Item 1. Business (continued): - -------- ----------------------
have an annually renewed three year loan or two years in which to replace the loan. At the Trust's option interest on any loan will be at any of the following rates (i) the prime lending rate plus 1/4 of 1%; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed rate of interest in effect from time to time.
Real Estate Market Conditions: - ------------------------------
Investments in real estate equities tend to be long term investments, and accordingly, tend to limit the ability of the Trust to vary its portfolio of real estate owned promptly in response to changing economic, financial and investment conditions, such as overbuilding in certain markets and the resulting intense competition for tenants. Although the Trust requires leases from all tenants occupying space in its properties, in the event of a default by a tenant, the Trust may modify the lease terms or evict the tenant. Tenant evictions result in increased expenses and the possibility of lost rents until the space is re-leased.
The tenant occupying the largest amount of space in any of the Trust's Properties currently pays rent totaling $974,000 or 9.2% of the Trust's 1996 total revenues. This tenant has a lease which matures September 30, 2005 but the lease contains six 10-year option provisions at the tenant's discretion which, if exercised, would extend the maturity date to September 30, 2065. The rent paid by this tenant is subject to an annual adjustment based on the increase or decrease in operating expenses of the property.
The Trust, in order to remain competitive, leases space at its properties at rates which are dictated by the market in which the property exists. The market rates, which are quoted to both new tenants and tenants who are renewing their leases, were at their highest levels in the early 1980's. These rates began to decline at most of the properties in 1984 and continued to decline through 1988. At that time, the market rates at all of the Trust's properties were at their lowest levels. Since 1989, the market rates have tended to increase. In 1996 the market rates at the majority of the properties were higher than those in 1988 but have not returned to the high rates that existed in 1983. The Trust is encouraged by the current trends in rates. Additionally, the majority of leases at the Properties include provisions for the tenant to pay additional rent if operating expenses of the property increase.
Taxes: - ------
Through fiscal 1992 the Trust qualified as a real estate investment trust (a "REIT") as defined by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Effective April 1, 1993 the Trust automatically failed to qualify as a REIT under the Code as on such date more than 50% in value of the Trust's shares (after the application of certain constructive ownership rules) were owned by five or fewer individuals.
Although the Trustees had the right pursuant to Section 8.5 of the Declaration of Trust to prevent the transfer, and/or call for the redemption of, securities of the Trust sufficient in the opinion of the Trustees to meet requirements for REIT status, the Trustees in their discretion determined that maximizing proceeds from the December 1992 rights offering (the "1992 Rights Offering") outweighed the benefits of REIT status. The primary impact on the Trust as a result of the failure to qualify as a REIT was that the Trust is now required to file its federal and state income tax returns as a corporation and is subject to taxation as a corporation. As a result, distributions to shareholders are subject to double taxation to the extent of current and accumulated earnings and profits of the Trust. The Trust will not be able to re-qualify as a REIT until fiscal year 1998. At September 30, 1996 the Trust has net operating and capital loss carryforwards (NOL's) of approximately $10.2 million available to offset taxable income. In future years, the Trust can use approximately $298,000 per year of NOL's, plus it can apply gains on the sales of properties ("built in
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gains") for those properties which were owned by the Trust on December 28, 1992, plus any prior year's unused portion (limited by carryforward periods) for NOL's generated prior to December, 28, 1992. The Trust can also use NOL carryforwards generated after December 28, 1992. These carryforwards of approximately $9.5 million expire through 2011. The balance of the carryforwards of $700,000 may be recognized for a period through fiscal 1998 against built in gains, if any, to the extent that fair market values of these properties exceeded their tax bases as of December 28, 1992.
Once the Plan is approved, distributions to shareholders will be considered liquidating distributions and reported as return of capital to shareholders to the extent of the individual shareholders basis in their shares. Shareholders are encouraged to consult their tax advisors for information concerning these distributions.
Competition and Limited Resources: - ----------------------------------
The Trust's Properties are subject to competition from similar types of properties in the vicinities in which they are located. Additionally, the Trust is relatively small in comparison to many of its competitors. This size limits the Trust's resources and may limit its ability to compete effectively in the geographic markets in which the Trust owns property. However, since the Trust's objective is to sell its properties, the Trust will concentrate its efforts on being able to satisfy the requirements of prospective tenants so that they lease space in the Trust's Properties rather than the competitors'.
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Item 2.
Item 2. Properties. - ------- -----------
General: - --------
At September 30, 1996 the Trust had total invested assets of $39,015,000. The invested assets included $38,896,000 of properties held for sale and $119,000 of real estate mortgage loans.
The Trust's $38,896,000 of properties held for sale at September 30, 1996 included the following: eight office buildings with a carrying value of $20,304,000; five commercial properties with a carrying value of $18,552,000; and one investment in land with a carrying value of $40,000. Carrying value represents amounts included in the Trust's Statement of Financial Condition at September 30, 1996 after depreciation and the valuation reserve. On September 24, 1996 the Trustees of the Trust announced that they unanimously voted to recommend a Plan for the Orderly Liquidation (the "Plan") of the Trust. Since the Trust had previously adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS No. 121") the Trust, effective September 30, 1996, classified all real estate owned as "Properties held for sale." A review of the properties at September 30, 1996 determined that four properties required a valuation reserve, as the market values, less cost to sell, of these properties were less than their carrying value. Therefore a valuation reserve of $3,307,000 was established. In determining the estimated net sales prices the Trust applied an estimated capitalization rate to the individual properties' cash flow. The Trust did not deem it necessary to obtain appraisals of any of its properties.
Management will from time to time undertake a major renovation of a Property in order to keep it competitive within its market. Currently, the Cannon West Shopping Center located in Austin, Texas is having a trench drain installed at a cost of approximately $150,000. This work is being done in order to combat a sub-soil problem at the property. Management believes that the installation of this trench drain will alleviate the problem. The cost of this work will be reported in the first two quarters of fiscal year 1997. Additionally, Management is reviewing plans for the installation of new store fronts at Tiffany Plaza, a shopping center located in Ardmore, Oklahoma. The current estimated cost of this work is $250,000. If the Trust proceeds with this work it should begin in the spring of 1997.
In the opinion of Management, all Properties in the Trust's portfolio are adequately covered by insurance. Additionally, Management believes all properties are suitable and adequate for their intended use.
The amount of leverage varies among the Properties which the Trust owns. At September 30, 1996 two of the Trust's Properties were leveraged with long-term non-recourse individual mortgage financing and one property was leveraged with a $2,612,000 loan of which the first $750,000 is recourse and the balance is non-recourse. Additionally, as of September 30, 1996 six of the Trust's remaining investments serve as collateral for the Trust's bank notes payable.
At September 30, 1996 the Trust owned two real estate mortgage loans with a total balance of $119,000. Both loans are purchase money mortgages received by the Trust in connection with sales of vacant land in Akron, Ohio. The first was a $290,000 loan received in connection with the $834,000 March, 1994 sale of 70 acres. The second was a $212,000 loan received in connection with the $212,000 May, 1994 sale of 17.7697 acres.
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Investments in Real Estate: (Continued): - -----------------------------------------
(A) At September 30, 1996 the Trust had 338 tenants under lease in its office buildings (excluding the Littleton Bank Bldg., Littleton Colorado which was sold October 7, 1996), and its commercial properties, all of which are shopping centers, with Triangle Square also having mini-warehouse facilities behind the retail area (excluding the mini warehouses at Triangle Square). These tenants are under leases of one year or more. Additionally, the Trust had 215 month-to-month leases for mini-warehouse spaces at Triangle Square.
(B) The following lists individually those tenants who occupy 10,000 square feet or more, and whose original lease terms expire five years or more from September 30, 1996. Seventeen (17) other tenants occupy less than 10,000 square feet and have leases which expire in five years or more from September 30, 1996. These are grouped together and shown as "Others" on the table below:
All leases listed on the table are subject to an annual adjustment in rent based on the increase or decrease in the operating expenses of the Property.
The annual base rents of the tenants listed in the table equal 30% of the total 1996 rental income, and these tenants occupy 496,000 square feet (45%) of the total 1,100,000 square feet (excluding the Littleton Bank Bldg. which was sold October 7, 1996) currently occupied. The remaining 604,000 square feet are occupied by 307 tenants. These tenants' leases expire during the next five years. The loss of rentals from any one of these leases, if the Trust would not be able to renew or replace, would not have a significant effect on the Trust's operations.
(C) The following is the only tenant who occupies 50% or more of a Property: Englewood Bank Building -- Bank One, Denver -- 108,000 sq. ft. (84%).
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(D) The Littleton Bank Building was sold on October 7, 1996. The sale resulted in a gain of approximately $563,000 which will be reported in the first quarter of Fiscal Year 1997.
(E) ENGLEWOOD BANK BUILDING. The Englewood Bank Building is located in Englewood, Colorado. The building contains 10 stories and is suitable and adequate for its use as a bank and office building.
The main tenant is Bank One, Denver which occupies 84% of the building. The balance of the building is primarily leased to small service or professional organizations for use as general offices. The Trust's policy is to sign leases of three to five years in order to take advantage of changes in the market.
The Trust has been notified by the City of Englewood that the City has recently passed a law that would require the Trust to install a sprinkler system and fire pull stations on every floor of this property. The law requires that this work be done over a five (5) year period starting in 1997. The Trust is currently reviewing all of its options relating to this required work. At this time the Trust does not have any estimates as to the costs that would be involved in undertaking this work. Other than this required work there are no other significant renovations planned for this property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space.
The Englewood Bank Building is subject to limited direct competition from comparable office projects in the general vicinity. There is only one competing high-rise office building in the area of similar size, quality, condition and location to the Englewood Bank Building. Other competing projects consist of low-rise office buildings and converted retail space generally considered to be of lesser quality.
The occupancy rates for the fiscal years ended September 30, 1992 through 1996 were as follows: 89% in 1992, 91% in 1993, 98% in 1994, 97% in 1995 and 1996 . The Property's average rental rate per occupied square foot for the same period was $6.65 in 1992, $6.69 in 1993, $6.80 in 1994, $6.63 in 1995, and $6.67 in 1996.
Bank One, Denver is the only tenant occupying over 10% of the rentable space. Its annual rent is currently $974,000 but is subject to an annual adjustment based on increases or decreases in property expenses. This lease expires September 30, 2005 and has six ten-year renewal options available.
Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
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Investments in Real Estate: (Continued) - ---------------------------------------
The Englewood Bank Building is depreciated for tax purposes using the straight line method over 40 years for the building and improvements. The depreciable tax basis was $1,896,000 at September 30, 1996. The 1995 real estate taxes for the Property were $107,539 based on a millage rate of $8.252 per $1,000 of assessed value. The 1996 real estate taxes are not yet known.
(F) EXECUTIVE CLUB BUILDING. The Executive Club Building is located in Denver, Colorado. The building contains eleven floors and has a health club, which includes a swimming pool, located in the basement. The building is suitable and adequate for its use as an office building.
Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign new leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market.
Presently, the Trust has no plans for any significant renovations of the property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, condition and quality that directly compete with the Executive Club Building. The Trust believes that the advantage that this building has is that the building caters to small tenant users, while the majority of the properties in the area prefer larger tenants.
Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 92% in 1992; 97% in 1993 and 1994; 93% in 1995 and 73% in 1996. The Property's average rental rates per occupied square foot for the same periods were: $9.69 in 1992; $9.55 in 1993; $10.15 in 1994; $11.63 in 1995 and $11.78 in 1996.
There are no tenants in this property occupying 10% or more of the space.
Based upon leases in place as of September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
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Investments in Real Estate: (Continued) - ---------------------------------------
The Executive Club Building is depreciated for tax purposes using the straight line method with the building and improvements having a 40 year life. The depreciable tax basis was $1,862,000 at September 30, 1996. The 1995 real estate taxes for the Property were $79,693 based on a millage rate of $8.1161 per $1,000 of assessed value. The 1996 real estate taxes are not yet known.
(G) PETROLEUM CLUB BUILDING. The Petroleum Club Building is located in Tulsa, Oklahoma. The building contains sixteen floors with an attached four level parking garage which is leased out to American Parking for an annual rent plus a percentage rent determined at the end of each year and offers valet, self parking both covered and uncovered. The building is suitable and adequate for its use as an office building.
The main tenant is The Petroleum Club which occupies the top four floors. The balance of the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign new leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market.
Presently, the Trust has no plans for any significant renovations of the property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
This property is located in the downtown area of Tulsa and, as such, there are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, condition and quality that directly compete with the Petroleum Club Building. The floor size of this property is only 7,800 square feet and as such the Trust can offer small tenants a substantial portion of a floor without the tenant competing with larger tenants who usually dominate downtown office space. Despite the stagnate economy of Tulsa, which depends primarily on the oil and gas industry, the Trust has made strides in recent years in increasing the occupancy of this property. One recent benefit has been the Petroleum Clubs willingness to open its membership to others outside of the petroleum industry. The majority of the tenants in the building now belong to the Club.
Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 75% in 1992; 72% in 1993; 78% in 1994; 81% in 1995; and 82% in 1996. The property's average rental rates per occupied square foot for the same periods were: $8.47 in 1992; $8.69 in 1993; $7.84 in 1994; $8.22 in 1995; and $8.84 in 1996.
There are no tenants in this property occupying 10% or more of the space.
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Investments in Real Estate: (Continued) - ---------------------------------------
Based upon leases in place as of September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
The Petroleum Club Building is depreciated for tax purposes using the straight line method with the building and improvements having a 40 year life. The depreciable tax basis was $2,618,000 at September 30, 1996. The 1995 real estate taxes for the Property were $27,558 based on a millage rate of $10.021 per $1,000 of assessed value. The 1996 real estate taxes are not yet known.
(H) WALNUT STEMMONS OFFICE PARK. Walnut Stemmons Office Park is located in Dallas, Texas. The complex is currently composed of three single story buildings. This property originally was composed of nine single story buildings. Four of the buildings were sold in November, 1992. Two more buildings were sold September 30, 1996. All six buildings were sold to the same buyer. The remaining three buildings all have exterior entrances for the tenants, with no common areas.
Space in the buildings is leased to small businesses, the majority of which are just commencing operations. The Trust's policy is to sign three to five year leases with both new and renewal tenants with the tenant being responsible for all services within their space, such as, electricity and cleaning.
Presently, the Trust has no plans for any significant renovations of the property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are similar properties in the immediate area of this Property. The surrounding area features restaurants, a bowling alley, and a chiropractic college. Since this property is primarily leased to first time businesses, there is significant turnover. The Trust believes that these three buildings will be purchased by the same buyer who purchased the other six buildings.
Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 73% in 1992; 97% in 1993; 86% in 1994; 79% in 1995; and 71% in 1996. The Property's average rental rates per occupied square foot for the same periods were: $5.09 in 1992; $4.62 in 1993; $5.11 in 1994; $5.34 in 1995; and $5.38 in 1996.
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There are no tenants in this property occupying 10% of more of the space.
Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
(I) OFFICE ALPHA. Office Alpha is located in the North-Dallas LBJ-East office market of Dallas, Texas. Office Alpha contains five stories and is suitable and adequate for its use as an office building.
Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market.
Presently, the Trust has no plans for any significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, style, condition and quality that directly compete with Office Alpha. Leasing proposals for both new and renewal tenants in this submarket are highly competitive. Many of the Trust's competitors in this submarket have substantially greater capital and resources than the Trust.
Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 73% for 1992; 84% for 1993; 83% for 1994; 91% for 1995; and 90% for 1996. The Property's average rental rates per occupied square foot for the same period were: $9.61 in 1992; $8.91 in 1993; $9.00 in 1994; $9.52 in 1995; and $10.01 in 1996.
At September 30, 1996 Jewish Family Services of Dallas, Inc., a non-profit organization which performs social services primarily for the Jewish community in Dallas, was the only tenant occupying 10% or more of the space in Office Alpha. This tenant's annual rent is $98,000. Its lease expires September 30, 1999.
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Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Office Alpha is depreciated for tax purposes using the straight line basis with the building and improvements having a 15 year life. The depreciable tax basis was $1,776,000 at September 30, 1996. The 1995 real estate taxes for the Property were $82,636 based on a millage rate of $2.71 per $100 of assessed value. The 1996 real estate taxes are not yet known.
(J) 14800 QUORUM BUILDING. 14800 Quorum Building is located in the North-Dallas, Quorum office market of Dallas, Texas. 14800 Quorum contains five stories and is suitable and adequate for its use as an office building.
The Trust owns this Property in fee simple, subject to a first mortgage loan, at a rate of 8.3%, which matures August 19, 2000. The loan is non-recourse except the first $750,000. At September 30, 1996 the balance of this loan was $2,612,000. By maturity $174,000 of scheduled amortization payments are required and therefore a balance of $2,438,000 will be due at maturity. There is a prepayment penalty of 2.0% if the loan is paid off early.
Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market.
Presently, the Trust has no plans for any significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, style, condition and quality that directly compete with 14800 Quorum. Leasing proposals for both new and renewal tenants in this submarket are highly competitive. Many of the Trust's competitors in this submarket have substantially greater capital and resources than the Trust.
The Trust purchased the Property on August 26, 1994. The occupancy for the two full fiscal years ended September 30, 1995 and 1996 that the Trust has operated the Property was as follows: 90% in 1995 and 92% in 1996. The Property's average rental rates per occupied square foot for the same two years were as follows: $9.87 in 1995 and $11.02 in 1996.
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At September 30, 1996 Preston Equities, Inc., who runs executive suites for general office use, was the only tenant occupying 10% or more of the space in 14800 Quorum. This tenant's annual rent is $131,108. Its lease expires March 31, 2002.
Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
(K) BROOKSIDE OFFICE BUILDING. The Brookside Office Building is a three-story brick office building located in Arlington, Texas. The Trust purchased the Property on March 28, 1996. The Property is suitable and adequate for its use as an office building.
Space in the building is leased to service and professional organizations for use as general offices. The Property was 100% occupied at the time of purchase and has remained such during the balance of the fiscal year. It is the Trust's intention to sign new leases with any new and renewal tenants for periods of three to five years in order to take advantage of changes in the market. Several of the existing tenants have informed the Trust that should any current tenant vacate its space they would like to expand their space. The Trust will make every effort to accommodate these tenants should the situation arise.
Presently, the Trust has no plans for any significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, style, condition and quality that directly compete with the Brookside Office Building. As stated above, with several tenants desiring to expand the Trust believes that the size of the Property will be the only drawback in retaining tenants. Since the Property is new to the Trust's portfolio it remains to be seen what other competitive actions will be needed in the future to keep the Property at 100% occupied at a competitive rate.
The occupancy for the six months in the fiscal year ended September 30, 1996 that the Trust has owned the Property was 100%. The average rental rate per occupied space for this same period was $11.69.
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At September 30, 1996 two tenants occupied more than 10% of the Property. The first was Schrickel, Rollins and Associates, Inc., an architectural firm. This tenant's annual rent is $168,660 and their lease expires August 31, 2003. the second tenant was Vestal-Loftis-Kalista, Architects, Inc., an architectural firm. This tenant's annual rent is $64,000 and their lease expires January 31, 2000.
Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
(L) TRIANGLE SQUARE SHOPPING CENTER. The Triangle Square Shopping Center is composed of three one- story retail shopping center buildings and nine all concrete block mini-warehouse buildings (including one two-story building) located in Hilton Head, South Carolina. The main tenants of the three retail buildings are service oriented businesses. The Property is suitable and adequate for its use as a retail center and mini-warehouse facility.
The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are numerous shopping centers located in the direct vicinity, some of higher quality, and numerous projects of similar age, condition and quality of the Property. However, the majority of these centers are composed of retail tenants, while Triangle Square's tenant are primarily service oriented. There are no mini-warehouse facilities in the immediate area.
Occupancy of the combined project for the fiscal years ended September 30, 1992 through 1996 was as follows: 72% in 1992; 74% in 1993; 78% in 1994; 89% in 1995; and 88% in 1996. The average rental rate per occupied square foot during the same period was $6.58 in 1992; $6.25 in 1993; $5.99 in 1994; $5.74 in 1995; and $6.55 in 1996.
There are no tenants in this property occupying 10% or more of the space.
All leases for storage space in the mini-warehouses are less than one year. At September 30, 1996 there were 215 leases for 86,570 square feet at an annual rental of $272,400 (44% of gross annual base
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rents). Based upon leases in place as of September 30, 1996 in the three retail buildings, lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
(M) CANNON WEST SHOPPING CENTER. The Cannon West Shopping Center is a grocery-anchored neighborhood strip center located in Austin, Texas. Cannon West's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center.
The Trust is currently installing a Trench Drain at a cost of approximately $150,000 at the Property. This work is being done in order to combat a sub-soil problem at the property. Other than this work, which is currently under way, the Trust has no other plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
The Trust owns this Property in fee simple, subject to a first mortgage loan, at a rate of 8.3%, which matures May 1, 2002. At September 30, 1996 the balance of this loan was $5,742,000. By maturity $1,231,000 of scheduled amortization payments are required and therefore a balance of $4,511,000 will be due at maturity.
The Cannon West Shopping Center is subject to a limited amount of direct competition in its immediate trade area. Although there are a number of grocery anchored shopping centers located in South Austin serving the south-side communities that are located along William Cannon Drive -- a major East-West highway serving the South Austin area -- Cannon West Shopping Center is the only retail shopping center located at the intersection of William Cannon Drive and Westgate Boulevard that serves the immediate surrounding neighborhoods.
Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 88% in 1992; 93% in 1993; 75% in 1994; 82% in 1995; and 95% in 1996. The average rental rate, including percentage rents, per occupied square foot during the same period was $7.44 in 1992; $7.05 in 1993; $8.38 in 1994; $9.01 in 1995; and $9.39 in 1996.
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Cannon West has two tenants that occupy more than 10% of the Property. The first is H.E. Butt Grocery Store ("HEB"). Their annual base rent is $250,000. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. For 1996 the percentage rent paid was $105,000. This lease expires October 5, 2001 and has four five-year renewal options. In September, 1995 the Trust was notified by HEB that they had purchased a parcel of land approximately one mile from Cannon West. As of September 30, 1996 this land had not yet been rezoned for a grocery store center, however, the Trust is of the understanding that HEB is in the process of having this land rezoned. Should HEB build a store and/or a shopping center on this parcel of land, it could effect Cannon West. The second tenant is Premiere Lady's Fitness Center, a health club, fitness center for women only. Their annual rent is $68,000. The lease also calls for tax, insurance and maintenance escalations. This lease expires August 31, 2001.
Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
(N) SPRING VILLAGE SHOPPING CENTER. The Spring Village Shopping Center is a grocery-anchored neighborhood strip center located in Davenport, Iowa. Spring Village's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center.
The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
The Spring Village Shopping Center is subject to direct competition in its immediate trade area. There are several grocery anchored shopping centers located on Kimberly Road, the major retail East-West road servicing Davenport. At September 30, 1996 Spring Village was 99% occupied primarily due to the attractiveness of the center's grocery store which was remodeled and expanded in 1994 at the cost of the Store.
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Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 98% in 1992; 99% in 1993; 98% in 1994; 100% in 1995; and 99% in 1996. The average rental rate, including percentage rents, per occupied square foot during the same period was $8.00 in 1992; $8.00 in 1993; $8.26 in 1994; $7.89 in 1995; and $8.58 in 1996.
Spring Village has two tenants that occupy more than 10% of the Property. The first is Eagle Food Centers, whose annual base rent is $204,000. Their lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. This lease expires June 30, 2005. The second is the Walgreen Company, which operates a drug store, and pays annual base rent of $67,000. Its lease also calls for tax, insurance and maintenance escalations. This lease expires November 30, 2010.
Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
(O) WARREN PLAZA SHOPPING CENTER. The Warren Plaza Shopping Center is a grocery-anchored neighborhood strip center located in Dubuque, Iowa. Warren Plaza's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center.
The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
In addition to the 90,000 square feet owned by the Trust, there is a 97,000 square foot Target discount store attached to the property, which is not owned by the Trust. The Property is subject to direct competition in its immediate trade area. There are several grocery anchored shopping centers located on both Dodge Street and John F. Kennedy Blvd. (this Property is located on the corner of these two streets). Across the street from the Property is a mall, which the Trust does not consider competition. Additionally, there is both a K-Mart and Wal-mart in the area which compete with the Target store. For both 1994 and 1995 this Property was 100% occupied, dropping to 98% for 1996. The Trust attributes this high occupancy for the past two years to both the grocery store and the Target Store. Both of these stores have been recently remodeled and expanded at the cost of the stores.
PART I ------
Item 2. Properties (Continued): - ------- -----------------------
Investments in Real Estate: (Continued) - ---------------------------------------
Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 92% in 1992; 99% in 1993; 100% in 1994 and 1995; and 98% in 1996. The average rental rate, including percentage rent, per occupied square foot during the same period was $8.86 in 1992; $8.60 in 1993; $9.67 in 1994; $9.24 in 1995; and $9.17 in 1996.
Warren Plaza has one tenant that occupies more than 10% of the Property, HY-VEE Food Store. Its annual base rent is $256,000. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. The lease expires June 30, 2013.
Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
(P) TIFFANY PLAZA SHOPPING CENTER. The Tiffany Plaza Shopping Center is a grocery-anchored neighborhood strip center located in Ardmore, Oklahoma. Tiffany Plaza's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center.
The Trust is reviewing plans for the installation of new store fronts at the Property. The Trust believes that the Property, which was constructed in 1975, has begun to look old and that the new store fronts will give the center a new look. The estimated cost of this work is $250,000. If the Trust proceeds with this work it should begin in the spring of 1997. No other renovation work beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property is planned.
The main competition for this center is a mall and a Wal-mart center, both of which are located more than a mile away from Tiffany Plaza.
PART I ------
Item 2. Properties (Continued): - ------- -----------------------
Investments in Real Estate: (Continued) - ---------------------------------------
Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 89% in 1992; 92% in 1993; 97% in 1994; 95% in 1995; and 98% in 1996. The average rental rate, including percentage rent, per occupied square foot during the same period was: $4.10 in 1992; $4.05 in 1993; $3.59 in 1994; $3.66 in 1995; and $3.93 in 1996.
Tiffany plaza has three tenants who occupy more than 10% of the Property. The first is Flemming Companies who operate a Buy-For-Less grocery store. The annual rent is $86,625. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. The lease expires March 20, 2001. The second tenant is Orscheln Farm and Home Supply, Inc., who sell farm equipment and supplies. The annual rent is $102,000. The lease also calls for tax, insurance and maintenance escalations. The lease expires August 31, 2001. The third tenant is CR Anthony Company, a family clothing store. The annual rent is $69,300. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. The lease expires March 7, 2001.
Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
PART I
Item 2. Properties (Continued): - ------- -----------------------
Geographic Distribution: - ------------------------
The Trust's properties are located in six states. The table below demonstrates the geographic distribution of the Trust's properties at September 30, 1996:
PART I ------
Item 3.
Item 3. Legal Proceedings - ------- -----------------
The Trust is involved in a number of legal proceedings arising in the normal course of its business activities, none of which, in the opinion of the Management, is expected to have a material adverse effect on the financial position or liquidity of the Trust.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------- ----------------------------------------------------
No matters were submitted to a vote of the Trust's Shareholders during the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Registrant - ------------------------------------
The following information regarding executive officers of the Trust is provided pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART II -------
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------- ----------------------------------------------------------------- Matters -------
Market Price Range: - -------------------
The shares of the Trust are traded in the Nasdaq National Market (symbol CTRIS). The table below contains the quarterly high and low closing bid prices for such Shares.
Distributions to Shareholders: - ------------------------------
PART II -------
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations. --------------
Financial Condition - -------------------
During the three-year period ended September 30, 1996 the Trust's total assets decreased 4% to $43,852,000. On September 24, 1996 the Board of Trustees of the Trust announced that they unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust (the "Plan"). The Plan, as proposed, would involve the sale of the Trust's properties during a period of approximately three years. Based on this announcement the Trust has reclassified all of its properties to Properties held for sale at September 30, 1996, in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS No. 121"). The Trust made a review of the carrying value of all the properties at September 30, 1996 and determined that four of the Trust's properties had a carrying value higher than the anticipated sales price. The Trust, therefore, established a valuation reserve for these four properties which totaled $3,307,000. In determining the estimated net sales prices the Trust applied an estimated capitalization rate to the individual properties' cash flow. The Trust did not deem it necessary to obtain appraisals of any of its properties. See Item 2, Part I for allocation of the valuation reserve. In 1994 the Trust applied the allowance for possible investment losses to three previously foreclosed properties for which it had been previously provided. This application was done in connection with the Trust's regular evaluation of its portfolio of properties. The evaluation concluded that it was unlikely that these properties would recover in value and, therefore, they were written down to their net realizable value.
During this three-year period the carrying value of the Trust's invested assets decreased 10% or $4,440,000 to $39,015,000. In fiscal 1996 the Trust purchased the land on which its Englewood Bank Building, located in Englewood, Colorado, is located. This land, which was previously leased by the Trust, was purchased for a price of $1,263,000. Also, the Trust purchased a 52,554 square foot suburban office building located in Arlington, Texas, for a purchase price of $2,202,000. Additionally, during 1996 the Trust sold three improved properties. The first was the sale during January and February of three condominium units located in Davie, Florida, for a combined sales price of $138,000 which resulted in a gain of $69,000. The second was the $600,000 sale of European Crossroads in Dallas, Texas, which resulted in a loss of $313,000. The third was a $615,000 sale of two of the five buildings comprising the Walnut Stemmons Office Park located in Dallas, Texas and resulted in a gain of $261,000. In fiscal 1995 the Trust sold three improved properties. The first was the sale of the 197 room Quality Hotel in St. Louis, Missouri for $2,650,000, which resulted in a gain of $452,000. The second was the sale of the 124 unit Parkwood Place Apartments in Greeley, Colorado for $2,595,000, which resulted in a gain of $1,859,000. The third was the sale of the 51,000 square foot Walnut Hill West office building in Dallas, Texas for $800,000 which resulted in a gain of $97,000. In fiscal 1994 the Trust purchased a 104,000 square foot office building located in Dallas, Texas for $3,918,000. Of this amount, $2,170,000 was provided by a first mortgage loan on the property which the Trust obtained at the time of the purchase. Additionally, the Trust sold four vacant land parcels during this three-year period. The result of the three purchases during this three-year period was an increase of approximately $7,387,000 to the carrying value of the Trust's portfolio of invested assets. The result of all the sales during this three year period was a decrease of approximately $5,328,000 to the carrying value of the Trust's portfolio of invested assets. Additionally, the recording of $5,648,000 of depreciation, a non-cash adjustment, reduced the carrying value during this three-year period. Also, during this three-year period, the Trust made improvements to its existing properties of $2,491,000 and received payments totaling $533,000 on real estate mortgage loans.
PART II -------
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) -------------
Financial Condition - (Continued) - -------------------
During the three-year period ended September 30, 1996 the Trust's mortgage notes payable decreased 44% or $7,563,000 to $9,563,000. This resulted from additional borrowings of $500,000 under one of the existing mortgage loans, amortization payments of $1,029,000, the repayment of a $7,689,000 maturing loan, and additional repayments/paydowns which reduced the mortgage notes payable $1,515,000. Of this $1,515,000, the actual cash outlay by the Trust was $1,463,000 with $52,000 representing discounts obtained by the Trust. Additionally, the Trust obtained a $2,170,000 first mortgage loan in connection with its purchase of a 104,000 square foot office building, as referenced above. The Trust's bank notes payable increased $1,000,000 during the three-year period ended September 30, 1996 to $9,800,000. The Trust borrowed $10,899,000, $7,689,000 of which was used to repay the above referenced maturing mortgage loan and the remaining $3,200,000 was used for the purchase of properties during 1996, and made principal amortization and repayments of $9,889,000.
During the three-year period ended September 30, 1996 the Trust's shareholders' equity increased 27% or $4,831,000 to $22,500,000. This increase was primarily the result of the Trust receiving $5,929,000 from its 1993 rights offering, which expired January 28, 1994, net of $1,532,000 to repurchase 38,000 of the Trust's Shares in fiscal 1996, 253,553 of the Trust's Shares in fiscal 1995 and 103,210 of the Trust's Shares in fiscal 1994, $3,080,000 of net income and $2,646,000 of distributions to shareholders during this three-year period. As a result of the Trust's total debt being reduced approximately $6,563,000 and total shareholders' equity increasing $4,831,000, the Trust's debt to shareholders' equity ratio has decreased to .86-to-1.00 at September 30, 1996 from 1.47-to-1.00 at September 30, 1993.
Liquidity and Capital Resources - -------------------------------
For each of the fiscal years ended September 30, 1996, 1995 and 1994, the Trust's portfolio of invested assets generated sufficient revenues to cover all operating expenses (excluding depreciation, a non-cash expense and in 1996 the provision for valuation reserve, also a non-cash expense), required mortgage notes amortization payments, required bank amortization payments, capital improvements to existing properties, and distributions to shareholders. During this three-year period the year end occupancy of the Trust's portfolio has been 79% at September 30, 1994, 81% at September 30, 1995, and 91% at September 30, 1996 while the average rental rates per square foot have increased from $8.47 for the year ended September 30, 1994 to $8.61 for the year ended September 30, 1995 to $9.14 for the year ended September 30, 1996. At this time Management assumes that the Trust will be implementing its Plan of liquidation during fiscal 1997. On October 7, 1996 the Trust completed a $2,450,000 sale of the Littleton Bank Building located in Littleton, Colorado. This sale resulted in a gain of approximately $563,000 which will be reported in the first quarter of Fiscal 1997. Currently, the Trust has four of its properties under contracts of sales. The Englewood Bank Building located in Englewood, Colorado is under a contract of sale for a sales price of $5,350,000. The Executive Club Building located in Denver, Colorado is under a contract of sale for $5,300,000. The Spring Village Shopping Center located in Davenport, Iowa is under a contract of sale for a sales price of $5,350,000. The Warren Plaza Shopping Center located in Dubuque, Iowa is under a contract of sale for a sales price of $5,950,000. All four of these contracts provide for due diligence periods, during which time the buyer could cancel the contract at his option. Additionally, after the completion of the due diligence period the buyer will place a non-refundable deposit with the Trust. Should the buyer fail to complete the sale, these deposits would be forfeited and retained by the Trust. Therefore,
PART II -------
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) -------------
Liquidity and Capital Resources - (Continued) - -------------------------------
there is no guarantee that these properties will actually be sold at the prices stated. Also, the Trust has signed Letters of Intent with various buyers for the sales of three additional properties. The total gross sales prices for these three properties is $15,640,000. Letters of intent are only agreements in principle on the most fundamental terms and the parties do not intend that there be any binding obligation to buy or sell the property until such time as a contract of sale is executed by both the buyer and the Trust. However, even though additional properties could be sold during fiscal 1997 the Trust's estimate for fiscal year 1997 is that operating revenues should be sufficient to cover all operating expenses (excluding depreciation, a non-cash expense), required monthly mortgage amortization payments and anticipated improvements to existing properties. Under the Plan the only distributions the Trust will make to Shareholders will be liquidating distributions resulting from the sales of Properties. Additionally, during 1997 the Trust will accrue certain employee severance payments which will be made to terminated employees primarily from the proceeds of Property sales.
Management has from time to time undertaken a major renovation of a Property in order to keep it competitive within its market. Currently, the Cannon West Shopping Center located in Austin, Texas is having a trench drain installed at a cost of approximately $150,000. This work is being done in order to combat a sub-soil problem at the property. Management believes that the installation of the trench drain will alleviate the problem. The cost of this work will be reported in the first two quarters of fiscal year 1997. Additionally, Management is reviewing plans for the installation of new store fronts at Tiffany Plaza, a shopping center located in Ardmore, Oklahoma. The current estimated cost of this work is $250,000. If the Trust proceeds with this work it should begin in the spring of 1997. No other renovation projects are currently contemplated or in process.
The Trust's cash flow from operations decreased $1,213,000 (55%) when comparing 1996 to 1995. The decrease was primarily due to the net activity of the following items:
* In 1996 the Trust had an operating loss of $2,060,000 compared to an operating income of $596,000 in 1995, or a decrease of $2,656,000. Included in the 1996 results was a $3,307,000 provision for valuation reserve, which was a non-cash expense. Also, income from real estate operations was $424,000 higher in 1996 than 1995. Additionally, 1996 included $225,000 of dividend income with no like income in 1995.
* Other assets increased $1,971,000 from 1995 to 1996. Of this amount $1,918,000 represents the amount due the Trust on its sale of securities, which amount was received by the Trust on October 1, 1996.
For 1996 the net cash used in investing activities was $1,995,000. As previously discussed, the Trust purchased land and a suburban office building for a total of $3,465,000. The Trust also purchased securities for $2,057,000. Additionally, the Trust expended $972,000 for improvements to existing properties. Cash inflows included proceeds from the sale of three condominiums, two small office buildings and a retail center totaling $1,386,000, $2,929,000 from the sale of securities and $184,000 in real estate mortgage loan repayments. During 1995, as previously discussed, the Trust sold three improved properties and a vacant land parcel. The proceeds from these sales totaled $5,545,000. Additionally, at the completion of the
PART II -------
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) -------------
Liquidity and Capital Resources - (Continued) - -------------------------------
renovation and repair project on the Tulsa, Oklahoma Petroleum Club Building the insurance settlement proceeds exceeded the expenditures for the work by $738,000. The Trust also received $145,000 in real estate loan repayments. The only net cash outflow was the $666,000 (primarily tenant improvements) spent on improvements to existing properties and the $240,000 which the Trust invested in the purchase of 14,000 shares in a real estate company. In 1996 net cash from financing activities totaled $2,286,000 while in 1995 net cash used in financing activities totaled $7,809,000, a variance of $10,095,000. Mortgage notes payable amortization payments were $203,000 in 1996 and $330,000 in 1995. Principal prepayments were $1,463,000 in 1995, as the Trust repaid a $498,000 first mortgage loan and settled a $1,017,000 first mortgage loan for $965,000 (the settlement resulted in a $52,000 extraordinary income item). In 1996 the Trust borrowed an additional $500,000 on one of its existing mortgage loans. In 1995 the Trust paid off its $3,460,000 1986 loan and paid down the 1994 Credit (defined below) $1,089,000. In 1996 the Trust borrowed $3,200,000 which was used in the purchase of property, as previously discussed. In 1996 the Trust repurchased and retired 38,000 of its shares at a cost of $174,000. In 1995 the Trust repurchased and retired 14,000 of its shares for a cost of $48,000 and through a tender offer made to all shareholders of the Trust repurchased and retired 239,553 of its shares for a cost of $1,014,000. In 1995 the Trust redeemed a $500,000 certificate of deposit. In 1996 the Trust made five distributions of $.04 per share to shareholders of the Trust for a total of $1,037,000. In 1995 the Trust made four distributions of $.04 per share for a total of $874,000.
On November 30, 1994 the Trust and National City Bank of Cleveland, Ohio and Manufacturer's and Traders Trust Company of Buffalo, New York executed a revolving line of credit agreement for a maximum of $25,000,000 (limited by the value of the collateral provided) ("1994 Credit"). The 1994 Credit was for an initial term of three years. Each year the lenders review the 1994 Credit with the option of extending the credit for one additional year. During 1996 the lenders extended the 1994 Credit to March 1, 1999. If the lenders do not extend the credit then, absent an event of acceleration, the Trust will have two years in which to repay all borrowings outstanding under the 1994 Credit. The loans will bear interest at the Trust's option at any of the following rates: (i) 1/4 of 1% over the prime lending rate; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed interest rate available from time to time.
In addition to the required monthly amortization payments under the terms of the first mortgage loans the Trust currently has (see Note E to the financial statements), during the next five fiscal years the Trust's major debt maturities are: in fiscal 1999 the 1994 Credit, which currently has a balance of $9,800,000 outstanding and on August 19, 2000 a $2,612,000 first mortgage loan.
Since Management is currently under the assumption that the Trust will be selling its Properties under the Plan, the 1994 Credit and the first mortgage loans should be repaid through the sales of the Properties. The first mortgage loans will be required to be paid off at the closing of the sale of the Property securing the loan. The 1994 Credit will be paid down at the time any of the Properties securing the 1994 Credit are sold.
Results of Operations - ---------------------
FISCAL YEAR COMPARISON:
Income from real estate operations in 1996 increased $424,000 (14%) and $781,000 (29%) as compared to
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) -------------
Results of Operations - (Continued) - ---------------------
1995 and 1994, respectively. The increases related primarily to higher rental income in 1996 compared to both 1995 and 1994 and lower depreciation expense in 1996 compared to both 1995 and 1995. Rental income was $223,000 (2%) higher in 1996 than 1995, and $718,000 (7%) higher in 1996 than 1994. Depreciation expense in 1996 was $16,000 (1%) and $142,000 (7%) lower than in 1995 and 1994, respectively. Real estate operating expenses were $185,000 (4%) lower in 1996 than 1995, but $79,000 (2%) higher in 1996 than 1994. The reasons for these variances in rental income, real estate operating expenses and depreciation expense are described below.
The Trust considers the cyclical nature of real estate markets a normal part of portfolio risk. The performance of the various real estate markets and economies of the Southwest remains mixed. Improvement in the Trust's operations will depend partially upon further economic recovery of the Southwest and, in particular, the local markets and properties where the Trust operates, especially Dallas, Texas.
1996 - 1995
Income from real estate operations increased $424,000 (14%) from 1995 to 1996. Rental income increased $223,000 (2%) from 1995 to 1996. Real estate operating expenses were $185,000 lower in 1996 than 1995. The increase in rental income was primarily due to an increase in occupancy (91% at September 30, 1996 versus 81.5% at September 30, 1995) and an increase in average rental rates ($9.14 per occupied square foot at September 30, 1996 versus $8.61 per occupied square foot at September 30, 1995). The decrease in real estate operating expenses was primarily due to the sales during 1995 of the 124 unit Parkwood Place Apartments located in Greeley, Colorado and the 51,000 square foot Walnut Hill West office building located in Dallas, Texas, as well as the March, 1996 sale of the European Crossroads a office/retail complex located in Dallas, Texas. During 1996 the Trust received $225,000 of dividend income on securities owned. There was no dividend income reported in 1995. At September 30, 1996, in accordance with the Plan the Trust made a provision for valuation reserve of $3,307,000. There was no provision made in 1995.
In 1996 the Trust recorded net gains on the sales of real estate totaling $40,000 as the result of four sales. The sales were as follows: (i) In January and February, 1996 the sale of three condominium units located in Davie, Florida for a combined sale of $138,000, resulting in a total gain of $69,000; (ii) March, 1996 $600,000 sale of the European Crossroads located in Dallas, Texas, which resulted in a loss of $313,000; (iii) April, 1996 $115,000 sale of 7.42 acres of vacant land located in Akron, Ohio, which resulted in a gain of $23,000; and (iv) September, 1996 $615,000 sale of two of the five buildings of the Walnut Stemmons Office Park located in Dallas, Texas, which resulted in a gain of $261,000. In 1995 the Trust reported gains on the sales of real estate totaling $2,499,000 on the sales of four properties. These sales are described in detail under the 1995 - 1994 analysis below.
In 1996 the Trust recorded gains on the sales of securities of $632,000. There were no gains on the sales of securities for 1995. For 1996 there were no extraordinary items. For 1995 the Trust reported $790,000 of extraordinary items which are described under the 1995 - 1994 analysis below.
1995 - 1994
Income from real estate operations increased $357,000 (13%) from 1994 to 1995. Rental income increased
PART II -------
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) -------------
Results of Operations - (Continued) - ---------------------
$495,000 (5%) from 1994 to 1995. Real estate operating expenses were $264,000 (5%) higher in 1995 compared to 1994. The increase in rental income and real estate operating expenses were primarily due to the Trust's purchase in August, 1994 of a 104,000 square foot office building located in Dallas, Texas. Additionally, depreciation expense was $126,000 (6%) lower in 1995 than 1994. The $343,000 (16%) decrease in interest expense was primarily due to lower outstanding balances. In March, 1995 the Trust repaid a $498,000 first mortgage loan on its shopping center located in Ardmore, Oklahoma. In May, 1995 the Trust settled at a discount a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado. In February and March, 1995 the Trust repaid the $3,460,000 1986 loan it had with a bank. Additionally, the Trust reduced the 1994 Credit balance from $7,689,000 to $6,600,000 (a reduction of $1,089,000) during 1995.
In 1995 the Trust recorded gains totaling $2,499,000 as the result of four property sales. The sales and gains were as follows: (i) February, 1995 $2,650,000 sale of the 197 room Quality Hotel located in St. Louis, Missouri, which resulted in a gain of $452,000; (ii) March, 1995 $2,595,000 sale of the 124 unit Parkwood Place Apartments located in Greeley, Colorado which resulted in a gain of $1,859,000; (iii) March, 1995 $800,000 sale of the 51,000 square foot Walnut Hill West office building located in Dallas, Texas which resulted in a gain of $97,000; and (iv) May, 1995 $212,000 sale of 17.7697 acres of vacant land located in Akron, Ohio which resulted in a gain of $91,000. In 1994 the Trust recorded gains on the sales of both a 69 acre and a 17 acre vacant land parcel located in Akron, Ohio which resulted in total gains of $445,000.
In 1995 the Trust settled at a discount a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado. This settlement resulted in an extraordinary income item of $52,000. In January 1994 the Trust's Petroleum Club Building located in Tulsa, Oklahoma sustained a major fire. In July, 1994 the Trust and its insurance company agreed on a settlement of $6,025,000. The Trust has completed all necessary repairs and building improvements. Upon completion of the work there was $738,000 of the settlement which had not been expended. The Trust has recorded this $738,000 as an extraordinary income item in fiscal 1995. In addition $253,000 was the cost of building improvements made as part of the building restoration. This $253,000 was capitalized as building improvements and also was recorded as an extraordinary income item in fiscal 1994.
Dividends: - ----------
For 1994 the Trust paid distributions to its shareholders of $735,000 or $.15 per share. For the shareholders $.07 per share of these distributions were classified for tax purposes as dividends and $.08 per share were classified as return of capital.
For 1995 the Trust paid distributions to its shareholders of $874,000 or $.16 per share. For the shareholders these distributions were classified for tax purposes as dividends.
For 1996 the Trust paid distributions to its shareholders of $1,037,000 or $.20 per share. For the shareholders the $.04 per share paid in October, 1995 was classified for tax purposes as dividends. The $.04 ($.16 total) per share paid in January, April, July, and September, 1996 will be classified for tax purposes as return of capital.
PART II -------
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) -------------
Income Taxes: - -------------
At September 30, 1996 the Trust had net deferred tax assets of approximately $3,048,000. As was the case at both September 30, 1995 and 1994 the Trust has established a valuation allowance equal to its net tax assets as there is doubt as to whether the net deferred tax asset will be realized.
Other: - ------
Inflation, which has been at relatively low rates for the past three years, has had an immaterial impact on the Trust's operations during the three-year period ended September 30, 1996.
Item 8.
Item 8. Financial Statements and Supplementary Data. - ------- --------------------------------------------
The response to this Item is submitted in a separate section of this report. See Item 14 of this report for information concerning financial statements and schedules filed with this report. The quarterly financial data required by this item is included as Note L of the Notes to Financial Statements filed in Part IV, Item 14 (a) (1) and (2).
Item 9.
Item 9. Disagreement on Accounting and Financial Disclosure. - ------- ----------------------------------------------------
There has not been any change in the Trust's independent auditors, nor have there been any disagreements concerning accounting principles, auditing procedures, or financial statement disclosure within the twenty four (24) months prior to the date of the most recent financial statements presented in this report.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - -------- ---------------------------------------------------
Except as set forth under "Executive Officers of the Registrant" following Item 4 of Part I, which is incorporated by reference, all information required by this Item is incorporated by reference to the material under the caption "Election of Trustees" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
Item 11.
Item 11. Executive Compensation. - -------- -----------------------
All information required by this Item is incorporated by reference to the material under the caption "Executive Compensation" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- ---------------------------------------------------------------
All information required by this Item is incorporated by reference to the material under the caption "Beneficial Ownership of Principal Holders and Management" of the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
Item 13.
Item 13. Certain Relationships and Related Transactions. - -------- -----------------------------------------------
Information required by this Item with respect to certain relationships and related transactions is incorporated by reference to the material under the caption "Certain Transactions" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - -------- ----------------------------------------------------------------
(a) The following documents are filed as a part of this Report:
(1) The Financial Statements listed on the List of Financial Statements and Financial Statement Schedules are filed as a separate section of this Report.
(2) The Financial Statement Schedules listed on the List of the Financial Statements and Financial Statement Schedules are filed as a separate section of this Report.
(3) The exhibits required by Item 601 of Regulation S-K and identified on the Exhibit Index contained in this Report.
(b) Reports on Form 8-K filed in the fourth quarter of Fiscal Year 1996:
Form 8-K dated September 24, 1996
Item 5. Other Events - - On September 24, 1996 the Board of Trustees of CleveTrust Realty Investors (the "Trust") determined that it would submit to the shareholders of the Trust a plan for the orderly liquidation of the Trust pursuant to Article XIII of the Trust's Declaration. A copy of a News Release dated September 25, 1996 was filed as Exhibit 99.1.
Item 7. Financial Statements and Exhibits - - Press Release dated September 25, 1996.
(c) The exhibits being filed with this Report are identified on the Exhibit Index contained in this Report.
(d) The Financial Statement Schedules are filed as a separate section of this Report.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEVETRUST REALTY INVESTORS Dated: December 9, 1996 By: /s/ Michael R. Thoms --------------------- Michael R. Thoms Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated:
ANNUAL REPORT ON FORM 10-K
PART IV, ITEM 14(a)(1) and (2) and ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED SEPTEMBER 30, 1996
CLEVETRUST REALTY INVESTORS
WESTLAKE, OHIO
Form 10-K -- Part IV, Item 14(a)(1) and (2)
CLEVETRUST REALTY INVESTORS
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements:
The following financial statements of CleveTrust Realty Investors are included in Part II, Item 8:
Statement of Financial Condition -- September 30, 1996 and 1995
Statement of Operations -- Years ended September 30, 1996, 1995 and 1994
Statement of Cash Flows -- Years ended September 30, 1996, 1995 and 1994
Statement of Changes in Shareholders' Equity -- Years ended September 30, 1996, 1995 and 1994
Notes to Financial Statements
Financial Statement Schedules:
The following financial statement schedules of CleveTrust Realty Investors are included in Part IV, Item 14(d):
Schedule III -- Real Estate and Accumulated Depreciation.
All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Report of Independent Auditors
Trustees and Shareholders CleveTrust Realty Investors Westlake, Ohio
We have audited the accompanying statement of financial condition of CleveTrust Realty Investors as of September 30, 1996 and 1995, and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). 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 perfortn the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CleveTrust Realty Investors at September 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
November 15, 1996 Cleveland, Ohio
STATEMENT OF FINANCIAL CONDITION
CLEVETRUST REALTY INVESTORS
See notes to financial statements.
STATEMENT OF OPERATIONS
CLEVETRUST REALTY INVESTORS
See notes to financial statements.
STATEMENT OF CASH FLOWS
CLEVETRUST REALTY INVESTORS
See notes to financial statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
CLEVETRUST REALTY INVESTORS
Years Ended September 30, 1996, 1995, and 1994
NOTES TO FINANCIAL STATEMENTS
CLEVETRUST REALTY INVESTORS
Years Ended September 30, 1996, 1995 and 1994
NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CleveTrust Realty Investors is a business trust organized in the State of Massachusetts, but with its headquarters in Ohio. The Trust's primary business objective is the ownership and operation of improved real estate.
USE OF ESTIMATES: The preparation of financial statements requires Management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could affect the amounts reported and disclosed herein.
INCOME RECOGNITION: Rental income from improved properties is generally recorded as it accrues. Interest on mortgage loans is recognized as income as it accrues during the period the loans are outstanding except where collection of interest is considered doubtful. Contingent rents and interest are recognized as income when determinable. Accrual of income is suspended on any investment when the collection of rent, principal, or interest is doubtful.
REAL ESTATE: In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" the Trust reviews long-lived assets whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. If, based on this review, the sum of expected future cash flows from an asset is less than the carrying amount, an impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Additionally, SFAS No. 121 requires that long-lived assets to be disposed of be carried at the lower of amortized cost or fair market value, less cost to sell, whichever is lower.
On September 24, 1996 the Trustees of the Trust unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust ("the Plan"). The Plan, as proposed, would involve the sale of the Trust's properties during a period of approximately three years. Based on this announcement the Trust has reclassified all of its properties at September 30, 1996 in accordance with SFAS No. 121 to Properties Held for Sale. A review of the carrying value of all the properties at September 30, 1996 determined that certain properties had a carrying value lower than the estimated fair market value, less cost to sell. Therefore, a valuation reserve was established for those properties. (See NOTE C)
Prior to the adoption by the Trust of SFAS No. 121, the Trust regularly evaluated the recoverability of each investment in the portfolio. When appropriate, an allowance for possible investment losses was provided for properties acquired through foreclosure or deed in lieu of foreclosures. In fiscal 1994 the Trust applied the allowance for possible investment losses to three previously foreclosed properties for which it had been provided. The Trust concluded that it was unlikely that the value of these properties would recover. Therefore, they were written down to their net realizable value through application of the allowance.
Real estate previously acquired by the Trust pursuant to normal real estate purchase transactions was recorded at cost. Real estate acquired by foreclosure or deed in lieu of foreclosure was recorded at estimated fair value at the date of acquisition, but not in excess of the unpaid balance of the related loan plus costs of securing title to and possession of the property.
DEPRECIATION: Depreciation on equity investments is computed by the straight-line method at rates based upon the expected economic lives of the assets which range from 31 to 40 years for buildings, 5 to 40 years for other property and the specific length of the tenant lease for tenant improvements. Additionally, one building and its permanent improvements are depreciated over a life of 55 years. In accordance with the Plan, properties held for sale will not be depreciated in Fiscal year 1997.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - - CONTINUED
REPAIRS AND CAPITAL IMPROVEMENTS: Expenditures for repairs and maintenance which do not add to the value or prolong the useful life of property owned are charged to expense as incurred; those expenditures for improvements which do add to the value or extend the useful life are capitalized.
CASH AND CASH EQUIVALENTS : The Trust defines cash and cash equivalents as cash in bank accounts and investments in marketable securities, primarily short-term commercial paper with original maturities of three months or less.
INVESTMENTS IN SECURITIES: At September 30, 1996 the Trust did not own any equity securities. At September 30, 1995 the Trust classified its investments in equity securities in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities," as available for sale and as a result they were stated at their fair value. The effect of the unrealized gains was included as a component of Shareholders' Equity. Realized gains are calculated on an actual cost basis.
INCOME TAXES: Deferred income taxes are recognized for temporary differences between the financial reporting basis of assets and liabilities and their respective tax basis and for operating and capital loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence including tax planning strategies and other factors. The effects of changes in tax laws or rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date.
NET INCOME PER SHARE: Net income per Share of Beneficial Interest has been computed using the weighted average number of Shares of Beneficial Interest outstanding each year.
RECLASSIFICATION: Certain items in previously issued financial statements have been reclassified to conform to 1996 presentations.
NOTE B - - INCOME TAXES
The Trust's deferred tax assets and liabilities at September 30, 1996 and 1995 are as follows:
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE B - - INCOME TAXES - - CONTINUED
The Trust maintains a valuation reserve equal to its net deferred tax asset as there is doubt as to whether the net deferred tax asset will be realized.
For the fiscal year ended September 30, 1996 the Trust had a net loss for tax purposes and therefore had no income tax expense. Additionally, the Trust had no income tax expense for the fiscal year ended September 30, 1995. A reconciliation between the 1995 results and the amount of income tax expense that would result from applying Federal statutory rates to pretax income is as follows:
At September 30, 1996 the Trust had, for federal tax purposes, net operating loss and capital loss carryforwards of approximately $10.2 million. The use of the net operating loss carryforwards is limited by Section 382 of the Internal Revenue Code with effect for losses associated with years prior to December 28, 1992. Net capital loss carryforwards can only be utilized to the extent that net capital gains are incurred during the next five year period. The Trust can use approximately $ 298,000 per year of net operating loss carryforwards, plus gains of the sales of properties ("built in gains"), plus any prior years' unused portion (limited by carryforward periods) for losses generated prior to December 28, 1992. The Trust can also use carryforwards generated post December 28, 1992. These carryforwards of approximately $9.5 million expire through 2011. The remaining carryforwards of $700,000 may be recognized for a period through fiscal 1998 against gains on sales of properties, if any , to the extent that fair market values of these properties exceeded their tax bases as of December 28, 1992.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE C - - PROPERTIES
The following is a summary of the Trust's properties held for sale and related indebtedness at September 30, 1996:
Following is a summary of activity with regards to the properties for the three years ended September 30, 1996:
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTES C - - PROPERTIES - - CONTINUED
On February 20, 1996 the Trust completed the purchase of the land on which its Englewood Bank Building is located. This land, which was previously leased by the Trust, was purchased for a price of $1,263,000.
On March 28, 1996 the Trust purchased a 52,554 square foot suburban office building located in Arlington, Texas for a purchase price of $2,202,000.
On August 26, 1994 the Trust purchased a 104,000 square foot office building located in Dallas, Texas for $3,918,000. Of this amount $2,170,000 was provided by a first mortgage loan on the property, which the Trust obtained at the time of the purchase.
On January 18, 1994 the Trust's Petroleum Club Building located in Tulsa, Oklahoma sustained a major fire. In July, 1994 the Trust and its insurance company agreed on a settlement of $6,025,000. The Trust has completed all necessary repairs and building improvements for an amount less than the settlement. The Trust has recorded $738,000 as an extraordinary income item in fiscal 1995. The cost of building improvements made as part of the building restoration was $253,000 was capitalized and recorded as an extraordinary income item in fiscal 1994.
NOTE D - - REAL ESTATE SALES
The fiscal 1996 net gains on sales of real estate totaling $40,000 include the following: (i) $69,000 which represents the gain the Trust realized on its January and February, 1996 sales of three condominium units located in Davie, Florida for a combined sales price of $138,000; (ii) a loss of $313,000 the Trust realized on its March, 1996 $600,000 sale of the European Crossroads office/retail complex on 11.5 acres of land located in Dallas, Texas; (iii) $23,000 represents the gain the Trust realized on its April, 1996 $115,000 sale of 7.42 acres of vacant land located in Akron, Ohio; and (iv) $261,000 represents the gain the Trust realized on its September, 1996 $615,000 sale of two of the five buildings comprising the Walnut Stemmons Office Park located in Dallas, Texas.
The fiscal 1995 gains on sales of real estate totaling $2,499,000 include the following: (i) $452,000 which represents the gain the Trust realized on its February, 1995 $2,650,000 sale of the 197 room Quality Hotel located at the airport in St. Louis, Missouri; (ii) $1,859,000 represents the gain the Trust realized on its March, 1995 $2,595,000 sale of the 124 unit Parkwood Place Apartments located in Greeley, Colorado; (iii) $97,000 represents the gain the Trust realized on its March, 1995 $800,000 sale of the 51,000 square foot Walnut Hill West office building located in Dallas, Texas; and (iv) $91,000 represents the gain the Trust realized on its May, 1995 $212,000 sale of 17.7697 acres of vacant land located in Akron, Ohio. The Trust received a purchase money mortgage for the total $212,000 purchase price in connection with the sale.
The fiscal 1994 gains on sales of real estate totaling $445,000 include the following: (i) $361,000 which represents the gain the Trust realized on its March, 1994 $834,000 sale of 70 acres of vacant land located in Akron, Ohio. The Trust received a purchase money mortgage for $290,000 of the purchase price in connection with the sale; and (ii) $84,000 which represents the gain the Trust realized on its August, 1994 $198,000 sale of 16.6 acres of vacant land located in Akron, Ohio.
NOTE E - - MORTGAGE NOTES PAYABLE
At September 30, 1996 the mortgage notes payable of the Trust are non-recourse mortgages except the first $750,000 of the $2,612,000 loan maturing August 19, 2000 which is recourse to the Trust. The following data pertains to the mortgage notes payable as of September 30, 1996.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE E - - MORTGAGE NOTES PAYABLE - - CONTINUED
On October 7, 1996 the Trust completed the sale of the Littleton Bank building located in Littleton, Colorado (see NOTE J). This property secured the above listed $1,209,000 loan which was to mature July 1, 2003. This loan was repaid on October 7, 1996 in connection with the sale of the property.
Required payments on the Trust's two remaining mortgage notes payable for the succeeding five years are as follows:
Effective December 28, 1995 the Trust and its Lender modified the first mortgage loan on the 14800 Quorum Office Building located in Dallas, Texas as follows: The Trust borrowed an additional $500,000, which increased the outstanding borrowings to $2,640,000 at the time of the transaction. Additionally, the interest rate, which was 1.75% over the prime lending rate (9.5% at the time of the modification) adjusted every two years, was changed to a fixed rate of 8.3%, effective January 1, 1996, until the maturity date of August 19, 2000.
Effective September 1, 1996 the Trust and its Lender modified the first mortgage loan on the Cannon West Shopping Center located in Austin, Texas as follows: The interest rate was reduced from 9.5% to 8.3% and the maturity date was extended five years from May 7, 1997 to May 7, 2002.
On March 16, 1995 the Trust repaid a $498,000 first mortgage loan on its shopping center located in Ardmore, Oklahoma. This loan had a maturity date of June 16, 1996. On May 1, 1995 the Trust settled at a discount, a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado, which had a maturity date of February 1, 1999. This settlement resulted in an extraordinary income item of $52,000.
Total interest expense on mortgage notes payable did not differ materially from interest paid.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE F - - BANK NOTES PAYABLE
At September 30, 1996 the bank notes payable included $9,800,000 of borrowings under the 1994 Credit Agreement. At September 30, 1995 the bank notes payable included $6,600,000 of borrowings under the 1994 Credit Agreement.
Effective November 30, 1994 the Trust converted a September 30, 1994 $7,689,000 demand note to a revolving line of credit ("1994 Credit") issued by National City Bank of Cleveland, Ohio ("NCB") and Manufacturer's and Traders Trust Company of Buffalo, New York ("M&T"). The 1994 Credit is for up to $25,000,000 (but is limited by the value of the collateral provided). Of this amount a maximum of $15,000,000 is currently available and $10,000,000 will be available at the Trust's discretion upon payment of an activation fee of 3/4 of 1% on the $10,000,000. The initial term of the 1994 Credit was three years. Each year the lenders will review the 1994 Credit with the right to extend it for one additional year. The lenders have extended the 1994 Credit to March 1, 1999. Interest only payments, which is at the option of the Trust, will be at either (i) 1/4 of 1% over the prime rate; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed interest rate available from time to time. Additionally, a commitment fee of 3/8 of 1% is due on any funds available but not borrowed. The 1994 Credit is secured by certain of the Trust's real estate investments and contains certain covenants including a covenant for a minimum shareholders' equity. At September 30, 1996 the amount of shareholders' equity free from such restriction was approximately $2,500,000.
The Trust also had a loan with another bank which was scheduled to mature December 25, 1993 but, had been extended to December 25, 1997. The interest rate was prime plus 1% with a minimum rate of 7.5%. The Trust was required to make monthly amortization payments based on a twenty-year amortization schedule. On February 28, 1995 the Trust made a principal payment of $2,200,000 and on March 15, 1995 paid off the remaining balance of $1,260,000.
Total interest expense on bank notes payable did not differ materially from interest paid.
NOTE G - - SHARES OF BENEFICIAL INTEREST
On December 7, 1995 the Trust repurchased 38,000 of its Shares of Beneficial Interest for $174,000 in an open market purchase. These shares were retired by the Trust.
On August 21, 1995 the Trust mailed an Offer to purchase for cash an aggregate of 500,000 Shares of Beneficial Interest for a price of $4.00 per share to each shareholder of the Trust. The Offer ended September 22, 1995 and at its conclusion 239,553 shares were purchased and retired by the Trust. In addition to the $4.00 per share the Trust incurred costs of $56,000 in connection with the Offer.
On April 17, 1995 the Trust repurchased 14,000 of its Shares of Beneficial Interest for $48,000 in an open market purchase. These shares were retired by the Trust.
On June 26, 1994 the Trust repurchased 103,210 of its Shares of Beneficial Interest for $296,000 in an open market purchase. These shares were retired by the Trust.
On November 23, 1993 the Trust mailed a prospectus and certificate of rights to all shareholders of record as of November 12, 1993. The certificates entitled the shareholder to the right to purchase one Share of Beneficial Interest of the Trust for every two Shares owned at a price of $3.25 per Share. Additionally, this offering also provided for an oversubscription privilege which entitled each holder of a right to subscribe for Shares not purchased by other holders of rights. Oversubscriptions were allocated prorata based on the number of Shares owned. The offering expired on January 28, 1994. All 1,857,969 Shares available were sold. The net proceeds to the Trust totaled $5,929,000.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE G - - SHARES OF BENEFICIAL INTEREST - - CONTINUED
On February 21, 1992 the shareholders of the Trust approved the amended and extended 1983 Incentive Stock Option Plan, now titled the 1992 Stock Option Plan ("1992 Plan"). Under the 1992 Plan, an additional 200,000 Shares of Beneficial Interest of the Trust are reserved and made available for issuance of options to officers and employees of the Trust at the discretion of the Board of Trustees. The original plan had reserved 100,000 Shares. The 1992 Plan is extended to October 21, 2011. The option price is the fair market value on the date of the grant and no option shall be exercisable for less than 100% of this value. Under the 1992 Plan, the share appreciation rights granted previously will be unaffected; however, no share appreciation rights will be issued with grants of the 200,000 new Shares or the 17,500 Shares remaining from the original 100,000 Shares. Share appreciation rights entitle the holder to receive the difference between the market value on the date of exercise and the option price in Shares, cash or a combination thereof, at the discretion of the Board of Trustees.
In connection with the Trustees' Plan of Liquidation, the four primary officers of the Trust have executed new employment contracts effective September 1, 1996. As part of these contracts the officers waive all rights with respect to unexercised options. In return, additional compensation will be paid to the officers, based on a calculation of a minimum threshold of the distributions to the Shareholders during the liquidation period. Such amounts will be expensed as incurred.
NOTE H - - PENSION PLAN
The Trust has a defined contribution pension plan covering all full-time employees of the Trust. Contributions are determined as a set percentage of each covered employee's annual cash compensation. Contributions by the Trust are accrued during the year and paid prior to the filing of the Trust's federal income tax return for said year. For fiscal 1996 the Trust accrued $30,000 for contributions to the pension plan (for fiscal 1995 - $24,000 and fiscal 1994 - $31,000).
NOTE I - - OPERATING LEASES
Minimum future rentals due the Trust on noncancelable leases for the succeeding five fiscal years and thereafter are as follows: 1997, $7,841,000; 1998, $6,526,000; 1999, $5,324,000; 2000, $3,3716,000; 2001, $2,777,000; and $9,214,000 thereafter. Certain leases provide for contingent rentals. The Trust received $123,000 of contingent rentals for 1996 ($123,000 for 1995 and $131,000 for 1994). The Trust's carrying amount at September 30, 1996 of these real estate investments consists of land of $7,547,000 and improvements of $58,487,000, less accumulated depreciation of $23,948,000 and valuation reserve of $3,307,000.
NOTE J - - SUBSEQUENT EVENTS
On October 7, 1996 the Trust completed a $2,450,000 sale of the Littleton Bank Building located in Littleton, Colorado. This sale resulted in a gain of approximately $563,000 which will be reported in the first quarter of Fiscal Year 1997.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE K - - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended September 30, 1996 and 1995 is as follows:
SCHEULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION CLEVETRUST REALTY INVESTORS As of September 30, 1996 (In Thousands)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - - CONTINUED CLEVETRUST REALTY INVESTORS
(3) On September 24, 1996 the Trustees of the Trust unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust (the "Plan"). Since the Trust had previously adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Aseets to be Disposed of" ("SFAS No. 121") the Trust, effective September 30, 1996, classified all real estate owned as Property held for sale. In accordance with this classification the Trust reviewed the fair value of all of its property. The Trust has established a valuation reserve against four of its properties as follows:
(4) The Trust's aggregate cost for federal income tax purposes at September 30, 1996 was $66,263,000. The Trust's federal income tax return for the year ended September 30, 1996 has not yet been filed.
(5) Depreciation lives exclude tenant improvements which are depreciated over the specific lease term involved.
(6) At September 30, 1996 the Trust owned the building improvements subject to a long term ground lease. On October 7, 1996 the Trust sold the improvements to gound lease holder. The Trust will recognize a gain of approximately $563,000 in the first quarter of the fiscal year ending September 30, 1997.
CLEVETRUST REALTY INVESTORS
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED SEPTEMBER 30, 1996
EXHIBIT INDEX
CLEVETRUST REALTY INVESTORS
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED SEPTEMBER 30, 1996
EXHIBIT INDEX
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