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XXXXXX
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REALTY
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TRUST
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A Real Estate Investment Trust
1997
ANNUAL
REPORT
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XXXXXX LOGO
XXXXXX REALTY TRUST, INC.
1997 ANNUAL REPORT
CONTENTS PAGE
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Financial Highlights........................................ Inside
Front Cover
The Trust................................................... 1
Market Information.......................................... 1
Dividends................................................... 1
Letter to Shareholders...................................... 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 3
Financial Statements and Notes.............................. 7
Directors and Officers...................................... 17
Shareholder Information..................................... 18
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SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
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FOR THE YEAR: 1997 1996 1995 1994 1993
------------- ---- ---- ---- ---- ----
(NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
Rental and other income......................... $ 3,101,871 $ 3,017,982 $ 2,861,293 $ 2,719,324 $ 2,761,766
Net income/(loss)............................... (125,363) 216,538 185,597 42,217 163,001
Per share................................... (0.14) 0.25 0.21 0.05 0.19
Funds from operations....................... 604,961 974,476 906,637 749,211 880,578
Distributions declared.......................... 381,314 693,299 563,307 424,646 433,312
Per share................................... 0.44 0.80 0.65 0.49 0.50
Paid in current year:
Taxable to shareholders................. 0.09 0.40 0.31 0.22 0.24
Return of capital....................... 0.35 0.40 0.34 0.37 0.16
Declared 1993, paid in January 1994....... (0.10) 0.10
AT YEAR END:
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Total assets.................................... $14,926,763 $15,481,638 $16,009,017 $16,504,068 $16,761,085
Investment property - net....................... 13,769,633 14,214,620 14,811,351 15,219,284 15,605,700
Mortgage note payable........................... 4,740,875 4,830,236 4,912,421 4,988,006 4,844,598
Shareholders' equity............................ 9,737,778 10,244,455 10,721,216 11,098,926 11,481,355
Number of shares outstanding.................... 866,624 866,624 866,624 866,624 866,624
---------------
Represents net income adjusted for depreciation and amortization.
Currently in dispute. For more information see Note 7 to the Financial
Statements for the year ended December 31, 1997.
See Management's Discussion and Analysis for discussion of comparability of
items.
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THE TRUST
Xxxxxx Realty Trust, Inc. (the "Trust") is a corporation formed on June
14, 1984, to make equity investments in income-producing real properties,
primarily commercial and light industrial properties. The Trust has invested in
three properties: The Atrium at Alpha Business Center, an office building in
Bloomington, Minnesota; the Applied Communications, Inc. Building, an office
building in Omaha, Nebraska; and the Franklin Park Distribution Center, a
warehouse and distribution facility in suburban Chicago, Illinois. Since 1985
the Trust has qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code.
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MARKET INFORMATION
The Company's common stock trades on The Nasdaq Stock Market under the
symbol NRTI. The Nasdaq high and low prices for the shares during 1996 and 1997
were as follows:
HIGH LOW
---- ---
1997
First Quarter................................. $10.75 $ 9.75
Second Quarter................................ $10.875 $ 9.50
Third Quarter................................. $11.625 $10.00
Fourth Quarter................................ $11.75 $ 9.875
1996
First Quarter................................. $ 9.00 $ 7.25
Second Quarter................................ $ 9.00 $ 8.00
Third Quarter................................. $10.23 $ 8.00
Fourth Quarter................................ $10.50 $ 9.25
As of February 1, 1998, there were 522 shareholders of record.
DIVIDENDS
The following cash dividends were paid to shareholders during 1996 and
1997:
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
1996.......................... $.20 $.20 $.20 $.20
1997.......................... $.22 $.22 -0- -0-
ONE
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March 31, 1998
To Our Shareholders:
We are pleased to report that the net operating income of the Trust's
properties exceeded our budget forecast for the year ended December 31, 1997.
The Applied Communications Building in Omaha, Nebraska, and the Franklin
Park Distribution Center in Chicago, Illinois, continued at 100% occupancy
under existing leases. Management has reached an agreement to renew a major
tenant lease at Franklin Park which expires June 20, 1998, for a ten-year
period with a 39% increase in rent.
The Atrium at Alpha Business Center in Bloomington, Minnesota, ended the
year at 98% occupancy. Rental rates continued to increase for new and existing
tenants.
The Atrium building has been included in the Minneapolis Airport
Committee's Safety Zone A for the future expansion of the Minneapolis Airport.
Management is continuing to monitor the effect this expansion might have on the
Atrium building. The Minneapolis Airport Committee may be petitioned to buy the
building, or the Trust may elect to sell the project. Given the preliminary
stage of the future expansion, management is unable to determine at this time
what impact, if any, this matter will have on the future value of the Atrium
building.
For the fiscal year ended December 31, 1997, the Trust's earnings (losses)
were ($125,363) or ($.14) per share. Funds from operations, which adds
depreciation and amortization to net income computed in accordance with
generally acceptable accounting principals, were $606,637 or $.70 per share.
Funds from operations decreased $367,838 or $.42 per share compared to fiscal
year 1996.
The third quarter 1997 report explained in detail that the decrease in
Funds from Operations was due to the cost of ongoing litigation and the holding
of the special shareholders meeting on August 6, 1997. The Directors of the
Trust have, from the beginning of KelCor's action last Spring, maintained and
continue to maintain that an annual meeting of the Trust cannot be held until
the validity of the "Excess Share" issue brought about by KelCor's original
lawsuit filed last June is determined by a court of competent jurisdiction.
Unfortunately the litigation continues.
The Board of Directors is committed to scheduling an annual meeting as soon
as the litigation is finally settled.
The Directors, during the year, suspended the declaration and payment of
regular quarterly dividends because the declaration and payment of dividends on
any shares has been questioned due to the uncertain legal status surrounding
the alleged "Excess Shares".
In the meantime, the Directors and management will continue to aggressively
manage the individual Trust's properties with a goal of maximizing shareholder
value.
Sincerely,
XXXXXX REALTY TRUST, INC.
Xxxxxxx X. Xxxxxx
Chairman and Chief Executive Officer
TWO
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash reserves on hand as of December 31, 1997, were $657,470, an increase
of $16,343 from year ended December 31, 1996. The increase in cash is
attributable to an increase in cash provided by operating activities which
increased the Trust's cash reserves. The Trust's current cash position and the
properties' ability to provide operating cash flow should enable the Trust to
fund anticipated capital expenditures in 1998. The anticipated capital
expenditures by property are as follows:
OTHER LEASING
CAPITAL CAPITAL TOTAL
------- ------- -----
Atrium at Alpha......................... $46,600 $86,336 $132,936
Franklin Park Dist. Center.............. 25,000 79,405 104,405
Applied Communications Inc. Bldg........ 0 0 0
------- ------- --------
$71,600 $165,741 $237,341
The capital expenditures at Atrium at Alpha Business Center include leasing
capital for tenant alterations and lease commissions for new and renewal
tenants. In addition, the Registrant anticipates spending capital funds for a
new heating and air conditioning compressor, new tenant suite signage, and
upgrading of the elevators. At Franklin Park Distribution Center, a contingency
reserve has been set aside for possible capital expenditures arising from the
annual inspections to the exterior of the property. In addition, a lease
commission for the renewal of one of the major tenants has been budgeted. There
are no capital expenditures anticipated at the Applied Communications Inc.
building.
The Trust's multi-tenant office building located in Bloomington, Minnesota
has been classified in the Minneapolis Airport Committee's (the "MAC") Safety
Zone A in the future expansion of the Minneapolis Airport. The expansion runway
is anticipated to be completed in 2003. The MAC will be buying out impacted
buildings during 1998 and 1999. Safety Zone A is adjacent to the Federal
Aviation Authority's noise buyout zone. The MAC has not indicated whether or
not it will buyout the Trust's building. The Trust is monitoring whether the
increased noise from the new runway will have an impact on future leasing of
the building. If the Trust determines there is a negative impact, the Trust
will petition the MAC to buy the building. If the building continues to be
classified in Safety Zone A, it will be classified as nonconforming use. Give
the preliminary state of the future expansion, management is unable at this
time to determine what impact, if any, this matter will have on the Trust.
RESULTS OF OPERATIONS
The results of operations for the Trust's properties for the years ended
December 31, 1997, 1996 and 1995 are detailed in the schedule below.
Administrative expenses of the Trust are excluded.
FUNDS FROM OPERATIONS
The white paper on Funds from Operations approved by the board of governors
of NAREIT in March 1995 defines funds from operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate
THREE
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related depreciation and amortization and after adjustments for unconsolidated
partnership and joint ventures. The Trust computes Funds from Operations in
accordance with the standards established by the white paper which may differ
from the methodology for calculating Funds from Operations utilized by other
equity REITs, and, accordingly, may not be comparable to such other REITs.
Funds from Operations do not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, distributions, or other commitments and uncertainties.
Funds from Operations should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Trust financial
performance or to cash flows from operating activities (determined in
accordance with GAAP) as a measure of the Trust liquidity, nor is it indicative
of funds available to fund the Trust cash needs including its ability to make
distributions. The Trust believes Funds from Operations are helpful to
investors as measures of the performance of the Trust because along with cash
flows from operating activities, financing activities and investing activities,
they provide investors with an understanding of the ability of the Trust to
incur and service debt and make capital expenditures.
ATRIUM AT FRANKLIN PARK APPLIED COMM.
ALPHA DIST. CENTER INC. BLDG.
--------- ------------- -------------
1997
Revenues................................ $1,289,077 $755,679 $1,081,276
Expenses................................ 1,051,050 582,497 897,735
---------- -------- ----------
Net Income.............................. $ 238,027 $173,182 $ 183,541
Depreciation and Amortization........... 352,248 178,182 183,164
---------- -------- ----------
Funds from Operations................... $ 590,275 $351,364 $ 366,705
1996
Revenues................................ $1,211,306 $770,247 $1,035,582
Expenses................................ 1,020,102 604,580 909,586
---------- -------- ----------
Net Income.............................. $ 191,204 $165,667 $ 125,996
Depreciation and Amortization........... 362,549 182,374 196,529
---------- -------- ----------
Funds from Operations................... $ 553,753 $348,041 $ 322,525
1995
Revenues................................ $1,092,488 $752,875 $1,002,033
Expenses................................ 919,264 583,418 887,751
---------- -------- ----------
Net Income.............................. $ 173,224 $169,457 $ 114,282
Depreciation and Amortization........... 336,993 177,021 190,406
---------- -------- ----------
Funds from Operations................... $ 510,217 $346,478 $ 304,688
1997 COMPARISONS BY PROPERTY
Operating results at the Atrium at Alpha Business Center improved during
1997. Revenues increased primarily due to increases in the base rental rates
from tenants renewing and an increase in the escalation income received from
the tenant, partially offset by a decrease in miscellaneous income. In 1996,
the Trust received a cancellation fee due to the early termination of one of
the tenants. Expenses overall increased due to slight increases in a number of
the expense categories. There was no single expenditure which in and of itself
is significant.
FOUR
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At Franklin Park Distribution Center, the operating results were very
steady when comparing the year ended 1997 to year ended 1996. Revenues
decreased slightly due to a decrease in real estate tax reimbursement and
common area maintenance reimbursement. Expenses decreased due to the decrease
in real estate taxes and a decrease in building repairs and maintenance.
At the Applied Communications Inc. building, the operating results improved
during 1997. Revenues increased due to a built-in rent step-up annually from
the building's only tenant and an increase in the escalation reimbursements.
Operating expenses decreased slightly due to a decrease in parking lot
expenses, depreciation and amortization, partially offset by an increase in
building repairs and maintenance.
Occupancy at the Trust's properties during the fourth quarter remained at a
high level. This can be attributable to the Trust's ability to renew tenants at
The Atrium at Alpha Business Center as their leases expired. The occupancy
levels at December 31 are as follows:
OCCUPANCY LEVELS AT DECEMBER 31,
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1997 1996 1995
---- ---- ----
Atrium at Alpha................................... 98% 95% 99%
Franklin Park Dist. Center........................ 100% 100% 100%
Applied Communications Inc. Bldg.................. 100% 100% 100%
During the fourth quarter, the occupancy level at Atrium at Alpha increased
from 96% at the beginning of the quarter to 98% at the end of the quarter.
During the quarter, three tenants leased an additional 5,027 square feet. One
tenant renewed its lease for 3,605 square feet and two tenants vacated 3,608
square feet. For the year, occupancy increased 3%. During 1997 new leases were
signed with seven tenants occupying 20,063 square feet. Renewal leases were
signed with four tenants occupying 8,142 square feet, and three tenants vacated
which occupied 17,808 square feet. The property has two major tenants who lease
11% and 20% of the building with leases which expire in May 1999 and July 2001,
respectively. The tenant whose lease expires in 2001 has a cancellation option
to cancel effective July 1999.
Franklin Park Distribution Center has been fully leased by two tenants
throughout 1997. The larger of the two tenants occupies 57% of the building
while the other occupies 43% of the building. Their leases expire in December
1999 and June 1998, respectively. The Trust has reached an agreement to renew
the lease at Franklin Park which expires June 20, 1998, for a ten-year period
with a 39% increase in rent.
The Applied Communications Inc. building has a single tenant who has
occupied the entire building throughout 1997. This tenant's lease expires in
August 1999.
YEAR 2000 ISSUES
The Registrant believes that the impact of the year 2000 will not have a
material impact on future results. The Registrant utilizes various computer
software packages as tools in running its accounting operations. The
Registrant's properties are maintained on software provided by a third party.
The Registrant has received information from that company indicating that the
main software program has all its core products already compatible with 2000
dates and that these have been proven in the field for over five years. A few
of the add on products that are not critical to the Registrant's business are
in process of being updated and the third party vendor anticipates compliance
by the end of 1998.
FIVE
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1997 COMPARISONS
For the year ended December 31, 1997, the Trust's consolidated revenues
were $3,110,120 compared to $3,033,511 for the year ended December 31, 1996.
Thus, revenues increased 3% or $76,609. The increase in consolidated revenues
relates mainly to increases in base rental rates at the Atrium at Alpha
Business Center and the Applied Communications Inc. building.
The Trust's consolidated expenses for the year ended December 31, 1997,
were $3,235,483 compared to $2,816,973 for the year ended December 31, 1996.
The increase in expenses is due primarily to the high cost of the two lawsuits
and a related proxy contest that the Trust has been involved in during 1997.
The net loss for the year ended December 31, 1997, was ($125,363) or ($.14)
per share. Net income in 1996 was $216,538 or $.25 per share. The high cost of
the two lawsuits and a related proxy contest has negatively impacted the
operations of the Trust.
Cash flow provided by operating activities was $669,835 for 1997. The Trust
paid capital expenditures of $182,817, paid dividends to shareholders of
$381,314, and reduced the principal on the mortgage notes by $89,361 during
1997.
1996 COMPARISONS
For the year ended December 31, 1996, the Trust's consolidated revenues
were $3,033,511 compared to $2,865,261 for the year ended December 31, 1995.
This is a 6% increase, or $168,250. The increase in consolidated revenues
relates mainly to the Atrium at Alpha Business Center and the Applied
Communications Inc. building. At Atrium at Alpha Business Center, revenues
increased due to the receipt of a tenant's lease cancellation fee and an
increase in escalation income. Revenues increased at the Applied Communications
Inc. building due to the single tenant's built-in step-up rent increase.
The Trust's consolidated expenses for the year ended December 31, 1996,
were $2,816,973 compared to $2,679,664 for the year ended December 31, 1995.
The increase in expenses is attributable to real estate taxes, property
management fee increases due to higher income and an increase in repair and
maintenance expense.
Net income increased $30,941 or $.04 per share when compared to the year
ended December 31, 1995. For the year ended December 31, 1996, net income was
$216,538 resulting in earnings of $.25 per share. Cash flow from operations
from the year ended December 31, 1996, was $928,863. The Trust paid out
dividends of $693,299 or $.80 per share during 1996.
Cash flow from operations was also used to fund minor property capital
expenditures and principal payments on the Trust's note payable of $82,185.
INFLATION
The effects of inflation did not have a material impact upon the Trust's
operation in fiscal 1995, 1996 and l997.
SIX
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INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Xxxxxx Realty Trust, Inc.:
We have audited the accompanying balance sheets of Xxxxxx Realty Trust, Inc.
(the "Trust") as of December 31, 1997 and 1996, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Xxxxxx Realty Trust, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
January 16, 1998
(March 10, 1998 as to Note 7 and
February 9, 1998 and March 1, 1998 as to Note 8)
St. Louis, Missouri
SEVEN
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XXXXXX REALTY TRUST, INC.
BALANCE SHEETS
DECEMBER 31,
----------------------
1997 1996
---- ----
ASSETS
CASH....................................................................... $ 657,470 $ 641,127
ACCOUNTS RECEIVABLE--no allowance for doubtful accounts considered
necessary................................................................ 260,085 353,619
PREPAID EXPENSES........................................................... 28,560 29,266
INVESTMENT PROPERTY--at cost (Note 3):
Land................................................................... 2,568,955 2,568,955
Buildings and improvements............................................. 17,739,921 17,593,831
----------- -----------
20,308,876 20,162,786
Less accumulated depreciation.......................................... (6,539,243) (5,948,166)
----------- -----------
13,769,633 14,214,620
DEFERRED EXPENSES--at amortized cost (Note 5).............................. 211,015 243,006
----------- -----------
TOTAL...................................................................... $14,926,763 $15,481,638
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage note payable (Note 3)......................................... $ 4,740,875 $ 4,830,236
Accounts payable and accrued expenses.................................. 448,110 406,947
----------- -----------
Total liabilities.............................................. 5,188,985 5,237,183
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SHAREHOLDERS' EQUITY:
Common stock, $1 par value--Authorized, 5,000,000 shares; issued and
outstanding, 866,624 shares (Note 7)................................. 866,624 866,624
Additional paid-in capital............................................. 14,252,532 14,252,532
Distributions in excess of net income.................................. (5,381,378) (4,874,701)
----------- -----------
Total shareholders' equity..................................... 9,737,778 10,244,455
----------- -----------
TOTAL...................................................................... $14,926,763 $15,481,638
=========== ===========
See notes to financial statements.
EIGHT
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XXXXXX REALTY TRUST, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ---
REVENUES:
Rental and other income (Notes 4 and 6)................................ $3,101,871 $3,017,982 $2,861,293
Interest income........................................................ 8,249 15,529 3,968
---------- ---------- ----------
Total revenues..................................................... 3,110,120 3,033,511 2,865,261
---------- ---------- ----------
EXPENSES:
Depreciation and amortization.......................................... 730,324 757,938 721,040
Real estate taxes...................................................... 564,132 579,305 523,735
Professional fees (Note 7)............................................. 431,825 49,836 54,256
Interest on mortgage note.............................................. 402,351 411,220 416,126
Utilities.............................................................. 288,553 280,400 289,392
Advisory fee--related party (Note 5)................................... 118,906 117,864 116,309
Property management fees--related party (Note 5)....................... 118,269 112,982 106,367
Repairs and maintenance................................................ 98,217 89,299 60,081
Trustee fees and expenses.............................................. 37,868 18,323 14,879
Other operating expenses............................................... 445,038 399,806 377,479
---------- ---------- ----------
Total expenses..................................................... 3,235,483 2,816,973 2,679,664
---------- ---------- ----------
NET INCOME (LOSS).......................................................... $ (125,363) $ 216,538 $ 185,597
========== ========== ==========
PER SHARE DATA:
Net income (loss) (Note 7)............................................. $ (0.14) $ 0.25 $ 0.21
========== ========== ==========
Distributions:
Paid in current year:
Taxable to shareholders........................................ $ 0.09 $ 0.40 $ 0.31
Return of capital.............................................. 0.35 0.40 0.34
---------- ---------- ----------
Total paid in current year......................................... $ 0.44 $ 0.80 $ 0.65
========== ========== ==========
Weighted average shares outstanding (Note 7)........................... 866,624 866,624 866,624
========== ========== ==========
See notes to financial statements.
NINE
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XXXXXX REALTY TRUST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK
--------------------- ADDITIONAL DISTRIBUTIONS
NUMBER PAID-IN IN EXCESS OF
OF SHARES AMOUNT CAPITAL NET INCOME
--------- ------ ---------- -------------
(NOTE 7)
BALANCE, JANUARY 1, 1995.......................... 866,624 $866,624 $14,252,532 $(4,020,230)
Net income.................................... 185,597
Dividends paid................................ (563,307)
------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1995........................ 866,624 866,624 14,252,532 (4,397,940)
Net loss...................................... 216,538
Dividends paid................................ (693,299)
------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1996........................ 866,624 866,624 14,252,532 (4,874,701)
Net loss...................................... (125,363)
Dividends paid................................ (381,314)
------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997........................ 866,624 $866,624 $14,252,532 $(5,381,378)
======= ======== =========== ===========
See notes to financial statements.
TEN
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XXXXXX REALTY TRUST, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from operations...................................... $(125,363) $ 216,538 $ 185,597
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation....................................................... 627,804 626,300 613,893
Amortization of deferred expenses.................................. 102,520 131,638 107,147
Changes in accounts affecting operations:
Accounts receivable............................................ 93,534 (91,647) 15,093
Prepaid expenses............................................... 706 55,537 (48,194)
Deferred expenses.............................................. (70,529) (41,070) (71,215)
Accounts payable and accrued expenses.......................... 41,163 31,567 (41,756)
--------- --------- -----------
Net cash provided by operating activities.................. 669,835 928,863 760,565
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to investment property................................... (182,817) (29,569) (205,960)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to shareholders......................................... (381,314) (693,299) (563,307)
Payments on mortgage note payable...................................... (89,361) (82,185) (75,585)
--------- --------- -----------
Net cash used in financing activities...................... (470,675) (775,484) (638,892)
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH............................................ 16,343 123,810 (84,287)
CASH, BEGINNING OF YEAR.................................................... 641,127 517,317 601,604
--------- --------- -----------
CASH, END OF YEAR.......................................................... $ 657,470 $ 641,127 $ 517,317
========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................. $ 402,351 $ 411,220 $ 416,126
========= ========= ===========
See notes to financial statements.
ELEVEN
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XXXXXX REALTY TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1--BUSINESS:
Xxxxxx Realty Trust, Inc. (the "Trust"), a Missouri corporation, was
formed on June 14, 1984 for the purpose of making equity investments in
income-producing real properties, primarily commercial and light industrial
properties. The Trust's portfolio is comprised of a multi-tenant office
building located in Bloomington, Minnesota (Note 9); a single-tenant office
building located in Omaha, Nebraska; and a warehouse and distribution facility
in Franklin Park, Illinois. These properties generated 41.2%, 34.6% and 24.2%
of rental and other income, respectively, for the year ended December 31, 1997.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Trust has qualified and elected to be taxed as a real estate investment
trust (REIT) under the Internal Revenue Code. The Trust intends to continue to
qualify as a REIT and to distribute substantially all of its taxable income to
its shareholders (See Note 7). Accordingly, no provision for income taxes is
reflected in the financial statements. At December 31, 1997, the Trust has net
operating loss carryforwards of approximately $835,000 for tax purposes which
expire in various amounts through 2005.
The preparation of 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.
Investment property is recorded at the lower of cost or net realizable
value. Impairment is determined if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the property.
Buildings and improvements are depreciated over their estimated useful
lives (35 years) using the straight-line method. Tenant improvements are
depreciated over the term of the lease.
Deferred expenses consist of lease fees and financing costs and are
amortized over the terms of the respective leases or notes.
Lease agreements are accounted for as operating leases and rentals from
such leases are reported as revenues ratably over the terms of the leases.
Certain lease agreements provide for rent concessions. At December 31, 1997,
accounts receivable include approximately $140,000 ($166,000 in 1996) of
accrued rent concessions which is not yet due under the terms of the various
lease agreements.
Included in rental and other income are amounts received from tenants under
provisions of lease agreements which require the tenants to pay additional rent
equal to specified portions of certain expenses such as real estate taxes,
insurance, utilities and common area maintenance. The income is recorded in the
same period that the related expense is incurred.
TWELVE
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XXXXXX REALTY TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In February 1997, Statement of Financial Accounting Standards ("SFAS")
128, Earnings Per Share, ("EPS") was issued. The statement is applicable to
the Trust for the year ended December 31, 1997. The Trust displays only basic
EPS on the face of the statement of operations as there were no items having a
dilutive effect on EPS.
Net income (loss) per share was computed based upon the weighted average
number of shares of common stock outstanding during each year. Distributions
per share are stated at the amount per share declared by the Directors. The
taxability of all distributions paid is based upon earnings and profits as
defined by the Internal Revenue Code. The taxability of distributions declared
but unpaid is determined in the year the dividend is paid.
NOTE 3--MORTGAGE NOTE PAYABLE:
Mortgage note payable at December 31 consists of the following:
1997 1996
---- ----
8.4%, due in monthly installments of $40,976 including interest to
November 2001 when remaining principal payment of $4,330,508 is
due.................................................................. $4,740,875 $4,830,236
========== ==========
The mortgage note is collateralized by deeds of trust and assignments of
rents on all investment properties. Principal payments required are as follows:
1998......................................................... 97,162
1999......................................................... 105,646
2000......................................................... 114,870
2001......................................................... 4,423,198
----------
$4,740,875
==========
In accordance with Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments, the estimated fair value
of mortgage notes payable with maturities greater than one year is determined
based on rates currently available to the Trust for mortgage notes with similar
terms and remaining maturities. The carrying amount and estimated fair value of
the Trust's debt at December 31, 1997 and 1996 are summarized as follows:
1997 1996
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Mortgage notes payable............................ $4,740,875 $4,802,000 $4,830,236 $4,858,000
Fair value estimates are made at a specific point in time, are subjective
in nature and involve uncertainties and matters of significant judgment.
Settlement of the Trust's debt obligation at fair value may not be possible and
may not be a prudent management decision. The potential loss on
THIRTEEN
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16
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XXXXXX REALTY TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
extinguishment at December 31, 1997 does not take into consideration expenses
that would be incurred to settle the debt obligation at fair value.
NOTE 4--RENTAL REVENUES UNDER OPERATING LEASES:
Minimum future rental revenues under noncancelable operating leases in
effect as of December 31, 1997 are as follows:
1998.............................................. $2,482,000
1999.............................................. 1,838,000
2000.............................................. 441,000
2001.............................................. 164,000
----------
Total......................................... $4,925,000
==========
In addition, certain lease agreements require tenant participation in
certain operating expenses and additional contingent rentals based upon
percentages of tenant sales in excess of minimum amounts. Tenant participation
in expenses included in revenues approximated $403,000 for the year ended
December 31, 1997, $417,000 in 1996, and $411,000 in 1995. Contingent rentals
were not significant for the years ended December 31, 1997, 1996 and 1995.
NOTE 5--RELATED PARTY TRANSACTIONS:
The Trust has entered into an agreement with Xxxxxx Advisors Ltd., L.P.
(the "Advisor"), a Missouri limited partnership, to advise the Trust with
respect to the Trust's investments and investment policies and to administer
the operations of the Trust. This advisory agreement is renewable annually by a
vote of the Directors. A notice to terminate the contract effective February 9,
1998 was approved on December 10, 1997 (See Note 8). An Officer and Director of
the Trust is a general partner of Xxxxxx Advisors Ltd., L.P. The Advisor
receives a fee for its services based upon net invested assets or net operating
income as defined in the agreement. The fees were $118,906, $117,864 and
$116,309 for the years ended December 31, 1997, 1996 and 1995, respectively.
Certain other affiliates of the Advisor receive lease commissions and
property management fees in connection with the operation of investment real
estate owned by the Trust. In 1997, lease commissions of $41,330 ($21,014 in
1996) were paid by the Trust to Xxxxxx Xxxxxxxx Company, an affiliate of the
Advisor. Lease commissions are capitalized as deferred expenses and amortized
over the life of the lease. Additionally, property management fees paid to
Xxxxxx Xxxxxxxx Company were $98,558 for the period January 1, 1997 through
October 31, 1997, and $112,982 and $106,367 for the years ended December 31,
1996 and 1995, respectively.
On October 31, 1997, Xxxxxx Company sold its property management business
operated through its wholly-owned subsidiary, Xxxxxx Xxxxxxxx Company, to
Xxxxxx Real Estate Company D/B/A Xxxxxx Inc., an indirect wholly-owned
subsidiary of CGS Real Estate Company, Inc., a Texas corporation.
Simultaneously Xxxxxx Company, Xxxxxxx X. Xxxxxx, Xx. and PAN, Inc. sold their
general and limited partnership interest in Xxxxxx Advisors Ltd., L.P., the
FOURTEEN
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17
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XXXXXX REALTY TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
external advisor to the Registrant to S-P Properties, Inc., a California
corporation, which also is a wholly-owned subsidiary of CGS Real Estate
Company. Prior to the sale, the independent Directors of the Registrant
approved the change in control of the Advisor and authorized a new management
contract for the Registrant's properties with Xxxxxx Inc., with the same terms
and expiration dates as the existing advisory and management contracts. In
1997, lease commissions of $8,266 were paid by the Trust to Xxxxxx Inc. for the
period from November 1, 1997 to December 31, 1997. In the same period, the
Trust paid Xxxxxx Inc. management fees of $19,711.
NOTE 6--MAJOR TENANTS:
A substantial amount of the Trust's revenue in 1997 was derived from three
major tenants, revenue from which amounted to $1,093,649, $418,928 and $337,813
or 35.2%, 13.5%, and 10.9%, respectively, of total revenues. A substantial
amount of the Trust's revenue in 1996 was derived from three major tenants
whose rentals amounted to $1,035,600, $463,000 and $343,900 or 34.3%, 15.4% and
11.4%, respectively, of total revenues. A substantial amount of the Trust's
revenue in 1995 was derived from three major tenants whose rentals amounted to
$978,000, $411,000 and $335,000 or 34.2%, 14.4% and 11.7%, respectively, of
total revenues.
NOTE 7--LAWSUITS:
As of December 31, 1997, the Trust is a party to two lawsuits. The first is
State of Missouri ex rel. KelCor, Inc. x. Xxxxxx Realty Trust, Inc. On August
8, 1997, KelCor, Inc., a shareholder of the Trust, filed a Petition for
mandamus relief against the Trust. KelCor's Petition sought a writ of mandamus
compelling the Trust to hold an Annual Meeting of shareholders by October 31,
1997. The Trust opposed KelCor's Petition on the basis that the Trust was
unable to hold a valid meeting because of uncertainty over the validity of
certain shares of the Trust and that the determination of the validity of those
shares needed to first be determined. The case was tried before the Court on
December 1, 1997, on which date the Court entered a permanent order of mandamus
requiring the Trust to hold an Annual Meeting by January 15, 1998. The Trust
appealed the Court's order to the Missouri Court of Appeals for the Eastern
District. An oral argument on appeal was held on March 10, 1998. No decision
has been received. The Board of Directors continues to maintain that KelCor is
not entitled to mandamus relief with respect to the holding of an Annual
Meeting.
The second lawsuit is Xxxxxx Realty Trust, Inc. v. Xxxxx X. Xxxxxxx, et.
al. This has been filed in the Circuit Court of Xxxxxxx County, Missouri. On
August 18, 1997, the Trust filed a petition for declaratory judgment against
certain individuals and entities who claim to hold shares of the Trust. The
Trust initiated the suit to obtain a judicial determination of the validity and
status of some of the Trust's shares (known as "Excess Shares") which
Defendants claim to have purchased as a group on August 26, 1997. The
Defendants moved to dismiss the suit and/or to stay the suit pending resolution
of the KelCor's mandamus suit in St. Louis County above. On December 9, 1997,
the Court denied Defendants' motion to dismiss the suit but stayed the case
pending disposition of the mandamus action. The Board of Directors plans to
conduct discovery as permitted by the Court so that the validity and status of
the Excess Shares can be finally determined pursuant to this suit.
FIFTEEN
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18
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XXXXXX REALTY TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
While the results of such litigation cannot be predicted with certainty,
management, after discussion with counsel, believes the final outcome will not
have a material adverse effect on the financial position and results of
operations reflected in the financial statements presented herein. In addition,
a determination in the second lawsuit that the Trust's shares at issue are
Excess Shares may result in these shares being returned to the Trust's treasury
without compensation, thus reducing the number of shares outstanding and
increasing shareholders' equity per outstanding share. At this point, however,
management cannot predict with certainty whether such shares will be deemed to
be Excess Shares or how such shares will be treated if they are deemed to be
Excess Shares. Once the validity and status of the Excess Shares can be
determined, the Trust will be in a position to hold an Annual Meeting. Until
the validity of the Excess Shares is known, the payment of dividends has been
suspended. In order for the Trust to continue to qualify as a REIT,
substantially all of the Trust's taxable income must be distributed to its
shareholders. Accordingly, lack of resolution of the status of the Excess
Shares could affect the Trust's ability to continue to qualify as a REIT under
the Internal Revenue Code in the future. The cost of the two lawsuits has been
significant and has negatively impacted the earnings during 1997 and will
continue to do so in 1998 as the two court cases move forward.
NOTE 8--SUBSEQUENT EVENTS:
Effective February 9, 1998, the Trust's contracts with Xxxxxx Advisors
Ltd., L.P. and Xxxxxx, Inc. were canceled due to a vote at a special meeting of
the Board of Directors on December 10, 1997, changing the governance and
management of the Trust to that of an internally self-managed trust. Effective
March 1, 1998, the Trust entered into two five year employment agreements that
are cancelable after 3 years subject to certain performance criteria as defined
in the employment agreements. Annual compensation recognizable under the
agreements total $300,000 and include options to purchase 75,000 shares of the
Trust's common stock at $10.00 per share. No options may be exercised during
1998. The options expire in various years from 2004 through 2008.
NOTE 9--CONTINGENCY:
The Trust's multi-tenant office building located in Bloomington, Minnesota
has been classified in the Minneapolis Airport Committee's (the "MAC") Safety
Zone A in the future expansion of the Minneapolis Airport. The expansion runway
is anticipated to be completed in 2003. The MAC will be buying out impacted
buildings during 1998 and 1999. Safety Zone A is adjacent to the Federal
Aviation Authority's noise buyout zone. The MAC has not indicated whether or
not it will buyout the Trust's building. The Trust is monitoring whether the
increased noise from the new runway will have an impact on future leasing of
the building. If the Trust determines there is a negative impact, the Trust
will petition the MAC to buy the building. If the building continues to be
classified in Safety Zone A, it will be classified as nonconforming use. Given
the preliminary stage of the future expansion, management is unable at this
time to determine what impact, if any, this matter will have on the Trust.
SIXTEEN
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19
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DIRECTORS AND OFFICERS
Board of Directors
Xxxxxxx X. Xxxxxx Founder and Chief Executive Officer of CGS Real
Estate Company, Newport Beach, California. CGS is a
diversified real estate investment management company.
Xxxxxxxx X. Xxxxxxx Real estate owner, consultant and educator.
Xxxxxxx X. Xxxxx, Xx. President, Carlsberg Mangement Company, Santa
Monica, California.
Xxxxx X. Xxxxxx President, Cambridge Savings Bank, Cambridge,
Massachusetts.
Xxxxxxx X. Xxxxxx, Xx. Chairman of the Board and Chief Executive Officer,
Xxxxxx, Inc. Xxxxxx Inc. is a real estate
investment management firm, and a wholly-owned
subsidiary of CGS Real Estate Company.
Officers
Xxxxxxx X. Xxxxxx Chief Executive Officer and Chairman of the Board
Xxxxxxx X. Xxxxxx, Xx. Vice Chairman
Xxxxxxxx X. Xxxxxx President and Secretary
Xxxxxx X. Xxxxxxx Treasurer and CFO
SEVENTEEN
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20
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XXXXXX LOGO
SHAREHOLDER INFORMATION
Transfer Agent:
ChaseMellon Shareholder Services
X.X. Xxx 0000
Xxxxx Xxxxxxxxxx, XX 00000-0000
Legal Counsel:
Xxxxx Xxxx LLP
St. Louis, Missouri
Independent Accountants:
Deloitte & Touche LLP
St. Louis, Missouri
The following information is available to shareholders without charge upon
written request to Xxxxxxxx X. Xxxxxx, Secretary, Xxxxxx Realty Trust, Inc.,
000 X. Xxxxxxxx, Xx. Xxxxx, Xxxxxxxx 00000:
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Form 10-K is available in April.
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission. Forms 10-Q are available in May, August and November.
Xxxxxx Realty Trust, Inc. Dividend Reinvestment Plan and Enrollment Card
EIGHTEEN
------------
21
INVESTMENT PROPERTIES
THE ATRIUM
AT ALPHA BUSINESS CENTER
BLOOMINGTON, MINNESOTA
APPLIED COMMUNICATIONS, INC. BUILDING
OMAHA, NEBRASKA
FRANKLIN XXXX XXXXXXXXXXXX XXXXXX
XXXXXXXX XXXX, XXXXXXXX
XXXXXX REALTY TRUST
000 X. XXXXXXXX
XX. XXXXX, XXXXXXXX 00000
