ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2.
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On August 14, 2000, the Trust exercised its rights under the Trust's employment agreement with Mr. Leonard G. Levine by suspending him and placing him on leave from his position as president. Simultaneously, the Trust initiated an arbitration proceeding as required under the employment agreement. On October 5, 2000, Mr. Levine filed an action in the Circuit Court of Cook County, Illinois asking the court to terminate the arbitration proceedings by reason of improper forum. On October 18, 2000, the Trust filed a lawsuit against Mr. Levine in the Circuit Court of Cook County, Illinois. The Trust's complaint alleges violations of Mr. Levine's duty of loyalty owed to the Trust.
On December 6, 2000, Mr. Levine and the Trust, through their respective attorneys, agreed to dismiss the arbitration action and Mr. Levine's lawsuit challenging the arbitration and further agreed to resolve all issues under Mr. Levine's employment contract within the Trust's lawsuit against Mr. Levine in the Circuit Court of Cook County (the "Employment Litigation"). The Trust has since filed an amended complaint which seeks a declaratory judgment that the Trust has, and had, "just cause" to terminate Mr. Levine's employment contract as well as an accounting and the disgorgement of all benefits received by Mr. Levine while in breach of his fiduciary duties. The factual bases underlying the amended complaint include allegations that (i) Mr. Levine caused the Trust to pay on his account or reimburse him for expenses that were not reasonable, ordinary and necessary business expenses and (ii) during negotiations between the Trust and The Oak Realty Group, Inc. (an entity solely owned by Mr. Levine) Mr. Levine attempted to pressure the Trust into accepting Oak's offer to acquire the Trust by revealing to one of the trustees that Oak had entered into certain confidentiality and exclusivity agreements which had the intended effect of excluding potential purchasers and/or capital providers from purchasing or providing financing to a potential purchaser of the Trust, except through Oak.
On January 19, 2001, Mr. Levine filed an answer, affirmative defenses and counterclaim in the Employment Litigation. The pleading generally denies that Mr. Levine breached his fiduciary duties, raises various defenses and seeks a judgment in favor of Mr. Levine on the counterclaim reinstating him to active employment status. Discovery in this case has recently begun. The maximum potential liability in connection with Mr. Levine's contract (inclusive of incentives but exclusive of base salary) is estimated to be $1.8 million.
Also on January 19, 2001, Mr. Levine filed two lawsuits in the Circuit Court of Cook County. In the first action, Mr. Levine, suing derivatively on behalf of the Trust's shareholders, seeks to enjoin trustees Daniel Levinson, Stephen Peck and L.G. Schafran from completing the pending sale of substantially all of the Trust's assets to Denholtz Management Corporation until the Trust obtains approval of the transaction from a majority of the Trust's shareholders. This matter has been removed by the Trustees to the United States District Court for the Northern District of Illinois and the Trust has intervened as an additional defendant. All defendants jointly moved for summary judgment on February 9, 2001. The plaintiff filed a cross motion for summary judgment on February 20, 2001. The cross motions for summary judgment were fully briefed as of March 2, 2001 and the Court has taken the matter under advisement.
Mr. Levine has also filed an action in the Circuit Court of Cook County against trustees Daniel Levinson, Stephen Peck and L.G. Schafran as well as two of the Trust's largest shareholders Morgens, Waterfall, Vintiadis & Company, Inc. and Magten Asset Management Corporation. This action seeks unspecified compensatory and punitive damages for a variety of business related torts which Mr. Levine alleges the defendants have committed against him. This matter has been removed by the defendants to the United States District Court for Northern District of Illinois. No answer or other responsive pleadings has yet been filed by any of the defendants.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust held its 1999 Meeting of Shareholders on December 14, 2000. There were two proposals considered at the Meeting:
PROPOSAL #1 was to elect four trustees;
PROPOSAL #2 was to ratify the selection of Ernst & Young, LLP as our independent accountants for 2000;
PROPOSAL #1
FOR WITHHELD ---------- -------- SLATE OF TRUSTEES ELECTED
Walter E. Auch, Sr. 11,450,953 108,816 Daniel Levinson 10,571,346 988,423 Stephen M. Peck 11,108,688 451,081 L.G. Schafran 10,586,014 973,755
(All elected)
FOR AGAINST ABSTAIN ---------- ------- ------- PROPOSAL #2 11,489,591 32,159 38,019 (Carried)
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS
Our shares are included for quotation on the NASDAQ National Market (symbol - BSRTS). The table below shows the quarterly high and low bid prices reported by NASDAQ and the amount of cash distributions we paid per share for the years ended December 31, 2000 and 1999.
---- Quarter Share Per Share Declaration Ended Price Distributions Date - ------- ----- ------------- -----------
3/31 High $6.00 $0.12 4/5/00 Low $5.25
6/30 High $6.06 $0.12 7/14/00 Low $5.13
9/30 High $6.00 $0.12 10/16/00 Low $5.06
12/31 High $5.75 $0.03 1/19/01 Low $5.13
---- Quarter Share Per Share Declaration Ended Price Distributions Date - ------- ----- ------------- -----------
3/31 High $5.81 $0.12 4/05/99 Low $4.31
6/30 High $6.00 $0.12 7/07/99 Low $4.37
9/30 High $6.06 $0.12 10/06/99 Low $4.75
12/31 High $6.00 $0.12 1/10/00 Low $4.37
On January 19, 2001, we declared a cash distribution for the quarter ended December 31, 2000 of $0.03 per share payable February 28, 2001 to shareholders of record on January 29, 2001.
During 2000 and 1999, we paid distributions to common shareholders equal to $0.48 and $0.48 per share, respectively. A total of $0.12 per share in 2000 represented a return of capital to common shareholders. During 2000, we also paid distribution to preferred shareholders of $9.51 per share. No portion of 1999 distributions represented a return of capital.
Our ability to make future distributions to our shareholders is dependent upon, among other things:
. sustaining the operating performance of our existing real estate investments through scheduled increases in base rents under existing leases and through general improvement in the real estate markets where our properties are located;
. our level of operating expenses; and
. the timing of and our success in completing the sale of our real estate assets pursuant to our plan of termination and liquidation.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" for a more complete discussion.
As of February 16, 2001, there were 3,148 record holders of shares of beneficial interest.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
During the year ended December 31, 2000, we marketed our portfolio for sale and began negotiating a contract with a potential purchaser. At December 31, 2000, we owned individually or, in some cases, through joint ventures:
. fourteen office properties totaling 1.5 million rentable square feet;
. twelve flex industrial properties totaling 1.7 million rentable square feet;
. one retail center which contains 321,600 rentable square feet.
We did not acquire or sell any properties during the year ended December 31, 2000. During the year ended December 31, 1999, we sold four apartment complexes containing 864 units and one flex industrial property totaling 182,300 rentable square feet but did not acquire any properties. During 1998, we acquired ten properties totaling 834,600 square feet but did not sell any properties.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
During the year ended December 31, 2000 and 1999 our income before minority interest, net gains and extraordinary item totaled approximately $3.1 million and approximately $5.1 million, respectively. Our total revenue decreased by approximately $3.9 million or 9.4% to approximately $37.8 million from approximately $41.7 million, due to a decrease in the number of properties that we own and a decrease in total occupancy. This decrease in total revenues was partially offset by a decrease in total operating expenses, which include property operating, repairs and maintenance, real estate taxes, and ground lease expenses; and a decrease in interest expense. However, the decrease in total operating expenses and interest expense in 2000 was partially negated by severance and termination costs in the amount of approximately $1.9 million related to an employee severance and retention policy (see Severance and Termination Costs below).
On a "same-store" basis (comparing the results of operations of the properties owned during the entire year ended December 31, 2000 with the results of the same properties owned during the entire year ended December 31, 1999), total revenue increased by approximately $0.5 million due to an increase in rental rates.
As of December 31, 2000, 15% of our leasable square footage was vacant and during 2001, leases for approximately fifteen percent (15%) of our leasable square footage will expire. Although vacancy may increase temporarily, at most of our properties we believe that this lease "roll- over" is routine and the underlying space will be released at market rental rates to either the existing or new tenants. Our most significant vacancy is at 6901 Riverport Drive where a tenant occupying approximately 145,000 square feet or 45% of this property's space vacated on July 31, 2000. We are in the process of marketing this space but have not secured a new tenant. Our total revenues may be adversely affected if the space remains vacant for an extended period of time. Since December 31, 2000, a major tenant at Colonial Penn Building took occupancy of 21,850 square feet increasing the occupancy of that property to 100%, and at the Lexington Business Center two tenants took occupancy of 41,600 square feet increasing that property's occupancy from 70% to 84%. In total, out of approximately 520,000 square feet that were vacant at December 31, 2000, and approximately 148,000 square feet of leased space that expired during the first two months of 2001, approximately 207,000 square feet have been leased decreasing vacancy to approximately 460,000 square feet as of March 1, 2001.
Our total expenses decreased by approximately $1.9 million to approximately $34.7 million from approximately $36.6 million in 1999. This decrease is due to a decrease in the number of properties that we own, partially offset by approximately $1.9 million in severance and termination costs that we incurred in 2000. Our total operating expenses which include property operating, repairs and maintenance, real estate taxes, and ground lease decreased by approximately $1.3 million to approximately $12.3 million from approximately $13.6 million in 1999. On the "same-store" basis, our total operating expenses increased by approximately $0.7 million or 6.0%. Interest expense decreased by approximately $2.4 million to approximately $9.2 million from approximately $11.6 million primarily due to a reduction in the amounts borrowed as a result of the 1999 property dispositions and the conversion of our unsecured loan to Series A convertible preferred shares in January 2000.
SEVERANCE AND TERMINATION COSTS
In September 2000, we adopted an employee severance and retention program. We have since terminated certain employees and will continue to review our staffing needs in the future. The total expenses for the year ended December 31, 2000 include a charge of approximately $1.9 million for this program. These costs include a charge of approximately $0.3 million for base compensation payable to Mr. Leonard G. Levine from August 14, 2000 through December 31, 2001 under the terms of his employment agreement. Subsequent to September 30, 2000, we entered into employment agreements with Messrs. Schafran, Higgins and Teglia, and into separation agreements with Messrs. Hansen and Schmidt. Pursuant to these separation agreements and Mr. Teglia's new employment agreement, we paid a total of approximately $0.8 million in severance and termination costs in the fourth quarter of 2000. These costs are included in the $1.9 million severance and termination costs discussed above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
During the year ended December 31, 1999 and 1998 our net income totaled approximately $8.5 million and approximately $5.4 million, respectively. The approximately $3.1 million increase resulted primarily from net gains on dispositions of investments in real estate of approximately $4.1 million, and revenue growth of approximately $2.3 million reduced by expense growth of approximately $3.3 million. In particular, our total revenues increased by approximately $2.3 million or 5.8% to approximately $41.7 million from approximately $39.4 million, due primarily to an increase in the number of properties that we owned in 1999 compared to 1998. On a "same-store" basis (comparing the results of operations of the properties owned during the entire year ended December 31, 1999 with the results of the same properties owned during the year ended December 31, 1998), net operating income decreased by approximately $0.6 million with total revenues decreasing by approximately $1.1 million offset by a decrease in total operating expenses of approximately $0.5 million. The decrease in same store revenues was caused by a decrease in the occupancy at four of our properties, the Lexington Business Center, Phoenix Business Park, Elmhurst Metro Court, and Airways Plaza Office Center. The average occupancy levels at these properties were 65%, 67%, 65%, and 41% during the year ended December 31, 1999, respectively, compared to 85%, 96%, 76%, and 99% average occupancy levels during the year ended December 31, 1998. The occupancy at these four properties, as well as for our overall portfolio, was lower than our historical levels as a result of the termination of several leases during 1998 and 1999.
Our total expenses increased by approximately $3.3 million primarily due to an increase in the number of properties that we owned in 1999 compared to 1998. Our total operating expenses, which include property operating, repairs and maintenance, real estate taxes, and ground lease increased by approximately $0.2 million to approximately $13.6 million from approximately $13.4 million in 1998. On a "same-store" basis, total operating expenses decreased by approximately $0.4 million or 4.1% to approximately $9.4 million from approximately $9.8 million. Interest expense increased by approximately $1.8 million to approximately $11.6 million from approximately $9.8 million, primarily due to an increase in the amount we borrowed in connection with the acquisitions that we completed in 1998. General and Administrative expense decreased by approximately $0.1 million to approximately $4.5 million from approximately $4.6 million. Depreciation and Amortization expense increased by approximately $1.4 million to approximately $6.6 million from approximately $5.2 million which accounts for the remaining net increase in total expenses.
LIQUIDITY AND CAPITAL RESOURCES
On January 5, 2001, we adopted a Plan of Termination and Liquidation under which our Trust will be dissolved, the obligations of the Trust will be paid, appropriate reserves will be taken and the net proceeds will be distributed to our shareholders. On January 8, 2001, we entered into a Purchase and Sale Agreement to sell all of our real estate assets to an unaffiliated third party for $226 million plus the cost of all prepayment penalties and assumption fees related to our mortgage debt ("Denholtz Transaction"). The contract contains standard conditions to closing including a due diligence period during which the buyer may terminate the contract for any reason without penalty. The due diligence period ends March 30, 2001 with a closing scheduled for April 30, 2001, unless extended by the parties.
We cannot predict if, or when, we will ultimately be successful in consummating the Denholtz Transaction or an alternative transaction, should the current one terminate. However, if we are successful in completing a transaction, it is our intention to establish only those essential reserves needed to cover liquidation costs and contingent liabilities, including those costs and contingent liabilities related to pending litigation. Furthermore, it is our intention to distribute all cash proceeds from the sale of our assets in excess of these reserves to our shareholders. We expect to make a first distribution as soon as practical after the closing and a final liquidating distribution before the end of 2001.
Until we are certain that all contingencies under the purchase and sale contract are eliminated, that the buyer can terminate the contract only under penalty and that a closing date for the sale of our assets is scheduled, it is our intention to make regular quarterly distributions to the extent that the distributions can be supported by our cash flow. However, there can be no assurance that these distributions can be made with regularity or that, if made, they will equal or exceed our previous distribution levels.
In the event that we are unsuccessful in consummating the Denholtz Transaction, we expect to fund our short-term liquidity needs, including recurring capital expenditures, from our working capital (including the restricted cash which is available for capital expenditures, real estate taxes and insurance), and from income derived primarily from our property operations. We anticipate using these monies to fund periodic tenant- related capital expenditures and other capital improvements. We expect to fund our long-term liquidity needs, including funds necessary for non- recurring capital improvements and severance and termination costs from long-term and short-term secured debt or from the proceeds from the sale of
assets. If we require additional liquidity to fund a portion of the cost of improving properties in the future, we expect to borrow under our present credit facility which is secured by our Johns Creek Office and Industrial Park and Technology Park properties. As discussed below, we will need to extend or replace this facility if the Denholtz Transaction is delayed or terminated. We also have the ability to mortgage our Avalon Ridge Business Park which is our only unencumbered property.
At December 31, 2000, our assets totaled approximately $196.1 million, a decrease of approximately $10.5 million from total assets at December 31, 1999 of approximately $206.6 million. Our liabilities totaled approximately $126.4 million at December 31, 2000 a decrease of approximately $12.7 million from a total of approximately $139.1 million at December 31, 1999. Our shareholders equity increased by approximately $2.1 million to approximately $67.4 million at December 31, 2000 from approximately $65.3 million at December 31, 1999.
Cash and cash equivalents consist of cash and short-term investments. Our cash and cash equivalents balance was approximately $2.4 million at December 31, 2000 and approximately $13.1 million at December 31, 1999. The decrease in total cash and cash equivalents resulted from using approximately $6.1 million in investing activities and approximately $14.0 million in financing activities while receiving approximately $9.4 million from operating activities.
Cash Flows From Operating Activities: Net cash provided by operating activities decreased by approximately $1.4 million for the year ended December 31, 2000 to approximately $9.4 million from approximately $10.8 million in 1999. This decrease is primarily due to a reduction in the number of properties that we own. See Results of Operations above for further discussion of the operations of our real estate assets.
In prior years, we have presented Funds From Operations ("FFO") and Funds Available for Distribution ("FAD") in the Cash Flow from Operating Activities section of Liquidity and Capital Resources for purposes of allowing the reader of our financials to compare our results with those of other REIT's. In light of our adoption of a Plan of Termination and Liquidation, we will no longer present this information because our operations are no longer comparable to other REIT's that are going concerns. Therefore, while we operate pursuant to the Plan of Liquidation, FFO and FAD will no longer be presented in our annual or quarterly filings.
Cash Flows From Investing Activities: During the year ended December 31, 2000, we used approximately $6.1 million in investing activities. Cash flow was primarily used to make capital improvements at our various properties in the amount of approximately $6.4 million. In comparison during the same period in 1999, we generated approximately $7.6 million from investing activities, primarily from proceeds from the sale of investments in real estate. During the year ended December 31, 1999, we sold four apartment complexes and one flex/industrial property resulting in proceeds from sale of approximately $13.7 million (gross proceeds from sale of approximately $29.9 million less approximately $16.2 million representing debt assumed by the purchaser). We also made capital improvements at our various properties in the amount of approximately $6.0 million.
Cash Flows From Financing Activities: During the year ended December 31, 2000, we used approximately $14.0 million in financing activities. We used cash primarily to make net payments on mortgage loans, and on an unsecured loan payable of approximately $6.9 million and to pay distributions to shareholders of approximately $6.8 million. During the year ended December 31, 1999, we used approximately $9.1 million in financing activities. During the year ended December 31, 1999, we used cash primarily to make net payments on mortgage loans and bonds payable of approximately $2.8 million and to pay distributions to shareholders of approximately $6.5 million.
FINANCINGS:
On May 1, 2000, we entered into a loan agreement with LaSalle Bank National Association (the "LaSalle Loan") which provided for a loan in the amount of $12.1 million, which we can draw in four installments. The amount of $8.5 million was drawn on May 1, 2000. An additional $2 million was drawn on October 30, 2000. The loan, which is collateralized by our Johns Creek Office and Industrial Park and Technology Park properties, bears interest at a variable rate equal to LIBOR plus 2.2% and is payable monthly. The loan principal is pre-payable without penalty and matures on May 31, 2001. We utilized the proceeds from the first draw primarily to repay the amounts outstanding on a line of credit which was due on May 1, 2000 and which was previously collateralized by our Johns Creek Office and Industrial Park and Technology Park properties, and secondarily for transaction costs. We used proceeds from the second draw primarily to pay severance costs with the balance being used to fund tenant improvement costs.
On October 8, 1999, we entered into a loan agreement with LaSalle Bank N.A. in the amount of $7.8 million. The loan, which is collateralized by the Trust's Lexington Business Center property, bears interest at a variable rate equal to LIBOR plus 2% and is payable monthly. The loan principal is pre-payable without penalty and had an initial maturity date of May 31, 2000. We had two options to extend the term of the loan for one year each at the same interest rate by paying a fee of $19,500 for each extension. We exercised our first option to extend the term of the loan until May 31, 2001.
In the event that the Denholtz Transaction is delayed or terminated, we will exercise our final option to extend the Lexington loan and will attempt to extend or replace the Johns Creek and Technology Park LaSalle Loan.
As of December 31, 2000, we had borrowed $10.5 million on the LaSalle Loan leaving approximately $1.6 million available for future borrowing. At December 31, 2000, our debt to total market capitalization ratio was 58% based upon the closing share price on that date of $5.50.
During the third quarter of 1998, we borrowed $7.4 million under a convertible term loan agreement entered into with a group of lenders in October 1997. On January 20, 2000, we paid conversion fee of $37,000 (0.5% of the outstanding loan balance) and we repaid approximately $1.2 million of the convertible term loan. The remaining balance of approximately $6.2 million was converted into 61,572 Series A convertible preferred shares at a conversion rate of $100 per share and may be further converted into common shares at a conversion rate of $5.15 per share.
RISK FACTORS
FACTORS PERTAINING TO PLAN OF TERMINATION AND LIQUIDATION
NO ASSURANCES THAT THE TRANSACTIONS CONTEMPLATED BY THE PURCHASE AGREEMENT WILL CLOSE. On January 5, 2001, we adopted a Plan of Termination and Liquidation (the "Plan") and on January 8, 2001, we entered into a Purchase and Sale Agreement with Denholtz Management Corporation ("Denholtz") to sell all of our real estate assets (the "Purchase Agreement"). The Purchase Agreement grants Denholtz until March 30, 2001, the right to terminate the Purchase Agreement in its sole discretion. Additionally, the Purchase Agreement gives Denholtz the right to exclude certain properties if certain rental and other thresholds are not met. Also, the closing of the transactions contemplated by the Purchase Agreement are dependent on standard conditions to closing, one or more of which may not occur.
There can be no assurance that the transactions contemplated by the Purchase Agreement will ever close. If the transactions contemplated by the Purchase Agreement do not close, we may not be able to sell all of our assets in a timely manner and on financial terms that are as favorable as those contained in the Purchase Agreement. Additionally, there can be no assurance that Denholtz will purchase all of our properties. If Denholtz does not purchase one or more of our properties, we may not be able to sell those properties in a timely manner and on financial terms that are as favorable as those contained in the Purchase Agreement. The consequence of a termination of the Denholtz Transaction will be that any liquidating distribution that was expected to be made from the net sale proceeds will be delayed until another transaction or series of transactions can be completed for all or part of our assets. In the interim, our ability to make quarterly distributions will depend on the cash flow generated by our properties less our corporate overhead.
Further, our failure to sell in a timely manner any properties that Denholtz does not purchase increases the risk that we will make distributions pursuant to the Plan after the 24 month anniversary of its adoption. Any distributions made after January 5, 2003 will not qualify for the dividends paid deduction thereby potentially subjecting us to tax on our net income and net gains from dispositions. See, "We Might Fail to Qualify as a REIT," below.
SALES OF ASSETS NOT SUBJECT TO SHAREHOLDER APPROVAL. The Denholtz Transaction will not be submitted to a vote of our shareholders. We have obtained written advice from our Massachusetts counsel and therefore we believe that our Declaration of Trust grants the Trustees the authority, without shareholder approval, to sell any and all of our assets on such terms as the Board of Trustees determines appropriate, so long as such sales are made pursuant to the Plan. On January 19, 2001, Leonard G. Levine, our suspended president and chief executive officer, not individually but on behalf of the shareholders of the Trust, filed a lawsuit in the Circuit Court of Cook County, Illinois, alleging that the Purchase Agreement and the transactions contemplated thereby require shareholder approval. The complaint seeks an injunction against three of our trustees to prevent them from closing the transaction until shareholder approval is obtained. Although, based in part upon written advice we have received from our Massachusetts counsel, we believe that our shareholders are not required to approve the sale of our assets (and, the Purchase Agreement requires our outside counsel to give an opinion to that effect), there can be no assurance that Mr. Levine will not prevail in this lawsuit.
The pendency or the result of Mr. Levine's lawsuit may delay or abort the closing of the transactions contemplated by the Purchase Agreement.
LIMITED MARKET FOR SHARES. If we fail to sell all of our properties in accordance with the Purchase Agreement, and the value of our assets decline or the costs and expenses related to such sales and to the liquidation process exceed those we are currently estimating, the liquidation may not yield distributions as great as, or greater than, the recent market prices of our shares. No assurances can be made as to the actual amount and timing of distributions, which could be made over a substantial period of time.
DECREASING LIQUIDITY. As we sell our assets and distribute proceeds, our market capitalization and "float" will diminish and market interest in our shares by the investment community may diminish, thereby reducing or effectively eliminating the market demand and liquidity for our shares, which would adversely affect the market price for our shares. At a later stage of the liquidation process, the Nasdaq National Market may cause our shares to be delisted.
QUALIFICATION AS A REIT. The calculation of the estimated liquidation price per share, assumes that we will continue to qualify as a REIT under the Code during the entire liquidation process and, therefore, no provision has been made for federal income taxes. Although we expect to maintain such REIT qualification, there can be no assurance thereof. See "We Might Fail to Qualify as a REIT" below.
RISKS OF ABANDONMENT OF PLAN. In the event the Plan is abandoned by our Trustees (which may occur at any time during the liquidation process) at a time when we are significantly reduced in size, certain operating risks will increase, as will the risk that our share price will trade at a greater discount to the perceived underlying value of its real estate holdings.
REAL ESTATE RISKS
WE COMPETE FOR TENANTS. All of our office and flex industrial properties are located in highly-developed areas that include other office and flex industrial properties. Some of these properties are newer or better located than our properties. Further, our competitors may have greater resources than we do, which could allow them to reduce rents to a level that is not profitable for us. We may also be required to spend money upgrading or renovating our properties to make them attractive to both existing and potential tenants thus increasing our expenses and reducing our cash resources. The number of properties or other companies that compete in our market areas could have a material effect upon:
. our ability to lease space at our properties; . the amount of rent that we can charge on new leases or renewals; and . the dollar amount of tenant improvements or leasing commissions required to lease a property.
WE OWN PROPERTIES IN A LIMITED NUMBER OF MARKETS. Our properties are located in the Midwestern and Southeastern United States, primarily suburban Chicago, where we own properties that account for 22% of our gross rental revenue, and suburban Atlanta, where we own properties that account for 31% of our gross rental revenue. Our ability to maintain or increase our revenues or to generate revenues that exceed our operating expenses is affected by economic conditions in the Midwestern and Southeastern United States. Like other real estate markets, these markets have experienced economic downturns in the past and will likely experience downturns in the future. Layoffs or downsizing, industry slowdowns, changing demographics, increases in the supply of property or reduced demand for office or flex industrial space may decrease our revenues or increase our operating expenses or both.
LEASES ON APPROXIMATELY 15% OF OUR RENTABLE SQUARE FEET EXPIRE DURING 2001 AND 15% OF OUR RENTABLE SQUARE FOOTAGE WAS VACANT AS OF DECEMBER 31, 2000. As leases expire, we may not be able to renew or re-lease space at rates comparable to or better than the rates contained in the expiring leases. Leases on approximately 15% of our rentable square feet will expire prior to December 31, 2001. If we fail to renew or re-lease space at rates that are at least comparable to the rates on expiring leases, the revenues generated by our properties will decline. Further, we may have to spend significant sums of money to renew or re-lease space covered by expiring leases, potentially reducing the amount of money that we have available to distribute to you or to use for other purposes.
OUR TENANTS MAY NOT PAY THEIR RENT OR MAY DECLARE BANKRUPTCY. We derive substantially all of our revenue from leasing space at our properties. Our ability to make distributions to you may be negatively affected if tenants leasing a significant percentage of our rentable square feet fail to pay their rent or if we are unable to profitably lease space. We may experience substantial delays and incur significant expenses enforcing our rights against tenants who do not pay their rent. A tenant may also seek the protection of the bankruptcy laws and delay making rental payments to us or actually reject or terminate its lease under those laws. Even if a tenant did not seek the protection of the bankruptcy laws, the tenant may from time to time experience a downturn in its business which may weaken its financial condition and its ability to make rental payments to us when due.
WE MAY NOT BE ABLE TO QUICKLY VARY OUR PORTFOLIO. Investments in real estate are relatively illiquid. Except in certain circumstances, in order to continue qualifying as a REIT, we are subject to rules and regulations which limit our ability to sell properties within a short period of time.
WE ARE REQUIRED TO COMPLY WITH VARIOUS LAWS AND REGULATIONS. As an owner of property, we are required to comply with a variety of federal, state and local laws. Complying with these laws and regulations may increase our operating expenses and reduce our profits. For example, we are required to comply with laws and regulations that impose liability on a property owner for the costs of removing or remediating certain hazardous materials released on a property. We are subject to these laws even if we are not aware of, or responsible for, releasing these materials. These laws or regulations may also restrict the way that we can use a property or the type of business which may be operated on the property. Further, if we fail to comply with these laws or regulations by, for example, failing to properly remediate a release of hazardous material, we may not be able to sell the affected property or borrow money using the property as collateral for a loan. We may also be required to pay money to individuals who are injured due to the presence of hazardous materials on our property. Although we are not aware of any hazardous materials at our properties, these materials may exist and the cost of removing or remediating them may be material and could adversely impact the value of the property affected. We may also be required to pay the cost of removing or remediating hazardous materials from a disposal or treatment facility to which we may have shipped hazardous or toxic substances even if we never owned or operated the disposal or treatment facility. Our properties must also comply with the Americans with Disabilities Act. This act establishes certain standards related to access to and use of properties by disabled persons. We may be required, for example, to remove any barriers to access. If we fail to comply, the U.S. government may fine us or we may be required to pay damages to a disabled person. Complying with these requirements may increase our expenses and changes in these requirements may result in unexpected expenses.
OUR OBJECTIVES MAY CONFLICT WITH THOSE OF OUR JOINT VENTURE PARTNERS. We own eight of our properties, or approximately 40% of our rentable square footage, through controlling interests in joint ventures with various third parties. Investments in joint ventures which own properties may involve risks that are not otherwise present when we wholly own the property directly or through one of our subsidiaries. For example, our co-venturer may file for bankruptcy protection or may have economic or business interests or goals which are inconsistent with our goals or interests. Further, although in each of these ventures we own a controlling interest and have authority over major decisions such as the sale or refinancing of properties, we owe fiduciary duties to our partners that may cause us to take actions we otherwise would not have taken.
WE MAY NOT HAVE ENOUGH INSURANCE. We carry comprehensive liability, fire, flood, earthquake, extended coverage and rental loss policies that insure us against losses at our properties with policy specifications and insurance limits that we believe are reasonable. There are certain types of losses, for example environmental, that we may decide not to insure against since the cost of insuring for the loss is not economical. In establishing our insurance strategy, we use our discretion in determining the amount of coverage, the limits on this coverage and the deductibles that apply to the coverage in an attempt to balance the amount of insurance that we purchase and the cost of that insurance. We may, however, suffer losses that exceed our insurance coverage. Further, inflation, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance.
PROPERTY TAXES MAY INCREASE. We are required to pay taxes based on the assessed value of our properties as determined by various taxing authorities such as state or local governments. These taxing authorities may increase the tax rate imposed on a property or may reassess property value, either of which would increase our operating expenses.
REAL ESTATE FINANCIAL RISKS
WE OFTEN NEED TO BORROW MONEY TO FINANCE OUR BUSINESS. Our ability to internally fund our capital needs is limited since we must distribute at least 95% of our net taxable income (excluding net capital gains) to our shareholders to qualify as a REIT. Consequently, we often borrow money to fund our operating or capital needs, and may borrow monies to satisfy the 95% distribution requirement. The documents which govern how we may conduct our business do not limit the amount of money that we may borrow. Borrowing money to fund operating or capital needs exposes us to various risks. For example, our properties may not generate enough cash to pay the principal and interest obligations on our loans or we may violate a loan covenant that results in the lender accelerating the maturity date of a loan. As of December 31, 2000, we owed a total of approximately $119.7 million, secured by mortgages on certain of our properties. If we fail to make timely payments on our loans, including those cases where a lender has accelerated the maturity date due to a violation of a loan covenant, the lenders could foreclose on the properties securing their loans and we could lose our entire investment in those properties. Once a loan becomes due, we must either pay the remaining balance or borrow additional money to pay off the maturing loan. We may not, however, be able to obtain a new loan, or the terms of the new loan, such as the interest rate or payment schedule, may not be as favorable as the terms of the maturing loan. Thus, we may be forced to sell a property at an unfavorable price to pay off the maturing loan or agree to less favorable loan terms. A total of $23.6 and $4.2 million of our indebtedness matures on or before December 31, 2001 and 2002, respectively.
We occasionally enter into loans where the interest rate may fluctuate. As of December 31, 2000, we owed approximately $22.5 million that bore interest at variable rates. We may borrow additional amounts that bear interest at variable rates. If interest rates increase, the amount of interest that we are required to pay on these borrowings will also increase. Any such increase would increase our operating expenses.
WE DEPEND ON A SMALL NUMBER OF KEY PERSONNEL. Our success depends, in part, on the efforts of our principal executive officers, particularly Messrs. Schafran, Higgins and Teglia. Although we have entered into employment contracts with each of these individuals, the loss of their services could have an adverse effect upon our operations.
THIRD PARTIES MAY BE DISCOURAGED FROM MAKING ACQUISITION OR OTHER PROPOSALS THAT MAY BE IN YOUR BEST INTERESTS. Under our Declaration, no single person or group of persons (an entity is considered a person) may own more than 9.9% of our outstanding common shares. The employment contracts we have with each of our senior executives may require us, in certain circumstances, to make payments to these individuals if a "change of control" occurs. These provisions may prevent or discourage a third party from making a tender offer or other business combination proposal such as a merger, even if such a proposal would be in the best interest of our shareholders.
WE MIGHT FAIL TO QUALIFY AS A REIT. If we fail to qualify as a REIT, we would not be allowed to deduct amounts distributed to our shareholders in computing our taxable income and would incur substantially greater expenses for taxes and would have less money available to distribute to you. We would also be subject to federal income tax at regular corporate rates as well as potentially the alternative minimum tax. Unless we satisfied some exception, we could not elect to be taxed as a REIT for the four taxable years following the year during which we were disqualified. We may fail to qualify as a REIT if, among other things:
. less than 75% of the value of our total assets consists of real estate assets, cash and government securities at the close of each fiscal quarter;
. more than 5% of the value of our assets consists of securities of any one issuer or we hold more than 10% of the outstanding voting securities (subsequent to January 1, 2001, 10% of the value of the securities) of any one issuer at the close of each fiscal quarter;
. less than 75% of our gross income is generated from rents from real property, interest on obligations secured by mortgages, gain from the sale of property, and certain other property-related revenue sources; or
. we fail to distribute at least 95% (subsequent to January 1, 2001, 90%) of our "REIT taxable income" to our shareholders.
If we fail to distribute enough money to satisfy the REIT requirements, we may also have to pay a non-deductible excise tax. This tax is equal to 4% of the amount in any year that our distributions are less than the sum of 85% of our ordinary income in the current year plus 95% of our net income from capital gains in the current year plus 100% of the taxable income that we did not distribute in prior years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not engage in any hedge transaction or in the ownership of any derivative financial instruments. To mitigate the impact of fluctuations in interest rates, we generally maintained over 70% of our debt as fixed rate in nature by borrowing on a long-term basis.
As of December 31, 2000, we had approximately $119.7 million of outstanding long-term debt, of which $22.5 million bears interest at variable rates. As of December 31, 2000, the weighted-average interest rate on this variable rate debt was 8.33%. If interest rates on this variable rate debt were to increase one percentage point (1%), interest expense would increase by $225,000 on an annual basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BANYAN STRATEGIC REALTY TRUST INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----
Report of Independent Auditors 28
Consolidated Balance Sheets, December 31, 2000 and 1999 29
Consolidated Statements of Income For the Years Ended December 31, 2000, 1999 and 1998 31
Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 2000, 1999 and 1998 33
Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999 and 1998 34
Notes to Consolidated Financial Statements 36
Schedule -------- Consolidated Real Estate and Accumulated Depreciation III
SCHEDULES NOT FILED:
All schedules other than those indicated in the above index are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
THE SHAREHOLDERS BANYAN STRATEGIC REALTY TRUST
We have audited the accompanying consolidated balance sheets of Banyan Strategic Realty Trust as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the index at Item 8. These financial statements and schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Banyan Strategic Realty Trust at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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
Chicago, Illinois February 1, 2001
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. LIQUIDATION OF THE TRUST
On January 8, 2001, the Trust entered into a Purchase and Sale Agreement to sell all its real estate assets to an unaffiliated third party for $226 million plus the cost of all prepayment penalties and assumption fees related to the Trust's mortgage debt. The contract contains standard conditions to closing including a due diligence period during which the buyer may terminate the contract for any reason without penalty. The due diligence period ends March 30, 2001 with a closing scheduled for April 30, 2001, unless extended by the parties.
In anticipation of the sale of the Trust's real estate assets, the Trustees on January 5, 2001 adopted a Plan of Termination and Liquidation under which, the Trust will be dissolved, the obligations of the Trust will be paid, appropriate reserves will be taken and the net proceeds will be distributed to the shareholders. Effective as of January 5, 2001, the Trust adopted the liquidation basis of accounting. The following represents the unaudited pro forma Shareholders' Equity as of December 31, 2000 assuming the adoption of the liquidation basis of accounting as of that date:
Shareholders' Equity at December 31, 2000 (Going concern basis) $67,350
Pro Forma adjustments to Liquidation Basis Liquidation and Termination Costs (810) Elimination of intangible assets (5,470) ------- Pro Forma Shareholders' Equity at December 31, 2000 (Liquidation Basis) $61,070 =======
2. ORGANIZATION AND DESCRIPTION OF BUSINESS
Banyan Strategic Realty Trust (the "Trust") was organized in 1986 as a business trust under the laws of the Commonwealth of Massachusetts. The business of the Trust is the ownership and operation of real estate properties. At December 31, 2000, the Trust owned twenty-seven properties located principally in the Midwest and Southeast United States. See Note 8 for information with respect to the Trust's business segments.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the Trust, its wholly-owned subsidiaries and its controlled Partnerships. In all of its partnerships, the Trust is the controlling general partner and retains sole authority over all significant decisions. All intercompany balances and transactions have been eliminated in consolidation.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INVESTMENT IN REAL ESTATE
Costs incurred with respect to third parties for the acquisition, development, construction and improvement of properties are capitalized. Certain costs of yet-to-be acquired properties, including deposits and professional fees, are capitalized as other assets. These costs are subsequently capitalized as property acquisition costs or charged to expense when it becomes apparent that acquisition of a particular property is not probable. Repairs and maintenance are charged to expense when incurred.
Depreciation of buildings is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years. Depreciation of tenant improvements is computed using the straight-line method over the shorter of the lease term or useful life. For the years ended December 31, 2000, 1999 and 1998, depreciation expense amounted to $6,091, $5,982 and $4,765, respectively.
The Trust recognizes impairment losses for its properties when indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying amount.
The Trust classifies its real estate properties as held for sale when its Board of Trustees has authorized the sale and an active program to find a buyer has been initiated. The Trust classified all of its properties as held for sale as of December 31, 2000 in consideration of the Purchase and Sale Agreement described in Note 1. As of December 31, 1999, none of the properties were classified as held for sale.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related loans.
REVENUE RECOGNITION
Minimum rentals are recognized on a straight-line basis over the term of the related leases. Additional rents in the form of operating expense reimbursements for common area maintenance expenses and real estate taxes are recognized in the period in which the related expenses are incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Trust believes the carrying amount of its financial instruments approximates fair value at December 31, 2000 and 1999, because (i) the fixed rates on mortgage loans payable are comparable to rates currently offered in the market, (ii) the rates on the line of credit and bonds payable are variable and the terms are comparable to those currently offered in the market and (iii) the maturities of the Trust's cash equivalents are relatively short.
INCOME TAXES
For the years ended December 31, 2000, 1999 and 1998, the Trust elected or will elect to be treated as a real estate investment trust ("REIT") under Internal Revenue Code Sections 856-860. In order to qualify, the Trust is required to distribute at least 95% of its "REIT" taxable income to shareholders, meet asset and income tests and comply with certain other requirements.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of December 31, 2000, Investment in Real Estate has a gross and net basis of $205,686 and $184,175, respectively, for income tax purposes. Additionally, investment in a liquidating trust with a tax basis of $675 has not been accorded any value for financial reporting purposes.
As of December 31, 2000, the Trust has a net operating loss carry- forward of $16,029 which will expire in 2006 ($7,787), 2008 ($789), and 2012 ($7,453).
CASH EQUIVALENTS
The Trust considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash represents amounts held by lenders to provide for future real estate tax expenditures and tenant improvements, utility deposits and security deposits. Certain of these amounts may be reduced upon the fulfillment of certain conditions.
STOCK OPTIONS
The Trust has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), in accounting for its stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Trust's employee stock options equals or exceeds the market price of the underlying stock at the date of grant.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported 1999 and 1998 consolidated financial statements in order to provide comparability with the 2000 consolidated financial statements. These reclassifications have not changed the 1999 or 1998 results.
4. EARNINGS PER SHARE
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. LONG-TERM DEBT
The Trust's long-term debt consists of the following at December 31, 2000 and 1999:
2000 1999 ----------------------- ------------------------- Weighted Weighted Average Average Interest Interest Balance Rate Balance Rate --------- -------- --------- -------- Mortgage loans . . . . $115,452 7.66% $120,781 7.48% Bonds. . . . . 4,200 6.07% 4,500 5.53% -------- -------- -------- -------- Total collateralized debt. . . . . $119,652 7.61% $125,281 7.41% ======== ======== ======== ======== Unsecured loans . . . . $ -- -- $ 7,400 12.00% ======== ======== ======== ========
Mortgage loans of $97,152 had fixed interest rates that ranged from 6.95% to 8.89% at December 31, 2000 and $18,300 had a variable rate (8.85% at December 31, 2000). Bonds payable consist of variable rate tax exempt revenue bonds which bear interest equal to 6.07% at December 31, 2000. Substantially all of the mortgage loans and bonds contain prepayment penalties. During 2000 and 1999, the Trust recognized extraordinary losses of $42 and $183, respectively, related to prepayments on refinanced debt and the writeoff of unamortized financing costs. Substantially all of the Trust's real estate is pledged as collateral for the mortgage loans and bonds.
During 1998, the Trust borrowed $7.4 million pursuant to its $20 million 1997 Convertible Term Loan Agreement for an unsecured convertible term loan (the "Unsecured Loan"). On January 20, 2000, the Trust repaid $1,243 of the Unsecured Loan and the remaining balance of $6,157 was converted into 61,572 Series A convertible preferred shares. The Series A convertible preferred shares pay quarterly preferred dividends at rate of 10% per annum and are convertible into common shares at a conversion price of $5.15 per share. Prior to conversion, the Unsecured Loan bore interest at an annual interest rate of 12% payable quarterly and the Trust was required to pay an annual fee equal to 2% of the amount outstanding on October 14, of each year.
The principal balance of the Trust's long-term debt at December 31, 2000, is scheduled to be repaid as follows:
2001 . . . . . . . . . . . . . $ 23,608 2002 . . . . . . . . . . . . . 4,198 2003 . . . . . . . . . . . . . 13,494 2004 . . . . . . . . . . . . . 10,938 2005 . . . . . . . . . . . . . 1,734 Thereafter . . . . . . . . . . 65,680 -------- $119,652 ========
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. INVESTMENT IN REAL ESTATE
DISPOSITION ACTIVITIES
QUANTUM BUSINESS CENTRE
On November 4, 1999, the Trust sold its interest in Quantum Business Centre, a multi-tenant, flex/industrial property located in Jefferson County, Kentucky, to a private investor for a price of approximately $6,100. The Trust received cash proceeds, net of debt repayment, of approximately $3,700 and recognized a gain of approximately $700.
OKLAHOMA APARTMENT PORTFOLIO
On December 16, 1999, the Trust sold its Oklahoma Apartment Portfolio - - four separate apartment complexes totaling 864 units - for a price of approximately $24,100. The Trust received net proceeds of approximately $7,500 and recognized a gain of approximately $3,400. The bonds used to finance the properties were assumed by the purchaser.
7. PRO FORMA INFORMATION (UNAUDITED)
The Trust did not acquire any properties during 2000 or 1999. The following unaudited pro forma summary presents information as if the Trust's 1998 property acquisitions had occurred at the beginning of that year. The pro forma information is provided for information purposes only.
It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Company.
Year Ended December 31, ------------ --------
Total revenue . . . . . . . . . . . . . . . . . $ 42,260 Net income. . . . . . . . . . . . . . . . . . . $ 5,187 Basic earnings per share. . . . . . . . . . . . $ 0.39 Diluted earnings per share. . . . . . . . . . . $ 0.38
8. BUSINESS SEGMENTS
The Trust owns and operates real estate properties located principally in the Midwest and Southeast United States. The Trust has three operating segments corresponding to the three property types comprising its real estate assets: flex/industrial, office and retail. As of December 31, 2000, the flex/industrial segment was comprised of twelve complexes with long-term leases to approximately 180 tenants; the office segment was comprised of fourteen office sites with long-term leases to approximately 270 tenants; and the retail segment was comprised of one retail center with long-term leases to approximately 50 tenants. As of December 31, 1999, the flex/industrial segment was comprised of thirteen complexes, the office segment was comprised of fourteen office sites and the retail segment was comprised of one retail center. Prior to the sale of the Oklahoma Apartment Portfolio in December 1999, a fourth segment - the residential segment - was comprised of four apartment complexes with 864 units. The Trust's long-term tenants are in a variety of businesses and no individual tenant is significant to the Trust's business when considered as a whole.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Information by business segments is set forth below:
2000 1999 1998 -------- -------- -------- Revenue Flex/Industrial. . . $ 11,205 $ 11,416 $ 10,838 Office . . . . . . . 21,313 21,264 19,577 Residential. . . . . -- 4,168 4,170 Retail . . . . . . . 4,705 4,771 4,646 Corporate/Other. . . 573 97 185 -------- -------- -------- $ 37,796 $ 41,716 $ 39,416 ======== ======== ========
Income (loss) before net gains and extraordinary item Flex/Industrial. . . $ 2,857 $ 2,518 $ 3,787 Office . . . . . . . 4,686 5,177 5,124 Residential. . . . . -- 688 682 Retail . . . . . . . 576 736 550 Corporate/Other. . . (5,494) (4,538) (4,624) -------- -------- -------- $ 2,625 $ 4,581 $ 5,519 ======== ======== ========
2000 1999 -------- -------- Total Assets Flex/Industrial. . . $ 69,176 $ 69,279 Office . . . . . . . 107,151 105,756 Residential. . . . . -- -- Retail . . . . . . . 17,444 18,125 Corporate/Other. . . 2,286 13,487 -------- -------- $196,057 $206,647 ======== ========
2000 1999 1998 -------- -------- -------- Depreciation and amortization Flex/Industrial. . . $ 2,366 $ 2,252 $ 1,714 Office . . . . . . . 3,984 3,287 2,404 Residential. . . . . -- 552 534 Retail . . . . . . . 573 538 523 Corporate/Other. . . -- -- 37 -------- -------- -------- $ 6,923 $ 6,629 $ 5,212 ======== ======== ======== Interest expense Flex/Industrial. . . $ 2,954 $ 3,557 $ 2,669 Office . . . . . . . 4,914 5,540 4,524 Residential. . . . . -- 1,136 1,199 Retail . . . . . . . 1,312 1,325 1,338 Corporate/Other. . . -- -- 48 -------- -------- -------- $ 9,180 $ 11,558 $ 9,778 ======== ======== ========
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2000 1999 1998 -------- -------- -------- Additions to Investment in Real Estate Flex/Industrial. . . $ 1,906 $ 2,364 $ 32,942 Office . . . . . . . 4,473 3,257 31,533 Residential. . . . . -- 278 324 Retail . . . . . . . 43 85 69 Corporate/Other. . . -- -- 28 -------- -------- -------- $ 6,422 $ 5,984 $ 64,896 ======== ======== ========
9. TRANSACTIONS WITH AFFILIATES
During the first eight months of 2000 and the years ended December 31, 1999 and 1998, the Trust paid no salary to, but purchased legal services from an executive officer of the Trust. Fees for legal services totaled $246, $331 and $391, respectively. The executive paid no rent, as such, to the Trust for the use of office space or equipment but granted the Trust a discount equal to approximately 20% compared to rates charged to third parties for all time billed to the Trust by the executive and his employees. The executive also reimbursed the Trust for the cost of two full time and certain part time employees. As of September 1, 2000, this executive signed an employment agreement whereby he became a full time employee of the Trust.
10. DISTRIBUTIONS PAID AND PAYABLE
To qualify as a REIT, the Trust must distribute at least 95% of its "REIT Taxable Income" to shareholders. For 1999, net operating losses of $2,923 were utilized in meeting this requirement. A portion of the distributions paid during the subsequent year may be allocable to taxable income earned in the prior year.
The Trust has determined the shareholders' treatment for federal income tax purposes to be as follows:
2000 1999 1998 ------- ------- ------- Ordinary income . . . . . $ 5,652 $ 2,562 $ 5,978 Long-term capital gain. . . . . . . . . . -- 3,899 -- Return of capital . . . . 1,741 -- 140 ------- ------- ------- $ 7,393 $ 6,461 $ 6,118 ======= ======= =======
On January 19, 2001, the Trust declared a cash distribution for the quarter ended December 31, 2000 of $0.03 per share payable February 28, 2001 to shareholders of record on January 29, 2001.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. LEASES
MINIMUM RENTALS UNDER OPERATING LEASES
The Trust receives rental income from the rental of retail, office and flex/industrial space under operating leases. The following is the minimum future base rentals (excluding amounts representing executory costs such as taxes, maintenance and insurance) on operating leases for the Trust's flex/industrial, office and retail projects held at December 31, 2000:
2001 . . . . . . . $ 30,909 2002 . . . . . . . 25,293 2003 . . . . . . . 19,769 2004 . . . . . . . 13,860 2005 . . . . . . . 7,736 Thereafter . . . . 12,295 -------- $109,862 ========
No single tenant at the Trust's operating properties produced ten percent or more of total income from property operating activities.
The Trust is subject to the usual business risks regarding the collection of the above-mentioned rentals.
GROUND LEASE
The Trust owns a leasehold interest in a shopping center in Atlanta, Georgia. The lease expires in 2067. The ground lease requires annual lease payments of $600 through October 4, 2007 plus 7% of total annual gross rental income commencing when gross rental income exceeds $2,000 from the operations of the shopping center. The ground lease also requires that the Trust pay property operating expenses, including real estate taxes. The base rent is reset in 2007 based upon a market rent within a contractually defined range.
12. OMNIBUS STOCK AND INCENTIVE PLAN
On May 14, 1997, the Board of Trustees (the "Board") adopted and on July 8, 1997, the shareholders of the Trust approved, the 1997 Omnibus Stock and Incentive Plan (the "Option Plan") which allows the Trust to make stock-based awards as part of its employee and Trustee compensation program. Under the Option Plan, the Trust is authorized to issue options to purchase up to one million shares of beneficial interest in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance shares and units. On December 31, 1999, the outstanding options issued under the Option Plan totaled 463,676. When the shareholders elected three new trustees on December 13, 1999, the members of the board of trustees as of October 1, 1997 no longer constituted a majority of the members of the board. By definition, this reconstitution of the board was a "Change of Control" within the meaning of the Employee Stock Option Agreements. As a result, all outstanding employee options became immediately exercisable in accordance with the terms of the option agreements. At that time, the Board of Trustees offered all of the Trust's current employees and advisors who held options, the opportunity to exercise all their vested but unexercised options with the proceeds of a loan from the Trust. Each loan is non-recourse and bears interest at an annual rate of 6.5%. Each person was required to pledge all shares purchased with the proceeds of the loan to secure the payment of principal
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
and interest on the loan. The loan program was available until January 12, 2000. On that date, employees borrowed approximately $3.2 million to purchase 575,337 shares. The loans were originally scheduled to mature on the earlier of January 11, 2005 or one month after the date that an individual's employment is terminated. At that time, the employee would be required to repay the loan and all accrued interest, or forfeit the shares held as security for the loan. Under the employee severance and retention program (see Note 14), the Trust extended the maturity date of the loans for terminated employees to the date the last of the notes becomes due.
FIXED STOCK OPTIONS
The Board administers the Option Plan and has the authority to determine, among other things, the individuals to be granted options, the exercise price at which shares may be acquired, the number of shares subject to options and the vesting requirements and the exercise period of each option. The Board is granted discretion to determine the term of each option granted under the Option Plan to employees, executives and Trustees, but in no event will the term exceed ten years and one day from the date of the grant.
A summary of the Trust's fixed stock option activity, and related information for the years ended December 31, 1999 and 2000 follows:
Weighted Shares Average Subject Exercise Price to Options Per Share ---------- --------------
Outstanding at December 31, 1998 . . . . . 485,676 $ 5.630
Options granted. . . . . . . . . . . . . -- -- Options exercised. . . . . . . . . . . . (2,000) 4.375 Options canceled . . . . . . . . . . . . (20,000) 5.710 ------- -------
Outstanding at December 31, 1999 . . . . . 463,676 5.632
Options granted. . . . . . . . . . . . . 14,000 5.464 Options exercised. . . . . . . . . . . . (432,005) 5.648 Options canceled . . . . . . . . . . . . (8,002) 5.813 ------- ------- Outstanding at December 31, 2000 . . . . . 37,669 $ 5.342 ======= =======
Exercisable at 12/31/99 (a). . . . . . . 463,676 $ 5.632 Exercisable at 12/31/00. . . . . . . . . 27,669 $ 5.294
- ----------
(a) Due to the election of three new trustees, on December 13, 1999, the members of the board as of October 1, 1997 no longer constituted a majority of the members of the board. By definition, this reconstitution of the board was a "Change of Control" within the meaning of the Employee Stock Option Agreements. As a result, all outstanding employee options became immediately exercisable in accordance with the terms of the option agreements.
At December 31, 2000, options to purchase 369,002 shares were available for future grant.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The weighted average grant date fair value of options granted in 2000 and 1998 was $.66 and $.54, respectively. The remaining weighted-average contractual life of these options was 7.85 years. Exercise prices for options outstanding at December 31, 2000 ranged from $4.08 to $6.75 per share.
TARGET STOCK PRICE PERFORMANCE OPTIONS
The exercise price of each target stock price performance option granted is equal to the market price of the Trust's common shares on the date of grant and vests as the Trust's common share price achieves certain pre-established targets which were set on the date of grant. In conjunction with the 1998 signing of an employment agreement between the Trust and its suspended President Leonard G. Levine (see Note 15), the Board granted Mr. Levine stock options to purchase an aggregate of 150,000 shares of the Trust's common shares of beneficial interest at an exercise price equal to $5.50 per share which options were exercised in 2000.
A summary of the Trust's target stock price performance option activity, and related information for the years ended December 31, 1999 and 2000 follows: Weighted Shares Average Subject Exercise Price to Options Per Share ---------- -------------- Outstanding at December 31, 1998 and 1999 . . . . . . . . . . . . . . . . 150,000 $ 5.500 Options exercised. . . . . . . . . . . . . (150,000) $ 5.500 -------- -------- Outstanding at December 31, 2000 . . . . . -- -- ======== ========
Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock Based Compensation", and has been determined as if the Trust had accounted for all options granted under the Option Plan using the fair value method of that statement. The fair value for the fixed stock options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 2000 and 1998: risk free interest rates of 5.94% and 5.31%; expected dividend yields of 8.08% and 7.47%; volatility factors of the expected market price of the Trust's common stock of 0.279 and 0.201; and a weighted-average expected lives of the options of 2 years and 5 years, respectively. No options were granted during 1999. In addition, the fair value for the target stock price performance options granted in 1998 was estimated at the date of grant using a modified Black-Scholes option pricing model which, in addition to the required inputs above, takes into consideration the target stock price (or barrier) which must be attained.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models, such as the Black-Scholes model, require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's view, the existing models do not necessarily provide a reliable single measure of the fair value of the options granted under the Plan.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The effects on 2000, 1999 and 1998 pro forma net income and pro forma earnings per common share of amortizing to expense the estimated fair value of stock options are not necessarily representative of the effects on net income to be reported in future years due to such things as the vesting period of the stock options, and potential for issuance of additional stock options in future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
The Trust's pro forma information is as follows:
Years Ended December 31, ------------------------------ 2000 1999 1998 ------ ------ ------ Pro forma net income . . . . . . . . $2,581 $8,260 $5,279 Pro forma basic earnings per share . $ 0.18 $ 0.61 $ 0.40 Pro forma diluted earnings per share. . . . . . . . . . . . . $ 0.18 $ 0.61 $ 0.38
13. DISTRIBUTION REINVESTMENT AND SHARE PURCHASE PLAN
The Trust has established the Trust's Distribution Reinvestment and Share Purchase Plan (the "DRIP Plan"). The DRIP Plan allows shareholders of the Trust to: (i) automatically reinvest the cash distributions on all, or part, of shares registered in their name; and (ii) make cash investments of not more than $120 per calendar year. Shares purchased under the DRIP Plan will be issued directly by the Trust at either: (i) 97% of the average closing sales price of the shares as reported on the NASDAQ National Market on the last five business days preceding the relevant investment date in the case of reinvested cash distributions; or (ii) 100% of the aforementioned average closing price in the case of cash investments. For the years ended December 31, 2000, 1999 and 1998, the Trust issued 149,367, 161,422 and 141,321 shares of beneficial interest under the DRIP Plan and received total proceeds of $797, $835 and $818, respectively.
14. SEVERANCE AND TERMINATION COSTS
In September 2000, the Trust adopted an employee severance and retention program. The Trust has since terminated certain employees and will continue to review its staffing needs in the future in consideration of the adoption of the Plan of Termination and Liquidation (see Note 1). The accompanying consolidated financial statements include a charge of approximately $1,900 related to the severance and retention program. These severance and termination costs include a charge of approximately $300 related to base compensation payable to Mr. Leonard Levine from August 14, 2000 through December 31, 2001 under the terms of his employment agreement (see Note 17).
15. LITIGATION
On August 14, 2000, the Trust exercised its rights under the Trust's employment agreement with Mr. Leonard G. Levine by suspending him and placing him on leave from his position as president. Simultaneously, the Trust initiated an arbitration proceeding as required under the employment agreement. On October 5, 2000, Mr. Levine filed an action in the Circuit Court of Cook County, Illinois asking the court to terminate the arbitration proceedings by reason of improper forum. On October 18, 2000, the Trust filed a lawsuit against Mr. Levine in the Circuit Court of Cook County, Illinois. The Trust's complaint alleges violations of Mr. Levine's duty of loyalty owed to the Trust.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On December 6, 2000, Mr. Levine and the Trust, through their respective attorneys, agreed to dismiss the arbitration action and Mr. Levine's lawsuit challenging the arbitration and further agreed to resolve all issues under Mr. Levine's employment contract within the Trust's lawsuit against Mr. Levine in the Circuit Court of Cook County (the "Employment Litigation"). The Trust has since filed an amended complaint which seeks a declaratory judgment that the Trust has, and had, "just cause" to terminate his employment contract as well as an accounting and the disgorgement of all benefits received by Mr. Levine while in breach of his fiduciary duties. The factual bases underlying the amended complaint include allegations that (i) Mr. Levine caused the Trust to pay on his account or reimburse him for expenses that were not reasonable, ordinary and necessary business expenses and (ii) during negotiations between the Trust and The Oak Realty Group, Inc. (an entity solely owned by Mr. Levine) Mr. Levine attempted to pressure the Trust into accepting Oak's offer to acquire the Trust by revealing to one of the trustees that Oak had entered into certain confidentiality and exclusivity agreements which had the effect of excluding potential purchasers and/or capital providers from purchasing or providing financing to a potential purchaser of the Trust, except through Oak.
On January 19, 2001, Mr. Levine filed an answer affirmative defenses and counterclaim in the Employment Litigation. The pleading generally denies that Mr. Levine breached his fiduciary duties, raises various defenses and seeks a judgment in favor of Mr. Levine on the counterclaim reinstating him to active employment status. Discovery in this case has recently begun. The maximum potential liability in connection with Mr. Levine's contract (inclusive of incentives but exclusive of base salary) is estimated to be $1,800.
Additionally, on January 19, 2001, Mr. Levine filed two lawsuits in the Circuit Court of Cook County. In the first action, Mr. Levine, suing derivatively on behalf of the Trust's shareholders, seeks to enjoin trustees Daniel Levinson, Stephen Peck and L.G. Schafran from completing the pending sale of substantially all of the Trust's assets to Denholtz Management Corporation until the Trust obtains approval of the transaction from a majority of the Trust's shareholders. This matter has been removed to the United States District Court for the Northern District of Illinois and the Trust has intervened as an additional defendant.
Mr. Levine has also filed an action in the Circuit Court of Cook County against trustees Daniel Levinson, Stephen Peck and L.G. Schafran as well as two of the Trust's largest shareholders Morgens, Waterfall, Vintiadis & Company, Inc. and Magten Asset Management Corporation. This action seeks unspecified compensatory and punitive damages for a variety of business related torts which Mr. Levine alleges the defendants have committed against him. This matter has been removed by the defendants to the United States District Court for Northern District of Illinois. No answer or other responsive pleading has yet been filed by any of the defendants.
The Trust is also involved in various litigation arising in the ordinary course of business. It is management's opinion that the defense of these matters and the potential liability are adequately protected by insurance coverage. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have an adverse effect on the Trust's financial position or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, the accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
ITEM 10. OUR TRUSTEES AND EXECUTIVE OFFICERS
The trustees and executive officers of the Trust are as follows:
Walter E. Auch, Sr. Trustee Daniel Levinson Trustee Stephen M. Peck Trustee L.G. Schafran Interim President/ Chief Executive Officer and Trustee Leonard G. Levine President Robert G. Higgins First Vice President/ Chief Operating Officer and General Counsel Joel L. Teglia Executive Vice President/ Chief Financial Officer
WALTER E. AUCH, SR. Mr. Auch, age 79, has served as an independent trustee since 1986. Mr. Auch served as the chairman and chief executive officer of the Chicago Board of Options Exchange from 1979 to 1986. Prior to that time, Mr. Auch was executive vice president, director and a member of the executive committee of PaineWebber. Mr. Auch is a director of Pimco Advisors L.P., Smith Barney Concert Series Funds, Smith Barney Trak Fund, The Brinson Partners Funds, the Nicholas Applegate Funds, Semele Group, Inc., and Legend Properties, Inc. and a trustee of Hillsdale College and the Arizona Heart Institute.
DANIEL LEVINSON. Mr. Levinson, age 43, has served as an independent trustee since 1999 and currently serves as chief financial officer for the Oracle Investment Management Inc. From 1993 to 1999, Mr. Levinson was employed by Morgens Waterfall, Vintadis and Company, Inc. as its chief financial officer and specialized in the management and workout of real estate and other investments in its investment funds. Before working at Morgens, Mr. Levinson was a vice president at Sentinel Real Estate Corporation, an institutional real estate investment manager. Prior to joining Sentinel in 1988, Mr. Levinson was at KPMG Peat Marwick for over six years. Mr. Levinson received a Bachelor of Science degree from Lehigh University. Mr. Levinson is a certified public accountant and a member of the American Institute of Certified Public Accountants.
STEPHEN M. PECK. Mr. Peck, age 66, has served as an independent trustee since 1999 and currently maintains an investment office at Gilder, Gagnon, Howe & Co. LLC. Mr. Peck is a director of Harnischfeger, Inc., Fresenius Medical Care and OFFIT Investment Funds. He is also a Chairman of the Advisory Board of the Torrey Funds and a member of the Advisory Board of Brown Simpson Asset Management. Mr. Peck serves as a member of the Board of Trustees of New York University, The Jewish Theological Seminary and Mount Sinai School of Medicine and is Chairman of the Board of Trustees of Mount Sinai-NYU Health.
L.G. SCHAFRAN. Mr. Schafran, age 62, has served as a trustee since 1999 and as our interim president and chief executive officer since August 14, 2000. He is currently chairman of our board and has been a Managing General Partner at L.G. Schafran & Associates since 1984. Mr. Schafran is a director of Tarragon Realty Investors, Inc. (f/k/a National Income Realty Trust), PubliCARD, Inc. (f/k/a Publicker Industries, Inc.), COMSAT Corporation and chairman of the board of Delta-Omega Technologies, Inc. Mr. Schafran served as a director of Capsure Holdings Inc. from 1986 to 1997, OXIGENE, Inc. from 1993 to 1996, Glasstech, Inc. from 1995 to 1997, Dart Group Corporation from 1993 to 1997 and Kasper A.S.L., Ltd. from 1997 to 2000.
ROBERT G. HIGGINS. Mr. Higgins, age 49, has served as our vice president and general counsel since 1992 and as secretary since 1995. Effective December 14, 2000, Mr. Higgins became our first vice president, general counsel, chief operating officer and assistant secretary. Mr. Higgins received a B.A. degree in government from the University of Notre Dame and a law degree from Loyola University of Chicago. Mr. Higgins concentrates his practice in the areas of real estate development, finance, acquisition, land use, sales, lending and general corporate business practice. Mr. Higgins previously served as vice president, general counsel and secretary of Legend Properties, Inc. (f/k/a Banyan Mortgage Investment Fund), Banyan Short Term Income Trust and Semele Group, Inc. (f/k/a Banyan Strategic Land Fund II) (collectively, the "Banyan Funds")and is currently serving in the same position for BSRT Management Corp. Mr. Higgins is admitted to the bar in the States of Illinois, Minnesota and Texas and also practices law as a sole practitioner.
JOEL L. TEGLIA. Mr. Teglia, age 39, has served as our vice president and chief financial officer since 1994. Effective December 14, 2000, Mr. Teglia became our executive vice president and chief financial officer. Previously he served as vice president and chief financial officer of each of the Banyan Funds and is currently serving in the same position for BSRT Management Corp. Prior to his appointment, Mr. Teglia provided various services to us in his capacity as controller for BSRT Management Corp. (f/k/a Banyan Management Corp.), a position that he held from 1991 to 1994.
Mr. Teglia is a director of Brass Fund, Inc. Mr. Teglia received a B.A. degree in accounting from the University of Notre Dame and is a certified public accountant.
LEONARD G. LEVINE. Mr. Levine, age 53, has been our president and chief executive officer since 1990. On August 14, 2000, we suspended Mr. Levine from his duties as president and chief executive officer. Mr. Levine also served as a trustee of ours from September, 1986 until February 1990 and again from 1998 to 2000. Mr. Levine received a bachelors of science/bachelors of arts degree in accounting from Roosevelt University and a masters degree in taxation from DePaul University. Mr. Levine previously served as president of the Banyan Funds. Mr. Levine is a certified public accountant and a licensed real estate broker.
ITEM 11. COMPENSATION OF TRUSTEES AND EXECUTIVE OFFICERS
A. INDEPENDENT TRUSTEE COMPENSATION
Each independent trustee is paid an annual fee of $20,000, payable quarterly, plus $1,000 for each board or committee meeting attended in person and $500 an hour for each board or committee meeting held by telephonic conference call. We also reimburse each independent trustee for out-of-pocket expenses incurred in attending board meetings. Each person serving as an independent trustee is awarded an option to purchase 2,000 of our common shares ten days after each annual meeting. All options granted to the independent trustees vest and become exercisable in the following installments: (1) fifty percent (50%) on the first anniversary of the grant; and (2) fifty percent (50%) on the second anniversary of the grant.
In February 2000, our board formed a financial advisory committee to evaluate and explore strategic alternatives designed to maximize shareholder value. The financial advisory committee was comprised of Messrs. Auch, Peck, Levinson and Schafran and has met 24 times in 2000. The financial advisory committee was disbanded on December 21, 2000, following the annual meeting of shareholders on December 14, 2000. The financial advisory committee was deemed no longer necessary because, as of December 14, 2000, the membership of the financial advisory committee and the full board were identical.
B. EXECUTIVE COMPENSATION
This table shows compensation paid to our chief executive officer and our next three most highly compensated executive officers during the last three years ended December 31, 2000.
EMPLOYMENT AGREEMENTS.
MR. LEVINE. We entered into an employment agreement with Mr. Levine on March 11, 1998, although the agreement became effective retroactively as of October 1, 1997. This term of the agreement expires on December 31, 2001. On December 14, 1999 we amended Mr. Levine's employment agreement to provide for certain rights upon liquidation of the Trust and the immediate vesting of all outstanding options. Under the agreement, we agreed to pay Mr. Levine a base salary equal to $200,000 per year through December 31, 1999 increasing to $210,000 per year during the last two years of the agreement. The agreement also grants Mr. Levine the ability to earn annual incentive compensation equal to 62.5% of the base salary each year, provided that we achieve certain predetermined levels of "funds from operations" increased by .03 for each one percentage point that our actual per share "funds from operations" exceed the target and decreased (but not below zero) by .04 for each one percentage point our actual per share "funds from operations" is below the target amount.
Mr. Levine was also granted options to purchase 350,000 shares at an exercise price equal to $5.50 per share. The number of shares underlying the options and the exercise price of each option is subject to adjustment from time to time if we: (1) issue or sell additional common shares in exchange for consideration at a price less than the prevailing market price of our shares; (2) issue or sell warrants with exercise prices less than the prevailing market price; (3) declare a dividend or otherwise make a distribution to our shareholders in the form of additional common shares; (4) subdivide our outstanding common shares into a larger number of common shares; or (5) combine our outstanding common shares into a smaller number of common shares. Mr. Levine exercised all of the options on January 12, 2000. The agreement also requires us to provide Mr. Levine with both life and disability insurance benefits during the term of the agreement, as well as all non-wage benefits we provide to our other salaried employees.
Mr. Levine's agreement contains provisions that requires us to make certain payments to him upon the occurrence of a "Triggering Event" which is defined as:
. the date that a Plan of Liquidation of the Trust becomes effective; . the date on which we sell all or substantially all of our assets; . the date we merge or enter into a business combination with another entity if, among other things, we are not the surviving entity; or . the members of the existing board fail to constitute a majority of the board.
The agreement also gives us the right to terminate or suspend Mr. Levine under certain circumstances. On August 14, 2000, we suspended Mr. Levine pursuant to our employment agreement with him and have filed a lawsuit alleging that Mr. Levine breached certain fiduciary duties owed to us and that he committed intentional acts that caused material damage to our business or properties. Pending a final ruling by a court, we will comply with the employment agreement including the compensation provisions.
To replace Mr. Levine, our board of trustees appointed Larry Schafran to the position of interim president and chief executive officer.
MR. SCHAFRAN. On August 14, 2000, following the suspension of Mr. Levine, we engaged Mr. Schafran to become our interim president and chief executive officer. On October 26, 2000, we entered into an employment agreement with Mr. Schafran, the term of which extends until February 13, 2002, unless sooner terminated for "cause," by death or disability, voluntarily by Mr. Schafran, upon a "change in control" of the Trust, or upon Mr. Levine's reinstatement as our president and chief executive officer.
Under the agreement we will pay Mr. Schafran an annual base salary of $200,000 and an incentive bonus based on the present value of aggregate distributions we make to shareholders during the term of the agreement. We will pay the incentive bonus once our shareholders receive distributions whose aggregate present value is at least $6.25 per share discounted to October 26, 2000 at 12%. The amount of incentive bonus starts at $300,000 and increases as the present value of distributions to our shareholders increases. Additionally, in lieu of the incentive bonus, Mr. Schafran could have received an early completion bonus equal to $300,000 if our shareholders received distributions greater than $6.00 per share on or before December 31, 2000. The early completion bonus is reduced to $225,000 if our shareholders receive distributions greater than $6.00 per share after December 31, 2000 but on or before March 31, 2001.
If we terminate Mr. Schafran's employment because Mr. Levine is reinstated to his former position, we are obligated to pay Mr. Schafran his entire incentive bonus, based on the present value of the aggregate distributions made to our shareholders, as though his employment had not been terminated. Additionally, if we terminate Mr. Schafran's employment due to his death, disability or a "change in control," we are obligated to pay Mr. Schafran a portion of the incentive compensation equal to the amount of incentive compensation he would have earned had we not terminated his employment, multiplied by a fraction, the numerator of which is the number of days he had served as our interim president and chief executive officer and the denominator of which is 548. Finally, if we terminate the agreement upon our final dissolution and liquidation, we are obligated to pay Mr. Schafran the amount of base salary he would have earned through February 13, 2002 and any earned but unpaid incentive bonus based on the present value of the amount distributed to our shareholders under the plan of liquidation.
MR. HIGGINS. Effective on September 1, 2000, we entered into an employment agreement with Mr. Higgins whereby he became our first vice president, general counsel and chief operating officer until October 31, 2002. Mr. Higgins' employment agreement may be terminated prior to its expiration as follows: (1) by us for "cause"; (2) by us upon 60 days prior written notice; (3) by our complete dissolution and liquidation; (4) by Mr. Higgins' death or disability; or (5) voluntarily by Mr. Higgins. Under the agreement, Mr. Higgins becomes our full-time employee, however, he is allowed to perform legal services for clients. Mr. Higgins' initial base salary is $260,000 with automatic 5% increases on January 1, 2001 and 2002.
Unless we terminate Mr. Higgins' employment for "cause" or Mr. Higgins terminates it voluntarily, upon expiration of the term of the agreement, we will pay Mr. Higgins a severance payment of one year's salary and a bonus equal to 50% of the aggregate amount of base salary Mr. Higgins earned from November 1, 2000 to the end of the agreement. "Cause" is defined in the agreement as: (1) conduct amounting to fraud or wilful misconduct, (2) any material act of dishonesty, (3) the conviction of Mr. Higgins of a felony crime, and (4) a material breach of the agreement by Mr. Higgins which remains uncured for a period of five business days following notice of such breach. Additionally, Mr. Higgins may terminate the agreement if: (A) the members of our board as of the date of the agreement fail to constitute a majority of the board; (B) our shareholders adopt a plan of liquidation without our board's approval or recommendation; (C) we sell all of our real estate properties or business; (D) we combine with another entity and our shareholders immediately prior to the combination fail to retain a majority of the voting securities of the surviving entity; (E) any person or entity becomes the beneficial owner of a majority of our voting shares; (F) we relocate our executive offices to a location in excess of 100 miles outside of the Chicago Loop area; (G) we breach the agreement in a material respect which we fail to cure within five business days of notice of such breach; and (H) a material diminution of Higgins' duties, responsibilities or authority occurs.
MESSRS. HANSEN, SCHMIDT AND TEGLIA. We also had employment agreements with each of Messrs. Hansen, Schmidt and Teglia. Pursuant to these agreements, we were obligated to pay Messrs. Hansen, Schmidt and Teglia annual base salaries equal to $213,040, $176,680 and $138,240 respectively.
On October 1, 2000 we entered into agreements with Messrs. Schmidt and Hansen terminating their employment and settling all claims for severance pay. On November 1, 2000 we entered into a new employment agreement with Mr. Teglia.
MR. TEGLIA. On November 1, 2000, we entered into a new agreement with Mr. Teglia whereby he became our executive vice president and chief financial officer following the annual meeting until October 31, 2002. Mr. Teglia's agreement may be terminated for the same reasons enumerated in Mr. Higgins' agreement. Upon execution of the agreement, we paid to Mr. Teglia a severance payment of $204,765 in settlement of our obligations to him under his prior employment agreement. Under the new agreement, Mr. Teglia's initial annual base salary is $181,120, which is increased to $200,000 on January 1, 2001 and $210,000 on January 1, 2002. Additionally, unless we terminate Mr. Teglia's employment for "cause" or Mr. Teglia terminates it voluntarily, upon expiration of the term of the agreement, we will pay Mr. Teglia a bonus equal to 50% of the aggregate amount of base salary Mr. Teglia earned during the term of the agreement. The definition of "cause" in Mr. Teglia's agreement is identical to the definition set forth in Mr. Higgins' agreement.
STOCK OPTION GRANTS
We did not grant any options to purchase shares of beneficial interest during the year ended December 31, 2000 to any of our executive officers. On December 26, 2000 we granted options to purchase shares of beneficial interest to each of our independent trustees in accordance with our Executive and Director Stock Option Plan. The table below sets forth the aggregated option exercises and year-end option value for 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE --------------------------------------------------- (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End (#) FY-End ($) Shares Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable Unexercisable - ---- ----------- --------------------------- ---------------
Leonard G. Levine. . 350,000(1) $ 65,800 0 / 0 $0 / $0
Larry G. Schafran. . -- --
Jay E. Schmidt . . . 3,334 $ 4,528 0 / 0 $0 / $0 36,000(1) $ 0
Neil D. Hansen . . . 3,334 $ 4,318 0 / 0 $0 / $0 36,000(1) $ 0
Joel L. Teglia . . . 29,000(1) $ 0 3,335 / 0 $4,736 / $0
Note 1. Represents options exercised with the proceeds from a non-recourse loan offered by the company to its employees as of December 31, 1999 at an annual rate of interest of 6.5%.
All of the options granted vested on December 13, 1999 because there occurred a "change in control" as that term was defined in our Executive and Director Omnibus Stock Option Plan. The "change in control" occurred because on that date, the members of our board as of the effective date of the Plan failed to constitute a majority of the members of our board. In addition, in December 1999, we offered all of our current employees and advisors who hold options the opportunity to exercise all of the vested but unexercised options with the proceeds of a loan from us. Each loan is non- recourse and bears interest at an annual rate of 6.5%. Each person is required to pledge all shares purchased with the proceeds of the loan to secure the payment of principal and interest on the loan. We loaned approximately $3.2 million to these persons. All loans will mature in five years; provided that any person who terminates his or her employment or whom we terminate is required to repay the loan and all accrued interest by surrendering the shares securing the loan or by tendering sufficient funds to pay all amounts owing within one month of terminating employment. Pursuant to our Severance and Retention Program for non-contract employees, we have extended the term of any note made by a terminated employee or will extend the term of any note made by any other employee we choose to terminate, to the date upon which the last of these notes comes due.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 16, 2001 regarding the number and percentage of our outstanding common shares beneficially owned by: (1) each trustee; (2) each executive officer; and (3) all trustees and executive officers as a group. The table also sets forth information as of December 31, 2000 with respect to any person known to us to be the beneficial owner of more than five percent of our outstanding common shares. Information with respect to Morgens Waterfall Income Partners, L.P., Kensington Investment Group, Inc., and Magten Asset Management Corp. listed in the table below, including the notes, is based solely on copies of statements filed under Section 13(d) or 13(g) of the Exchange Act, and we have not independently confirmed this information. Share amounts and percentages shown for each person or entity are adjusted to give effect to common shares that are not outstanding but may be acquired by a person or entity upon exercise of all options exercisable by such entity or person within sixty days of the date of the date hereof. However, those common shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding common shares beneficially owned by any other person.
Amount and Nature of Name and Address of Beneficially Percent Beneficial Owner Owned of Class - -------------------- --------------- ----------
Morgens Waterfall Income 3,391,074 21.9% Partners, L.P. (1) Restart Partners, L.P. Restart Partners II, L.P. Restart Partners III, L.P. Restart Partners IV, L.P. Restart Partners V, L.P. Endowment Restart, L.L.C. 10 East 50th Street New York, NY 10022
Kensington Investment Group, Inc. (2) 2,471,056 17.3% Mellon Bank, N.A. as Trustee for the General Motors Employees Domestic Group Pension Trust 350 East 21st Street New York, New York 10010
Magten Asset Management Corp. (3) 743,750 5.2%
Four Orinda Way Suite 220D Orinda, CA 94563
Daniel Levinson (4) 1,000 *
Amount and Nature of Name and Address of Beneficially Percent Beneficial Owner Owned of Class - -------------------- --------------- ----------
Leonard G. Levine, 862,504 6.0% President (5)
Stephen M. Peck (4) 1,000 *
L.G. Schafran, 1,000 * Interim President and CEO (4)
Robert G. Higgins, 40,642 * First Vice President, General Counsel, Chief Operating Officer and Assistant Secretary (4)(5)
Joel J. Teglia, 36,974 * Chief Financial Officer (4)(5)
Walter E. Auch, Sr. (4) 5,000 *
All Trustees and 948,120 6.6% Named Executive Officers of the Trust, as a group (eight persons)
- --------------------
* less than 1%
(1) Includes the conversion of 61,572 shares of convertible preferred stock, which can be converted into 1,195,573 of our common shares at a price of $5.15 per share. Certain affiliates of Morgens Waterfall Income Partners, L.P. have filed reports with the SEC pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") indicating combined ownership of five percent (5%) or more of the outstanding common shares. As of December 31, 2000, (i) Morgens Waterfall Income Partners, L.P. owns 83,315 common shares; (ii) Restart Partners, L.P. owns 418,768 common shares; (iii) Restart Partners II, L.P. owns 692,830 common shares; (iv) Restart Partners III, L.P. owns 482,350 common shares; (v) Restart Partners IV, L.P. owns 304,758 common shares; (vi) Restart Partners V, L.P. owns 100,855 common shares; (vii) Endowment Restart, L.L.C. owns 109,625 common shares. Although John C. Waterfall and Edwin H. Morgens do not directly own any common shares, each of them may be deemed an indirect beneficial owner of 2,192,501 common shares by virtue of their effective control over the operation of each of the affiliated entities listed above. Furthermore, Morgens Waterfall Capital, L.L.C. may be deemed an owner of 83,315 common shares by virtue of its position as general partner of Morgens Waterfall Income Partners, L.P.
(2) According to filings made with the SEC, Kensington Investment Group, Inc. ("Kensington") is an investment advisor registered under the Investment Advisors Act of 1940. Kensington has filed reports with the SEC pursuant to Section 13(d) of the Exchange Act, indicating ownership of five percent (5%) or more of the outstanding common shares. As of December 31, 2000, Kensington has sole dispositive power over 2,471,056 common shares, and sole voting power over 2,471,056 common shares.
(3) According to filings made with the SEC, Magten Asset Management Corp. ("Magten") is an investment advisor registered under the Investment Advisors Act of 1940. Magten has filed reports with the SEC pursuant to Section 13(d) of the Exchange Act, indicating ownership of five percent (5%) or more of the outstanding common shares. As of December 31, 2000, Magten has shared dispositive power over 743,750 common shares, and shared voting power over 210,150 common shares.
(4) Includes options to purchase 3,335 shares for Mr. Teglia, 5,000 shares for Mr. Auch and 1,000 shares for each of Messrs. Levinson, Peck and Schafran.
(5) Includes shares purchased on January 12, 2000 pursuant to the aforementioned employee stock loan program as follows: Mr. Levine, 350,000 shares; Mr. Higgins, 30,335 shares; and Mr. Teglia, 29,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first eight months of 2000, we paid no salary to, but purchased legal services from, Robert G. Higgins, our vice president, secretary and general counsel. We paid Mr. Higgins, in the aggregate, $246,405 for these services. We also provided Mr. Higgins with office space and equipment. Mr. Higgins did not pay any rent for the use of office space and equipment. Instead, Mr. Higgins billed us at a discounted rate. Mr. Higgins also reimbursed us for the cost of two full-time and certain part-time employees. For the first eight months of 2000, Mr. Higgins reimbursed us for a total of $136,815. On September 1, 2000, Mr. Higgins became our full time employee, as did the employees whose salaries were reimbursed to us by Mr. Higgins. During the fiscal year ended December 31, 2000, we paid Adam Levine, the son of Mr. Levine, $125,916 for services rendered to us as an employee. We also provided Adam Levine with benefits customarily provided to our other employees. On October 31, 2000, we terminated the employment of Adam Levine as part of our Retention and Severance Program and paid him a severance payment in accordance with that program equal to $90,762.
On January 12, 2000, our employees exercised their vested options to purchase 575,337 of our common shares with the proceeds of loans from us. See "Compensation of Trustees and Executive Officers" above for details of the loan program. The table below shows the original amounts outstanding and the loan balances on December 31, 2000 due from our executive officers and Adam Levine.
Original Balance at Name Amount December 31, 2000 - ---- ---------- -----------------
Leonard G. Levine $1,925,000 $1,864,921 Jay E. Schmidt $ 213,500 $ 208,223 Neil D. Hansen $ 213,500 $ 208,223 Joel L. Teglia $ 170,875 $ 166,560 Robert G. Higgins $ 173,735 $ 168,930 Adam Levine $ 95,493 $ 92,691
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements of the Company are set forth in this report in Item 8.
(2) Financial Statement Schedule is set forth in this report in Item 8.
(b) Reports on Form 8-K:
. dated August 17, 2000, filed October 25, 2000 including Item 7; and
. dated and filed October 25, 2000 including Item 7; and
. dated and filed November 9, 2000 including Item 9.
(c) Exhibits (see Exhibit Index included elsewhere herein).
(d) None.
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.
BANYAN STRATEGIC REALTY TRUST
By: /s/ L.G. Schafran Date: March 9, 2001 L.G. Schafran, Interim President
PURSUANT to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on our behalf and in the capacities and on the dates indicated.
By: /s/ L.G. Schafran Date: March 9, 2001 L.G. Schafran, Interim President and Trustee
By: /s/ Joel L. Teglia Date: March 9, 2001 Joel L. Teglia, Executive Vice President and Chief Financial Officer
By: /s/ Walter E. Auch, Sr. Date: March 9, 2001 Walter E. Auch, Sr., Trustee
By: /s/ Daniel Levinson Date: March 9, 2001 Daniel Levinson, Trustee
By: /s/ Stephen M. Peck Date: March 9, 2001 Stephen M. Peck, Trustee
EXHIBIT INDEX - -------
2.1 Plan of Termination and Liquidation (1)
3.1 Third Amended and Restated Declaration of Trust dated as of August 8, 1986, as amended on March 8, 1991, May 1, 1993, August 12, 1998 and December 13, 1999, including Certificate of designations, preferences and rights of Series A convertible preferred shares. (2)
3.2 First Amendment of Third Amended and Restated Declaration of Trust effective December 13, 1999. (3)
3.3 By-Laws dated March 13, 1996. (4)
3.4 BSRT UPREIT Limited Partnership Limited Partnership Agreement (5)
4.1 Convertible Term Loan Agreement dated as of October 10, 1997 among Banyan Strategic Realty Trust, as Borrower, and the Entities listed therein, as Lenders. (6)
4.2 First Amendment to Convertible Term Loan Agreement dated as of March 30, 1998 made by and among Banyan Strategic Realty Trust and the Entities listed therein, as Lenders. (7)
4.3 Second Amendment to Convertible Term Loan Agreement dated as of June 26, 1998 made by and among Banyan Strategic Realty Trust and the Entities listed therein, as Lenders. (8)
4.4 Revolving Credit Agreement dated April 30, 1998 among Banyan Strategic Realty Trust, as Borrower and the Capital Company of America, as Lender. (9)
4.5 Loan Agreement dated May 22, 1998 among BSRT Fountain Square L.L.C., BSRT Phoenix Business Park L.L.C., BSRT Newtown Trust, BSRT Southlake L.L.C., BSRT Technology Center L.L.C., BSRT Airways Plaza L.L.C., BSRT Peachtree Pointe L.L.C., BSRT Avalon Center L.L.C., BSRT Sand Lake Tech Center L.L.C., BSRT Park Center L.L.C., BSRT Metric Plaza L.L.C., and BSRT University Corporate Center L.L.C., as Borrower, and the Capital Company of America, as Lender. (8)
4.6 First Amendment to Loan Agreement dated September 11, 1998 among BSRT Fountain Square L.L.C., BSRT Phoenix Business Park L.L.C., BSRT Newton Trust, BSRT Southlake L.L.C., BSRT Technology Center L.L.C., BSRT Airways Plaza L.L.C., BSRT Peachtree Pointe L.L.C., BSRT Avalon Center L.L.C., BSRT Sand Lake Tech Center L.L.C., BSRT Park Center L.L.C., BSRT Metric Plaza L.L.C., and BSRT University Corporate Center L.L.C., as Borrower, and the Capital Company of America LLC, as Lender. (10)
4.7 Loan Agreement dated June 22, 1998 between Banyan/Morgan Wisconsin L.L.C., and Banyan/Morgan Elmhurst L.L.C., as Borrower and the Capital Company of America, as Lender. (8)
4.8 First Amendment to Loan Agreement dated September 11, 1998 between Banyan/Morgan Wisconsin L.L.C., and Banyan/Morgan Elmhurst L.L.C., as Borrower and the Capital Company of America LLC, as Lender. (10)
10.1 Employment Agreement of L.G. Schafran dated October 26, 2000. (14)
10.2 Employment Agreement of Leonard G. Levine as of December 14, 1999. (2)
EXHIBIT INDEX - -------
10.3 Employment Agreement of Leonard G. Levine as of October 1, 1997. (11)
10.4 Employment Agreement of Joel L. Teglia dated November 1, 2000. (14)
10.5 Employment Agreement of Joel L. Teglia dated December 31, 1998. (5)
10.6 Employment Agreement of Robert G. Higgins dated September 1, 2000. (14)
10.7 Separation Agreement of Neil Hansen dated October 1, 2000. (14)
10.8 Employment Agreement of Neil Hansen dated December 31, 1998. (5)
10.9 Separation Agreement of Jay Schmidt dated October 1, 2000. (14)
10.10 Employment Agreement of Jay Schmidt dated December 31, 1998. (5)
10.11 1997 Omnibus Stock and Incentive Plan dated July 9, 1997. (12)
10.12 Share Purchase Agreement by and among Banyan Strategic Realty Trust and the Purchasers listed on the signature page attached thereto dated as of October 10, 1997. (6)
10.13 Registration Rights Agreement dated as of October 10, 1997 between Banyan Strategic Realty Trust and the Purchasers listed on the Signature Pages attached thereto. (6)
10.14 Registration Rights Agreement dated as of October 1, 1997 between Banyan Strategic Realty Trust and Leonard G. Levine. (5)
10.15 Consulting Agreement dated as of February 18, 2000 between CFC Advisory Services Limited Partnership and Banyan Strategic Realty Trust. (13)
10.16 Modification to Consulting Agreement dated as of May 31, 2000 between CFC Advisory Services Limited Partnership and Banyan Strategic Realty Trust. (13)
10.17 Purchase and Sale Agreement dated January 8, 2001. (1)
21. Subsidiaries of Banyan Strategic Realty Trust (*)
23. Consent of Independent Auditors (*)
- --------------------
(*) Filed herewith.
(1) Incorporated by reference from the Trust's Form 8-K dated January 8, 2001.
(2) Incorporated by reference from the Trust's Form 10-K for the year ended December 31, 1999.
(3) Incorporated by reference from the Trust's Form 10-Q dated March 31, 2000.
(4) Incorporated by reference from the Trust's Registration Statement on Form S-11 (file number 33-4169).
(5) Incorporated by reference from the Trust's Form 10-K for the year ended December 31, 1998.
(6) Incorporated by reference from the Trust's Form 8-K dated October 14, 1997.
(7) Incorporated by reference from the Trust's Form 10-K/A for the year ended December 31, 1997.
(8) Incorporated by reference from the Trust's Form 8-K dated May 22, 1998.
(9) Incorporated by reference from the Trust's Form 10-Q dated March 31, 1998.
(10) Incorporated by reference from the Trust's Form 8-K/A-1 dated August 14, 1998.
(11) Incorporated by reference from the Trust's Form 10-K dated December 31, 1997.
(12) Incorporated by reference from the Trust's Form 10-Q for the quarter ended June 30, 1997.
(13) Incorporated by reference from the Trust's Form 10-Q for the quarter ended June 30, 2000.
(14) Incorporated by reference from the Trust's Form 10-Q for the quarter ended September 30, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
During the year ended December 31, 2000, we marketed our portfolio for sale and began negotiating a contract with a potential purchaser. At December 31, 2000, we owned individually or, in some cases, through joint ventures:
. fourteen office properties totaling 1.5 million rentable square feet;
. twelve flex industrial properties totaling 1.7 million rentable square feet;
. one retail center which contains 321,600 rentable square feet.
We did not acquire or sell any properties during the year ended December 31, 2000. During the year ended December 31, 1999, we sold four apartment complexes containing 864 units and one flex industrial property totaling 182,300 rentable square feet but did not acquire any properties. During 1998, we acquired ten properties totaling 834,600 square feet but did not sell any properties.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
During the year ended December 31, 2000 and 1999 our income before minority interest, net gains and extraordinary item totaled approximately $3.1 million and approximately $5.1 million, respectively. Our total revenue decreased by approximately $3.9 million or 9.4% to approximately $37.8 million from approximately $41.7 million, due to a decrease in the number of properties that we own and a decrease in total occupancy. This decrease in total revenues was partially offset by a decrease in total operating expenses, which include property operating, repairs and maintenance, real estate taxes, and ground lease expenses; and a decrease in interest expense. However, the decrease in total operating expenses and interest expense in 2000 was partially negated by severance and termination costs in the amount of approximately $1.9 million related to an employee severance and retention policy (see Severance and Termination Costs below).
On a "same-store" basis (comparing the results of operations of the properties owned during the entire year ended December 31, 2000 with the results of the same properties owned during the entire year ended December 31, 1999), total revenue increased by approximately $0.5 million due to an increase in rental rates.
As of December 31, 2000, 15% of our leasable square footage was vacant and during 2001, leases for approximately fifteen percent (15%) of our leasable square footage will expire. Although vacancy may increase temporarily, at most of our properties we believe that this lease "roll- over" is routine and the underlying space will be released at market rental rates to either the existing or new tenants. Our most significant vacancy is at 6901 Riverport Drive where a tenant occupying approximately 145,000 square feet or 45% of this property's space vacated on July 31, 2000. We are in the process of marketing this space but have not secured a new tenant. Our total revenues may be adversely affected if the space remains vacant for an extended period of time. Since December 31, 2000, a major tenant at Colonial Penn Building took occupancy of 21,850 square feet increasing the occupancy of that property to 100%, and at the Lexington Business Center two tenants took occupancy of 41,600 square feet increasing that property's occupancy from 70% to 84%. In total, out of approximately 520,000 square feet that were vacant at December 31, 2000, and approximately 148,000 square feet of leased space that expired during the first two months of 2001, approximately 207,000 square feet have been leased decreasing vacancy to approximately 460,000 square feet as of March 1, 2001.
Our total expenses decreased by approximately $1.9 million to approximately $34.7 million from approximately $36.6 million in 1999. This decrease is due to a decrease in the number of properties that we own, partially offset by approximately $1.9 million in severance and termination costs that we incurred in 2000. Our total operating expenses which include property operating, repairs and maintenance, real estate taxes, and ground lease decreased by approximately $1.3 million to approximately $12.3 million from approximately $13.6 million in 1999. On the "same-store" basis, our total operating expenses increased by approximately $0.7 million or 6.0%. Interest expense decreased by approximately $2.4 million to approximately $9.2 million from approximately $11.6 million primarily due to a reduction in the amounts borrowed as a result of the 1999 property dispositions and the conversion of our unsecured loan to Series A convertible preferred shares in January 2000.
SEVERANCE AND TERMINATION COSTS
In September 2000, we adopted an employee severance and retention program. We have since terminated certain employees and will continue to review our staffing needs in the future. The total expenses for the year ended December 31, 2000 include a charge of approximately $1.9 million for this program. These costs include a charge of approximately $0.3 million for base compensation payable to Mr. Leonard G. Levine from August 14, 2000 through December 31, 2001 under the terms of his employment agreement. Subsequent to September 30, 2000, we entered into employment agreements with Messrs. Schafran, Higgins and Teglia, and into separation agreements with Messrs. Hansen and Schmidt. Pursuant to these separation agreements and Mr. Teglia's new employment agreement, we paid a total of approximately $0.8 million in severance and termination costs in the fourth quarter of 2000. These costs are included in the $1.9 million severance and termination costs discussed above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
During the year ended December 31, 1999 and 1998 our net income totaled approximately $8.5 million and approximately $5.4 million, respectively. The approximately $3.1 million increase resulted primarily from net gains on dispositions of investments in real estate of approximately $4.1 million, and revenue growth of approximately $2.3 million reduced by expense growth of approximately $3.3 million. In particular, our total revenues increased by approximately $2.3 million or 5.8% to approximately $41.7 million from approximately $39.4 million, due primarily to an increase in the number of properties that we owned in 1999 compared to 1998. On a "same-store" basis (comparing the results of operations of the properties owned during the entire year ended December 31, 1999 with the results of the same properties owned during the year ended December 31, 1998), net operating income decreased by approximately $0.6 million with total revenues decreasing by approximately $1.1 million offset by a decrease in total operating expenses of approximately $0.5 million. The decrease in same store revenues was caused by a decrease in the occupancy at four of our properties, the Lexington Business Center, Phoenix Business Park, Elmhurst Metro Court, and Airways Plaza Office Center. The average occupancy levels at these properties were 65%, 67%, 65%, and 41% during the year ended December 31, 1999, respectively, compared to 85%, 96%, 76%, and 99% average occupancy levels during the year ended December 31, 1998. The occupancy at these four properties, as well as for our overall portfolio, was lower than our historical levels as a result of the termination of several leases during 1998 and 1999.
Our total expenses increased by approximately $3.3 million primarily due to an increase in the number of properties that we owned in 1999 compared to 1998. Our total operating expenses, which include property operating, repairs and maintenance, real estate taxes, and ground lease increased by approximately $0.2 million to approximately $13.6 million from approximately $13.4 million in 1998. On a "same-store" basis, total operating expenses decreased by approximately $0.4 million or 4.1% to approximately $9.4 million from approximately $9.8 million. Interest expense increased by approximately $1.8 million to approximately $11.6 million from approximately $9.8 million, primarily due to an increase in the amount we borrowed in connection with the acquisitions that we completed in 1998. General and Administrative expense decreased by approximately $0.1 million to approximately $4.5 million from approximately $4.6 million. Depreciation and Amortization expense increased by approximately $1.4 million to approximately $6.6 million from approximately $5.2 million which accounts for the remaining net increase in total expenses.
LIQUIDITY AND CAPITAL RESOURCES
On January 5, 2001, we adopted a Plan of Termination and Liquidation under which our Trust will be dissolved, the obligations of the Trust will be paid, appropriate reserves will be taken and the net proceeds will be distributed to our shareholders. On January 8, 2001, we entered into a Purchase and Sale Agreement to sell all of our real estate assets to an unaffiliated third party for $226 million plus the cost of all prepayment penalties and assumption fees related to our mortgage debt ("Denholtz Transaction"). The contract contains standard conditions to closing including a due diligence period during which the buyer may terminate the contract for any reason without penalty. The due diligence period ends March 30, 2001 with a closing scheduled for April 30, 2001, unless extended by the parties.
We cannot predict if, or when, we will ultimately be successful in consummating the Denholtz Transaction or an alternative transaction, should the current one terminate. However, if we are successful in completing a transaction, it is our intention to establish only those essential reserves needed to cover liquidation costs and contingent liabilities, including those costs and contingent liabilities related to pending litigation. Furthermore, it is our intention to distribute all cash proceeds from the sale of our assets in excess of these reserves to our shareholders. We expect to make a first distribution as soon as practical after the closing and a final liquidating distribution before the end of 2001.
Until we are certain that all contingencies under the purchase and sale contract are eliminated, that the buyer can terminate the contract only under penalty and that a closing date for the sale of our assets is scheduled, it is our intention to make regular quarterly distributions to the extent that the distributions can be supported by our cash flow. However, there can be no assurance that these distributions can be made with regularity or that, if made, they will equal or exceed our previous distribution levels.
In the event that we are unsuccessful in consummating the Denholtz Transaction, we expect to fund our short-term liquidity needs, including recurring capital expenditures, from our working capital (including the restricted cash which is available for capital expenditures, real estate taxes and insurance), and from income derived primarily from our property operations. We anticipate using these monies to fund periodic tenant- related capital expenditures and other capital improvements. We expect to fund our long-term liquidity needs, including funds necessary for non- recurring capital improvements and severance and termination costs from long-term and short-term secured debt or from the proceeds from the sale of
assets. If we require additional liquidity to fund a portion of the cost of improving properties in the future, we expect to borrow under our present credit facility which is secured by our Johns Creek Office and Industrial Park and Technology Park properties. As discussed below, we will need to extend or replace this facility if the Denholtz Transaction is delayed or terminated. We also have the ability to mortgage our Avalon Ridge Business Park which is our only unencumbered property.
At December 31, 2000, our assets totaled approximately $196.1 million, a decrease of approximately $10.5 million from total assets at December 31, 1999 of approximately $206.6 million. Our liabilities totaled approximately $126.4 million at December 31, 2000 a decrease of approximately $12.7 million from a total of approximately $139.1 million at December 31, 1999. Our shareholders equity increased by approximately $2.1 million to approximately $67.4 million at December 31, 2000 from approximately $65.3 million at December 31, 1999.
Cash and cash equivalents consist of cash and short-term investments. Our cash and cash equivalents balance was approximately $2.4 million at December 31, 2000 and approximately $13.1 million at December 31, 1999. The decrease in total cash and cash equivalents resulted from using approximately $6.1 million in investing activities and approximately $14.0 million in financing activities while receiving approximately $9.4 million from operating activities.
Cash Flows From Operating Activities: Net cash provided by operating activities decreased by approximately $1.4 million for the year ended December 31, 2000 to approximately $9.4 million from approximately $10.8 million in 1999. This decrease is primarily due to a reduction in the number of properties that we own. See Results of Operations above for further discussion of the operations of our real estate assets.
In prior years, we have presented Funds From Operations ("FFO") and Funds Available for Distribution ("FAD") in the Cash Flow from Operating Activities section of Liquidity and Capital Resources for purposes of allowing the reader of our financials to compare our results with those of other REIT's. In light of our adoption of a Plan of Termination and Liquidation, we will no longer present this information because our operations are no longer comparable to other REIT's that are going concerns. Therefore, while we operate pursuant to the Plan of Liquidation, FFO and FAD will no longer be presented in our annual or quarterly filings.
Cash Flows From Investing Activities: During the year ended December 31, 2000, we used approximately $6.1 million in investing activities. Cash flow was primarily used to make capital improvements at our various properties in the amount of approximately $6.4 million. In comparison during the same period in 1999, we generated approximately $7.6 million from investing activities, primarily from proceeds from the sale of investments in real estate. During the year ended December 31, 1999, we sold four apartment complexes and one flex/industrial property resulting in proceeds from sale of approximately $13.7 million (gross proceeds from sale of approximately $29.9 million less approximately $16.2 million representing debt assumed by the purchaser). We also made capital improvements at our various properties in the amount of approximately $6.0 million.
Cash Flows From Financing Activities: During the year ended December 31, 2000, we used approximately $14.0 million in financing activities. We used cash primarily to make net payments on mortgage loans, and on an unsecured loan payable of approximately $6.9 million and to pay distributions to shareholders of approximately $6.8 million. During the year ended December 31, 1999, we used approximately $9.1 million in financing activities. During the year ended December 31, 1999, we used cash primarily to make net payments on mortgage loans and bonds payable of approximately $2.8 million and to pay distributions to shareholders of approximately $6.5 million.
FINANCINGS:
On May 1, 2000, we entered into a loan agreement with LaSalle Bank National Association (the "LaSalle Loan") which provided for a loan in the amount of $12.1 million, which we can draw in four installments. The amount of $8.5 million was drawn on May 1, 2000. An additional $2 million was drawn on October 30, 2000. The loan, which is collateralized by our Johns Creek Office and Industrial Park and Technology Park properties, bears interest at a variable rate equal to LIBOR plus 2.2% and is payable monthly. The loan principal is pre-payable without penalty and matures on May 31, 2001. We utilized the proceeds from the first draw primarily to repay the amounts outstanding on a line of credit which was due on May 1, 2000 and which was previously collateralized by our Johns Creek Office and Industrial Park and Technology Park properties, and secondarily for transaction costs. We used proceeds from the second draw primarily to pay severance costs with the balance being used to fund tenant improvement costs.
On October 8, 1999, we entered into a loan agreement with LaSalle Bank N.A. in the amount of $7.8 million. The loan, which is collateralized by the Trust's Lexington Business Center property, bears interest at a variable rate equal to LIBOR plus 2% and is payable monthly. The loan principal is pre-payable without penalty and had an initial maturity date of May 31, 2000. We had two options to extend the term of the loan for one year each at the same interest rate by paying a fee of $19,500 for each extension. We exercised our first option to extend the term of the loan until May 31, 2001.
In the event that the Denholtz Transaction is delayed or terminated, we will exercise our final option to extend the Lexington loan and will attempt to extend or replace the Johns Creek and Technology Park LaSalle Loan.
As of December 31, 2000, we had borrowed $10.5 million on the LaSalle Loan leaving approximately $1.6 million available for future borrowing. At December 31, 2000, our debt to total market capitalization ratio was 58% based upon the closing share price on that date of $5.50.
During the third quarter of 1998, we borrowed $7.4 million under a convertible term loan agreement entered into with a group of lenders in October 1997. On January 20, 2000, we paid conversion fee of $37,000 (0.5% of the outstanding loan balance) and we repaid approximately $1.2 million of the convertible term loan. The remaining balance of approximately $6.2 million was converted into 61,572 Series A convertible preferred shares at a conversion rate of $100 per share and may be further converted into common shares at a conversion rate of $5.15 per share.
RISK FACTORS
FACTORS PERTAINING TO PLAN OF TERMINATION AND LIQUIDATION
NO ASSURANCES THAT THE TRANSACTIONS CONTEMPLATED BY THE PURCHASE AGREEMENT WILL CLOSE. On January 5, 2001, we adopted a Plan of Termination and Liquidation (the "Plan") and on January 8, 2001, we entered into a Purchase and Sale Agreement with Denholtz Management Corporation ("Denholtz") to sell all of our real estate assets (the "Purchase Agreement"). The Purchase Agreement grants Denholtz until March 30, 2001, the right to terminate the Purchase Agreement in its sole discretion. Additionally, the Purchase Agreement gives Denholtz the right to exclude certain properties if certain rental and other thresholds are not met. Also, the closing of the transactions contemplated by the Purchase Agreement are dependent on standard conditions to closing, one or more of which may not occur.
There can be no assurance that the transactions contemplated by the Purchase Agreement will ever close. If the transactions contemplated by the Purchase Agreement do not close, we may not be able to sell all of our assets in a timely manner and on financial terms that are as favorable as those contained in the Purchase Agreement. Additionally, there can be no assurance that Denholtz will purchase all of our properties. If Denholtz does not purchase one or more of our properties, we may not be able to sell those properties in a timely manner and on financial terms that are as favorable as those contained in the Purchase Agreement. The consequence of a termination of the Denholtz Transaction will be that any liquidating distribution that was expected to be made from the net sale proceeds will be delayed until another transaction or series of transactions can be completed for all or part of our assets. In the interim, our ability to make quarterly distributions will depend on the cash flow generated by our properties less our corporate overhead.
Further, our failure to sell in a timely manner any properties that Denholtz does not purchase increases the risk that we will make distributions pursuant to the Plan after the 24 month anniversary of its adoption. Any distributions made after January 5, 2003 will not qualify for the dividends paid deduction thereby potentially subjecting us to tax on our net income and net gains from dispositions. See, "We Might Fail to Qualify as a REIT," below.
SALES OF ASSETS NOT SUBJECT TO SHAREHOLDER APPROVAL. The Denholtz Transaction will not be submitted to a vote of our shareholders. We have obtained written advice from our Massachusetts counsel and therefore we believe that our Declaration of Trust grants the Trustees the authority, without shareholder approval, to sell any and all of our assets on such terms as the Board of Trustees determines appropriate, so long as such sales are made pursuant to the Plan. On January 19, 2001, Leonard G. Levine, our suspended president and chief executive officer, not individually but on behalf of the shareholders of the Trust, filed a lawsuit in the Circuit Court of Cook County, Illinois, alleging that the Purchase Agreement and the transactions contemplated thereby require shareholder approval. The complaint seeks an injunction against three of our trustees to prevent them from closing the transaction until shareholder approval is obtained. Although, based in part upon written advice we have received from our Massachusetts counsel, we believe that our shareholders are not required to approve the sale of our assets (and, the Purchase Agreement requires our outside counsel to give an opinion to that effect), there can be no assurance that Mr. Levine will not prevail in this lawsuit.
The pendency or the result of Mr. Levine's lawsuit may delay or abort the closing of the transactions contemplated by the Purchase Agreement.
LIMITED MARKET FOR SHARES. If we fail to sell all of our properties in accordance with the Purchase Agreement, and the value of our assets decline or the costs and expenses related to such sales and to the liquidation process exceed those we are currently estimating, the liquidation may not yield distributions as great as, or greater than, the recent market prices of our shares. No assurances can be made as to the actual amount and timing of distributions, which could be made over a substantial period of time.
DECREASING LIQUIDITY. As we sell our assets and distribute proceeds, our market capitalization and "float" will diminish and market interest in our shares by the investment community may diminish, thereby reducing or effectively eliminating the market demand and liquidity for our shares, which would adversely affect the market price for our shares. At a later stage of the liquidation process, the Nasdaq National Market may cause our shares to be delisted.
QUALIFICATION AS A REIT. The calculation of the estimated liquidation price per share, assumes that we will continue to qualify as a REIT under the Code during the entire liquidation process and, therefore, no provision has been made for federal income taxes. Although we expect to maintain such REIT qualification, there can be no assurance thereof. See "We Might Fail to Qualify as a REIT" below.
RISKS OF ABANDONMENT OF PLAN. In the event the Plan is abandoned by our Trustees (which may occur at any time during the liquidation process) at a time when we are significantly reduced in size, certain operating risks will increase, as will the risk that our share price will trade at a greater discount to the perceived underlying value of its real estate holdings.
REAL ESTATE RISKS
WE COMPETE FOR TENANTS. All of our office and flex industrial properties are located in highly-developed areas that include other office and flex industrial properties. Some of these properties are newer or better located than our properties. Further, our competitors may have greater resources than we do, which could allow them to reduce rents to a level that is not profitable for us. We may also be required to spend money upgrading or renovating our properties to make them attractive to both existing and potential tenants thus increasing our expenses and reducing our cash resources. The number of properties or other companies that compete in our market areas could have a material effect upon:
. our ability to lease space at our properties; . the amount of rent that we can charge on new leases or renewals; and . the dollar amount of tenant improvements or leasing commissions required to lease a property.
WE OWN PROPERTIES IN A LIMITED NUMBER OF MARKETS. Our properties are located in the Midwestern and Southeastern United States, primarily suburban Chicago, where we own properties that account for 22% of our gross rental revenue, and suburban Atlanta, where we own properties that account for 31% of our gross rental revenue. Our ability to maintain or increase our revenues or to generate revenues that exceed our operating expenses is affected by economic conditions in the Midwestern and Southeastern United States. Like other real estate markets, these markets have experienced economic downturns in the past and will likely experience downturns in the future. Layoffs or downsizing, industry slowdowns, changing demographics, increases in the supply of property or reduced demand for office or flex industrial space may decrease our revenues or increase our operating expenses or both.
LEASES ON APPROXIMATELY 15% OF OUR RENTABLE SQUARE FEET EXPIRE DURING 2001 AND 15% OF OUR RENTABLE SQUARE FOOTAGE WAS VACANT AS OF DECEMBER 31, 2000. As leases expire, we may not be able to renew or re-lease space at rates comparable to or better than the rates contained in the expiring leases. Leases on approximately 15% of our rentable square feet will expire prior to December 31, 2001. If we fail to renew or re-lease space at rates that are at least comparable to the rates on expiring leases, the revenues generated by our properties will decline. Further, we may have to spend significant sums of money to renew or re-lease space covered by expiring leases, potentially reducing the amount of money that we have available to distribute to you or to use for other purposes.
OUR TENANTS MAY NOT PAY THEIR RENT OR MAY DECLARE BANKRUPTCY. We derive substantially all of our revenue from leasing space at our properties. Our ability to make distributions to you may be negatively affected if tenants leasing a significant percentage of our rentable square feet fail to pay their rent or if we are unable to profitably lease space. We may experience substantial delays and incur significant expenses enforcing our rights against tenants who do not pay their rent. A tenant may also seek the protection of the bankruptcy laws and delay making rental payments to us or actually reject or terminate its lease under those laws. Even if a tenant did not seek the protection of the bankruptcy laws, the tenant may from time to time experience a downturn in its business which may weaken its financial condition and its ability to make rental payments to us when due.
WE MAY NOT BE ABLE TO QUICKLY VARY OUR PORTFOLIO. Investments in real estate are relatively illiquid. Except in certain circumstances, in order to continue qualifying as a REIT, we are subject to rules and regulations which limit our ability to sell properties within a short period of time.
WE ARE REQUIRED TO COMPLY WITH VARIOUS LAWS AND REGULATIONS. As an owner of property, we are required to comply with a variety of federal, state and local laws. Complying with these laws and regulations may increase our operating expenses and reduce our profits. For example, we are required to comply with laws and regulations that impose liability on a property owner for the costs of removing or remediating certain hazardous materials released on a property. We are subject to these laws even if we are not aware of, or responsible for, releasing these materials. These laws or regulations may also restrict the way that we can use a property or the type of business which may be operated on the property. Further, if we fail to comply with these laws or regulations by, for example, failing to properly remediate a release of hazardous material, we may not be able to sell the affected property or borrow money using the property as collateral for a loan. We may also be required to pay money to individuals who are injured due to the presence of hazardous materials on our property. Although we are not aware of any hazardous materials at our properties, these materials may exist and the cost of removing or remediating them may be material and could adversely impact the value of the property affected. We may also be required to pay the cost of removing or remediating hazardous materials from a disposal or treatment facility to which we may have shipped hazardous or toxic substances even if we never owned or operated the disposal or treatment facility. Our properties must also comply with the Americans with Disabilities Act. This act establishes certain standards related to access to and use of properties by disabled persons. We may be required, for example, to remove any barriers to access. If we fail to comply, the U.S. government may fine us or we may be required to pay damages to a disabled person. Complying with these requirements may increase our expenses and changes in these requirements may result in unexpected expenses.
OUR OBJECTIVES MAY CONFLICT WITH THOSE OF OUR JOINT VENTURE PARTNERS. We own eight of our properties, or approximately 40% of our rentable square footage, through controlling interests in joint ventures with various third parties. Investments in joint ventures which own properties may involve risks that are not otherwise present when we wholly own the property directly or through one of our subsidiaries. For example, our co-venturer may file for bankruptcy protection or may have economic or business interests or goals which are inconsistent with our goals or interests. Further, although in each of these ventures we own a controlling interest and have authority over major decisions such as the sale or refinancing of properties, we owe fiduciary duties to our partners that may cause us to take actions we otherwise would not have taken.
WE MAY NOT HAVE ENOUGH INSURANCE. We carry comprehensive liability, fire, flood, earthquake, extended coverage and rental loss policies that insure us against losses at our properties with policy specifications and insurance limits that we believe are reasonable. There are certain types of losses, for example environmental, that we may decide not to insure against since the cost of insuring for the loss is not economical. In establishing our insurance strategy, we use our discretion in determining the amount of coverage, the limits on this coverage and the deductibles that apply to the coverage in an attempt to balance the amount of insurance that we purchase and the cost of that insurance. We may, however, suffer losses that exceed our insurance coverage. Further, inflation, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance.
PROPERTY TAXES MAY INCREASE. We are required to pay taxes based on the assessed value of our properties as determined by various taxing authorities such as state or local governments. These taxing authorities may increase the tax rate imposed on a property or may reassess property value, either of which would increase our operating expenses.
REAL ESTATE FINANCIAL RISKS
WE OFTEN NEED TO BORROW MONEY TO FINANCE OUR BUSINESS. Our ability to internally fund our capital needs is limited since we must distribute at least 95% of our net taxable income (excluding net capital gains) to our shareholders to qualify as a REIT. Consequently, we often borrow money to fund our operating or capital needs, and may borrow monies to satisfy the 95% distribution requirement. The documents which govern how we may conduct our business do not limit the amount of money that we may borrow. Borrowing money to fund operating or capital needs exposes us to various risks. For example, our properties may not generate enough cash to pay the principal and interest obligations on our loans or we may violate a loan covenant that results in the lender accelerating the maturity date of a loan. As of December 31, 2000, we owed a total of approximately $119.7 million, secured by mortgages on certain of our properties. If we fail to make timely payments on our loans, including those cases where a lender has accelerated the maturity date due to a violation of a loan covenant, the lenders could foreclose on the properties securing their loans and we could lose our entire investment in those properties. Once a loan becomes due, we must either pay the remaining balance or borrow additional money to pay off the maturing loan. We may not, however, be able to obtain a new loan, or the terms of the new loan, such as the interest rate or payment schedule, may not be as favorable as the terms of the maturing loan. Thus, we may be forced to sell a property at an unfavorable price to pay off the maturing loan or agree to less favorable loan terms. A total of $23.6 and $4.2 million of our indebtedness matures on or before December 31, 2001 and 2002, respectively.
We occasionally enter into loans where the interest rate may fluctuate. As of December 31, 2000, we owed approximately $22.5 million that bore interest at variable rates. We may borrow additional amounts that bear interest at variable rates. If interest rates increase, the amount of interest that we are required to pay on these borrowings will also increase. Any such increase would increase our operating expenses.
WE DEPEND ON A SMALL NUMBER OF KEY PERSONNEL. Our success depends, in part, on the efforts of our principal executive officers, particularly Messrs. Schafran, Higgins and Teglia. Although we have entered into employment contracts with each of these individuals, the loss of their services could have an adverse effect upon our operations.
THIRD PARTIES MAY BE DISCOURAGED FROM MAKING ACQUISITION OR OTHER PROPOSALS THAT MAY BE IN YOUR BEST INTERESTS. Under our Declaration, no single person or group of persons (an entity is considered a person) may own more than 9.9% of our outstanding common shares. The employment contracts we have with each of our senior executives may require us, in certain circumstances, to make payments to these individuals if a "change of control" occurs. These provisions may prevent or discourage a third party from making a tender offer or other business combination proposal such as a merger, even if such a proposal would be in the best interest of our shareholders.
WE MIGHT FAIL TO QUALIFY AS A REIT. If we fail to qualify as a REIT, we would not be allowed to deduct amounts distributed to our shareholders in computing our taxable income and would incur substantially greater expenses for taxes and would have less money available to distribute to you. We would also be subject to federal income tax at regular corporate rates as well as potentially the alternative minimum tax. Unless we satisfied some exception, we could not elect to be taxed as a REIT for the four taxable years following the year during which we were disqualified. We may fail to qualify as a REIT if, among other things:
. less than 75% of the value of our total assets consists of real estate assets, cash and government securities at the close of each fiscal quarter;
. more than 5% of the value of our assets consists of securities of any one issuer or we hold more than 10% of the outstanding voting securities (subsequent to January 1, 2001, 10% of the value of the securities) of any one issuer at the close of each fiscal quarter;
. less than 75% of our gross income is generated from rents from real property, interest on obligations secured by mortgages, gain from the sale of property, and certain other property-related revenue sources; or
. we fail to distribute at least 95% (subsequent to January 1, 2001, 90%) of our "REIT taxable income" to our shareholders.
If we fail to distribute enough money to satisfy the REIT requirements, we may also have to pay a non-deductible excise tax. This tax is equal to 4% of the amount in any year that our distributions are less than the sum of 85% of our ordinary income in the current year plus 95% of our net income from capital gains in the current year plus 100% of the taxable income that we did not distribute in prior years.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not engage in any hedge transaction or in the ownership of any derivative financial instruments. To mitigate the impact of fluctuations in interest rates, we generally maintained over 70% of our debt as fixed rate in nature by borrowing on a long-term basis.
As of December 31, 2000, we had approximately $119.7 million of outstanding long-term debt, of which $22.5 million bears interest at variable rates. As of December 31, 2000, the weighted-average interest rate on this variable rate debt was 8.33%. If interest rates on this variable rate debt were to increase one percentage point (1%), interest expense would increase by $225,000 on an annual basis.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BANYAN STRATEGIC REALTY TRUST INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----
Report of Independent Auditors 28
Consolidated Balance Sheets, December 31, 2000 and 1999 29
Consolidated Statements of Income For the Years Ended December 31, 2000, 1999 and 1998 31
Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 2000, 1999 and 1998 33
Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999 and 1998 34
Notes to Consolidated Financial Statements 36
Schedule -------- Consolidated Real Estate and Accumulated Depreciation III
SCHEDULES NOT FILED:
All schedules other than those indicated in the above index are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
THE SHAREHOLDERS BANYAN STRATEGIC REALTY TRUST
We have audited the accompanying consolidated balance sheets of Banyan Strategic Realty Trust as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the index at Item 8. These financial statements and schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Banyan Strategic Realty Trust at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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
Chicago, Illinois February 1, 2001
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. LIQUIDATION OF THE TRUST
On January 8, 2001, the Trust entered into a Purchase and Sale Agreement to sell all its real estate assets to an unaffiliated third party for $226 million plus the cost of all prepayment penalties and assumption fees related to the Trust's mortgage debt. The contract contains standard conditions to closing including a due diligence period during which the buyer may terminate the contract for any reason without penalty. The due diligence period ends March 30, 2001 with a closing scheduled for April 30, 2001, unless extended by the parties.
In anticipation of the sale of the Trust's real estate assets, the Trustees on January 5, 2001 adopted a Plan of Termination and Liquidation under which, the Trust will be dissolved, the obligations of the Trust will be paid, appropriate reserves will be taken and the net proceeds will be distributed to the shareholders. Effective as of January 5, 2001, the Trust adopted the liquidation basis of accounting. The following represents the unaudited pro forma Shareholders' Equity as of December 31, 2000 assuming the adoption of the liquidation basis of accounting as of that date:
Shareholders' Equity at December 31, 2000 (Going concern basis) $67,350
Pro Forma adjustments to Liquidation Basis Liquidation and Termination Costs (810) Elimination of intangible assets (5,470) ------- Pro Forma Shareholders' Equity at December 31, 2000 (Liquidation Basis) $61,070 =======
2. ORGANIZATION AND DESCRIPTION OF BUSINESS
Banyan Strategic Realty Trust (the "Trust") was organized in 1986 as a business trust under the laws of the Commonwealth of Massachusetts. The business of the Trust is the ownership and operation of real estate properties. At December 31, 2000, the Trust owned twenty-seven properties located principally in the Midwest and Southeast United States. See Note 8 for information with respect to the Trust's business segments.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the Trust, its wholly-owned subsidiaries and its controlled Partnerships. In all of its partnerships, the Trust is the controlling general partner and retains sole authority over all significant decisions. All intercompany balances and transactions have been eliminated in consolidation.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INVESTMENT IN REAL ESTATE
Costs incurred with respect to third parties for the acquisition, development, construction and improvement of properties are capitalized. Certain costs of yet-to-be acquired properties, including deposits and professional fees, are capitalized as other assets. These costs are subsequently capitalized as property acquisition costs or charged to expense when it becomes apparent that acquisition of a particular property is not probable. Repairs and maintenance are charged to expense when incurred.
Depreciation of buildings is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years. Depreciation of tenant improvements is computed using the straight-line method over the shorter of the lease term or useful life. For the years ended December 31, 2000, 1999 and 1998, depreciation expense amounted to $6,091, $5,982 and $4,765, respectively.
The Trust recognizes impairment losses for its properties when indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying amount.
The Trust classifies its real estate properties as held for sale when its Board of Trustees has authorized the sale and an active program to find a buyer has been initiated. The Trust classified all of its properties as held for sale as of December 31, 2000 in consideration of the Purchase and Sale Agreement described in Note 1. As of December 31, 1999, none of the properties were classified as held for sale.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related loans.
REVENUE RECOGNITION
Minimum rentals are recognized on a straight-line basis over the term of the related leases. Additional rents in the form of operating expense reimbursements for common area maintenance expenses and real estate taxes are recognized in the period in which the related expenses are incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Trust believes the carrying amount of its financial instruments approximates fair value at December 31, 2000 and 1999, because (i) the fixed rates on mortgage loans payable are comparable to rates currently offered in the market, (ii) the rates on the line of credit and bonds payable are variable and the terms are comparable to those currently offered in the market and (iii) the maturities of the Trust's cash equivalents are relatively short.
INCOME TAXES
For the years ended December 31, 2000, 1999 and 1998, the Trust elected or will elect to be treated as a real estate investment trust ("REIT") under Internal Revenue Code Sections 856-860. In order to qualify, the Trust is required to distribute at least 95% of its "REIT" taxable income to shareholders, meet asset and income tests and comply with certain other requirements.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of December 31, 2000, Investment in Real Estate has a gross and net basis of $205,686 and $184,175, respectively, for income tax purposes. Additionally, investment in a liquidating trust with a tax basis of $675 has not been accorded any value for financial reporting purposes.
As of December 31, 2000, the Trust has a net operating loss carry- forward of $16,029 which will expire in 2006 ($7,787), 2008 ($789), and 2012 ($7,453).
CASH EQUIVALENTS
The Trust considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash represents amounts held by lenders to provide for future real estate tax expenditures and tenant improvements, utility deposits and security deposits. Certain of these amounts may be reduced upon the fulfillment of certain conditions.
STOCK OPTIONS
The Trust has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), in accounting for its stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Trust's employee stock options equals or exceeds the market price of the underlying stock at the date of grant.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported 1999 and 1998 consolidated financial statements in order to provide comparability with the 2000 consolidated financial statements. These reclassifications have not changed the 1999 or 1998 results.
4. EARNINGS PER SHARE
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. LONG-TERM DEBT
The Trust's long-term debt consists of the following at December 31, 2000 and 1999:
2000 1999 ----------------------- ------------------------- Weighted Weighted Average Average Interest Interest Balance Rate Balance Rate --------- -------- --------- -------- Mortgage loans . . . . $115,452 7.66% $120,781 7.48% Bonds. . . . . 4,200 6.07% 4,500 5.53% -------- -------- -------- -------- Total collateralized debt. . . . . $119,652 7.61% $125,281 7.41% ======== ======== ======== ======== Unsecured loans . . . . $ -- -- $ 7,400 12.00% ======== ======== ======== ========
Mortgage loans of $97,152 had fixed interest rates that ranged from 6.95% to 8.89% at December 31, 2000 and $18,300 had a variable rate (8.85% at December 31, 2000). Bonds payable consist of variable rate tax exempt revenue bonds which bear interest equal to 6.07% at December 31, 2000. Substantially all of the mortgage loans and bonds contain prepayment penalties. During 2000 and 1999, the Trust recognized extraordinary losses of $42 and $183, respectively, related to prepayments on refinanced debt and the writeoff of unamortized financing costs. Substantially all of the Trust's real estate is pledged as collateral for the mortgage loans and bonds.
During 1998, the Trust borrowed $7.4 million pursuant to its $20 million 1997 Convertible Term Loan Agreement for an unsecured convertible term loan (the "Unsecured Loan"). On January 20, 2000, the Trust repaid $1,243 of the Unsecured Loan and the remaining balance of $6,157 was converted into 61,572 Series A convertible preferred shares. The Series A convertible preferred shares pay quarterly preferred dividends at rate of 10% per annum and are convertible into common shares at a conversion price of $5.15 per share. Prior to conversion, the Unsecured Loan bore interest at an annual interest rate of 12% payable quarterly and the Trust was required to pay an annual fee equal to 2% of the amount outstanding on October 14, of each year.
The principal balance of the Trust's long-term debt at December 31, 2000, is scheduled to be repaid as follows:
2001 . . . . . . . . . . . . . $ 23,608 2002 . . . . . . . . . . . . . 4,198 2003 . . . . . . . . . . . . . 13,494 2004 . . . . . . . . . . . . . 10,938 2005 . . . . . . . . . . . . . 1,734 Thereafter . . . . . . . . . . 65,680 -------- $119,652 ========
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. INVESTMENT IN REAL ESTATE
DISPOSITION ACTIVITIES
QUANTUM BUSINESS CENTRE
On November 4, 1999, the Trust sold its interest in Quantum Business Centre, a multi-tenant, flex/industrial property located in Jefferson County, Kentucky, to a private investor for a price of approximately $6,100. The Trust received cash proceeds, net of debt repayment, of approximately $3,700 and recognized a gain of approximately $700.
OKLAHOMA APARTMENT PORTFOLIO
On December 16, 1999, the Trust sold its Oklahoma Apartment Portfolio - - four separate apartment complexes totaling 864 units - for a price of approximately $24,100. The Trust received net proceeds of approximately $7,500 and recognized a gain of approximately $3,400. The bonds used to finance the properties were assumed by the purchaser.
7. PRO FORMA INFORMATION (UNAUDITED)
The Trust did not acquire any properties during 2000 or 1999. The following unaudited pro forma summary presents information as if the Trust's 1998 property acquisitions had occurred at the beginning of that year. The pro forma information is provided for information purposes only.
It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Company.
Year Ended December 31, ------------ --------
Total revenue . . . . . . . . . . . . . . . . . $ 42,260 Net income. . . . . . . . . . . . . . . . . . . $ 5,187 Basic earnings per share. . . . . . . . . . . . $ 0.39 Diluted earnings per share. . . . . . . . . . . $ 0.38
8. BUSINESS SEGMENTS
The Trust owns and operates real estate properties located principally in the Midwest and Southeast United States. The Trust has three operating segments corresponding to the three property types comprising its real estate assets: flex/industrial, office and retail. As of December 31, 2000, the flex/industrial segment was comprised of twelve complexes with long-term leases to approximately 180 tenants; the office segment was comprised of fourteen office sites with long-term leases to approximately 270 tenants; and the retail segment was comprised of one retail center with long-term leases to approximately 50 tenants. As of December 31, 1999, the flex/industrial segment was comprised of thirteen complexes, the office segment was comprised of fourteen office sites and the retail segment was comprised of one retail center. Prior to the sale of the Oklahoma Apartment Portfolio in December 1999, a fourth segment - the residential segment - was comprised of four apartment complexes with 864 units. The Trust's long-term tenants are in a variety of businesses and no individual tenant is significant to the Trust's business when considered as a whole.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Information by business segments is set forth below:
2000 1999 1998 -------- -------- -------- Revenue Flex/Industrial. . . $ 11,205 $ 11,416 $ 10,838 Office . . . . . . . 21,313 21,264 19,577 Residential. . . . . -- 4,168 4,170 Retail . . . . . . . 4,705 4,771 4,646 Corporate/Other. . . 573 97 185 -------- -------- -------- $ 37,796 $ 41,716 $ 39,416 ======== ======== ========
Income (loss) before net gains and extraordinary item Flex/Industrial. . . $ 2,857 $ 2,518 $ 3,787 Office . . . . . . . 4,686 5,177 5,124 Residential. . . . . -- 688 682 Retail . . . . . . . 576 736 550 Corporate/Other. . . (5,494) (4,538) (4,624) -------- -------- -------- $ 2,625 $ 4,581 $ 5,519 ======== ======== ========
2000 1999 -------- -------- Total Assets Flex/Industrial. . . $ 69,176 $ 69,279 Office . . . . . . . 107,151 105,756 Residential. . . . . -- -- Retail . . . . . . . 17,444 18,125 Corporate/Other. . . 2,286 13,487 -------- -------- $196,057 $206,647 ======== ========
2000 1999 1998 -------- -------- -------- Depreciation and amortization Flex/Industrial. . . $ 2,366 $ 2,252 $ 1,714 Office . . . . . . . 3,984 3,287 2,404 Residential. . . . . -- 552 534 Retail . . . . . . . 573 538 523 Corporate/Other. . . -- -- 37 -------- -------- -------- $ 6,923 $ 6,629 $ 5,212 ======== ======== ======== Interest expense Flex/Industrial. . . $ 2,954 $ 3,557 $ 2,669 Office . . . . . . . 4,914 5,540 4,524 Residential. . . . . -- 1,136 1,199 Retail . . . . . . . 1,312 1,325 1,338 Corporate/Other. . . -- -- 48 -------- -------- -------- $ 9,180 $ 11,558 $ 9,778 ======== ======== ========
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2000 1999 1998 -------- -------- -------- Additions to Investment in Real Estate Flex/Industrial. . . $ 1,906 $ 2,364 $ 32,942 Office . . . . . . . 4,473 3,257 31,533 Residential. . . . . -- 278 324 Retail . . . . . . . 43 85 69 Corporate/Other. . . -- -- 28 -------- -------- -------- $ 6,422 $ 5,984 $ 64,896 ======== ======== ========
9. TRANSACTIONS WITH AFFILIATES
During the first eight months of 2000 and the years ended December 31, 1999 and 1998, the Trust paid no salary to, but purchased legal services from an executive officer of the Trust. Fees for legal services totaled $246, $331 and $391, respectively. The executive paid no rent, as such, to the Trust for the use of office space or equipment but granted the Trust a discount equal to approximately 20% compared to rates charged to third parties for all time billed to the Trust by the executive and his employees. The executive also reimbursed the Trust for the cost of two full time and certain part time employees. As of September 1, 2000, this executive signed an employment agreement whereby he became a full time employee of the Trust.
10. DISTRIBUTIONS PAID AND PAYABLE
To qualify as a REIT, the Trust must distribute at least 95% of its "REIT Taxable Income" to shareholders. For 1999, net operating losses of $2,923 were utilized in meeting this requirement. A portion of the distributions paid during the subsequent year may be allocable to taxable income earned in the prior year.
The Trust has determined the shareholders' treatment for federal income tax purposes to be as follows:
2000 1999 1998 ------- ------- ------- Ordinary income . . . . . $ 5,652 $ 2,562 $ 5,978 Long-term capital gain. . . . . . . . . . -- 3,899 -- Return of capital . . . . 1,741 -- 140 ------- ------- ------- $ 7,393 $ 6,461 $ 6,118 ======= ======= =======
On January 19, 2001, the Trust declared a cash distribution for the quarter ended December 31, 2000 of $0.03 per share payable February 28, 2001 to shareholders of record on January 29, 2001.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. LEASES
MINIMUM RENTALS UNDER OPERATING LEASES
The Trust receives rental income from the rental of retail, office and flex/industrial space under operating leases. The following is the minimum future base rentals (excluding amounts representing executory costs such as taxes, maintenance and insurance) on operating leases for the Trust's flex/industrial, office and retail projects held at December 31, 2000:
2001 . . . . . . . $ 30,909 2002 . . . . . . . 25,293 2003 . . . . . . . 19,769 2004 . . . . . . . 13,860 2005 . . . . . . . 7,736 Thereafter . . . . 12,295 -------- $109,862 ========
No single tenant at the Trust's operating properties produced ten percent or more of total income from property operating activities.
The Trust is subject to the usual business risks regarding the collection of the above-mentioned rentals.
GROUND LEASE
The Trust owns a leasehold interest in a shopping center in Atlanta, Georgia. The lease expires in 2067. The ground lease requires annual lease payments of $600 through October 4, 2007 plus 7% of total annual gross rental income commencing when gross rental income exceeds $2,000 from the operations of the shopping center. The ground lease also requires that the Trust pay property operating expenses, including real estate taxes. The base rent is reset in 2007 based upon a market rent within a contractually defined range.
12. OMNIBUS STOCK AND INCENTIVE PLAN
On May 14, 1997, the Board of Trustees (the "Board") adopted and on July 8, 1997, the shareholders of the Trust approved, the 1997 Omnibus Stock and Incentive Plan (the "Option Plan") which allows the Trust to make stock-based awards as part of its employee and Trustee compensation program. Under the Option Plan, the Trust is authorized to issue options to purchase up to one million shares of beneficial interest in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance shares and units. On December 31, 1999, the outstanding options issued under the Option Plan totaled 463,676. When the shareholders elected three new trustees on December 13, 1999, the members of the board of trustees as of October 1, 1997 no longer constituted a majority of the members of the board. By definition, this reconstitution of the board was a "Change of Control" within the meaning of the Employee Stock Option Agreements. As a result, all outstanding employee options became immediately exercisable in accordance with the terms of the option agreements. At that time, the Board of Trustees offered all of the Trust's current employees and advisors who held options, the opportunity to exercise all their vested but unexercised options with the proceeds of a loan from the Trust. Each loan is non-recourse and bears interest at an annual rate of 6.5%. Each person was required to pledge all shares purchased with the proceeds of the loan to secure the payment of principal
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
and interest on the loan. The loan program was available until January 12, 2000. On that date, employees borrowed approximately $3.2 million to purchase 575,337 shares. The loans were originally scheduled to mature on the earlier of January 11, 2005 or one month after the date that an individual's employment is terminated. At that time, the employee would be required to repay the loan and all accrued interest, or forfeit the shares held as security for the loan. Under the employee severance and retention program (see Note 14), the Trust extended the maturity date of the loans for terminated employees to the date the last of the notes becomes due.
FIXED STOCK OPTIONS
The Board administers the Option Plan and has the authority to determine, among other things, the individuals to be granted options, the exercise price at which shares may be acquired, the number of shares subject to options and the vesting requirements and the exercise period of each option. The Board is granted discretion to determine the term of each option granted under the Option Plan to employees, executives and Trustees, but in no event will the term exceed ten years and one day from the date of the grant.
A summary of the Trust's fixed stock option activity, and related information for the years ended December 31, 1999 and 2000 follows:
Weighted Shares Average Subject Exercise Price to Options Per Share ---------- --------------
Outstanding at December 31, 1998 . . . . . 485,676 $ 5.630
Options granted. . . . . . . . . . . . . -- -- Options exercised. . . . . . . . . . . . (2,000) 4.375 Options canceled . . . . . . . . . . . . (20,000) 5.710 ------- -------
Outstanding at December 31, 1999 . . . . . 463,676 5.632
Options granted. . . . . . . . . . . . . 14,000 5.464 Options exercised. . . . . . . . . . . . (432,005) 5.648 Options canceled . . . . . . . . . . . . (8,002) 5.813 ------- ------- Outstanding at December 31, 2000 . . . . . 37,669 $ 5.342 ======= =======
Exercisable at 12/31/99 (a). . . . . . . 463,676 $ 5.632 Exercisable at 12/31/00. . . . . . . . . 27,669 $ 5.294
- ----------
(a) Due to the election of three new trustees, on December 13, 1999, the members of the board as of October 1, 1997 no longer constituted a majority of the members of the board. By definition, this reconstitution of the board was a "Change of Control" within the meaning of the Employee Stock Option Agreements. As a result, all outstanding employee options became immediately exercisable in accordance with the terms of the option agreements.
At December 31, 2000, options to purchase 369,002 shares were available for future grant.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The weighted average grant date fair value of options granted in 2000 and 1998 was $.66 and $.54, respectively. The remaining weighted-average contractual life of these options was 7.85 years. Exercise prices for options outstanding at December 31, 2000 ranged from $4.08 to $6.75 per share.
TARGET STOCK PRICE PERFORMANCE OPTIONS
The exercise price of each target stock price performance option granted is equal to the market price of the Trust's common shares on the date of grant and vests as the Trust's common share price achieves certain pre-established targets which were set on the date of grant. In conjunction with the 1998 signing of an employment agreement between the Trust and its suspended President Leonard G. Levine (see Note 15), the Board granted Mr. Levine stock options to purchase an aggregate of 150,000 shares of the Trust's common shares of beneficial interest at an exercise price equal to $5.50 per share which options were exercised in 2000.
A summary of the Trust's target stock price performance option activity, and related information for the years ended December 31, 1999 and 2000 follows: Weighted Shares Average Subject Exercise Price to Options Per Share ---------- -------------- Outstanding at December 31, 1998 and 1999 . . . . . . . . . . . . . . . . 150,000 $ 5.500 Options exercised. . . . . . . . . . . . . (150,000) $ 5.500 -------- -------- Outstanding at December 31, 2000 . . . . . -- -- ======== ========
Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock Based Compensation", and has been determined as if the Trust had accounted for all options granted under the Option Plan using the fair value method of that statement. The fair value for the fixed stock options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 2000 and 1998: risk free interest rates of 5.94% and 5.31%; expected dividend yields of 8.08% and 7.47%; volatility factors of the expected market price of the Trust's common stock of 0.279 and 0.201; and a weighted-average expected lives of the options of 2 years and 5 years, respectively. No options were granted during 1999. In addition, the fair value for the target stock price performance options granted in 1998 was estimated at the date of grant using a modified Black-Scholes option pricing model which, in addition to the required inputs above, takes into consideration the target stock price (or barrier) which must be attained.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models, such as the Black-Scholes model, require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's view, the existing models do not necessarily provide a reliable single measure of the fair value of the options granted under the Plan.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The effects on 2000, 1999 and 1998 pro forma net income and pro forma earnings per common share of amortizing to expense the estimated fair value of stock options are not necessarily representative of the effects on net income to be reported in future years due to such things as the vesting period of the stock options, and potential for issuance of additional stock options in future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
The Trust's pro forma information is as follows:
Years Ended December 31, ------------------------------ 2000 1999 1998 ------ ------ ------ Pro forma net income . . . . . . . . $2,581 $8,260 $5,279 Pro forma basic earnings per share . $ 0.18 $ 0.61 $ 0.40 Pro forma diluted earnings per share. . . . . . . . . . . . . $ 0.18 $ 0.61 $ 0.38
13. DISTRIBUTION REINVESTMENT AND SHARE PURCHASE PLAN
The Trust has established the Trust's Distribution Reinvestment and Share Purchase Plan (the "DRIP Plan"). The DRIP Plan allows shareholders of the Trust to: (i) automatically reinvest the cash distributions on all, or part, of shares registered in their name; and (ii) make cash investments of not more than $120 per calendar year. Shares purchased under the DRIP Plan will be issued directly by the Trust at either: (i) 97% of the average closing sales price of the shares as reported on the NASDAQ National Market on the last five business days preceding the relevant investment date in the case of reinvested cash distributions; or (ii) 100% of the aforementioned average closing price in the case of cash investments. For the years ended December 31, 2000, 1999 and 1998, the Trust issued 149,367, 161,422 and 141,321 shares of beneficial interest under the DRIP Plan and received total proceeds of $797, $835 and $818, respectively.
14. SEVERANCE AND TERMINATION COSTS
In September 2000, the Trust adopted an employee severance and retention program. The Trust has since terminated certain employees and will continue to review its staffing needs in the future in consideration of the adoption of the Plan of Termination and Liquidation (see Note 1). The accompanying consolidated financial statements include a charge of approximately $1,900 related to the severance and retention program. These severance and termination costs include a charge of approximately $300 related to base compensation payable to Mr. Leonard Levine from August 14, 2000 through December 31, 2001 under the terms of his employment agreement (see Note 17).
15. LITIGATION
On August 14, 2000, the Trust exercised its rights under the Trust's employment agreement with Mr. Leonard G. Levine by suspending him and placing him on leave from his position as president. Simultaneously, the Trust initiated an arbitration proceeding as required under the employment agreement. On October 5, 2000, Mr. Levine filed an action in the Circuit Court of Cook County, Illinois asking the court to terminate the arbitration proceedings by reason of improper forum. On October 18, 2000, the Trust filed a lawsuit against Mr. Levine in the Circuit Court of Cook County, Illinois. The Trust's complaint alleges violations of Mr. Levine's duty of loyalty owed to the Trust.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On December 6, 2000, Mr. Levine and the Trust, through their respective attorneys, agreed to dismiss the arbitration action and Mr. Levine's lawsuit challenging the arbitration and further agreed to resolve all issues under Mr. Levine's employment contract within the Trust's lawsuit against Mr. Levine in the Circuit Court of Cook County (the "Employment Litigation"). The Trust has since filed an amended complaint which seeks a declaratory judgment that the Trust has, and had, "just cause" to terminate his employment contract as well as an accounting and the disgorgement of all benefits received by Mr. Levine while in breach of his fiduciary duties. The factual bases underlying the amended complaint include allegations that (i) Mr. Levine caused the Trust to pay on his account or reimburse him for expenses that were not reasonable, ordinary and necessary business expenses and (ii) during negotiations between the Trust and The Oak Realty Group, Inc. (an entity solely owned by Mr. Levine) Mr. Levine attempted to pressure the Trust into accepting Oak's offer to acquire the Trust by revealing to one of the trustees that Oak had entered into certain confidentiality and exclusivity agreements which had the effect of excluding potential purchasers and/or capital providers from purchasing or providing financing to a potential purchaser of the Trust, except through Oak.
On January 19, 2001, Mr. Levine filed an answer affirmative defenses and counterclaim in the Employment Litigation. The pleading generally denies that Mr. Levine breached his fiduciary duties, raises various defenses and seeks a judgment in favor of Mr. Levine on the counterclaim reinstating him to active employment status. Discovery in this case has recently begun. The maximum potential liability in connection with Mr. Levine's contract (inclusive of incentives but exclusive of base salary) is estimated to be $1,800.
Additionally, on January 19, 2001, Mr. Levine filed two lawsuits in the Circuit Court of Cook County. In the first action, Mr. Levine, suing derivatively on behalf of the Trust's shareholders, seeks to enjoin trustees Daniel Levinson, Stephen Peck and L.G. Schafran from completing the pending sale of substantially all of the Trust's assets to Denholtz Management Corporation until the Trust obtains approval of the transaction from a majority of the Trust's shareholders. This matter has been removed to the United States District Court for the Northern District of Illinois and the Trust has intervened as an additional defendant.
Mr. Levine has also filed an action in the Circuit Court of Cook County against trustees Daniel Levinson, Stephen Peck and L.G. Schafran as well as two of the Trust's largest shareholders Morgens, Waterfall, Vintiadis & Company, Inc. and Magten Asset Management Corporation. This action seeks unspecified compensatory and punitive damages for a variety of business related torts which Mr. Levine alleges the defendants have committed against him. This matter has been removed by the defendants to the United States District Court for Northern District of Illinois. No answer or other responsive pleading has yet been filed by any of the defendants.
The Trust is also involved in various litigation arising in the ordinary course of business. It is management's opinion that the defense of these matters and the potential liability are adequately protected by insurance coverage. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have an adverse effect on the Trust's financial position or results of operations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, the accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
ITEM 10.
ITEM 10. OUR TRUSTEES AND EXECUTIVE OFFICERS
The trustees and executive officers of the Trust are as follows:
Walter E. Auch, Sr. Trustee Daniel Levinson Trustee Stephen M. Peck Trustee L.G. Schafran Interim President/ Chief Executive Officer and Trustee Leonard G. Levine President Robert G. Higgins First Vice President/ Chief Operating Officer and General Counsel Joel L. Teglia Executive Vice President/ Chief Financial Officer
WALTER E. AUCH, SR. Mr. Auch, age 79, has served as an independent trustee since 1986. Mr. Auch served as the chairman and chief executive officer of the Chicago Board of Options Exchange from 1979 to 1986. Prior to that time, Mr. Auch was executive vice president, director and a member of the executive committee of PaineWebber. Mr. Auch is a director of Pimco Advisors L.P., Smith Barney Concert Series Funds, Smith Barney Trak Fund, The Brinson Partners Funds, the Nicholas Applegate Funds, Semele Group, Inc., and Legend Properties, Inc. and a trustee of Hillsdale College and the Arizona Heart Institute.
DANIEL LEVINSON. Mr. Levinson, age 43, has served as an independent trustee since 1999 and currently serves as chief financial officer for the Oracle Investment Management Inc. From 1993 to 1999, Mr. Levinson was employed by Morgens Waterfall, Vintadis and Company, Inc. as its chief financial officer and specialized in the management and workout of real estate and other investments in its investment funds. Before working at Morgens, Mr. Levinson was a vice president at Sentinel Real Estate Corporation, an institutional real estate investment manager. Prior to joining Sentinel in 1988, Mr. Levinson was at KPMG Peat Marwick for over six years. Mr. Levinson received a Bachelor of Science degree from Lehigh University. Mr. Levinson is a certified public accountant and a member of the American Institute of Certified Public Accountants.
STEPHEN M. PECK. Mr. Peck, age 66, has served as an independent trustee since 1999 and currently maintains an investment office at Gilder, Gagnon, Howe & Co. LLC. Mr. Peck is a director of Harnischfeger, Inc., Fresenius Medical Care and OFFIT Investment Funds. He is also a Chairman of the Advisory Board of the Torrey Funds and a member of the Advisory Board of Brown Simpson Asset Management. Mr. Peck serves as a member of the Board of Trustees of New York University, The Jewish Theological Seminary and Mount Sinai School of Medicine and is Chairman of the Board of Trustees of Mount Sinai-NYU Health.
L.G. SCHAFRAN. Mr. Schafran, age 62, has served as a trustee since 1999 and as our interim president and chief executive officer since August 14, 2000. He is currently chairman of our board and has been a Managing General Partner at L.G. Schafran & Associates since 1984. Mr. Schafran is a director of Tarragon Realty Investors, Inc. (f/k/a National Income Realty Trust), PubliCARD, Inc. (f/k/a Publicker Industries, Inc.), COMSAT Corporation and chairman of the board of Delta-Omega Technologies, Inc. Mr. Schafran served as a director of Capsure Holdings Inc. from 1986 to 1997, OXIGENE, Inc. from 1993 to 1996, Glasstech, Inc. from 1995 to 1997, Dart Group Corporation from 1993 to 1997 and Kasper A.S.L., Ltd. from 1997 to 2000.
ROBERT G. HIGGINS. Mr. Higgins, age 49, has served as our vice president and general counsel since 1992 and as secretary since 1995. Effective December 14, 2000, Mr. Higgins became our first vice president, general counsel, chief operating officer and assistant secretary. Mr. Higgins received a B.A. degree in government from the University of Notre Dame and a law degree from Loyola University of Chicago. Mr. Higgins concentrates his practice in the areas of real estate development, finance, acquisition, land use, sales, lending and general corporate business practice. Mr. Higgins previously served as vice president, general counsel and secretary of Legend Properties, Inc. (f/k/a Banyan Mortgage Investment Fund), Banyan Short Term Income Trust and Semele Group, Inc. (f/k/a Banyan Strategic Land Fund II) (collectively, the "Banyan Funds")and is currently serving in the same position for BSRT Management Corp. Mr. Higgins is admitted to the bar in the States of Illinois, Minnesota and Texas and also practices law as a sole practitioner.
JOEL L. TEGLIA. Mr. Teglia, age 39, has served as our vice president and chief financial officer since 1994. Effective December 14, 2000, Mr. Teglia became our executive vice president and chief financial officer. Previously he served as vice president and chief financial officer of each of the Banyan Funds and is currently serving in the same position for BSRT Management Corp. Prior to his appointment, Mr. Teglia provided various services to us in his capacity as controller for BSRT Management Corp. (f/k/a Banyan Management Corp.), a position that he held from 1991 to 1994.
Mr. Teglia is a director of Brass Fund, Inc. Mr. Teglia received a B.A. degree in accounting from the University of Notre Dame and is a certified public accountant.
LEONARD G. LEVINE. Mr. Levine, age 53, has been our president and chief executive officer since 1990. On August 14, 2000, we suspended Mr. Levine from his duties as president and chief executive officer. Mr. Levine also served as a trustee of ours from September, 1986 until February 1990 and again from 1998 to 2000. Mr. Levine received a bachelors of science/bachelors of arts degree in accounting from Roosevelt University and a masters degree in taxation from DePaul University. Mr. Levine previously served as president of the Banyan Funds. Mr. Levine is a certified public accountant and a licensed real estate broker.
ITEM 11.
ITEM 11. COMPENSATION OF TRUSTEES AND EXECUTIVE OFFICERS
A. INDEPENDENT TRUSTEE COMPENSATION
Each independent trustee is paid an annual fee of $20,000, payable quarterly, plus $1,000 for each board or committee meeting attended in person and $500 an hour for each board or committee meeting held by telephonic conference call. We also reimburse each independent trustee for out-of-pocket expenses incurred in attending board meetings. Each person serving as an independent trustee is awarded an option to purchase 2,000 of our common shares ten days after each annual meeting. All options granted to the independent trustees vest and become exercisable in the following installments: (1) fifty percent (50%) on the first anniversary of the grant; and (2) fifty percent (50%) on the second anniversary of the grant.
In February 2000, our board formed a financial advisory committee to evaluate and explore strategic alternatives designed to maximize shareholder value. The financial advisory committee was comprised of Messrs. Auch, Peck, Levinson and Schafran and has met 24 times in 2000. The financial advisory committee was disbanded on December 21, 2000, following the annual meeting of shareholders on December 14, 2000. The financial advisory committee was deemed no longer necessary because, as of December 14, 2000, the membership of the financial advisory committee and the full board were identical.
B. EXECUTIVE COMPENSATION
This table shows compensation paid to our chief executive officer and our next three most highly compensated executive officers during the last three years ended December 31, 2000.
EMPLOYMENT AGREEMENTS.
MR. LEVINE. We entered into an employment agreement with Mr. Levine on March 11, 1998, although the agreement became effective retroactively as of October 1, 1997. This term of the agreement expires on December 31, 2001. On December 14, 1999 we amended Mr. Levine's employment agreement to provide for certain rights upon liquidation of the Trust and the immediate vesting of all outstanding options. Under the agreement, we agreed to pay Mr. Levine a base salary equal to $200,000 per year through December 31, 1999 increasing to $210,000 per year during the last two years of the agreement. The agreement also grants Mr. Levine the ability to earn annual incentive compensation equal to 62.5% of the base salary each year, provided that we achieve certain predetermined levels of "funds from operations" increased by .03 for each one percentage point that our actual per share "funds from operations" exceed the target and decreased (but not below zero) by .04 for each one percentage point our actual per share "funds from operations" is below the target amount.
Mr. Levine was also granted options to purchase 350,000 shares at an exercise price equal to $5.50 per share. The number of shares underlying the options and the exercise price of each option is subject to adjustment from time to time if we: (1) issue or sell additional common shares in exchange for consideration at a price less than the prevailing market price of our shares; (2) issue or sell warrants with exercise prices less than the prevailing market price; (3) declare a dividend or otherwise make a distribution to our shareholders in the form of additional common shares; (4) subdivide our outstanding common shares into a larger number of common shares; or (5) combine our outstanding common shares into a smaller number of common shares. Mr. Levine exercised all of the options on January 12, 2000. The agreement also requires us to provide Mr. Levine with both life and disability insurance benefits during the term of the agreement, as well as all non-wage benefits we provide to our other salaried employees.
Mr. Levine's agreement contains provisions that requires us to make certain payments to him upon the occurrence of a "Triggering Event" which is defined as:
. the date that a Plan of Liquidation of the Trust becomes effective; . the date on which we sell all or substantially all of our assets; . the date we merge or enter into a business combination with another entity if, among other things, we are not the surviving entity; or . the members of the existing board fail to constitute a majority of the board.
The agreement also gives us the right to terminate or suspend Mr. Levine under certain circumstances. On August 14, 2000, we suspended Mr. Levine pursuant to our employment agreement with him and have filed a lawsuit alleging that Mr. Levine breached certain fiduciary duties owed to us and that he committed intentional acts that caused material damage to our business or properties. Pending a final ruling by a court, we will comply with the employment agreement including the compensation provisions.
To replace Mr. Levine, our board of trustees appointed Larry Schafran to the position of interim president and chief executive officer.
MR. SCHAFRAN. On August 14, 2000, following the suspension of Mr. Levine, we engaged Mr. Schafran to become our interim president and chief executive officer. On October 26, 2000, we entered into an employment agreement with Mr. Schafran, the term of which extends until February 13, 2002, unless sooner terminated for "cause," by death or disability, voluntarily by Mr. Schafran, upon a "change in control" of the Trust, or upon Mr. Levine's reinstatement as our president and chief executive officer.
Under the agreement we will pay Mr. Schafran an annual base salary of $200,000 and an incentive bonus based on the present value of aggregate distributions we make to shareholders during the term of the agreement. We will pay the incentive bonus once our shareholders receive distributions whose aggregate present value is at least $6.25 per share discounted to October 26, 2000 at 12%. The amount of incentive bonus starts at $300,000 and increases as the present value of distributions to our shareholders increases. Additionally, in lieu of the incentive bonus, Mr. Schafran could have received an early completion bonus equal to $300,000 if our shareholders received distributions greater than $6.00 per share on or before December 31, 2000. The early completion bonus is reduced to $225,000 if our shareholders receive distributions greater than $6.00 per share after December 31, 2000 but on or before March 31, 2001.
If we terminate Mr. Schafran's employment because Mr. Levine is reinstated to his former position, we are obligated to pay Mr. Schafran his entire incentive bonus, based on the present value of the aggregate distributions made to our shareholders, as though his employment had not been terminated. Additionally, if we terminate Mr. Schafran's employment due to his death, disability or a "change in control," we are obligated to pay Mr. Schafran a portion of the incentive compensation equal to the amount of incentive compensation he would have earned had we not terminated his employment, multiplied by a fraction, the numerator of which is the number of days he had served as our interim president and chief executive officer and the denominator of which is 548. Finally, if we terminate the agreement upon our final dissolution and liquidation, we are obligated to pay Mr. Schafran the amount of base salary he would have earned through February 13, 2002 and any earned but unpaid incentive bonus based on the present value of the amount distributed to our shareholders under the plan of liquidation.
MR. HIGGINS. Effective on September 1, 2000, we entered into an employment agreement with Mr. Higgins whereby he became our first vice president, general counsel and chief operating officer until October 31, 2002. Mr. Higgins' employment agreement may be terminated prior to its expiration as follows: (1) by us for "cause"; (2) by us upon 60 days prior written notice; (3) by our complete dissolution and liquidation; (4) by Mr. Higgins' death or disability; or (5) voluntarily by Mr. Higgins. Under the agreement, Mr. Higgins becomes our full-time employee, however, he is allowed to perform legal services for clients. Mr. Higgins' initial base salary is $260,000 with automatic 5% increases on January 1, 2001 and 2002.
Unless we terminate Mr. Higgins' employment for "cause" or Mr. Higgins terminates it voluntarily, upon expiration of the term of the agreement, we will pay Mr. Higgins a severance payment of one year's salary and a bonus equal to 50% of the aggregate amount of base salary Mr. Higgins earned from November 1, 2000 to the end of the agreement. "Cause" is defined in the agreement as: (1) conduct amounting to fraud or wilful misconduct, (2) any material act of dishonesty, (3) the conviction of Mr. Higgins of a felony crime, and (4) a material breach of the agreement by Mr. Higgins which remains uncured for a period of five business days following notice of such breach. Additionally, Mr. Higgins may terminate the agreement if: (A) the members of our board as of the date of the agreement fail to constitute a majority of the board; (B) our shareholders adopt a plan of liquidation without our board's approval or recommendation; (C) we sell all of our real estate properties or business; (D) we combine with another entity and our shareholders immediately prior to the combination fail to retain a majority of the voting securities of the surviving entity; (E) any person or entity becomes the beneficial owner of a majority of our voting shares; (F) we relocate our executive offices to a location in excess of 100 miles outside of the Chicago Loop area; (G) we breach the agreement in a material respect which we fail to cure within five business days of notice of such breach; and (H) a material diminution of Higgins' duties, responsibilities or authority occurs.
MESSRS. HANSEN, SCHMIDT AND TEGLIA. We also had employment agreements with each of Messrs. Hansen, Schmidt and Teglia. Pursuant to these agreements, we were obligated to pay Messrs. Hansen, Schmidt and Teglia annual base salaries equal to $213,040, $176,680 and $138,240 respectively.
On October 1, 2000 we entered into agreements with Messrs. Schmidt and Hansen terminating their employment and settling all claims for severance pay. On November 1, 2000 we entered into a new employment agreement with Mr. Teglia.
MR. TEGLIA. On November 1, 2000, we entered into a new agreement with Mr. Teglia whereby he became our executive vice president and chief financial officer following the annual meeting until October 31, 2002. Mr. Teglia's agreement may be terminated for the same reasons enumerated in Mr. Higgins' agreement. Upon execution of the agreement, we paid to Mr. Teglia a severance payment of $204,765 in settlement of our obligations to him under his prior employment agreement. Under the new agreement, Mr. Teglia's initial annual base salary is $181,120, which is increased to $200,000 on January 1, 2001 and $210,000 on January 1, 2002. Additionally, unless we terminate Mr. Teglia's employment for "cause" or Mr. Teglia terminates it voluntarily, upon expiration of the term of the agreement, we will pay Mr. Teglia a bonus equal to 50% of the aggregate amount of base salary Mr. Teglia earned during the term of the agreement. The definition of "cause" in Mr. Teglia's agreement is identical to the definition set forth in Mr. Higgins' agreement.
STOCK OPTION GRANTS
We did not grant any options to purchase shares of beneficial interest during the year ended December 31, 2000 to any of our executive officers. On December 26, 2000 we granted options to purchase shares of beneficial interest to each of our independent trustees in accordance with our Executive and Director Stock Option Plan. The table below sets forth the aggregated option exercises and year-end option value for 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE --------------------------------------------------- (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End (#) FY-End ($) Shares Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable Unexercisable - ---- ----------- --------------------------- ---------------
Leonard G. Levine. . 350,000(1) $ 65,800 0 / 0 $0 / $0
Larry G. Schafran. . -- --
Jay E. Schmidt . . . 3,334 $ 4,528 0 / 0 $0 / $0 36,000(1) $ 0
Neil D. Hansen . . . 3,334 $ 4,318 0 / 0 $0 / $0 36,000(1) $ 0
Joel L. Teglia . . . 29,000(1) $ 0 3,335 / 0 $4,736 / $0
Note 1. Represents options exercised with the proceeds from a non-recourse loan offered by the company to its employees as of December 31, 1999 at an annual rate of interest of 6.5%.
All of the options granted vested on December 13, 1999 because there occurred a "change in control" as that term was defined in our Executive and Director Omnibus Stock Option Plan. The "change in control" occurred because on that date, the members of our board as of the effective date of the Plan failed to constitute a majority of the members of our board. In addition, in December 1999, we offered all of our current employees and advisors who hold options the opportunity to exercise all of the vested but unexercised options with the proceeds of a loan from us. Each loan is non- recourse and bears interest at an annual rate of 6.5%. Each person is required to pledge all shares purchased with the proceeds of the loan to secure the payment of principal and interest on the loan. We loaned approximately $3.2 million to these persons. All loans will mature in five years; provided that any person who terminates his or her employment or whom we terminate is required to repay the loan and all accrued interest by surrendering the shares securing the loan or by tendering sufficient funds to pay all amounts owing within one month of terminating employment. Pursuant to our Severance and Retention Program for non-contract employees, we have extended the term of any note made by a terminated employee or will extend the term of any note made by any other employee we choose to terminate, to the date upon which the last of these notes comes due.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 16, 2001 regarding the number and percentage of our outstanding common shares beneficially owned by: (1) each trustee; (2) each executive officer; and (3) all trustees and executive officers as a group. The table also sets forth information as of December 31, 2000 with respect to any person known to us to be the beneficial owner of more than five percent of our outstanding common shares. Information with respect to Morgens Waterfall Income Partners, L.P., Kensington Investment Group, Inc., and Magten Asset Management Corp. listed in the table below, including the notes, is based solely on copies of statements filed under Section 13(d) or 13(g) of the Exchange Act, and we have not independently confirmed this information. Share amounts and percentages shown for each person or entity are adjusted to give effect to common shares that are not outstanding but may be acquired by a person or entity upon exercise of all options exercisable by such entity or person within sixty days of the date of the date hereof. However, those common shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding common shares beneficially owned by any other person.
Amount and Nature of Name and Address of Beneficially Percent Beneficial Owner Owned of Class - -------------------- --------------- ----------
Morgens Waterfall Income 3,391,074 21.9% Partners, L.P. (1) Restart Partners, L.P. Restart Partners II, L.P. Restart Partners III, L.P. Restart Partners IV, L.P. Restart Partners V, L.P. Endowment Restart, L.L.C. 10 East 50th Street New York, NY 10022
Kensington Investment Group, Inc. (2) 2,471,056 17.3% Mellon Bank, N.A. as Trustee for the General Motors Employees Domestic Group Pension Trust 350 East 21st Street New York, New York 10010
Magten Asset Management Corp. (3) 743,750 5.2%
Four Orinda Way Suite 220D Orinda, CA 94563
Daniel Levinson (4) 1,000 *
Amount and Nature of Name and Address of Beneficially Percent Beneficial Owner Owned of Class - -------------------- --------------- ----------
Leonard G. Levine, 862,504 6.0% President (5)
Stephen M. Peck (4) 1,000 *
L.G. Schafran, 1,000 * Interim President and CEO (4)
Robert G. Higgins, 40,642 * First Vice President, General Counsel, Chief Operating Officer and Assistant Secretary (4)(5)
Joel J. Teglia, 36,974 * Chief Financial Officer (4)(5)
Walter E. Auch, Sr. (4) 5,000 *
All Trustees and 948,120 6.6% Named Executive Officers of the Trust, as a group (eight persons)
- --------------------
* less than 1%
(1) Includes the conversion of 61,572 shares of convertible preferred stock, which can be converted into 1,195,573 of our common shares at a price of $5.15 per share. Certain affiliates of Morgens Waterfall Income Partners, L.P. have filed reports with the SEC pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") indicating combined ownership of five percent (5%) or more of the outstanding common shares. As of December 31, 2000, (i) Morgens Waterfall Income Partners, L.P. owns 83,315 common shares; (ii) Restart Partners, L.P. owns 418,768 common shares; (iii) Restart Partners II, L.P. owns 692,830 common shares; (iv) Restart Partners III, L.P. owns 482,350 common shares; (v) Restart Partners IV, L.P. owns 304,758 common shares; (vi) Restart Partners V, L.P. owns 100,855 common shares; (vii) Endowment Restart, L.L.C. owns 109,625 common shares. Although John C. Waterfall and Edwin H. Morgens do not directly own any common shares, each of them may be deemed an indirect beneficial owner of 2,192,501 common shares by virtue of their effective control over the operation of each of the affiliated entities listed above. Furthermore, Morgens Waterfall Capital, L.L.C. may be deemed an owner of 83,315 common shares by virtue of its position as general partner of Morgens Waterfall Income Partners, L.P.
(2) According to filings made with the SEC, Kensington Investment Group, Inc. ("Kensington") is an investment advisor registered under the Investment Advisors Act of 1940. Kensington has filed reports with the SEC pursuant to Section 13(d) of the Exchange Act, indicating ownership of five percent (5%) or more of the outstanding common shares. As of December 31, 2000, Kensington has sole dispositive power over 2,471,056 common shares, and sole voting power over 2,471,056 common shares.
(3) According to filings made with the SEC, Magten Asset Management Corp. ("Magten") is an investment advisor registered under the Investment Advisors Act of 1940. Magten has filed reports with the SEC pursuant to Section 13(d) of the Exchange Act, indicating ownership of five percent (5%) or more of the outstanding common shares. As of December 31, 2000, Magten has shared dispositive power over 743,750 common shares, and shared voting power over 210,150 common shares.
(4) Includes options to purchase 3,335 shares for Mr. Teglia, 5,000 shares for Mr. Auch and 1,000 shares for each of Messrs. Levinson, Peck and Schafran.
(5) Includes shares purchased on January 12, 2000 pursuant to the aforementioned employee stock loan program as follows: Mr. Levine, 350,000 shares; Mr. Higgins, 30,335 shares; and Mr. Teglia, 29,000 shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first eight months of 2000, we paid no salary to, but purchased legal services from, Robert G. Higgins, our vice president, secretary and general counsel. We paid Mr. Higgins, in the aggregate, $246,405 for these services. We also provided Mr. Higgins with office space and equipment. Mr. Higgins did not pay any rent for the use of office space and equipment. Instead, Mr. Higgins billed us at a discounted rate. Mr. Higgins also reimbursed us for the cost of two full-time and certain part-time employees. For the first eight months of 2000, Mr. Higgins reimbursed us for a total of $136,815. On September 1, 2000, Mr. Higgins became our full time employee, as did the employees whose salaries were reimbursed to us by Mr. Higgins. During the fiscal year ended December 31, 2000, we paid Adam Levine, the son of Mr. Levine, $125,916 for services rendered to us as an employee. We also provided Adam Levine with benefits customarily provided to our other employees. On October 31, 2000, we terminated the employment of Adam Levine as part of our Retention and Severance Program and paid him a severance payment in accordance with that program equal to $90,762.
On January 12, 2000, our employees exercised their vested options to purchase 575,337 of our common shares with the proceeds of loans from us. See "Compensation of Trustees and Executive Officers" above for details of the loan program. The table below shows the original amounts outstanding and the loan balances on December 31, 2000 due from our executive officers and Adam Levine.
Original Balance at Name Amount December 31, 2000 - ---- ---------- -----------------
Leonard G. Levine $1,925,000 $1,864,921 Jay E. Schmidt $ 213,500 $ 208,223 Neil D. Hansen $ 213,500 $ 208,223 Joel L. Teglia $ 170,875 $ 166,560 Robert G. Higgins $ 173,735 $ 168,930 Adam Levine $ 95,493 $ 92,691
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements of the Company are set forth in this report in Item 8.
(2) Financial Statement Schedule is set forth in this report in Item 8.
(b) Reports on Form 8-K:
. dated August 17, 2000, filed October 25, 2000 including Item 7; and
. dated and filed October 25, 2000 including Item 7; and
. dated and filed November 9, 2000 including Item 9.
(c) Exhibits (see Exhibit Index included elsewhere herein).
(d) None.
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.
BANYAN STRATEGIC REALTY TRUST
By: /s/ L.G. Schafran Date: March 9, 2001 L.G. Schafran, Interim President
PURSUANT to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on our behalf and in the capacities and on the dates indicated.
By: /s/ L.G. Schafran Date: March 9, 2001 L.G. Schafran, Interim President and Trustee
By: /s/ Joel L. Teglia Date: March 9, 2001 Joel L. Teglia, Executive Vice President and Chief Financial Officer
By: /s/ Walter E. Auch, Sr. Date: March 9, 2001 Walter E. Auch, Sr., Trustee
By: /s/ Daniel Levinson Date: March 9, 2001 Daniel Levinson, Trustee
By: /s/ Stephen M. Peck Date: March 9, 2001 Stephen M. Peck, Trustee
EXHIBIT INDEX - -------
2.1 Plan of Termination and Liquidation (1)
3.1 Third Amended and Restated Declaration of Trust dated as of August 8, 1986, as amended on March 8, 1991, May 1, 1993, August 12, 1998 and December 13, 1999, including Certificate of designations, preferences and rights of Series A convertible preferred shares. (2)
3.2 First Amendment of Third Amended and Restated Declaration of Trust effective December 13, 1999. (3)
3.3 By-Laws dated March 13, 1996. (4)
3.4 BSRT UPREIT Limited Partnership Limited Partnership Agreement (5)
4.1 Convertible Term Loan Agreement dated as of October 10, 1997 among Banyan Strategic Realty Trust, as Borrower, and the Entities listed therein, as Lenders. (6)
4.2 First Amendment to Convertible Term Loan Agreement dated as of March 30, 1998 made by and among Banyan Strategic Realty Trust and the Entities listed therein, as Lenders. (7)
4.3 Second Amendment to Convertible Term Loan Agreement dated as of June 26, 1998 made by and among Banyan Strategic Realty Trust and the Entities listed therein, as Lenders. (8)
4.4 Revolving Credit Agreement dated April 30, 1998 among Banyan Strategic Realty Trust, as Borrower and the Capital Company of America, as Lender. (9)
4.5 Loan Agreement dated May 22, 1998 among BSRT Fountain Square L.L.C., BSRT Phoenix Business Park L.L.C., BSRT Newtown Trust, BSRT Southlake L.L.C., BSRT Technology Center L.L.C., BSRT Airways Plaza L.L.C., BSRT Peachtree Pointe L.L.C., BSRT Avalon Center L.L.C., BSRT Sand Lake Tech Center L.L.C., BSRT Park Center L.L.C., BSRT Metric Plaza L.L.C., and BSRT University Corporate Center L.L.C., as Borrower, and the Capital Company of America, as Lender. (8)
4.6 First Amendment to Loan Agreement dated September 11, 1998 among BSRT Fountain Square L.L.C., BSRT Phoenix Business Park L.L.C., BSRT Newton Trust, BSRT Southlake L.L.C., BSRT Technology Center L.L.C., BSRT Airways Plaza L.L.C., BSRT Peachtree Pointe L.L.C., BSRT Avalon Center L.L.C., BSRT Sand Lake Tech Center L.L.C., BSRT Park Center L.L.C., BSRT Metric Plaza L.L.C., and BSRT University Corporate Center L.L.C., as Borrower, and the Capital Company of America LLC, as Lender. (10)
4.7 Loan Agreement dated June 22, 1998 between Banyan/Morgan Wisconsin L.L.C., and Banyan/Morgan Elmhurst L.L.C., as Borrower and the Capital Company of America, as Lender. (8)
4.8 First Amendment to Loan Agreement dated September 11, 1998 between Banyan/Morgan Wisconsin L.L.C., and Banyan/Morgan Elmhurst L.L.C., as Borrower and the Capital Company of America LLC, as Lender. (10)
10.1 Employment Agreement of L.G. Schafran dated October 26, 2000. (14)
10.2 Employment Agreement of Leonard G. Levine as of December 14, 1999. (2)
EXHIBIT INDEX - -------
10.3 Employment Agreement of Leonard G. Levine as of October 1, 1997. (11)
10.4 Employment Agreement of Joel L. Teglia dated November 1, 2000. (14)
10.5 Employment Agreement of Joel L. Teglia dated December 31, 1998. (5)
10.6 Employment Agreement of Robert G. Higgins dated September 1, 2000. (14)
10.7 Separation Agreement of Neil Hansen dated October 1, 2000. (14)
10.8 Employment Agreement of Neil Hansen dated December 31, 1998. (5)
10.9 Separation Agreement of Jay Schmidt dated October 1, 2000. (14)
10.10 Employment Agreement of Jay Schmidt dated December 31, 1998. (5)
10.11 1997 Omnibus Stock and Incentive Plan dated July 9, 1997. (12)
10.12 Share Purchase Agreement by and among Banyan Strategic Realty Trust and the Purchasers listed on the signature page attached thereto dated as of October 10, 1997. (6)
10.13 Registration Rights Agreement dated as of October 10, 1997 between Banyan Strategic Realty Trust and the Purchasers listed on the Signature Pages attached thereto. (6)
10.14 Registration Rights Agreement dated as of October 1, 1997 between Banyan Strategic Realty Trust and Leonard G. Levine. (5)
10.15 Consulting Agreement dated as of February 18, 2000 between CFC Advisory Services Limited Partnership and Banyan Strategic Realty Trust. (13)
10.16 Modification to Consulting Agreement dated as of May 31, 2000 between CFC Advisory Services Limited Partnership and Banyan Strategic Realty Trust. (13)
10.17 Purchase and Sale Agreement dated January 8, 2001. (1)
21. Subsidiaries of Banyan Strategic Realty Trust (*)
23. Consent of Independent Auditors (*)
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(*) Filed herewith.
(1) Incorporated by reference from the Trust's Form 8-K dated January 8, 2001.
(2) Incorporated by reference from the Trust's Form 10-K for the year ended December 31, 1999.
(3) Incorporated by reference from the Trust's Form 10-Q dated March 31, 2000.
(4) Incorporated by reference from the Trust's Registration Statement on Form S-11 (file number 33-4169).
(5) Incorporated by reference from the Trust's Form 10-K for the year ended December 31, 1998.
(6) Incorporated by reference from the Trust's Form 8-K dated October 14, 1997.
(7) Incorporated by reference from the Trust's Form 10-K/A for the year ended December 31, 1997.
(8) Incorporated by reference from the Trust's Form 8-K dated May 22, 1998.
(9) Incorporated by reference from the Trust's Form 10-Q dated March 31, 1998.
(10) Incorporated by reference from the Trust's Form 8-K/A-1 dated August 14, 1998.
(11) Incorporated by reference from the Trust's Form 10-K dated December 31, 1997.
(12) Incorporated by reference from the Trust's Form 10-Q for the quarter ended June 30, 1997.
(13) Incorporated by reference from the Trust's Form 10-Q for the quarter ended June 30, 2000.
(14) Incorporated by reference from the Trust's Form 10-Q for the quarter ended September 30, 2000.