAQ National Market System. (j) For a period of at least three (3) years after the Effective Date, the Company will continue to file with the SEC all reports and other documents as may be required by the 1933 Act, the Rules and Regulations and the 1934 Act. (k) The Company will apply the proceeds from the sale of the Shares substantially in the manner set forth in the Prospectus. (l) Prior to or as of the First Closing Date, the Company shall have performed each condition to closing required to be performed by it pursuant to Section 4 hereof. (m) Other than as permitted by the 1933 Act and the Rules and Regulations, the Company will not distribute any prospectus or other offering material in connection with the Offering. 14 (n) The Company will, for a period of two (2) years after the Effective Date, furnish directly to you, quarterly profit and loss statements, reports of the Company's cash flow, and statements of application of the proceeds of the offering contained in reports or statements filed by the Company with the Commission. (o) The Company will make generally available to its security holders as soon as practicable, but in any event not later than eighteen (18) months after the effective date of the Registration Statement, a statement of earnings of the Company (which need not be audited) complying with Section 11(a) of the 1933 Act and the Rules and Regulations of the Commission thereunder (including at the option of the Company Rule 158). (p) The Company authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the Underwriters in connection with the distribution of the Shares to use the Prospectus as from time to time amended or supplemented in connection with the offering and sale of the Shares and in accordance with the applicable provisions of the Act and the applicable Rules and Regulations and applicable state Blue Sky or securities laws. (q) The Company shall not request an Effective Date nor allow the Registration Statement to be declared effective without the prior approval of the Representative. (r) Within the time during which the Prospectus is required to be delivered under the Act, the Company will comply, at its own expense, with all requirements imposed upon it by the 1933 Act, by the Rules and Regulations, by the Exchange Act, and by any order of the Commission, so far as necessary to permit the continuance of sales or dealing in the Shares. (s) The Company will reserve and keep available that maximum number of its authorized but unissued shares of Common Stock which are issuable upon conversion of the Shares or the Underwriter's Warrant during the term of the Shares and the Underwriter's Warrant. (t) Prior to the Closing Date, no discussions will be held by officers, directors or any other affiliate or associate of the Company with any member of the news media and no news release or other publicity about the Company will be permitted without prior approval of the Company's and the Representative's respective legal counsel. (u) The Company shall have obtained a CUSIP number for the Shares (and its components) prior to the effective date of the Registration Statement under the Act. (v) The Company shall supply to the Representative and its legal counsel, at the Company's cost, one complete bound volume of all of the documents relating to the public offering, within a reasonable time after the Closing Date, not to exceed four (4) months. The volume shall be hard cover bound in book format (w) The Company will apply the proceeds from the sale of the Shares by it to the purposes and in the manner set forth in the Registration Statement and, pending such 15 application, shall invest such net proceeds only in one or more of the following, except as otherwise provided by prior written consent of the Underwriter: (i) interest-bearing obligations issued by the United States Government or issued by an agency or instrumentality of the United States Government and guaranteed by the United States Government and having a maturity not in excess of one year, (ii) interest-bearing domestic commercial paper having a maturity of not more than three hundred sixty-five (365) days and, at the time of purchase by the Company, rated investment grade by Moody's Investors Service, Inc. or Standard & Poor's Corporation, (iii) interest-bearing certificates of deposit issued by a commercial bank chartered by the United States Government or by any state of the United States having shareholders' equity of at least $500,000,000 except that the foregoing notwithstanding, the Company may invest no more than $100,000 of such net proceeds in certificates of deposit issued by any such commercial bank regardless of shareholders' equity, and (iv) shares or other Shares of interest in a registered open-ended investment company the assets of which aggregate at leas $200,000,000 and are invested solely in so-called "money market" obligations. 4. Conditions of the Underwriters' Obligations. The respective obligation of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy of the representations and warranties of the Company, in the case of the Firm Shares as of the date hereof and the First Closing Date (as if made on and as of the First Closing Date) and in the case of the Option Shares, as of the date hereof and the Second Closing Date (as if made on and as of the Second Closing Date), to the performance by the Company of its obligations hereunder, and to the satisfaction of the following additional conditions on or before the First Closing Date in the case of the Firm Shares and on or before the Second Closing Date in the case of the Option Shares: (a) The Registration Statement shall have become effective not later than 5:00 P.M. Minneapolis time, on the first full business day following the date of this Agreement, or such later date as shall be consented to in writing by the Representative (the "Effective Date"). If the Company has elected to rely upon Rule 430A, the information concerning the price of the Shares and price-related information previously omitted from the effective Registration Statement pursuant to Rule 430A shall have been transmitted to the SEC for filing pursuant to Rule 424(b) within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Representative of such timely filing (or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the 1933 Act and the Rules and Regulations). No stop order suspending the effectiveness thereof shall have been issued and no proceeding for that purpose shall have been initiated or, to the knowledge of the Company or the Representative, threatened by the SEC or any state securities commission or similar regulatory body. Any request of the SEC for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Underwriters and their legal counsel. The NASD, upon review of the terms of the Offering, shall not have objected to the terms of the Underwriters' participation in the Offering. 16 (b) The Representative shall not have advised the Company that the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, contains any untrue statement of a fact which is material or omits to state a fact which is material and is required to be stated therein or is necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading; provided, however, that this Section 4(b) shall not apply to statements in, or omissions from, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by any of the Underwriters specifically for use in the preparation of the Registration Statement or the Prospectus, or any such amendment or supplement. (c) Subsequent to the date as of which information is given the Registration Statement and Prospectus, there shall not have occurred any change, or any development involving a prospective change, which materially and adversely affects the business or properties of the Company and which, in the reasonable opinion of the Representative, materially and adversely affects the market for the Shares. (d) The Representative shall have received the opinion of Foley & Lardner, counsel for the Company, dated as of such respective Closing Date and satisfactory in form and substance to the Representative and its counsel, to the effect that: (i) The Company and each of its subsidiaries has been duly organized and is validly existing in good standing under the laws of the State of organization with the requisite power to own, lease and operate their properties and conduct their business as described in the Prospectus; and are duly qualified to do business in good standing in all jurisdictions where the ownership or leasing of its properties or the conduct of their business requires such qualification and in which the failure to be so qualified or in good standing would have a material adverse effect on its business and the activities of the Company or the respective subsidiary. (ii) The number of authorized and, to the best of such counsel's knowledge, the number of issued and outstanding shares of capital stock of the Company are as set forth in the Prospectus, and all such capital stock has been duly authorized and is validly issued, fully paid and nonassessable. Upon delivery of and payment for the Shares hereunder, the Underwriters will acquire the Shares free and clear of all liens, encumbrances or claims. To the best knowledge of such counsel's knowledge, no preemptive rights, contractual or otherwise, of securities holders of the Company or others exist with respect to the issuance or sale of the Shares by the Company pursuant to this Agreement or to the issuance of Warrant Shares upon exercise of the Underwriters' Warrants. To the best of such counsel's knowledge, no rights to require registration of Shares of Common Stock or other securities of the Company exist which may be exercised in connection with the filing of the Registration Statement. The Shares, Underwriters' Warrants and Warrant Shares conform as to matters of law in all material respects to the description of these securities made in the Prospectus and 17 such description accurately sets forth the material legal provisions thereof required to be set forth in the Prospectus. (iii) The shares of Common Stock issuable upon conversion of the Shares have been duly authorized and reserved for issuance and when issued, sold and delivered in accordance with the terms of the Shares, will be validly issued, fully paid and nonassessable. The issuance, sale and delivery of the Underwriter's Warrant has been duly authorized and the Warrant Shares issuable upon the exercise thereof have been reserved for issuance upon such exercise. The Warrant Shares, when issued, sold and delivered in accordance with the terms of the Underwriter's Warrant, will be validly issued, fully paid and nonassessable. No preemptive rights of, or rights of refusal in favor of, shareholders of the Company exist with respect to the Shares (or any component thereof), the Underwriter's Warrant or the Warrant Shares, or the issue and sale thereof, pursuant to the Company's Declaration of Trust or Bylaws. (iv) The authorized securities of the Company conform as to legal matters in all material respects to the description thereof set forth in the Prospectus under the caption "Description of Securities." The certificates representing the Shares are in proper form under the Maryland Trust Statute. (v) The Registration Statement and the Prospectus comply as to form in all material respects with the requirements of the 1933 Act and with the Rules and Regulations, except the financial statements, the notes thereto and the related schedules and other financial and statistical data contained therein, as to which such counsel need not express an opinion. (vi) Counsel knows of no contracts, leases or documents that are required to be described in the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed. (vii) The Underwriting Agreement, the underlying common stock and the Underwriter's Warrant have been duly authorized by all requisite corporate action, executed and delivered by the Company and constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms. (viii) The execution and delivery of the Underwriting Agreement and the issue and sale of the Underwriter's Warrant, the Shares and the Warrant Shares will not violate or conflict with the organizational documents or the Bylaws of the Company or any material provision of any material contract or instrument to which the Company is a party or by which the Company is bound, or any law of the United States or the State of Maryland, any rule or regulation of any governmental authority or regulatory body of the United States or the State of Maryland, or any judgment, order or decree known by such counsel and applicable to the Company of any court or governmental authority. 18 (ix) No holders of capital stock of the Company, or securities convertible into capital stock of the Company, have the right to cause the Company to include such holder's capital stock in the Registration Statement pursuant to the Company's organizational documents or Bylaws or any contract or agreement. (x) No consent, approval, authorization or order of, and no notice to or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the issue and sale of the Shares pursuant to the Underwriting Agreement, except such as may be required and obtained under the 1933 Act or under state or other securities laws in connection with the purchase and distribution of the Shares by the Underwriter. (xi) The Underwriter's Warrants has been duly authorized, executed and delivered by the Company and are the valid and binding obligations of the Company, enforceable in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium, or other laws of general application affecting the rights of creditors generally and by judicial limitations on the right of specific performance and other equitable remedies, and except as the enforceability of indemnification or contribution provisions hereof may be limited by federal or state securities laws. The Warrant Shares when issued in accordance with the terms of this and the Underwriter's Warrants will be validly issued, fully paid and nonassessable. A sufficient number of shares of Common Stock has been reserved for issuance upon exercise of the Underwriter's Warrants. (xii) The Registration Statement has become and is effective under the 1933 Act, the Prospectus has been filed as required by Rule 424(b), if necessary and, to the best knowledge of such counsel, no stop orders suspending the effectiveness of the Registration Statement have been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. The registration of the Company's securities on Form 8-A has become effective under the Securities Exchange Act of 1934, as amended, and no stop order suspending the effectiveness of such registration, and, to such counsel's knowledge, no proceedings for that purpose have been instituted or are pending by the Commission. (xiii) To the best of such counsel's knowledge, there are no material legal or governmental proceedings of a character required by the 1933 Act and the Rules and Regulations to be described or referred to in the Registration Statement or Prospectus that are not described or referred to therein. All pending legal or governmental proceedings, if any, to which the Company is a party or to which any of its property is subject which are not described in the Registration Statement and the Prospectus, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material to the Company. 19 (xiv) To the best of such counsel's knowledge, there are no material legal or governmental proceedings of a character required by the 1933 Act and the Rules and Regulations to be described or referred to in the Registration Statement or Prospectus that are not described or referred to therein. All pending legal or governmental proceedings, if any, to which the Company is a party or to which any of its property is subject which are not described in the Registration Statement and the Prospectus, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material to the Company. (xv) The Registration Statement, when it became effective, the Prospectus and any amendments thereof or supplements thereto, (other than the financial statements and supporting financial and statistical data included or incorporated therein, as to which such counsel need express no opinion) on the date of filing or the date thereof, complied as to form in all material respects with the requirements of the 1933 Act and the Rules and Regulations. (xvi) This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification or contribution provisions hereof may be limited by federal or state securities laws. (xvii) To the best of such counsel's knowledge, the execution, delivery and performance of this Agreement and the consummation of the transactions described herein will not result in a violation of, or a default under, the terms or provisions of (A) any material bond, debenture, note, contract, lease, license, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which the Company or any of its properties are bound, or (B) any material law, order, rule, regulation, writ, injunction, or decree known to such counsel of any government, governmental agency or court having jurisdiction over the Company or any of its properties. In expressing the foregoing opinion, as to matters of fact relevant to conclusions of law, counsel may rely, to the extent that they deem proper, upon certificates of public officials and of the officers of the Company, provided that copies of such officers' certificates are attached to the opinion. In addition to the matters set forth above, such opinion shall also include a statement to the effect that, although such counsel cannot guarantee the accuracy, completeness or fairness of any of the statements contained in the Registration Statement, Prospectus, or any amendment thereof or supplement thereto in connection with such counsel's representation, investigation and due inquiry of the Company in the preparation of the Registration Statement, Prospectus and any amendment thereof or supplement thereto, nothing has come to the attention of such counsel which causes them to believe that the Registration Statement, Prospectus and any amendment thereof or supplement 20 thereto (other than the financial statements and supporting financial and statistical data included or incorporated therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that such opinion of counsel does not require any statement concerning statements in, or omissions from, the Registration Statement, Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by any of the Underwriters specifically for use in the preparation of the Registration Statement, Prospectus, or any such amendment or supplement. (e) The Representative shall have received from Maun & Simon, PLC, its counsel, such opinion or opinions as the Underwriters may reasonably require, dated as of each closing date and satisfactory in form and substance to the Representative, with respect to the sufficiency of corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby, and the Company shall have furnished to said counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. In connection with such opinion, as to matters of fact relevant to conclusions of law, such counsel may rely, to the extent that they deem proper, upon representations or certificates of public officials and of responsible officers of the Company. (f) The Representative and the Company shall have received letters, dated the date hereof and as of each closing date, from Grant Thornton, independent public accountants, substantially similar to the form set forth in the Appendix A hereto. (g) The Representative shall have received from the Company a certificate, dated as of each closing date, of the principal executive officer and the principal financial or accounting officer of the Company to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct as if made on and as of each closing date. The Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at, or prior to, such date. (ii) Neither the Registration Statement nor the Prospectus nor any amendment thereof or supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented prospectus which has not been so set forth; provided, however, that such certificate does not require any representation concerning statements in, or omissions from, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information, as identified in Section 12 herein, furnished to the Company by any 21 of the Underwriters specifically for use in the preparation of the Registration Statement or the Prospectus, or any such amendment or supplement. (iii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as contemplated or referred to in the Prospectus, no event has occurred that should have been set forth in an amendment or supplement to Registration Statement or the Prospectus which has not been so set forth and the Company has not incurred any direct or contingent liabilities or obligations material to the Company, or entered into any material transactions, except liabilities, obligations or transactions in the ordinary course of business, and there has not been any change in the capital stock or long-term debt of the Company, (including any capitalized lease obligations), any material increase in the short-term debt of the Company, any material adverse change in the financial position, net worth or results of operations of the Company or declaration or payment of any dividend. (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss of, or damage to, its properties, whether or not insured. (v) There are no material actions, suits or proceedings pending before any court or governmental agency, authority or body, or, to the best of their knowledge, threatened, to which the Company is a party or of which the business or property of the Company is the subject. (h) The Representative shall have received, dated as of each closing date, from the Secretary of the Company a certificate of incumbency certifying the names, titles and signatures of the officers authorized to execute the resolutions of the Board of Trustees of the Company authorizing and approving the execution, delivery and performance of this Agreement, a copy of such resolutions to be attached to such certificate, certifying that such resolutions and the organizational documents of the Company and the Bylaws of the Company have been validly adopted and have not been amended or modified. (i) In addition, at each closing, the Company shall have delivered to the Underwriters an opinion, satisfactory to the Underwriters, of either Foley & Lardner or Grant Thornton, dated as such respective Closing Date, and satisfactory in form and substance to the Representative and its counsel, to the effect that under the existing federal income tax laws and regulations, assuming the Company acts as described in the "Federal Income Tax Considerations" section of the Prospectus and the Company timely filed the requisite elections, Foley & Lardner or Grant Thornton is of the opinion that the Company has been organized in conformity with the requirements for qualification as a REIT beginning with its taxable year ending December 31, 1996, and its method of operation (as described in the Prospectus and represented by management) will enable it to satisfy the REIT Requirements (as defined in the Prospectus). In expressing the foregoing opinion, as to matters of fact relevant to conclusions of law, counsel may rely, to the extent that they deem proper, upon certificates of public 22 officials and of the officers of the Company, provided that copies of such officers' certificates are attached to the opinion. In addition to the matters set forth above, such opinion shall also include a statement to the effect that, although such counsel cannot guarantee the accuracy, completeness or fairness of any of the statements regarding intellectual property matters contained in the Registration Statement, Prospectus, or any amendment thereof or supplement thereto in connection with such counsel's representation of the Company in connection with intellectual property matters and in preparation of the intellectual property portions of the Registration Statement, Prospectus, or any amendment thereof or supplement thereto, nothing has come to the attention of such counsel which causes them to believe that the Intellectual property portions of the Registration Statement, Prospectus, or any amendment thereof or supplement thereto (other than the financial statements and supporting financial and statistical data included or incorporated therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that such opinion of counsel does not require any statement concerning statements in, or omissions from, the Registration Statement, Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by the Underwriters specifically for use in the preparation of the Registration Statement, Prospectus, or any such amendment or supplement. (j) The Representative shall have received a written agreement from each of the officers and directors of the Company and certain other shareholders of the Company determined by the Representative that such person will not, without the prior written consent of the Representative during the Lockup Period (i) sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of any Shares of Common Stock of the Company beneficially held by such person during the Lockup Period, (ii) sell, transfer or otherwise dispose of or agree to sell, transfer or otherwise dispose of any options, rights, warrants or other securities exercisable or convertible into Shares of Common Stock of the Company beneficially held by the officer or director during the Lockup Period, or (iii) sell or grant, or agree to sell or grant, options, rights, warrants or other securities exercisable or convertible into to any such Shares of Common Stock; provided, however, that the foregoing does not prohibit gifts to donees who agree to be bound by the restrictions set forth in the lockup agreement or transfers by will or the laws of descent, and the Underwriters will not unreasonably withhold consent to a sale of Shares of Common Stock if necessary to pay federal or state taxes. (k) The Company shall not have failed to have performed any of its agreements herein contained and required to be performed at or prior to the First Closing Date or the Second Closing Date, as the case may be. (l) The Shares shall have been registered or qualified for sale or exempt from such registration or qualification under the securities laws of such jurisdictions as designated by the Underwriters such qualifications or exemptions shall continue in effect to and including the First Closing Date or the Second Closing Date, as the case may be. 23 (m) The Company shall have furnished to the Underwriters, dated as of the date of the Closing Date, such further certificates and documents as the Underwriters shall have reasonably required. (n) All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to the Underwriters and its legal counsel. All statements contained in any certificate, letter, or other document delivered pursuant hereto by, or on behalf of, the Company shall be deemed to constitute representations and warranties of the Company. (o) The Underwriters may waive in writing the performance of any one or more of the conditions specified in this Section 4 or extend the time for their performance. (p) If any of the conditions specified in this Section 4 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, each Closing Date by the Representative. Any such cancellation shall be without liability of the Underwriters to the Company and shall not relieve the Company of its obligations under Section 3(g) hereof. Notice of such cancellation shall be given to the Company at the address specified in Section 11 hereof in writing, or by telegraph or telephone confirmed in writing. 5. Underwriters' Warrants. On the First Closing Date, the Company shall sell and deliver to the Representative for $50 the Underwriters' Warrants, which shall first become exercisable one year after the Effective Date and shall remain exercisable for a period of four (4) years thereafter. The Underwriters' Warrants shall be subject to certain transfer restrictions and shall be in substantially the form filed as an exhibit to the Registration Statement and attached as Appendix B hereto. 6. Indemnification. (a) The Company hereby agrees to indemnify and hold harmless the Underwriters and each person, if any, who controls the Underwriters within the meaning of Section 15 of the 1933 Act against any losses, claims, damages or liabilities, joint or several, to which the Underwriters or each such controlling person may become subject, under the 1933 Act, the 1934 Act, the common law or otherwise, insofar as such losses, claims, damages or liabilities (or judicial or governmental actions or proceedings in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, or the omission or alleged omission to state in the Registration Statement or any amendment thereof a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus if used prior to the Effective Date of the Registration Statement or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the SEC any amendment thereof or supplement thereto), 24 or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Shares under, or exempt the Shares or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and the Company will reimburse the Underwriters, and each such controlling person for any legal or other expenses reasonably incurred by the Underwriters, or controlling person (subject to the limitation set forth in Section 6(c) hereof) in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of, or is based upon, an untrue statement, or alleged untrue statement, omission or alleged omission, made in reliance upon and in conformity with written information furnished to the Company by, or on behalf of, the Underwriters specifically for use in the preparation of the Registration Statement or any such post-effective amendment thereof, any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or the Underwriters filed in any jurisdiction in order to qualify the Shares under, or exempt the Shares or the sale thereof from qualification under, the securities laws of such jurisdiction; and provided further that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any Preliminary Prospectus but eliminated or remedied in the Prospectus, such indemnity agreement shall not inure to the benefit of the Underwriters if the person asserting any loss, claim, damage or liability purchased the Shares from the Underwriters which are the subject thereof (or to the benefit of any person who controls the Underwriters), if a copy of the Prospectus was not sent or given to such person with, or prior to, the written confirmation of the sale of such Shares to such person. This indemnity agreement is in addition to any liability which the Company may otherwise have. (b) The Underwriters severally, but not jointly, agrees to indemnify and hold harmless the Company, each of the Company's directors, each of the Company's officers who has signed the Registration Statement and each person who controls the Company within the meaning of Section 15 of the 1933 Act against any losses, claims, damages or liabilities to which the Company or any such director, officer, or controlling person may become subject, under the 1933 Act, the 1934 Act, the common law, or otherwise, insofar as such losses, claims, damages, or liabilities (or judicial or governmental actions or proceedings in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, or the omission or alleged omission to state in the Registration Statement or any amendment thereof, a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus if 25 used prior to the Effective Date of the Registration Statement or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or by the Underwriters and filed in any jurisdiction in order to qualify the Shares under, or exempt the Shares or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in each case to the extent, but only the extent, that such untrue statement, alleged untrue statement, omission or alleged omission, was made in reliance upon and in conformity with written information furnished to the Company by, or on behalf of, the Underwriters specifically for use in the preparation of the Registration Statement or any such post effective amendment thereof, any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or by the Underwriters and filed in any jurisdiction; and the Underwriters will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action. This indemnity agreement is in addition to any liability which the Underwriters may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, notify in writing the indemnifying party of the commencement thereof. The omission so to notify the indemnifying party will not relieve it from any liability under this Section 7 as to the particular item for which indemnification is then being sought, unless such omission so to notify prejudices the indemnifying party's ability to defend such action. In case any such action is brought against any indemnified party and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel who shall be reasonably satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of the indemnified party, it is advisable for such parties and controlling persons to be represented by separate counsel, any indemnified party shall have the right to employ separate counsel to represent it and all other parties and their controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company or by the Company against the Underwriters hereunder, in which event the fees and expenses of such separate counsel shall 26 be borne by the indemnifying party and paid as incurred. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the prior written consent of such indemnifying party. 7. Contribution. (a) If the indemnification provided for in Section 7 is unavailable under applicable law to any indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The Company and the Underwriters agree that contribution determined by per capita allocation would not be equitable. The respective relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same proportion (A) in the case of the Company, as the total price paid to the Company for the Shares by the Underwriters (net of underwriting discount received but before deducting expenses) bears to the aggregate public offering price of the Shares, (B) in the case of the Underwriters, as the aggregate underwriting discount received by them bears to the aggregate public offering price of the Shares, in each case as reflected in the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. Notwithstanding the provisions of this Section 8, the Underwriters shall not be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it were offered to the public exceeds the amount of any damages which the Underwriters has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls the Underwriters within the meaning of the 1933 Act or the 1934 Act shall have the same rights to contribution as the Underwriters, each person who controls the Company within the meaning of the 1933 Act or the 1934 Act shall have the same rights to contribution as the Company and each 27 officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company. (b) Promptly after receipt by a party to this Agreement of notice of the commencement of any action, suit or proceeding, such person will, if a claim for contribution in respect thereof is to be made against another party (the "Contributing Party"), notify the Contributing Party of the commencement thereof, but the omission so to notify the Contributing Party will not relieve the Contributing Party from any liability which it may have to any party other than under this Section 8, unless such omission so to notify prejudices the Contributing Party's ability to defend such action. Any notice given pursuant to Section 7 hereof shall be deemed to be like notice hereunder. In case any such action, suit or proceeding is brought against any party, and such person notifies a Contributing Party of the commencement thereof, the Contributing Party will be entitled to participate therein with the notifying party and any other Contributing Party similarly notified. 8. Effective Date of This Agreement and Termination. (a) This Agreement shall become effective when the Underwriters releases the initial public offering of the Firm Shares for sale to the public. The Underwriters shall notify the Company immediately after any action has been taken which causes this Agreement to become effective. Until this Agreement is effective, it may be terminated by the Company or the Underwriters by giving notice as hereinafter provided, except that the provisions of Section 3(g) and Sections 6, 7 and 9 shall at all times be effective. For purposes of this Agreement, the release of the initial public offering of the Firm Shares for sale to the public shall be deemed to have been made when the Underwriters releases, by facsimile or otherwise, firm offers of the Firm Shares to securities dealers or release for publication a newspaper advertisement relating to the Firm Shares, whichever occurs first. (b) Until the First Closing Date, this Agreement may be terminated by the Underwriters, at its option, by giving notice to the Company, if (i) the Company shall have sustained a loss by fire, flood, accident or other calamity which is material with respect to the business of the Company; the Company shall have become a party to material litigation, not disclosed in the Registration Statement or the Prospectus; or the business or financial condition of the Company shall have become the subject of any material litigation, not disclosed in the Registration Statement or the Prospectus; or there shall have been, since the respective dates as of which information is given in the Registration Statement or the Prospectus, any material adverse change in the general affairs, business, key personnel, capitalization, financial position or net worth of the Company, whether or not arising in the ordinary course of business, which loss or change, in the reasonable judgment of the Underwriters, shall render it inadvisable to proceed with the delivery of the Shares, whether or not such loss shall have been insured; (ii) trading in securities generally on the New York Stock Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq SmallCap Market or the over-the-counter market shall have been suspended or minimum prices shall have been established on such exchange by the SEC or by such exchanges or markets; (iii) a general banking moratorium shall have been declared by federal, New York or Minnesota authorities; (iv) 28 there shall have been such a material adverse change in general economic, monetary, political or financial conditions, or the effect of international conditions on the financial markets in the United States shall be such that, in the judgment of the Underwriters, makes it inadvisable to proceed with the delivery of the Shares; (v) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of either of any court or other governmental authority which, in the judgment of the Underwriters, materially and adversely affects or will materially and adversely affect the business or operations of the Company; (vi) there shall be a material outbreak of hostilities or material escalation and deterioration in the political and military situation between the United States and any foreign power, or a formal declaration of war by the United States of America shall have occurred; (vii) the Company shall have failed to comply with any of the provisions of this Agreement on its part to be performed on or prior to such date or if any of the conditions, agreements, representations or warranties of the Company shall not have been fulfilled within the respective times provided for in this Agreement; or (viii) the Company is no longer registered under the 1934 Act. Any such termination shall be without liability of any party to any other party, except as provided in Sections 6 and 7 hereof; provided, however, that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 3(g) hereof. (c) If the Underwriters elects to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 8, it shall notify the Company promptly by telegram or telephone, confirmed by letter sent to the address specified in Section 11 hereof. If the Company shall elect to prevent this Agreement from becoming effective, it shall notify the Underwriters promptly by telegram or telephone, confirmed by letter sent to the address specified in Section 11 hereof. 9. Default of Underwriter. If any Underwriter or Underwriters default in their obligation to purchase the Firm Shares hereunder and the aggregate amount of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total amount of Firm Shares, the other Underwriters shall be obligated, severally, in proportion to their respective commitments hereunder, to purchase the Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or Underwriters so defaults and the aggregate amount of Firm Shares with respect to which such default or defaults occur is more than 10% of the total number of Firm Shares and arrangements satisfactory to the Representative and the Company for purchase of such Firm Shares by other persons (who may include one or more of the nondefaulting Underwriters, including the Representative) are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company except for the provisions of Sections 6 and 7 hereof. In any such case, either the Representative or the Company shall have the right to postpone the Closing Date, but in no event for more than seven days, in order that any required changes, not including a reduction in the number of Firm Shares, to the Registration Statement and the Prospectus of any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. Survival of Indemnities, Contribution Agreements, Warranties and Representations. The respective indemnity and contribution agreements of the Company and 29 the Underwriters contained in Sections 6 and 7, respectively, the representations and warranties of the Company set forth in Sections 1 hereof respectively and the covenants of the Company set forth in Section 3 hereof shall remain operative and in full force and effect, regardless of any investigation made by, or on behalf of, the Underwriters, the Company, any of its officers and directors, or any controlling person referred to in Sections 7 and 8, and shall survive the delivery of and payment for the Shares. The aforesaid indemnity and contribution agreements shall also survive any termination or cancellation of this Agreement. Any successor of any party or of any such controlling person, or any legal representative of such controlling person as the case may be, shall be entitled to the benefit of the respective indemnity and contribution agreements. 11. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to Underwriters or any of the Underwriters, shall be mailed, delivered or telegraphed and confirmed, to R. J. Steichen & Company, One Financial Plaza, 120 South Sixth Street, Minneapolis, Minnesota 55402 Attention: John E. Feltl, President, with a copy to Philip T. Colton, Esq., Maun & Simon, PLC, 2000 Midwest Plaza Building West, 801 Nicollet Mall, Minneapolis, Minnesota 55402; or, if sent to the Company, shall be mailed, delivered or telegraphed and confirmed, to Wellington Properties Trust, 11000 Prairie Lakes Drive, Suite 610, Minneapolis, Minnesota 55344 (612) 826-6968. Attention: Duane Lund CEO. 12. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside front cover and the statements under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitute the only written information furnished by, or on behalf of, the Underwriters specifically for use with reference to the Underwriters referred to in Section 1(b) and Section 6 hereof. 13. Parties. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Company, their respective successors and assigns, and the officers, directors and controlling persons referred to in Sections 7 and 8. Nothing expressed in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto, their respective successors and assigns, and the controlling persons, officers and directors referred to in Sections 7 and 8 any legal or equitable right, remedy, or claim under, or in respect of, this Agreement or any provision herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors, assigns and such controlling persons, officers and directors, and for the benefit of no other person or corporation. No purchaser of any Shares from the Underwriters shall be construed a successor or assign merely by reason of such purchase. 14. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. 15. Counterparts. This Agreement may be execute in any number of counterparts, each of which when so executed shall constitute an original copy hereof, but all of which together shall constitute one Agreement. 30 If the foregoing is in accordance with the Underwriters' understanding of this agreement, kindly sign and return to the Company the enclosed counterpart of this Agreement, whereupon it will become a binding agreement between the Company and the Underwriters in accordance with its terms. Very truly yours, WELLINGTON PROPERTIES TRUST By:________________________________________ Its:_____________________________________ Confirmed as of the date hereof at Minneapolis, Minnesota R.J. STEICHEN & COMPANY By:________________________________ ________________________________ Its:_______________________________ 31 APPENDIX A FORM OF COMFORT LETTER OF GRANT THORNTON (1) They are independent public accountants with respect to the Company within the meaning of the Securities Act of 1933, as amended (the "1933 Act"). (2) In their opinion, the financial statements of the Company included in the Registration Statement which are stated therein to have been examined by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the related published rules and regulations. (3) On the basis of specified procedures (but not an audit in accordance with generally accepted auditing standards), including inquiries of certain officers of the Company responsible for financial and accounting matters as to transactions and events subsequent to the date of the financial statements included in the Prospectus, a reading of minutes of meetings of the stockholders and directors of the Company since the date of the financial statements included in the Prospectus and other procedures as specified in such letter, nothing came to their attention which caused them to believe that (a) at a specified date not more than five (5) days prior to the date thereof in the case of the first letter and not more than two (2) business days prior to the date thereof in the case of the second and third letters, there was any change in the capital stock, long-term debt, or short-term debt (other than normal payments) of the Company, or any material decrease in net current assets or stockholders' equity, as compared with amounts shown on the latest balance sheet of the Company included in the Registration Statement; or (b) for the period from the date of such balance sheet to a date not more than five (5) days prior to the date thereof in the case of the first letter and not more than two (2) business days prior to the date thereof in the case of the second letter, there were any material decreases in working capital, long-term debt or total stockholders' equity, except for changes or decreases which the Prospectus discloses, have occurred or may occur, or which are set forth in such letter. (4) They have carried out specified procedures, which have been agreed to by the Underwriters, with respect to certain information in the Prospectus specified by the Underwriters, and on the basis of such procedures, they have found such information to be in agreement with the accounting records of the Company or with material derived from such records. SCHEDULE I Name of Underwriter Number of Firm Shares - ------------------- --------------------- 1. R.J. Steichen & Company 2. [Name] 3. [Name] 4. [Name] 5. [Name] 6. [Name] 7. [Name] 8. [Name] 9. [Name] 10. [Name] 11. [Name] 12. [Name] 13. [Name] 14. [Name] 15. [Name] ___________________ TOTAL EX-4.2 3 CLASS A PREFERRED STOCK PURCHASE WARRANT Warrant No. I. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS COVERING SUCH SECURITIES, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH LAWS. _______, 1999 WARRANT ------- TO PURCHASE SHARES OF SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK OF WELLINGTON PROPERTIES TRUST THIS CERTIFIES THAT, for good and valuable consideration, R. J. Steichen & Company (the "Underwriter"), or its registered assigns, is entitled to subscribe for and purchase from Wellington Properties Trust, a Maryland business trust (the "Company"), at any time after __________, 2000 to and including ________________, 2004, _______________________________________________________ (______________) fully paid and nonassessable Shares of the Company's Series A Cumulative Convertible Preferred Stock at the price of $10.00 per Share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. Reference is made to this Warrant in the Underwriting Agreement dated , 1999, as amended, by and between the Company and the Underwriter. The Shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." The term "Share" shall mean one share of the Company's Series A Cumulative Convertible Preferred Stock. As used herein, the term "Holder" means the Underwriter, any party who acquires all or a part of this Warrant as a registered transferee of the Underwriter, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant. As used herein, the term "Common Stock" means and includes the Company's presently authorized common stock, $.01 par value, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the Holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise: Transferability. ------------------------- A. The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional Share), by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company prior to the expiration of this Warrant and accompanied or preceded by the surrender of this Warrant along with a check in payment of the Warrant Exercise Price for such Shares. B. Except where (i) directed by a court of competent jurisdiction pursuant to the dissolution, (ii) liquidation of a corporate holder hereof, (iii) by will, pursuant to the laws of descent and distribution, or (iv) by the operation of law, and in each case subject to Section 7, for one (1) year from the date hereof, title to this Warrant may be transferred only to a person who is an officer and employee of the Underwriter, who are also shareholders of the Underwriter, or to a successor (or an officer or employee of the successor who are also shareholders) in interest to the business of the Underwriter, by endorsement (by the holder hereof executing the form of assignment attached hereto) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. 2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the Underwriter shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses, taxes (other than stock transfer taxes), and other charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Section 2. 3. Issuance of the Warrant Shares. ------------------------------ A. The Company agrees that the Shares purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such Warrant Shares as aforesaid. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the right to 2 purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. B. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Such Holder shall also provide the Company with written representations from the Holder and the proposed transferee satisfactory to the Company regarding the transfer or, at the election of the Company, an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed transfer of this Warrant or disposition of Shares may be effected without registration or qualification (under any Federal or State law) of this Warrant or the Warrant Shares. Upon receipt of such written notice and either such representations or opinion by the Company, such Holder shall be entitled to transfer this Warrant, or to exercise this Warrant in accordance with its terms and dispose of the Warrant Shares, all in accordance with the terms of the notice delivered by such Holder to the Company, provided that an appropriate legend, if any, respecting the aforesaid restrictions on transfer and disposition may be endorsed on this Warrant or the certificates for the Warrant Shares. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws, except as provided in Section 9. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. C. The Shares issuable upon exercise or conversion of this Warrant shall have the terms and conditions of the Company's Series A Cumulative Convertible Preferred Stock, whether or not such Shares have been redeemed or converted prior to exercise or conversion of the Warrant. 4. Covenants of the Company. The Company covenants and agrees that all Warrant Shares and shares issuable upon exercise of the Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof except for all taxes, liens and changes imposed by the Holder. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of Shares and shares of Common Stock to provide for the exercise of the rights represented by this Warrant included therein. 5. Antidilution Adjustments. If the Company shall at any time hereafter subdivide or combine its outstanding Shares or shares of Common Stock, or declare a dividend payable in 3 Shares or shares of Common Stock, or declare a dividend payable in Shares or shares of Common Stock, the exercise price in effect immediately prior to the subdivision, combination or record date for such dividend payable in Shares or shares of Common Stock shall forthwith be proportionately increased, in the case of combination, or proportionately decreased, in the case of subdivision or declaration of a dividend payable in Shares or shares of Common Stock, and the number of Shares purchasable upon exercise of this Warrant, immediately preceding such event, shall be changed to the number determined by dividing the then current exercise dividend payable in Shares or shares of Common Stock and against the number of Shares purchasable upon the exercise of this Warrant immediately preceding such event, so as to achieve an exercise price and number of Shares purchasable after such event proportional to such exercise price and number of Shares purchasable immediately preceding such event. No adjustment in exercise price shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; PROVIDED, HOWEVER, that any adjustments which are not required to be so made shall be carried forward and taken into account in any subsequent adjustment. All calculations hereunder shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. No fractional Shares are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a Share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of Share's on the day of exercise as determined in good faith by the Company. In case of any capital reorganization or any reclassification of the Shares or shares of Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation, or the sale of all or substantially all of its assets to another corporation, which is effected in such a manner that the holders of Shares or shares of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Shares or shares of Common Stock, then, as a part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately prior to such reorganization, reclassification, consolidation, merger or sale, the holder had held the number of Shares which were then purchasable upon the exercise of the Warrant. In any such case, appropriate adjustment (as determined in good faith by the Board of Trustees of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. When any adjustment is required to be made in the exercise price, initial or adjusted, the Company shall forthwith determine the new exercise price, and A. Prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new exercise price; and 4 B. Cause a copy of such statement to be mailed to the holder of the Warrant as of a date within ten (10) days after the date when the circumstances giving rise to the adjustment occurred. 6. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 7. Notice of Transfer of Warrant or Resale of the Warrant Shares. ------------------------------------------------------------- A. Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel and to counsel to the original purchaser of this Warrant. If in the opinion of each such counsel the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel to the Company and satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "1933 Act") and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. B. If in the opinion of either of the counsel referred to in this Section 7, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 7 may not be effected without registration or qualification of this Warrant or such Warrant Shares the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the opinion of both such counsel, are permitted by law. 8. Fractional Shares. Fractional Shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional Share, the Company shall, upon the exercise of this Warrant for the largest number of whole Shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Fair Market Value (as defined in Section 10(d)) of such fractional Share over the proportional part of the Warrant Exercise Price represented by such fractional Share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional Share. 5 9. Registration Rights. ------------------- A. If at any time prior to the expiration of seven (7) years from the date hereof, the Company proposes to file any Registration Statement under the 1933 Act covering a public offering of any of the Company's securities (except by a Form S-4 or Form S-8 Registration Statement or any successor forms thereto), it will give written notice to all Holders of this Warrant, any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and any securities issuable upon exercise of this Warrant or securities issuable upon conversion thereof of its intention to do so and, on the written request of any such Holder given within twenty (20) days after receipt of any such notice (which request shall specify the interest in this Warrant or the securities issuable upon exercise of this Warrant or conversion of the Warrant Shares intended to be sold or disposed of by such Holder and describe the nature of any proposed sale or other disposition thereof), the Company will use its best efforts to cause all such securities, the Holders of which shall have requested the registration or qualification thereof, to be included in such registration statement proposed to be filed by the Company; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any registration. If any registration pursuant to this Section 9(a) is underwritten in whole or in part, the Company may require that the securities requested for inclusion pursuant to this Section 9(a) be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If a greater number of securities is offered for participation in the proposed offering than in the reasonable opinion of the managing underwriter of the proposed offering can be accommodated without adversely affecting the proposed offering, then the amount of securities proposed to be offered by such Holders for registration, as well as the number of securities of any other selling shareholders participating in the registration, shall be proportionately reduced to a number deemed satisfactory by the managing underwriter. B. Further, at any time prior to the expiration of this Warrant, and provided that a registration statement on Form S-3 (or any successor form thereto) is then available to the Company, and on a one-time basis only, upon request by the Holder or Holders of a majority in interest of any securities originally issuable under this or any warrant issued to the Underwriter or any affiliate in connection with the sale of shares pursuant to the Underwriter Agreement (whether or not then issued) the Company will promptly take all necessary steps to register or qualify, under the 1933 Act and the securities laws of such states as the Holders may reasonably request, such number of securities issued and to be issued upon conversion of the Shares requested by such Holders in their request to the Company. In addition, upon the receipt of such request, the Company shall promptly give written notice to all other record Holders of the securities not theretofore registered under the Securities Act and sold that such registration is to be effected. The Company shall include in such registration statement such securities for which it has received written requests to register by such other record Holders within 30 days after the delivery of the Company's written notice to such other record Holders. The Company shall be obligated to prepare, file and cause to become effective only one registration statement pursuant to this Section 9(b) and to pay the costs and expenses associated with such registration statement to the extent provided in Section 9(c). The Company shall keep effective and maintain any registration, qualification, notification, or approval specified 6 in this Paragraph (b) for a period of one hundred twenty (120) days or the date on which all securities are sold, whichever is earlier. C. With respect to each inclusion of securities in a registration statement pursuant to this Section 9, the Company shall bear the following fees, costs, and expenses: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company is required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance for the benefit of the Company and/or its directors and officers against liability arising out of the public offering, and legal fees and disbursements and other expenses of complying with state securities laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Fees and disbursements of special counsel and accountants for the selling Holders, underwriting discounts and commissions, and transfer taxes for selling Holders shall be borne by the selling Holders. D. The Company hereby indemnifies each of the Holders of this Warrant and of any securities issued upon exercise thereof or the Shares, and the officers and directors, if any, who control such Holders, within the meaning of Section 15 of the 1933 Act, against all losses, claims, damages, and liabilities caused by (1) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (and as amended or supplemented if the Company shall have furnished any amendments thereof or supplements thereto), any Preliminary Prospectus or any state securities law filings; (2) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as such losses, claims, damages, or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by such Holder expressly for use therein; and each such Holder by its acceptance hereof severally agrees that it will indemnify and hold harmless the Company, each of its officers who signs such Registration Statement, and each person, if any, who controls the Company, within the meaning of Section 15 of the 1933 Act, with respect to losses, claims, damages, or liabilities which are caused by any untrue statement or alleged untrue statement, omission or alleged omission contained in information furnished in writing to the Company by such Holder expressly for use therein. 10. Additional Right to Convert Warrant. ----------------------------------- A. The Holder of this Warrant shall have the right to require the Company to convert this Warrant (the "Conversion Right") at any time after it is exercisable, but prior to its expiration, into Shares as provided for in this Section 10. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any exercise price) that number of Shares equal to the quotient obtained by dividing (x) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate exercise price for the Warrant in effect immediately prior to the exercise of the Conversion Right from the aggregate Fair Market Value (as determined below) for the Warrant immediately prior to the exercise of the Conversion Right) by (y) the Fair Market Value of one share of Company Class A 7 Cumulative Convertible Preferred Stock immediately prior to the exercise of the Conversion Right. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of Shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder of this Warrant an amount in cash equal to the fair market value of the resulting fractional share. B. The Conversion Right may be exercised by the Holder, at any time or from time to time after this Warrant is exercisable, prior to its expiration, on any business day by delivering a written notice in the form attached hereto (the "Conversion Notice") to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of shares of Class A Cumulative Convertible Preferred Stock the Holder will purchase pursuant to such conversion and (ii) a place and date not less than one or more than 20 business days from the date of the Conversion Notice for the closing of such purchase. C. At any closing under Section 10(b) hereof, (i) the Holder will surrender the Warrant and (ii) the Company will deliver to the Holder a certificate or certificates for the number of shares of Company Class A Cumulative Convertible Preferred Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the Holder a new Warrant representing the number of Shares, if any, with respect to which the Warrant shall not have been converted. D. Fair Market Value of a share of Class A Cumulative Convertible Preferred Stock as of a particular date (the "Determination Date") shall mean: (i) If the Company's Class A Cumulative Convertible Preferred Stock are traded on an exchange or is quoted on the Nasdaq National Market System, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date, (ii) If the Company's Class A Cumulative Convertible Preferred Stock is not traded on an exchange or on the Nasdaq National Market System but is traded on the Nasdaq SmallCap Market or other over-the-counter market, then the average closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date, and (iii) If the Company's Class A Cumulative Convertible Preferred Stock is not traded on an exchange or on the Nasdaq National Market, Nasdaq SmallCap Market or other over-the-counter market, then the price established in good faith by the Company's Board of Trustees. 11. Miscellaneous. Whenever reference is made herein to the issue or sale of shares of Common Stock, the term "Common Stock" shall include any stock of any class of the Company other than preferred stock with a fixed limit on dividends and a fixed amount payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company. 8 The Company will not, by amendment of its Declaration of Trust or Bylaws or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company, but will, at all times in good faith, assist, insofar as it is able, in the carrying out of all provisions hereof and in the taking of all other action which may be necessary in order to protect the rights of the Holder hereof against dilution. The Company agrees to provide Underwriter with detailed quarterly and annual financial statements as soon as available, in a form reasonably satisfactory to Underwriter, as well as any other documents as Underwriter or its counsel may reasonably request in a form satisfactory to Underwriter, so long as this Warrant or any Warrant Shares are outstanding and unregistered. Upon written request of the Holder of this Warrant, the Company will promptly provide such Holder with a then current written list of the names and addresses of all Holders of warrants originally issued under the terms of, and concurrent with, this Warrant. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. References to the "holder of" include the immediate holder of shares purchased on the exercise of this Warrant, and the word "holder" shall include the plural thereof. This Common Stock Purchase Warrant shall be interpreted under the laws of the State of Minnesota. All shares of Common Stock or other securities issued upon the exercise of the Warrant shall be validly issued, fully paid and non-assessable, and the Company will pay all taxes due and payable by the issuer in respect of the issuance thereof. Notwithstanding anything contained herein to the contrary, the holder of this Warrant shall not be deemed a Shareholder of the Company for any purpose whatsoever until and unless this Warrant is duly exercised. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 9 IN WITNESS WHEREOF, Wellington Properties Trust has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated ________________, 1999. "Company" WELLINGTON PROPERTIES TRUST By________________________________________ Its_______________________________________ 10 TO: WELLINGTON PROPERTIES TRUST NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in Order to Exercise the Warrant The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, __________________ of the Shares issuable upon the exercise of such Warrant, and requests that certificates for such Shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of ------------------------------------------ (Print Name) Please insert social security or other identifying number of registered Holder of certificate (_____________) Address: ------------------------------------------ ------------------------------------------ Date: ____________ __________________________________________ Signature* *The signature on the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. 11 ASSIGNMENT FORM To be signed only upon authorized transfer of Warrants. FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto _______________________________ the right to purchase the securities of Wellington Properties Trust to which the within Warrant relates and appoints ______________________, attorney, to transfer said right on the books of Wellington Properties Trust with full power of substitution in the premises. Dated:___________ _____________________________________ (Signature) Address: ------------------------------------- ------------------------------------- 12 CASHLESS EXERCISE FORM (To be executed upon exercise of Warrant pursuant to Section 10) TO: WELLINGTON PROPERTIES TRUST The undersigned hereby irrevocably elects a cashless exercise of the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, _______________ shares of Series A Cumulative Convertible Preferred Stock, as provided for in Section 10 therein. Please issue a certificate or certificates for such Series A Cumulative Convertible Preferred Stock or shares of Common Stock in the name of, and pay any cash for any fractional share to: Name______________________________ (Please print name) Address___________________________________ Social Security No._______________ Signature_________________________________ NOTE: The above signature should correspond exactly with the name on the first page of this Warrant Certificate or with the name of the assignee appearing in the assignment form below. And if said number of shares is not all of the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder rounded up to the next higher number of shares. 13 EX-5 4 DRAFT OPINION LETTER Exhibit 5 F O L E Y & L A R D N E R CHICAGO FIRSTAR CENTER SACRAMENTO DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE MADISON FACSIMILE (414) 297-4900 TAMPA MILWAUKEE WASHINGTON, D.C. ORLANDO WEST PALM BEACH August 8, 1999 Wellington Properties Trust 18650 West Corporate Drive Brookfield, Wisconsin 53008-0916 Ladies and Gentlemen: We have acted as counsel for Wellington Properties Trust, a Maryland real estate investment trust (the "Company"), with respect to the preparation of a Registration Statement of Form SB-2 (the "Registration Statement"), including the prospectus constituting a part thereof (the "Prospectus"), filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to 1,200,000 shares of the Company's Class A Cumulative Convertible Preferred Shares, $0.01 par value per share (the "Class A Preferred Shares"), together with up to 180,000 Class A Preferred Shares being registered to cover an over-allotment option granted to the underwriters and a sufficient number of shares of the Company's common stock, $0.01 par value per share, into which the Class A Preferred Shares are convertible (the "Common Shares"). In connection with our representation, we have examined: (a) the Registration Statement, including the Prospectus; (b) the Declaration of Trust and Bylaws of the Company, as amended to date; (c) resolutions of the Company's Board of Trustees relating to the authorization of the issuance of the securities covered by the Registration Statement; and (d) such other proceedings, documents and records as we have deemed necessary to enable us to render this opinion. Based on the foregoing, we are of the opinion that: 1. The Company is a real estate investment trust validly existing under the laws of the State of Maryland. 2. The Class A Preferred Shares covered by the Registration Statement, when issued and paid for in the manner contemplated in the Registration Statement and Prospectus, Foley & Lardner Wellington Properties Trust August 8, 1999 Page 2 and the Common Shares into which the Class A Preferred Shares are convertible when issued pursuant to such conversion, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and to the references to our firm therein. In giving our consent, we do not admit that we are "experts" within the meaning of Section 11 of the Securities Act or within the category of persons whose consent is required by Section 7 of the Securities Act. Very truly yours, [DRAFT] FOLEY & LARDNER EX-10.16 5 PURCHASE AGREEMENT PURCHASE AGREEMENT THIS AGREEMENT is entered into this 2nd day of July, 1999, by and between Maple Grove Apartment Home, Inc., a Wisconsin corporation (hereafter referred to as the "Seller"), and The Shelard Group, Inc., a Minnesota corporation, or its designee, (the "Buyer"), upon the basis of the following facts, understandings and intentions of Seller and Buyer. RECITALS: 1. Seller is the fee owner of a parcel of property ("Land") currently improved with fifteen (15) residential apartment buildings containing in the aggregate three hundred four (304) residential apartment units (hereafter in the aggregate the "Buildings") together with miscellaneous improvements to the Land ("Miscellaneous Improvements") commonly known as the "Maple Grove Apartments" located at 3019 Maple Valley Drive, City of Madison, County of Dane, Wisconsin and legally described in Exhibit A hereto attached; 2. Buyer desires to purchase the Land, the Buildings, the Miscellaneous Improvements, and all licenses, trade names (including the name "Maple Grove Apartments" and variations thereof), permits, equipment, fixtures and furnishings and all other personal property, tangible or intangible, owned by Seller and physically located on the Land and used in the operation and maintenance of the foregoing and any computer programs which are transferable and all data bases on any type of computer or computer related storage used in the operation of the foregoing (hereafter said licenses, trade names, permits, equipment, fixtures, furnishings and other personal property and computer programs, data bases and computer related storage items shall be referred to in the aggregated as "Personal Property," and hereafter the Land, the Buildings, the Miscellaneous Improvements, and Personal Property is sometimes referred to in the aggregate as the "Property") in accordance with the terms and conditions hereinafter set forth; and 3. Seller is willing to grant and extend to Buyer such purchase right. NOW, THEREFORE, in consideration of the agreements hereinafter provided and other good and valuable consideration, Seller agrees to sell and Buyer agrees to purchase from Seller the Property, together with and including all hereditaments, appurtenances, easements and right of ways thereunto belonging or in any way appertaining and also the right, title and interest (if any) of Seller in and to the bounding and abutting streets, alleys and highways, subject to and upon the following terms and conditions: SECTION I. PURCHASE PRICE It is hereby agreed that the Purchase Price of the Property shall be Sixteen Million Seven Hundred Thousand and no/100 Dollars ($16,700,000.00) (the "Purchase Price"), which shall be paid by Buyer to Seller as follows: (a) $100,000.00 earnest money to be paid into escrow as provided for in Section II below;; (b) Approximately $12,680,000.00 by Buyer agreeing to assume and pay according to its terms that certain existing first mortgage on the Property ("Mortgage") and (c) By Buyer paying at closing in cash the difference between the unpaid portion of the Purchase Price and the remaining unpaid principal amount of the Mortgage as of the date of closing being approximately $16,600,000.00 less $12,680,000.00 or $3,920,000.00 subject to adjustments and prorations at closing as described herein. SECTION II. EARNEST MONEY DEPOSIT Currently with the execution of this Agreement, Buyer shall deposit in escrow with First American Title Insurance Company (the "Escrow Agent") and (sometimes hereafter "Title") the sum of $100,000.00 and any additional earnest money sums paid herein by Buyer (collectively referred to as "Deposit") which shall be retained by the Escrow Agent for the benefit of Seller and Buyer in accordance with the provisions of this Agreement. The parties hereby agree to execute such documentation, if any, reasonably required by the Escrow Agent in connection with the disbursement of the Deposit and establishment of said Deposit account referenced above. SECTION III. INVESTMENT AND DISBURSEMENT OF DEPOSIT The Escrow Agent is hereby directed to invest the Deposit in a segregated interest-bearing money market bank deposit with an established local bank. The Deposit shall be disbursed by the Escrow Agent as follows: (a) Except as provided for in (b) below, in the event Buyer fails to terminate this Purchase Agreement pursuant to Section IV hereof within 14 days after Buyer has received a fully executed copy of this Purchase Agreement executed by Seller as well as Buyer, ("Early Termination Date"), the Deposit shall be delivered to Seller upon the termination of this Agreement. -2- (b) The Deposit shall be delivered to Buyer in the event Buyer terminates this Agreement pursuant to Section IV (d), (e), (f), (g) or (h) or Sections VI, XVI and XVII or if Buyer terminates this Agreement prior to the Early Termination Date pursuant to any other subsections of Section IV. (c) In the event Buyer proceeds to closing, the Deposit shall be delivered to Seller at closing as part payment of the Purchase Price. (d) Upon the disbursement of the Deposit, any interest earned thereon shall be paid to Buyer. SECTION IV. CONDITIONS PRECEDENT Seller agrees that this Agreement shall be conditioned upon Buyer satisfying himself, in his sole and absolute judgment, that the following contingencies with respect to the Property are met: (a) Buyer's inspection and approval of the Land, the completed Buildings, the completed Miscellaneous Improvements, Personal Property, Leases (as hereafter defined), the Other Agreements (as hereafter defined) and all other information required herein to be provided to Buyer by Seller, all during regular weekday business hours. Seller agrees to allow buyer and its agents the right of any ingress or egress over and through the Property for the purpose of inspecting and testing the same and making other observations as Buyer deems reasonably necessary. Buyer agrees to indemnify and hold Seller harmless from all injury, death or property damage or claims of any kind whatsoever arising out of or in any way incidental to Buyer's presence on the Property for the purposes aforesaid. The parties acknowledge that Buyer has not had an opportunity to examine the items relating to the Property prior to execution of this Agreement. Seller hereby agrees to provide Buyer with the following items within five (5) days from the execution of this Agreement and to supplement the same on a monthly basis between the date of execution of this Agreement and the closing: (i) Complete Plans and Specifications, blueprints, operating manuals, and licenses used to construct and to operate the Buildings and the remainder of the Property; (ii) Complete copies of all leases and rental agreement and amendments thereto relating to the operation of the Building ("Leases"); (iii) Complete copies of all contracts or other agreements of any kind or nature currently affecting the Property ("Other Agreements") including management agreements with resident or non-resident managers, if any, service contracts, title policies or opinions by Seller's attorneys as to the title, copies of all insurance polices insuring the Property and any parking or cross-parking agreements; -3- (iv) A copy of the rent roll as of the last day of the month preceding the date hereof showing all delinquencies, including a current summary of any and all other tenant defaults under the Leases and further containing the following information: (i) the space occupied; (ii) the name of the tenant; (iii) the term of the Lease; (iv) the monthly rental, escalations or pass-throughs; (v) whether rental includes utilities or other services; (vi) the security or other deposit collected and/or applied; (vii) the amount of prepaid rent, if any; and (viii) any provisions concerning concessions, extensions, offsets, expansion rights, termination rights, allowances, options or any other extraordinary provision; (v) Copies of all certificates and policies of insurance held by Seller with respect to the Property; (vi) Copies of all permits or authorizations required to be issued by any governmental body having jurisdiction in connection with any state of facts or activity presently existing or being carried on with respect to the Property; (vii) Copies of all warranties and guaranties which pertain to the Property or any portion thereof ("Warranties"); (viii) A complete statement of operating income and expenses for the Property for the last three (3) years. Said financial statements shall include those statements used in preparation of the tax returns filed with the Internal Revenue Service; (ix) Inventory of the Personal Property owned by the Seller and located on the Land and used in connection with the operation of the Property including, but not limited to, appliances located in the apartments, licenses, permits and equipment; (x) A complete vendor and supplier list containing the names, addresses and telephone numbers of all vendors and suppliers and a list of products or services which they each furnish; (xi) Copies of real estate tax statements for the Property for taxes due and payable in 1999 ("1999 Real Estate Tax Statements") along with copies of statements of assessed value for taxes due and payable in the years 1998 and 1997; (xii) Copies of the Mortgage and the underlying debt instruments and related collateral documents. (b) Buyer may use the Property for residential apartment purposes ("Current Uses") without being in violation of any zoning classification, land use classification, environmental requirement, or any other use classification or building classification or requirement established by any entity or authority having legal jurisdiction or authority thereof. (c) All utilities, including but not limited to electricity, gas, water (fire and domestic) storm and sanitary sewer, are available on site, through valid and adequate -4- public or private easements for Current Uses; provided that in the case of private easements, they are appurtenant to the Property, or on the Property's side of abutting streets of size and capacity sufficient to serve the Current Uses. (d) That none of the encumbrances set forth on Exhibit B attached (the "Permitted Encumbrances") interfere with the Current Uses. (e) Buyer obtaining, as provided in Section V(A) hereof, a hazardous waste report for the Property from Buyer's approved environmental consultant and certified in favor of buyer showing the absence of hazardous substance, pollutants and trash thereon, and also showing the absence of asbestos or other materials that may create a health risk together with a certificate from Seller's architect certified in favor of Buyer certifying that the Plans and Specifications for the Building and the Miscellaneous Improvements did not require in the construction thereof, the use of asbestos or other products that are presently considered a health risk. (f) Written approval of the assumption of the Mortgage by Buyer and the sale of the Property to Buyer by the holder of the Mortgage, which approval shall be obtained by Seller. All costs and expenses including, but not limited to, the payment to such holder of any "assumption fee" or similar fees that may be charged by such holder shall be paid at the closing fifty percent (50%) by the Seller and fifty percent (50%) by the Buyer. (g) Buyer concluding that the Property is not in violation of the Fair Housing Act (42 U.S.C.ss.3601, etc.). (h) All of Seller's warranties contained herein are true and correct now and as of the date of closing. The conditions precedent enumerated above shall be deemed not found to exist to the satisfaction of Buyer, and this Agreement shall be deemed terminated unless Buyer gives written notice hereunder to Seller that Buyer affirmatively satisfies or waives in writing the conditions precedent prior to the Early Termination Date with respect to subparagraphs (a), (b) and (c) above and prior to closing, as hereafter defined, with respect to subparagraphs (d), (e), (f), (g) and (h). Upon termination of this Agreement as a result of Buyer's not waiving these conditions precedent, all parties hereto shall be released from all duties and obligations to each other contained herein. SECTION V. ENVIRONMENTAL AUDITS AND SURVEY A. Environmental Audits. Buyer shall obtain, at Buyer's sole cost and expense, a "Phase One and/or Phase Two" environmental audit(s) done currently certified to Buyer. Notwithstanding the foregoing, Buyer shall have the right to do additional environmental audits and/or soil tests regardless of the cost as long as Buyer pays for all of -5- such costs. Buyer agrees to indemnify and hold Seller harmless from all mechanic's liens liability and other costs and expenses arising from Buyer's doing such additional environmental audits and/or soil tests. B. Survey. Buyer shall as promptly as possible after the date hereof obtain a current "as built" survey of the Property currently certified to Buyer and Title as legally described in Exhibit A meeting such as the requirements of an ALTA/ACSM Land Title Survey as Buyer deems appropriate. C. Copies of Seller's Documents. Seller shall promptly deliver to Buyer copies of all soil tests, environmental audits, surveys and other documents relating to the physical properties of the Property which are within Seller's control. SECTION VI. TITLE EVIDENCE A. Buyer shall as soon as possible, at Buyer's expense, obtain a commitment(s) (the "Commitment") for an Owner's Policy of Title Insurance for the Property issued by Title. Buyer shall pay at closing the cost of the actual title insurance policy, if any, to be purchased by Buyer in the amount of the Purchase Price. The Commitment shall bear a date subsequent to the date hereof, shall include legible copies of all documents, maps, or plats set forth therein as affecting the Property and shall be issued through the Title in its capacity as a title insurance company by its local office or by its local agent situated in a County where the Property is located. The Commitment shall identify the Property and easements appurtenant thereto by the legal description(s) set forth on the Survey. The Commitment shall, at Buyer's option, contain endorsements guaranteeing: (i) all parcels shown in Exhibit A which comprise the Property to be contiguous; (ii) the zoning classification of the Property; (iii) that the Property abuts the public street(s) immediately adjacent thereto and has direct and valid access thereto; and (iv) such other endorsements as Buyer shall reasonably request. B. Within twenty (20) business days after receipt of both the Commitment in the form specified above and the Survey to be obtained by Buyer pursuant to Section V hereof, Buyer shall deliver to Seller a written statement containing any objection Buyer has to title. If such statement is not delivered within the twenty (20) business day period, title shall be deemed approved by Buyer. If such statement is so delivered, Seller shall use its best efforts and all due diligence to cure or remove all such objections prior to closing. If any objection is not cured or removed within one hundred twenty (120) days of the receipt by Seller of the aforesaid written statement containing objection of Buyer to title, Buyer, at its option, may either: (i) accept title as it is, subject to the right to deduct from the Purchase Price liens or encumbrances securing a definite or ascertainable amount; (ii) cure such objections itself at Seller's expense and proceed to closing, in which case Seller agrees to escrow with the Title Company such reasonably estimated expenses and attorneys' fees needed to cure such objections and be responsible for any deficiencies in the escrowed amount; or (iii) terminate this Agreement. Upon any such termination all parties shall be released from all duties or -6- obligations contained herein and the Deposit returned to Buyer as provided for in Section II hereof. SECTION VII. 1031 EXCHANGE At either party's request, the other party agrees to cooperate with the requesting party in a deferred or simultaneous ss. 1031 like kind exchange of the Property as long as the other party is not required to take title to any other property or to incur any further cost, expense, liability or delay. SECTION VIII. INTENTIONALLY LEFT BLANK SECTION IX. WARRANTIES Seller warrants and represents to Buyer that the following statements are now, and will at the closing, be true and accurate: (a) Seller will have marketable and insurable record title to the Property as of closing subject only to the Permitted Encumbrances listed on Exhibit B attached hereto and made a part hereof. (b) The information supplied to Buyer pursuant to Section IV(a) hereof is complete and materially correct and has been duly supplemented including, but not limited to, any new Other Agreements; (c) At closing Seller shall: (i) convey to Buyer by Warranty Deed the Property; (ii) convey by Warranty Bill of Sale the Personal Property to Buyer free of all leases, conveyances or other transfers or encumbrances on the Property or any portion thereof except for Permitted Encumbrances and other matters approved by Buyer pursuant to Sections IV, VI or VII or as otherwise provided herein; (iii) shall assign all of Seller's interest in the Leases and, to the extent requested by Buyer and to the extent they are assignable, all of Seller's interest in the "Other Agreements," (iv) shall execute an Indemnification Agreement ("Indemnification Agreement") with Buyer in the form of Exhibit C hereto attached; and (v) shall assign to Buyer all of Seller's interest, if an, in the name "Maple Grove Apartments" or variations thereof; (d) Seller has not received any notice nor are they aware of any pending action to take by eminent domain or by deed in lieu thereof all or any portion of the Property; -7- (e) Seller shall be solely responsible for and shall pay on the date of closing any deferred tax or assessment, catch-up or adjustment in future taxes due as a result of the Property having been classified under any designation authorized by law to obtain a special low ad valorem tax rate or receive either an abatement or deferment of ad valorem taxes; (f) Seller is not a "foreign persons" as contemplated by Section 1445 of the Internal Revenue Code, and that at the closing Seller will deliver to Buyer a certificate so stating, in a form complying with the Federal tax law; (g) Seller has the full right, power and authority to enter into this Agreement and to carry out the terms and provisions hereof including, but not limited to, compliance with all appropriate procedures to authorize the execution and delivery or this Agreement; (h) The Property has not been used for storage or disposal of, nor does it contain, any hazardous substance or high concentrations or pollutants or contaminants, including but not limited to, those defined in any federal or state environmental law nor has the Property been used for the dumping or trash or other waste products; and Seller has no knowledge or belief that any other person has so used the Property. Any asbestos or other health endangering elements or chemicals are either absent from the Property or are properly encapsulated and do not present any health risk; (i) No unrecorded condition, restriction, obligation or agreement shall exist which shall materially and adverse affect the Property or Buyer's ability to use the Property for the Current Uses; (j) No portion of the Property is located within an area designated as a "floodplain" or "flood prone area" under any statute, regulation, or ordinance. The Property is free from any use or occupancy restrictions, except those imposed by zoning laws and regulations, and no part is dedicated or has been used as a cemetery or burial ground; (k) To the best of Seller's knowledge, no fact or condition exists which would result in the termination of the current access to the Property from any presently existing streets and roads adjoining or situated on the Property or to any existing sewer or other utility Facilities servicing, adjoining or situated on the Property. All utilities needed for Current Uses are available to the Property. (l) There is no default under the Mortgage, Seller has paid in full for all labor and materials which have been furnished to the Property and there is no litigation at law or in equity, and no proceedings of any administrative or regulatory authority pending or threatened against the Seller or affecting the Property; (m) All required foreign, federal and state tax returns, reports and estimates have been correctly prepared and filed by Seller for all of the years and periods for which any returns, reports or estimates were due, and all taxes, interests and penalties payable have been paid by Seller so there is and shall be no claim or lien or charge for taxes asserted -8- against the Property. All contributions required to be paid by Seller to any unemployment, workers compensation or other governmentally administrated programs have been paid as and when due and there are no deficiencies in Seller's said account with respect to the Property. Seller will terminate all of its employees and Seller will pay, prior to or on the date of closing, to all of their employees all wages, fringe benefits, all accrued sick and vacation pay through the date of closing. (n) Seller warrants that there are no material defects or structural defects in the assets being transferred hereunder including, but not limited to, water leakage, flooding, seepage or drainage problems with the Property and there are no outstanding citations or notices of violations of any statutes, ordinances or regulations of any kind, nor has Seller ever been so cited or noticed with respect to the Property except Seller has received a letter of inquiry from the United States Department of Justice attempting to determine whether the Property complies with the Fair Housing Act, 42 U.S.C. ss. 3601, etc. (o) The Property is zoned for the Current Uses and the Property complies with the parking, setback and other requirements of the applicable zoning ordinances; (p) All instruments, other documents and written information delivered to Buyer by or on behalf of Seller shall be complete and correct in all respects as of the date of delivery to Buyer and as of the closing date. Seller has not knowingly withheld from Buyer any documents or other information material to the Property or the transactions contemplated in this Agreement; (q) The Property contains no individual sewage treatment system nor does it contain any wells and the Property does not contain any underground storage tanks containing fuel, oil or any other hazardous materials. Seller agrees to indemnify and hold Buyer harmless from all claims, expenses and liabilities (including reasonable attorney's fees) incurred by Buyer as a result of Seller's breach of any of the foregoing warranties. Seller further agrees to defend, indemnify and hold harmless Buyer and all other persons and entities subsequently owning and/or possessing the Property or any portion thereof and from any and all liabilities (including but not limited to attorney's fees), claims, demands, actions, causes of action, in law or in equity, whether past, present or future, known or unknown, liquidated or unliquidated, whether in tort, contact, statutory cause of action or administrative agency proceeding or otherwise, whether for personal injury, property damage, clean-up, remedial or response costs, wrongful death, or loss of consortium or support which arise out of or in any way relate to activities which Seller has conducted on the Property. SECTION X. CLOSING -9- Subject to any extension as hereafter provided or agreed to in writing by the parties, the closing of this transaction shall take place in the office of Title on or before August 6, 1999. Notwithstanding anything hereunder to the contrary and except for the 120-day period given to Seller to cure title defects in Section VI B, if in the event that the closing of the transactions contemplated by this Agreement have not occurred on or prior to September 1, 1999, any party hereto shall have the unilateral right to elect to terminate this Agreement. If such an election to terminate occurs, no party hereunder shall have any liability whatsoever to any other party hereunder. Possession of the Property shall be deemed to have been given by Seller to Buyer coincident with the closing. The following procedure shall govern the closing: (a) Prior to the closing, Seller shall deliver to Buyer and the Title Company a copy of the proposed general Warranty Deed (the "Deed") which shall be in recordable form and shall convey good and marketable record title to the Property (using the legal descriptions set forth on the survey provided by Seller) to Buyer, subject only to current real estate taxes, the Permitted Encumbrances and other matters approved by buyer. If the form of the deed does not comply with the provisions set forth above, the Seller shall promptly correct the same upon notice from either buyer or the Title Company; (b) On or before the closing, Seller shall deliver to the Title Company or Buyer the following: (i) the Deed, properly executed and acknowledged along with the Deposit and a standard form Seller's Affidavit; (ii) current real estate tax statements; (iii) any applicable owner's duplicate certificates of title to the Property; (iv) any applicable abstracts of title; (v) a warranty of bill of sale properly executed for all Personal Property including all of Seller's supply of lease forms, advertising material and other business forms; (vi) properly executed assignments of all Seller's interest in and to the Leases and the original copies of all the Leases then in force and effect on the Property as of the closing and Other Agreements and the original copies of the Other Agreements (to the extent Buyer has requested the same and to the extent they are assignable), together with a current rent roll for tenants of the Property, and al security deposits and accrued statutory interest thereon, prepaid rents and other deposits made by tenants of the Property; (vii) a properly executed Indemnification Agreement; -10- (viii) the Plans and Specifications for the improvements to the Property; (ix) an assignment of the warranties and any other documents required by this Agreement; (x) any other documentation reasonably requested by the Title Company in order to confirm the authority of the Seller to consummate this transaction or to permit the Title Company to issue to Buyer, upon completion of the closing, its Owner's Title Insurance Policy in an amount equal to the Purchase Price, subject only to those matters shown on the Commitment which were approved by buyer (the "Title Policy"); provided, however, that the foregoing shall not be construed to obligate Seller to provide any indemnity or to pay any sums not otherwise required to be paid by Seller hereunder; (xi) such funds may be required by Seller to pay closing costs or charges properly allocable to Seller; (c) On or before the closing Buyer shall deliver to the Title Company or Seller the following: (i) a properly executed Indemnification Agreement; (ii) such additional funds as may be required of Buyer to pay the Purchase Price, closing costs or charges properly allocable to Buyer. (d) After the Title Company has received all of the items to be deposited with it, and when it is in a position to issue the Title Policy reflected by the approved Commitment, the Title Company shall; (i) record the Deed instructing the Recorder's Office to return the same to Buyer; (ii) record any other instruments executed by the parties, or either of them, which are contemplated by this Agreement to be placed of record, instructing the Recorder's Office to return the same to the beneficiary thereof; (iii) issue to Buyer its Title Policy and deliver to Buyer all other documents to be herein deliver by Seller to the Title Company pursuant to this Agreement; (iv) charge Buyer for the cost of the title policy and survey, the recording cost of the Deed and the closing fee less abstracting charges and/or the cost of the title commitment which shall be charged to Seller; (v) charge Seller for the cost of recording any documents clearing title to the Property, any abstracting costs and/or the cost of the title commitment, and the cost, if any, of Buyer assuming the Other Agreements; -11- (vi) charge Seller for the full cost of any deed transfer, revenue or similar tax with respect to the sale of the Property; (vii) 1998 real estate taxes and for prior years shall be paid by Seller and 1999 real estate taxes shall be prorated as of the date of closing. Seller shall pay all real estate taxes for 1998. All special assessments, levied or pending, including interest thereon, against the Property on the closing date, including, without limitation, trunk area charges and charges for lateral benefit from truck which remain unpaid in respect of the Property for sanitary sewer and storm sewer shall be paid for by Seller. If year 1999 real estate taxes are not available, then a proration shall be made based on the preceding years amount, and the amount of such taxes shall be adjusted when the current amount becomes known; (viii) all revenues and income, in connection with the operation of the Property (unless specifically otherwise allocated herein), shall all be prorated between the parties on the calendar year as of the closing date. Any income from rentals due but not paid as of closing date shall be forwarded to Seller if actually collected and received by buyer subsequent to the closing date; however, the parties agree that from and after the closing date, any monies received from any tenant shall be allocated first towards rental then currently due from such tenant, prior to allocation of past rentals due and owing from such tenant to Seller; (ix) all bills for services, labor, materials, capital improvements or other charges of any kind or nature rendered to Seller or the Property prior to the closing date shall be borne by and paid by Seller; (x) all tenant security deposits and any prepaid rent received by Seller for periods after the closing date shall be credited or paid to Buyer and charged to Seller and Buyer shall receive as a credit any accrued but unpaid interest on the Mortgage and a credit for the broker's fee of $410,000.00 as referenced in Section XIV hereof; (xi) all such proration of revenues and expenses shall be adjusted to the extent known on the closing date. Any such items unknown as of the closing date shall be adjusted after the closing date when such items become known; and (xii) prepare closing statements for Seller and Buyer, respectively, indicating deposits, credits and charges (including allocation of current real property taxes) and deliver the same, together with a disbursement of funds, to any appropriate party; Any supplemental closing instructions given by any party shall also be followed by the Title Company provided the same do not conflict with any instructions set forth herein. SECTION XI. DEFAULT BY BUYER -12- In the event the transactions contemplated hereby fail to close as a result of a material default by buyer of any of the terms of this Agreement, and such failure to close continues for a period of ten (10) days after Seller notifies Buyer of such event, Seller's sole and exclusive remedy for such default shall be the right to cancel and terminate this Agreement as provided for by law. Except for the provision of Section III, upon such termination each party shall be released from all duties and obligations contained herein, it being understood and agreed that Seller is hereby releasing and/or waiving any right it might have to either specifically enforce this Agreement or sue for damages. SECTION XII. DEFAULT BY SELLER If Seller refuses to perform any of its obligations as set forth herein and such failure to perform continues for a period of ten (10) days after Buyer notifies Seller of such event, Buyer may, at its option, elect one of the following remedies: (a) To terminate this Agreement by notice to Seller, in which event, except for the provision of Section III, neither party shall have any further rights or obligations hereunder; or (b) to enforce specific performance of Seller's obligations hereunder, including specifically the conveyance of the Property in the condition required hereby. SECTION XIII. EXPENSE OF ENFORCEMENT If either party brings an action at law or in equity to enforce or interpret this Agreement, the prevailing party in such action shall be entitled to recover reasonable attorney's fees and court costs in addition to any other remedy granted. SECTION XIV. BROKERS Seller warrants to Buyer that except for a brokerage commission due to the Buyer in the amount of $410,000.00, and a commission equal to three percent (3%) of the Purchase Price due to Wellington Realty, Inc. which Seller agrees to pay at the closing, Seller has not taken any action which would result in any real estate broker's fee being due or payable to any party in connection with this transaction. Buyer warrants to Seller that except for the foregoing fee, Buyer has not taken any action which would result in any real estate broker's fee, finder's fee or other fee being due or payable to any party in connection with this transaction. Except for the foregoing commission payable to Buyer, Seller and Buyer respectively agree to indemnify, defend and hold harmless the other from and against any and all other claims, fees, commissions and suits of any real estate broker or agent with respect to -13- services claimed to have been rendered for or on behalf of such party in connection with the execution of this Agreement or the transaction set forth herein. SECTION XV. NOTICE All notices, demands and requests required or permitted to be given under this Agreement must be in writing and shall be deemed to have been properly given or served either by personal delivery or by depositing the same in the United States Mail, addressed to Seller or to Buyer, as the case may be, prepaid and registered or certified mail, return receipt requested, at the following addresses: TO SELLER: Maple Grove Apartment Home, Inc. 18650 W. Corporate Drive, #300 Brookfield, WI 53045 Attn: Robert F. Rice WITH COPY TO: __________________________________ __________________________________ __________________________________ Attn:_____________________________ TO BUYER: The Shelard Group, Inc. c/o Century Bank, N.A. 11455 Viking Drive, Suite 100 Eden Prairie, Minnesota 55344 Attn: Sheldon Z. Wert WITH COPY TO: Maun & Simon, PLC 2000 Midwest Plaza Building West 801 Nicollet Mall Minneapolis, Minnesota 55402 Attn: Charles Bans Rejection or refusal to accept or the inability to deliver notice hereunder because of changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request. Any party shall have the right from time to time and at any time upon the last ten (10) days' written notice thereof, to change their respective addresses, and each shall have the right to specify as its address any other address within the United States of America. SECTION XVI. -14- CONDEMNATION In the event any portion of the Property is condemned or access thereto shall be taken, or in either case threatened, prior to the closing, and Buyer concludes that the taking renders the land remaining unsuitable for the Current Uses contemplated and Buyer notifies Seller in writing of such conclusion within thirty (30) days after written notice to Buyer of such condemnation action, then this Agreement shall terminate. If the Agreement is not terminated pursuant to the preceding sentence, the Purchase Price of the Property shall not be affected, it being agreed that if the award is paid prior to the closing of this transaction, such amount, insofar as it pertains to the Property, shall be held in escrow and delivered to Buyer at the time of closing; and if the award has not been paid prior to the closing of this transaction, then at the closing Seller shall assign to Buyer all of its right, title and interest with respect to such award and shall further execute any other instrument requested by Buyer to assure that such award is paid to Buyer. If Buyer does not terminate this Agreement, it shall have the right to contest the condemnation and/or the award resulting therefrom. SECTION XVII. DAMAGE OCCURRING PRIOR TO CLOSING If, prior to the closing date, all or any part of the Property is substantially damaged by fire, casualty, the elements or any other cause, Seller shall immediately give notice to Buyer of such fact and at Buyer's option (to be exercised with ten (10) days after Seller's notice), this Agreement shall terminate, in which event neither party will have any further obligations under this Agreement. If Buyer fails to elect to terminate despite such damage, Seller shall promptly commence to repair such damage or destruction to mitigate further damages. If such damage shall be completely repaired prior to the closing date, then there shall be no reduction in the Purchase Price and Seller shall retain the proceeds of all insurance related to such damage. If such damage shall not be completely repaired prior to the closing date, Seller shall assign to Buyer all right to receive the proceeds of all insurance related to such damage, less costs incurred by Seller in mitigating damage or making repairs that are reimbursable by insurance then in force, and the Purchase Price shall remain the same. For purposes of this Section, the words "substantially damaged" mean damage that would cost $50,000.00 or more to repair. SECTION XVIII. EMPLOYEE MATTERS This Agreement does not include and there shall not be assigned to or assumed by Buyer, by any provision of this Agreement nor by any other Agreement between Seller and Buyer, any obligations of Seller under labor agreements, pension plans, health and welfare plans, group insurance plans, tax, worker's or employer's compensation, contribution of -15- funding requirements and other contracts of commitment of Seller to its employees or former employees, whether with respect to the Property, its improvements thereon or otherwise. Buyer hereby does not agree to, and this Agreement shall not obligate Buyer to continue the employment of any employees or former employees of Seller. Seller shall indemnify and hold Buyer harmless from any loss, damage, claim or liability to employees and former employees of Seller of Seller arising from their employment by Seller, and termination of said employment by Seller with respect to the Property, its improvements thereon or otherwise. SECTION XIX. CONTINUATION OF BUSINESS Seller hereby agrees that during the period between the execution of this Agreement and the closing date it will continue to actively and aggressively retain existing tenants, enforce all leases and seek tenants for vacant space, in accordance with their past business practices. SECTION XX. MERGER/BINDING AGREEMENT All previous negotiations and understandings between Seller and Buyer or their respective agents and employees with respect to the transaction set forth herein are merged in this Agreement which alone fully and completely expresses the parties' rights, duties and obligations. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives, it being understood and agreed that the warranties, representations and/or indemnities and hold harmless agreements made and expressed herein shall survive the closing of this transaction and shall not be merged therein. SECTION XXI. EFFECTIVE DATE The Effective Date of this Agreement shall be the date of the last party's execution; provided, however, that if the last party does not execute this Agreement and deliver a duly executed counterpart of the same to the first signing party within ten (10) days of the first party's execution date, then the offer or commitment to be bound hereby by the first executing party shall automatically be revoked and withdrawn, whereupon neither party shall be bound hereto. SECTION XXII. GOVERNING LAW -16- This Agreement shall be deemed to be a contract made under the laws of the State of Wisconsin and for all purposes shall be governed and construed in accordance with the laws of said State. SECTION XXIII. ASSIGNMENT Buyer may assign effective at closing its rights under this Purchase Agreement, provided it gives Seller notice of such assignment. IN WITNESS WHEREOF, the parties hereto have executed these presents intending to be bound by the provisions herein contained. SELLER: BUYER: MAPLE GROVE APARTMENT HOME, INC. THE SHELARD GROUP, INC. By:/s/ By:/s/ ----------------------------- ---------------------------------- Its:____________________________ Its:______________________________ -17- EXHIBIT A LEGAL DESCRIPTION Units One (1), Two (2), Three (3), Four (4), Five (5), Six (6), Seven (7), Eight (8), Nine (9), Ten (10), Eleven (11), Twelve (12), Thirteen (13), and Fourteen (14), Maple Grove Apartment Homes, a Condominium, in the City of Madison, Dane County, Wisconsin. Being a part of Lot 140, Maple Grove First Addition, recorded in Volume 56-68B of Plats on pages 201-202, Dane County Registry, and Lot 154, Maple Grove Second Addition, recorded in Volume 56-100A of Plats on page 291, Dane County Registry, located in the Southeast 1/4 of the Southwest 1/4 of Section 1, Town 6 North, Range 8 East, in the City of Madison, Dane County, Wisconsin, to-wit: Commencing at the South 1/4 corner of said Section 1, thence North 00 degrees 30' 36" East, 60.01 feet to the point of beginning; thence South 89 degrees 27' 19" West, 469.82 feet; thence North 00 degrees 32' 41" West, 188.66 feet; thence North 89 degrees 26' 47" West, 230.22 feet to the start of a curve; thence Northwesterly on a curve to the left which has a radius of 183.00 feet and a chord which bears North 30 degrees 23' 03" West, 182.11 feet; thence North 60 degrees 13' 25" West, 100.00 feet to a point of curve; thence Northwesterly on a curve to the right which has a radius of 117.00 feet and a chord which bears North 29 degrees 50' 06" West, 118.37 feet; thence North 00 degrees 33' 13" East 245.86 feet; thence South 89 degrees 26' 47" East 186.93 feet, thence North 80 degrees 26' 25" East, 110.04 feet; thence North 67 degrees 18' 45" East; 102.57 feet; thence North 54 degrees 38' 53" East 102.57 feet; thence North 43 degrees 53' 58" East, 71.62 feet; thence North 39 degrees 28' 58" East, 139.54 feet; thence North 44 degrees 52' 12" West, 17.15 feet; thence North 46 degrees 29' 30" West, 108.20 feet; thence North 39 degrees 28' 58" East, 30.07 feet; thence South 46 degrees 29' 30" East, 110.31 feet to a point of curve; thence Southeasterly on a curve to the right which has a radius of 333.00 feet and a chord which bears South 22 degrees 59' 27" East 265.58 feet; thence South 00 degrees 30' 36" West, 358.90 feet; thence South 89 degrees 29' 24" East, 220.00 feet; thence South 00 degrees 30' 36" West, 444.99 feet to the point of beginning. EXHIBIT B PERMITTED ENCUMBRANCES 1. Leases EXHIBIT C INDEMNIFICATION AGREEMENT This Agreement entered into this ____ day of ___________, 1999 by and between Maple Grove Apartment Home, Inc. (hereinafter referred to as the "Seller") and _______________________, (the "Buyer"). RECITALS: 1. Seller, simultaneously with the execution of this Indemnification Agreement, has sold to Buyer pursuant to a Purchase Agreement dated ______________________, 1999 ("Purchase Agreement") a parcel of land ("Land") located in Dane County, State of Wisconsin, legally described as ______________ ______________________________________________________. 2. The Land is improved with ______________________ (_________) residential apartment buildings contained in the aggregate three hundred four (304) residential apartment units ("Improvements"). 3. The property purchased by Buyer from Seller includes not only the Land and the Improvements, but also all licenses, permits, equipment, fixtures and furnishings and certain other personal property, tangible and intangible, owned by the Seller and used in the operation and maintenance of the Improvements (hereafter said licenses, permits, equipment, fixtures, furnishings and other personal property, together with the Land and the Improvements, shall be referred to in the aggregate as the "Property"). 4. Pursuant to the Purchase Agreement, the parties have agreed to execute this Indemnification Agreement relating to the Property. NOW, THEREFORE, in consideration of the foregoing and of the terms and conditions hereafter set forth, the parties agree as follows: 1. All risks, losses and liabilities incurred or accruing through the ownership or operation of the Property on or before the date hereof, shall be borne by Seller, including without limitation all liabilities which are presently unknown, undetermined or the subject of court litigation. 2. All risks, losses and liabilities arising from ownership or operation of the Property subsequent to the date hereof shall be borne by Buyer. 3. Seller hereby agrees to indemnify and hold Buyer harmless from all claims, liabilities, costs, expenses and attorneys' fees which accrue through the ownership or operation of the Property on or before the date hereof, including, but not limited to, all claims or liabilities arising out of Leases (as defined in the Purchase Agreement) or the Other Agreements (as defined in the Purchase Agreement). 4. Seller further agrees to defend, indemnify and hold harmless Buyer from any and all liabilities (including but not limited to attorneys' fees), claims, demands, actions, causes of action, in law or in equity, whether past, present or future, known or unknown, liquidated or unliquidated, whether in tort, contract, statutory cause of action or administrative agency proceeding or otherwise, whether for personal injury, property damage, clean-up, remedial or response costs, wrongful death, or loss of consortium or support which arise out of or in any way relate to activities ("Activities") which Seller had conducted on the Property. 5. Seller agrees to indemnify and hold Buyer harmless from all claims, expenses and liabilities (including reasonable attorneys' fees) incurred by Buyer as a result of Seller's breach of any of the warranties contained in the Purchase Agreement. 6. Buyer hereby agrees to indemnify and hold Seller harmless from all claims, liabilities, costs and expenses and attorneys' fees which accrue through the ownership or operation of the Property after the date hereof, including, but not limited to, claims or liabilities and expenses arising out of Leases (as defined in the Purchase Agreement) and the Other Agreements which accrue after the date hereof and including all liabilities (including but not limited to attorneys' fees), claims, demands, actions, causes of action, in law or in equity, whether past, present or future, known or unknown, liquidated or unliquidated, whether in tort, contract, statutory cause of action or administrative agency proceeding or otherwise, whether for personal injury, property damage, clean-up, remedial or responses costs, wrongful death, or loss of consortium or support which arise out of or in any way relate to activities ("Activities") which Buyer has conducted on the Property. 7. Nothing in this Agreement shall be deemed to supersede or abrogate any terms of conditions of the Purchase Agreement, but rather the terms and conditions of this Agreement shall be deemed to supplement the terms and conditions of the Purchase Agreement. 8. This Agreement shall be construed according to the laws of the State of Minnesota and shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. SELLER: BUYER: MAPLE GROVE APARTMENT HOME, INC. THE SHELARD GROUP, INC. By:/s/ By:/s/ ----------------------------- ---------------------------------- Its:____________________________ Its:_________________________________ -2- EX-23.1 6 CONSENT EXHIBIT 23.1 We have issued our reports dated April 9, 1999, accompanying the consolidated financial statements of Wellington Properties Trust and Subsidiaries contained in the Prospectus. We consent to the use of the aforementioned reports in the Prospectus, and to the use of our name as it appears under the caption "Experts." /s/ GRANT THORNTON LLP Fond du Lac, Wisconsin August 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----