-----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, BcYAJI7qg8p/S1MP6ad0DKAtEQ+bS83cHZv822c6T5iXeeDYTvYPX63Ime4q1+d6 OQM5WwmFm+Im5zO9GHF2dw== 0000950152-98-009729.txt : 19981228 0000950152-98-009729.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950152-98-009729 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981222 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: SEC FILE NUMBER: 000-05641 FILM NUMBER: 98773308 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 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, 1998 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 (IRS Employer Identification No.) incorporation or organization) 1991 Crocker Road, Suite 215, Westlake, Ohio 44145 -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (440) 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 . --- --- At December 2, 1998, 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, 1998, which was $.01) was approximately $18,000. 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. 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 . --- Documents incorporated by reference: None 2 PART I ------ Item 1. Business. - ------- --------- General: - -------- CleveTrust Realty Investors (the "Trust") is a business trust organized in Massachusetts that commenced operations in 1971. On September 24, 1996 the Board of Trustees of the Trust unanimously voted to recommend a Plan for the Orderly Liquidation of the Trust, providing for the sale of the Trust's properties during a period of approximately three years (the "Plan"). Effective April 29, 1997 the shareholders approved the Plan. During the year ended September 30, 1997 the Trust completed the sale of eleven of its Properties. During the year ended September 30, 1998 the Trust sold it's remaining five Properties. (See Item 2, Properties for further information concerning the sale of these five properties during the year ended September 30, 1998.) On September 15, 1998, the Trust made a liquidation distribution of $.785 per share. On December 14, 1998 the Trust declared a final distribution of $.008 per share, payable December 30, 1998 to shareholders of record on December 23, 1998. Effective that date, the share transfer books of the Trust will be permanently closed and the National Association of Securities Dealers, Inc. is instructed to cease all quotations for outstanding shares. Including this final distribution, the Trust made a total of $7.193 per share of liquidation distributions under the Plan. At September 30, 1998 the Trust had no employees. Taxes: - ------ For the year ended September 30, 1998 the Trust recorded federal income tax expense of $407,000 ($276,000 of current taxes plus $131,000 of deferred tax liabilities) and state income tax benefits of $40,000. For the year ended September 30, 1997 the Trust recorded federal income taxes of $2,400,000 ($2,531,000 of current taxes, net of a deferred tax asset of $131,000) and state income taxes of $314,000. In determining the federal income taxes for the year ended September 30, 1997 the Trust utilized its total $10.2 million of net operating and capital loss carryforwards. As referenced previously, the Trust will distribute a total of $7.193 per share to shareholders under the Plan ($5.70 per share during fiscal 1997, $1.485 per share during fiscal 1998 and $.008 in December, 1998). Under the Plan, all distributions made to shareholders are considered liquidation 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 the tax consequences of these distributions. Item 2 . Properties. - -------- ----------- During the year ended September 30, 1998 the Trust completed the sale of its last five Properties as follows: (i) $3,150,000 sale on December 8, 1997 of the Petroleum Club Building, Tulsa, Oklahoma, resulting in a gain of $373,000; (ii) $643,000 sale on December 15, 1997 of a vacant restaurant located in Davenport, Iowa, which resulted in a loss of $129,000, previously provided for in the valuation reserve; (iii) $7,400,000 sale on January 30, 1998 of the Cannon West Shopping Center, Austin, Texas, resulting in a gain of $744,000; (iv) $100,000 sale on July 14, 1998 of 20 acres of vacant land in Akron, Ohio, which resulted in a loss of $33,000, previously provided for in the valuation reserve; and (v) $3,200,000 sale on August 14, 1998 of the Tiffany Plaza, Ardmore, Oklahoma, resulting in a loss of $76,000. - 1 - 3 PART I ------ Item 3 . Legal Proceedings - -------- ----------------- There are no items or events requiring reporting with respect to this item. 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. 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 1998 Fiscal 1997 ----------- ----------- Quarter Ended High Low Quarter Ended High Low - ------------- ---- --- ------------- ---- --- Dec. 31, 1997 1-3/4 1 Dec. 31, 1996 5-1/2 4-5/8 Mar. 31, 1998 1-11/16 3/8 Mar. 31, 1997 6-3/16 5-1/8 June 30, 1998 13/16 4/8 June 30, 1997 6-1/2 2-3/4 Sep. 30, 1998 7/8 1/16 Sep. 30, 1997 3-7/8 1-1/8
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 1, 1998, there were approximately 1,000 record holders of the shares. Distributions to Shareholders
Fiscal 1998 Amount Fiscal 1997 Amount Payment Date Per Share Payment Date Per Share - ------------ --------- ------------ --------- Jan. 19, 1998 $.70 May 16, 1997 $2.50 Sep. 15, 1998 .785 June 19, 1997 1.10 ------ $1.485 Aug. 19, 1997 2.10 ====== ----- $5.70 =====
For a discussion of the tax classification of cash distributions see Management's Discussion and Analysis of Financial Condition and results of Operations - Distributions. - 2 - 4 PART II ------- Item 6. Selected Financial Data - ---------------------------------
Year Ended September 30, 1998 1997 1996 1995 1994 - ------------------------------------- -------- -------- -------- -------- -------- (in thousands, except per share data) OPERATIONS: Rental income $ 1,142 $ 7,485 $ 10,368 $ 10,145 $ 9,650 Interest income 136 225 40 56 76 Dividend income 0 0 225 0 0 Other income 181 294 12 26 29 -------- -------- -------- -------- -------- Operating revenues 1,459 8,004 10,645 10,227 9,755 Provision for valuation reserve (98) (1,348) 3,307 0 0 Operating expenses other than provision for valuation reserve 1,372 9,772 9,398 9,631 9,870 Income (loss) before gains and taxes 185 (420) (2,060) 596 (115) Net gains on sales of real estate 1,043 16,922 40 2,499 445 Gains on sales of securities 0 0 632 0 0 Federal and state income taxes 367 2,714 0 0 0 Extraordinary items 0 0 0 790 253 Net income (loss) 861 13,788 (1,388) 3,885 583 Cash distributions to shareholders 7,628 29,279 1,037 874 735 Per Share of Beneficial Interest: Income (loss) before gains and taxes $ 0.04 $ (0.08) $ (0.40) $ 0.11 $ (0.02) Net gains on sales of real estate 0.20 3.29 0.01 0.46 0.09 Gains on sales of securities 0.00 0.00 0.12 0.00 0.00 Federal and state income taxes (0.07) (0.53) 0.00 0.00 0.00 Extraordinary items 0.00 0.00 0.00 0.14 0.05 -------- -------- -------- -------- -------- Net income (loss) $ 0.17 $ 2.68 $ (0.27) $ 0.71 $ 0.12 ======== ======== ======== ======== ======== Cash distributions $ 1.485 $ 5.70 $ 0.20 $ 0.16 $ 0.15 Weighted average number of Shares of Beneficial Interest outstanding 5,137 5,138 5,186 5,459 4,959 At September 30, 1998 1997 1996 1995 1994 - ------------------------------------- -------- -------- -------- -------- -------- (Liquidation (in thousands) Basis) FINANCIAL CONDITION: Properties held for sale $ 0 $ 12,918 $ 42,203 $ 203 $ 0 Valuation reserve 0 (260) (3,307) 0 0 Investments in real estate 0 0 0 40,739 45,380 Real estate mortgage loans 0 0 119 303 236 Investments in securities 0 0 0 267 0 Cash and cash equivalents 282 4,612 1,490 188 251 Certificates of deposit 0 0 0 0 500 Insurance settlement proceeds 0 0 0 0 3,341 Total assets 289 17,638 43,852 43,076 51,004 Mortgage notes payable 0 5,561 9,563 9,266 11,111 Bank notes payable 0 0 9,800 6,600 11,180 Shareholders' equity 41 6,808 22,500 25,126 23,150 Number of Shares of Beneficial Interest outstanding at September 30 5,137 5,137 5,179 5,217 5,471
-3- 5 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and - -------- --------------------------------------------------------------- Results of Operations. ---------------------- Financial Condition - ------------------- Effective April 29, 1997 the shareholders of the Trust approved the Plan for the Orderly Liquidation of the Trust, calling for the sale of the Trust's properties during a period of approximately three years. Based on the Trustees' recommendation of the Plan in September, 1996 the Trust 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"). In connection with the reclassification, the Trust reviewed 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 estimated fair value, less cost to sell. The Trust, therefore, established a valuation reserve for these four properties, which totaled $3,307,000. By September 30, 1998 the Trust had sold all sixteen of the properties that had been classified as properties held for sale at September 30, 1996. (See NOTE D of the Notes to Financial Statements in PART II, Item 8, of this Form 10-K for details on the eleven individual sales in the year ended September 30, 1997 and the five individual sales in the year ended September 30, 1998). During the two years it took to sell the properties the Trust reversed $1,446,000 of the reserve and did not need to make any additions to the reserve. The Plan called for the Trust to sell all of its assets, relieve all liabilities, and distribute the remaining funds to the shareholders. During the years ended September 30, 1997 and September 30, 1998 the Trust accomplished the Plan. At September 30, 1998 the Trust's assets consisted of $282,000 of cash and $7,000 of accounts receivable. Also, at September 30, 1998 the Trust's total liabilities were $248,000 consisting of $12,000 of accrued federal and state income taxes and $236,000 of accrued expenses and there was $41,000 of shareholders' equity. During fiscal years 1998 and 1997 (the liquidation years) property sales resulted in proceeds of $59,007,000, the Trust expended $700,000 for improvements to existing properties and received final repayments from real estate mortgage loans of $119,000. Therefore, the net proceeds from the Trust's investments were $58,426,000. From these funds, plus the cash on hand of $1,490,000, plus operating income, $3,204,000 was used in operating activities, including payments of severance pay to employees, payments in lieu of options and incentive bonus payments of officers (see Results of Operations). Additionally, the Trust repaid in full $9,563,000 of first mortgage loans and $9,800,000 of bank notes payable. Also, the Trust repurchased and retired 42,000 shares of beneficial interest in the amount of $201,000, and distributed to the shareholders as liquidation distributions $36,907,000 ($7.185 per share). At September 30, 1998 the Trust had cash on hand of $282,000. Results of Operations - --------------------- In order for the Trust to complete the Plan and sell its properties for the highest prices, the Trust's operating strategy during the liquidation process was to maintain high occupancies, increase rental rates, to the extent that competitive conditions permitted, and implement expense controls consistent with the proper maintenance of the properties. During the period from October 1, 1996 through September 30, 1998, the liquidation period, the Trust's administrative expenses included $1,263,000 of severance payments to employees, $1,100,000 of payments in lieu of options paid to the four officers, and $1,736,000 of incentive bonuses. -4- 6 PART II ------- Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations - (Continued) --------------------- Distributions: - -------------- When the Plan was adopted, the Trust estimated that the shareholders would receive liquidation distributions between $6.50 and $7.00 per share. On September 15, 1998 the Trust made a distribution of $.785 per share, bringing the total of liquidation distributions to $7.185 per share. Subsequent to the end of fiscal 1998 the final distribution of $.008 per share was declared, bringing the total distributions under the Plan to $7.193 per share. For 1998 the Trust paid liquidation distributions to its shareholders of $7,598,000 or $1.485 per share. For the shareholders the $1.485 per share paid will be considered return of capital up to the shareholder's individual basis in the Trust's shares and then capital gains thereafter. For 1997 the Trust paid liquidation distributions to its shareholders of $29,279,000 or $5.70 per share. For the shareholders the $5.70 per share paid was considered return of capital up to the shareholder's individual basis in the Trust's shares and then capital gains thereafter. 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 was classified for tax purposes as return of capital. Income Taxes: - ------------- For the year ended September 30, 1998 the Trust recorded federal income tax expense of $407,000 ($276,000 of current taxes, plus $131,000 of deferred tax liabilities) and state income tax benefits of $40,000. For the year ended September 30, 1997 the Trust recorded federal income taxes of $2,400,000 ($2,531,000 of current taxes, net of a deferred tax asset of $131,000) and state income taxes of $314,000. In determining the federal income taxes the Trust utilized the total $10.2 million of net operating and capital loss carryforwards. There were no federal or state income taxes recorded for the year ended September 30, 1996. At September 30, 1996 the Trust had net deferred tax assets of approximately $3,048,000. The Trust established a valuation allowance equal to its net tax assets, as there was doubt as to whether the net deferred tax asset would be realized. Other: - ------ The Trust had previously announced that there was a party who had expressed an interest in purchasing all the outstanding shares of beneficial interest of the Trust. However, in October, 1998 the party informed the Trust that they no longer had an interest in purchasing the shares. 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, 1998. -5- 7 PART II ------- Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - -------- ----------------------------------------------------------- Not applicable. 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 filed with this report. The quarterly financial data, required by this item, is included as Note K of the Notes to Financial Statements. Item 9. Changes in and Disagreements with Accountants 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. -6- 8 PART III -------- Item 10. Directors and Executive Officers of the Registrant. - -------- --------------------------------------------------- Trustees of the Registrant: - --------------------------- Based upon information received from the respective Trustees as of November 15, 1998, the following information with respect to each person is furnished:
Position(s) with the Trust, Principal Occupation, Business Name (Age) of Trustee Experience and Other Directorships - --------------------- ---------------------------------- Howard Amster (51)(a) Trustee of the Trust since December, 1992; Investment Consultant with Everen Securities, Inc. (securities, investments), Director of Astrex, Inc. (distributor of electronic components). Robert H. Kanner (51)(b) Trustee of the Trust since December, 1992; President, Chairman and a Director of Pubco Corporation (computer printer supplies, manufacturing, and specialty construction products). Until June 27, 1996, President, Chairman and a Director of Bobbie Brooks, Incorporated and Chairman and a Director of Aspen Imaging International, Inc., which companies were merged into Pubco Corporation on that date. Director of Riser Foods, Inc. (food distribution). John C. Kikol (54) Trustee of the Trust since 1982; President of the Trust since 1974; Chairman of the Trust since February, 1995. Leighton A. Rosenthal (83)(c) Trustee of the Trust since October, 1991; President LARS Aviation, Inc. (private aircraft charters), Cleveland, Ohio. John C. Weil (58)(d) Trustee of the Trust since June, 1991; President Clayton Management Co. (bookkeeping and investment management services), St. Louis, Missouri. Director of Cliffs Drilling (oil service), Oglebay Norton Company (lake shipping, mining and manufacturing), Physicians Insurance Company of Ohio (medical malpractice insurance) and Todd Shipyards, Inc. (ship building and repair company).
(a) Chairman of the Audit Committee (b) Chairman of the Investment Committee (c) Chairman of the Nominating Committee (d) Chairman of Compensation Committee Each Trustee is a member of all of the Committees of the Trust, except that Mr. Kikol does not serve on the Compensation Committee. -7- 9 PART III -------- Item 10. Directors and Executive officers of the Registrant - (Continued) - -------- -------------------------------------------------- Except as otherwise indicated in the above table, each Trustee has had the principal occupation or former occupation indicated for more than five years. Executive Officers of the Registrant: - -------------------------------------
Position(s) with the Trust, Principal Occupation, Name (age) Business, Experience, and Other Directorships - ---------- --------------------------------------------- John C. Kikol (54) Chairman; Chairman of the Board of Trustees since 1995; Trustee of the Trust since 1982; President of the Trust since 1974; Secretary since 1997 Michael R. Thoms (50) Vice President and Treasurer of the Trust since 1987 Brian D. Griesinger (37) Vice President - Management of the Trust since 1989
-8- 10 PART III -------- Item 11. Executive Compensation - -------------------------------- Summary Compensation of Executive Officers: - ------------------------------------------- The following table sets forth, for each of the Trust's last three fiscal years, the compensation awarded to, earned by or paid to the three executive officers of the Trust whose total salary and bonuses exceeded $100,000 for the year ended September 30, 1998. The employment of the three listed officers was terminated effective at the close of business on September 30, 1998, however, all three remain as officers of the Trust. Summary Compensation Table
Name and Fiscal Base Payments All Other Principal Year Salary in Lieu of Incentive Severance Compensation Position Ended (1) Bonuses Options (2) Bonus (3) (4) (5) - -------------- ------------------------------------------------------------------------------------------ John C. Kikol 9/30/98 $196,000 --- $134,560 $969,420 $546,000 $9,438 Chairman, President 9/30/97 170,250 64,990 384,250 413,470 --- 9,516 & Chief Executive Officer 9/30/96 135,000 47,000 --- --- --- 15,151 Michael R. Thoms (6) 9/30/98 149,075 --- 72,400 18,000 184,000 7,038 Vice President, Treasurer 9/30/97 88,000 27,050 124,660 --- --- 7,119 & Chief Financial Officer 9/30/96 76,000 16,000 --- --- --- 6,517 Brian D. Griesinger 9/30/98 102,600 --- 68,820 260,360 147,520 7,038 Vice President - 9/30/97 92,750 28,420 123,270 103,370 --- 7,119 Management 9/30/96 80,000 17,000 --- --- --- 7,024
(1) Included in the base salary amounts for the year ended September 30, 1998 is a payment for unused vacation as follows: Mr. Kikol - $14,000, Mr. Thoms - $7,075, and Mr. Griesinger - $5,600. (2) Under the employment agreements, each of the three officers listed waived all rights to unexercised stock options. In lieu of the options the officers received payments based upon liquidation distributions to the Trust's shareholders, including a gross up amount (See Employment Agreements - Salary, Bonus and Other Compensation for further details of these payments). (3) Mr. Kikol's Employment Agreement provides for participation in an incentive compensation program for officers of the Trust (See Employment Agreement - Incentive Compensation Program, for details of these payments). (4) Under the employment agreements, the Trust paid a severance payment to each of the three officers listed. After obtaining the required releases the severance payments were prepaid on October 24, 1997 in order to show them as an expense on the Trust's 1997 tax returns. See Employment Agreements. (5) For fiscal 1998, the amount for Mr. Kikol represents the premium paid ($2,400) by the Trust for a "key man" insurance policy for the benefit of the Chief Executive Officer and his designated heirs and pension plan contributions ($7,038). For the other two officers the amount shown represents only pension plan contributions. (6) Included in Mr. Thoms' base salary is a consulting fee of $50,000 for his services in preparing the Form 10-K for the year ended September 30, 1998, plus preparation of all tax returns, including federal income tax returns, state income tax returns, and payroll tax returns, plus other administrative requirements needed to complete the operations of the Trust. - 9 - 11 PART III -------- Item 11. Executive Compensation - (Continued) - -------- ---------------------- Employment Agreements - --------------------- In connection with the adoption of the Plan by the Trustees, the Compensation Committee of the Board of Trustees approved Amended and Restated Employment Agreements, effective as of September 1, 1996, between the Trust and the three executive officers of the Trust, Mr. Kikol, Chairman and President, Mr. Thoms, Vice President and Treasurer, and Mr. Griesinger, Vice President - Management. Mr. Kikol's Agreement was subject to shareholder approval, which approval was granted by the shareholders effective April 29, 1997. PURPOSE. The Trust entered into the Employment Agreements in order to induce the officers to remain in their positions throughout the liquidation process in order to provide continuity and to maximize the liquidation distributions to the shareholders. In Mr. Kikol's case the agreement provides incentives by tying his compensation to the aggregate amount of distributions to shareholders. SALARY, BONUS AND OTHER COMPENSATION. The Employment Agreements provide that commencing January 1, 1997 the Trust will pay base salaries to the officers as follows: Mr. Kikol - $182,000 per year in semi-monthly installments; Mr. Thoms - $92,000 per year in semi-monthly installments; and Mr. Griesinger - $97,000 per year in semi-monthly installments. Under the Employment Agreements, the officers waived all rights to unexercised stock options to purchase Shares of Beneficial Interest of the Trust granted to them under the Trust's 1992 Incentive Stock Option Plan. In lieu of such options, the Trust will pay to the officers amounts based upon the liquidation distributions to the Trust's shareholders from time to time (the "Payments'), including a gross up amount (the "Gross Up Amount") that, when added to the Payments, will allow the officers to retain a net amount after payment of all federal, state and local income taxes equal to the net amount of the Payments. The Payments and Gross Up Amount are paid to the officers at the same time as liquidation distributions are made to shareholders. The Payments are designed to compensate the officers in amounts similar to the liquidation distributions that they would receive if they exercised the options prior to such distributions. The Payments are net of the exercise price of the respective options, and the Gross Up Amount is paid in recognition of the fact that the officers would have been able to apply capital loss carryforwards to any capital gains they would have recognized on the sale of Shares of Beneficial Interest acquired through exercise of the incentive stock options. The Trust believes that it will not be economically disadvantaged by payment of the Gross Up Amount because the Trust expects to be able to deduct for federal income tax purposes the full amount of Payments and the Gross Up Amount, whereas it would not be entitled to any deduction upon exercise of incentive stock options. Incentive Compensation Program. - ------------------------------- Mr. Kikol's Employment Agreement also provides for participation in an incentive compensation program for officers of the Trust (the "Incentive Compensation Program"). Under the Incentive Compensation Program, an incentive compensation pool is created for distribution to certain key employees. The amount to be allocated to the pool is calculated based on amounts otherwise available to be paid by the Trust as liquidation distributions to its shareholders. The amount allocated to the pool is the sum of: (a) 10% of all amounts otherwise available for distribution between $4.75 and $5.50 per share; and (b) 15% of all amounts otherwise available for distribution in excess of $5.50 per Share. For purposes of computing the amount payable to the pool, liquidation distributions when made are reduced to their present value as of January 1, 1997 using a discount rate of 10%. The amounts are allocable to the pool and available for distribution to the key employees at the same time, and from time to time, as liquidation distributions are made to shareholders. Mr. Kikol is entitled to receive not less than 80% of amounts distributed from the pool. -10- 12 PART III -------- Item 11. Executive Compensation - (Continued) - -------- ---------------------- CERTAIN BENEFITS. The Employment Agreements provide for the continuation of certain plan benefits currently provided to the officers, including health and accident insurance, retirement, group life insurance and similar plan benefits. The officers are also entitled to payment or reimbursement of business expenses. Mr. Kikol is also entitled to the use of an automobile, the payment of club dues and the payment of premiums on an insurance policy on his life. TERMINATION OF AGREEMENTS. The Employment Agreements may be terminated by either the Trust or the officers at any time and for any reason without prior notice to the other. If terminated (i) by the Trust (except on the grounds of the officers' misappropriation of Trust funds or property) or (ii) by the death or disability of the officer or (iii) by the officer because of a material change in his duties, the Employment Agreement provides for a severance payment to the officers as follows: Mr. Kikol - $546,000; Mr. Thoms - $184,000; and Mr. Griesinger - $136,406 plus $1,010 per month for each month of employment starting October 1, 1997 until his termination up to a maximum payment of $194,000. Such severance payments were to be paid only if the officer delivered to the Trust prior to such payment, a release of all claims against the Trust. The Employment Agreement automatically terminates upon the death or disability of the officer. This severance payment is in addition to any payment to which the officers may be entitled under the Incentive Compensation Program described previously. On October 24, 1997 the Trustees prepaid the severance payments to each of these three officers, after obtaining the required releases. By prepaying the severance, the payments were shown as an expense on the Trust's 1997 tax return thus reducing the 1997 federal income tax obligations, which the Trustees deemed was in the best interest of all the shareholders. Mr. Griesinger was paid $136,406 on October 24, 1997 and an additional $11,114 upon his termination on September 30, 1998. PAYMENT OF LEGAL FEES. The Employment Agreements provide for the payment of the officers' legal fees and expenses under certain circumstances, including the failure of the Trust to comply with its obligations under the Employment Agreements or in the event the Trust or any other person takes action to declare the Employment Agreements void and unenforceable or institutes litigation to deny or recover form the officers the benefits intended to be provided under the Employment Agreements. EXCISE TAX GROSS UP PAYMENT. If amounts payable to Mr. Kikol under his Employment Agreement become subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, he is entitled to a gross up payment such that, after the payment of the excise tax and any federal, state or local income taxes on such gross up payment, he retains a net amount equal to the amount he would if retained from payments under the Employment Agreement had the excise tax not been applicable. The Trust compensated all Trustees (other than Mr. Kikol, who does not receive fees for services as a Trustee) at a rate of $8,000 per annum which was paid in quarterly installments of $2,000, said sum being in lieu of all meeting and other fees. Effective October 1, 1997 the Trustees agreed to waive the $8,000 annual fee. However, all Trustees will continue to be reimbursed for actual expenses incurred in connection with meetings attended or extended services provided. -11- 13 PART III -------- Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- --------------------------------------------------------------- The following table sets forth, as of November 15, 1998, information furnished to the Trust with respect to the beneficial ownership of the Trust's Shares of Beneficial Interest by each shareholder or group of shareholders known to the Trust to be the beneficial owner of more than five (5%) percent of the Trust's outstanding Shares of Beneficial Interest, each present Trustee, each executive officer of the Trust, and all present Trustees and executive officers of the Trust as a group.
Beneficial Owner, Trustee, Officer Number of Shares Percent or Number of Persons in Group Beneficially Owned (a) of Class - ----------------------------- ---------------------- -------- Howard Amster (Beneficial owner and Trustee)(b) 788,868 15.4% 23811 Chagrin Blvd., Chagrin Plaza East Suite 200 Beachwood, Ohio 44122 Robert H. Kanner (Beneficial owner and Trustee)(c) 1,300,000 25.3 3830 Kelley Avenue Cleveland, Ohio 44114 John C. Kikol (Trustee and officer)(d) 70,479 1.4 1991 Crocker Road, Suite 215 Westlake, Ohio 44145 Leighton A. Rosenthal (Beneficial owner and Trustee) 393,000 7.7 The Halle Building, Suite 310 1228 Euclid Avenue Cleveland, Ohio 44115 John D. Weil (Beneficial owner and Trustee)(e) 745,000 14.5 200 North Broadway, Suite 825 St. Louis, Missouri 63102-2573 Brian D. Griesinger (Officer) 7,000 * 1991 Crocker Road, Suite 215 Westlake, Ohio 44145 Michael R. Thoms (Officer)(d) 28,055 * 1991 Crocker Road, Suite 215 Westlake, Ohio 44145 7 present Trustees and officers listed above 3,317,468 64.6
* Less than one percent. (a) Except as noted, in each case the beneficial owner has sole voting and sole investment power. (b) Includes 400 Shares of Beneficial Interest held by Tamra F. Gould (Mr. Amster's wife) in which Mr. Amster disclaims any beneficial interest. Excludes 27,600 Shares of Beneficial Interest held by Sonia Amster (Mr. Amster's mother) in which Mr. Amster disclaims any beneficial interest. -12- 14 PART III -------- Item 12. Security Ownership of Certain Beneficial Owners and Management. - - -------- --------------------------------------------------------------- (Continued) (c) The shares shown as being held by Robert H. Kanner are owned by a trust of which Mr. Kanner is the sole beneficiary. Mr. Kanner is not a trustee of such trust and has neither investment not voting power in such shares. Trustees of such trust are Stephen R. Kalette and Eleonora Grmek who have an address of 3830 Kelly Avenue, Cleveland, Ohio 44114. Excludes 5,000 Shares of Beneficial Interest held by Buckeye Business Products Bargaining Unit Pension Trust of which Mr. Kanner is a trustee but not a participant. (d) Includes 14,934 Shares of Beneficial Interest held in a trust in which Messrs. Kikol and Thoms are Trustees with all voting and investment power and have an interest as beneficiaries (with respect to a portion of the trust's assets). The Shares of Beneficial Interest held by all Trustees and officers as a group in the table have been adjusted to eliminate the duplication of beneficial ownership. (e) Includes 25,000 Shares of Beneficial Interest held in the name of a family trust of which Mr. Weil is the trustee. Also includes 100,000 Shares of Beneficial Interest held in the name of Richard K. Weil (the father of Mr. Weil), 25,000 Shares of Beneficial Interest held in the name of Victoria L. Weil (the daughter of Mr. Weil) and 225,000 Shares of Beneficial Interest in the aggregate held by Richard K. Weil Jr., Mark S. Weil and Paula K. Weil (siblings of Mr. Weil), the beneficial ownership of which he disclaims. Item 13. Certain Relationships and Related Transactions. - -------- ----------------------------------------------- None. -13- 15 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 are filed as a separate section of this Report . (2) The exhibits required by Item 601 of Regulation S-K and identified on the Exhibit Index contained in this Report. (b) No Reports on Form 8-K were filed during the last quarter of the period covered by this Report. (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. -14- 16 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 21, 1998 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 21, 1998 - ------------------------------- Trustees, President and John C. Kikol Principal Executive Officer /s/ Michael R. Thoms Vice President, Treasurer - ------------------------------- Principal Financial Officer December 21, 1998 Michael R. Thoms and Principal Accounting Officer */s/ Howard Amster Trustee December 21, 1998 - ------------------------------- Howard Amster */s/ Robert H. Kanner Trustee December 21, 1998 - ------------------------------- Robert H. Kanner */s/ Leighton A. Rosenthal Trustee December 21, 1998 - ------------------------------- Leighton A. Rosenthal */s/ John D. Weil Trustee December 21, 1998 - ------------------------------- John D. Weil */s/ By: Michael R. Thoms December 21, 1998 - ------------------------------- Michael R. Thoms Attorney-in-Fact
-15- 17 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, 1998 CLEVETRUST REALTY INVESTORS WESTLAKE, OHIO 18 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 Net Assets in Liquidation - September 30, 1998 Statement of Financial Condition -- September 30, 1997 Statement of Operations -- Years ended September 30, 1998, 1997 and 1996 Statement of Cash Flows -- Years ended September 30, 1998, 1997 and 1996 Statement of Changes in Shareholders' Equity -- Years ended September 30, 1998, 1997 and 1996 Notes to Financial Statements Financial Statement Schedules: All 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 19 Report of Independent Auditors Trustees and Shareholders CleveTrust Realty Investors Westlake, Ohio We have audited the statement of financial condition of CleveTrust Realty Investors as of September 30, 1997 and the related statements of operations, changes in shareholders' equity and cash flows for the two years then ended and for the year ended September 30, 1998. In addition, we have audited the statement of net assets in liquidation as of September 30, 1998. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note A to the financial statements, the shareholders of CleveTrust Realty Investors approved a Plan for the Orderly Liquidation of the Trust on April 29, 1997, and the Trust commenced liquidation shortly thereafter. On September 30, 1998, the orderly liquidation of the Trust appeared imminent and as a result the Trust has changed its basis of accounting for periods subsequent to September 30, 1998 from the going- concern basis to a liquidation basis. 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, 1997, and the results of its operations and its cash flows for each of the two years then ended and for the year ended September 30, 1998, and its net assets in liquidation as of September 30, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP October 30, 1998 Cleveland, Ohio F-2 20 STATEMENT OF NET ASSETS IN LIQUIDATION CLEVETRUST REALTY INVESTORS
September 30, 1998 ---------------------- (in thousands) ASSETS Cash and cash equivalents - - NOTE A $282 Other assets 7 ---------------------- TOTAL ASSETS $289 ====================== LIABILITIES Accrued federal and state income taxes - NOTE B $12 Accrued expenses and other liabilities - NOTE G 236 ---------------------- TOTAL LIABILITIES 248 SHAREHOLDERS' EQUITY Shares of Beneficial Interest, par value $1 per Share - - NOTE H: Authorized - - Unlimited Issued and outstanding shares (5,136,616) 5,137 Additional paid-in capital 1,784 Accumulated deficit (6,880) ---------------------- TOTAL SHAREHOLDERS' EQUITY 41 ---------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $289 ======================
See notes to financial statements. F-3 21 STATEMENT OF FINANCIAL CONDITION CLEVETRUST REALTY INVESTORS
September 30, 1997 --------------------- (in thousands) ASSETS Invested assets - - NOTES A, C and D: Properties held for sale $12,918 Less: Valuation reserve 260 --------------------- 12,658 Cash and cash equivalents - - NOTE A 4,612 Other assets 368 --------------------- TOTAL ASSETS $17,638 ===================== LIABILITIES Mortgage notes payable - NOTE E $5,561 Accrued federal and state income taxes - NOTE B 2,085 Accrued expenses and other liabilities - NOTE G 3,184 --------------------- TOTAL LIABILITIES 10,830 SHAREHOLDERS' EQUITY Shares of Beneficial Interest, par value $1 per Share - - NOTE H: Authorized - - Unlimited Issued and outstanding shares (5,136,616) 5,137 Additional paid-in capital 9,412 Accumulated deficit (7,741) --------------------- TOTAL SHAREHOLDERS' EQUITY 6,808 --------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,638 =====================
See notes to financial statements. F-4 22 STATEMENTS OF OPERATIONS CLEVETRUST REALTY INVESTORS
Years ended September 30, ------------------------------------------ 1998 1997 1996 -------- -------- -------- (in thousands, except per share data) INCOME Real estate operations: Rental income $ 1,142 $ 7,485 $ 10,368 Less: Real estate operating expenses 349 3,513 5,060 Depreciation expenses 0 0 1,830 -------- -------- -------- 349 3,513 6,890 -------- -------- -------- Income from real estate operations 793 3,972 3,478 Interest income 136 225 40 Dividend income 0 0 225 Other 181 294 12 -------- -------- -------- 1,110 4,491 3,755 EXPENSES Interest: Mortgage notes payable - - NOTE E 151 673 888 Bank notes payable 0 294 886 -------- -------- -------- 151 967 1,774 General and Administrative - - NOTE G 872 5,292 734 Provision for valuation reserve - - NOTE A (98) (1,348) 3,307 -------- -------- -------- 925 4,911 5,815 -------- -------- -------- Income (loss) before net gains on sales of real estate, gains on sales of securities, and income taxes 185 (420) (2,060) Net gains on sales of real estate - -NOTE D 1,043 16,922 40 Gains on sales of securities 0 0 632 Federal and state income taxes - - NOTE B (367) (2,714) 0 -------- -------- -------- NET INCOME (LOSS) $ 861 $ 13,788 $ (1,388) ======== ======== ======== PER SHARE OF BENEFICIAL INTEREST - - NOTE A: Income (loss) before net gains on sales of real estate, gains on sales of securities, and income taxes $ 0.04 $ (0.08) $ (0.40) Net gains on sales of real estate 0.20 3.29 0.01 Gains on sales of securities 0.00 0.00 0.12 Federal and state income taxes (0.07) (0.53) 0.00 -------- -------- -------- NET INCOME (LOSS) PER SHARE $ 0.17 $ 2.68 $ (0.27) ======== ======== ======== Weighted average number of Shares of Beneficial Interest outstanding 5,137 5,138 5,186 ======== ======== ========
See notes to financial statements. F-5 23 STATEMENTS OF CASH FLOWS CLEVETRUST REALTY INVESTORS
Years ended September 30, ------------------------------------------ 1998 1997 1996 -------- -------- -------- (in thousands) Cash flow from operating activities: Net income (loss) $ 861 $ 13,788 $ (1,388) Non-cash revenues and expenses included in income: Depreciation 0 0 1,830 Provision for (reverse) valuation reserve (98) (1,348) 3,307 Decrease in accrued interest on notes payable 0 (14) (9) (Decrease) increase in accrued expenses and other liabilities (2,948) 1,209 (86) (Decrease) increase in accrued federal and state income taxes (2,073) 2,085 0 Decrease (increase) in other assets 361 2,979 (1,971) Reconciliation to net cash flow from operating activities: Net gains on sales of real estate (1,043) (16,922) (40) Gains on sales of securities 0 0 (632) -------- -------- -------- CASH FLOW (USED IN) FROM OPERATING ACTIVITIES (4,940) 1,777 1,011 Cash flow from investing activities: Equity investments: Improvements to existing properties 0 (700) (972) Purchase of property 0 0 (3,465) Proceeds from properties sold 13,799 45,208 1,386 Real estate mortgage loans: Repayments 0 119 184 Investments in securities: Securities purchased 0 0 (2,057) Proceeds from sales of securities 0 0 2,929 -------- -------- -------- NET CASH FROM (USED IN) INVESTING ACTIVITIES 13,799 44,627 (1,995) Cash flow from financing activities: Mortgage notes payable: Principal amortization payments (47) (212) (203) Principal repayments (5,514) (3,790) 0 Principal borrowings 0 0 500 Bank notes payable: Principal repayments 0 (9,800) 0 Principal borrowings 0 0 3,200 Distributions to shareholders (7,628) (29,279) (1,037) Shares repurchased and subsequently retired 0 (201) (174) -------- -------- -------- NET CASH (USED IN) FROM FINANCING ACTIVITIES (13,189) (43,282) 2,286 -------- -------- -------- (Decrease) increase in cash and cash equivalents (4,330) 3,122 1,302 Balance at beginning of year 4,612 1,490 188 -------- -------- -------- Balance at end of year $ 282 $ 4,612 $ 1,490 ======== ======== ========
See notes to financial statements. F-6 24 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CLEVETRUST REALTY INVESTORS Years Ended September 30, 1998, 1997, and 1996
Shares Of Additional Unrealized Total Beneficial Paid-In Accumulated Gains On Shareholders' Interest Capital Deficit Securities Equity ------------ ------------- --------------- ------------ ------------- (in thousands) Balance October 1, 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 H (38) (136) (174) Change in unrealized gains on securities (27) (27) ------------ ------------- --------------- ------------ ------------- Balance September 30, 1996 5,179 38,850 (21,529) 0 22,500 Net income for the year ended September 30, 1997 13,788 13,788 Cash liquidating distributions declared and paid -- $5.70 per share (29,279) (29,279) Shares repurchased and subsequently retired -- NOTE H (42) (159) (201) ------------ ------------- --------------- ------------ ------------- Balance September 30, 1997 5,137 9,412 (7,741) 0 6,808 Net income for the year ended September 30, 1998 861 861 Cash liquidating distributions declared and paid -- $1.485 per share (7,628) (7,628) ------------ ------------- --------------- ------------ ------------- Balance September 30, 1998 $5,137 $1,784 $(6,880) $0 $41 ============ ============= =============== ============ =============
See notes to financial statements. F-7 25 NOTES TO FINANCIAL STATEMENTS CLEVETRUST REALTY INVESTORS Years Ended September 30, 1998, 1997 and 1996 NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CleveTrust Realty Investors is a business trust organized in the State of Massachusetts, headquartered in Ohio. The Trust's primary business objective was the ownership and operation of improved real estate. 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 shareholders of the Trust approved the Plan effective April 29, 1997 and subsequently, the Trust commenced liquidation proceedings. During 1998, the remaining real estate holdings of the trust were disposed of, and on September 30, 1998, the liquidation of the Trust appeared imminent. Accordingly, at that date, the Trust began to account for its assets and liabilities on a liquidation basis of accounting, rather than on a going-concern basis. Under the liquidation basis of accounting, assets are valued at their estimated net realizable value, and liabilities, including all estimated expenditures necessary to complete the liquidation of the Trust are stated at their estimated amounts. Adoption of the liquidation basis of accounting did not result in any material adjustments to the Trust's assets or liabilities. 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 was generally recorded as it accrued. Interest on mortgage loans was recognized as income as it accrued during the period the loans were outstanding, except where collection of interest was considered doubtful. Contingent rents and interest were recognized as income when determinable. Accrual of income was suspended on any investment when the collection of rent, principal, or interest was doubtful. REAL ESTATE: Properties held for sale were reported in the Trust's financial statements at the lower of carrying value or estimated fair value, less cost to sell. DEPRECIATION: In accordance with the Plan, properties held for sale were not depreciated in fiscal years 1998 and 1997. Previously, depreciation on equity investments was computed by the straight-line method at rates based upon the expected economic lives of the assets which ranged 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 were depreciated over a life of 55 years. REPAIRS AND CAPITAL IMPROVEMENTS: Expenditures for repairs and maintenance which did not add to the value or prolong the useful life of property owned were charged to expense as incurred; those expenditures for improvements which did add to the value or extend the useful life were capitalized. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash in bank accounts and investments in marketable securities, primarily short-term government securities, with original maturates of three months or less. F-8 26 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - - CONTINUED INCOME TAXES: Deferred income taxes were 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 were recognized only to the extent that it is more likely than not that they would 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 were recognized in the period that included 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 the 1998 method of presentation. NOTE B - - INCOME TAXES For the fiscal year ended September 30, 1998 the Trust recorded federal income tax expense of $407,000 ($276,000 of current taxes, of which $265,000 has been paid at September 30, 1998, plus $131,000 of deferred tax liabilities) and state income tax benefits of $40,000. For the fiscal year ended September 30, 1997 the Trust recorded federal income taxes of $2,400,000 ($2,531,000 of current taxes, net of a deferred tax asset of $131,000) and state income taxes of $314,000. The Trust had no income tax expense for the fiscal year ended September 30, 1996. The Trust's deferred tax assets and liabilities at September 30, 1998 and 1997 are as follows:
1998 1997 -------- -------- (in thousands) Deferred tax assets: Properties held for sale - valuation reserve $ -0- $ 88 Other -0- 546 Deferred tax liabilities: Depreciation -0- (503) -------- -------- Net deferred tax asset $ -0- $ 131 ======== ========
For fiscal 1997 the $546,000 other deferred asset represented expenses totaling $1,607,000 which were accrued and expensed in the financial statements for the year ended September 30, 1997, but were not deducted in determining the taxable income for tax year 1997. These expenses were $1,576,000 of severance pay, incentive bonus pool and payments in lieu of options (see NOTE - G for further information concerning these expenses) and $31,000 of state taxes. F-9 27 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE B - - INCOME TAXES - - CONTINUED A reconciliation between the income tax expense that would have resulted from applying federal statutory rates to pretax income and federal income taxes recorded is as follows:
9/30/98 9/30/97 9/30/96 ------- ------- ------- (in thousands) Expected income tax expense at Federal statutory tax rate $ 418 $ 5,611 $ (472) State income taxes (net of federal benefit) (26) 207 --- Increase (decrease) in taxes resulting from: Effect of temporary differences (25) 352 (853) (Recognized) unrecognized net operating loss carryforwards -0- (3,456) 1,325 ------- ------- ------- Income Tax Expense $ 367 $ 2,714 $ -0- ======= ======= =======
In determining the federal income taxes for the fiscal year ended September 30, 1997 the Trust utilized the total $10.2 million of net operating and capital loss carryforwards. NOTE C - - PROPERTIES Following is a summary of activity with regards to the properties held for sale for the three years ended September 30, 1998:
1998 1997 1996 ---- ---- ---- (in thousands) Balance, beginning of year $ 12,658 $ 38,896 $ 40,942 Improvements to existing properties -0- 700 972 Purchase of properties -0- -0- 3,465 Sales of properties - NOTE D (12,918) (29,985) (1,346) Valuation reserve 260 3,047 (3,307) Depreciation -0- -0- (1,830) -------- -------- -------- Balance, end of year $ -0- $ 12,658 $ 38,896 ======== ======== ========
NOTE D - - REAL ESTATE SALES The fiscal 1998 net gains on sales of real estate totaling $1,043,000 included the following: (i) $373,000 which represents the gain on the December 8, 1997, $3,150,000 sale of the Petroleum Club Building, Tulsa, Oklahoma; (ii) $744,000 which represents the gain on the January 30, 1998, $7,400,000 sale of the Cannon West Shopping Center, Austin, Texas; (iii) a loss of $76,000 on the August 14, 1998, $3,200,000 sale of the Tiffany Plaza Shopping Center, Ardmore, Oklahoma; and (iv) $2,000 gain for the sale of all personal property of the Trust. Additionally, the Trust sold two properties, resulting in losses, which had previously been provided for in the valuation reserve. The December 15, 1997, $643,000 sale of a vacant restaurant in Davenport, Iowa, resulted in a loss of $129,000 and the July 14, 1998, $100,000 sale of 20 acres of vacant land in Akron, Ohio, resulted in a loss of $33,000. F-10 28 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE D - - REAL ESTATE SALES - - CONTINUED The fiscal 1997 net gains on sales of real estate totaling $16,922,000 included the following: (i) $563,000 which represents the gain on the October 7, 1996, $2,450,000 sale of the Littleton Bank Building, Littleton, Colorado; (ii) $13,000 which represents the gain on the December 30, 1996, $20,000 sale of a .23 acre land parcel located in Dubuque, Iowa; (iii) $1,727,000 which represents the gain on the January 21, 1997, $5,950,000 sale of the Warren Plaza Shopping Center, Dubuque, Iowa; (iv) $2,650,000 which represents the gain on the February 28, 1997, $3,475,000 sale of Triangle Square, Hilton Head, South Carolina; (v) $2,317,000 which represents the gain on the March 12, 1997, $5,350,000 sale of the Englewood Bank Building, Englewood, Colorado; (vi) $679,000 which represents the gain on the April 28, 1997, $4,450,000 sale of the Spring Village Shopping Center, Davenport, Iowa; (vii) $3,463,000 which represents the gain on the June 2, 1997, $5,300,000 sale of the Executive Club Building, Denver, Colorado; (viii) $5,175,000 which represents the gain on the August 1, 1997, $17,860,000 sale of Office Alpha, 14800 Quorum, both of which are located in Dallas, Texas, and the Brookside Office Building, Arlington, Texas: and (ix) $335,000 which represents the gain on the September 5, 1997, $1,100,000 sale of the Walnut Stemmons Office Park, Dallas, Texas. 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. NOTE E - - MORTGAGE NOTES PAYABLE In connection with the January 30, 1998 sale of the Cannon West Shopping Center, the Trust repaid in full the $5,514,000 first mortgage loan, which was secured by the Cannon West Shopping Center. In connection with the October 7, 1996 sale of the Littleton Bank Building, the Trust repaid in full the $1,208,000 first mortgage loan, which was secured by the Littleton Bank Building. In connection with the August 2, 1997 sale of the 14800 Quorum Building, the Trust repaid in full the $2,582,000 first mortgage loan, which was secured by the 14800 Quorum Building. Total interest expense on mortgage notes payable did not differ materially from interest paid. NOTE F - - BANK NOTES PAYABLE On January 21, 1997 the Trust repaid in full the revolving line of credit ("1994 Credit") issued by National City Bank of Cleveland and Manufacturer's and Traders Trust Company of Buffalo, New York. Effective February 6, 1997 the Trust terminated the 1994 Credit. Total interest expense on bank notes payable did not differ materially from interest paid. F-11 29 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE G - - GENERAL AND ADMINISTRATIVE EXPENSES In connection with the Plan, the Trust made severance payments to the officers and employees of the Trust upon their termination. The defined obligations totaled $1,250,000, which was accrued and expensed in the year ended September 30, 1997. Of this amount $90,000 was paid during the year ended September 30, 1997 and $1,160,000 was paid during the year ended September 30, 1998. Certain other payments, including the additional compensation to be paid the officers as a result of their waiving all rights to unexercised options (See NOTE H), were made based on the Trust's ability to achieve defined distributions to shareholders. The Trust accrued and expensed $2,814,000 for these payments in the year ended September 30, 1997. Of this amount $1,274,000 was paid during the year ended September 30, 1997 and $1,540,000 was paid during the year ended September 30, 1998. NOTE H - - SHARES OF BENEFICIAL INTEREST On October 9, 1996 the Trust repurchased 42,527 of its Shares of Beneficial Interest for $201,000 in an open market purchase. These shares were retired by the Trust. 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. In connection with the Plan, the four primary officers of the Trust executed new employment contracts effective September 1, 1996. As part of these contracts the officers waived all rights with respect to unexercised options. In return, additional compensation was paid to the officers, based on a calculation of a minimum threshold of the distributions to the Shareholders during the liquidation period. (See NOTE G) NOTE I - - PENSION PLAN The Trust had a defined contribution pension plan covering all full-time employees of the Trust. Contributions were determined as a set percentage of each covered employee's annual cash compensation. Contributions by the Trust were accrued during the year and paid prior to the filing of the Trust's federal income tax return for said year. For fiscal 1998 the Trust accrued $30,000 for contributions to the pension plan (for fiscal 1997 - $42,000 and fiscal 1996 - $30,000). NOTE J - - SUBSEQUENT EVENT (unaudited) On December 14, 1998 the Trust declared a liquidation distribution of $.008 per share, payable December 30, 1998 to shareholders of record as of December 23, 1998. Effective that date, the share transfer books of the Trust will be permanently closed and the National Association of Securities Dealers, Inc. is instructed to cease all quotations for outstanding shares. F-12 30 NOTES TO FINANCIAL STATEMENTS - - CONTINUED NOTE K - - QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for the years ended September 30, 1998 and 1997 was as follows:
Quarter Ended Dec. 31 Mar. 31 June 30 Sept. 30 - ------------- ------- ------- ------- -------- (in thousands, except per share data) 1998 - ---- Operating revenues $ 752 $ 340 $ 171 $ 196 Income (loss) before gains and taxes 237 85 43 (180) Net income (loss) 402 573 27 (141) Income (loss) before gains and taxes per share (1) .05 .02 .01 (.04) Net income (loss) per share (1) .08 .11 .01 (.04) 1997 - ---- Operating revenues $ 2,514 $ 2,412 $ 1,815 $ 1,263 Income (loss) before gains and taxes 520 382 1,201 (2,523) Net income 1,096 6,976 3,890 1,826 Income (loss) before gains and taxes Per share (1) .10 .07 .23 (.48) Net income per share (1) .21 1.35 .76 .36
(1) Per Share calculations for each of the quarters are rounded to the nearest $.01 and are based on a weighted average number of shares outstanding for each period. Therefore, the sum of the quarters may not necessarily equal full-year amounts. F-13 31 CLEVETRUST REALTY INVESTORS ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED SEPTEMBER 30, 1998 EXHIBIT INDEX
"Assigned" Location of Exhibit No. * Description Exhibit ------------- ----------- ------- (2) Plan of Liquidation (Resolution adopted by the Incorporated by reference Board of Trustees, September 24, 1996) to Exhibit (2) to Form 10-Q for the quarter ended June 30, 1997 (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) Exhibits (10) (1) through (10) (3) represent Management contracts (10) (1) Amended and Restated Employment Agreement Incorporated by reference effective as of September 1, 1996 between to Exhibit (10) to Form CleveTrust Realty Investors and John C. Kikol. 10-K / A for the fiscal year ended September 30, 1996 (10) (2) Amended and Restated Employment Agreement Incorporated by reference effective as of September 1, 1996 between to Exhibit (10) to Form CleveTrust Realty Investors and Michael R. Thoms. 10-K / A for the fiscal year ended September 30, 1996 (10) (3) Amended and Restated Employment Agreement Incorporated by reference effective as of September 1, 1996 between to Exhibit (10) to Form CleveTrust Realty Investors and Brian D. 10-K / A for the fiscal Griesinger. year ended September 30, 1996 (11) Computation of net income (loss) per share of Filed herewith beneficial interest. Electronically (24) Power of Attorney. Filed herewith Electronically (27) Financial Data Schedule. Filed herewith Electronically
*Exhibits 4, 9, 12, 13, 16, 18, 19, 21, 22, 23, and 28 are either inapplicable to the Trust or require no answer. EX-11 2 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, --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (in thousands, except shares and per share data) Income (loss) before net gains on sales of real estate gains on sales of securities, and income taxes $ 185 $ (420) $ (2,060) Net gains on sales of real estate 1,043 16,922 40 Gains on sales of securities 0 0 632 Federal and state income taxes (367) (2,714) 0 ----------- ----------- ----------- NET INCOME (LOSS) $ 861 $ 13,788 $ (1,388) =========== =========== =========== Weighted average number of Shares of Beneficial Interest outstanding 5,136,616 5,138,247 5,186,099 =========== =========== =========== Primary net income (loss) per Share: Income (loss) before net gains on sales of real estate, gains on sales of securities, income taxes and $ 0.04 $ (0.08) $ (0.40) Net gains on sales of real estate 0.20 3.29 0.01 Gains on sales of securities 0.00 0.00 0.12 Federal and state income taxes (0.07) (0.53) 0.00 ----------- ----------- ----------- NET INCOME (LOSS) PER SHARE $ 0.17 $ 2.68 $ (0.27) =========== =========== ===========
(1) Per share data is computed using the weighted average number of shares of Beneficial Interest outstanding. EX-24 3 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 and Michael R. Thoms 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, 1998, 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 November 11, 1998 - ----------------------------------------- ------------------------------- Howard Amster, Trustee Date /s/ Robert H. Kanner December 14, 1998 - ----------------------------------------- ------------------------------- Robert H. Kanner, Trustee Date /s/ John C. Kikol November 11, 1998 - ----------------------------------------- ------------------------------- John C. Kikol, Trustee Date /s/ Leighton A. Rosenthal November 11, 1998 - ----------------------------------------- ------------------------------- Leighton A. Rosenthal, Trustee Date /s/ John D. Weil November 11, 1998 - ----------------------------------------- ------------------------------- John D. Weil, Trustee Date EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 282 0 7 0 0 0 0 0 289 248 0 0 0 5,137 (5,096) 289 0 1,459 0 349 872 (98) 151 185 367 (182) 0 1,043 0 861 .17 .17
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