-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VhGRCwaOypWyq41UQRalIZGl6VRf7Xo0OyZ/NvkD0BIA/ZNu857c+AzBT/gI7oSj 3cxs8aOE3QYgEnKIxJy6Cw== 0000950152-96-006567.txt : 19961213 0000950152-96-006567.hdr.sgml : 19961213 ACCESSION NUMBER: 0000950152-96-006567 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEVETRUST REALTY INVESTORS CENTRAL INDEX KEY: 0000020975 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 341085584 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05641 FILM NUMBER: 96679617 BUSINESS ADDRESS: STREET 1: 2001 CROCKER RD STE 400 CITY: WESTLAKE STATE: OH ZIP: 44145 BUSINESS PHONE: 2168990909 MAIL ADDRESS: STREET 1: 2001 CROCKER ROAD STREET 2: STE 400 CITY: WESTLAKE STATE: OH ZIP: 44145 10-K405 1 CLEVETRUST REALTY INVESTORS 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1996 Commission File Number 0-5641 ------ CleveTrust Realty Investors --------------------------- (Exact name of Registrant as specified in its charter) Massachusetts 34-1085584 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Crocker Road, Suite 400, Westlake, Ohio 44145 -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 899-0909 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Shares of Beneficial Interest, $1.00 Par Value ---------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X . --- At December 2, 1996, 5,136,616 Shares of Beneficial Interest, par value $1.00 per Share, were outstanding, and the aggregate market value of the Shares of the Registrant held by non-affiliates (based upon the closing price of the Registrant's Shares on December 2, 1996, which was $4.875) was approximately $7,128,000. For purposes of this information, the outstanding Shares beneficially owned by all Trustees and Officers of the Registrant, were deemed to be the shares held by affiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the CleveTrust Realty Investors Proxy Statement for the 1997 Annual Meeting of Shareholders (the "Proxy Statement") are incorporated by reference into Part III of this report. With the exception of those portions which are expressly incorporated by reference into this annual report on Form 10-K, the documents incorporated by reference are not deemed filed as part of this report. 2 PART I ------ Item 1. Business. - -------- --------- General: - -------- CleveTrust Realty Investors (the "Trust") is a business trust organized in Massachusetts which commenced operations in 1971. The Trust's assets are composed principally of investments in real estate. The Trust directly manages all of its improved properties. At September 30, 1996 the Trust had 19 full-time employees. On September 24, 1996 the Board of Trustees of the Trust unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust (the "Plan"). The Plan, as proposed, would involve the sale of the Trust's properties during a period of approximately three years. The Trustees will also consider proposals for a merger, combination or sale of all or a portion of its properties in a single transaction. The Plan will be submitted for approval by the Shareholders of the Trust at the Annual Meeting to be held in February, 1997. The Trustees, who in the aggregate own more than 70 percent of the outstanding shares of the Trust, have agreed to vote their shares in favor of the Plan. Portfolio: - ---------- At September 30, 1996, the Trust's investment portfolio consisted primarily of ownership interests in eight multi-tenanted office buildings, four multi-tenanted shopping centers, and one retail center (collectively, the "Properties"). Based on the above referenced announcement of the Plan, the Trust has classified all of its Properties as "Properties held for sale" at September 30, 1996, in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS No. 121"). The Trust made a review of the carrying value of all the Properties at September 30, 1996 and determined that four of the Trust's Properties had a carrying value higher than the anticipated net sales prices. Therefore a valuation reserve of $3,307,000 was established. In determining the estimated net sales prices the Trust applied an estimated capitalization rate to the individual properties' cash flow. The Trust did not deem it necessary to obtain appraisals of any of its properties. See Item 2 of Part I for allocation of the valuation reserve. The significant investment portfolio activity of the last three fiscal years is discussed under Item 7 of Part II below. Information pertaining to the operating revenues, operating income or loss and total assets of the Trust for each of the last three fiscal years is provided under Item 6 of Part II below. The Trust's primary business objective will be to sell the Trust's assets for the highest possible price. The proceeds from these sales will be distributed to the Shareholders after establishment of reserves, determined by Management of the Trust which should be adequate so as to satisfy outstanding obligations of the Trust. In order to sell the properties for the highest prices the Trust has reviewed its operating strategy and implemented one that is intended to achieve the Trust's business objective. One focus of this operating strategy is to maximize funds from operations from each of the Trust's Properties, thereby enhancing their value, through (i) rental rate increases, to the extent that competitive conditions permit; (ii) improvements in tenant retention; (iii) emphasis on expense controls consistent with the proper maintenance of the Properties; and (iv) strategic capital investments in order to increase the competitive position of the Properties. The Trust also believes that funds from operations from its investments may increase as a result of cyclical market recoveries and growth. The Trust strives to maintain operating expenses at its Properties at the lowest practical levels given the need to adequately operate and maintain its Properties, the majority of which were constructed in the mid-1970's to mid-1980's. Maintenance is emphasized because it is considered critical to the appreciation of the Properties. -1- 3 PART I ------ Item: 1. Business (continued): - -------- ---------------------- The second focus of the Trust's operating strategy will be to find buyers for the properties. The Trust has contacted and will continue to contact certain principals to see if a direct sale can be initiated. If the Trust is unable to find buyers by itself, then the trust will engage licensed real estate agents to seek buyers on behalf of the Trust. The Trust has established targeted sales prices for each of the Properties and will make every attempt to achieve or exceed these prices during the liquidation period. However, no assurances may be given that any or all of the Properties will be sold for the targeted prices established by the Trust or will be sold at all. On October 7, 1996 the Trust completed a $2,450,000 sale of the Littleton Bank Building located in Littleton, Colorado. The sale resulted in a gain of approximately $563,000 which will be reported in the first quarter of fiscal year 1997. Additionally, the Trust currently has four of its properties under contracts of sale. The Englewood Bank Building located in Englewood, Colorado is under a contract of sale for a sales price of $5,350,000. The Executive Club Building located in Denver, Colorado is under a contract of sale for $5,300,000. The Spring Village Shopping Center located in Davenport, Iowa is under a contract of sale for a sales price of $5,350,000. The Warren Plaza Shopping Center located in Dubuque, Iowa is under a contract of sale for a sales price of $5,950,000. All four of these contracts provide for "due diligence" periods, during which time the buyer could cancel the contract at his option. After the completion of the due diligence period the buyer will place a non-refundable deposit with the Trust. Should the buyers fail to complete the sale these deposits would be forfeited and retained by the Trust. However, no assurance may be given that these properties will actually be sold at the prices stated. Also, the Trust has signed letters of intent with various buyers for the sale of three additional properties. The total gross sales prices for these three properties is $15,640,000. Letters of intent are only agreements in principle on the most fundamental terms and the parties do not intend that there be any binding obligation to buy or sell the property until such time as a contract of sale is executed by both the buyer and the Trust. In all cases, the sales prices exceed the carrying value or the net book value of the properties. The Trust's portfolio of Properties has generated sufficient revenue to cover all operating expenses (excluding depreciation, a non-cash expense and in 1996 the provision for valuation reserve, also a non-cash expense), amortization of mortgage notes payable, required amortization of bank notes payable, and capital improvements to existing properties. Financing and Leverage: - ----------------------- The Trust used borrowed funds in purchasing certain properties which the Trust believes has helped to improve the Trust's return on investment in these properties. At September 30, 1996 two of the Trust's investments were leveraged with long-term non-recourse individual mortgage financing and one property was leveraged with a $2,612,000 loan of which the first $750,000 is recourse and the balance is non-recourse. At September 30, 1996 six of the Trust's remaining improved properties served as collateral for the Trust's bank notes payable. See Note F of the Notes to the Financial Statements presented in Part II, Item 8 of this report. Effective November 30, 1994 the Trust and two banks, National City Bank of Cleveland ("NCB") and Manufacturer's and Traders Trust Company of Buffalo ("M & T") signed a revolving line of credit agreement for up to $25,000,000 (but limited by the value of the collateral provided). Of this amount a maximum of $15,000,000 is currently available and $10,000,000 will be available at the Trust's discretion upon payment of an activation fee of 3/4 of 1% on the $10,000,000. This loan was for an initial term of three years. The banks review the loan annually, and if satisfied, they extend the loan for an additional year at that time. During 1996 the banks extended the maturity date to March 1, 1999. Therefore, the Trust will -2- 4 PART I ------ Item 1. Business (continued): - -------- ---------------------- have an annually renewed three year loan or two years in which to replace the loan. At the Trust's option interest on any loan will be at any of the following rates (i) the prime lending rate plus 1/4 of 1%; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed rate of interest in effect from time to time. Real Estate Market Conditions: - ------------------------------ Investments in real estate equities tend to be long term investments, and accordingly, tend to limit the ability of the Trust to vary its portfolio of real estate owned promptly in response to changing economic, financial and investment conditions, such as overbuilding in certain markets and the resulting intense competition for tenants. Although the Trust requires leases from all tenants occupying space in its properties, in the event of a default by a tenant, the Trust may modify the lease terms or evict the tenant. Tenant evictions result in increased expenses and the possibility of lost rents until the space is re-leased. The tenant occupying the largest amount of space in any of the Trust's Properties currently pays rent totaling $974,000 or 9.2% of the Trust's 1996 total revenues. This tenant has a lease which matures September 30, 2005 but the lease contains six 10-year option provisions at the tenant's discretion which, if exercised, would extend the maturity date to September 30, 2065. The rent paid by this tenant is subject to an annual adjustment based on the increase or decrease in operating expenses of the property. The Trust, in order to remain competitive, leases space at its properties at rates which are dictated by the market in which the property exists. The market rates, which are quoted to both new tenants and tenants who are renewing their leases, were at their highest levels in the early 1980's. These rates began to decline at most of the properties in 1984 and continued to decline through 1988. At that time, the market rates at all of the Trust's properties were at their lowest levels. Since 1989, the market rates have tended to increase. In 1996 the market rates at the majority of the properties were higher than those in 1988 but have not returned to the high rates that existed in 1983. The Trust is encouraged by the current trends in rates. Additionally, the majority of leases at the Properties include provisions for the tenant to pay additional rent if operating expenses of the property increase. Taxes: - ------ Through fiscal 1992 the Trust qualified as a real estate investment trust (a "REIT") as defined by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Effective April 1, 1993 the Trust automatically failed to qualify as a REIT under the Code as on such date more than 50% in value of the Trust's shares (after the application of certain constructive ownership rules) were owned by five or fewer individuals. Although the Trustees had the right pursuant to Section 8.5 of the Declaration of Trust to prevent the transfer, and/or call for the redemption of, securities of the Trust sufficient in the opinion of the Trustees to meet requirements for REIT status, the Trustees in their discretion determined that maximizing proceeds from the December 1992 rights offering (the "1992 Rights Offering") outweighed the benefits of REIT status. The primary impact on the Trust as a result of the failure to qualify as a REIT was that the Trust is now required to file its federal and state income tax returns as a corporation and is subject to taxation as a corporation. As a result, distributions to shareholders are subject to double taxation to the extent of current and accumulated earnings and profits of the Trust. The Trust will not be able to re-qualify as a REIT until fiscal year 1998. At September 30, 1996 the Trust has net operating and capital loss carryforwards (NOL's) of approximately $10.2 million available to offset taxable income. In future years, the Trust can use approximately $298,000 per year of NOL's, plus it can apply gains on the sales of properties ("built in -3- 5 PART I ------ Item 1. Business (continued): - ------- --------------------- gains") for those properties which were owned by the Trust on December 28, 1992, plus any prior year's unused portion (limited by carryforward periods) for NOL's generated prior to December, 28, 1992. The Trust can also use NOL carryforwards generated after December 28, 1992. These carryforwards of approximately $9.5 million expire through 2011. The balance of the carryforwards of $700,000 may be recognized for a period through fiscal 1998 against built in gains, if any, to the extent that fair market values of these properties exceeded their tax bases as of December 28, 1992. Once the Plan is approved, distributions to shareholders will be considered liquidating distributions and reported as return of capital to shareholders to the extent of the individual shareholders basis in their shares. Shareholders are encouraged to consult their tax advisors for information concerning these distributions. Competition and Limited Resources: - ---------------------------------- The Trust's Properties are subject to competition from similar types of properties in the vicinities in which they are located. Additionally, the Trust is relatively small in comparison to many of its competitors. This size limits the Trust's resources and may limit its ability to compete effectively in the geographic markets in which the Trust owns property. However, since the Trust's objective is to sell its properties, the Trust will concentrate its efforts on being able to satisfy the requirements of prospective tenants so that they lease space in the Trust's Properties rather than the competitors'. -4- 6 PART I ------ Item 2. Properties. - ------- ----------- General: - -------- At September 30, 1996 the Trust had total invested assets of $39,015,000. The invested assets included $38,896,000 of properties held for sale and $119,000 of real estate mortgage loans. The Trust's $38,896,000 of properties held for sale at September 30, 1996 included the following: eight office buildings with a carrying value of $20,304,000; five commercial properties with a carrying value of $18,552,000; and one investment in land with a carrying value of $40,000. Carrying value represents amounts included in the Trust's Statement of Financial Condition at September 30, 1996 after depreciation and the valuation reserve. On September 24, 1996 the Trustees of the Trust announced that they unanimously voted to recommend a Plan for the Orderly Liquidation (the "Plan") of the Trust. Since the Trust had previously adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS No. 121") the Trust, effective September 30, 1996, classified all real estate owned as "Properties held for sale." A review of the properties at September 30, 1996 determined that four properties required a valuation reserve, as the market values, less cost to sell, of these properties were less than their carrying value. Therefore a valuation reserve of $3,307,000 was established. In determining the estimated net sales prices the Trust applied an estimated capitalization rate to the individual properties' cash flow. The Trust did not deem it necessary to obtain appraisals of any of its properties. Management will from time to time undertake a major renovation of a Property in order to keep it competitive within its market. Currently, the Cannon West Shopping Center located in Austin, Texas is having a trench drain installed at a cost of approximately $150,000. This work is being done in order to combat a sub-soil problem at the property. Management believes that the installation of this trench drain will alleviate the problem. The cost of this work will be reported in the first two quarters of fiscal year 1997. Additionally, Management is reviewing plans for the installation of new store fronts at Tiffany Plaza, a shopping center located in Ardmore, Oklahoma. The current estimated cost of this work is $250,000. If the Trust proceeds with this work it should begin in the spring of 1997. In the opinion of Management, all Properties in the Trust's portfolio are adequately covered by insurance. Additionally, Management believes all properties are suitable and adequate for their intended use. The amount of leverage varies among the Properties which the Trust owns. At September 30, 1996 two of the Trust's Properties were leveraged with long-term non-recourse individual mortgage financing and one property was leveraged with a $2,612,000 loan of which the first $750,000 is recourse and the balance is non-recourse. Additionally, as of September 30, 1996 six of the Trust's remaining investments serve as collateral for the Trust's bank notes payable. At September 30, 1996 the Trust owned two real estate mortgage loans with a total balance of $119,000. Both loans are purchase money mortgages received by the Trust in connection with sales of vacant land in Akron, Ohio. The first was a $290,000 loan received in connection with the $834,000 March, 1994 sale of 70 acres. The second was a $212,000 loan received in connection with the $212,000 May, 1994 sale of 17.7697 acres. -5- 7
PART I ------ Item 2. Properties (Continued): - -------------------------------------- Properties Held for Sale: - -------------------------------------- The following table analyzes the properties held for sale at September 30, 1996 by type of property. Percentage Year Leased Square Total Accumulated Valuation Mortgage Description Acquired (A) (B) Footage Cost Depreciation Reserve Debt - -------------------------------------- --------------------------------------------------------------------------------------- OFFICE BUILDINGS: (-------------in thousands------------------) Colorado: Englewood Bank Bldg. - Englewood (C)(E) 1971 97% 129,000 $6,103 $3,108 $0 $0 Executive Club Bldg. - Denver (F) 1972 73 96,000 4,623 2,966 0 0 Littleton Bank Bldg. - Littleton (D) 1973 99 58,000 3,166 1,398 0 1,209 Oklahoma: Petroleum Club Bldg. - Tulsa (G) 1972 82 115,000 6,959 4,408 551 0 Texas: Walnut Stemmons O. P. - Dallas (H) 1975 71 60,000 2,452 1,792 0 0 Office Alpha - Dallas (I) 1983 90 103,000 11,048 3,502 2,546 0 14800 Quorum Bldg. - Dallas (J) 1994 92 104,000 4,312 272 0 2,612 Brookside Office Bldg. - Arlington(K) 1996 100 44,000 2,208 24 0 0 --------------------------------------------------------------------------- TOTAL OFFICE BUILDINGS: 88 709,000 40,871 17,470 3,097 3,821 COMMERCIAL PROPERTIES: South Carolina: Triangle Square - Hilton Head (L) 1976 87 93,000 1,911 1,104 0 0 Texas: Cannon West - Austin (M) 1987 95 123,000 8,225 2,174 0 5,742 Iowa: Spring Village - Davenport (N) 1987 99 103,000 5,579 1,078 0 0 Warren Plaza - Dubuque (O) 1987 98 90,000 5,367 1,174 0 0 Oklahoma: Tiffany Plaza - Ardmore (P) 1989 98 147,000 4,081 948 133 0 --------------------------------------------------------------------------- TOTAL COMMERCIAL PROPERTIES: 96 556,000 25,163 6,478 133 5,742 LAND: Ohio: Vacant land - Akron 1975 N/A N/A 117 N/A 77 0 --------------------------------------------------- TOTAL PROPERTIES HELD FOR SALE $66,151 $23,948 $3,307 $9,563 ===================================================
-6- 8 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued): - ----------------------------------------- (A) At September 30, 1996 the Trust had 338 tenants under lease in its office buildings (excluding the Littleton Bank Bldg., Littleton Colorado which was sold October 7, 1996), and its commercial properties, all of which are shopping centers, with Triangle Square also having mini-warehouse facilities behind the retail area (excluding the mini warehouses at Triangle Square). These tenants are under leases of one year or more. Additionally, the Trust had 215 month-to-month leases for mini-warehouse spaces at Triangle Square. (B) The following lists individually those tenants who occupy 10,000 square feet or more, and whose original lease terms expire five years or more from September 30, 1996. Seventeen (17) other tenants occupy less than 10,000 square feet and have leases which expire in five years or more from September 30, 1996. These are grouped together and shown as "Others" on the table below:
Expiration Square Annual Property Tenant Date Footage Base Rent - --------------- -------------- ----------- ------- --------- Englewood Bank Bank One, Denver 9/30/2005 108,000 $ 974,000 Petroleum Club Petroleum Club 4/30/2003 25,000 157,000 Cannon West Premiere Lady's Fit 8/31/2001 15,000 68,000 Cannon West H. E. Butt 10/05/2001 50,000 250,000* Spring Village Eagle Foods 6/30/2005 46,000 204,000* Spring Village Bombay Rest. 1/31/2011 10,000 98,000* Spring Village Walgreens 11/30/2010 11,000 67,000* Spring Village I. H. Miss 11/30/2011 10,000 34,000 Warren Plaza HY-VEE 9/08/2013 52,000 256,000* Tiffany Plaza Orscheln Farm 8/31/2001 30,000 102,000 Tiffany Plaza Fleming Companies 3/20/2001 42,000 87,000* Tiffany Plaza C. R. Anthony 3/07/2001 24,000 69,000* 14800 Quorum Preston 3/21/2002 13,000 131,000 Brookside Schrickel, Rollins 8/31/2003 15,000 169,000 Various Others Various 45,000 460,000* ---------- ---------- 496,000 $3,126,000 ========== ========== * Leases marked with an asterisk have additional rent provisions to be paid based on a percentage of the gross sales over a base sales figure.
All leases listed on the table are subject to an annual adjustment in rent based on the increase or decrease in the operating expenses of the Property. The annual base rents of the tenants listed in the table equal 30% of the total 1996 rental income, and these tenants occupy 496,000 square feet (45%) of the total 1,100,000 square feet (excluding the Littleton Bank Bldg. which was sold October 7, 1996) currently occupied. The remaining 604,000 square feet are occupied by 307 tenants. These tenants' leases expire during the next five years. The loss of rentals from any one of these leases, if the Trust would not be able to renew or replace, would not have a significant effect on the Trust's operations. (C) The following is the only tenant who occupies 50% or more of a Property: Englewood Bank Building -- Bank One, Denver -- 108,000 sq. ft. (84%). -7- 9 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued): - ---------------------------------------- (D) The Littleton Bank Building was sold on October 7, 1996. The sale resulted in a gain of approximately $563,000 which will be reported in the first quarter of Fiscal Year 1997. (E) ENGLEWOOD BANK BUILDING. The Englewood Bank Building is located in Englewood, Colorado. The building contains 10 stories and is suitable and adequate for its use as a bank and office building. The main tenant is Bank One, Denver which occupies 84% of the building. The balance of the building is primarily leased to small service or professional organizations for use as general offices. The Trust's policy is to sign leases of three to five years in order to take advantage of changes in the market. The Trust has been notified by the City of Englewood that the City has recently passed a law that would require the Trust to install a sprinkler system and fire pull stations on every floor of this property. The law requires that this work be done over a five (5) year period starting in 1997. The Trust is currently reviewing all of its options relating to this required work. At this time the Trust does not have any estimates as to the costs that would be involved in undertaking this work. Other than this required work there are no other significant renovations planned for this property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space. The Englewood Bank Building is subject to limited direct competition from comparable office projects in the general vicinity. There is only one competing high-rise office building in the area of similar size, quality, condition and location to the Englewood Bank Building. Other competing projects consist of low-rise office buildings and converted retail space generally considered to be of lesser quality. The occupancy rates for the fiscal years ended September 30, 1992 through 1996 were as follows: 89% in 1992, 91% in 1993, 98% in 1994, 97% in 1995 and 1996 . The Property's average rental rate per occupied square foot for the same period was $6.65 in 1992, $6.69 in 1993, $6.80 in 1994, $6.63 in 1995, and $6.67 in 1996. Bank One, Denver is the only tenant occupying over 10% of the rentable space. Its annual rent is currently $974,000 but is subject to an annual adjustment based on increases or decreases in property expenses. This lease expires September 30, 2005 and has six ten-year renewal options available. Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Rents Year Expiring Expiring Rents Expiring at 9/30/96 ---- -------- -------- -------------- ---------- 1997 5 7,738 $ 79,356 7% 1998 2 1,826 19,824 2 1999 3 8,051 77,892 7 2000 - 2004 NONE 2005 1 107,663 973,690 84 2006 NONE
-8- 10 PART I ------ Item 2 Properties (Continued): - ------ ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- The Englewood Bank Building is depreciated for tax purposes using the straight line method over 40 years for the building and improvements. The depreciable tax basis was $1,896,000 at September 30, 1996. The 1995 real estate taxes for the Property were $107,539 based on a millage rate of $8.252 per $1,000 of assessed value. The 1996 real estate taxes are not yet known. (F) EXECUTIVE CLUB BUILDING. The Executive Club Building is located in Denver, Colorado. The building contains eleven floors and has a health club, which includes a swimming pool, located in the basement. The building is suitable and adequate for its use as an office building. Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign new leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market. Presently, the Trust has no plans for any significant renovations of the property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, condition and quality that directly compete with the Executive Club Building. The Trust believes that the advantage that this building has is that the building caters to small tenant users, while the majority of the properties in the area prefer larger tenants. Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 92% in 1992; 97% in 1993 and 1994; 93% in 1995 and 73% in 1996. The Property's average rental rates per occupied square foot for the same periods were: $9.69 in 1992; $9.55 in 1993; $10.15 in 1994; $11.63 in 1995 and $11.78 in 1996. There are no tenants in this property occupying 10% or more of the space. Based upon leases in place as of September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 32 33,353 $392,920 42% 1998 20 21,688 253,392 27 1999 14 20,722 247,224 26 2000 1 1,282 15,120 2 2001 NONE 2002 1 2,169 27,108 3 2003-2006 NONE
-9- 11 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- The Executive Club Building is depreciated for tax purposes using the straight line method with the building and improvements having a 40 year life. The depreciable tax basis was $1,862,000 at September 30, 1996. The 1995 real estate taxes for the Property were $79,693 based on a millage rate of $8.1161 per $1,000 of assessed value. The 1996 real estate taxes are not yet known. (G) PETROLEUM CLUB BUILDING. The Petroleum Club Building is located in Tulsa, Oklahoma. The building contains sixteen floors with an attached four level parking garage which is leased out to American Parking for an annual rent plus a percentage rent determined at the end of each year and offers valet, self parking both covered and uncovered. The building is suitable and adequate for its use as an office building. The main tenant is The Petroleum Club which occupies the top four floors. The balance of the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign new leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market. Presently, the Trust has no plans for any significant renovations of the property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. This property is located in the downtown area of Tulsa and, as such, there are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, condition and quality that directly compete with the Petroleum Club Building. The floor size of this property is only 7,800 square feet and as such the Trust can offer small tenants a substantial portion of a floor without the tenant competing with larger tenants who usually dominate downtown office space. Despite the stagnate economy of Tulsa, which depends primarily on the oil and gas industry, the Trust has made strides in recent years in increasing the occupancy of this property. One recent benefit has been the Petroleum Clubs willingness to open its membership to others outside of the petroleum industry. The majority of the tenants in the building now belong to the Club. Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 75% in 1992; 72% in 1993; 78% in 1994; 81% in 1995; and 82% in 1996. The property's average rental rates per occupied square foot for the same periods were: $8.47 in 1992; $8.69 in 1993; $7.84 in 1994; $8.22 in 1995; and $8.84 in 1996. There are no tenants in this property occupying 10% or more of the space. -10- 12 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- Based upon leases in place as of September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 17 36,054 $366,996 40% 1998 3 6,346 132,444(i) 14 1999 7 24,255 223,872 24 2000 NONE 2001 1 5,741 47,364 5 2002 NONE 2003 1 24,579 155,040 17 2004-2006 NONE (i) Includes $69,780 for American Parking who leases the garage. Their lease expires March 31, 1998. There is no square footage included for this tenant.
The Petroleum Club Building is depreciated for tax purposes using the straight line method with the building and improvements having a 40 year life. The depreciable tax basis was $2,618,000 at September 30, 1996. The 1995 real estate taxes for the Property were $27,558 based on a millage rate of $10.021 per $1,000 of assessed value. The 1996 real estate taxes are not yet known. (H) WALNUT STEMMONS OFFICE PARK. Walnut Stemmons Office Park is located in Dallas, Texas. The complex is currently composed of three single story buildings. This property originally was composed of nine single story buildings. Four of the buildings were sold in November, 1992. Two more buildings were sold September 30, 1996. All six buildings were sold to the same buyer. The remaining three buildings all have exterior entrances for the tenants, with no common areas. Space in the buildings is leased to small businesses, the majority of which are just commencing operations. The Trust's policy is to sign three to five year leases with both new and renewal tenants with the tenant being responsible for all services within their space, such as, electricity and cleaning. Presently, the Trust has no plans for any significant renovations of the property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. There are similar properties in the immediate area of this Property. The surrounding area features restaurants, a bowling alley, and a chiropractic college. Since this property is primarily leased to first time businesses, there is significant turnover. The Trust believes that these three buildings will be purchased by the same buyer who purchased the other six buildings. Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 73% in 1992; 97% in 1993; 86% in 1994; 79% in 1995; and 71% in 1996. The Property's average rental rates per occupied square foot for the same periods were: $5.09 in 1992; $4.62 in 1993; $5.11 in 1994; $5.34 in 1995; and $5.38 in 1996. -11- 13 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - ---------------------------------------- There are no tenants in this property occupying 10% of more of the space. Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 10 15,443 $ 74,772 33% 1998 5 7,105 41,772 18 1999 5 11,426 66,576 29 2000 2 8,531 32,004 14 2001 1 1,875 11,244 6 2002-2006 NONE Walnut Stemmons Office Park is depreciated for tax purposes using the straight line method with the building and improvements having a 40 year life. The depreciable tax basis was $643,000 at September 30, 1996. The 1995 real estate taxes for the Property were $53,755 based on a millage rate of $2.56 per $100 of assessed value. The 1996 real estate taxes are not yet known.
(I) OFFICE ALPHA. Office Alpha is located in the North-Dallas LBJ-East office market of Dallas, Texas. Office Alpha contains five stories and is suitable and adequate for its use as an office building. Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market. Presently, the Trust has no plans for any significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, style, condition and quality that directly compete with Office Alpha. Leasing proposals for both new and renewal tenants in this submarket are highly competitive. Many of the Trust's competitors in this submarket have substantially greater capital and resources than the Trust. Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 73% for 1992; 84% for 1993; 83% for 1994; 91% for 1995; and 90% for 1996. The Property's average rental rates per occupied square foot for the same period were: $9.61 in 1992; $8.91 in 1993; $9.00 in 1994; $9.52 in 1995; and $10.01 in 1996. At September 30, 1996 Jewish Family Services of Dallas, Inc., a non-profit organization which performs social services primarily for the Jewish community in Dallas, was the only tenant occupying 10% or more of the space in Office Alpha. This tenant's annual rent is $98,000. Its lease expires September 30, 1999. -12- 14 PART I Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - ---------------------------------------- Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 - ---- -------- -------- -------------- ---------------- 1997 14 18,578 $197,532 20% 1998 12 23,823 248,424 25 1999 14 35,037 353,796 35 2000 5 14,241 156,852 16 2001 2 4,517 46,830 4 2002-2006 NONE
Office Alpha is depreciated for tax purposes using the straight line basis with the building and improvements having a 15 year life. The depreciable tax basis was $1,776,000 at September 30, 1996. The 1995 real estate taxes for the Property were $82,636 based on a millage rate of $2.71 per $100 of assessed value. The 1996 real estate taxes are not yet known. (J) 14800 QUORUM BUILDING. 14800 Quorum Building is located in the North-Dallas, Quorum office market of Dallas, Texas. 14800 Quorum contains five stories and is suitable and adequate for its use as an office building. The Trust owns this Property in fee simple, subject to a first mortgage loan, at a rate of 8.3%, which matures August 19, 2000. The loan is non-recourse except the first $750,000. At September 30, 1996 the balance of this loan was $2,612,000. By maturity $174,000 of scheduled amortization payments are required and therefore a balance of $2,438,000 will be due at maturity. There is a prepayment penalty of 2.0% if the loan is paid off early. Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market. Presently, the Trust has no plans for any significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, style, condition and quality that directly compete with 14800 Quorum. Leasing proposals for both new and renewal tenants in this submarket are highly competitive. Many of the Trust's competitors in this submarket have substantially greater capital and resources than the Trust. The Trust purchased the Property on August 26, 1994. The occupancy for the two full fiscal years ended September 30, 1995 and 1996 that the Trust has operated the Property was as follows: 90% in 1995 and 92% in 1996. The Property's average rental rates per occupied square foot for the same two years were as follows: $9.87 in 1995 and $11.02 in 1996. -13- 15 PART I ------ Item 2. Properties (Continued) - ------ ---------------------- Investments in Real Estate: (Continued) - -------------------------------------- At September 30, 1996 Preston Equities, Inc., who runs executive suites for general office use, was the only tenant occupying 10% or more of the space in 14800 Quorum. This tenant's annual rent is $131,108. Its lease expires March 31, 2002. Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- --------- -------- -------------- ---------------- 1997 9 20,538 $223,627 20% 1998 2 3,135 37,308 3 1999 9 29,517 358,764 32 2000 5 15,762 185,558 17 2001 5 12,973 158,628 14 2002 2 14,651 159,332 14 2003-2006 NONE 14800 Quorum is depreciated for tax purposes using the straight line basis with the building and improvements having a 40 year life. The depreciable tax basis was $3,772,000 at September 30, 1996. The 1995 real estate taxes for the Property were $93,990 based on a millage rate of $2.41 per $100 of assessed value. The 1996 real estate taxes are not yet known.
(K) BROOKSIDE OFFICE BUILDING. The Brookside Office Building is a three-story brick office building located in Arlington, Texas. The Trust purchased the Property on March 28, 1996. The Property is suitable and adequate for its use as an office building. Space in the building is leased to service and professional organizations for use as general offices. The Property was 100% occupied at the time of purchase and has remained such during the balance of the fiscal year. It is the Trust's intention to sign new leases with any new and renewal tenants for periods of three to five years in order to take advantage of changes in the market. Several of the existing tenants have informed the Trust that should any current tenant vacate its space they would like to expand their space. The Trust will make every effort to accommodate these tenants should the situation arise. Presently, the Trust has no plans for any significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, style, condition and quality that directly compete with the Brookside Office Building. As stated above, with several tenants desiring to expand the Trust believes that the size of the Property will be the only drawback in retaining tenants. Since the Property is new to the Trust's portfolio it remains to be seen what other competitive actions will be needed in the future to keep the Property at 100% occupied at a competitive rate. The occupancy for the six months in the fiscal year ended September 30, 1996 that the Trust has owned the Property was 100%. The average rental rate per occupied space for this same period was $11.69. -14- 16 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- At September 30, 1996 two tenants occupied more than 10% of the Property. The first was Schrickel, Rollins and Associates, Inc., an architectural firm. This tenant's annual rent is $168,660 and their lease expires August 31, 2003. the second tenant was Vestal-Loftis-Kalista, Architects, Inc., an architectural firm. This tenant's annual rent is $64,000 and their lease expires January 31, 2000. Based upon leases in place at September 30, 1996 lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 4 6,836 $ 77,210 15% 1998 2 8,507 97,040 19 1999 3 7,862 96,975 19 2000 1 5,774 64,000 13 2001 NONE 2002 NONE 2003 1 14,607 168,660 34 2004-2006 NONE Brookside Office Building is depreciated for tax purposes using the straight line basis with the building and improvements having a 40 year life. The depreciable tax basis was $1,884,000 at September 30, 1996. The 1995 real estate taxes for the Property were $48,730 based on a millage rate of $2.55 per $100 of assessed value. The 1996 real estate taxes are not yet known.
(L) TRIANGLE SQUARE SHOPPING CENTER. The Triangle Square Shopping Center is composed of three one- story retail shopping center buildings and nine all concrete block mini-warehouse buildings (including one two-story building) located in Hilton Head, South Carolina. The main tenants of the three retail buildings are service oriented businesses. The Property is suitable and adequate for its use as a retail center and mini-warehouse facility. The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. There are numerous shopping centers located in the direct vicinity, some of higher quality, and numerous projects of similar age, condition and quality of the Property. However, the majority of these centers are composed of retail tenants, while Triangle Square's tenant are primarily service oriented. There are no mini-warehouse facilities in the immediate area. Occupancy of the combined project for the fiscal years ended September 30, 1992 through 1996 was as follows: 72% in 1992; 74% in 1993; 78% in 1994; 89% in 1995; and 88% in 1996. The average rental rate per occupied square foot during the same period was $6.58 in 1992; $6.25 in 1993; $5.99 in 1994; $5.74 in 1995; and $6.55 in 1996. There are no tenants in this property occupying 10% or more of the space. All leases for storage space in the mini-warehouses are less than one year. At September 30, 1996 there were 215 leases for 86,570 square feet at an annual rental of $272,400 (44% of gross annual base -15- 17 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- rents). Based upon leases in place as of September 30, 1996 in the three retail buildings, lease expirations for the next ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 11 19,830 $189,132 31% 1998 4 4,543 45,396 7 1999 5 5,927 57,144 9 2000 2 2,886 29,805 5 2001-2003 NONE 2004 1 1,745 25,488 4 2005-2006 NONE Triangle Square is depreciated for tax purposes using the straight line method with the buildings and improvements having a 35 year life. The depreciable tax basis was $723,000 at September 30, 1996. The 1995 real estate taxes for the Property were $33,457.37 based on a millage rate of $2.441 per $1,000 of assessed value. The 1996 real estate taxes are not yet known.
(M) CANNON WEST SHOPPING CENTER. The Cannon West Shopping Center is a grocery-anchored neighborhood strip center located in Austin, Texas. Cannon West's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center. The Trust is currently installing a Trench Drain at a cost of approximately $150,000 at the Property. This work is being done in order to combat a sub-soil problem at the property. Other than this work, which is currently under way, the Trust has no other plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. The Trust owns this Property in fee simple, subject to a first mortgage loan, at a rate of 8.3%, which matures May 1, 2002. At September 30, 1996 the balance of this loan was $5,742,000. By maturity $1,231,000 of scheduled amortization payments are required and therefore a balance of $4,511,000 will be due at maturity. The Cannon West Shopping Center is subject to a limited amount of direct competition in its immediate trade area. Although there are a number of grocery anchored shopping centers located in South Austin serving the south-side communities that are located along William Cannon Drive -- a major East-West highway serving the South Austin area -- Cannon West Shopping Center is the only retail shopping center located at the intersection of William Cannon Drive and Westgate Boulevard that serves the immediate surrounding neighborhoods. Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 88% in 1992; 93% in 1993; 75% in 1994; 82% in 1995; and 95% in 1996. The average rental rate, including percentage rents, per occupied square foot during the same period was $7.44 in 1992; $7.05 in 1993; $8.38 in 1994; $9.01 in 1995; and $9.39 in 1996. -16- 18 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- Cannon West has two tenants that occupy more than 10% of the Property. The first is H.E. Butt Grocery Store ("HEB"). Their annual base rent is $250,000. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. For 1996 the percentage rent paid was $105,000. This lease expires October 5, 2001 and has four five-year renewal options. In September, 1995 the Trust was notified by HEB that they had purchased a parcel of land approximately one mile from Cannon West. As of September 30, 1996 this land had not yet been rezoned for a grocery store center, however, the Trust is of the understanding that HEB is in the process of having this land rezoned. Should HEB build a store and/or a shopping center on this parcel of land, it could effect Cannon West. The second tenant is Premiere Lady's Fitness Center, a health club, fitness center for women only. Their annual rent is $68,000. The lease also calls for tax, insurance and maintenance escalations. This lease expires August 31, 2001. Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 9 13,899 $168,886 18% 1998 5 5,951 84,696 9 1999 5 6,220 70,356 8 2000 3 11,099 157,380 17 2001 4 19,818 140,291 15 2002 1 49,585 250,000 27 2003 1 2,373 54,620 6 2004 - 2006 NONE The building and improvements are depreciated for tax purposes using the straight line method over 18 years. The depreciable tax basis was $3,624,000 at September 30, 1996. The 1995 real estate taxes were $153,100 based on a millage rate of $2.394 per $100 of assessed value. The 1996 real estate taxes are not yet known.
(N) SPRING VILLAGE SHOPPING CENTER. The Spring Village Shopping Center is a grocery-anchored neighborhood strip center located in Davenport, Iowa. Spring Village's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center. The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. The Spring Village Shopping Center is subject to direct competition in its immediate trade area. There are several grocery anchored shopping centers located on Kimberly Road, the major retail East-West road servicing Davenport. At September 30, 1996 Spring Village was 99% occupied primarily due to the attractiveness of the center's grocery store which was remodeled and expanded in 1994 at the cost of the Store. -17- 19 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 98% in 1992; 99% in 1993; 98% in 1994; 100% in 1995; and 99% in 1996. The average rental rate, including percentage rents, per occupied square foot during the same period was $8.00 in 1992; $8.00 in 1993; $8.26 in 1994; $7.89 in 1995; and $8.58 in 1996. Spring Village has two tenants that occupy more than 10% of the Property. The first is Eagle Food Centers, whose annual base rent is $204,000. Their lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. This lease expires June 30, 2005. The second is the Walgreen Company, which operates a drug store, and pays annual base rent of $67,000. Its lease also calls for tax, insurance and maintenance escalations. This lease expires November 30, 2010. Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 2 2,175 $ 26,016 4% 1998 2 4,200 47,136 7 1999 4 7,450 82,000 12 2000 3 10,825 136,535 20 2001 - 2004 NONE 2005 1 45,763 204,000 29 2006 NONE The building and improvements are depreciated for tax purposes using the straight line method over 31-1/2 years. The depreciable tax basis was $3,292,000 at September 30, 1996. The 1996 real estate taxes are $148,234 based on a millage rate of $34.5287 per $1,000 of assessed value.
(O) WARREN PLAZA SHOPPING CENTER. The Warren Plaza Shopping Center is a grocery-anchored neighborhood strip center located in Dubuque, Iowa. Warren Plaza's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center. The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property. In addition to the 90,000 square feet owned by the Trust, there is a 97,000 square foot Target discount store attached to the property, which is not owned by the Trust. The Property is subject to direct competition in its immediate trade area. There are several grocery anchored shopping centers located on both Dodge Street and John F. Kennedy Blvd. (this Property is located on the corner of these two streets). Across the street from the Property is a mall, which the Trust does not consider competition. Additionally, there is both a K-Mart and Wal-mart in the area which compete with the Target store. For both 1994 and 1995 this Property was 100% occupied, dropping to 98% for 1996. The Trust attributes this high occupancy for the past two years to both the grocery store and the Target Store. Both of these stores have been recently remodeled and expanded at the cost of the stores. -18- 20 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 92% in 1992; 99% in 1993; 100% in 1994 and 1995; and 98% in 1996. The average rental rate, including percentage rent, per occupied square foot during the same period was $8.86 in 1992; $8.60 in 1993; $9.67 in 1994; $9.24 in 1995; and $9.17 in 1996. Warren Plaza has one tenant that occupies more than 10% of the Property, HY-VEE Food Store. Its annual base rent is $256,000. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. The lease expires June 30, 2013. Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 2 3,900 $42,010 7% 1998 1 1,050 10,680 2 1999 4 5,500 61,644 10 2000 3 11,160 168,274 27 2001 2 8,500 57,624 9 2002 1 3,200 35,736 6 2003 NONE 2004 1 1,400 14,940 2 2005 - 2006 NONE The building and improvements are depreciated for tax purposes using the straight line method over 31-1/2 years. The depreciable tax basis was $3,568,000 at September 30, 1996. The 1996 real estate taxes are $108,178 based on a millage rate of $30.85536 per $1,000 of assessed value.
(P) TIFFANY PLAZA SHOPPING CENTER. The Tiffany Plaza Shopping Center is a grocery-anchored neighborhood strip center located in Ardmore, Oklahoma. Tiffany Plaza's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center. The Trust is reviewing plans for the installation of new store fronts at the Property. The Trust believes that the Property, which was constructed in 1975, has begun to look old and that the new store fronts will give the center a new look. The estimated cost of this work is $250,000. If the Trust proceeds with this work it should begin in the spring of 1997. No other renovation work beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property is planned. The main competition for this center is a mall and a Wal-mart center, both of which are located more than a mile away from Tiffany Plaza. -19- 21 PART I ------ Item 2. Properties (Continued): - ------- ----------------------- Investments in Real Estate: (Continued) - --------------------------------------- Occupancy for the fiscal years ended September 30, 1992 through 1996 was as follows: 89% in 1992; 92% in 1993; 97% in 1994; 95% in 1995; and 98% in 1996. The average rental rate, including percentage rent, per occupied square foot during the same period was: $4.10 in 1992; $4.05 in 1993; $3.59 in 1994; $3.66 in 1995; and $3.93 in 1996. Tiffany plaza has three tenants who occupy more than 10% of the Property. The first is Flemming Companies who operate a Buy-For-Less grocery store. The annual rent is $86,625. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. The lease expires March 20, 2001. The second tenant is Orscheln Farm and Home Supply, Inc., who sell farm equipment and supplies. The annual rent is $102,000. The lease also calls for tax, insurance and maintenance escalations. The lease expires August 31, 2001. The third tenant is CR Anthony Company, a family clothing store. The annual rent is $69,300. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1996. The lease expires March 7, 2001. Based upon leases in place at September 30, 1996 lease expirations for the ten fiscal years ended September 30, 2006 are as follows:
Number Total Percent of Gross of Leases Sq. Ft. Annual Base Annual Base Year Expiring Expiring Rents Expiring Rents at 9/30/96 ---- -------- -------- -------------- ---------------- 1997 6 12,774 $94,332 19% 1998 3 7,708 34,440 7 1999 4 10,986 57,624 12 2000 1 7,192 30,972 6 2001 4 100,551 258,000 53 2003 NONE 2004 1 5,108 14,928 3 2005 - 2006 NONE The building and improvements are depreciated for tax purposes using the straight line method over 31-1/2 years. The depreciable tax basis was $2,609,000 at September 30, 1996. The 1995 real estate taxes are $32,304 based on a millage rate of $8.3681 per $100 of assessed value. The 1996 real estate taxes are not yet known.
-20- 22 PART I Item 2. Properties (Continued): - ------- ----------------------- Geographic Distribution: - ------------------------ The Trust's properties are located in six states. The table below demonstrates the geographic distribution of the Trust's properties at September 30, 1996:
Percentage of Number of Percentage of Assets Based Investments Rental Income on Cost ----------- ------------- ------- Texas: Dallas 4 23% 27% Arlington 1 2 3 Austin 1 11 12 Colorado: Englewood 1 11 9 Denver 1 10 7 Littleton 1 5 5 Oklahoma: Tulsa 1 9 11 Ardmore 1 6 6 Iowa: Davenport 1 9 8 Dubuque 1 8 8 South Carolina: Hilton Head 1 6 3 Ohio: Akron 1 -- 1 --- ---- ---- 15 100% 100% ==== ===== ====
-21- 23 PART I ------ Item 3. Legal Proceedings - ------- ----------------- The Trust is involved in a number of legal proceedings arising in the normal course of its business activities, none of which, in the opinion of the Management, is expected to have a material adverse effect on the financial position or liquidity of the Trust. Item 4. Submission of Matters to a Vote of Security Holders. - ------- ---------------------------------------------------- No matters were submitted to a vote of the Trust's Shareholders during the fourth quarter of the fiscal year covered by this report. Executive Officers of the Registrant - ------------------------------------ The following information regarding executive officers of the Trust is provided pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Position(s) with the Trust, Principal Occupation, Business, Experience, Name (age) and Other Directorships ---------- ----------------------- John C. Kikol (52) Chairman; Chairman of the Board of Trustees since 1995; Trustee of the Trust since 1982; President of the Trust since 1974. Michael R. Thoms (48) Vice President and Treasurer of the Trust since 1987. Raymond C. Novinc (47) Vice President, Secretary and Counsel of the Trust since 1986. Brian D. Griesinger (35) Vice President -- Management and Acquisitions of the Trust since 1989
-22- 24 PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------- ----------------------------------------------------------------- Matters ------- Market Price Range: - ------------------- The shares of the Trust are traded in the Nasdaq National Market (symbol CTRIS). The table below contains the quarterly high and low closing bid prices for such Shares.
Fiscal 1996 Fiscal 1995 - --------------------------------------- ----------------------------------- Quarter Ended High Low Quarter Ended High Low ------------- ---- --- ---------------- ---- --- December 31, 1995 5-1/8 3-7/8 December 31, 1994 3-3/8 2-7/8 March 31, 1996 5-1/8 4-7/8 March 31, 1995 3-5/16 2-5/8 June 30, 1996 5 4-1/2 June 30, 1995 3-3/4 3-1/4 September 30, 1996 5 4-1/4 September 30, 1995 4-1/8 3-3/8 The bid prices for the Trust's Shares shown in the table above are interdealer prices and do not reflect retail mark ups, mark downs, or commissions and may not be representative of actual transactions. As of December 2, 1996, there were approximately 1,125 record holders of the Shares.
Distributions to Shareholders: - ------------------------------
Fiscal 1996 Amount Fiscal 1995 Amount Payment Date Per Share Payment Date Per Share - ------------ --------- ------------ --------- October 20, 1995 $ .04 October 21, 1994 $ .04 January 19, 1996 .04 January 20, 1995 .04 April 19, 1996 .04 April 21, 1995 .04 July 19, 1996 .04 July 21, 1995 .04 September 20, 1996 .04 ------ ------ $ .20 $ .16 ====== ====== For a discussion of the tax classification of cash distributions see Management's Discussion and Analysis of Financial Condition and Results of Operations-Dividends. Distributions are subject to a bank convenant which requires a minimum Shareholders' Equity. At September 30, 1996 the amount of required Shareholders' Equity was $20,000,000 and the amount free from this restriction was approximately $2,500,000.
-23- 25
PART II -------------- Item 6. Selected Financial Data - ---------------------------------------------- Year Ended September 30, 1996 1995 1994 1993 1992 - ---------------------------------- ------------ ----------- --------- --------- --------- (in thousands, except per share data) OPERATIONS: Rental income $ 10,368 $ 10,145 $ 9,650 $ 9,348 $ 9,400 Interest income 40 56 76 263 325 Dividend income 225 0 0 0 0 Other income 12 26 29 41 60 -------- -------- -------- -------- -------- Operating revenues 10,645 10,227 9,755 9,652 9,785 Provision for valuation reserve 3,307 0 0 0 0 Operating expenses other than provision for valuation reserve 9,398 9,631 9,870 10,384 11,125 Operating income (loss) (2,060) 596 (115) (732) (1,340) Gains on sales of real estate 40 2,499 445 563 51 Gains on sales of securities 632 0 0 0 0 Extraordinary items 0 790 253 286 0 Net income (loss) (1,388) 3,885 583 117 (1,289) Cash distributions to shareholders 1,037 874 735 393 117 Per Share of Beneficial Interest: Operating income (loss) $ (0.40) $ 0.11 $ (0.02) $ (0.22) $ (0.68) Gains on sales of real estate 0.01 0.46 0.09 0.17 0.02 Gains on sales of securities 0.12 0.00 0.00 0.00 0.00 Extraordinary items 0.00 0.14 0.05 0.09 0.00 -------- -------- -------- -------- -------- Net income (loss) $ (0.27) $ 0.71 $ 0.12 $ 0.04 $ (0.66) ======== ======== ======== ======== ======== Cash distributions $ 0.20 $ 0.16 $ 0.15 $ 0.12 $ 0.06 Weighted average number of Shares of Beneficial Interest outstanding 5,186 5,459 4,959 3,292 1,957 At September 30, 1996 1995 1994 1993 1992 - -------------------------------------- ---------- --------- --------- -------- --------- (in thousands) FINANCIAL CONDITION: Properties held for sale $ 42,203 $ 203 $ 0 $ 0 $ 0 Valuation reserve (3,307) 0 0 0 0 Investments in real estate 0 40,739 45,380 49,394 51,510 Real estate mortgage loans 119 303 236 150 1,986 Allowance for possible investment losses 0 0 0 (6,089) (6,089) Investments in securities 0 267 0 0 0 Cash and cash equivalents 1,490 188 251 315 721 Certificates of deposit 0 0 500 500 500 Insurance settlement proceeds 0 0 3,341 0 0 Total assets 43,852 43,076 51,004 45,499 50,249 Mortgage notes payable 9,563 9,266 11,111 17,126 18,807 Bank notes payable 9,800 6,600 11,180 8,800 15,626 Shareholders' equity 22,500 25,126 23,150 17,669 13,714 Number of Shares of Beneficial Interest outstanding at September 30 5,179 5,217 5,471 3,716 1,957
-24- 26 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations. -------------- Financial Condition - ------------------- During the three-year period ended September 30, 1996 the Trust's total assets decreased 4% to $43,852,000. On September 24, 1996 the Board of Trustees of the Trust announced that they unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust (the "Plan"). The Plan, as proposed, would involve the sale of the Trust's properties during a period of approximately three years. Based on this announcement the Trust has reclassified all of its properties to Properties held for sale at September 30, 1996, in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS No. 121"). The Trust made a review of the carrying value of all the properties at September 30, 1996 and determined that four of the Trust's properties had a carrying value higher than the anticipated sales price. The Trust, therefore, established a valuation reserve for these four properties which totaled $3,307,000. In determining the estimated net sales prices the Trust applied an estimated capitalization rate to the individual properties' cash flow. The Trust did not deem it necessary to obtain appraisals of any of its properties. See Item 2, Part I for allocation of the valuation reserve. In 1994 the Trust applied the allowance for possible investment losses to three previously foreclosed properties for which it had been previously provided. This application was done in connection with the Trust's regular evaluation of its portfolio of properties. The evaluation concluded that it was unlikely that these properties would recover in value and, therefore, they were written down to their net realizable value. During this three-year period the carrying value of the Trust's invested assets decreased 10% or $4,440,000 to $39,015,000. In fiscal 1996 the Trust purchased the land on which its Englewood Bank Building, located in Englewood, Colorado, is located. This land, which was previously leased by the Trust, was purchased for a price of $1,263,000. Also, the Trust purchased a 52,554 square foot suburban office building located in Arlington, Texas, for a purchase price of $2,202,000. Additionally, during 1996 the Trust sold three improved properties. The first was the sale during January and February of three condominium units located in Davie, Florida, for a combined sales price of $138,000 which resulted in a gain of $69,000. The second was the $600,000 sale of European Crossroads in Dallas, Texas, which resulted in a loss of $313,000. The third was a $615,000 sale of two of the five buildings comprising the Walnut Stemmons Office Park located in Dallas, Texas and resulted in a gain of $261,000. In fiscal 1995 the Trust sold three improved properties. The first was the sale of the 197 room Quality Hotel in St. Louis, Missouri for $2,650,000, which resulted in a gain of $452,000. The second was the sale of the 124 unit Parkwood Place Apartments in Greeley, Colorado for $2,595,000, which resulted in a gain of $1,859,000. The third was the sale of the 51,000 square foot Walnut Hill West office building in Dallas, Texas for $800,000 which resulted in a gain of $97,000. In fiscal 1994 the Trust purchased a 104,000 square foot office building located in Dallas, Texas for $3,918,000. Of this amount, $2,170,000 was provided by a first mortgage loan on the property which the Trust obtained at the time of the purchase. Additionally, the Trust sold four vacant land parcels during this three-year period. The result of the three purchases during this three-year period was an increase of approximately $7,387,000 to the carrying value of the Trust's portfolio of invested assets. The result of all the sales during this three year period was a decrease of approximately $5,328,000 to the carrying value of the Trust's portfolio of invested assets. Additionally, the recording of $5,648,000 of depreciation, a non-cash adjustment, reduced the carrying value during this three-year period. Also, during this three-year period, the Trust made improvements to its existing properties of $2,491,000 and received payments totaling $533,000 on real estate mortgage loans. -25- 27 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) ------------- Financial Condition - (Continued) - ------------------- During the three-year period ended September 30, 1996 the Trust's mortgage notes payable decreased 44% or $7,563,000 to $9,563,000. This resulted from additional borrowings of $500,000 under one of the existing mortgage loans, amortization payments of $1,029,000, the repayment of a $7,689,000 maturing loan, and additional repayments/paydowns which reduced the mortgage notes payable $1,515,000. Of this $1,515,000, the actual cash outlay by the Trust was $1,463,000 with $52,000 representing discounts obtained by the Trust. Additionally, the Trust obtained a $2,170,000 first mortgage loan in connection with its purchase of a 104,000 square foot office building, as referenced above. The Trust's bank notes payable increased $1,000,000 during the three-year period ended September 30, 1996 to $9,800,000. The Trust borrowed $10,899,000, $7,689,000 of which was used to repay the above referenced maturing mortgage loan and the remaining $3,200,000 was used for the purchase of properties during 1996, and made principal amortization and repayments of $9,889,000. During the three-year period ended September 30, 1996 the Trust's shareholders' equity increased 27% or $4,831,000 to $22,500,000. This increase was primarily the result of the Trust receiving $5,929,000 from its 1993 rights offering, which expired January 28, 1994, net of $1,532,000 to repurchase 38,000 of the Trust's Shares in fiscal 1996, 253,553 of the Trust's Shares in fiscal 1995 and 103,210 of the Trust's Shares in fiscal 1994, $3,080,000 of net income and $2,646,000 of distributions to shareholders during this three-year period. As a result of the Trust's total debt being reduced approximately $6,563,000 and total shareholders' equity increasing $4,831,000, the Trust's debt to shareholders' equity ratio has decreased to .86-to-1.00 at September 30, 1996 from 1.47-to-1.00 at September 30, 1993. Liquidity and Capital Resources - ------------------------------- For each of the fiscal years ended September 30, 1996, 1995 and 1994, the Trust's portfolio of invested assets generated sufficient revenues to cover all operating expenses (excluding depreciation, a non-cash expense and in 1996 the provision for valuation reserve, also a non-cash expense), required mortgage notes amortization payments, required bank amortization payments, capital improvements to existing properties, and distributions to shareholders. During this three-year period the year end occupancy of the Trust's portfolio has been 79% at September 30, 1994, 81% at September 30, 1995, and 91% at September 30, 1996 while the average rental rates per square foot have increased from $8.47 for the year ended September 30, 1994 to $8.61 for the year ended September 30, 1995 to $9.14 for the year ended September 30, 1996. At this time Management assumes that the Trust will be implementing its Plan of liquidation during fiscal 1997. On October 7, 1996 the Trust completed a $2,450,000 sale of the Littleton Bank Building located in Littleton, Colorado. This sale resulted in a gain of approximately $563,000 which will be reported in the first quarter of Fiscal 1997. Currently, the Trust has four of its properties under contracts of sales. The Englewood Bank Building located in Englewood, Colorado is under a contract of sale for a sales price of $5,350,000. The Executive Club Building located in Denver, Colorado is under a contract of sale for $5,300,000. The Spring Village Shopping Center located in Davenport, Iowa is under a contract of sale for a sales price of $5,350,000. The Warren Plaza Shopping Center located in Dubuque, Iowa is under a contract of sale for a sales price of $5,950,000. All four of these contracts provide for due diligence periods, during which time the buyer could cancel the contract at his option. Additionally, after the completion of the due diligence period the buyer will place a non-refundable deposit with the Trust. Should the buyer fail to complete the sale, these deposits would be forfeited and retained by the Trust. Therefore, -26- 28 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) ------------- Liquidity and Capital Resources - (Continued) - ------------------------------- there is no guarantee that these properties will actually be sold at the prices stated. Also, the Trust has signed Letters of Intent with various buyers for the sales of three additional properties. The total gross sales prices for these three properties is $15,640,000. Letters of intent are only agreements in principle on the most fundamental terms and the parties do not intend that there be any binding obligation to buy or sell the property until such time as a contract of sale is executed by both the buyer and the Trust. However, even though additional properties could be sold during fiscal 1997 the Trust's estimate for fiscal year 1997 is that operating revenues should be sufficient to cover all operating expenses (excluding depreciation, a non-cash expense), required monthly mortgage amortization payments and anticipated improvements to existing properties. Under the Plan the only distributions the Trust will make to Shareholders will be liquidating distributions resulting from the sales of Properties. Additionally, during 1997 the Trust will accrue certain employee severance payments which will be made to terminated employees primarily from the proceeds of Property sales. Management has from time to time undertaken a major renovation of a Property in order to keep it competitive within its market. Currently, the Cannon West Shopping Center located in Austin, Texas is having a trench drain installed at a cost of approximately $150,000. This work is being done in order to combat a sub-soil problem at the property. Management believes that the installation of the trench drain will alleviate the problem. The cost of this work will be reported in the first two quarters of fiscal year 1997. Additionally, Management is reviewing plans for the installation of new store fronts at Tiffany Plaza, a shopping center located in Ardmore, Oklahoma. The current estimated cost of this work is $250,000. If the Trust proceeds with this work it should begin in the spring of 1997. No other renovation projects are currently contemplated or in process. The Trust's cash flow from operations decreased $1,213,000 (55%) when comparing 1996 to 1995. The decrease was primarily due to the net activity of the following items: * In 1996 the Trust had an operating loss of $2,060,000 compared to an operating income of $596,000 in 1995, or a decrease of $2,656,000. Included in the 1996 results was a $3,307,000 provision for valuation reserve, which was a non-cash expense. Also, income from real estate operations was $424,000 higher in 1996 than 1995. Additionally, 1996 included $225,000 of dividend income with no like income in 1995. * Other assets increased $1,971,000 from 1995 to 1996. Of this amount $1,918,000 represents the amount due the Trust on its sale of securities, which amount was received by the Trust on October 1, 1996. For 1996 the net cash used in investing activities was $1,995,000. As previously discussed, the Trust purchased land and a suburban office building for a total of $3,465,000. The Trust also purchased securities for $2,057,000. Additionally, the Trust expended $972,000 for improvements to existing properties. Cash inflows included proceeds from the sale of three condominiums, two small office buildings and a retail center totaling $1,386,000, $2,929,000 from the sale of securities and $184,000 in real estate mortgage loan repayments. During 1995, as previously discussed, the Trust sold three improved properties and a vacant land parcel. The proceeds from these sales totaled $5,545,000. Additionally, at the completion of the -27- 29 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) ------------- Liquidity and Capital Resources - (Continued) - ------------------------------- renovation and repair project on the Tulsa, Oklahoma Petroleum Club Building the insurance settlement proceeds exceeded the expenditures for the work by $738,000. The Trust also received $145,000 in real estate loan repayments. The only net cash outflow was the $666,000 (primarily tenant improvements) spent on improvements to existing properties and the $240,000 which the Trust invested in the purchase of 14,000 shares in a real estate company. In 1996 net cash from financing activities totaled $2,286,000 while in 1995 net cash used in financing activities totaled $7,809,000, a variance of $10,095,000. Mortgage notes payable amortization payments were $203,000 in 1996 and $330,000 in 1995. Principal prepayments were $1,463,000 in 1995, as the Trust repaid a $498,000 first mortgage loan and settled a $1,017,000 first mortgage loan for $965,000 (the settlement resulted in a $52,000 extraordinary income item). In 1996 the Trust borrowed an additional $500,000 on one of its existing mortgage loans. In 1995 the Trust paid off its $3,460,000 1986 loan and paid down the 1994 Credit (defined below) $1,089,000. In 1996 the Trust borrowed $3,200,000 which was used in the purchase of property, as previously discussed. In 1996 the Trust repurchased and retired 38,000 of its shares at a cost of $174,000. In 1995 the Trust repurchased and retired 14,000 of its shares for a cost of $48,000 and through a tender offer made to all shareholders of the Trust repurchased and retired 239,553 of its shares for a cost of $1,014,000. In 1995 the Trust redeemed a $500,000 certificate of deposit. In 1996 the Trust made five distributions of $.04 per share to shareholders of the Trust for a total of $1,037,000. In 1995 the Trust made four distributions of $.04 per share for a total of $874,000. On November 30, 1994 the Trust and National City Bank of Cleveland, Ohio and Manufacturer's and Traders Trust Company of Buffalo, New York executed a revolving line of credit agreement for a maximum of $25,000,000 (limited by the value of the collateral provided) ("1994 Credit"). The 1994 Credit was for an initial term of three years. Each year the lenders review the 1994 Credit with the option of extending the credit for one additional year. During 1996 the lenders extended the 1994 Credit to March 1, 1999. If the lenders do not extend the credit then, absent an event of acceleration, the Trust will have two years in which to repay all borrowings outstanding under the 1994 Credit. The loans will bear interest at the Trust's option at any of the following rates: (i) 1/4 of 1% over the prime lending rate; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed interest rate available from time to time. In addition to the required monthly amortization payments under the terms of the first mortgage loans the Trust currently has (see Note E to the financial statements), during the next five fiscal years the Trust's major debt maturities are: in fiscal 1999 the 1994 Credit, which currently has a balance of $9,800,000 outstanding and on August 19, 2000 a $2,612,000 first mortgage loan. Since Management is currently under the assumption that the Trust will be selling its Properties under the Plan, the 1994 Credit and the first mortgage loans should be repaid through the sales of the Properties. The first mortgage loans will be required to be paid off at the closing of the sale of the Property securing the loan. The 1994 Credit will be paid down at the time any of the Properties securing the 1994 Credit are sold. Results of Operations - --------------------- FISCAL YEAR COMPARISON: Income from real estate operations in 1996 increased $424,000 (14%) and $781,000 (29%) as compared to -28- 30 PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) ------------- Results of Operations - (Continued) - --------------------- 1995 and 1994, respectively. The increases related primarily to higher rental income in 1996 compared to both 1995 and 1994 and lower depreciation expense in 1996 compared to both 1995 and 1995. Rental income was $223,000 (2%) higher in 1996 than 1995, and $718,000 (7%) higher in 1996 than 1994. Depreciation expense in 1996 was $16,000 (1%) and $142,000 (7%) lower than in 1995 and 1994, respectively. Real estate operating expenses were $185,000 (4%) lower in 1996 than 1995, but $79,000 (2%) higher in 1996 than 1994. The reasons for these variances in rental income, real estate operating expenses and depreciation expense are described below. The Trust considers the cyclical nature of real estate markets a normal part of portfolio risk. The performance of the various real estate markets and economies of the Southwest remains mixed. Improvement in the Trust's operations will depend partially upon further economic recovery of the Southwest and, in particular, the local markets and properties where the Trust operates, especially Dallas, Texas. 1996 - 1995 Income from real estate operations increased $424,000 (14%) from 1995 to 1996. Rental income increased $223,000 (2%) from 1995 to 1996. Real estate operating expenses were $185,000 lower in 1996 than 1995. The increase in rental income was primarily due to an increase in occupancy (91% at September 30, 1996 versus 81.5% at September 30, 1995) and an increase in average rental rates ($9.14 per occupied square foot at September 30, 1996 versus $8.61 per occupied square foot at September 30, 1995). The decrease in real estate operating expenses was primarily due to the sales during 1995 of the 124 unit Parkwood Place Apartments located in Greeley, Colorado and the 51,000 square foot Walnut Hill West office building located in Dallas, Texas, as well as the March, 1996 sale of the European Crossroads a office/retail complex located in Dallas, Texas. During 1996 the Trust received $225,000 of dividend income on securities owned. There was no dividend income reported in 1995. At September 30, 1996, in accordance with the Plan the Trust made a provision for valuation reserve of $3,307,000. There was no provision made in 1995. In 1996 the Trust recorded net gains on the sales of real estate totaling $40,000 as the result of four sales. The sales were as follows: (i) In January and February, 1996 the sale of three condominium units located in Davie, Florida for a combined sale of $138,000, resulting in a total gain of $69,000; (ii) March, 1996 $600,000 sale of the European Crossroads located in Dallas, Texas, which resulted in a loss of $313,000; (iii) April, 1996 $115,000 sale of 7.42 acres of vacant land located in Akron, Ohio, which resulted in a gain of $23,000; and (iv) September, 1996 $615,000 sale of two of the five buildings of the Walnut Stemmons Office Park located in Dallas, Texas, which resulted in a gain of $261,000. In 1995 the Trust reported gains on the sales of real estate totaling $2,499,000 on the sales of four properties. These sales are described in detail under the 1995 - 1994 analysis below. In 1996 the Trust recorded gains on the sales of securities of $632,000. There were no gains on the sales of securities for 1995. For 1996 there were no extraordinary items. For 1995 the Trust reported $790,000 of extraordinary items which are described under the 1995 - 1994 analysis below. 1995 - 1994 Income from real estate operations increased $357,000 (13%) from 1994 to 1995. Rental income increased -29- 31 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) ------------- Results of Operations - (Continued) - --------------------- $495,000 (5%) from 1994 to 1995. Real estate operating expenses were $264,000 (5%) higher in 1995 compared to 1994. The increase in rental income and real estate operating expenses were primarily due to the Trust's purchase in August, 1994 of a 104,000 square foot office building located in Dallas, Texas. Additionally, depreciation expense was $126,000 (6%) lower in 1995 than 1994. The $343,000 (16%) decrease in interest expense was primarily due to lower outstanding balances. In March, 1995 the Trust repaid a $498,000 first mortgage loan on its shopping center located in Ardmore, Oklahoma. In May, 1995 the Trust settled at a discount a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado. In February and March, 1995 the Trust repaid the $3,460,000 1986 loan it had with a bank. Additionally, the Trust reduced the 1994 Credit balance from $7,689,000 to $6,600,000 (a reduction of $1,089,000) during 1995. In 1995 the Trust recorded gains totaling $2,499,000 as the result of four property sales. The sales and gains were as follows: (i) February, 1995 $2,650,000 sale of the 197 room Quality Hotel located in St. Louis, Missouri, which resulted in a gain of $452,000; (ii) March, 1995 $2,595,000 sale of the 124 unit Parkwood Place Apartments located in Greeley, Colorado which resulted in a gain of $1,859,000; (iii) March, 1995 $800,000 sale of the 51,000 square foot Walnut Hill West office building located in Dallas, Texas which resulted in a gain of $97,000; and (iv) May, 1995 $212,000 sale of 17.7697 acres of vacant land located in Akron, Ohio which resulted in a gain of $91,000. In 1994 the Trust recorded gains on the sales of both a 69 acre and a 17 acre vacant land parcel located in Akron, Ohio which resulted in total gains of $445,000. In 1995 the Trust settled at a discount a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado. This settlement resulted in an extraordinary income item of $52,000. In January 1994 the Trust's Petroleum Club Building located in Tulsa, Oklahoma sustained a major fire. In July, 1994 the Trust and its insurance company agreed on a settlement of $6,025,000. The Trust has completed all necessary repairs and building improvements. Upon completion of the work there was $738,000 of the settlement which had not been expended. The Trust has recorded this $738,000 as an extraordinary income item in fiscal 1995. In addition $253,000 was the cost of building improvements made as part of the building restoration. This $253,000 was capitalized as building improvements and also was recorded as an extraordinary income item in fiscal 1994. Dividends: - ---------- For 1994 the Trust paid distributions to its shareholders of $735,000 or $.15 per share. For the shareholders $.07 per share of these distributions were classified for tax purposes as dividends and $.08 per share were classified as return of capital. For 1995 the Trust paid distributions to its shareholders of $874,000 or $.16 per share. For the shareholders these distributions were classified for tax purposes as dividends. For 1996 the Trust paid distributions to its shareholders of $1,037,000 or $.20 per share. For the shareholders the $.04 per share paid in October, 1995 was classified for tax purposes as dividends. The $.04 ($.16 total) per share paid in January, April, July, and September, 1996 will be classified for tax purposes as return of capital. -30- 32 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - (Continued) ------------- Income Taxes: - ------------- At September 30, 1996 the Trust had net deferred tax assets of approximately $3,048,000. As was the case at both September 30, 1995 and 1994 the Trust has established a valuation allowance equal to its net tax assets as there is doubt as to whether the net deferred tax asset will be realized. Other: - ------ Inflation, which has been at relatively low rates for the past three years, has had an immaterial impact on the Trust's operations during the three-year period ended September 30, 1996. Item 8. Financial Statements and Supplementary Data. - ------- -------------------------------------------- The response to this Item is submitted in a separate section of this report. See Item 14 of this report for information concerning financial statements and schedules filed with this report. The quarterly financial data required by this item is included as Note L of the Notes to Financial Statements filed in Part IV, Item 14 (a) (1) and (2). Item 9. Disagreement on Accounting and Financial Disclosure. - ------- ---------------------------------------------------- There has not been any change in the Trust's independent auditors, nor have there been any disagreements concerning accounting principles, auditing procedures, or financial statement disclosure within the twenty four (24) months prior to the date of the most recent financial statements presented in this report. -31- 33 PART III Item 10. Directors and Executive Officers of the Registrant. - -------- --------------------------------------------------- Except as set forth under "Executive Officers of the Registrant" following Item 4 of Part I, which is incorporated by reference, all information required by this Item is incorporated by reference to the material under the caption "Election of Trustees" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report. Item 11. Executive Compensation. - -------- ----------------------- All information required by this Item is incorporated by reference to the material under the caption "Executive Compensation" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report. Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- --------------------------------------------------------------- All information required by this Item is incorporated by reference to the material under the caption "Beneficial Ownership of Principal Holders and Management" of the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report. Item 13. Certain Relationships and Related Transactions. - -------- ----------------------------------------------- Information required by this Item with respect to certain relationships and related transactions is incorporated by reference to the material under the caption "Certain Transactions" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report. -32- 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - -------- ---------------------------------------------------------------- (a) The following documents are filed as a part of this Report: (1) The Financial Statements listed on the List of Financial Statements and Financial Statement Schedules are filed as a separate section of this Report. (2) The Financial Statement Schedules listed on the List of the Financial Statements and Financial Statement Schedules are filed as a separate section of this Report. (3) The exhibits required by Item 601 of Regulation S-K and identified on the Exhibit Index contained in this Report. (b) Reports on Form 8-K filed in the fourth quarter of Fiscal Year 1996: Form 8-K dated September 24, 1996 Item 5. Other Events - - On September 24, 1996 the Board of Trustees of CleveTrust Realty Investors (the "Trust") determined that it would submit to the shareholders of the Trust a plan for the orderly liquidation of the Trust pursuant to Article XIII of the Trust's Declaration. A copy of a News Release dated September 25, 1996 was filed as Exhibit 99.1. Item 7. Financial Statements and Exhibits - - Press Release dated September 25, 1996. (c) The exhibits being filed with this Report are identified on the Exhibit Index contained in this Report. (d) The Financial Statement Schedules are filed as a separate section of this Report. -33- 35 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLEVETRUST REALTY INVESTORS Dated: December 9, 1996 By: /s/ Michael R. Thoms --------------------- Michael R. Thoms Vice President and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated:
Signature Title Date --------- ----- ---- */s/ John C. Kikol Chairman of the Board of December 9, 1996 - --------------------------- Trustees, President and John C. Kikol Principal Executive Officer /s/ Michael R. Thoms Vice President, Treasurer - --------------------------- Principal Financial Officer December 9, 1996 Michael R. Thoms and Principal Accounting Officer */s/ Howard Amster Trustee December 9, 1996 - --------------------------- Howard Amster */s/ Robert H. Kanner Trustee December 9, 1996 - -------------------------- Robert H. Kanner */s/ Leighton A. Rosenthal Trustee December 9, 1996 - --------------------------- Leighton A. Rosenthal */s/ John D. Weil Trustee December 9, 1996 - --------------------------- John D. Weil */s/ By: Michael R. Thoms December 9, 1996 - --------------------------- Michael R. Thoms Attorney-in-Fact
-34- 36 ANNUAL REPORT ON FORM 10-K PART IV, ITEM 14(a)(1) and (2) and ITEM 14(d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEAR ENDED SEPTEMBER 30, 1996 CLEVETRUST REALTY INVESTORS WESTLAKE, OHIO 37 Form 10-K -- Part IV, Item 14(a)(1) and (2) CLEVETRUST REALTY INVESTORS LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Financial Statements: The following financial statements of CleveTrust Realty Investors are included in Part II, Item 8: Statement of Financial Condition -- September 30, 1996 and 1995 Statement of Operations -- Years ended September 30, 1996, 1995 and 1994 Statement of Cash Flows -- Years ended September 30, 1996, 1995 and 1994 Statement of Changes in Shareholders' Equity -- Years ended September 30, 1996, 1995 and 1994 Notes to Financial Statements Financial Statement Schedules: The following financial statement schedules of CleveTrust Realty Investors are included in Part IV, Item 14(d): Schedule III -- Real Estate and Accumulated Depreciation. All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-1 38 Report of Independent Auditors Trustees and Shareholders CleveTrust Realty Investors Westlake, Ohio We have audited the accompanying statement of financial condition of CleveTrust Realty Investors as of September 30, 1996 and 1995, and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perfortn the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CleveTrust Realty Investors at September 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP November 15, 1996 Cleveland, Ohio F-2 39 STATEMENT OF FINANCIAL CONDITION CLEVETRUST REALTY INVESTORS
September 30, --------------------------------------------- 1996 1995 -------------- -------------- (in thousands) ASSETS Invested assets - - NOTES A, C and D: Properties held for sale $42,203 $203 Less: Valuation reserve 3,307 0 -------------- -------------- 38,896 203 Investments in real estate Improved properties 0 63,282 Less: Accumulated depreciation 0 22,543 -------------- -------------- 0 40,739 Real estate mortgage loans 119 303 -------------- -------------- 39,015 41,245 Cash and cash equivalents - - NOTE A 1,490 188 Investments in securities - - NOTE A 0 267 Other assets 3,347 1,376 -------------- -------------- TOTAL ASSETS $43,852 $43,076 ============== ============== LIABILITIES Mortgage notes payable - NOTE E $9,563 $9,266 Bank notes payable - NOTE F 9,800 6,600 Accrued interest on notes payable - NOTE F 14 23 Accrued expenses and other liabilities 1,975 2,061 -------------- -------------- TOTAL LIABILITIES 21,352 17,950 SHAREHOLDERS' EQUITY Shares of Beneficial Interest, par value $1 per Share - - NOTE G: Authorized - - Unlimited Issued and outstanding shares (9/30/96 - 5,179,143; 9/30/95 - 5,217,143) 5,179 5,217 Additional paid-in capital 38,850 38,986 Accumulated deficit (21,529) (19,104) -------------- -------------- 22,500 25,099 Unrealized gains on securities 0 27 -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 22,500 25,126 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $43,852 $43,076 ============== ==============
See notes to financial statements. F-3 40 STATEMENT OF OPERATIONS CLEVETRUST REALTY INVESTORS
Year ended September 30, ------------------------------------- 1996 1995 1994 ------------ ----------- ---------- (in thousands, except per share data) INCOME Real estate operations: Rental income $10,368 $10,145 $9,650 Less: Real estate operating expenses 5,060 5,245 4,981 Depreciation expenses 1,830 1,846 1,972 ------- ------- ------- 6,890 7,091 6,953 ------- ------- ------- Income from real estate operations 3,478 3,054 2,697 Interest income 40 56 76 Dividend income 225 0 0 Other 12 26 29 ------- ------- ------- 3,755 3,136 2,082 EXPENSES Interest: Mortgage notes payable -- NOTE E 888 988 1,678 Bank notes payable -- NOTE F 886 789 442 ------- ------- ------- 1,774 1,777 2,120 General and Administrative 734 763 797 Provision for valuation reserve 3,307 0 0 ------- ------- ------- 5,815 2,540 2,917 ------- ------- ------- OPERATING INCOME (LOSS) (2,060) 596 (115) Net gains on sales of real estate -- NOTE D 40 2,499 445 Gains on sales of securities 632 0 0 ------- ------- ------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (1,388) 3,095 330 Extraordinary items -- NOTES C and E 0 790 253 ------- ------- ------- NET INCOME (LOSS) $(1,388) $3,885 $583 ======= ======= ======= Per Share of Beneficial Interest -- NOTE A: Operating income (loss) $(0.40) $0.11 $(0.02) Net gains on sales of real estate 0.01 0.46 0.09 Gains on sales of securities 0.12 0.00 0.00 ------- ------- ------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (0.27) 0.57 0.07 Extraordinary items 0.00 0.14 0.05 ------- ------- ------- NET INCOME (LOSS) PER SHARE $(0.27) $0.71 $0.12 ======= ======= ======= Weighted average number of Shares of Beneficial Interest outstanding 5,186 5,459 4,959 ======= ======= =======
See notes to financial statements. F-4 41 STATEMENT OF CASH FLOWS CLEVETRUST REALTY INVESTORS
Year ended September 30, ----------------------------------- 1996 1995 1994 ---------- --------- ---------- (in thousands) Cash flow from operating activities: Net income (loss) $(1,388) $ 3,885 $ 583 Non-cash revenues and expenses included in income: Depreciation 1,830 1,846 1,972 Provision for valuation reserve 3,307 0 0 Decrease in accrued interest on notes payable (9) (4) (33) (Decrease) increase in accrued expenses and other liabilities (86) (134) 351 Increase in other assets (1,971) (80) (67) Reconciliation to net cash flow from operating activities: Net gains on sales of real estate (40) (2,499) (445) Gains on sales of securities (632) 0 0 Extraordinary items 0 (790) (253) ------- ------- ------- CASH FLOW FROM OPERATING ACTIVITIES 1,011 2,224 2,108 Cash flow from investing activities: Equity investments: Improvements to existing properties (972) (666) (853) Purchase of property (3,465) 0 (3,918) Proceeds from properties sold 1,386 5,545 879 Net insurance proceeds 0 738 253 Real estate mortgage loans: Repayments 184 145 204 Investments in securities: Securities purchased (2,057) (240) 0 Proceeds from sales of securities 2,929 0 0 ------- ------- ------- NET CASH (USED IN) FROM INVESTING ACTIVITIES (1,995) 5,522 (3,435) Cash flow from financing activities: Mortgage notes payable: Principal amortization payments (203) (330) (496) Principal repayments 0 (1,463) (7,689) Principal borrowings 500 0 2,170 Bank notes payable: Principal amortization payments 0 (31) (147) Principal repayments 0 (4,549) (5,162) Principal borrowings 3,200 0 7,689 Certificate of Deposit 0 500 0 Distributions to shareholders (1,037) (874) (735) Shares issued pursuant to rights offerings 0 0 5,929 Shares repurchased and subsequently retired (174) (1,062) (296) ------- ------- ------- NET CASH FROM (USED IN) FINANCING ACTIVITIES 2,286 (7,809) 1,263 ------- ------- ------- Increase (decrease) in cash and cash equivalents 1,302 (63) (64) Balance at beginning of year 188 251 315 ------- ------- ------- Balance at end of year $ 1,490 $ 188 $ 251 ======= ======= =======
See notes to financial statements. F-5 42 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY CLEVETRUST REALTY INVESTORS Years Ended September 30, 1996, 1995, and 1994
Shares Of Additional Unrealized Total Beneficial Paid-In Accumulated Gains On Shareholders' Interest Capital Deficit Securities Equity --------- --------- ------------- ------------- -------------- (in thousands) Balance October 1, 1993 $3,716 $35,916 $(21,963) $0 $17,669 Net income for the year ended September 30, 1994 583 583 Cash distributions declared and paid -- $.15 per share (735) (735) Shares issued pursuant to rights offering -- NOTE G 1,858 4,071 5,929 Shares repurchased and subsequently retired -- NOTE G (103) (193) (296) --------- --------- ---------- ------- ---------- Balance September 30, 1994 5,471 39,794 (22,115) 0 23,150 Net income for the year ended September 30, 1995 3,885 3,885 Cash distributions declared and paid -- $.16 per share (874) (874) Shares repurchased and subsequently retired -- NOTE G (254) (808) (1,062) Change in unrealized gains on securities 27 27 --------- --------- ---------- ------- ---------- Balance September 30, 1995 5,217 38,986 (19,104) 27 25,126 Net (loss) for the year ended September 30, 1996 (1,388) (1,388) Cash distributions declared and paid -- $.20 per share (1,037) (1,037) Shares repurchased and subsequently retired -- NOTE G (38) (136) (174) Change in unrealized gains on securities (27) (27) --------- --------- ---------- ------- ---------- Balance September 30, 1996 $5,179 $38,850 $(21,529) $0 $22,500 ========= ========= ========== ======= ==========
F-6 43 NOTES TO FINANCIAL STATEMENTS CLEVETRUST REALTY INVESTORS Years Ended September 30, 1996, 1995 and 1994 NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CleveTrust Realty Investors is a business trust organized in the State of Massachusetts, but with its headquarters in Ohio. The Trust's primary business objective is the ownership and operation of improved real estate. USE OF ESTIMATES: The preparation of financial statements requires Management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could affect the amounts reported and disclosed herein. INCOME RECOGNITION: Rental income from improved properties is generally recorded as it accrues. Interest on mortgage loans is recognized as income as it accrues during the period the loans are outstanding except where collection of interest is considered doubtful. Contingent rents and interest are recognized as income when determinable. Accrual of income is suspended on any investment when the collection of rent, principal, or interest is doubtful. REAL ESTATE: In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" the Trust reviews long-lived assets whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. If, based on this review, the sum of expected future cash flows from an asset is less than the carrying amount, an impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Additionally, SFAS No. 121 requires that long-lived assets to be disposed of be carried at the lower of amortized cost or fair market value, less cost to sell, whichever is lower. On September 24, 1996 the Trustees of the Trust unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust ("the Plan"). The Plan, as proposed, would involve the sale of the Trust's properties during a period of approximately three years. Based on this announcement the Trust has reclassified all of its properties at September 30, 1996 in accordance with SFAS No. 121 to Properties Held for Sale. A review of the carrying value of all the properties at September 30, 1996 determined that certain properties had a carrying value lower than the estimated fair market value, less cost to sell. Therefore, a valuation reserve was established for those properties. (See NOTE C) Prior to the adoption by the Trust of SFAS No. 121, the Trust regularly evaluated the recoverability of each investment in the portfolio. When appropriate, an allowance for possible investment losses was provided for properties acquired through foreclosure or deed in lieu of foreclosures. In fiscal 1994 the Trust applied the allowance for possible investment losses to three previously foreclosed properties for which it had been provided. The Trust concluded that it was unlikely that the value of these properties would recover. Therefore, they were written down to their net realizable value through application of the allowance. Real estate previously acquired by the Trust pursuant to normal real estate purchase transactions was recorded at cost. Real estate acquired by foreclosure or deed in lieu of foreclosure was recorded at estimated fair value at the date of acquisition, but not in excess of the unpaid balance of the related loan plus costs of securing title to and possession of the property. DEPRECIATION: Depreciation on equity investments is computed by the straight-line method at rates based upon the expected economic lives of the assets which range from 31 to 40 years for buildings, 5 to 40 years for other property and the specific length of the tenant lease for tenant improvements. Additionally, one building and its permanent improvements are depreciated over a life of 55 years. In accordance with the Plan, properties held for sale will not be depreciated in Fiscal year 1997. F-7 44 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - - CONTINUED REPAIRS AND CAPITAL IMPROVEMENTS: Expenditures for repairs and maintenance which do not add to the value or prolong the useful life of property owned are charged to expense as incurred; those expenditures for improvements which do add to the value or extend the useful life are capitalized. CASH AND CASH EQUIVALENTS : The Trust defines cash and cash equivalents as cash in bank accounts and investments in marketable securities, primarily short-term commercial paper with original maturities of three months or less. INVESTMENTS IN SECURITIES: At September 30, 1996 the Trust did not own any equity securities. At September 30, 1995 the Trust classified its investments in equity securities in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities," as available for sale and as a result they were stated at their fair value. The effect of the unrealized gains was included as a component of Shareholders' Equity. Realized gains are calculated on an actual cost basis. INCOME TAXES: Deferred income taxes are recognized for temporary differences between the financial reporting basis of assets and liabilities and their respective tax basis and for operating and capital loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence including tax planning strategies and other factors. The effects of changes in tax laws or rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date. NET INCOME PER SHARE: Net income per Share of Beneficial Interest has been computed using the weighted average number of Shares of Beneficial Interest outstanding each year. RECLASSIFICATION: Certain items in previously issued financial statements have been reclassified to conform to 1996 presentations. NOTE B - - INCOME TAXES The Trust's deferred tax assets and liabilities at September 30, 1996 and 1995 are as follows:
1996 1995 ---- ---- (in thousands) Deferred tax assets: Properties held for sale - valuation reserve $ 1,124 $ -0- Investments in real estate - write-downs -0- 1,752 Net operating and capital loss carryforwards 3,456 2,167 Other -0- 489 Deferred tax liabilities: Depreciation (1,489) (1,841) Other (43) -0- ------ ------ 3,048 2,567 Valuation allowance (3,048) (2,567) ------ ------ Net deferred tax asset/(liability) $ -0- $ -0- ====== ======
F-8 45 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE B - - INCOME TAXES - - CONTINUED The Trust maintains a valuation reserve equal to its net deferred tax asset as there is doubt as to whether the net deferred tax asset will be realized. For the fiscal year ended September 30, 1996 the Trust had a net loss for tax purposes and therefore had no income tax expense. Additionally, the Trust had no income tax expense for the fiscal year ended September 30, 1995. A reconciliation between the 1995 results and the amount of income tax expense that would result from applying Federal statutory rates to pretax income is as follows:
9/30/96 9/30/95 ------- ------- (in thousands) Expected income tax expense at Federal statutory tax rate $ (472) $1,321 Increase (decrease) in taxes resulting from: Effect of temporary differences (853) (535) (Recognized) unrecognized net operating loss carryforward 1,325 (786) ------ ------ Income Tax Expense $ -0- $ -0- ====== ======
At September 30, 1996 the Trust had, for federal tax purposes, net operating loss and capital loss carryforwards of approximately $10.2 million. The use of the net operating loss carryforwards is limited by Section 382 of the Internal Revenue Code with effect for losses associated with years prior to December 28, 1992. Net capital loss carryforwards can only be utilized to the extent that net capital gains are incurred during the next five year period. The Trust can use approximately $ 298,000 per year of net operating loss carryforwards, plus gains of the sales of properties ("built in gains"), plus any prior years' unused portion (limited by carryforward periods) for losses generated prior to December 28, 1992. The Trust can also use carryforwards generated post December 28, 1992. These carryforwards of approximately $9.5 million expire through 2011. The remaining carryforwards of $700,000 may be recognized for a period through fiscal 1998 against gains on sales of properties, if any , to the extent that fair market values of these properties exceeded their tax bases as of December 28, 1992. F-9 46 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE C - - PROPERTIES The following is a summary of the Trust's properties held for sale and related indebtedness at September 30, 1996:
Income from Total Accumulated Valuation Carrying Real Estate Amount of Classification Cost Depreciation Reserve Value Operations Indebtness - ------------------------------ ----------------- -------------- ---------- ---------- --------------- ---------- (in thousands) Office Buildings: Englewood, Colorado $6,103 $3,108 $0 $2,995 $375 $0 Denver, Colorado 4,623 2,966 0 1,657 351 0 Littleton, Colorado 3,166 1,398 0 1,768 210 1,209 Tulsa, Oklahoma 6,959 4,408 551 2,000 10 0 Dallas, Texas 2,452 1,792 0 660 66 0 Dallas, Texas 11,048 3,502 2,546 5,000 (3) 0 Dallas, Texas 4,312 272 0 4,040 302 2,612 Arlington, Texas 2,208 24 0 2,184 78 0 ----------------- -------------- --------- ---------- ------ ---------- 40,871 17,470 3,097 20,304 1,389 3,821 Commercial Properties: Hilton Head, S. C. 1,911 1,104 0 807 277 0 Austin, Texas 8,225 2,174 0 6,051 559 5,742 Davenport, Iowa 5,579 1,078 0 4,501 472 0 Dubuque, Iowa 5,367 1,174 0 4,193 447 0 Ardmore, Oklahoma 4,081 948 133 3,000 291 0 ----------------- -------------- --------- ---------- ------ ---------- 25,163 6,478 133 18,552 2,046 5,742 Land 117 0 77 40 (1) 0 ----------------- -------------- --------- ---------- ------ ---------- Total of all properties $66,151 $23,948 $3,307 $38,896 3,434 $9,563 ================= ============== ========= ========== ====== ==========
Following is a summary of activity with regards to the properties for the three years ended September 30, 1996:
1996 1995 1994 ----------------- -------------- -------------- (in thousands) Balance, beginning of year $40,942 $45,380 $49,394 Improvements to existing properties 972 666 853 Purchase of properties 3,465 0 3,918 Sales of properties - NOTE D (1,346) (3,258) (724) Valuation reserve (3,307) 0 0 Application of allowance for investment losses 0 0 (6,089) Depreciation (1,830) (1,846) (1,972) ----------------- -------------- -------------- Balance, end of year $38,896 $40,942 $45,380 ================= ============== ==============
F-10 47 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTES C - - PROPERTIES - - CONTINUED On February 20, 1996 the Trust completed the purchase of the land on which its Englewood Bank Building is located. This land, which was previously leased by the Trust, was purchased for a price of $1,263,000. On March 28, 1996 the Trust purchased a 52,554 square foot suburban office building located in Arlington, Texas for a purchase price of $2,202,000. On August 26, 1994 the Trust purchased a 104,000 square foot office building located in Dallas, Texas for $3,918,000. Of this amount $2,170,000 was provided by a first mortgage loan on the property, which the Trust obtained at the time of the purchase. On January 18, 1994 the Trust's Petroleum Club Building located in Tulsa, Oklahoma sustained a major fire. In July, 1994 the Trust and its insurance company agreed on a settlement of $6,025,000. The Trust has completed all necessary repairs and building improvements for an amount less than the settlement. The Trust has recorded $738,000 as an extraordinary income item in fiscal 1995. The cost of building improvements made as part of the building restoration was $253,000 was capitalized and recorded as an extraordinary income item in fiscal 1994. NOTE D - - REAL ESTATE SALES The fiscal 1996 net gains on sales of real estate totaling $40,000 include the following: (i) $69,000 which represents the gain the Trust realized on its January and February, 1996 sales of three condominium units located in Davie, Florida for a combined sales price of $138,000; (ii) a loss of $313,000 the Trust realized on its March, 1996 $600,000 sale of the European Crossroads office/retail complex on 11.5 acres of land located in Dallas, Texas; (iii) $23,000 represents the gain the Trust realized on its April, 1996 $115,000 sale of 7.42 acres of vacant land located in Akron, Ohio; and (iv) $261,000 represents the gain the Trust realized on its September, 1996 $615,000 sale of two of the five buildings comprising the Walnut Stemmons Office Park located in Dallas, Texas. The fiscal 1995 gains on sales of real estate totaling $2,499,000 include the following: (i) $452,000 which represents the gain the Trust realized on its February, 1995 $2,650,000 sale of the 197 room Quality Hotel located at the airport in St. Louis, Missouri; (ii) $1,859,000 represents the gain the Trust realized on its March, 1995 $2,595,000 sale of the 124 unit Parkwood Place Apartments located in Greeley, Colorado; (iii) $97,000 represents the gain the Trust realized on its March, 1995 $800,000 sale of the 51,000 square foot Walnut Hill West office building located in Dallas, Texas; and (iv) $91,000 represents the gain the Trust realized on its May, 1995 $212,000 sale of 17.7697 acres of vacant land located in Akron, Ohio. The Trust received a purchase money mortgage for the total $212,000 purchase price in connection with the sale. The fiscal 1994 gains on sales of real estate totaling $445,000 include the following: (i) $361,000 which represents the gain the Trust realized on its March, 1994 $834,000 sale of 70 acres of vacant land located in Akron, Ohio. The Trust received a purchase money mortgage for $290,000 of the purchase price in connection with the sale; and (ii) $84,000 which represents the gain the Trust realized on its August, 1994 $198,000 sale of 16.6 acres of vacant land located in Akron, Ohio. NOTE E - - MORTGAGE NOTES PAYABLE At September 30, 1996 the mortgage notes payable of the Trust are non-recourse mortgages except the first $750,000 of the $2,612,000 loan maturing August 19, 2000 which is recourse to the Trust. The following data pertains to the mortgage notes payable as of September 30, 1996. F-11 48 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE E - - MORTGAGE NOTES PAYABLE - - CONTINUED
Book Value Of The Investment Mortgage Securing Base Interest Notes Payable The Debt Maturity Rate ------------- -------- -------- ---- (in thousands) $ 5,742 $ 6,051 May 7, 2002 8.300% 2,612 4,040 Aug. 19, 2000 8.300 1,209 1,768 July 1, 2003 8.125 -------- ------- $ 9,563 $ 11,859 ======== ========
On October 7, 1996 the Trust completed the sale of the Littleton Bank building located in Littleton, Colorado (see NOTE J). This property secured the above listed $1,209,000 loan which was to mature July 1, 2003. This loan was repaid on October 7, 1996 in connection with the sale of the property. Required payments on the Trust's two remaining mortgage notes payable for the succeeding five years are as follows:
Year Ending September 30, Principal Interest Total (in thousands) 1997 $ 221 $ 682 $ 903 1998 240 663 903 1999 260 643 903 2000 2,712 587 3,299 2001 252 396 648
Effective December 28, 1995 the Trust and its Lender modified the first mortgage loan on the 14800 Quorum Office Building located in Dallas, Texas as follows: The Trust borrowed an additional $500,000, which increased the outstanding borrowings to $2,640,000 at the time of the transaction. Additionally, the interest rate, which was 1.75% over the prime lending rate (9.5% at the time of the modification) adjusted every two years, was changed to a fixed rate of 8.3%, effective January 1, 1996, until the maturity date of August 19, 2000. Effective September 1, 1996 the Trust and its Lender modified the first mortgage loan on the Cannon West Shopping Center located in Austin, Texas as follows: The interest rate was reduced from 9.5% to 8.3% and the maturity date was extended five years from May 7, 1997 to May 7, 2002. On March 16, 1995 the Trust repaid a $498,000 first mortgage loan on its shopping center located in Ardmore, Oklahoma. This loan had a maturity date of June 16, 1996. On May 1, 1995 the Trust settled at a discount, a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado, which had a maturity date of February 1, 1999. This settlement resulted in an extraordinary income item of $52,000. Total interest expense on mortgage notes payable did not differ materially from interest paid. F-12 49 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE F - - BANK NOTES PAYABLE At September 30, 1996 the bank notes payable included $9,800,000 of borrowings under the 1994 Credit Agreement. At September 30, 1995 the bank notes payable included $6,600,000 of borrowings under the 1994 Credit Agreement. Effective November 30, 1994 the Trust converted a September 30, 1994 $7,689,000 demand note to a revolving line of credit ("1994 Credit") issued by National City Bank of Cleveland, Ohio ("NCB") and Manufacturer's and Traders Trust Company of Buffalo, New York ("M&T"). The 1994 Credit is for up to $25,000,000 (but is limited by the value of the collateral provided). Of this amount a maximum of $15,000,000 is currently available and $10,000,000 will be available at the Trust's discretion upon payment of an activation fee of 3/4 of 1% on the $10,000,000. The initial term of the 1994 Credit was three years. Each year the lenders will review the 1994 Credit with the right to extend it for one additional year. The lenders have extended the 1994 Credit to March 1, 1999. Interest only payments, which is at the option of the Trust, will be at either (i) 1/4 of 1% over the prime rate; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed interest rate available from time to time. Additionally, a commitment fee of 3/8 of 1% is due on any funds available but not borrowed. The 1994 Credit is secured by certain of the Trust's real estate investments and contains certain covenants including a covenant for a minimum shareholders' equity. At September 30, 1996 the amount of shareholders' equity free from such restriction was approximately $2,500,000. The Trust also had a loan with another bank which was scheduled to mature December 25, 1993 but, had been extended to December 25, 1997. The interest rate was prime plus 1% with a minimum rate of 7.5%. The Trust was required to make monthly amortization payments based on a twenty-year amortization schedule. On February 28, 1995 the Trust made a principal payment of $2,200,000 and on March 15, 1995 paid off the remaining balance of $1,260,000. Total interest expense on bank notes payable did not differ materially from interest paid. NOTE G - - SHARES OF BENEFICIAL INTEREST On December 7, 1995 the Trust repurchased 38,000 of its Shares of Beneficial Interest for $174,000 in an open market purchase. These shares were retired by the Trust. On August 21, 1995 the Trust mailed an Offer to purchase for cash an aggregate of 500,000 Shares of Beneficial Interest for a price of $4.00 per share to each shareholder of the Trust. The Offer ended September 22, 1995 and at its conclusion 239,553 shares were purchased and retired by the Trust. In addition to the $4.00 per share the Trust incurred costs of $56,000 in connection with the Offer. On April 17, 1995 the Trust repurchased 14,000 of its Shares of Beneficial Interest for $48,000 in an open market purchase. These shares were retired by the Trust. On June 26, 1994 the Trust repurchased 103,210 of its Shares of Beneficial Interest for $296,000 in an open market purchase. These shares were retired by the Trust. On November 23, 1993 the Trust mailed a prospectus and certificate of rights to all shareholders of record as of November 12, 1993. The certificates entitled the shareholder to the right to purchase one Share of Beneficial Interest of the Trust for every two Shares owned at a price of $3.25 per Share. Additionally, this offering also provided for an oversubscription privilege which entitled each holder of a right to subscribe for Shares not purchased by other holders of rights. Oversubscriptions were allocated prorata based on the number of Shares owned. The offering expired on January 28, 1994. All 1,857,969 Shares available were sold. The net proceeds to the Trust totaled $5,929,000. F-13 50 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE G - - SHARES OF BENEFICIAL INTEREST - - CONTINUED On February 21, 1992 the shareholders of the Trust approved the amended and extended 1983 Incentive Stock Option Plan, now titled the 1992 Stock Option Plan ("1992 Plan"). Under the 1992 Plan, an additional 200,000 Shares of Beneficial Interest of the Trust are reserved and made available for issuance of options to officers and employees of the Trust at the discretion of the Board of Trustees. The original plan had reserved 100,000 Shares. The 1992 Plan is extended to October 21, 2011. The option price is the fair market value on the date of the grant and no option shall be exercisable for less than 100% of this value. Under the 1992 Plan, the share appreciation rights granted previously will be unaffected; however, no share appreciation rights will be issued with grants of the 200,000 new Shares or the 17,500 Shares remaining from the original 100,000 Shares. Share appreciation rights entitle the holder to receive the difference between the market value on the date of exercise and the option price in Shares, cash or a combination thereof, at the discretion of the Board of Trustees. In connection with the Trustees' Plan of Liquidation, the four primary officers of the Trust have executed new employment contracts effective September 1, 1996. As part of these contracts the officers waive all rights with respect to unexercised options. In return, additional compensation will be paid to the officers, based on a calculation of a minimum threshold of the distributions to the Shareholders during the liquidation period. Such amounts will be expensed as incurred. NOTE H - - PENSION PLAN The Trust has a defined contribution pension plan covering all full-time employees of the Trust. Contributions are determined as a set percentage of each covered employee's annual cash compensation. Contributions by the Trust are accrued during the year and paid prior to the filing of the Trust's federal income tax return for said year. For fiscal 1996 the Trust accrued $30,000 for contributions to the pension plan (for fiscal 1995 - $24,000 and fiscal 1994 - $31,000). NOTE I - - OPERATING LEASES Minimum future rentals due the Trust on noncancelable leases for the succeeding five fiscal years and thereafter are as follows: 1997, $7,841,000; 1998, $6,526,000; 1999, $5,324,000; 2000, $3,3716,000; 2001, $2,777,000; and $9,214,000 thereafter. Certain leases provide for contingent rentals. The Trust received $123,000 of contingent rentals for 1996 ($123,000 for 1995 and $131,000 for 1994). The Trust's carrying amount at September 30, 1996 of these real estate investments consists of land of $7,547,000 and improvements of $58,487,000, less accumulated depreciation of $23,948,000 and valuation reserve of $3,307,000. NOTE J - - SUBSEQUENT EVENTS On October 7, 1996 the Trust completed a $2,450,000 sale of the Littleton Bank Building located in Littleton, Colorado. This sale resulted in a gain of approximately $563,000 which will be reported in the first quarter of Fiscal Year 1997. F-14 51 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE K - - QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for the years ended September 30, 1996 and 1995 is as follows:
Quarter Ended Dec. 31 Mar. 31 June 30 Sept. 30 - ------------- ------- ------- ------- -------- (in thousands, except per share data) 1996 - ---- Operating revenues $ 2,638 $ 2,657 $ 2,693 $ 2,657 Operating income (loss) 331 316 258 (2,965) Net Income (loss) 331 72 281 (2,072) Operating income (loss) per share (1) .06 .06 .05 (.57) Net Income (Loss) per share (1) .06 .01 .06 (.40) 1995 - ---- Operating revenues $ 2,666 $ 2,614 $ 2,486 $ 2,461 Operating income before extraordinary item 67 94 255 180 Extraordinary item 0 0 52 738 Net income 67 2,502 398 918 Operating income per share before extraordinary item (1) .01 .02 .05 .03 Extraordinary item per share (1) .00 .00 .02 .12 Net income (loss) per share (1) .01 .46 .08 .16 (1) Per Share calculations for each of the quarters is based on a weighted average number of shares outstanding for each period and, therefore, the sum of the quarters may not necessarily equal full-year amounts.
F-15 52 SCHEULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION CLEVETRUST REALTY INVESTORS As of September 30, 1996 (In Thousands)
Amount at which carried at Initial Coto Trust September 30, 1996 ----------------------- Cost of ----------------------------------- Description Encumbrances Land Improvements Improvements Land Improvements Total (1), (4) --------------------- ------------------------------------------------------------------------------------------------- Office Buildings: Englewood Bank Bldg. Englewood, CO $0 $1,263 $4,328 $512 $1,263 $4,840 $6,103 Executive Club Bldg Denver, CO 0 165 2,834 1,624 165 4,458 4,623 Littleton Bank Bldg Littleton, CO 1,209 0 2,738 428 0 3,166 3,166 (6) Petroleum Club Bldg Tulsa,OK 0 648 3,306 3,005 648 6,311 6,959 (3) Walnut Stemmons Office Park Dallas, TX 0 228 1,489 735 228 2,224 2,452 Office Alpha Dallas, TX 0 1,500 8,439 1,109 1,500 9,548 11,048 (3) 14800 Quorum Bldg Dallas, TX 2,612 335 3,583 394 335 3,977 4,312 Brookside Office Bldg Arlington, TX 0 300 1,902 6 300 1,908 2,208 Commercial Properties: Triangle Square Hilton Head, SC 0 135 1,157 619 135 1,776 1,911 Cannon West Austin, TX 5,742 874 6,758 593 874 7,351 8,225 Spring Village Davenport, IA 0 1,013 4,373 193 1,013 4,566 5,579 Warren Plaza Dubuque, IA 0 401 4,800 166 401 4,966 5,367 Tiffany Plaza Ardmore, OK 0 684 2,847 550 684 3,397 4,081 (3) Vacant Land Akron, OH 0 117 0 0 117 0 117 (3) -------------- ------------------------------------ ----------------------------------- Totals $9,563 $7,663 $48,554 $9,934 $7,663 $58,488 $66,151 ============== ==================================== =================================== Accumulated Construction Date Depreciation Description Depreciation (2) Completed Acquired Lives (5) --------------------- -------------------------------------------------------- Office Buildings: (Various from) Englewood Bank Bldg. Englewood, CO $3,108 1970 1971 5 to 40 years Executive Club Bldg Denver, CO 2,966 1971 1972 5 to 40 years Littleton Bank Bldg Littleton, CO 1,398 1972 1973 5 to 55 years Petroleum Club Bldg Tulsa,OK 4,408 1963 1972 5 to 40 years Walnut Stemmons Office Park Dallas, TX 1,792 1971 1975 5 to 35 years Office Alpha Dallas, TX 3,502 1981 1983 5 to 40 years 14800 Quorum Bldg Dallas, TX 272 1980 1994 5 to 40 years Brookside Office Bldg Arlington, TX 24 1986 1996 5 to 40 years Commercial Properties: Triangle Square Hilton Head, SC 1,104 1975 1976 5 to 35 years Cannon West Austin, TX 2,174 1981 1987 5 to 40 years Spring Village Davenport, IA 1,078 1980 1987 5 to 40 years Warren Plaza Dubuque, IA 1,174 1980 1987 5 to 40 years Tiffany Plaza Ardmore, OK 948 1975 1989 10 to 31 years Vacant Land Akron, OH 0 N/A 1975 N/A ----------------- Totals $23,948 =================
F-16 53 SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - - CONTINUED CLEVETRUST REALTY INVESTORS
Year Ended September 30, -------------------------------------------------- 1996 1995 1994 --------------- ------------ ------------- (1) Reconciliation of real estate: Balance of real estate at October 1, 1995, 1994 and 1993, respectively $63,485 $71,028 $73,296 Additions during period: Cost of Improvements 972 666 853 Purchase of Property 3,465 0 3,918 --------------- ------------ ------------- Total Additions 4,437 666 4,771 --------------- ------------ ------------- 67,922 71,694 78,067 Application of allowance for investment losses 0 0 6,089 Less carrying amount of real estate sold or disposed 1,771 8,209 950 --------------- ------------ ------------- Balance of real estate at September 30, 1996, 1995 and 1994, respectively $66,151 $63,485 $71,028 =============== ============ ============= (2) Reconciliation of accumulated depreciation: Balance of accumulated depreciation at October 1, 1995, 1994 and 1993, respectively $22,543 $25,648 $23,902 Additions charged to expenses 1,830 1,846 1,972 --------------- ------------ ------------- 24,373 27,494 25,874 Accumulated depreciation on real estate sold or disposed 425 4,951 226 --------------- ------------ ------------- Balance of accumulated depreciation at September 30, 1996, 1995 and 1994, respectively $23,948 $22,543 $25,648 =============== ============ =============
(3) On September 24, 1996 the Trustees of the Trust unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust (the "Plan"). Since the Trust had previously adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Aseets to be Disposed of" ("SFAS No. 121") the Trust, effective September 30, 1996, classified all real estate owned as Property held for sale. In accordance with this classification the Trust reviewed the fair value of all of its property. The Trust has established a valuation reserve against four of its properties as follows: Petroleum Club Bldg - Tulsa OK $551,000 Office Alpha - Dallas, TX 2,546,000 Tiffany Plaza - Ardmore, OK 133,000 Vacant Land - Akron, OH 77,000 --------------- Total Valuation reserve $3,307,000 ===============
(4) The Trust's aggregate cost for federal income tax purposes at September 30, 1996 was $66,263,000. The Trust's federal income tax return for the year ended September 30, 1996 has not yet been filed. (5) Depreciation lives exclude tenant improvements which are depreciated over the specific lease term involved. (6) At September 30, 1996 the Trust owned the building improvements subject to a long term ground lease. On October 7, 1996 the Trust sold the improvements to gound lease holder. The Trust will recognize a gain of approximately $563,000 in the first quarter of the fiscal year ending September 30, 1997. F-17 54 CLEVETRUST REALTY INVESTORS ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED SEPTEMBER 30, 1996 EXHIBIT INDEX
"Assigned" Location of Exhibit No. * Description Exhibit ------------- ----------- ------- (3) (A) Second Amended and Restated Declaration Incorporated by of Trust. reference to Exhibit (3) to Registration Statement on Form S-2, File Number, 33-46552. (3) (B) By-Laws Incorporated by reference to Exhibit (3) to Report on Form 10-K for the fiscal year ended September 30, 1986. (File No. 0-5641) (4) (1) Credit Agreement By and Amoung CleveTrust Realty Incorporated by reference Investors, Borrower, National City Bank, as Agent, to Exhibit (4) to Form and The Banks Identified Herein dated as of 10-K for the fiscal year November 30, 1994. ended September 30, 1994. (4) (2) Amendment to Credit Agreement dated as of April Incorporated by reference 28, 1995 to the Credit Agreement By and Amoung to Exhibit (4) to Form CleveTrust Realty Investors, Borrower, National 10-K for the fiscal year City Bank, as Agent, and The Banks Identified ended September 30, 1995. Herein dated as of November 30, 1994. (4) (3) Deed of Trust and Security Agreement made as of Incorporated by May 28, 1987 between CleveTrust Realty Investors reference to Exhibit (4) and The Northwestern Mutual Life Insurance Company. to Report on Form 10-K for the fiscal year ended September 30, 1987. (File No. 0-5641) (4) (4) Promissory Note dated May 28, 1987 in the amount Incorporated by of $6,500,000 with respect to the Deed of Trust reference to Exhibit (4) and Security Agreement made as of May 28, 1987 to Report on Form 10-K between CleveTrust Realty Investors and the for the fiscal year ended Northwestern Mutual Life Insurance Company September 30, 1987. (File No. 0-5641) Certain of the Registrant's assets are subject to long-term mortgage obligations each of which individually relates to indebtedness totaling less than 10% of the total assets of the Registrant. The Registrant hereby agrees to furnish a copy of such agreements to the Commission upon its request.
55 CLEVETRUST REALTY INVESTORS ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED SEPTEMBER 30, 1996 EXHIBIT INDEX --(CONTINUED)--
"Assigned" Location of Exhibit No. * Description Exhibit ------------- ----------- ------- Exhibits (10) (1) through (10) (5) represent Management contracts or compensation plans or arrangements. (10) (1) Amended and Restated Employment Agreement Filed herewith effective as of September 1, 1996 between electronically CleveTrust Realty Investors and John C. Kikol. (10) (2) Amended and Restated Employment Agreement Filed herewith effective as of September 1, 1996 between electronically CleveTrust Realty Investors and Michael R. Thoms. (10) (3) Amended and Restated Employment Agreement Filed herewith effective as of September 1, 1996 between electronically CleveTrust Realty Investors and Raymond C. Novinc. (10) (4) Amended and Restated Employment Agreement Filed herewith effective as of September 1, 1996 between electronically CleveTrust Realty Investors and Brian D. Griesinger. (10) (5) CleveTrust Realty Investors 1992 Incorporated by Incentive Stock Option Plan. reference to Exhibit (10) to Registration Statement on Form S-2, File Number, 33-46552. (11) Computation of net income (loss) per share of Filed herewith beneficial interest. electronically (23) Consent of Independent Auditors. Filed herewith electronically (24) Power of Attorney. Filed herewith electronically (27) Financial Data Schedule. Filed herewith electronically * Exhibits 2, 9, 12, 13, 16, 18, 19, 21, 22, and 28 are either inapplicable to the Trust or require no answer.
EX-10.1 2 EXHIBIT 10(1) 1 Exhibit (10)(1) AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, (which hereinafter, along with all Exhibits and Schedules referenced herein and attached hereto, is referred to as the "Agreement") is made by and between CLEVETRUST REALTY INVESTORS, a Massachusetts voluntary association of the type generally known as a business trust (the "Trust"), and John C. Kikol ("Officer"). The Trust and the Officer are sometimes referred to as a "party" or, collectively, as the "parties." R E C I T A L S: A. The parties entered into an Amended and Restated Employment Agreement dated as of January 1, 1993 pursuant to which the Officer was retained as the Trust's President. B. The Board of Trustees of the Trust (the "Board") has resolved to recommend to the Trust's shareholders that all Trust properties be sold and that the Trust be liquidated over a period of three years or the Trust properties be otherwise disposed of in a merger, consolidation or similar transaction (the "Liquidation Process"), and the Board desires to retain the Officer as President to implement and oversee the Liquidation Process. C. As an inducement to the Officer to continue in the employment of the Trust as its President during the Liquidation Process, the parties desire to amend and completely restate the terms of the Officer's employment agreement as set forth below, effective September 1, 1996. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the parties hereby agree as follows provided that this Agreement is subsequently approved by the Trust's shareholders: SECTION 1. STATUS OF PRIOR AGREEMENT. ---------- -------------------------- The Officer's current employment agreement with the Trust shall be superseded by the terms of this Agreement effective September 1, 1996 provided that as conditions subsequent the Trust's shareholders approve of this Agreement and the Liquidation Process. The members of the Board who hold shares in the Trust shall vote such shares in favor of the adoption of this Agreement and the Liquidation Process at the time of such shareholder vote. If for any reason this Agreement does not become effective, the Officer's current employment agreement shall remain in force according to its terms. 2 SECTION 2. CONTINUATION OF OFFICER'S SERVICES. ---------- ----------------------------------- Until such employment is terminated as provided herein, the Trust hereby retains the Officer to render services to the Trust as its President in connection with the management and liquidation of the Trust including the timely sale of the Trust's properties (but subject to prior Board approval), the payment of its expenses and liabilities, the distribution of its net assets and the winding up of its affairs. It is the intention of the Board that the Liquidation Process be completed by the third anniversary of the shareholder vote approving the Liquidation Process (the "Termination Date") but subject, however, to the Board's subsequent determination in its discretion to extend the Liquidation Process beyond the Termination Date. During the term of this Agreement the Officer shall devote his full time during normal working hours (except normal vacation periods and periods of illness) and shall exert his best efforts, knowledge, and skill to the business affairs of the Trust including the Liquidation Process. Officer shall promptly notify the Board of his involvement in or negotiations concerning any business or employment relationships with any persons or entities pursuing the purchase of any properties from the Trust during the Liquidation Process. SECTION 3. BASE SALARY. ---------- ------------ The Trust will pay to the Officer during the period from and after the effective date hereof through December 31, 1996 (i) base salary at a rate of $135,000 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments plus (ii) a bonus of $47,000 (payable on December 1, 1996, net of applicable withholding taxes). Thereafter, during the term of this Agreement, the Trust will pay the Officer a base salary at a rate of $182,000.00 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments. SECTION 4. ADDITIONAL COMPENSATION IN LIEU OF STOCK OPTIONS. ---------- ------------------------------------------------- (a) In February, 1992, shareholders of the Trust adopted and approved the 1992 Stock Option Plan which further amended and extended the 1983 Incentive Stock Option Plan. The Officer has been granted certain stock options to purchase shares in the Trust in accordance with the terms of the 1992 Incentive Stock Option Plan or otherwise. (b) The Officer hereby waives all rights with respect to unexercised options described in (a) above as of the effective date of this Agreement. The Trust will make additional compensation payments to the Officer in an amount based upon the liquidating distributions made to Trust shareholders from time to time pursuant to the table set forth on Exhibit A attached hereto and made a part hereof (the "Payments in Lieu of Options"). In addition to the Payments in Lieu of Options, the Trust shall also pay to the Officer an additional amount (the "Tax Gross Up Amount") which, when added to the Payments in 2 3 Lieu of Options, would allow the Officer to retain a net amount after payment of all federal, state and local income taxes equal to the net amount of the Payments in Lieu of Options which the Officer would have retained after such taxes if such Payments in Lieu of Options had been treated as long term capital gain for federal income tax purposes and based on the assumption that the Officer has long term capital losses of $200,000 and no other long term capital gains. For purposes of the computation of the Gross Up Amount it is assumed that the Officer's combined tax rate for capital gains is 35% and for ordinary income is 46%. The computation of the Gross Up Amount is illustrated in the example set forth on Exhibit A-1. Such Payments in Lieu of Options and the related Gross Up Amount (net of applicable withholding taxes) shall be made at the same time as liquidating distributions are paid to the shareholders by the Trust. If the Trust is sold, merged or combined with another entity resulting in payments by the buyer directly to the Trust's shareholders rather than payments to and liquidating distributions from the Trust, the Trust shall pay the Officer as additional compensation the amount which would be payable to him under the foregoing provisions of this Section 4(b), as if the present cash value of the consideration received in such sale, merger or combination would be distributed to the shareholders as a liquidating distribution on the closing date of such transaction. If at the termination of Officer's employment under this Agreement, any Trust properties remain unsold, the Officer shall be entitled to further payments (including Gross Up Amounts) at such times as additional liquidating distributions are made to the Trust shareholders from the sale of such properties. SECTION 5. INCENTIVE COMPENSATION PROGRAM. ---------- ------------------------------- The Trust has established an Incentive Compensation Program with respect to the Liquidation Process, a copy of which is attached hereto as Exhibit B. The Officer shall participate in the Incentive Compensation Program in accordance with its terms. SECTION 6. OTHER BENEFITS. ---------- --------------- During the term of his employment the Trust shall continue to provide benefits to the Officer comparable to those presently being provided, including a retirement plan, group life insurance, health and accident insurance, hospitalization and other similar plans and will continue pay or reimburse the Officer for reasonable and ordinary business expenses (including professional dues and membership fees in professional and industry associations). Notwithstanding any provision to the contrary in this Agreement or in any qualified or non qualified retirement or deferred compensation plan of the Trust, it is specifically agreed by the Officer that any payments made to him under Sections 4, 5, 7, 8 or 9 hereof, will not be considered in determining any benefit payments due to the Officer under any qualified or non qualified retirement or deferred compensation plan of the Trust. The Officer will also be entitled to the use of an automobile and to payment or reimbursement of dues at Avon Oaks Country Club or a like amount of dues at such other club as the Officer may choose. At the conclusion of the current lease term of the automobile currently being used by the Officer, the Trust shall purchase the automobile 3 4 currently under lease and convey such automobile to the Officer in fulfillment of its automobile obligation under this Section 6. The Officer currently owns MBL Life Assurance Company Policy No. AL 164,338 on his life. The Trust shall pay the premium payments on such policy from the date of this Agreement until the termination of this Agreement at $600 per quarter and such premium payments will be reported as additional income to the Officer. SECTION 7. TERMINATION AND SEVERANCE PAYMENT. ---------- ---------------------------------- (a) The Trust and Officer shall have the right to terminate this Agreement at any time, for any reason, without any prior notice to the other although it is currently intended by the parties that the Officer shall continue to be employed by the Trust under this Agreement throughout the Liquidation Process. This Agreement shall automatically terminate upon the disability (as described in section 2(e)(v) of Exhibit B) or the death of the Officer. In the event of the termination of this Agreement either (i) by action of the Trust or as a result of the Officer's death or disability either before or after the conclusion of the Liquidation Process or (ii) by action of the Officer after a material change in the Officer's duties (as described in (b) below), the Trust shall pay to the Officer (or his estate in the event of his death) a severance payment equal to $546,000 within fifteen (15) days after the event giving rise to the payment obligation. (b) For purposes of this Agreement, the parties acknowledge that the Officer's duties will be changing in some respect from the duties he previously performed as President as a result of the Liquidation Process and such changes shall not be considered a "material change" for purposes of (a) above provided, however, that any change of duties which results in the Officer no longer functioning as President and chief executive officer of the Trust or any relocation of the Officer from the greater Cleveland area without his consent shall be considered a "material change." (c) In the event the Officer is accused by the Trust of appropriating $25,000 or more of the Trust's funds or property for his personal betterment, the Trust may immediately terminate the Officer and withhold the severance payment described in (a) above pending the adjudication of the allegation. In the event the Officer is subsequently convicted in a court of law of embezzling $25,000 or more from the Trust, the Trust shall have no obligation to pay any severance payment. If, however, the Officer is not convicted of embezzlement, the Trust shall immediately pay to the Officer the severance payment and reimburse him for legal fees and related expenses. (d) In consideration for the Officer's continued employment under this Agreement and the payments and benefits provided hereunder, and particularly, the severance payment provided hereunder and as a condition precedent to receiving such payment, the Officer shall sign and deliver to the Trust a Release of Claims substantially in the form as set forth on Exhibit C attached hereto and with such changes thereto as specifically authorized by the Board. For purposes of this Section 6(d), the Release of 4 5 Claims shall not be considered delivered until the period for rescission set forth therein has expired. SECTION 8. LEGAL FEES AND EXPENSES. ---------- ------------------------ (a) In the event the Trust has failed to comply with any of its obligations under this Agreement or in the event that the Trust or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from the Officer the benefits intended to be provided to the Officer hereunder, the Trust irrevocably authorizes the Officer, from time to time, to retain legal counsel of his choice, at the expense of the Trust, to represent the Officer in connection with the initiation or defense of any litigation or other legal action, whether by or against the Trust or any Trustee, Officer, shareholder or other person affiliated with the Trust, in any jurisdiction provided, however, that no such legal fees shall be paid by the Trust with respect to any controversy with respect to Section 5 and Exhibit B unless the controversy is asserted by the Officer in good faith and involves an amount in excess of Fifty Thousand Dollars ($50,000). The Trust shall pay all such legal costs promptly upon receipt of a detailed invoice and be solely responsible for any and all attorneys' and related fees and expenses incurred by the Officer as a result of the Trust's failure to perform this Agreement or any provision thereof or as a result of the Trust or any person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid; but subject to the limitations set forth in the immediately preceding sentence with respect to Section 5 and Exhibit B. (b) The Trust shall pay to Jason C. Blackford, legal counsel for the Officer and certain other officers executing employment agreements with the Trust of even date herewith, his reasonable fee for legal representation of such officers with respect to such employment agreements in an amount not to exceed five thousand dollars ($5,000) with respect to such representation of all such officers in the aggregate, and the obligations of the Trust under the provisions of this Section 8(b) shall be the only responsibility of the Trust with respect to legal fees of Officer in connection with the negotiation and drafting of this Agreement. SECTION 9. GROSS UP FOR PARACHUTE PAYMENT EXCISE TAX. ---------- ------------------------------------------ If any payment hereunder to the Officer (including payments pursuant to Exhibit A) becomes subject to the excise tax imposed by section 4999 of the Internal Revenue Code, the Trust shall pay to the Officer an additional amount (the "Gross Up Payment") such that the net amount retained from payments hereunder (including payments under this Section 9) by the Officer, after the deduction of such excise tax and any additional federal, state or local income or excise taxes upon such Gross Up Payment, shall equal the net amount of such payments the Officer would have retained from payments hereunder if the excise tax imposed by Code section 4999 had not been applicable. 5 6 SECTION 10. MANAGEMENT CONTRACT FOR THE PROPERTIES REMAINING ----------- ------------------------------------------------ AFTER THE LIQUIDATION PROCESS IS COMPLETED. ------------------------------------------- If so requested by the Trust, The Officer hereby agrees to manage the remaining unsold properties of the Trust, if any, upon completion of the Liquidation Process, for an annual management fee equal to five percent (5%) of the "gross property income" of such remaining properties (i.e. gross rental receipts without reduction for customary on-site expenses or reasonable travel expenses related to such property) pursuant to a Management Agreement substantially in the form as set forth on Exhibit D attached hereto. All salary and benefits payable to Officer under this Agreement shall cease at the commencement of the term of the Management Agreement (other than amounts which become payable under this Agreement prior to its termination). The management fee shall be computed and paid monthly. The Officer shall not be responsible to pay customary on-site expenses or reasonable travel expenses with respect to such properties. This management obligation shall be at the option of the Board and shall require a ninety (90) day written notice to the Officer prior to the commencement of the management services. The Board may also terminate such management services of the Officer upon ninety (90) days advance written notice to him. Any such management services required from the Officer shall be performed on a non-exclusive basis and the Officer shall have the right to terminate such management services upon ninety (90) day advance written notice to the Board or its successor in interest. SECTION 11. NOTICE. ----------- ------- Any notice required to be given pursuant to the provisions of this Agreement shall be deemed to be effectively given if personally delivered or if mailed, by certified mail, postage prepaid, to the parties at the following addresses: To the Trust: Board of Trustees CleveTrust Realty Investors 2001 Crocker Road, Suite 400 Westlake, OH 44145 With copies to each of the following: Robert H. Kanner PUBCO Corporation 3830 Kelley Avenue Cleveland, OH 44114 John D. Weil Clayton Management Company 200 North Broadway, Suite 825 St. Louis, MO 63102-2573 6 7 Howard Amster Everen Securities 23811 Chagrin Falls Blvd. Chagrin Plaza East - Suite 200 Beachwood, OH 44122 Leighton A. Rosenthal LARS Aviation, Inc. The Halle Building, Suite 310 1228 Euclid Avenue Cleveland, OH 44115 To Officer: John C. Kikol 505 Walmar Drive Bay Village, OH 44140 or to such other addresses as may be designated by one party to the other in a notice complying with the provisions of this Section 11. SECTION 12. EXISTING AGREEMENTS AND AMENDMENTS. ----------- ----------------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and, shall supersede any and all existing agreements between the parties with respect to the Officer's employment by the Trust. This Agreement (except as otherwise provided in Exhibit B) may be modified and amended only in a writing signed by each of the parties. SECTION 13. NON-ASSIGNABILITY. ----------- ------------------ None of the rights or obligations of the Officer hereunder may be assigned without the prior written consent of the Board. SECTION 14. BENEFIT. ----------- -------- This Agreement shall inure to the benefit of and be binding upon the Trust, its successors and assigns, and upon the Officer, his heirs and personal representatives and permitted assigns. SECTION 15. SEVERABILITY. ----------- ------------- If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement which can be given 7 8 effect without the invalid provisions, and, to that end, the provisions hereof are severable and any invalid provision shall be deemed modified to the least extent necessary to render such provision valid. SECTION 16. EQUITABLE ADJUSTMENT. ----------- --------------------- With respect to any payments hereunder which are computed with reference to "per share" valuations or distributions or with respect to the number of Trust shares outstanding, there shall be an equitable adjustment as determined by the Board in such computations in the event of any stock split, reverse stock split or similar transaction causing a change in the number of Trust shares outstanding from the date this Agreement is executed to the date such payment computation is required. SECTION 17. WAIVER. ----------- ------- The failure or omission by any party to enforce any provision of this Agreement, no matter how long continued, shall not be considered to be a waiver of such provision. No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any other subsequent breach or default of the same or similar or dissimilar nature. SECTION 18. CONTROLLING LAW. ----------- ---------------- This Agreement shall be interpreted and enforced in accordance with the laws of the State of Ohio. SECTION 19. STATUS OF THE TRUST. ----------- -------------------- The Trust is a Massachusetts business trust governed by the terms of a Second Amended and Restated Declaration of Trust dated as of February 21, 1992 as amended by an Amendment dated February 21, 1995. No obligation of the Trust is personally binding upon, nor shall resort be had to the private property of any of the Trustees, shareholders, officers, employees or agents of the Trust, but the Trust property or a specific portion thereof only shall be bound. 8 9 IN WITNESS WHEREOF, the parties have executed this Agreement this 24th day of September, 1996. CLEVETRUST REALTY INVESTORS By /s/ John D. Weil /s/ John C. Kikol ---------------------------------- ------------------------------- John D. Weil John C. Kikol and By /s/ Robert H. Kanner ---------------------------- and By /s/ Howard Amster ---------------------------- and By ---------------------------- Each of the undersigned hereby agrees in his individual capacity that he will vote all shares of beneficial interest in CleveTrust Realty Investors beneficially owned by him in favor of the adoption of the above Agreement and the Liquidation Process. /s/ Robert H. Kanner /s/ John D. Weil - -------------------------------------- ------------------------------- Robert H. Kanner John D. Weil /s/ Howard Amster /s/ Leighton A. Rosenthal - -------------------------------------- ------------------------------- Howard Amster Leighton A. Rosenthal 9 10 EXHIBIT A Payments in Lieu of Options --------------------------- (Pursuant to Section 4(b) of this Agreement) Mr. Kikol is entitled to a share of each distribution when and if paid to Trust shareholders based upon the following table:
Cumulative Distributions Percentage of Total Distribution ------------------------ -------------------------------- Payable Per share Which is Payable to Kikol(1) ----------------- -------------------------- first $2.62 of distribution -0- next $0.38 of distribution 0.009299 next $0.06 of distribution 0.009857 next $2.06 of distribution 0.012647 all additional distributions 0.014527
Example Amount Payable to Kikol ------- ----------------------- Amount of first distribution $2.75 $ 6,499.66(2) Amount of second distribution $3.50 $243,894.73(3) ---------- $250,394.39 Total Payments in Lieu of Options Payable to Mr. Kikol. - ------------------------ 1. The percentages were computed on the assumption that all outstanding options would be exercised when trust distributions equaled the respective strike prices and on the assumption that there are 5,179,143 actual shares outstanding. The percentages will be equitably adjusted to the extent there is a change in the number of actual shares outstanding from time to time. 2. $2.62 x 5,376,643 x 0 - -0- $0.13 x 5,376,643 x 0.009299 - $ 6,499.66 -------- $ 6,499.66 3. $0.25 x 5,376,643 x 0.009299 - $ 12,499.35 $0.06 x 5,376 x 0.009857 - $ 3,179.85 $2.06 x 5,376,643 x 0.012647 - $140,076.71 $41.13 x 5,376,643 x 0.014507 - $ 88,138.82 ---------- $243,894.73 PLEASE NOTE: This example is only meant to illustrate the calculations for a payment in lieu of options. No inference should be drawn concerning the prospectus for actual distributions. For the purposes of this example it is assumed that 5,179,143 Trust shares will be outstanding so that the shares on a fully diluted basis would equal 5,376,643. The actual calculation of payments will be based on the actual number of fully diluted Trust shares outstanding at the time a distribution is made.
11 EXHIBIT A-1 COMPUTATION OF GROSS UP AMOUNT (PURSUANT TO SECTION 4(b) OF THIS AGREEMENT) Assume the Payments in Lieu of Options payable to Kikol are as set forth on Exhibit A:
Payments in Lieu of Options - --------------------------- 1. $ 6,499.66 2. $243,894.73 ---------- $250,394.39 Total Payments in Lieu of Options Payable to Kikol.
Gross Up Amount for First Payment - --------------------------------- $6,499.66 divided by .54(1) = $12,036.41 Total amount payable to Kikol - 6,499.66 Payment in Lieu of Options ---------- $ 5,536.75 Gross Up Amount
Total amount payable at time of first payment = $12,036.41 Gross Up Amount for Second Payment - ---------------------------------- 1. $193,500.34(5) divided by .54(1) = $358,333.96 - 193,500.34 ----------- $164,833.62 First Part of Gross Up Amount 2. $50,394.39x 20.37%(3) = $ 10,265.34 Second Part of Gross Up Amount + 50,394.39 ----------- $ 60,659.73 3. Total Gross Up Amount on Second Payment = $164,833.62 + $10,265.34 = $175,098.96 4. Total Amount Payable at time of Second Payment = $358,333.96 + $60,659.73 = $418,993.69 Summary - ------- 1. Total Payments in Lieu of Options Payable to Mr. Kikol $ 6,499.66 $243,894.73 ----------- $250,394.39 2. Total Gross Up Payments payable to Mr. Kikol $ 5,536.75 $175,098.96 ----------- $180,635.71 3. Total payments payable to Mr. Kikol under Section 4(b) $250,394.39 $180,635.71 ----------- $431,030.10 4. Tax Benefit to Trust (assuming Trust's tax rate $431,030.10 equals 40%) x 40% ---------- $172,412.04 - -------------------- 1. 100% minus his deemed combined tax rate of 46%. 2. Remaining portion of first $200,00 of Payments in Lieu of Options. 3. The spread between the deemed ordinary income rate of 46% and the deemed capital gain rate of 35% is 11%. That percentage divided by .54 yields the percentage to be used to determine the gross up amount for the payments which would otherwise have been taxed at capital gains rates.
2 12 EXHIBIT B INCENTIVE COMPENSATION PROGRAM CleveTrust Realty Investors (the "Trust") hereby adopts effective September 1, 1996 an Incentive Compensation Program for the benefit of certain designated officers and employees of the Trust who shall be participants hereunder as additional incentive for their efforts during the sale of the Trust's properties and the liquidation of its assets (the "Liquidation Process"). It is intended that the Liquidation Process be completed by the third anniversary of the shareholder vote approving the Liquidation Process (the "Termination Date") but the Board of Trustees of the Trust (the "Board") have the discretion to continue the Liquidation Process beyond such Termination Date. With the exception of Mr. John C. Kikol ("Kikol") no participant in the program shall be guaranteed any right to participate hereunder, and the payments to each participant, if any, shall be only pursuant to the terms and provisions hereunder. SECTION 1. INCENTIVE PLAN FOR EMPLOYEES. ---------- ----------------------------- A discretionary bonus pool of the two hundred thousand dollars ($200,000) is established to fund bonus payments during the Liquidation Process to staff employees and officers of the Trust (other than Kikol). Kikol shall have complete discretion to determine who shall receive bonus payments and when and in what amounts, provided, however, no more than seventy-five thousand dollars ($75,000) in the aggregate may be paid from the pool to officers of the Trust. SECTION 2. INCENTIVE PLAN FOR OFFICERS. ---------- ---------------------------- (a) DETERMINATION OF POOL PAYMENTS. ------------------------------- The amount of all cash liquidation distributions of the Trust resulting from the sale of properties after September 1, 1996, shall be calculated when made as a present value amount as of January 1, 1997 (or the date of the distribution if earlier than January 1, 1997) using a discount rate of 10 percent (the "Present Valued Distributions"). An Incentive Compensation Pool (the "Pool") for Officers of the Trust shall be based upon the following formula: (a) 10 percent of all Present Valued Distributions between $4.75 per share and $5.50; and (b) 15 percent of all Present Valued Distributions in excess of $5.50 per share. 13 Such amounts will be payable to the Pool and available for distribution at the same time (and from time to time) as liquidating distributions triggering eligibility for payments to the Pool are made to shareholders after September 1, 1996. For purposes of computing the amount payable to the Pool as the result of a distribution, the amount of cash available for contribution to the Pool shall be considered a distribution. For example, if the Trust has cash liquidation proceeds available of $5.05 per share (on a present value basis as described above) the amount payable to the Pool shall be the product of $.03 (10% x $.30) times the number of shares then outstanding even though this means the actual Present Valued Distribution available for distribution to shareholders after the Pool contribution is made will be $5.02 per share. (b) DISTRIBUTION OF POOL PAYMENTS. ------------------------------ The amount to be distributed from the Pool shall be allocated as follows: (i) 80% shall be distributed to Kikol. (ii) 20% shall be distributed among any one or all of the then employed officers of the Trust (including Kikol) in such proportions as shall be determined in the absolute discretion of (1) Mr. John Weil, or in the event Mr. Weil is no longer a member of the Board or is unwilling or unable to perform such allocation, then (2) Robert Kanner, or if Mr. Kanner is no longer a member of the Board or is unwilling or unable to perform such allocation, then (3) the Board. The entire 20% must be distributed, but the participant eligible to be a recipient shall receive anywhere from 0% to 100% of such amount at the sole discretion of Mr. Weil, Mr. Kanner or the Board, as the case may be, and different allocations among the eligible participants may be made with respect to each serial distribution from the Pool. There is no maximum limit on the amount of incentive compensation that can potentially be earned through the Pool. (c) POOL PAYMENTS WITH RESPECT TO UNSOLD PROPERTIES. ------------------------------------------------ In the event properties of the Trust remain unsold as of the Termination Date (or at such later date as the Officer's employment with the Trust is terminated if such employment continues beyond the Termination Date), the values of such unsold properties shall be computed using a 12 percent earnings capitalization rate based on the last twelve months of cash flow from such properties, before debt service computed as historically reported to the 14 Board and as reflected on Schedule 1 attached to this Incentive Compensation Program. Such value shall then be adjusted as follows: (i) subtract outstanding mortgage loan balances; (ii) subtract an amount equal to a reasonable estimate of remaining and anticipated Trust expenses including, but not limited to, remaining payments on employment contracts, liabilities for taxes and professional fees and a reasonable reserve for contingent liabilities; and (iii) add an amount equal to the reasonably estimated values of remaining Trust tangible assets other than unsold properties including but not limited to computers, furniture and fixtures. Such adjusted value shall be deemed distributed to Trust shareholders on the Termination Date (or such later date as described above), in order to complete the calculations for all Present Valued Distributions during the Liquidation Process. No such deemed distribution will be computed and no amount will be payable under this Section 2(c) unless a minimum $3.50 per share of actual Present Valued Distributions have been made to the shareholders of the Trust by the Termination Date (or such later date as described above). (d) IN KIND DISTRIBUTION IN LIEU OF POOL PAYMENTS. ---------------------------------------------- In the event there are properties of the Trust remaining unsold as of the Termination Date, the Trust shall have the option of (i) paying to the Pool the amount based on the deemed distribution of unsold properties described at (c) above, or (ii) providing the equivalent adjusted value in a distribution of ownership interests in the remaining unsold properties. For example, if the Pool contribution with respect to deemed distributions under (c) above is calculated at $500,000 and the Trust has two remaining unsold properties that are valued at $5,000,000 on the same basis as described in (c) above, the Trust could make an in kind distribution to the Pool of a 10 percent ownership interest in those properties (or a commensurate interest in any entity formed to hold such properties) in lieu of any further cash payments. (e) IMPACT ON POOL OF KIKOL TERMINATION OF EMPLOYMENT. -------------------------------------------------- Notwithstanding any provision herein to the contrary, if Kikol's employment with the Trust terminates prior to the Termination Date under the circumstances described below, the following provisions shall apply: (i) If his employment is terminated by the Trust (a) during 1998 or thereafter and he has failed to sell at least three Trust properties after September 1, 1996 and before the end of calendar year 15 1997 or (b) during 1999 or thereafter and he has failed to sell at least three Trust properties during calendar year 1998 (all such sales to be subject to the approval of the Board) Kikol shall be entitled to an immediate cash payment of $250,000 in lieu of any participation in the Pool and the Board, in its discretion, may prospectively modify or terminate the entire Incentive Compensation Program described above. (ii) If his employment is terminated by the Trust (a) during 1997, or (b) during 1998 and he had sold at least three properties after September 1, 1996 and before the end of 1997, or (c) during 1999 or thereafter and he had sold at least three properties after September 1, 1996 and before the end of 1997 and had sold at least three additional properties before the end of 1998, he shall be entitled to his payments from the Pool when Pool distributions are payable as if his employment had not terminated and the Board, in its discretion, may prospectively modify or terminate all other provisions of the Incentive Compensation Program described above. (iii) If his employment is terminated under circumstances under which he is not entitled to severance payment for the reasons set out in Section 7(c) his Employment Agreement, he shall forfeit any right to payments from the Pool and the Board in its discretion, may prospectively modify or terminate the entire Incentive Compensation Program described above. (iv) If his employment is voluntarily terminated by Kikol because of a material change in his duties as described in Section 7(a) and (b) of his Employment Agreement, he shall be entitled to the payments described in (ii) above. If his employment is otherwise voluntarily terminated by Kikol the provisions as described in (iii) above shall apply. (v) If his employment is terminated because of his death or disability at a time when the sum of all Present Valued Distributions paid to the shareholders and all Present Valued Distributions payable to the shareholders from the proceeds of sales of Trust properties sold prior to such death or disability equals or exceeds $4.75 per share, he (or his personal representative, as the case may be) shall be entitled to payments from the Pool based upon such Present Valued Distributions (paid and 16 payable) to the extent they had not been taken into account in previous Pool payments distributed to him. If his employment is terminated because of his death or disability at a time other than as described in the immediately preceding sentence, the provisions as described in (iii) above shall apply. In the event his employment is terminated because of his death or disability under any circumstances, the Board, in its discretion, may prospectively modify or terminate the entire Incentive Compensation Program provided the payments required by the first sentence of this section 2(e)(v) are first made. For purposes of this Incentive Compensation Program, "disability" shall mean the inability of Kikol to carry out his duties hereunder by reason of any medically determinable physical or mental impairment which can be expected to result in death or which can be expected to last for a continuous period of not less than six months. Whether or not and when Kikol has become disabled shall be determined by agreement between the Trust and Kikol (or Kikol's legal representative) and failing such agreement, then by a physician jointly approved by the Trust and Kikol (or his legal representative) or, failing such joint approval, by a physician appointed by the American Arbitration Association at Cleveland, Ohio. (f) PAYMENTS IN LIEU OF POOL PAYMENTS IN THE EVENT OF A TRUST MERGER OR SALE. --------------------------------------- If the Trust is sold, merged or combined with another entity prior to the Termination Date, the Trust shall pay Kikol as incentive compensation, the greater of (i) the amount which would have been payable to him under the Pool based upon the Present Valued Distributions which would result if the present cash value of the consideration received in such merger or sale were distributed to the Trust shareholders on the closing date and, for this purpose, assuming Kikol would have received a 100% allocation of such hypothetical Pool amount, or (ii) $400,000. In such event the Board, in its discretion, may prospectively modify or terminate the rest of the provisions of the Incentive Compensation Program described above. This provision is intended to compensate Kikol for his efforts in a successful sale or merger of the Trust, and would be in lieu of his ability to earn a larger potential compensation benefit from the liquidation of the Trust's assets during the Liquidation Process. For example, if the Trust were sold for the equivalent of a net present value (computed pursuant to Section 2(a) above) of $5.50 per share, the amount computed under clause (i) of this Section 2(f) would equal $388,435.73 [(5.50 - 4.75) x 10% x 5,179,143 shares outstanding]. In such an example, Kikol would be paid the $400,000 under clause (ii) of this Section 2(f). 17 SECTION 3. EXAMPLE. ---------- -------- Examples of the computation of amounts payable under this Incentive Compensation Program is set forth on Schedule 2 attached hereto. 18 INCENTIVE COMPENSATION PLAN SCHEDULE 1 In accordance with Section 2(c) entitled "Pool Payments with Respect to Unsold Properties" attached are samples of three different property types for Fiscal Year ending September 30, 1995. As indicated in Section 2(c) the cash flow is the amount remaining after deducting all operating and fixed expenses but before any interest expense and mortgage principal amortization. That figure would be capitalized at 12 percent to calculate the valuation of such assets remaining unsold before adjustment for items (i) through (iii) in Section 2(c). The following summary illustrates how the calculation would be made on three properties currently owned by the Trust. A. OFFICE BUILDING EXAMPLE: E-13 Executive Club Building Line Item Net Cash Flow YTD Actual reflects the year-to-date net cash flow from the property. Such figure would be capitalized at 12 percent to calculate the value for purposes of the unsold properties as of the termination date, which is a defined term. Net Cash Flow YTD Actual $500,206.46 Valuation Based upon 12 percent capitalization $4,168,387.40
B. COMBINATION RETAIL AND MINI-WAREHOUSES EXAMPLE: E-35 TRIANGLE SQUARE Net Cash Flow YTD Actual $315,490.03 Valuation Based upon 12 percent capitalization $2,629,083.50
19 C. RETAIL SHOPPING CENTER EXAMPLE: E-47 CANNON WEST SHP. CENTER This is an example of a property that has an outstanding mortgage balance. Net Cash Flow YTD Actual $ 51,064.60 Add: Principal Amortization 95,024.05 Fixed Interest Expense 560,847.95 Contingent Interest 11,551.20 ------------- TOTAL: Net Cash Flow Before Principal Amortization and Interest Expense $ 718,487.80 Valuation Based upon 12 percent capitalization $ 5,987,398.30
PLEASE NOTE: The examples used throughout the Schedules to Exhibit B are meant as illustrations only. No inference should be drawn concerning the prospects for actual sales proceeds or actual Trust distributions. 20 INCENTIVE COMPENSATION PROGRAM SCHEDULE 2 Complete Liquidation of CleveTrust Distributions occurring on January 1, 1997 With Additional Distributions Occurring Each January 1 thereafter Final Distribution on January 1, 2000 Bonus Payable on Distributable Amount
Present Amount Net Present Cumulative Value of Distributable Value at Gross Cumulative Distribution Per Outstanding 10% PVD if Available Available Earned Dates Shares 1 Distributed Amount Amount Bonus ----- --------- ----------- ------ ------ ----- 1/1/97 $1.92 $1.92 $1.92 $1.92 0 1/1/98 .14 .13 2.06 2.05 0 1/1/98 1.44 1.31 3.50 3.36 0 1/1/99 .21 .17 3.71 3.53 0 1/1/99 2.13 1.76 5.84 5.29 .0540 1/1/00 .67 .50 6.51 5.79 .0645 --- --- ---- ---- ----- Totals $6.51 $5.79 $6.51 $5.79 .1185
Bonus Calculation Per Share: - ---------------------------- 1st Calculation: PVD of distributable amount - Base = Bonus eligible amount $5.79 - $4.75= $1.04 2nd Calculation: First $0.75 of bonus eligible amount x 10% = 10% bonus $0.75 x 10% = $.075 bonus 3rd Calculation: Balance of bonus eligible amount x 15% = 15% bonus $0.29 x 15% = $.0435 bonus Total bonus per share: $.075 + $0.435 = $.1185 (.0540/share payable on 1/1/99 and 0.645/share payable on 1/1/00) Bonus Calculation Gross: (assuming 5,179,143 shares): $.1185 x 5,179,143 = $613,728.45 Net Amount Distributed to Stockholders per Share: In Gross Dollars: $6.51 - $0.1185 = $6.3915 In Present Dollars: $5.79 - $0.1185 = $5.6715 Net Amount to Stockholders (assuming 5,179,143 shares, including options): In Gross Dollars: $6.3915 x 5,179,143 = $33,102,492.48 In Present Dollars: $5.6715 x 5,179,143 = $29,373,509.52 - --------------------------- 1. 5,179,143 shares outstanding (the actual calculation will be based on the actual number of Trust shares outstanding at the time a distribution is made.)
21 EXHIBIT C RELEASE OF CLAIMS I, _______________, the undersigned have been an employee of CleveTrust Realty Investors (the "Trust") pursuant to an Amended and Restated Employment Agreement dated __________, 1996 by and between the Trust and me (the "Employment Agreement"). My employment by the Trust is terminating effective ________, 19__ and, pursuant to Section __ of the Employment Agreement and in consideration of my employment by the Trust and the payments and benefits under the Employment Agreement and, particularly the severance payment under Section __ thereof, I hereby agree as follows: (1) I hereby voluntarily agree to waive and release any and all claims, charges and actions, known or unknown, including those relating in any way to my employment, or to my termination from employment with the Trust, and any claims for wrongful discharge, breach of contract, implied contract, promissory estoppel, tortious conduct, or claims under any federal, state or local employment statute, law, order or ordinance, including any claims for discrimination, and rights under the Age Discrimination in Employment Act which I may now or in the future have or assert against the Trust or any of its officers, trustees, employees, representatives, shareholders or related entities. This Release applies to all rights or claims which arise on or before the date on which it is signed. (2) I agree to return all property belonging to the Trust, including all keys, credit cards, and manuals. (3) I agree that I will not seek re-employment with the Trust or any related entity in any capacity except, if applicable, employment as manager pursuant to Section 10 of the Employment Agreement. (4) I understand that I have the option to consider and reflect upon this Release before its signing. It is advised that I consult with an attorney and/or other professionals such as accountants, financial advisors concerning its terms. I will be responsible for my attorney's fees and costs should I choose to have counsel review this Release. (5) I understand and agree that I will not make any derogatory or defamatory remarks about the Trust, its trustees, officers, employees, representatives or related entities. 22 (6) I agree to keep the terms of this Release and of my severance payment under my Employment Agreement confidential, and I will not publicize or communicate them in any newspaper, electronic media or other public or private forum, or in any manner whatsoever except as may be required by applicable law. (7) For a period of seven days after I sign this Release and return it to the Trust, I may revoke it by advising the Trust in writing that I have decided to revoke it. This Release will not become effective until that seven day period has expired. (8) I acknowledge that no promise or agreement not expressed in my Employment Agreement, in the Trust's personnel or employee benefit documents or this Release has been made to me, and that this Release and my Employment Agreement constitute the complete agreement between the Trust and me. (9) I understand and agree completely to the terms and conditions listed above. I acknowledge that I have twenty-one (21) days after receiving this Release to sign it and return it to the Trust. AGREED TO at ______________________, Ohio, this __________ day of ___________, 19__. ----------------------------------- [Employee] -2- 23 EXHIBIT D MANAGEMENT AGREEMENT THIS AGREEMENT is made this ____ day of ____________, 19__, by and between ____________________________ ("Owner") and JOHN C. KIKOL ("Agent"). RECITALS ERROR! BOOKMARK NOT DEFINED.A. Owner is the owner of certain real property (the "Properties") described in the attached Schedule of Properties. The Properties are/were real estate assets owned by CleveTrust Realty Investors ("CleveTrust") which were unable to be sold or otherwise disposed of during CleveTrust's three year plan of liquidation. Owner requires the services of a manager to supervise the operation of such Properties pending their eventual sale or other disposition and requires certain other administrative services pending Owner's liquidation or other disposition. Agent is/was employed as the President of CleveTrust and is, therefore, intimately familiar with the Properties and with the day to day administrative requirements of Owner. It is the present intention of Owner and Agent that Agent manage the Properties for Owner and perform those administrative services required by Owner during the term of this Agreement. In that regard, Owner and Agent desire to set forth their mutual understandings in writing. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth below, Owner and Agent hereby agree as follows: SECTION 1. APPOINTMENT OF AGENT. Effective as of the date of this Agreement and until such services are terminated as provided herein (the "Term"), Owner hereby appoints Agent as its (i) exclusive manager of the Properties and (ii) administrative officer responsible for Owner's ongoing business activities, and Agent hereby accepts such appointments and agrees to serve in such capacities, upon the terms and conditions contained herein. Agent agrees to use his best efforts in managing the Properties for Owner, consistent with the scope of his duties hereunder. Throughout the Term, Agent shall report and be responsive to Owner's Board of Trustees, management committee, or other designated governing body. No bond shall be required of Agent hereunder. It is not contemplated that Agent shall be required to devote his full business time to the -3- 24 affairs of Owner, however, Agent shall devote such of his business time as shall be required to carry out his duties and responsibilities under this Agreement. SECTION 2. TERM OF AGREEMENT. The Term shall continue until terminated (i) by either party upon not less than 90 days advance written notice; (ii) upon the death or disability of Agent; (iii) upon the sale or other disposition by Owner of the last of the Properties; or (iv) upon the filing of a petition in bankruptcy by or against either Owner or Agent which is not dismissed within 10 days, or upon the filing by either Owner or Agent of an assignment for the benefit of creditors. SECTION 3. MANAGEMENT FEE. Owner shall pay Agent a fee (the "Management Fee") in an amount equal to 5% of the "gross income" derived from the Properties (gross income for purposes hereof meaning the gross rental receipts from the Properties, without reduction for customary on-site expenses or reasonable travel expenses to or from the Properties) which shall compensate Agent for all of the administrative services and property management services to be rendered by Agent under this Agreement. The Management Fee shall be computed and paid on a monthly basis and shall be prorated for any partial month. SECTION 4. DUTIES - ADMINISTRATIVE SERVICES. Agent shall provide all day to day administrative services required to satisfy Owner's routine operational obligations, including but not limited to (i) maintaining an office and a telephone in the name of Owner; (ii) timely responding to telephonic and written inquiries whether from shareholders/partners or other persons; (iii) preparing and filing on a timely basis all public company reports required to be filed to maintain in good standing Owner's and CleveTrust's public company status; (iv) preparing and disseminating, as directed by Owner, monthly accounting statements in sufficient detail to allow Owner to determine the then current status of its Properties and business; (v) maintaining auditable books and records and assisting Owner's auditors in completing a timely audit of such books and records; (vi) preparing on a timely basis routine payroll deposit returns and other reports and tax returns and cooperating with Owner and any outside preparers in preparing and filing on a timely basis all annual tax returns and other periodic reports required to be filed by Owner and CleveTrust with Federal, state and local governmental and administrative agencies; (vii) procuring property, casualty, liability and other types of insurance, as may be reasonably required, to protect Owner's interests. Agent shall have the authority to hire such full or part time assistants as Agent deems necessary to assist Agent to accomplish the foregoing responsibilities and duties, but the cost associated with such assistants shall be the responsibility of Agent and shall be paid by him out of the Management Fee. Notwithstanding the foregoing, Owner, rather than Agent, shall be responsible for the costs associated with (i) the preparation of any accounting, audit and tax reviews by outside preparers; (ii) the cost of any required outside legal services; and (iii) any stock transfer fees. -4- 25 SECTION 5. DUTIES - MANAGEMENT SERVICES RELATED TO THE PROPERTIES. Agent shall be responsible for all aspects of managing the Properties, including, but not limited to (i) supervising on-site management personnel as more fully described in subsection a. below; (ii) supervising accounts and records of the Properties; (iii) coordinating advertising and marketing of the Properties; (iv) executing leases, renewals, amendments, expansions, and relocations; (v) cancelling existing leases due to non-performance as more fully described in subsection b. below; (vi) coordinating the collection of rents when due; (vii) depositing all rents and other funds collected into Owner's custodial account; (viii) hiring, discharging, and supervising all caretaker employees; (ix) coordinating all ordinary repairs and replacements necessary to preserve the Properties as more fully described in subjection c. below; (x) coordinating all alterations and decorations required to comply with lease agreements as more fully described in subjection d. below; (xi) coordinating the purchase of all supplies and payment of all Property-related bills; and (xii) coordinating the delivery of those services required to be rendered to tenants or other occupants of the Properties as more fully described in subsection e. below. ON-SITE EMPLOYEES. Agent agrees to supervise the work of and to hire and discharge employees of Owner performing their duties at the Properties and agrees to use reasonable care in the hiring of such employees. Agent's management of such employees shall include, but not be limited to (i) maintaining good labor union relations, (ii) computing withholding taxes, and (iii) dealing with hospitalization, group life insurance, disability insurance and other benefits. All of such employees shall be employees of Owner, and not of Agent, and the wages, other compensation and benefits attributable to such employees shall be the responsibility of Owner. Agent shall not be liable to Owner or others for any act or omission on the part of such employees. All wages, salaries and other compensation paid to such employees, including all items payable with respect to payroll, such as, but not limited to, unemployment insurance, social security, workers compensation, disability benefits if any, accrued vacation pay, medical and surgical plans, now in existence or hereafter imposed or included in union agreements which Agent may enter into shall be considered as operating expenses of the Properties. EVICTIONS. Agent is authorized in the name of Owner, when directed by Owner, to institute any and all legal actions or proceedings to effect the collection of rents or the ousting or dispossessing of tenants or other persons from the Properties and to employ counsel at Owner's expense to effect same. REPAIRS AND MAINTENANCE. Agent is authorized, at the expense of Owner, to cause to be made such ordinary repairs to the Properties, to purchase supplies for the Properties, and to enter into such -5- 26 service contracts as Agent shall deem advisable or necessary with respect to the Properties. Any expense to be incurred in excess of $2,000, shall not be incurred unless authorized in writing by Owner, except where the same is immediately required by law, or under circumstances which Agent reasonably deems constitutes an emergency. Any and all discounts obtained shall be for the benefit of Owner. ALTERATIONS OR INSTALLATIONS. Agent is authorized on behalf of Owner to consent to and approve tenant alterations and installments which are provided for in the tenant's leases. With respect to alterations and installations not provided for by leases, Agent is authorized to approve and consent to such work provided (i) such alterations and installations are made solely at tenant's expense and in accordance with governmental requirements; and (ii) such alterations and installations do not affect the basic structure of any building on the properties or interfere with essential Property services to other tenants. SERVICES TO TENANTS. Agent agrees to use his best efforts to have all services rendered to tenants occupants at a minimum cost to Owner consistent with Owner's standards for the Properties. No services will be promised or performed for tenants other than the usual services provided by owners or lessors of similar buildings unless approved in advance in writing by Owner. NOTICES OF VIOLATIONS. Upon obtaining knowledge thereof, Agent shall promptly notify Owner and Owner shall promptly notify Agent of any violation, order, rule or determination of any Federal, State or Municipal authority affecting the Properties. DEPOSIT OF COLLECTED FUNDS. All monies received by Agent for or on behalf of Owner shall be and remain the property of Owner and shall be deposited in accounts at a bank designated by and for the benefit of Owner. The parties agree that the following costs are not intended to be paid out of the Management Fee and are the responsibility of Owner: (i) payment of third party fees incurred in connection with the institution of litigation to collect past due rentals or evict tenants; (ii) preparation of audited statements and tax returns which shall be performed by outside accounting firms of Owner's choice; (iii) customary on-site expenses related to the properties; (iv) reasonable travel expenses of Agent to or from the Properties. SECTION 6. INSURANCE. At Owner's sole expense, Agent shall procure for Owner and Owner agrees to carry general liability insurance with a minimum limit of at least $__________, including elevator liability insurance, contractual liability insurance, -6- 27 steam boiler insurance, worker's compensation, superintendent's fidelity bond, and such other insurance as may be reasonably necessary for the protection of the interests of Owner and Agent. Agent shall be named as a co-insured on all of such policies. The public liability, elevator liability, and contractual liability insurance must contain a severability of interest clause and coverage for personal injury. A certificate of insurance indicating each of the coverages or policies of insurance, issued by the carrier, shall be delivered promptly to Agent by Owner upon receipt. Owner agrees (i) to hold and save Agent free and harmless from any claim for damages or injuries to persons or property by reason of any cause whatsoever when Agent is carrying out his duties hereunder or acting under the express or implied directions of Owner, or due to Owner's failure or refusal to comply with or abide by any rule, order, determination, ordinance or law of any federal, state or municipal authority, (ii) to reimburse Agent upon demand for any monies which Agent is reasonably required to expend for any reason in defense of any claim or civil action, proceeding, charge or prosecution made, instituted or maintained against Agent or against Owner and Agent, jointly or severally, due to the condition of or use of the Properties, or acts or omissions of Agent or employees of Owner or Agent, or arising out of or based upon any law, regulation, requirement, contract or award relating to the hours of employment, working conditions, wages and/or compensation of employees or former employees of Owner, or otherwise, and (iii) to defend promptly and diligently, at Owner's sole expense, any claim, action or proceeding brought against Agent or against Owner and Agent, jointly or severally, arising out of or connected with any of the foregoing, and to hold harmless and fully indemnify Agent from any judgment, loss or settlement on account thereof. The provisions of this paragraph shall survive the termination of this Agreement. Nothing contained herein is intended to nor shall it relieve Agent from responsibility to Owner rising out of the sole negligence of Agent or his intentional acts. Owner shall procure an appropriate clause in, or endorsement on, each of its policies of fire or extended coverage insurance and on all other forms of property damage insurance, including, but not limited to coverage such as water damage insurance, property damage insurance, boiler and machinery insurance, sprinkler leakage insurance, and other insurance covering the premises on which the Properties are located, the Properties or personal property fixtures or equipment located thereon, whereby the insurer waives subrogation or consents to a waiver of right of recovery against Agent and having obtained such a clause or endorsement of waiver of subrogation or consent to a waiver of right of recovery, Owner hereby agrees that it will not make any claim against, or seek to recover from Agent for any loss or damage to property to the extent such damage or loss is recovered by such insurance. SECTION 7. NOTICES. Any notice required to be given pursuant to the provisions of this Agreement shall be deemed to be effectively given if personally delivered to a party or if mailed, by certified mail, postage prepaid, to a party, or if transmitted via overnight courier service (FEDEX, UPS Overnight, or the like), at the following addresses: -7- 28 To Owner: To Agent: John C. Kikol or to such other addresses as may be designated by the parties in a notice complying with the provisions of this Section. Where written approval from Owner is required for any activity contemplated herein, such approval shall be valid only if signed by an executive officer of Owner, other than Agent, if Agent is then an officer of Owner, or by a representative of the Board of Trustees or other governing entity of Owner, designated for such purpose. SECTION 8. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties and may not be changed or modified except by a written instrument executed by all parties hereto. SECTION 9. NON-ASSIGNMENT. This Agreement may not be assigned by Agent without the prior written consent of Owner. Owner may assign this Agreement to any successor of the Properties and business of Owner. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. [OWNER] By John C. Kikol -8- EX-10.2 3 EXHIBIT 10.2 1 Exhibit (10)(2) AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, (which hereinafter, along with all Exhibits and Schedules referenced herein and attached hereto, is referred to as the "Agreement") is made by and between CLEVETRUST REALTY INVESTORS, a Massachusetts voluntary association of the type generally known as a business trust (the "Trust"), and MICHAEL R. THOMS ("Officer"). The Trust and the Officer are sometimes referred to as a "party" or, collectively, as the "parties." R E C I T A L S: A. The parties entered into an Amended and Restated Employment Agreement dated as of January 1, 1993 pursuant to which the Officer was retained as the Trust's Vice President and Treasurer. B. The Board of Trustees of the Trust (the "Board") has resolved to recommend to the Trust's shareholders that all Trust properties be sold and that the Trust be liquidated over a period of three years or the Trust properties be otherwise disposed of in a merger, consolidation or similar transaction (the "Liquidation Process"), and the Board desires to retain the Officer for at least a portion of the Liquidation Process as Vice President and Treasurer to assist in that Process. C. As an inducement to the Officer to continue in the employment of the Trust as its Vice President and Treasurer for at least a portion of the Liquidation Process, the parties desire to amend and completely restate the terms of the Officer's employment agreement as set forth below, effective September 1, 1996. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the parties hereby agree as follows provided that the Liquidation process is subsequently approved by the Trust's shareholders: Section 1. Status of Prior Agreement. ---------- -------------------------- The Officer's current employment agreement with the Trust shall be superseded by the terms of this Agreement effective September 1, 1996 provided that as conditions subsequent the Trust's shareholders approve this Agreement and the Liquidation Process. If for any reason this Agreement does not become effective, the Officer's current employment agreement shall remain in force according to its terms. Section 2. Continuation of Officer's Services. ---------- ----------------------------------- Until such employment is terminated as provided herein, the 2 Trust hereby retains the Officer to render services to the Trust as its Vice President and Treasurer in connection with the management and liquidation of the Trust including the timely sale of the Trust's properties (but subject to prior Board approval), the payment of its expenses and liabilities, the distribution of its net assets and the winding up of its affairs. It is the intention of the Board that the Liquidation Process be completed by the third anniversary of the shareholder vote approving the Liquidation Process (the "Termination Date") but subject, however, to the Board's subsequent determination in its discretion to extend the Liquidation Process beyond the Termination Date but no guarantee is made that Officer's employment shall continue for the entire Liquidation Process. During the term of this Agreement the Officer shall devote his full time during normal working hours (except normal vacation periods and periods of illness) and shall exert his best efforts, knowledge, and skill to the business affairs of the Trust including the Liquidation Process. Section 3. Base Salary. ---------- ------------ The Trust will pay to the Officer during the period from and after the effective date hereof through December 31, 1996 (i) base salary at a rate of $76,000 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments plus (ii) a bonus of $16,000 (payable on December 1, 1996, net of applicable withholding taxes). Thereafter, during the term of this Agreement, the Trust will pay the Officer a base salary at a rate of $92,000 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments. Section 4. Additional Compensation in Lieu of Stock Options. ---------- ------------------------------------------------- (a) In February, 1992, shareholders of the Trust adopted and approved the 1992 Stock Option Plan which further amended and extended the 1983 Incentive Stock Option Plan. The Officer has been granted certain stock options to purchase shares in the Trust in accordance with the terms of the 1992 Incentive Stock Option Plan or otherwise. (b) The Officer hereby waives all rights with respect to unexercised options described in (a) above as of the effective date of this Agreement. The Trust will make additional compensation payments to the Officer in an amount based upon the liquidating distributions made to Trust shareholders from time to time pursuant to the table set forth on Exhibit A attached hereto and made a part hereof (the "Payments in Lieu of Options"). In addition to the Payments in Lieu of Options, the Trust shall also pay to the Officer an additional amount (the "Tax Gross Up Amount") which, shall be based on the difference between the ordinary income tax rate to which such payment will be subject for federal income tax purposes and the capital gains rate which could have applied for federal income tax purposes to the stock options. For purposes of the computation of the Gross Up Amount it is assumed that the Officer's combined tax rate for capital gains is 35% and for ordinary income is 46%. The computation of the Gross Up Amount is 2 3 illustrated in the example set forth on Exhibit A-l. Such Payments in Lieu of Options and the related Gross Up Amount (net of applicable withholding taxes) shall be made at the same time as liquidating distributions are paid to the shareholders by the Trust. If the Trust is sold, merged or combined with another entity resulting in payment by the Buyer directly to the Trust's shareholders rather than payments to and liquidating distributions from the Trust, the Trust shall pay the Officer as additional compensation the amount which would be payable to him under the foregoing provisions of this Section 4(b) as if the present cash value of the consideration received in such sale, merger or combination would be distributed to the shareholders as a liquidating distribution on the closing date of such transaction. If at the termination of Officer's employment under this Agreement, any Trust properties remain unsold, the Officer shall be entitled to further distributions (including Gross Up Amounts) at such times as additional liquidating distributions are made to the Trust shareholders from the sale of such properties. Section 5. Other Benefits. ---------- --------------- During the term of his employment, the Trust shall continue to provide benefits to the Officer comparable to those presently being provided, including a retirement plan, group life insurance, health and accident insurance, hospitalization and other similar plans and will continue to pay or reimburse the Officer for reasonable and ordinary business expenses (including professional dues and membership fees in professional and industry associations). Notwithstanding any provision to the contrary in this Agreement or in any qualified or non qualified retirement or deferred compensation plan of the Trust, it is specifically agreed by the Officer that any payments made to him under Sections 4, 5 or 7 hereof, will not be considered in determining any benefit payments due to the Officer under any qualified retirement or deferred compensation plan of the Trust. Section 6. Termination and Severance Payment. ---------- ---------------------------------- (a) The Trust and Officer shall have the right to terminate this Agreement at any time, for any reason, without any prior notice to the other. This Agreement shall automatically terminate upon the disability or the death of the Officer. In the event of the termination of this Agreement either (i) by action of the Trust or as a result of the Officer's death or disability either before or after the conclusion of the Liquidation Process or (ii) by action of the Officer after a material change in the Officer's duties (as described in (b) below), the Trust shall pay to the Officer (or his estate in the event of his death) a severance payment equal to $184,000 within fifteen (15) days after the event giving rise to the payment obligation. For purposes of this Agreement, "disability" shall mean the inability of the Officer to carry out his duties hereunder by reason of any medically determinable physical or mental impairment which can be expected to result in death or which can be expected to last for a continuous period of not less than six months. 3 4 (b) For purposes of this Agreement, the parties acknowledge that the Officer's duties will be changing in some respect from the duties he previously performed as Vice President and Treasurer as a result of the Liquidation Process and such changes shall not be considered a "material change" for purposes of (a) above provided, however, that any change of duties which results in the Officer no longer functioning as Vice President and Treasurer of the Trust or any relocation of the Officer from the greater Cleveland area without his consent shall be considered a "material change." (c) In the event the Officer is accused by the Trust of appropriating $25,000 or more of the Trust's funds or property for his personal betterment, the Trust may immediately terminate the Officer and withhold the severance payment described in (a) above pending the adjudication of the allegation. In the event the Officer is subsequently convicted in a court of law of embezzling $25,000 or more from the Trust, the Trust shall have no obligation to pay any severance payment. If, however, the Officer is not convicted of embezzlement, the Trust shall immediately pay to the Officer the severance payment and reimburse him for legal fees and related expenses. (d) In consideration for the Officer's continued employment under this Agreement and the payments and benefits provided hereunder, and particularly, the severance payment provided hereunder and as a condition precedent to receiving such payment, the Officer shall sign and deliver to the Trust a Release of Claims substantially in the form as set forth on Exhibit B attached hereto and with such changes thereto as specifically authorized by the Board. For purposes of this Section 6(d), the Release of Claims shall not be considered delivered until the period for rescission set forth therein has expired. Section 7. Legal Fees and Expenses. ---------- ------------------------ (a) In the event the Trust has failed to comply with any of its obligations under Section 6 of this Agreement or in the event that the Trust or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from the Officer the benefits intended to be provided to the Officer under Section 6 of this Agreement, the Trust irrevocably authorizes the Officer, from time to time, to retain legal counsel of his choice, at the expense of the Trust, to represent the Officer in connection with the initiation or defense of any litigation or other legal action, whether by or against the Trust or any Trustee, Officer, shareholder or other person affiliated with the Trust, in any jurisdiction. The Trust shall pay all such legal costs promptly upon receipt of a detailed invoice and be solely responsible for any and all attorneys' and related fees and expenses incurred by the Officer as a result of the Trust's failure to perform its obligation under this Section 7 or as a result of the Trust or any person contesting the validity or enforceability of this Section 7. (b) The Trust shall pay to Jason C. Blackford, legal counsel 4 5 for the Officer and certain other officers executing employment agreements with the Trust, his reasonable fee for legal representation of such officers with respect to such employment agreements in an amount not to exceed five thousand dollars ($5,000) with respect to such representation of all such officers in the aggregate, and the obligations of the Trust under the provisions of this Section 7(b) shall be the only responsibility of the Trust with respect to legal fees of Officer in connection with the negotiation and drafting of this Agreement. Section 8. Notice. ---------- ------- Any notice required to be given pursuant to the provisions of this Agreement shall be deemed to be effectively given if personally delivered or if mailed, by certified mail, postage prepaid, to the parties at the following addresses: To the Trust: Board of Trustees CleveTrust Realty Investors 2001 Crocker Road, Suite 400 Westlake, OH 44145 To Officer: MICHAEL R. THOMS 8101 Fenway Drive Parma, Ohio 44129 or to such other addresses as may be designated by one party to the other in a notice complying with the provisions of this Section 8. Section 9. Existing Agreements and Amendments. ---------- ----------------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and, shall supersede any and all existing agreements between the parties with respect to the Officer's employment by the Trust. This Agreement may be modified and amended only in a writing signed by each of the parties. Section 10. Non-Assignability. ----------- ------------------ None of the rights or obligations of the Officer hereunder may be assigned without the prior written consent of the Board. Section 11. Benefit. ----------- -------- This Agreement shall inure to the benefit of and be binding upon the Trust, its successors and assigns, and upon the Officer, his heirs and personal representatives and permitted assigns. Section 12. Severability. ----------- ------------- If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other 5 6 provision of this Agreement which can be given effect without the invalid provisions, and, to that end, the provisions hereof are severable and any invalid provision shall be deemed modified to the least extent necessary to render such provision valid. Section 13. Equitable Adjustment. ----------- --------------------- With respect to any payments hereunder which are computed with reference to "per share" valuations or distributions or with respect to the number of Trust shares outstanding, there shall be an equitable adjustment as determined by the Board in such computations in the event of any stock split, reverse stock split or similar transaction causing a change in the number of Trust shares outstanding from the date this Agreement is executed to the date such payment computation is required. Section 14. Waiver. ----------- ------- The failure or omission by any party to enforce any provision of this Agreement, no matter how long continued, shall not be considered to be a waiver of such provision. No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any other subsequent breach or default of the same or similar or dissimilar nature. Section 15. Controlling Law. ----------- ---------------- This Agreement shall be interpreted and enforced in accordance with the laws of the State of Ohio. Section 16. Status of the Trust. ----------- -------------------- The Trust is a Massachusetts business trust governed by the terms of a Second Amended and Restated Declaration of Trust dated as of February 21, 1992 as amended by an Amendment dated February 21, 1995. No obligation of the Trust is personally binding upon, nor shall resort be had to the private property of any of the Trustees, shareholders, officers, employees or agents of the Trust, but the Trust property or a specific portion thereof only shall be bound. IN WITNESS WHEREOF, the parties have executed this Agreement this 30th day of September, 1996. CLEVETRUST REALTY INVESTORS By /s/ John C. Kikol /s/ Michael R. Thoms - -------------------------------------- -------------------- JOHN C. KIKOL MICHAEL R. THOMS 6 7 EXHIBIT A Payments in Lieu of Options --------------------------- (Pursuant to Section 4(b) of this Agreement) Mr. Thoms is entitled to a share of each distribution when and if paid to Trust shareholders based upon the following table:
Cumulative Distributions Percentage of Total Distribution ------------------------ -------------------------------- Payable Per Share Which is Payable to Mr. Thoms(1) ----------------- -------------------------------- first $2.62 of distribution -0- next $0.38 of distribution 0.004650 next $0.06 of distribution 0.004836 next $2.06 of distribution 0.006231 all additional distributions 0.007533 Example Amount Payable to Mr. Thoms ------- --------------------------- Amount of first distribution $2.75 - $ 3,250.18(2) Amount of second distribution $3.50 - $122,591.81(3) ----------- $125,841.99 Total Payments in Lieu of Options Payable to Mr. Thoms. - ---------- (1) These percentages were computed on the assumption that all outstanding options would be exercised when Trust distributions equaled the respective strike prices and on the assumption that there are 5,376,643 actual shares outstanding. The percentages will be equitable adjusted to the extent there is a change in the number of actual shares outstanding from time to time. (2) $2.62 x 5,376,643 x 0 - -0- $0.13 x 5,376,643 x 0.004650 - $ 3,250.18 ----------- 3,250.18 (3) $0.25 x 5,376,643 x 0.004650 - $ 6,250.34 $0.06 x 5,376,643 x 0.004836 - $ 1,560.09 $2.06 x 5,376,643 x 0.006231 - $ 69,013.84 $1.13 x 5,376,643 x 0.007533 - $ 45,767.54 ----------- $122,591.81
PLEASE NOTE: This example is only meant to illustrate the calculations for a payment in lieu of options. No inference should be drawn concerning the prospects for actual distributions. For purposes of this example it is assumed that 5,179,143 Trust shares will be outstanding so that the shares on a fully diluted basis would total 5,376,643. The actual calculations of payments will be based on the actual number of fully diluted Trust shares outstanding at the time a distribution is made. 8 EXHIBIT A-1 COMPUTATION OF GROSS UP AMOUNT (Pursuant to Section 4(b) of this Agreement) Assume the Payments in Lieu of Options payable to Mr. Thoms are as set forth on Exhibit A: Payments in Lieu of Options - --------------------------- 1. $ 3,250.18 2. $122,591.81 ----------- $125,841.99 Total Payments in Lieu of Options Payable to Mr. Thoms Gross Up Amount for First Payment - --------------------------------- $3,250.18 x 20.37%(1) = $ 622.06 Gross Up Amount $3,250.18 Payment in Lieu of Options --------- $3,912.24 Total Payment to Mr. Thoms Gross Up Amount for Second Payment - ---------------------------------- $122,591.81 x 20.37%(1) = $ 24,971.95 Gross Up Amount $122,591.81 Payment in Lieu of Options ----------- $147,563.76 Total Payment to Mr. Thoms Summary - ------- 1. Total Payments in Lieu of Options Payable to Mr. Thoms $ 3,250.18 $122,591.81 ----------- $125,841.99 2. Total Gross Up Payments payable to Mr. Thoms $ 662.06 $ 24,971.95 ----------- $ 25,634.01 3. Total payments payable to Mr. Thoms under Section 4(b) $125,841.99 $ 25,634.01 ----------- $151,476.00 - ---------- (1) The spread between the deemed ordinary income rate of 46% and the deemed capital gain rate of 35% is 11%. That percentage divided by .54 yields the percentage to be used to determine the gross up amount for the payments which would otherwise have been taxed at capital gains rates.
9 EXHIBIT B RELEASE OF CLAIMS I, ____________, the undersigned have been an employee of CleveTrust Realty Investors (the "Trust") pursuant to an Amended and Restated Employment Agreement dated _________, 1996 by and between the Trust and me (the "Employment Agreement"). My employment by the Trust is terminating effective _______, 19__ and, pursuant to Section 6 of the Employment Agreement and in consideration of my employment by the Trust and the payments and benefits under the Employment Agreement and, particularly the severance payment under Section 6 thereof, I hereby agree as follows: (1) I hereby voluntarily agree to waive and release any and all claims, charges and actions, known or unknown, including those relating in any way to my employment, or to my termination from employment with the Trust, and any claims for wrongful discharge, breach of contract, implied contract, promissory estoppel, tortious conduct, or claims under any federal, state or local employment statute, law, order or ordinance, including any claims for discrimination, and rights under the Age Discrimination in Employment Act which I may now or in the future have or assert against the Trust or any of its officers, trustees, employees, representatives, shareholders or related entities. This Release applies to all rights or claims which arise on or before the date on which it is signed. (2) I agree to return all property belonging to the Trust, including all keys, credit cards, and manuals. (3) I agree that I will not seek re-employment with the Trust or any related entity in any capacity. (4) I understand that I have the option to consider and reflect upon this Release before its signing. It is advised that I consult with an attorney and/or other professionals such as accountants, financial advisors concerning its terms. I will be responsible for my attorney's fees and costs should I choose to have counsel review this Release. (5) I understand and agree that I will not make any derogatory or defamatory remarks about the Trust, its trustees, officers, employees, representatives or related entities. (6) I agree to keep the terms of this Release and of my severance payment under my Employment Agreement confidential, and I will not publicize or communicate them in any newspaper, electronic 1 10 media or other public or private forum, or in any manner whatsoever except as may be required by applicable law. (7) For a period of seven days after I sign this Release and return it to the Trust, I may revoke it by advising the Trust in writing that I have decided to revoke it. This Release will not become effective until that seven day period has expired. (8) I acknowledge that no promise or agreement not expressed in my Employment Agreement, the Trust's personnel or employee benefit documents or this Release has been made to me, and that this Release and my Employment Agreement constitute the complete agreement between the Trust and me. (9) I understand and agree completely to the terms and conditions listed above. I acknowledge that I have twenty-one (21) days after receiving this Release to sign it and return it to the Trust. AGREED TO at __________________, Ohio, this ________ day of ___________, 19__. _____________________________________ [Employee] -2- EX-10.3 4 EXHIBIT 10.3 1 Exhibit (10)(3) AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, (which hereinafter, along with all Exhibits and Schedules referenced herein and attached hereto, is referred to as the "Agreement") is made by and between CLEVETRUST REALTY INVESTORS, a Massachusetts voluntary association of the type generally known as a business trust (the "Trust"), and RAYMOND C. NOVINC ("Officer"). The Trust and the Officer are sometimes referred to as a "party" or, collectively, as the "parties." R E C I T A L S: A. The parties entered into an Amended and Restated Employment Agreement dated as of January 1, 1993 pursuant to which the Officer was retained as the Trust's Vice President, Secretary, and Counsel. B. The Board of Trustees of the Trust (the "Board") has resolved to recommend to the Trust's shareholders that all Trust properties be sold and that the Trust be liquidated over a period of three years or the Trust properties be otherwise disposed of in a merger, consolidation or similar transaction (the "Liquidation Process"), and the Board desires to retain the Officer for at least a portion of the Liquidation Process as Vice President, Secretary, and Counsel to assist in that Process. C. As an inducement to the Officer to continue in the employment of the Trust as its Vice President, Secretary, and Counsel for at least a portion of the Liquidation Process, the parties desire to amend and completely restate the terms of the Officer's employment agreement as set forth below, effective September 1, 1996. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the parties hereby agree as follows provided that the Liquidation process is subsequently approved by the Trust's shareholders: Section 1. Status of Prior Agreement. ---------- -------------------------- The Officer's current employment agreement with the Trust shall be superseded by the terms of this Agreement effective September 1, 1996 provided that as conditions subsequent the Trust's shareholders approve this Agreement and the Liquidation Process. If for any reason this Agreement does not become effective, the Officer's current employment agreement shall remain in force according to its terms. 2 Section 2. Continuation of Officer's Services. ---------- ----------------------------------- Until such employment is terminated as provided herein, the Trust hereby retains the Officer to render services to the Trust as its Vice President, Secretary, and Counsel in connection with the management and liquidation of the Trust including the timely sale of the Trust's properties (but subject to prior Board approval), the payment of its expenses and liabilities, the distribution of its net assets and the winding up of its affairs. It is the intention of the Board that the Liquidation Process be completed by the third anniversary of the shareholder vote approving the Liquidation Process (the "Termination Date") but subject, however, to the Board's subsequent determination in its discretion to extend the Liquidation Process beyond the Termination Date but no guarantee is made that Officer's employment shall continue for the entire Liquidation Process. During the term of this Agreement the Officer shall devote his full time during normal working hours (except normal vacation periods and periods of illness) and shall exert his best efforts, knowledge, and skill to the business affairs of the Trust including the Liquidation Process. Section 3. Base Salary. ---------- ------------ The Trust will pay to the Officer during the period from and after the effective date hereof through December 31, 1996 (i) base salary at a rate of $80,000 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments plus (ii) a bonus of $12,000 (payable on December 1, 1996, net of applicable withholding taxes). Thereafter, during the term of this Agreement, the Trust will pay the Officer a base salary at a rate of $92,000 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments. Section 4. Additional Compensation in Lieu of Stock Options. ---------- ------------------------------------------------- (a) In February, 1992, shareholders of the Trust adopted and approved the 1992 Stock Option Plan which further amended and extended the 1983 Incentive Stock Option Plan. The Officer has been granted certain stock options to purchase shares in the Trust in accordance with the terms of the 1992 Incentive Stock Option Plan or otherwise. (b) The Officer hereby waives all rights with respect to unexercised options described in (a) above as of the effective date of this Agreement. The Trust will make additional compensation payments to the Officer in an amount based upon the liquidating distributions made to Trust shareholders from time to time pursuant to the table set forth on Exhibit A attached hereto and made a part hereof (the "Payments in Lieu of Options"). In addition to the Payments in Lieu of Options, the Trust shall also pay to the Officer an additional amount (the "Tax Gross Up Amount") which, shall be based on the difference between the ordinary income tax rate to which such payment will be subject for federal income tax purposes and the capital gains rate which could have applied for federal income tax purposes to the stock options. For purposes of 2 3 the computation of the Gross Up Amount it is assumed that the Officer's combined tax rate for capital gains is 35% and for ordinary income is 46%. The computation of the Gross Up Amount is illustrated in the example set forth on Exhibit A-l. Such Payments in Lieu of Options and the related Gross Up Amount (net of applicable withholding taxes) shall be made at the same time as liquidating distributions are paid to the shareholders by the Trust. If the Trust is sold, merged or combined with another entity resulting in payment by the Buyer directly to the Trust's shareholders rather than payments to and liquidating distributions from the Trust, the Trust shall pay the Officer as additional compensation the amount which would be payable to him under the foregoing provisions of this Section 4(b) as if the present cash value of the consideration received in such sale, merger or combination would be distributed to the shareholders as a liquidating distribution on the closing date of such transactions If at the termination of Officer's employment under this Agreement, any Trust properties remain unsold, the Officer shall be entitled to further distributions (including Gross Up Amounts) at such times as additional liquidating distributions are made to the Trust shareholders from the sale of such properties. Section 5. Other Benefits. ---------- --------------- During the term of his employment, the Trust shall continue to provide benefits to the Officer comparable to those presently being provided, including a retirement plan, group life insurance, health and accident insurance, hospitalization and other similar plans and will continue to pay or reimburse the Officer for reasonable and ordinary business expenses (including professional dues and membership fees in professional and industry associations). Notwithstanding any provision to the contrary in this Agreement or in any qualified or non qualified retirement or deferred compensation plan of the Trust, it is specifically agreed by the Officer that any payments made to him under Sections 4, 5 or 7 hereof, will not be considered in determining any benefit payments due to the Officer under any qualified retirement or deferred compensation plan of the Trust. Section 6. Termination and Severance Payment. ---------- ---------------------------------- (a) The Trust and Officer shall have the right to terminate this Agreement at any time, for any reason, without any prior notice to the other. This Agreement shall automatically terminate upon the disability or the death of the Officer. In the event of the termination of this Agreement either (i) by action of the Trust or as a result of the Officer's death or disability either before or after the conclusion of the Liquidation Process or (ii) by action of the Officer after a material change in the Officer's duties (as described in (b) below), the Trust shall pay to the Officer (or his estate in the event of his death) a severance payment equal to $184,000 within fifteen (15) days after the event giving rise to the payment obligation. For purposes of this Agreement, "disability" shall mean the inability of the Officer to carry out his duties hereunder by reason of any medically 3 4 determinable physical or mental impairment which can be expected to result in death or which can be expected to last for a continuous period of not less than six months. (b) For purposes of this Agreement, the parties acknowledge that the Officer's duties will be changing in some respect from the duties he previously performed as Vice President, Secretary, and Counsel as a result of the Liquidation Process and such changes shall not be considered a "material change" for purposes of (a) above provided, however, that any change of duties which results in the Officer no longer functioning as Vice President, Secretary, and Counsel of the Trust or any relocation of the Officer from the greater Cleveland area without his consent shall be considered a "material change." (c) In the event the Officer is accused by the Trust of appropriating $25,000 or more of the Trust's funds or property for his personal betterment, the Trust may immediately terminate the Officer and withhold the severance payment described in (a) above pending the adjudication of the allegation. In the event the Officer is subsequently convicted in a court of law of embezzling $25,000 or more from the Trust, the Trust shall have no obligation to pay any severance payment. If, however, the Officer is not convicted of embezzlement, the Trust shall immediately pay to the Officer the severance payment and reimburse him for legal fees and related expenses. (d) In consideration for the Officer's continued employment under this Agreement and the payments and benefits provided hereunder, and particularly, the severance payment provided hereunder and as a condition precedent to receiving such payment, the Officer shall sign and deliver to the Trust a Release of Claims substantially in the form as set forth on Exhibit B attached hereto and with such changes thereto as specifically authorized by the Board. For purposes of this Section 6(d), the Release of Claims shall not be considered delivered until the period for rescission set forth therein has expired. Section 7. Legal Fees and Expenses. ---------- ------------------------ (a) In the event the Trust has failed to comply with any of its obligations under Section 6 of this Agreement or in the event that the Trust or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from the Officer the benefits intended to be provided to the Officer under Section 6 of this Agreement, the Trust irrevocably authorizes the Officer, from time to time, to retain legal counsel of his choice, at the expense of the Trust, to represent the Officer in connection with the initiation or defense of any litigation or other legal action, whether by or against the Trust or any Trustee, Officer, shareholder or other person affiliated with the Trust, in any jurisdiction. The Trust shall pay all such legal costs promptly upon receipt of a detailed invoice and be solely responsible for any and all attorneys' and related fees and expenses incurred by 4 5 the Officer as a result of the Trust's failure to perform its obligation under this Section 7 or as a result of the Trust or any person contesting the validity or enforceability of this Section 7. (b) The Trust shall pay to Jason C. Blackford, legal counsel for the Officer and certain other officers executing employment agreements with the Trust, his reasonable fee for legal representation of such officers with respect to such employment agreements in an amount not to exceed five thousand dollars ($5,000) with respect to such representation of all such officers in the aggregate, and the obligations of the Trust under the provisions of this Section 7(b) shall be the only responsibility of the Trust with respect to legal fees of Officer in connection with the negotiation and drafting of this Agreement. Section 8. Notice. ---------- ------- Any notice required to be given pursuant to the provisions of this Agreement shall be deemed to be effectively given if personally delivered or if mailed, by certified mail, postage prepaid, to the parties at the following addresses: To the Trust: Board of Trustees CleveTrust Realty Investors 2001 Crocker Road, Suite 400 Westlake, Ohio 44145 To Officer: Raymond C. Novinc 217 Wells Court Euclid, Ohio 44132 or to such other addresses as may be designated by one party to the other in a notice complying with the provisions of this Section 8. Section 9. Existing Agreements and Amendments. ---------- ----------------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and, shall supersede any and all existing agreements between the parties with respect to the Officer's employment by the Trust. This Agreement may be modified and amended only in a writing signed by each of the parties. Section 10. Non-Assignability. ----------- ------------------ None of the rights or obligations of the Officer hereunder may be assigned without the prior written consent of the Board. Section 11. Benefit. ----------- -------- This Agreement shall inure to the benefit of and be binding upon the Trust, its successors and assigns, and upon the Officer, his heirs and personal representatives and permitted assigns. 5 6 Section 12. Severability. ----------- ------------- If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement which can be given effect without the invalid provisions, and, to that end, the provisions hereof are severable and any invalid provision shall be deemed modified to the least extent necessary to render such provision valid. Section 13. Equitable Adjustment. ----------- --------------------- With respect to any payments hereunder which are computed with reference to "per share" valuations or distributions or with respect to the number of Trust shares outstanding, there shall be an equitable adjustment as determined by the Board in such computations in the event of any stock split, reverse stock split or similar transaction causing a change in the number of Trust shares outstanding from the date this Agreement is executed to the date such payment computation is required. Section 14. Waiver. ----------- ------- The failure or omission by any party to enforce any provision of this Agreement, no matter how long continued, shall not be considered to be a waiver of such provision. No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any other subsequent breach or default of the same or similar or dissimilar nature. Section 15. Controlling Law. ----------- ---------------- This Agreement shall be interpreted and enforced in accordance with the laws of the State of Ohio. Section 16. Status of the Trust. ----------- -------------------- The Trust is a Massachusetts business trust governed by the terms of a Second Amended and Restated Declaration of Trust dated as of February 21, 1992 as amended by an Amendment dated February 21, 1995. No obligation of the Trust is personally binding upon, nor shall resort be had to the private property of any of the Trustees, shareholders, officers, employees or agents of the Trust, but the Trust property or a specific portion thereof only shall be bound. 6 7 IN WITNESS WHEREOF, the parties have executed this Agreement this 25th day of September, 1996. CLEVETRUST REALTY INVESTORS By /s/ John C. Kikol /s/ Raymond C. Novinc - ------------------------------------- --------------------------------------- JOHN C. KIKOL RAYMOND C. NOVINC 7 8 EXHIBIT A Payments in Lieu of Options --------------------------- Pursuant to Section 4(b) of this Agreement) Mr. Novinc is entitled to a share of each distribution when and if paid to Trust shareholders based upon the following table:
Cumulative Distributions Percentage of Total Distribution ------------------------ -------------------------------- Payable Per Share Which is Payable to Mr. Novinc(1) ----------------- --------------------------------- first $2.62 of distribution -0- next $0.38 of distribution 0.004650 next $0.06 of distribution 0.004836 next $2.06 of distribution 0.006231 all additional distributions 0.007533 Example Amount Payable to Mr. Novinc Amount of first distribution $2.75 - $3,250.18(2) Amount of second distribution $3.50 - $122,591.81(3) $125,841.99 Total Payments in Lieu of Option Payable to Mr. Novinc - ---------- (1) These percentages were computed on the assumption that all outstanding options would be exercised when Trust distributions equaled the respective strike prices and on the assumption that there are 5,179,143 actual shares outstanding. The percentages will be equitably adjusted to the extent there is a change in the number of actual shares outstanding from time to time. (2) $2.62 x 5,376,643 x 0 - -0- $0.13 x 5,376,643 x 0.004650 - $3,250.18 ----------- 3,250.18 (3) $0.25 x 5,376,643 x 0.004650 - $ 6,250.34 $0.06 x 5,376,643 x 0.004836 - $ 1,560.09 $2.08 x 5,376,643 x 0.006231 - $ 69,013.84 $1.13 x 5,376,643 x 0.007533 - $ 45,767.54 ----------- $122,591.81
PLEASE NOTE: This example is only meant to illustrate the calculations for a payment in lieu of options. No inference should be drawn concerning the prospects for actual distributions. For purposes of this example it is assumed that 5,179,143 Trust shares will be outstanding so that the shares on a fully diluted basis would total 5,376,643. The actual calculations of payments will be based on the actual number of fully diluted Trust shares outstanding at the time a distribution is made. 9 EXHIBIT A-1 COMPUTATION OF GROSS UP AMOUNT (Pursuant to Section 4(b) of this Agreement) Assume the Payments in Lieu of Options payable to Mr. Novinc are as set forth on Exhibit A: Payments in Lieu of Options - --------------------------- 1. $ 3,250.18 2. $122,591.81 ----------- $125,841.99 Total Payments in Lieu of Options Payable to Mr. Novinc. Gross Up Amount for First Payment - --------------------------------- $3,250.18 x 20.37%(1) = $ 622.06 Gross Up Amount $3,250.18 Payment in Lieu of Options --------- $3,912.24 Total Payment to Mr. Novinc Gross Up Amount for Second Payment - ---------------------------------- $122,591.81 x 20.37%(1) = $ 24,971.95 Gross Up Amount $122,591.81 Payment in Lieu of Options ----------- $147,563.76 Total Payment to Mr. Novinc Summary - ------- 1. Total Payments in Lieu of Options Payable to Mr. Novinc $ 3,250.18 $122,591.81 ----------- $125,841.99 2. Total Gross Up Payments payable to Mr. Novinc $ 662.06 $ 24,971.95 ----------- $ 25,634.01 3. Total payments payable to Mr. Novinc under Section 4(b) $125,841.99 $ 25,634.01 ----------- $151,476.00 - ---------- (1) The spread between the deemed ordinary income rate of 46% and the deemed capital gain rate of 35% is 11%. That percentage divided by .54 yields the percentage to be used to determine the gross up amount for the payments which would otherwise have been taxed at capital gains rates.
10 EXHIBIT B RELEASE OF CLAIMS I,________________, the undersigned have been an employee of CleveTrust Realty Investors (the "Trust") pursuant to an Amended and Restated Employment Agreement dated _____________, 1996 by and between the Trust and me (the "Employment Agreement"). My employment by the Trust is terminating effective ____________, 19___ and, pursuant to Section 6 of the Employment Agreement and in consideration of my employment by the Trust and the payments and benefits under the Employment Agreement and, particularly the severance payment under Section 6 thereof, I hereby agree as follows: (1) I hereby voluntarily agree to waive and release any and all claims, charges and actions, known or unknown, including those relating in any way to my employment, or to my termination from employment with the Trust, and any claims for wrongful discharge, breach of contract, implied contract, promissory estoppel, tortious conduct, or claims under any federal, state or local employment statute, law, order or ordinance, including any claims for discrimination, and rights under the Age Discrimination in Employment Act which I may now or in the future have or assert against the Trust or any of its officers, trustees, employees, representatives, shareholders or related entities. This Release applies to all rights or claims which arise on or before the date on which it is signed. (2) I agree to return all property belonging to the Trust, including all keys, credit cards, and manuals. (3) I agree that I will not seek re-employment with the Trust or any related entity in any capacity. (4) I understand that I have the option to consider and reflect upon this Release before its signing. It is advised that I consult with an attorney and/or other professionals such as accountants, financial advisors concerning its terms. I will be responsible for my attorney's fees and costs should I choose to have counsel review this Release. (5) I understand and agree that I will not make any derogatory or defamatory remarks about the Trust, its trustees, officers, employees, representatives or related entities. (6) I agree to keep the terms of this Release and of my severance payment under my Employment Agreement confidential, and I will not publicize or communicate them in any newspaper, electronic 1 11 media or other public or private forum, or in any manner whatsoever except as may be required by applicable law. (7) For a period of seven days after I sign this Release and return it to the Trust, I may revoke it by advising the Trust in writing that I have decided to revoke it. This Release will not become effective until that seven day period has expired. (8) I acknowledge that no promise agreement not expressed in my Employment Agreement, the Trust's personnel or employee benefit documents or this Release has been made to me, and that this Release and my Employment Agreement constitute the complete agreement between the Trust and me. (9) I understand and agree completely to the terms and conditions listed above. I acknowledge that I have twenty-one (21) days after receiving this Release to sign it and return it to the Trust. AGREED TO at ___________________, Ohio, this _________ day of ___________, 19__. ______________________________________ [Employee] -2- EX-10.4 5 EXHIBIT 10.4 1 Exhibit (10)(4) AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, (which hereinafter, along with all Exhibits and Schedules referenced herein and attached hereto, is referred to as the "Agreement") is made by and between CLEVETRUST REALTY INVESTORS, a Massachusetts voluntary association of the type generally known as a business trust (the "Trust"), and BRIAN D. GRIESINGER ("Officer"). The Trust and the Officer are sometimes referred to as a "party" or, collectively, as the "parties." R E C I T A L S: A. The parties entered into an Amended and Restated Employment Agreement dated as of January 1, 1993 (the "Prior Agreement") pursuant to which the Officer was retained as the Trust's Vice President - Management. B. The Board of Trustees of the Trust (the "Board") has resolved to recommend to the Trust's shareholders that all Trust properties be sold and that the Trust be liquidated over a period of three years or the Trust properties be otherwise disposed of in a merger, consolidation or similar transaction (the "Liquidation Process"), and the Board desires to retain the Officer for at least a portion of the Liquidation Process as Vice President - Management to assist in that Process. C. As an inducement to the Officer to continue in the employment of the Trust as its Vice President - Management for at least a portion of the Liquidation Process, the parties desire to amend and completely restate the terms of the Officer's employment agreement as set forth below, effective September 1, 1996. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the parties hereby agree as follows provided that the Liquidation process is subsequently approved by the Trust's shareholders: Section 1. Status of Prior Agreement. ---------- -------------------------- The Officer's current employment agreement with the Trust shall be superseded by the terms of this Agreement effective September 1, 1996 provided that as conditions subsequent the Trust's shareholders approve this Agreement and the Liquidation Process. If for any reason this Agreement does not become effective, the Officer's current employment agreement shall remain in force according to its terms. 2 Section 2. Continuation of Officer's Services. ---------- ----------------------------------- Until such employment is terminated as provided herein, the Trust hereby retains the Officer to render services to the Trust as its Vice President - Management in connection with the management and liquidation of the Trust including the timely sale of the Trust's properties (but subject to prior Board approval), the payment of its expenses and liabilities, the distribution of its net assets and the winding up of its affairs. It is the intention of the Board that the Liquidation Process be completed by the third anniversary of the shareholder vote approving the Liquidation Process (the "Termination Date") but subject, however, to the Board's subsequent determination in its discretion to extend the Liquidation Process beyond the Termination Date but no guarantee is made that Officer's employment shall continue for the entire Liquidation Process. During the term of this Agreement the Officer shall devote his full time during normal working hours (except normal vacation periods and periods of illness) and shall exert his best efforts, knowledge, and skill to the business affairs of the Trust including the Liquidation Process. Section 3. Base Salary. ---------- ------------ The Trust will pay to the Officer during the period from and after the effective date hereof through December 31, 1996 (i) base salary at a rate of $80,000 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments plus (ii) a bonus of $17,000 (payable on December 1, 1996, net of applicable withholding taxes). Thereafter, during the term of this Agreement, the Trust will pay the Officer a base salary at a rate of $97,000 per year, which shall be paid (net of applicable withholding taxes) in semi-monthly installments. Section 4. Additional Compensation in Lieu of Stock Options. ---------- ------------------------------------------------- (a) In February, 1992, shareholders of the Trust adopted and approved the 1992 Stock Option Plan which further amended and extended the 1983 Incentive Stock Option Plan. The Officer has been granted certain stock options to purchase shares in the Trust in accordance with the terms of the 1992 Incentive Stock Option Plan or otherwise. (b) The Officer hereby waives all rights with respect to unexercised options described in (a) above as of the effective date of this Agreement. The Trust will make additional compensation payments to the Officer in an amount based upon the liquidating distributions made to Trust shareholders from time to time pursuant to the table set forth on Exhibit A attached hereto and made a part hereof (the "Payments in Lieu of Options"). In addition to the Payments in Lieu of Options, the Trust shall also pay to the Officer an additional amount (the "Tax Gross Up Amount") which, shall be based on the difference between the ordinary income tax rate to which such payment will be subject for federal income tax purposes and the capital gains rate which could have applied for federal income tax purposes to the stock options. For purposes of the computation of the Gross Up Amount it is assumed that the Officer's combined tax rate for capital gains is 35% and for ordinary income is 46%. The computation of the Gross Up Amount is illustrated in the example set forth on Exhibit A-l. Such Payments in Lieu of Options and the related Gross Up Amount (net of applicable withholding taxes) shall be made at the same time as liquidating distributions are paid to the shareholders by the Trust. If the Trust is sold, merged or combined with another entity resulting in payment by the Buyer directly to the Trust's 2 3 shareholders rather than payments to and liquidating distributions from the Trust, the Trust shall pay the Officer as additional compensation the amount which would be payable to him under the foregoing provisions of this Section 4(b) as if the present cash value of the consideration received in such sale, merger or combination would be distributed to the shareholders as a liquidating distribution on the closing date of such transaction. If at the termination of Officer's employment under this Agreement, any Trust properties remain unsold, the Officer shall be entitled to further distributions (including Gross Up Amounts) at such times as additional liquidating distributions are made to the Trust shareholders from the sale of such properties. Section 5. Other Benefits. ---------- --------------- During the term of his employment, the Trust shall continue to provide benefits to the Officer comparable to those presently being provided, including a retirement plan, group life insurance, health and accident insurance, hospitalization and other similar plans and will continue to pay or reimburse the Officer for reasonable and ordinary business expenses (including professional dues and membership fees in professional and industry associations). Notwithstanding any provision to the contrary in this Agreement or in any qualified or non qualified retirement or deferred compensation plan of the Trust, it is specifically agreed by the Officer that any payments made to him under Sections 4, 5 or 7 hereof, will not be considered in determining any benefit payments due to the Officer under any qualified retirement or deferred compensation plan of the Trust. Section 6. Termination and Severance Payment. ---------- ---------------------------------- (a) The Trust and Officer shall have the right to terminate this Agreement at any time, for any reason, without any prior notice to the other. This Agreement shall automatically terminate upon the disability or the death of the Officer. In the event of the termination of this Agreement either (i) by action of the Trust or as a result of the Officer's death or disability either before or after the conclusion of the Liquidation Process or (ii) by action of the Officer after a material change in the Officer's duties (as described in (b) below), the Trust shall pay to the Officer (or his estate in the event of his death) a severance payment equal to $121,250 provided however that such amount shall be increased for employment with the Trust after July 1, 1996 pursuant but in applying such formula to such service, fractional years shall be counted (rounded to the closest month of service.) Such severance payment shall be made within fifteen (15) days after the event giving rise to the payment obligation. For purposes of this Agreement, "disability" shall mean the inability of the Officer to carry out his duties hereunder by reason of any medically determinable physical or mental impairment which can be expected to result in death or which can be expected to last for a continuous period of not less than six months. (b) For purposes of this Agreement, the parties acknowledge that the Officer's duties will be changing in some respect from the duties he previously performed as Vice President - Management as a result of the Liquidation Process and such changes shall not be considered a "material change" for purposes of (a) above provided, however, that any change of duties which results in the Officer no longer functioning as Vice President - Management of the Trust or any relocation of the Officer from the greater Cleveland area without his consent shall be considered a "material change." 3 4 (c) In the event the Officer is accused by the Trust of appropriating $25,000 or more of the Trust's funds or property for his personal betterment, the Trust may immediately terminate the Officer and withhold the severance payment described in (a) above pending the adjudication of the allegation. In the event the Officer is subsequently convicted in a court of law of embezzling $25,000 or more from the Trust, the Trust shall have no obligation to pay any severance payment. If, however, the Officer is not convicted of embezzlement, the Trust shall immediately pay to the Officer the severance payment and reimburse him for legal fees and related expenses. (d) In consideration for the Officer's continued employment under this Agreement and the payments and benefits provided hereunder, and particularly, the severance payment provided hereunder and as a condition precedent to receiving such payment, the Officer shall sign and deliver to the Trust a Release of Claims substantially in the form as set forth on Exhibit B attached hereto and with such changes thereto as specifically authorized by the Board. For purposes of this Section 6(d), the Release of Claims shall not be considered delivered until the period for rescission set forth therein has expired. Section 7. Legal Fees and Expenses. ---------- ------------------------ (a) In the event the Trust has failed to comply with any of its obligations under Section 6 of this Agreement or in the event that the Trust or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from the Officer the benefits intended to be provided to the Officer under Section 6 of this Agreement, the Trust irrevocably authorizes the Officer, from time to time, to retain legal counsel of his choice, at the expense of the Trust, to represent the Officer in connection with the initiation or defense of any litigation or other legal action, whether by or against the Trust or any Trustee, Officer, shareholder or other person affiliated with the Trust, in any jurisdiction. The Trust shall pay all such legal costs promptly upon receipt of a detailed invoice and be solely responsible for any and all attorneys' and related fees and expenses incurred by the Officer as a result of the Trust's failure to perform its obligation under this Section 7 or as a result of the Trust or any person contesting the validity or enforceability of this Section 7. (b) The Trust shall pay to Jason C. Blackford, legal counsel for the Officer and certain other officers executing employment agreements with the Trust, his reasonable fee for legal representation of such officers with respect to such employment agreements in an amount not to exceed five thousand dollars ($5,000) with respect to such representation of all such officers in the aggregate, and the obligations of the Trust under the provisions of this Section 7(b) shall be the only responsibility of the Trust with respect to legal fees of Officer in connection with the negotiation and drafting of this Agreement. Section 8. Notice. ---------- ------- Any notice required to be given pursuant to the provisions of this Agreement shall be deemed to be effectively given if personally delivered or if mailed, by certified mail, postage prepaid, to the parties at the following addresses: 4 5 To the Trust: Board of Trustees CleveTrust Realty Investors 2001 Crocker Road, Suite 400 Westlake, OH 44145 To Officer: BRIAN D. GRIESINGER 19299 Spinnaker Circle Strongsville, Ohio 44136 or to such other addresses as may be designated by one party to the other in a notice complying with the provisions of this Section 8. Section 9. Existing Agreements and Amendments. ---------- ----------------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and, shall supersede any and all existing agreements between the parties with respect to the Officer's employment by the Trust. This Agreement may be modified and amended only in a writing signed by each of the parties. Section 10. Non-Assignability. ----------- ------------------ None of the rights or obligations of the Officer hereunder may be assigned without the prior written consent of the Board. Section 11. Benefit. ----------- -------- This Agreement shall inure to the benefit of and be binding upon the Trust, its successors and assigns, and upon the Officer, his heirs and personal representatives and permitted assigns. Section 12. Severability. ----------- ------------- If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement which can be given effect without the invalid provisions, and, to that end, the provisions hereof are severable and any invalid provision shall be deemed modified to the least extent necessary to render such provision valid. Section 13. Equitable Adjustment. ----------- --------------------- With respect to any payments hereunder which are computed with reference to "per share" valuations or distributions or with respect to the number of Trust shares outstanding, there shall be an equitable adjustment as determined by the Board in such computations in the event of any stock split, reverse stock split or similar transaction causing a change in the number of Trust shares outstanding from the date this Agreement is executed to the date such payment computation is required. 5 6 Section 14. Waiver. -------------------- The failure or omission by any party to enforce any provision of this Agreement, no matter how long continued, shall not be considered to be a waiver of such provision. No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any other subsequent breach or default of the same or similar or dissimilar nature. Section 15. Controlling Law. ----------- ---------------- This Agreement shall be interpreted and enforced in accordance with the laws of the State of Ohio. Section 16. Status of the Trust. ----------- -------------------- The Trust is a Massachusetts business trust governed by the terms of a Second Amended and Restated Declaration of Trust dated as of February 21, 1992 as amended by an Amendment dated February 21, 1995. No obligation of the Trust is personally binding upon, nor shall resort be had to the private property of any of the Trustees, shareholders, officers, employees or agents of the Trust, but the Trust property or a specific portion thereof only shall be bound. IN WITNESS WHEREOF, the parties have executed this Agreement this 25th day of September, 1996. CLEVETRUST REALTY INVESTORS By /S/ John C. Kikol /S/ BRIAN D. GRIESINGER ----------------------- -------------------------- John C. Kikol BRIAN D. GRIESINGER 6 7 EXHIBIT A Payments in Lieu of Options --------------------------- (Pursuant to Section 4(b) of this Agreement) Mr. Griesinger is entitled to a share of each distribution when and if paid to Trust shareholders based upon the following table:
Cumulative Distributions Percentage of Total Distribution ------------------------ ------------------------------------ Payable Per Share Which is Payable to Mr. Griesinger(1) ----------------- ------------------------------------ first $2.62 of distribution -0- next $0.38 of distribution 0.004650 next $0.06 of distribution 0.004836 next $2.06 of distribution 0.006231 all additional distributions 0.007161
Example Amount Payable to Mr. Griesinger ------- -------------------------------- Amount of first distribution $2.75 - $ 3,250.18(2) Amount of second distribution $3.50 - $122,591.81(3) $125,841.99 Total Payments in Lieu of Options Payable to Mr. Griesinger. - --------------- 1 These percentages were computed on the assumption that all outstanding options would be exercised when Trust distributions equaled the respective strike prices and on the assumption that there are 5,179,143 actual shares outstanding. The percentages will be equitable adjusted to the extent there is a change in the number of actual shares outstanding from time to time. 2 $2.62 x 5,376,643 x 0 - -0- $0.13 x 5,376,643 x 0.004650 - $ 3,250.18 ----------- 3,250.18 3 $0.25 x 5,376,643 x 0.004650 - $ 6,250.34 $0.06 x 5,376,643 x 0.004836 - $ 1,560.09 $2.06 x 5,376,643 x 0.006231 - $ 69,013.84 $1.13 x 5,376,643 x 0.007161 - $ 43,507.42 ----------- $120,331.69 PLEASE NOTE: This example is only meant to illustrate the calculations for a payment in lieu of options. No inference should be drawn concerning the prospects for actual distributions. For purposes of this example it is assumed that 5,179,143 Trust shares will be outstanding so that the shares on a fully diluted basis would total 5,376,643. The actual calculations of payments will be based on the actual number of fully diluted Trust shares outstanding at the time a distribution is made.
8 EXHIBIT A-1 COMPUTATION OF GROSS UP AMOUNT (Pursuant to Section 4(b) of this Agreement) Assume the Payments in Lieu of Options payable to Mr. Griesinger are as set forth on Exhibit A: Payments in Lieu of Options - --------------------------- 1. $ 3,250.18 2. $120,331.69 ----------- $123,581.24 Total Payments in Lieu of Options Payable to Mr. Griesinger
Gross Up Amount for First Payment - --------------------------------- $3,250.18 x 20.37%(1) = $ 622.06 Gross Up Amount $3,250.18 Payment in Lieu of Options -------- $3,912.24 Total Payment to Mr. Griesinger Gross Up Amount for Second Payment - ---------------------------------- $120,331.69 x 20.37%(1) = $ 24,511.57 Gross Up Amount $120,331.69 Payment in Lieu of Options ---------- $144,843.36 Total Payment to Mr. Griesinger
Summary - ------- 1. Total Payments in Lieu of Options Payable to Mr. Griesinger $ 3,250.18 $120,331.69 ---------- $123,581.87 2. Total Gross Up Payments payable to Mr. Griesinger $ 662.06 $ 24,511.57 ---------- $ 25,173.63 3. Total payments payable to Mr. Griesinger under Section 4(b) $123,581.87 $ 25,173.63 ---------- $148,755.50 - ----------- 1 The spread between the deemed ordinary income rate of 46% and the deemed capital gain rate of 35% is 11%. That percentage divided by .54 yields the percentage to be used to determine the gross up amount for the payments which would otherwise have been taxed at capital gains rates.
1 9 EXHIBIT B RELEASE OF CLAIMS I, ____________, the undersigned have been an employee of CleveTrust Realty Investors (the "Trust") pursuant to an Amended and Restated Employment Agreement dated _________, 1996 by and between the Trust and me (the "Employment Agreement"). My employment by the Trust is terminating effective _______, 19 and, pursuant to Section 6 of the Employment Agreement and in consideration of my employment by the Trust and the payments and benefits under the Employment Agreement and, particularly the severance payment under Section 6 thereof, I hereby agree as follows: (1) I hereby voluntarily agree to waive and release any and all claims, changes and actions, known or unknown, including those relating in any way to my employment, or to my termination from employment with the Trust, and any claims for wrongful discharge, breach of contract, implied contract, promissory estoppel, tortious conduct, or claims under any federal, state or local employment statute, law, order or ordinance, including any claims for discrimination, and rights under the Age Discrimination in Employment Act which I may now or in the future have or assert against the Trust or any of its officers, trustees, employees, representatives, shareholders or related entities. This Release applies to all rights or claims which arise on or before the date on which it is signed. (2) I agree to return all property belonging to the Trust, including all keys, credit cards, and manuals. (3) I agree that I will not seek re-employment with the Trust or any related entity in any capacity. (4) I understand that I have the option to consider and reflect upon this Release before its signing. It is advised that I consult with an attorney and/or other professionals such as accountants, financial advisors concerning its terms. I will be responsible for my attorney's fees and costs should I choose to have counsel review this Release. (5) I understand and agree that I will not make any derogatory or defamatory remarks about the Trust, its trustees, officers, employees, representatives or related entities. (6) I agree to keep the terms of this Release and of my severance payment under my Employment Agreement confidential, and I will not publicize or communicate them in any newspaper, electronic 1 10 media or other public or private forum, or in any maner whatsoever except as may be required by applicable law. (7) For a period of seven days after I sign this Release and return it to the Trust, I may revoke it by advising the Trust in writing that I have decided to revoke it. This Release will not become effective until that seven day period has expired. (8) I acknowledge that no promise or agreement not expressed in my Employment Agreement, the Trust's personnel or employee benefit documents or this Release has been made to me, and that this Release and my Employment Agreement constitute the complete agreement between the Trust and me. (9) I understand and agree completely to the terms and conditions listed above. I acknowledge that I have twenty-one (21) days after receiving this Release to sign it and return it to the Trust. AGREED TO at __________________, Ohio, this ________ day of ___________, 19__. ___________________________ [Employee] -2- EX-11 6 EXHIBIT 11 1 Exhibit (11) EXHIBIT COMPUTATION OF NET INCOME (LOSS) PER SHARE OF BENEFICIAL INTEREST CLEVETRUST REALTY INVESTORS PRIMARY NET INCOME (LOSS) PER SHARE (1)
Year Ended September 30, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ (in thousands, except shares and per share data) Operating income (loss) $(2,060) $ 596 $(115) Net gains on sales of real estate 40 2,499 445 Gains on sales of securities 632 0 0 ------------ ------------ ----------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (1,388) 3,095 330 Extraordinary items 0 790 253 ------------ ------------ ----------- NET INCOME (LOSS) $(1,388) $3,885 $583 ============ ============ =========== Weighted average number of Shares of Beneficial Interest outstanding 5,186,099 5,459,377 4,958,996 ============ ============ =========== Primary net income (loss) per Share: Operating income (loss) $(0.40) $0.11 $(0.02) Net gains on sales of real estate 0.01 0.46 0.09 Gains on sales of securities 0.12 0.00 0.00 ------------ ------------ ----------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (0.27) 0.57 0.07 Extraordinary items 0.00 0.14 0.05 ------------ ------------ ----------- NET INCOME (LOSS) PER SHARE $(0.27) $0.71 $0.12 ============ ============ =========== (1) Per share data is computed using the weighted average number of shares of Beneficial Interest outstanding. For 1995, and 1994 the exercise of the outstanding stock options would have a dilutive effect of less than 3%.
EX-23 7 EXHIBIT 23 1 Exhibit (23) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated November 15, 1996, with respect to the financial statements and schedule of CleveTrust Realty Investors included in this Annual Report (Form 10-K) for the year ended September 30, 1996 in the following: Registration Statement Number 33-12663 on Form S-8 dated March 23, 1987; Registration Statement Number 33-12662 on Form S-3 dated March 23, 1987; Amendment Number 1 to Registration Statement Number 33-12662 on Form S-3 dated December 1, 1987; and Post-Effective Amendment Number 1 to Registration Statement Number 2-97843 on Form S-8 dated March 23, 1987. Ernst & Young LLP December 9, 1996 Cleveland, Ohio EX-24 8 EXHIBIT 24 1 EXHIBIT 24 TRUSTEE AND OFFICER POWER OF ATTORNEY (FORM 10-K) CLEVETRUST REALTY INVESTORS KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed below has made, constituted and appointed, and by this instrument does make, constitute and appoint John C. Kikol, Michael R. Thoms and Raymond C. Novinc and each of them his true and lawful attorney, with full power of substitution and resubstitution to affix for him and in his name, place and stead, as attorney-in-fact, his signature as a trustee or officer, or both, of CleveTrust Realty Investors, a Massachusetts business trust (the "Company"), to the Company's Annual Report on Form 10-K for the year ending September 30, 1996, pursuant to the Securities Exchange Act of 1934, and to any and all amendments and exhibits to that Form 10-K, and to any and all applications and other documents pertaining thereto, giving and granting to each such attorney-in-fact full power and authority to do and perform every act and thing whatsoever necessary to be done in the premises, as fully as they might or could do if personally present, and hereby ratifying and confirming all that each of such attorneys-in-fact or any such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed at Westlake, Ohio as of the date indicated. /s/ Howard Amster October 21, 1996 - -------------------------------------------- --------------------------- Howard Amster, Trustee Date /s/ Robert H. Kanner October 21, 1996 - -------------------------------------------- --------------------------- Robert H. Kanner, Trustee Date /s/ John C. Kikol October 21, 1996 - -------------------------------------------- --------------------------- John C. Kikol, Trustee Date /s/ Leighton A. Rosenthal October 21, 1996 - -------------------------------------------- --------------------------- Leighton A. Rosenthal, Trustee Date /s/ John D. Weil October 21, 1996 - -------------------------------------------- --------------------------- John D. Weil, Trustee Date EX-27 9 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 1,490 0 2,436 3,307 0 1,030 42,203 0 43,852 1,975 19,377 5,179 0 0 17,321 43,852 0 10,645 0 6,890 734 3,307 1,774 (2,060) 0 (2,060) 0 672 0 (1,388) (.27) (.27)
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