-----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, NY+Tht5IcBahE6I8tKtNsAqnaNPGP4J85hPpySToErRzJIXTRC/kPyJjAEJlh+wp gJNUgItjOgspa2J2o/4B1A== 0000067625-04-000077.txt : 20041214 0000067625-04-000077.hdr.sgml : 20041214 20041214123651 ACCESSION NUMBER: 0000067625-04-000077 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041214 DATE AS OF CHANGE: 20041214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT CORP CENTRAL INDEX KEY: 0000067625 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 221897375 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04258 FILM NUMBER: 041200788 BUSINESS ADDRESS: STREET 1: 3499 ROUTE 9 N, SUITE 3-C STREET 2: JUNIPER BUSINESS PLAZA CITY: FREEHOLD STATE: NJ ZIP: 07728 BUSINESS PHONE: 7325779996 MAIL ADDRESS: STREET 1: 3499 ROUTE 9 N, SUITE 3-C STREET 2: JUNIPER BUSINESS PLAZA CITY: FREEHOLD STATE: NJ ZIP: 07728 FORMER COMPANY: FORMER CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19900403 10-K 1 mreic93004done.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SCURITIES EXCHANGE ACT OF 1934 For the transition period ___________ to ___________ Commission File Number 0-4258 MONMOUTH REAL ESTATE INVESTMENT CORPORATION (Exact name of registrant as specified in its charter) Maryland 22-1897375 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3499 Route 9 North, Suite 3-C, Freehold, NJ 07728 Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code:(732)-577-9997 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 12 preceding 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 (Section 229.405 of this chapter) 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 of this Form 10-K X Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). X_ Yes __ No Based upon the assumption that directors and executive officers of the registrant are not affiliates of the registrant,the aggregate market value of the voting stock of the registrant held by nonaffiliates of the registrant at March 31, 2004 was $144,721,864. Presuming that such directors and executive officers are affiliates of the registrant, the aggregate market value of the voting stock of the registrant held by nonaffiliates of the registrant at March 31, 2004 was $129,489,502. There were 17,368,809 shares of common stock outstanding as of October 15, 2004. Documents Incorporated by Reference: Exhibits incorporated by reference are listed in Part IV, Item 15 (a) (3). Page 1 TABLE OF CONTENTS Item Page No. No. Part I 1 Business . . . . . . . . . . . . .. . . . . . . . . . 3 2 Properties . . . . . . . . . . . . . . . . . . . . . 10 3 Legal Proceedings . . . . . . . . . . . . . . . . . . 12 4 Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . . . . . . . . 12 Part II 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . 13 6 Selected Financial Data . . . . . . . . . . . . . . . 15 7 Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . . 18 7A Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . .27 8 Financial Statements and Supplementary Data . . . . . .28 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . .29 9A Controls and Procedures . . . . . . . . . . . . . . . .29 9B Other Information . . . . . . . . . . . . . . . . . . .29 Part III 10 Directors and Executive Officers of the Registrant . . 30 11 Executive Compensation . . . . . . . . . . . . . . . . 33 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . .38 13 Certain Relationships and Related Party Transactions . . . . . . . . . . . . . . . . . . . . . .40 14 Principal Accounting Fees and Services . . . . . . . . .41 Part IV 15 Exhibits, Financial Statement Schedules . . . . . . . . 42 Signatures . . . . . . . . . . . . . . . . . . . . . . .80 Page 2 PART I ITEM 1 - BUSINESS General Development of the Business Monmouth Real Estate Investment Corporation (the Company) is a corporation operating as a qualified real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue (the Code), and intends to maintain its qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Company will not be taxed under Federal and certain state income tax laws at the corporate level on taxable income that it distributes to its shareholders. For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code. The Company was incorporated in 1968 as a Delaware Corporation. On May 15, 2003, the Company changed its state of incorporation from Delaware to Maryland (the Reincorporation). The Reincorporation was approved by the Company's shareholders at the Company's annual meeting on May 6, 2003. The Company's primary business is the ownership of real estate. Its investment focus is to own net leased industrial property which are leased to credit tenants on long-term leases. In addition, the Company holds a portfolio of REIT securities. Narrative Description of Business Currently, the Company derives its income primarily from real estate rental operations. Rental and occupancy revenue was $21,329,500, $19,641,111 and $16,118,137 for the years ended September 30, 2004, 2003 and 2002, respectively. Total assets were $195,222,169 and $183,173,874 as of September 30, 2004 and 2003, respectively. The Company has approximately 3,734,000 square feet of property, of which approximately 1,223,000 square feet, or 33%, is leased to Federal Express Corporation (FDX) and subsidiaries and approximately 274,000 square feet, or 7%, is leased to Keebler Company, a subsidiary of the Kellogg Company. During 2004, 2003 and 2002 rental and occupancy charges from properties leased to these companies approximated 48%, 48% and 52%, respectively, of total rental and occupancy charges. At September 30, 2004, the Company had investments in thirty-four properties. (See Item 2 for detailed description of the properties.) These properties are located in New Jersey, New York, Pennsylvania, North Carolina, Mississippi, Massachusetts, Kansas, Iowa, Missouri, Illinois, Michigan, Nebraska, Florida, Virginia, Ohio, Connecticut, Wisconsin, Maryland and Arizona. All properties are managed by a management company. All properties are leased on a net basis except Monaca, Pennsylvania. The Company competes with other investors in real estate for attractive investment opportunities. These investors include other "equity" real estate investment trusts, limited partnerships, syndications and private investors, among others. Competition in the market areas Page 3 ITEM 1 - BUSINESS, (CONT'D.) in which the Company operates is significant and affects acquisitions and/or development of properties, occupancy levels, rental rates, and operating expenses of certain properties. Management has built relationships with merchant builders which provide the Company with investment opportunities which fit the Company's investment policy. Investment and Other Policies The Company has a flexible investment policy concentrating its investments in the area of net-leased industrial properties. The Company's strategy is to obtain a favorable yield spread between the yield from the net-leased industrial properties and mortgage interest costs. The Company continues to purchase net- leased industrial properties, since management believes that there is a potential for long-term capital appreciation through investing in well-located industrial properties. There is the risk that, on expiration of current leases, the properties can become vacant or re-leased at lower rents. The results obtained by the Company by re-leasing the properties will depend on the market for industrial properties at that time. In fiscal 2004, the Company purchased one net-leased industrial property, for a total cost of approximately $17,657,000. In fiscal 2005, the Company anticipates acquisitions of approximately $30,000,000. The funds for these acquisitions may come from the Company's available line of credit, other bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan and private placements. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made. Because of the contingent nature of contracts to purchase real property, the Company announces acquisitions only upon closing. The Company seeks to invest in well-located, modern buildings leased to credit worthy tenants on long-term leases. In management's opinion, newly built facilities leased to FDX or FDX subsidiaries meet this criteria. The Company has a concentration of properties leased to FDX and FDX subsidiaries. This is a risk factor that shareholders should consider. FDX is a publicly- owned corporation and information on its financial business operations is readily available to the Company's shareholders. The Company operates as part of a group of three public companies (all REITs) which includes United Mobile Homes, Inc., Monmouth Capital Corporation, and Monmouth Real Estate Investment Corporation (the affiliated companies). Some general and administrative expenses are allocated between the three affiliated companies based on use or services provided. The Company currently has eleven employees. Allocations of salaries and benefits are made between the affiliated companies based on the amount of the employees' time dedicated to each affiliated company. The Company does not have an advisory contract; however, all of the properties are managed by Cronheim Management Services, a division of David Cronheim Company. In 1998, the Company entered into a new management contract with Cronheim Management Services, Page 4 ITEM 1 - BUSINESS, (CONT'D.) a related party as defined in Note No. 9 to the Consolidated Financial Statements. Under this contract, Cronheim Management Services receives 3% of gross rental income on certain properties for management fees. Cronheim Management Services provides sub-agents as regional managers for the Company's properties and compensates them out of this management fee. Cronheim Management Services received $299,392, $258,626 and $245,597, in 2004, 2003 and 2002, respectively, for the management of the properties. David Cronheim Company received $132,185, $14,377 and $20,194 in lease commissions in 2004, 2003 and 2002, respectively. The Company is subject to various environmental regulatory requirements related to the ownership of real estate. Investments in real property have the potential for environmental liability on the part of the owner of such property. The Company is not aware of any environmental liabilities to the Company relating to the Company's investment properties which would have a material adverse effect on the Company's business, assets, or results of operations. The Company continues to invest in both debt and equity securities of other REITs. The Company from time to time may purchase these securities on margin when the interest and dividend yields exceed the cost of the funds. The securities portfolio, to the extent not pledged to secure borrowing, provides the Company with liquidity and additional income. Such securities are subject to risk arising from adverse changes in market rates and prices, primarily interest rate risk relating to debt securities and equity price risk relating to equity securities. From time to time the Company may use derivative instruments to mitigate interest rate risk. Additional information about the Company can be found on the Company's website which is located at www.mreic.com. The Company's filings with the Securities and Exchange Commission are made available through a link on the Company's website or by calling Investor Relations. Risk Factors Real Estate Industry Risks The Company faces risks associated with local real estate conditions in areas where the Company owns properties. The Company may be affected adversely by general economic conditions and local real estate conditions. For example, an oversupply of industrial properties in a local area or a decline in the attractiveness of our properties to tenants would have a negative effect on the Company. Other factors that may affect general economic conditions or local real estate conditions include: . population and demographic trends; Page 5 ITEM 1 - BUSINESS, (CONT'D.) . zoning, use and other regulatory restrictions; . income tax laws; . changes in interest rates and availability and costs of financing; . competition from other available real estate; . our ability to provide adequate maintenance and insurance; and . increased operating costs, including insurance premiums and real estate taxes. The Company may be unable to compete with its larger competitors and other alternatives available to tenants or potential tenants of our properties. The real estate business is highly competitive. The Company competes for properties with other real estate investors, including other real estate investment trusts, limited partnerships, syndications and private investors, many of whom have greater financial resources, revenues, and geographical diversity than the Company has. Furthermore, the Company competes for tenants with other property owners. All of the Company's industrial properties are subject to significant local competition. The Company also competes with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth. The Company is subject to significant regulation that inhibits our activities and increases our costs. Local zoning and use laws, environmental statutes and other governmental requirements may restrict expansion, rehabilitation and reconstruction activities. These regulations may prevent the Company from taking advantage of economic opportunities. Legislation such as the Americans with Disabilities Act may require management to modify the Company's properties. Future legislation may impose additional requirements. The Company cannot predict what requirements may be enacted or what changes may be implemented to existing legislation. Risks Associated with Our Properties The Company may be unable to renew leases or relet space as leases expire. While management seeks to invest in well-located, modern buildings leased to credit-worthy tenants on long term leases, a number of the Company's properties are subject to short-term leases. When a lease expires, a tenant may elect not to renew it. Management may not be able to relet the property on similar terms, if the property may be relet at all. Management has established an annual budget for renovation and reletting expenses that management believes is reasonable in light of each property's operating history and local market characteristics. This budget, however, may not be sufficient to cover these expenses. Page 6 ITEM 1 - BUSINESS, (CONT'D.) The Company has been and may continue to be affected negatively by tenant financial difficulties and leasing delays. A general decline in the economy may result in a decline in the demand for industrial space. As a result, the Company's tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy. Any such event could result in the termination of that tenant's lease and losses to the Company. The Company receives a substantial portion of our income as rents under long-term leases. If tenants are unable to comply with the terms of their leases because of rising costs or falling sales, management, in its sole discretion, may deem it advisable to modify lease terms to allow tenants to pay a lower rental or a smaller share of operating costs, taxes and insurance. The Company may be unable to sell properties when appropriate because real estate investments are illiquid. Real estate investments generally cannot be sold quickly and, therefore, will tend to limit management's ability to vary the property portfolio promptly in response to changes in economic or other conditions. The inability to respond promptly to changes in the performance of the Company's property portfolio could adversely affect the Company's financial condition and ability to service debt and make distributions to our stockholders. Environmental liabilities could affect the Company's profitability. The Company faces possible environmental liabilities. Current and former real estate owners and operators may be required by law to investigate and clean up hazardous substances released at the properties they own or operate. They may also be liable to the government or to third parties for property damage, investigation costs and cleanup costs. Contamination may affect adversely the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed on, or released from, the property. A conveyance of the property, therefore, does not relieve the owner or operator from liability. Management is not aware of any environmental liabilities relating to the Company's investment properties which would have a material adverse effect on the business, assets, or results of operations. However, management cannot assure you that environmental liability claims will not arise in the future. If our insurance coverage is inadequate or management cannot obtain acceptable insurance coverage, the Company operations could be materially adversely affected. Management generally maintains insurance policies related to the Company's business, including casualty, general liability and other policies covering business operations, employees and assets. The Company may be required to bear all losses that are not adequately covered by insurance. Although management believes that our insurance programs are adequate, no assurance can be given that we will not incur losses in excess of the Company's insurance coverage, or that the Company will be able to obtain insurance in the future at acceptable levels and reasonable cost. Page 7 ITEM 1 - BUSINESS, (CONT'D.) Financing Risks The Company faces risks generally associated with its debt. The Company finances a portion of its investments in properties and marketable securities through debt. This debt creates risks, including: . rising interest rates on the floating rate debt; . failure to repay or refinance existing debt as it matures, which may result in forced disposition of assets on disadvantageous terms; . refinancing terms less favorable than the terms of existing debt; and . failure to meet required payments of principal and/or interest. The Company faces risks associated with the use of debt to fund acquisitions, including refinancing risk. The Company is subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. Management anticipates that a portion of the principal of the Company's debt will not be repaid prior to maturity. Therefore, the Company will likely need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital or sales of properties, the Company's cash flow will not be sufficient to repay all maturing debt in years when significant "balloon" payments come due. As a result, we may be forced to dispose of properties on disadvantageous terms. Other Risks Management may amend our business policies without the stockholders' approval. Our board of directors determines our growth, investment, financing, capitalization, borrowing, REIT status, operations and distributions policies. Although the board of directors has no present intention to amend or reverse any of these policies, they may be amended or revised without notice to stockholders. Accordingly, stockholders may not have control over changes in our policies. Management cannot assure stockholders that changes in our policies will serve fully the interests of all stockholders. Page 8 ITEM 1 - BUSINESS, (CONT'D.) The market value of the Common Stock could decrease based on the Company's performance and market perception and conditions. The market value of the Company's Common Stock may be based primarily upon the market's perception of the Company's growth potential and current and future cash dividends, and may be secondarily based upon the real estate market value of the Company's underlying assets. The market price of the Company's Common Stock is influenced by, among other things, the dividend on the Company's Common Stock relative to market interest rates. Rising interest rates may lead potential buyers of the Company's Common Stock to expect a higher dividend rate, which would adversely affect the market price of the Common Stock. In addition, rising interest rates would result in increased expense, thereby adversely affecting cash flow and the Company's ability to service our indebtedness and pay dividends. There are restrictions on the transfer of the Company's Common Stock. To maintain the Company's qualification as a REIT under the Internal Revenue Code of 1986 (the Code), no more than 50% in value of the Company's outstanding capital stock may be owned, actually or by attribution, by five or fewer individuals, as defined in the Code to also include certain entities, during the last half of a taxable year. Accordingly, the Company's charter and bylaws contain provisions restricting the transfer of the Company's Common Stock. The Company's earnings are dependent, in part, upon the performance of our investment portfolio. As permitted by the Code, management invests in and owns securities of other real estate investment trusts. To the extent that the value of those investments declines or those investments do not provide a return, the Company's earnings could be adversely affected. The Company is subject to restrictions that may impede management's ability to effect a change in control. Certain provisions contained in the Company's charter and bylaws, and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and thereby inhibit a change in control. The Company may fail to qualify as a REIT. If the Company fails to qualify as a REIT, the Company will not be allowed to deduct distributions to stockholders in computing our taxable income and will be subject to Federal income tax, including any applicable alternative minimum tax, at regular corporate rates. In addition, the Company might be barred from qualification as a REIT for the four years following disqualification. The additional tax incurred at regular corporate rates would reduce significantly the cash flow available for distribution to stockholders and for debt service. Furthermore, the Company would no longer be required to make any distributions to the Company's stockholders as a condition to REIT qualification. Any distributions to stockholders that otherwise would have been subject to tax as capital gain dividends would be taxable as ordinary income to the extent of the Company's current and accumulated earnings and profits. Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Code. Page 9 ITEM 1 - BUSINESS, (CONT'D.) To qualify as a REIT, and to continue to qualify as a REIT, the Company must comply with certain highly technical and complex requirements. The Company cannot be certain it has complied, and will always be able to comply, with these requirements. In addition, facts and circumstances that may be beyond the Company's control may affect the Company's ability to continue to qualify as a REIT. The Company cannot assure stockholders that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to the Company's qualification as a REIT or with respect to the Federal income tax consequences of qualification. The Company believes that it has qualified as a REIT since its inception and intends to continue to qualify as a REIT. However, the Company cannot assure you that the Company is qualified or will remain qualified. The Company may be unable to comply with the strict income distribution requirements applicable to REITs. To obtain the favorable tax treatment associated with qualifying as a REIT, among other requirements, the Company is required each year to distribute to its stockholders at least 90% of its REIT taxable income. The Company will be subject to corporate income tax on any undistributed REIT taxable income. In addition, we will incur a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than the sum of (i) 85% of our ordinary income for the year, (ii) 95% of our capital gain net income for the year, and (iii) any undistributed taxable income from prior years. The Company could be required to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT (and to avoid corporate income tax and the 4% excise tax), even if conditions were not favorable for borrowing. Notwithstanding the Company's status as a REIT, the Company is subject to various Federal, state and local taxes on our income and property. For example, the Company will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains, provided, however, that properly designated undistributed capital gains will effectively avoid taxation at the stockholder level. The Company may also have to pay some state income or franchise taxes because not all states treat REITs in the same manner as they are treated for Federal income tax purposes. ITEM 2 - DETAILED DESCRIPTION OF PROPERTIES The Company operates as a real estate investment trust. Its portfolio is primarily in real estate holdings, some of which have been long-term holdings carried on the financial statements of the Company at depreciated cost. It is believed that their current market values exceed both the original cost and the depreciated cost. The following table sets forth certain information concerning the Company's real estate investments as of September 30, 2004: Page 10
Fiscal Year State City Acquisition Type _____ _____ ___________ ____ AZ Tolleson 2003 Industrial CT Newington 2001 Industrial FL Ft. Myers 2003 Industrial FL Jacksonville 1999 Industrial FL Tampa 2004 Industrial IL Schaumburg 1997 Industrial IL Burr Ridge 1997 Industrial IL Granite City 2001 Industrial IL Elgin 2002 Industrial IO Urbandale 1994 Industrial KS Wichita 1994 Industrial KS Edwardsville 2003 Industrial MA Franklin 1994 Industrial MD Beltsville 2001 Industrial MI Romulus 1998 Industrial MO O' Fallon 1994 Industrial MO Liberty 1998 Industrial MO St. Joseph 2001 Industrial MS Jackson 1993 Industrial MS Richland 1994 Industrial NC Fayetteville 1997 Industrial NC Greensboro 1993 Industrial NC Monroe 2001 Industrial NC Winston-Salem 2002 Industrial NE Omaha 1999 Industrial NJ Ramsey 1969 Industrial NJ South Brunswick 1993 Industrial NJ Somerset (1) 1970 Shopping Center NY Orangeburg 1993 Industrial OH Union Township 2000 Industrial PA Monaca 1977 Industrial VA Charlottesville 1999 Industrial VA Richmond 2001 Industrial WI Cudahy 2001 Industrial
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent reflects the Company's proportionate share of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease. Page 11A
Mortgage Square Balance State City Footage 9/30/04 _____ ____ _______ _______ AZ Tolleson 288,211 $ 10,146,307 CT Newington 54,812 2,127,778 FL Ft. Myers 90,020 3,045,095 FL Jacksonville 95,883 3,209,738 FL Tampa 170,779 12,603,145 IL Schaumburg 73,500 2,340,730 IL Burr Ridge 12,477 821,422 IL Granite City 184,800 8,349,161 IL Elgin 89,052 4,520,616 IO Urbandale 36,150 -0- KS Wichita 44,136 -0- KS Edwardsville 179,280 4,507,576 MA Franklin 84,376 -0- MD Beltsville 109,705 5,157,949 MI Romulus 72,000 1,996,698 MO O' Fallon 102,135 860,835 MO Liberty 98,200 3,355,368 MO St. Joseph 388,671 7,591,972 MS Jackson 26,340 308,344 MS Richland 36,000 -0- NC Fayetteville 148,000 2,668,864 NC Greensboro 40,560 -0- NC Monroe 160,000 3,574,850 NC Winston-Salem 106,507 4,480,339 NE Omaha 88,140 3,014,301 NJ Ramsey 44,719 -0- NJ South Brunswick 144,520 -0- NJ Somerset (1) 42,800 -0- NY Orangeburg 50,400 -0- OH Union Township 103,818 2,435,553 PA Monaca 291,474 -0- VA Charlottesville 49,900 2,087,804 VA Richmond 112,799 4,647,320 WI Cudahy 114,123 3,679,198 _________ ____________ 3,734,287 $97,530,963 ========== ===========
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent reflects the Company's proportionate share of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease. Page 11B
State City Tenant Expiration _____ _____ _______ __________ AZ Tolleson Western Container Corp 4/30/2012 CT Newington Keebler Company 2/28/2011 FL Ft. Myers Fedex Ground Package System. Inc 10/31/2011 FL Jacksonville Federal Express Corporation 5/31/2008 FL Tampa Fedex Ground Package System. Inc 1/31/2019 IL Schaumburg Federal Express Corporation 3/31/2007 IL Burr Ridge Sherwin-Wiliams Company 10/31/2009 IL Granite City Anheuser-Busch, Inc. 5/31/2011 IL Elgin Reynolds Metals Company 1/31/2012 IO Urbandale Glazers Distributors of Iowa, 6/30/2008 Inc. KS Wichita Keebler Company (4) 5/31/2005 KS Edwardsville Carlisle Tire & Wheel Company 5/31/2012 MA Franklin Keebler Company 1/31/2007 MD Beltsville Fedex Ground Package System. Inc 12/31/2010 MI Romulus Federal Express Corporation 5/31/2008 MO O' Fallon PPG Industries 6/30/2006 MO Liberty Johnson Controls, Inc. (3) 12/31/2007 MO St. Joseph Mead Corporation 11/30/2015 MS Jackson Oxford Auto Alabama month to month MS Richland Federal Express Corporation 3/31/2014 NC Fayetteville Belk Enterprises, Inc. (2) 6/30/2006 NC Greensboro Keebler Company 2/28/2006 NC Monroe Hughs Supply, Inc. 10/31/2011 NC Winston-Salem Fedex Ground Package System. Inc 12/31/2011 NE Omaha Federal Express Corporation 10/31/2008 NJ Ramsey Bogen Photo, Inc. 9/30/2006 NJ South Brunswick McMaster Carr Supply 3/31/2006 NJ Somerset (1) various various NY Orangeburg Keebler Company 12/31/2007 OH Union Township RPS Ground 8/31/2013 PA Monaca various various VA Charlottesville Federal Express Corporation 8/31/2008 VA Richmond Federal Express Corporation 10/21/2009 WI Cudahy Fedex Ground Package System. Inc 3/31/2011
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent reflects the Company's proportionate share of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease. Page 11C
Estimated State City Annual Rent AZ Tolleson $ 1,243,000 CT Newington 340,000 FL Ft. Myers 400,000 FL Jacksonville 526,000 FL Tampa 1,412,000 IL Schaumburg 463,000 IL Burr Ridge 151,000 IL Granite City 1,147,000 IL Elgin 614,000 IO Urbandale 121,000 KS Wichita 193,000 KS Edwardsville 671,000 MA Franklin 516,000 MD Beltsville 892,000 MI Romulus 396,000 MO O' Fallon 372,000 MO Liberty 699,000 MO St. Joseph 1,239,000 MS Jackson 145,000 MS Richland 140,000 NC Fayetteville 470,000 NC Greensboro 215,000 NC Monroe 589,000 NC Winston-Salem 637,000 NE Omaha 516,000 NJ Ramsey 285,000 NJ South Brunswick 673,000 NJ Somerset (1) 391,000 NY Orangeburg 390,000 OH Union Township 493,000 PA Monaca 400,000 VA Charlottesville 363,000 VA Richmond 707,000 WI Cudahy 572,000 ______________ $ 18,381,000 ===============
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent reflects the Company's proportionate Share of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease. Page 11D ITEM 2 - DETAILED DESCRIPTION OF PROPERTIES, (CONT'D) The Company's weighted-average lease expiration was 5.7 years at September 30, 2004 and the Company's occupancy rate was 95%. All properties were occupied 100% at September 30, 2004 except for Monaca, PA (56% occupied) and Wichita, KS (vacant but Keebler continues to honor lease). The Company is a partner in a limited liability company, Hollister `97, LLC, representing a 25% ownership interest. The sole business of this LLC is the ownership and operation of the Hollister Corporate Park in Teterboro, New Jersey. Under the agreement, the Company is to receive a cumulative preferred 11% annual return on its investment. ITEM 3 - LEGAL PROCEEDINGS None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fiscal fourth quarter of 2004. Page 12
PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The shares of common stock of Monmouth Real Estate Investment Corporation are traded on the National Association of Securities Dealers Automated Quotation (NASDAQ symbol MNRTA). The per share range of high and low market prices and distributions paid to shareholders during each quarter of the last two years were as follows: 2004 2003 Market Price Market Price Fiscal High Low Distrib. Fiscal High Low Distrib. Qtr. Qtr. _______ _____ _____ ______ _______ _____ _____ ________ First 8.80 8.11 $.145 First 7.17 6.70 $ .145 Second 9.33 8.65 .145 Second 7.90 6.70 .145 Third 8.99 7.39 .145 Third 8.80 7.36 .145 Fourth 8.50 7.76 .145 Fourth 8.77 7.31 .145 ______ ______ $ .58 $ .58 ====== ====== The over-the- counter market quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On September 30, 2004, the closing price was $8.34. As of September 30, 2004, there were approximately 1,174 shareholders of record who held shares of common stock of the Company. It is the Company's intention to continue distributing quarterly dividends. On October 1, 2004 the Company declared a dividend of $.145 per share to be paid on December 15, 2004 to shareholders of record on November 15, 2004. Future dividend policy will depend on the Company's earnings, capital requirements, financial condition, availability and cost of bank financing and other factors considered relevant by the Board of Directors.
Page13
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (CONT'D.) Equity Compensation Plan Information The following table summarizes information, as of September 30, 2004, relating to equity compensation plans of the Company (including individual compensation arrangements) pursuant to which equity securities of the Company are authorized for issuance: Number of Securities Remaining Number of Available for Securitiesto be Weighted- Future Issuance Is Issued Upon average Exercise Under Equity Exercise of Price of Compensation Outstanding Outstanding Plans (excluding Options, Options, Securities Plan Warrants and Warrants and reflected in Category Rights Rights Column (a)) (a) (b) (c) _____________ ____________ ___________ ___________ Equity Compensation Plans Approved by Security Holders 609,000 $7.22 495,000 Equity Compensation Plans not Approved by Security Holders N/A N/A N/A Total 609,000 $7.22 495,000 ======== ======== ========
Page 14
ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth selected financial and other information for the Company as of and for each of the years in the five year period ended September 30, 2004. This table should be read in conjunction with all of the financial statements and notes thereto included elsewhere herein. September 30, 2004 2003 2002 2001 2000 OPERATING DATA: Rental Income And Occupancy Charges $21,329,500 $19,641,111 $16,118,137 $11,979,886 $ 9,681,109 Gains on Securities Transactions, Net 1,714,395 1,018,862 909,704 632,492 110,960 Total Expenses 10,303,360 9,432,000 7,452,125 5,649,704 4,684,451 (Loss)Gain on Sales of Assets - Investment Property -0- -0- (175,376) -0- 88,631 Net Income 7,672,635 6,120,343 4,478,145 4,123,054 3,589,397 Interest Expense 6,979,007 6,906,078 6,059,415 4,590,757 3,334,861 Net Income Per Share - Basic and Diluted .47 .44 .40 .43 .44 BALANCE SHEET DATA: Total Assets $195,222,169 183,173,874 $149,011,493 $119,433,470 $86,003,905 Real Estate Investments, Net 166,879,808 152,770,335 129,107,256 102,722,084 65,893,693 Mortgage Notes Payable 97,530,963 90,909,299 78,220,163 60,424,754 36,104,743 Shareholders' Equity 92,907,840 78,313,289 59,005,016 49,929,539 41,013,926 CASH FLOW DATA: Net Cash Provided (Used) By: Operating Activities $ 10,385,410 $9,725,898 $6,792,043 $ 4,785,236 $ 4,583,749 Investing Activities (15,215,218) (35,417,062) (30,564,641) (32,301,411) (8,283,278) Financing Activities 4,684,267 26,068,148 24,318,591 27,149,664 2,971,162 OTHER INFORMATION: Average Number of Shares Outstanding - Basic 16,206,433 13,844,056 11,177,294 9,504,806 8,078,877 Funds from Operations* $11,718,456 $9,680,489 $7,594,618 $6,289,381 $5,203,753 Cash Dividends Per Share .58 .58 .58 .58 .58
Page 15
ITEM 6 - SELECTED FINANCIAL DATA, (CONT'D.) * Funds from operations (FFO), is defined as net income, excluding gains (or losses) from sales of depreciable assets, plus depreciation. FFO should be considered as a supplemental measure of operating performance used by real estate investment trusts (REITs). The Company believes that FFO is helpful to investors as one of several measures of the performance of a REIT. FFO excludes historical cost depreciation as an expense and may facilitate the comparison of REITs which have different cost bases. The items excluded from FFO are significant components in understanding the Company's financial performance. FFO (1) does not represent cash flow from operations as defined by generally accepted accounting principles; (2) should not be considered as an alternative to net income as a measure of operating performance or to cash flows from operating, investing and financing activities; and (3) is not an alternative to cash flow as a measure of liquidity. FFO, as calculated by the Company, may not be comparable to similarly entitled measures reported by other REITs. The Company's FFO is calculated as follows: 2004 2003 2002 2001 2000 _______ ______ ______ ______ ______ Net Income $7,672,635 $6,120,343 $4,478,145 $4,123,054 $3,589,397 (Gain) Loss on Sales of Depreciable -0- -0- 175,376 -0- (88,631) Assets Depreciation 4,045,821 3,560,146 2,941,097 2,166,327 1,702,987 _________ _________ _________ _________ _________ FFO $11,718,456 $9,680,489 $7,594,618 $6,289,381 $5,203,753 ========== ========= ========= ========= ==========
Page 16
ITEM 6 - SELECTED FINANCIAL DATA, (CONT'D.) SUMMARY OF OPERATIONS BY PROPERTY FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 2001 2000 _________ _______ ________ ________ ________ Net Rental Income (Loss): Somerset, New Jersey $ 342,446 $ 293,177 $ 166,747 $ 270,716 $ 247,795 Ramsey, New Jersey 226,404 232,785 222,078 114,702 157,488 Monaca, Pennsylvania 105,876 127,727 102,897 145,484 187,031 Orangeburg, New York 212,764 181,752 161,000 155,249 220,767 South Brunswick, New Jersey 513,717 489,916 505,744 448,308 412,634 Greensboro, North Carolina 147,773 224,251 220,285 207,361 192,358 Jackson, Mississippi 73,524 91,898 88,510 78,996 72,937 Franklin, Massachusetts 378,519 356,356 330,752 307,996 278,733 Wichita, Kansas 199,561 142,352 67,243 53,132 31,117 Urbandale, Iowa 62,302 47,250 38,001 28,631 88,628 Richland, Mississippi 96,643 87,263 80,056 69,508 58,738 O'Fallon, Missouri 215,267 199,537 177,225 130,480 101,646 Virginia Beach, Virginia* -0- -0- (320,181) (56,485) 110,359 Fayetteville, North Carolina 134,746 126,549 119,903 107,017 89,158 Schaumburg, Illinois 155,394 120,885 130,583 105,769 80,094 Burr Ridge, 53,248 41,206 39,595 33,355 41,756 Illinois Romulus, Michigan 142,485 130,652 118,385 104,130 93,874 Liberty, Missouri 283,994 264,945 243,747 222,353 206,755 Omaha, Nebraska 174,614 159,407 145,288 126,956 113,526 Charlottesville, Virginia 134,548 120,371 116,247 105,075 94,450 Jacksonville, Florida 167,252 163,079 140,924 132,789 114,921 Union Township, Ohio 180,147 94,872 75,140 62,314 41,177 Richmond, Virginia 240,531 224,077 320,576 198,862 -0- St. Joseph, Missouri 289,766 222,808 190,325 155,660 -0- Newington, Connecticut 80,989 73,400 26,670 66,321 -0- Cudahy, Wisconsin 116,922 109,891 88,637 35,275 -0- Maryland 335,192 316,619 299,699 115,176 -0- Granite City, Illinois 213,433 184,984 299,672 -0- -0- Monroe, North Carolina 201,610 164,180 185,450 -0- -0- Winston-Salem, North Carolina 164,163 149,097 123,007 -0- -0- Elgin, Illinois 143,540 133,700 55,468 -0- -0- Tolleson, Arizona 291,136 376,824 -0- -0- -0- Ft. Myers, Florida 132,752 136,885 -0- -0- -0- Edwardsville, Kansas 175,384 99,440 -0- -0- -0- Tampa, Florida 208,765 -0- -0- -0- -0- _________ _________ _________ ________ _______ Net Rental Income 6,595,407 5,888,135 4,599,324 3,485,479 3,035,942 Net Investment and Other Income 3,104,554 2,204,780 1,583,425 1,613,977 1,253,695 _________ _________ _________ ________ ________ TOTAL 9,699,961 8,092,915 6,182,749 5,099,456 4,289,637 General & Administrative Expenses (2,027,326) (1,972,572) (1,529,228) (976,402) (788,871) _________ _________ _________ ________ ________ Income Before (Loss) Gain on Sale of Assets-Investment Property 7,672,635 6,120,343 4,653,521 4,123,054 3,500,766 (Loss) Gain on Sale of Assets - Investment Property -0- -0- (175,376) -0- 88,631 _________ _________ _________ __________ _________ NET INCOME $ 7,672,635 $6,120,343 $4,478,145 $4,123,054 $3,589,397 ========= ========= ========= ========== ========= *Sold in May, 2002.
Page 17 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Overview The Company is a real estate investment trust (REIT). The Company's primary business is the ownership and management of industrial buildings subject to long-term leases to credit tenants. The Company owns thirty-three industrial properties and one shopping center with a total of 3,734,000 square feet. Total real estate investments were $166,879,808 at September 30, 2004. These properties are located in New Jersey, New York, Pennsylvania, North Carolina, Mississippi, Massachusetts, Kansas, Iowa, Missouri, Illinois, Michigan, Nebraska, Florida, Virginia, Ohio, Connecticut, Wisconsin, Maryland, and Arizona. At September 30, 2004, the Company's weighted average lease expiration term was 5.7 years and the Company's occupancy rate was 95%. In February 2004, the Company purchased a 170,779 square foot industrial building in Tampa, Florida for approximately $17,657,000. The building is 100% net leased to FedEx Ground Package Systems, Inc. a subsidiary of Federal Express Corporation, for 15 years. The Company obtained a mortgage of $12,800,000 at a rate of 6% which matures on March 1, 2019. The Company has a concentration of Federal Express Corporation and subsidiary (FDX) leased properties. At September 30, 2004, the percentage of FDX leased square footage as a total of the Company's rental space is 33%, with 14% leased with Federal Express Corporation and 19% with Federal Express subsidiaries. This is a risk factor that shareholders should consider. The Company intends to increase its real estate investments and expects to invest approximately $30,000,000 in acquisitions of real property in fiscal year 2005. The growth of the real estate portfolio depends on the availability of suitable properties which meet the Company's investment criteria. Competition in the market areas in which the Company operates is significant and affects acquisitions, occupancy levels, rental rates and operating expenses of certain properties. The Company also holds a portfolio of securities of other REITs with a balance of $23,084,270 at September 30, 2004. The Company invests in REIT securities on margin from time to time when the Company can achieve an adequate yield spread and when suitable acquisitions of real property cannot be found. At September 30, 2004, the Company's portfolio consisted of 63% preferred stocks, 26% common stocks and 11% debentures. The REIT securities portfolio provides the Company with liquidity and additional income until suitable acquisitions of real property are found. The Company's revenue primarily consists of rental and reimbursement income from the ownership of industrial rental property. Revenues also include interest and dividend income, gain (loss) on sales of securities transactions and income from an equity investment. Total rental and occupancy revenue increased 9% for the year ended September 30, 2004 as compared to the year ended September 30, 2003. Net income per share increased 7% for the year ended Page 18 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) September 30, 2004 as compared to the year ended September 30, 2003. The increase in revenue and net income per share was due mainly to property acquisitions and increased gain on securities available for sale partially offset by an increase of average shares outstanding. See PART I, Item 1 - Business for a more complete discussion of the economic and industry-wide factors relevant to the Company and the opportunities and challenges, and risks on which the Company is focused. Significant Accounting Policies and Estimates The discussion and analysis of the Company's financial condition and results of operation are based upon the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company's consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions. Significant accounting policies are defined as those that involve significant judgment and potentially could result in materially different results under different assumptions and conditions. Management believes the following significant accounting policies are affected by our more significant judgments and estimates used in the preparation of the Company's consolidated financial statements. For a detailed description of these and other accounting policies, see Note 1 in the notes to the Company's consolidated financial statements included in this Form 10-K. Real Estate Investments The Company applies Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", (Statement 144) to measure impairment in real estate investments. Rental properties are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis without interest) from a rental property is less than its historical net cost basis. These expected future cash flows consider factors such as future operating income, trends and prospects as well as the effects of leasing demand, competition and other factors. Upon determination that a permanent impairment has occurred, rental properties are reduced to their fair value. For properties to be disposed of, an impairment loss is recognized when the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the property measured at the time there is a commitment to sell the property and/or it is actively being marketed for sale. A property to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Subsequent to the date that a property is held for disposition, depreciation expense is not recorded. Page19 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) Upon acquisition of a property, the Company allocates the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings, leasing commissions and intangible assets, including in-place leases and above and below market leases. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property determined by third party appraisal of the property obtained in conjunction with the purchase. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term. The purchase price is further allocated to in-place lease values based on management's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Acquired above and below market leases are amortized over the remaining non- cancelable terms of the respective leases. The value of in-place lease intangibles, which is included as a component of Other Assets, is amortized to expense over the remaining lease term. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, leasing commissions above and below market leases and the in-place lease value is immediately charged to expense. Securities Available for Sale Investments in non-real estate assets consist primarily of marketable securities. Management individually reviews and evaluates our marketable securities for impairment on an annual basis, or when events or circumstances occur. Management considers, among other things, credit aspects of the issuer, amount of decline in fair value over cost and length of time in a continuous loss position. If a decline in fair value is determined to be other than temporary, an impairment charge is recognized in earnings and the cost basis of the individual security shall be written down to fair value as the new cost basis. Estimates and Revenue Recognition Estimates are used to establish amounts receivable and revenue from tenants for such things as annualized rents, real estate taxes and other cost recoveries. In addition, an estimate is made with respect to whether a provision for allowance for doubtful accounts receivable is necessary. The allowance for doubtful accounts reflects management's estimate of the amounts of the recorded accounts receivable at the balance sheet date that will not be realized from cash receipts in subsequent periods. If cash receipts in subsequent periods vary from our estimates, or if the Company's tenants' financial condition deteriorates as a result of operating difficulties, additional changes to the allowance may be required. Page 20 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) Results of Operation The Company's activities primarily generate rental income. Net income for the fiscal year ended September 30, 2004 was $7,672,635 as compared to $6,120,343 in 2003 and $4,478,145 in 2002. Net rental income, defined as rental and occupancy charges reduced by direct operating expenses, management fees, interest and depreciation, for the fiscal year ended September 30, 2004 was $6,595,407 as compared to $5,888,135 in 2003 and $4,599,324 in 2002. Net rental income increased $707,272 in 2004 as compared to 2003. The increase is due mainly to the addition of the net rental income related to the Tampa, Florida property, the full year of ownership of the properties purchased in 2003 (see below) and increased rent from the expansion of the Union Twp, Ohio property. The increase is also due to decreased interest expense on the Wichita, Kansas, and St. Joseph, Missouri properties due to loan payoffs in 2004. The increase was partially offset by decreased rent at the Greensboro, North Carolina property due to a 2-year lease extension at a decreased rental rate and an increase in depreciation on the Tolleson, Arizona property due to a full year of ownership. Net rental income increased $1,288,811 in 2003 as compared to 2002. The increase is due mainly to the addition of the net rental income related to the acquisitions of properties made in 2003 at Tolleson, Arizona, Ft. Myers, Florida and Edwardsville, Kansas and the selling of the property at Virginia Beach, Virginia in 2002 which had produced a net rental loss in 2002. The Company also paid off the mortgage on the Wichita, Kansas property during 2003 resulting in an interest savings in 2003 as compared to 2002. These increases were partially offset by a decrease in the net rental income at the Granite City, Illinois property due to a full year of depreciation in 2003 as compared with partial year depreciation in 2002. The Company also generated net investment income from its investments in securities available for sale and Hollister '97 LLC. These securities had an average dividend yield of approximately 7.56% and 8.6% during 2004 and 2003, respectively. Net investment and other income, which includes interest and dividend income, realized gains (losses) on securities available for sale, net reduced by margin loan interest expense increased $899,774 in 2004 as compared to 2003 due primarily to an increase in interest and dividend income and an increase in the gain on securities available for sale transactions, net. Net investment and other income increased $621,355 in 2003 as compared to 2002 due primarily to an increase in dividend and interest income and a increase in the gain on securities transactions net. Gain on securities available for sale transactions, net amounted to $1,714,395, $1,018,862, and 909,704 for 2004, 2003, and 2002, respectively. Interest expense increased $72,929 in 2004 as compared to 2003 and $846,663 in 2003 compared to 2002. The increases are primarily due to the mortgages related to the acquisitions of one industrial property in 2004 and three industrial properties in 2003. Page 21 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) Real estate taxes increased $301,072 in 2004 as compared to 2003 and $759,707 in 2003 as compared to 2002 due to the property acquisitions. The tenants related to the acquisitions in 2004 and 2003 are subject to net leases which require the tenants to absorb the real estate taxes as well as insurance and the majority of the repairs and maintenance. As such, the Company is reimbursed by the tenants for these real estate taxes. Professional fees decreased $187,972 in 2004 as compared to 2003. The decrease is due to legal fees incurred in 2003 relating to the reincorporation of the Company from Delaware to Maryland and the related shareholder lawsuit which was settled in fiscal 2003. Professional fees increased $76,507 in 2003 as compared to 2002. Legal fees in 2002 related to various SEC filings and research on the reincorporation. Operating expenses in 2004 were consistent with 2003. Operating expenses increased $135,537 in 2003 as compared to 2002. The increase in 2003 is due mainly to un-reimbursed insurance costs related to the new acquisitions and increased repairs and maintenance. Office and general expenses increased $209,254 in 2004 as compared to 2003 and increased $352,496 in 2003 as compared to 2002. The increase relates mainly to increases in personnel costs due to additional employees and increases in franchise taxes as the Company enters new states (Arizona and Kansas in 2003). The Company has been active in acquisitions and is expanding its operations. Total assets increased from approximately $119,000,000 as of September 30, 2001 to approximately $195,000,000 as of September 30, 2004. During 2002, the Company sold the warehouse facility in Virginia Beach, VA for a net loss of $175,376. Off-Balance Sheet Arrangements and Contractual Obligations The Company has not executed any off-balance sheet arrangements. The following is a summary of the Company's contractual obligations as of September 30, 2004: Less than 1 More than Contractual Total year 1-3 years 3-5 years 5 years Obligations Mortgage Notes Payable $97,530,963 $5,484,926 $14,432,847 $12,973,896 $64,639,294 Retirement Benefits 605,293 -0- -0- -0- 605,293 Purchase of Property 19,125,000 19,125,000 -0- -0- -0- ___________ __________ __________ __________ __________ Total $117,261,256 $24,609,926 $14,432,847 $12,973,896 $65,244,587 =========== ========== ========== ========== ========== Mortgage notes payable represents the principal amounts outstanding by scheduled maturity. The interest rates on these mortgages are fixed rates ranging from 5.8% to 8.5%. The Page 22 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) above table does not include the Company's obligation under its line of credit and margin loan as described in Note 6 of the Notes to Consolidated Financial Statements. Retirement benefits represent post-retirement benefits that are not funded and therefore will be paid from the assets of the Company. Purchase of property represents the purchase price of industrial buildings in Denver, Colorado and Hanahan, South Carolina. These purchases were completed on October 28, 2004 and December 6, 2004, respectively. (see Note 15 of the Notes to Consolidated Financial Statements). Liquidity and Capital Resources The Company operates as a real estate investment trust deriving its income primarily from real estate rental operations. At September 30, 2004, the Company's shareholders' equity increased to $92,907,840 as compared to $78,313,289 at September 30, 2003, principally due to proceeds from the dividend reinvestment and stock purchase plan, and the proceeds from a private placement partially offset by dividends and decreases in unrealized gains on securities available for sale. See further discussion below. The Company's ability to generate cash adequate to meet its needs is dependent primarily on income from its real estate investments and securities portfolio, the sale of real estate investments and securities, refinancing of mortgage debt, leveraging of real estate investments, availability of bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan (DRIP), proceeds from private placements, and access to the capital markets. Purchases of new properties, payments of expenses related to real estate operations, capital improvements programs, debt service, management and professional fees, and dividend requirements place demands on the Company's liquidity. The Company intends to operate its existing properties from the cash flows generated by the properties. However, the Company's expenses are affected by various factors, including inflation. Increases in operating expenses raise the breakeven point for a property and, to the extent that they cannot be passed on through higher rents, reduce the amount of available cash flow which can adversely affect the market value of the property. Management does not see an indication that material factors are present that may negatively impact cash flows. The Company is not aware of adverse trends, demands, commitments, events or uncertainties that are reasonably likely to have an impact on the Company's liquidity. The Company owns securities available for sale of $23,084,270 subject to margin loans of $1,261,901 at September 30, 2004. At September 30, 2004, the Company owned thirty-four properties of which 10 have no mortgages. These marketable securities and non-mortgaged properties provide the Company with additional liquidity. The Company has been raising capital through its DRIP and private placements and investing in net leased Page 23 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) industrial properties. The Company believes that funds generated from operations and the DRIP, the funds available on the line of credit, together with the ability to finance and refinance its properties and sell marketable securities will provide sufficient funds to adequately meet its obligations over the next several years. The Company's focus is on real estate investments. During the past ten years, the Company purchased thirty-two net-leased warehouse facilities at an aggregate cost of approximately $183,894,000. The Company financed these purchases primarily through mortgages on its acquisitions. The Company also has a secured $15,000,000 line of credit of which approximately $13,700,000 was available at September 30, 2004. Interest is at the bank's floating prime (4.50% at September 30, 2004) and is due monthly. The line expires in May, 2006. During 2004, the Company made one acquisition totaling approximately $17,657,000. The Company expects to make additional real estate investments from time to time. In fiscal 2005, the Company plans to acquire approximately $30,000,000 of net-leased industrial properties. The funds for these acquisitions may come from the Company's available line of credit, other bank borrowings and proceeds from the Dividend Reinvestment and Stock Purchase Plan or private placements. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made. The Company also invests in debt and equity securities of other REITs as a proxy for real estate when suitable acquisitions are not available, for liquidity, and for additional income. The Company from time to time may purchase these securities on margin when there is an adequate yield spread. During fiscal 2004, the Company's securities portfolio decreased by $2,337,281 primarily due to sales of approximately $9,229,076 and a decrease in the unrealized gain of approximately $1,141,835 partially offset by purchases of $8,033,630. Cash flows provided from operating activities were $10,385,410, $9,725,898 and $6,792,043 for fiscal year 2004, 2003 and 2002, respectively. The increases in cash provided from operating activities resulted primarily from the operations of the property acquisitions of approximately $17,657,000 in 2004 and $26,200,000 in 2003. Cash flows used in investing activities were $15,215,218, $35,417,062 and $30,564,641 for fiscal year 2004, 2003 and 2002, respectively. Cash flows used in investing activities decreased in 2004 as compared to 2003 due mainly to the decreases in securities purchases, capital improvements and acquisitions and increased in 2003 as compared to 2002 due mainly to the increase in securities purchases. Cash flows provided from financing activities were $4,684,267, $26,068,148, and $24,318,591 for fiscal year 2004, 2003 and 2002, respectively. Cash flows from financing activities decreased in 2004 as compared to 2003 due mainly to decreased proceeds from Page 24 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) mortgages, an increase in payments on loans, and a decrease in issuance of common stock through private placements. The Company sold $4,050,000 and $8,324,901 during 2004 and 2003, respectively, of common stock through private placements. Cash flows provided from financing activities increased in 2003 as compared to 2002 due mainly to an increase in cash from the issuance of common stock. The Company sold common stock in a private placement as noted above in addition to common stock sold through the Dividend Reinvestment and Stock Purchase Plan. See further explanation below. At September 30, 2004, the Company had total liabilities of $102,314,329 and total assets of $195,222,169. The Company believes that it has the ability to meet its obligations and to generate funds for new investments. During 2004, the Company paid $9,426,915 as a dividend of $0.58 per share. Management anticipates maintaining the annual dividend rate of $0.58 per share although no assurances can be given since various economic factors can reduce the amount of cash flow available to the Company for dividends. Of the $9,426,915 in dividends paid, $3,531,838 was reinvested in the Dividend Reinvestment and Stock Purchase Plan. The Company has a DRIP, in which participants purchase stock from the Company at a price at approximately 95% of market. During 2004, a total of $12,532,541 in additional capital was raised through the DRIP. It is anticipated, although no assurances can be given, that a comparable level of participation will continue in the DRIP in fiscal 2005. Therefore, the Company anticipates that the DRIP will result in further increased liquidity and capital resources in fiscal 2005. In January 2004, the Company issued 500,000 shares in a private placement for consideration of $4,050,000 or $8.10 per share. The proceeds of the private placement were used for working capital and to pay down the Company's outstanding line of credit and margin loan. The Company incurred approximately $67,993 in offering costs related to this private placement which were recorded as a reduction to Additional Paid-In Capital. During the year ended September 30, 2004, four directors and employees exercised their stock options and purchased 131,500 shares for a total of $830,705. During the year ended September 30, 2003, two directors exercised their stock options and purchased 9,500 shares for a total of $52,875. During the year ended September 30, 2002, nine officers, directors and key employees exercised their stock options and purchased 255,000 shares for a total of $1,617,488. Of this amount, 225,000 shares, for a total of $1,617,488, were exercised through the issuance of notes receivable from officers. These notes receivable are at an interest rate of 5%, mature on April 30, 2012 and are collateralized by the underlying common shares. As of September 30, 2004, the balance of these notes receivable was $1,215,938. Page 25 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D) New Accounting Pronouncements FASB Interpretation No. 46, Consolidation of Variable Interest Entities "FIN 46" was issued in January 2003 and was reissued as FASB Interpretation No. 46 (revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R is applicable to all special-purpose entities (SPEs) in which the entity holds a variable interest no later than the end of the first reporting period ending after December 15, 2003, and immediately to all entities created after January 31, 2003. The effective dates of FIN 46R vary depending on the type of reporting enterprise and the type of entity that the enterprise is involved with. FIN 46 and FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 and FIN 46R provides guidance on the identification of entities controlled through means other than voting rights. FIN 46 and FIN 46R specifies how a business enterprise should evaluate its involvement in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. Conversely, effective dispersion of risks among the parties involved requires that a company that previously consolidated a special purpose entity, upon adoption of FIN 46 or FIN 46R, to deconsolidate such entity. This interpretation did not have a material impact on the Company's consolidated financial statements. Safe Harbor Statement This Form 10-K contains various "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The words "may", "will", "expect", "believe", "anticipate", "should", "estimate", and similar expressions identify forward- looking statements. The forward-looking statements reflect the Company's current views with respect to future events and finance performance, but are based upon current assumptions regarding the Company's operations, future results and prospects, and are subject to many uncertainties and factors relating to the Company's operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: (i) changes in the general economic climate; (ii) increased competition in the geographic areas in which the Company operates; (iii) changes in government laws and regulations; and (iv) the ability of the Company to continue to identify, negotiate and acquire properties on terms favorable to the Company. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Page 26 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and acquisitions of the Company's real estate investment portfolio. The Company's interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows primarily at fixed rates. The following table sets forth information as of September 30, 2004, concerning the Company's debt obligations, including principal cash flow by scheduled maturity, weighted average interest rates and estimated fair value: Long -Term Debt: Average Fixed Rate Fiscal Carrying Interest Fair Value Value Rate 2005 $ -0- -0- 2006 -0- -0- 2007 2,668,864 7.80% 2008 1,169,179 8.5% 2009 -0- -0- Thereafter 93,692,920 6.99% ___________ ________ Total $ 97,530,963 7.03% $100,508,994 ========== The Company also has $1,361,198 in variable rate debt maturing in May, 2006. This debt is a line of credit. The interest is at the bank's floating prime rate and is due monthly. The interest rate was 4.50% at September 30, 2004. Additionally, the Company has $1,261,901 in variable rate debt due on demand. This debt is primarily margin loans secured by marketable securities. The interest rate on these loans was 3.5% at September 30, 2004. The Company has $13,638,802 available on this $15,000,000 line. The carrying value of the Company's variable rate debt approximates fair value at September 30, 2004. The Company also invests in both debt and equity securities of other REITs and is primarily exposed to equity price risk from adverse changes in market rates and conditions. All securities are classified as available for sale and are carried at fair value. Page 27 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data listed in Part VI, Item 15 (a) (1) are incorporated herein by reference and filed as part of this report. The following is the Unaudited Selected Quarterly Financial Data: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) THREE MONTHS ENDED FISCAL 2004 12/31/03 3/31/04 6/30/04 9/30/04 Rental and Occupancy Charges $5,047,924 $5,317,297 $5,453,966 $5,510,313 Total Expenses 2,410,910 2,665,121 2,477,926 2,749,403 Other Income (Expense) (1) 117,869 (565,644) (1,187,292) (1,718,438) Net Income 2,754,883 2,086,532 1,788,748 1,042,472 Net Income per Share .18 .13 .11 .05 FISCAL 2003 12/31/02 3/31/03 6/30/03 9/30/03 Rental and Occupancy Charges $4,653,072 $4,648,203 $5,109,109 $5,230,727 Total Expenses 2,094,910 2,236,314 2,399,152 2,701,624 Other income (Expense) (1,119,734) (1,269,760) (679,046) (1,020,228) Net Income 1,438,428 1,142,129 2,030,911 1,508,875 Net Income Per Share .12 .08 .14 .10 (1) Fluctuations are due to level of gains on securities transactions recognized in the respective quarters. Page 28 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A - CONTROLS AND PROCEDURES The Company's President and Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company's management, have evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Company's President and Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. The Company's President and Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B - OTHER INFORMATION None Page 29 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following are the Directors and Executive Officers of the Company as of September 30, 2004: Present Position with the Company; Business Experience During Past Director Name Age Five Years; Other Since Directorships ____ ___ _____________ ________ Anna T. Chew 46 Chief Financial Officer (1991 to N/A present) Certified Public Accountant. Director (1991-2004). Vice President (1995 to present) and Director (1994 to present) of United Mobile Homes, Inc., an affiliated company. Chief Financial Officer (1991 to present of Monmouth Capital Corporation, an affiliated company. Daniel D. 50 Director. Attorney at Law (1982 to 1989 Cronheim present); Executive Vice President (1989 to present) and General Counsel (1983 to present) of David Cronheim Company. President (1997 to present) of David Cronheim Mortgage Company; President (2000 to present) of Cronheim Management Services, Inc. and Director (2000 to present) of Hilltop Community Bank. Neal Herstik 45 Attorney at Law, Gross, Truss & 2004 Herstik, PC (1997 to present); Director of Monmouth Capital Corporation (2002 to present); First Vice President, Marlboro Community Players, Inc., a non- profit corporation (2000 to 2002); Co-founder and former President, Manalapan-Englishtown Education Foundation, Inc., a non-profit corporation (1995 to 2001). Matthew I. 45 Director. Attorney at law (1985 2000 Hirsch to present); Adjunct Professor of Law (1993 to present) Widener University School of Law. Page 30 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT'D) Present Position with the Company; Business Experience During Past Director Name Age Five Years; Other Since Directorships ____ ___ _____________ _______ Eugene W. Landy 70 President (1968 to present) and 1968 Director. Attorney at Law; President and Director (1961 to present) of Monmouth Capital Corporation, an affiliated company; Chairman of the Board (1995 to present), President (1969 to present) of United Mobile Homes, Inc., an affiliated company. Michael P. Landy 42 Vice President - Investments. N/A Executive Vice President (2001 to present) of Monmouth Capital Corporation, an affiliated company; Vice President - Investments (2001 to present) of United Mobile Homes, Inc., an affiliated company, President (1998 to 2001) of Siam Records, LLC; Chief Engineer and Technical Director (1987 to 1998) of GRP Recording Company. Samuel A. Landy 44 Director. Attorney at Law (1985 1989 to present); President (1995 to present), Vice President (1991 to 1995) and Director (1992 to present) of United Mobile Homes, Inc., an affiliated company; Director (1994 to 2004) of Monmouth Capital Corporation, an affiliated company. Cynthia J. 35 Executive Vice President and 2002 Morgenstern Director. Vice President (1996 to 2001) Summit Bank, Commercial Real Estate Division. John R. Sampson 50 Director. Managing Director and 1001 co-founder, Kalorama Partners, LLC, a strategic consulting company (2003 to present); Senior Portfolio Manager (1998 to 2002) at Fox Asset Management, LLC, a registered investment advisor that manages equity, fixed income and balanced portfolios; Principal (1995 to 1998) at Pharos Management and Principia Partners LLC, which specialize in fixed income consulting and research for the securities industry. Page 31 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT'D) Present Position with the Company; Business Experience During Past Director Name Age Five Years; Other Since Directorships ____ ___ _____________ ________ Maureen E. 35 Controller (2003 to present) and N/A Vecere Treasurer (2004 to present). Certified Public Accountant; Audit Manager (1996-2003), KPMG LLP. Controller (2003 to present) and Treasurer (2004 to present) of Monmouth Capital Corporation, an affiliated company Peter J. 57 Director. Investor; Director 2001 Weidhorn (2000-2003) of real estate acquisitions at Kushner Companies; Chairman of the Board, President/CEO (1998-2000) WNY Group, Inc. a real estate investment trust that owned and operated 8,000 apartments prior to its sale to the Kushner Companies; Director BNP Residential Properties, Inc. (2001 to present) Director of The Community Development Trust, Inc. (2003 to present); Trustee of the CentraState Healthcare Foundation, Inc. and Vice Chairman and Trustee of the Union for Reform Judaism. Stephen B. 50 Director. Principal of U.S. Real 2003 Wolgin Estate Advisors, Inc. (2000 to present), a real estate advisory services group based in New York; Principal of the Wolgin Group (2000-2003); prior affiliations with J.P. Morgan, Odyssey Associates, The Prudential Realty Group, Standard & Poor's Corporation, and Grubb and Ellis. Family Relationships There are no family relationships between any of the Directors or executive officers, except that Samuel A. Landy and Michael P. Landy are the sons of Eugene W. Landy, the President and a Director of the Company. Audit Committee The Company's Board of Directors has determined that at least one member of the Audit Committee is a financial expert. Page 32
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT'D) The Company has a separately-designated standing audit committee established in accordance with section 3 (a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). The members of the audit committee are Peter J. Weidhorn (Chairman), Matthew I. Hirsch, and Stephen B. Wolgin. Delinquent Filers There have been no delinquent filers pursuant to Item 405 of regulation S-K, to the best of management's knowledge. Code of Ethics The Company has adopted the Code of Business Conduct and Ethics (the Code of Ethics). The Code of Ethics can be found at the Company's website at www.mreic.com, as well as attached to this filing at Exhibit 14. ITEM 11 - EXECUTIVE COMPENSATION Summary Compensation Table The following Summary Compensation Table shows compensation paid or accrued by the Company for services rendered during 2004, 2003 and 2002 to the President and Chief Executive Officer and Executive Vice President. There were no other executive officers whose aggregate cash compensation allocated to the Company exceeded $100,000: Annual Compensation Name and Principal Fiscal Salary Bonus Options Position Year Granted Other _________________ _____ ______ _____ ______ _____ Eugene W. Landy 2004 $168,750 $15,000 65,000 $223,700(1) Chairman of the Board and 2003 150,000 30,000 65,000 94,000(1) President 2002 150,000 30,000 65,000 75,300(1) Cynthia J. Morgenstern 2004 $156,250 $12,654 50,000 $ 20,916(2) Executive Vice President 2003 139,077 9,615 -0- 21,905(2) 2002 121,250 8,462 50,000 6,438(2) (1) Represents Director's fees of $16,000, $17,500 and $16,300 for 2004, 2003 and 2002, respectively, paid to Mr. Landy; accrual for pension and other benefits of $190,200, $59,000 and $59,000 for 2004, 2003 and 2002, respectively, in accordance with Mr. Landy's employment contract; and legal fees of $17,500, $17,500 and $0 for 2004, 2003 and 2002, respectively. (2) Represents Director's fees and discretionary contributions by the Company to the Company's 401(k) Plan allocated to an account of the named executive officer.
Page 33 ITEM 11 - EXECUTIVE COMPENSATION (CONT'D) Stock Option Plan The following table sets forth, for the executive officers named in the Summary Compensation Table, information regarding individual grants of stock options made during the year ended September 30, 2004: Potential Realized Percent Price Value at Assumed Annual Options Granted Per Expiration Rates for to Option Terms Name Granted Employees Share Date 5% 10% ____ _______ _________ _____ ____ __ ___ Eugene W. Landy 65,000 27% $7.89 8/3/12 $234,300 $571,200 Cynthia J. Morgenstern 50,000 21% 7.41 5/20/12 230,000 550,800 The following table sets forth for the executive officers named in the Summary Compensation Table, information regarding stock options outstanding at September 30, 2004: Number of Value of Unexercised Unexercised Options at Year- Options Shares Value End At Year-End Name Exercised Realized Exercisable/ Exercisable/ Unexercisable Unexercisable ____ _________ ________ _____________ _____________ Eugene W. Landy 65,000 357,500 195,000/65,000 $274,625/$29,250 Cynthia Morgenstern 50,000 356,500 -0-/50,000 $-0-/$46,500 Employment Agreements On January 1, 2004, Eugene W. Landy's Employment Agreement with the Company was amended to extend for five years to December 31, 2009. Mr. Landy's amended Employment Agreement provides for (1) an increase in his annual base compensation from $150,000 to $175,000; (2) an increase in his severance payment from $300,000 payable $100,000 a year for three years to $500,000 payable $100,000 a year for five years; and (3) an increase from $40,000 a year to $50,000 a year of his pension benefits; and (4) an extension of three years of his pension payments commencing January 1, 2004. Mr. Landy receives bonuses and customary fringe benefits, including health insurance and five weeks vacation. Additionally, there will be bonuses voted by the Board of Directors. The Employment Agreement is terminable by either party at any time subject to certain notice requirements. Page 34 ITEM 11 - EXECUTIVE COMPENSATION (CONT'D) Effective January 15, 2004, the Company and Cynthia J. Morgenstern entered into a three-year employment agreement under which Ms. Morgenstern receives an annual base salary of $160,000, increasing to $176,000 in 2005 and to $194,000 in 2006, plus bonuses and customary fringe benefits, including health insurance, four weeks vacation and the use of an automobile. If there is a voluntary or involuntary termination of employment, due to merger or change in control, Ms. Morgenstern, shall be entitled to receive one year's compensation at the date of termination. In the event of her disability, her salary will continue for a period of two years. The agreement was amended on September 16, 2004 to purchase disability insurance for Ms. Morgenstern. In the event of a disability exceeding 90 days Ms. Morgenstern will receive lost wages from the disability policy, not her salary for two years. Other Information Effective April 1, 2002, the Directors receive a fee of $1,500 for each Board Meeting attended, and an additional fixed annual fee of $10,000 payable quarterly. Directors appointed to house committees receive $150 for each meeting attended. Those specific committees are Nominating Committee, Compensation Committee, Audit Committee and Stock Option Committee. Except as provided in the specific agreements described above, the Company has no pension or other post-retirement plans in effect for Officers, Directors or employees and, at present, has no intention of instituting such plans. Daniel D. Cronheim is a Director of the Company and Executive Vice President of David Cronheim Company. The David Cronheim Company received $132,185, $14,377 and $20,194 in lease commissions in 2004, 2003 and 2002, respectively. Cronheim Management Services, a division of David Cronheim Company, received the sum of $299,392, $258,626 and $245,597 in 2004, 2003 and 2002, respectively for management fees. In 1998, the Company entered into a new management contract with Cronheim Management Services. Under this contract, Cronheim Management Services receives 3% of gross rental income on certain properties for management fees. Cronheim Management Services provides sub- agents as regional managers for the Company's properties and compensates them out of this management fee. Management believes that the aforesaid fees are no more than what the Company would pay for comparable services elsewhere. Report of Board of Directors on Executive Compensation Overview and Philosophy The Company has a Compensation Committee consisting of two independent outside Directors. This Committee is responsible for making recommendations to the Board of Directors concerning compensation. The Compensation Committee takes into consideration three major factors in setting compensation. Page 35 ITEM 11 - EXECUTIVE COMPENSATION (CONT'D) The first consideration is the overall performance of the Company. The Board believes that the financial interests of the executive officers should be aligned with the success of the Company and the financial interests of its shareholders. Increases in funds from operations, the enhancement of the Company's equity portfolio, and the success of the Dividend Reinvestment and Stock Purchase Plan all contribute to increases in stock prices, thereby maximizing shareholders' return. The second consideration is the individual achievements made by each officer. The Company is a small real estate investment trust (REIT). The Board of Directors is aware of the contributions made by each officer and makes an evaluation of individual performance based on their own familiarity with the officer. The final criterion in setting compensation is comparable wages in the industry. In this regard, the REIT industry maintains excellent statistics. Evaluation The Company's funds from operations continue to increase. The Committee reviewed the growth of the Company and progress made by Eugene W. Landy, Chief Executive Officer and whether his accomplishments met the bonus goals outlined in his employment contract. His base compensation under his amended contract was increased in 2004 to $175,000 per year, and his bonus for 2004 was $15,000. Compensation Committee: Matthew I.Hirsch Stephen P.Wolgin Page 36 ITEM 11 - EXECUTIVE COMPENSATION (CONT'D) Comparative Stock Performance The following line graph compares the total return of the Company's common stock for the last five fiscal years to the NAREIT All REIT Total Return Index, published by the National Association of Real Estate Investment Trusts (NAREIT), and the S&P 500 Index for the same period. The total return reflects stock price appreciation and dividend reinvestment for all three comparative indices. The information herein has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed. Monmouth Real Estate Investment Year Corporation NAREIT S&P 500 1999 100 100 100 2000 106 126 91 2001 142 145 80 2002 176 153 62 2003 220 212 80 2004 242 241 81 Page 37
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table lists information with respect to the beneficial ownership of the Company's Common Stock (the Shares) as of September 30, 2004 by: . each person known by the Company to beneficially own more than five percent of the Company's outstanding Shares; . the Company's directors; . the Company's executive officers; and . all of the Company's executive officers and directors as a group. Unless otherwise indicated, the person or persons named below have sole voting and investment power and that person's address is c/o Monmouth Real Estate Investment Corporation, Juniper Business Plaza, 3499 Route 9 North, Suite 3-C, Freehold, New Jersey 07728. In determining the number and percentage of Shares beneficially owned by each person, Shares that may be acquired by that person under options exercisable within 60 days of September 30, 2004 are deemed beneficially owned by that person and are deemed outstanding for purposes of determining the total number of outstanding Shares for that person and are not deemed outstanding for that purpose for all other shareholders. Amount and Percentage Name and Address Nature of Shares of Beneficial Owner of Beneficial Outstanding (2) Ownership (1) ___________________ _____________ ____________ Teachers' Insurance and 1,000,000 5.78% Annuity Association 730 Third Avenue, 11th Floor New York, New York 10017 Oakland Financial 1,224,787 (3) 7.08% Corporation 34200 Mound Road Sterling Heights, MI 48310 Palisades Capital 1,375,491 7.96% Management LLC One Bridge Plaza Suite 695 Fort Lee, NJ 07027 Page 38
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D) Amount and Name and Address Nature Percentage of Beneficial Owner of Beneficial of Shares Ownership (1) Outstanding(2) _____________________ _____________ ______________ Anna T. Chew 99,116 (4) 0.57% Daniel D. Cronheim 63,390 (5) 0.37% Neal Herstik 200 (6) 0.001% Matthew I. Hirsch 46,356 (7) 0.27% Eugene W. Landy 1,131,284 (8) 6.47% Michael P. Landy 74,843 (9) 0.43% Samuel A. Landy 236,576 (10) 1.37% Cynthia J. Morgenstern 57,160 (11) 0.33% John R. Sampson 36,204 (12) 0.21% Maureen E. Vecere 60 (13) 0.00% Peter J. Weidhorn 55,370 0.32% Stephen B. Wolgin 2,686 (14) 0.02% Directors and Officers as a Group 1,803,245 10.25% (1)Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the Company believes that the persons named in the table have sole voting and investment power with respect to all Shares listed. (2)Based on the number of shares outstanding on September 30, 2004 which was 17,290,323. (3)Oakland Financial Corporation (Oakland), Liberty Bell Agency, Inc. (Liberty Bell), and Cherokee Insurance Company (Cherokee) has the following holdings as of June 30, 2004. Oakland owns 48,425 Shares, Liberty Bell owns 547,679 Shares and Cherokee owns 601,239 Shares, and Matthew T. Moroun owns 27,444 Shares. Amendment No. 3 to Schedule 13-D dated April 4, 2004, filed with the SEC by Oakland, indicates that Oakland shares voting and dispositive power with respect to those Shares with Liberty Bell and Cherokee, both of which are wholly-owned subsidiaries of Oakland. Matthew T. Moroun is the Chairman of the Board and controlling stockholder of Oakland, Liberty Bell and Cherokee.
Page 39 ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D) (4)Includes (a) 36,493 Shares owned jointly with Ms. Chew's husband; and (2) 12,623 Shares held in Ms. Chew's 401(k) Plan. Includes 50,000 Shares issuable upon exercise of a Stock Option. Excludes 50,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005. (5)Includes 15,000 Shares issuable upon exercise of a Stock Option. (6)Excludes 5,000 shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005. (7)Owned jointly with Mr. Hirsch's wife. Includes 14,000 Shares issuable upon exercise of a Stock Option. (8)Includes 89,106 Shares owned by Mr. Landy's wife; (b) 161,764 Shares held in the Landy & Landy Employees' Profit Sharing Plan of which Mr. Landy is a Trustee with power to vote; (c) 126,585 Shares held in the Landy & Landy Employees' Pension Plan of which Mr. Landy is a Trustee with power to vote; and (d) 60,000 Shares held in the Eugene W. and Gloria Landy Family Foundation, a charitable trust, of which Mr. Landy has power to vote. Includes 195,000 shares issuable upon exercise of Stock Options. Excludes 65,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until August 3, 2005. (9)Includes 8,645 Shares owned by Mr. Landy's wife; and (b) 57,257 Shares held in custodial accounts for Mr. Landy's minor children under the New Jersey Uniform Transfer to Minors Act in which he disclaims any beneficial interest but has power to vote. 10)Includes 6,883 Shares owned by Mr. Landy's wife; (b) 77,358 Shares held in custodial accounts for Mr. Landy's minor children under the New Jersey Uniform Transfer to Minors Act in which he disclaims any beneficial interest but has power to vote; (c) 1,000 Shares held in the Samuel Landy Family Limited Partnership and; (d) 32,064 Shares held in Mr. Landy's 401(k) Plan. Includes 15,000 Shares issuable upon exercise of a Stock Option. (11)Includes 1,002 Shares held in Ms. Morgenstern's 401(k) Plan. Excludes 50,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005. (12) Includes 2,000 Shares held in custodial accounts for Mr. Sampson's minor children under the New Jersey Uniform Gifts to Minors Act in which he disclaims any beneficial interest but has power to vote. Includes 20,000 Shares issuable upon exercise of a Stock Option. (13)Excludes 15,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005. (14)Excludes 5,000 shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005. There are no equity compensation plans other than the 1997 Stock Option Plan. See Note 7 in the notes to the Consolidated Financial Statements for a description of that plan. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Certain relationships and related party transactions are incorporated herein by reference to Item 15 (a) (1) (vi) Note 9 of the Notes to the Consolidated Financial Statements - Related Party Transactions. Page 40 ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES KPMG LLP (KPMG) served as the Company's independent auditors for the years ended September 30, 2004 and 2003. The following are the fees billed by KPMG in connection with services rendered: 2004 2003 ____ ____ Audit Fees $59,000 $73,000 Audit Related Fees -0- -0- Tax Fees 38,500 39,500 All Other Fees -0- -0- _______ ________ Total Fees $97,500 $112,500 ====== ======= Audit fees include professional services rendered by KPMG for the audit of the Company's annual financial statements and reviews of financial statements included in the Company's quarterly reports on Form 10-Q. Audit fees also include services that are normally provided by the Company's independent auditors in connection with statutory and regulatory filings, such as consents and assistance with and review of documents filed with the Securities and Exchange Commission. Tax fees include professional services rendered by KPMG for the preparation of the Company's federal and state corporate tax returns and supporting schedules as may be required by the Internal Revenue Service and applicable state taxing authorities. Tax fees also include other work directly affecting or supporting the payment of taxes, including planning and research of various tax issues. Audit Committee Pre-Approval Policy The Audit Committee has adopted a policy for the pre-approval of audit and permitted non-audit services provided by the Company's principal independent accountants. The policy requires that all services provided by KPMG to the Company, including audit services, audit-related services, tax services and other services, must be pre-approved by the Committee. The pre-approval requirements do not prohibit day-to-day normal tax consulting services, which matters will not exceed $10,000 in the aggregate. The Audit Committee has determined that the provision of the non-audit services described above is compatible with maintaining KPMG's independence. Page 41 PART IV ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES PAGE(S) _______ (a) (1) The following Financial Statements are filed as part of this report: (i) Report of Independent Registered Public Accounting 45 Firm (ii) Consolidated Balance Sheets as of September 30, 2004 and 46 2003 (iii) Consolidated Statements of Income for the years Ended September 30, 2004, 2003 and 2002 47 (iv) Consolidated Statements of Shareholders' Equity for the years ended September 30, 2004, 2003 and 2002 48-49 (v) Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002 50 (vi) Notes to the Consolidated Financial Statements 51-76 (a) (2) The following Financial Statement Schedule is filed as part of this report: (i) Schedule III - Real Estate and Accumulated Depreciation as of September 30, 2004 77-79 All other schedules are omitted for the reason that they are not required, are not applicable, or the required information is set forth in the Consolidated Financial Statements or Notes hereto. Page 42 ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a)(3) Exhibits (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession (i) Reference is hereby made to the Agreement and Plan of Merger dated April 23, 1990 by and between Monmouth Real Estate Investment Trust and Monmouth Real Estate Investment Corporation filed with The Securities and Exchange Commission on April 3, 1990 on Form S-4 (Registration No. 33-34103). (ii) Reference is hereby made to the Agreement and Plan of Merger dated March 24, 2003 by and between MREIC Maryland, Inc., a Maryland corporation ("Monmouth Maryland"), and Monmouth Real Estate Investment Corporation, a Delaware corporation ("Monmouth Delaware") filed with The Securities and Exchange Commission on April 7, 2003 in the 2002 proxy (Registration No. 000-04258). (3) Articles of Incorporation and By-Laws (i) Reference is hereby made to the Articles of Incorporation of MREIC Maryland, Inc. filed with The Securities and Exchange Commission on April 7, 2003 in the 2002 proxy (Registration No. 000-04258). (ii) Reference is hereby made to the Bylaws of MREIC Maryland, Inc. filed with the Securities and Exchange Commission on April 7, 2003 in the 2002 proxy (Registration No. 000-04258). (10) Material Contracts (i) Employment Agreement with Mr. Eugene W. Landy dated December 9, 1994 is incorporated by reference to that filed with the Company's Form 10-K filed with The Securities and Exchange Commission on December 28, 1994. (ii) Amendment to Employment agreement with Mr. Eugene W. Landy dated November 5, 2003 is incorporated by reference to that filed with the Securities Exchange Committee on April 1, 2004 in the 2004 proxy (Registration No. 000-04248). (iii) Employment Agreement with Mr. Ernest V. Bencivenga dated November 9, 1993 is incorporated by reference to that filed with the Company's Form 10-K filed with The Securities and Exchange Commission on December 28, 1994. (iv) Employment Agreement with Cynthia J. Morgenstern dated January 15, 2004, as amended September 16, 2004. (14) Code of Business Conduct and Ethics. Page 43 ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES (23) Consent of KPMG LLP. (31.1) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. (31.2) Certification pursuant to18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. (32) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. (99) Audit Committee Charter Page 44 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Monmouth Real Estate Investment Corporation: We have audited the consolidated financial statements of Monmouth Real Estate Investment Corporation and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Monmouth Real Estate Investment Corporation and subsidiary as of September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Short Hills, New Jersey December 3, 2004 Page 45
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDARY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, ASSETS 2004 2003 Real Estate Investments: Land $ 30,426,213 $ 25,426,213 Buildings, Improvements and Equipment, net of Accumulated Depreciation of $21,475,811 and $17,429,990, respectively 136,453,595 127,344,122 ___________ ___________ Total Real Estate Investments 166,879,808 152,770,335 Cash and Cash Equivalents 925,015 1,070,556 Securities Available for Sale at Fair Value 23,084,270 25,421,551 Interest and Other Receivables 1,441,827 1,364,885 Prepaid Expenses 87,816 117,450 Financing Costs - Net of Accumulated Amortization 1,287,731 1,193,157 Lease Costs - Net of Accumulated Amortization 254,792 108,539 Investments in Hollister '97, LLC 900,399 900,399 Other Assets 360,511 227,002 ___________ ___________ TOTAL ASSETS $ 195,222,169 $ 183,173,874 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage Notes Payable $ 97,530,963 $ 90,909,299 Loans Payable 2,623,099 12,324,926 Other Liabilities 2,160,267 1,626,360 ___________ ___________ Total Liabilities 102,314,329 104,860,585 ___________ ___________ Shareholders' Equity: Common Stock - $.01 Par Value, 20,000,000 Shares Authorized; 17,290,323 and 15,090,649 Shares Issued and Outstanding as of September 30, 2004 and 2003 respectively 172,903 150,906 Excess Stock - $.01 Par Value, 5,000,000 Shares Authorized; No Shares Issued or Outstanding -0- -0- Additional Paid-In Capital 92,262,871 76,657,545 Accumulated Other Comprehensive Income 1,688,004 2,829,839 Loans to Officers, Directors and Key Employees (1,215,938) (1,325,001) Undistributed Income -0- -0- ___________ ___________ Total Shareholders' Equity 92,907,840 78,313,289 ___________ __________ TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 195,222,169 $ 183,173,874 =========== ===========
See Accompanying Notes to the Consolidated Financial Statements Page 46
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 INCOME: Rental and Occupancy Charges $21,329,500 $19,641,111 $16,118,137 ___________ ___________ ___________ EXPENSES: Management Fees 299,392 258,626 245,597 Real Estate Taxes 3,024,887 2,723,815 1,964,108 Professional Fees 90,851 278,823 202,316 Operating Expenses 924,825 904,316 768,779 Office and General Expense 1,726,878 1,517,624 1,165,128 Director Fees 190,706 188,650 165,100 Depreciation 4,045,821 3,560,146 2,941,097 ___________ ___________ ___________ TOTAL EXPENSES 10,303,360 9,432,000 7,452,125 ___________ ___________ ___________ OTHER INCOME (EXPENSE): Interest and Dividend Income 1,801,107 1,688,448 1,027,220 Gains on Securities Transactions, net 1,714,395 1,018,862 909,704 Income from Equity Investment 110,000 110,000 110,000 Interest Expense (6,979,007) (6,906,078) (6,059,415) ___________ ___________ ___________ TOTAL OTHER INCOME (EXPENSE) (3,353,505) (4,088,768) (4,012,491) ___________ ___________ ___________ Income Before Loss 7,672,635 6,120,343 4,653,521 Loss on Sale of Assets-Investment Property -0- -0- (175,376) ___________ ___________ ___________ NET INCOME $ 7,672,635 $ 6,120,343 $ 4,478,145 ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 16,206,433 13,844,056 11,177,294 ========== ========== ========== Diluted 16,290,284 13,872,650 11,196,388 ========== ========== ========== PER SHARE INFORMATION: Income Before Loss $ .47 $ .44 $ .42 Loss on Sale of Assets - Investment Property -0- -0- (.02) __________ __________ __________ NET INCOME - PER SHARE BASIC AND DILUTED $ .47 $ .44 $ .40 ========== ========== ==========
See Accompanying Notes to the Consolidated Financial Statements Page 47
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002 Loans to Officers, Additional Directors Common Stock Issued Paid-In And Key Number Amount Capital Employees Balance September 30, 2001 10,264,728 $102,647 $48,284,847 $ -0- Shares Issued in Connection With the Dividend Reinvestment and 1,613,020 16,130 10,519,181 -0- Stock Purchase Plan Shares Issued through the Exercise of Stock Options Distributions 255,000 2,550 1,614,938 (1,439,363) Payments on Loans to Officers, -0- -0- (2,030,205) -0- Directors and Key Employees -0- -0- -0- 89,362 Net Income -0- -0- -0- -0- Unrealized Net Holding Gains on Securities Available for Sale Net of Reclassification Adjustment -0- -0- -0- -0- ___________ _________ __________ __________ Balance September 30, 2002 12,132,748 121,327 58,388,761 (1,350,001) Shares Issued in Connection with the Dividend Reinvestment and Stock Purchase Plan 1,691,148 16,911 11,870,958 -0- Shares Issued in Connection with a Private Placement (net of offering costs of $106,826) 1,257,253 12,573 8,205,502 -0- Shares Issued through the Exercise of Stock Options 9,500 95 52,780 -0- Distributions -0- -0- (1,867,281) -0- Payments on Loans to Officers, Directors and Key Employees -0- -0- -0- 25,000 Net Income -0- -0- -0- -0- Stock Based Compensation Expense -0- -0- 6,825 -0- Unrealized Net Holding Gains on Securities Available for Sale Net of Reclassification Adjustment -0- -0- -0- -0- ___________ _________ ___________ ___________ Balance September 30, 2003 15,090,649 150,906 76,657,545 (1,325,001) Shares Issued in Connection with the Dividend Reinvestment and Stock Purchase Plan 1,568,174 15,682 12,516,859 -0- Shares Issued in Connection with a Private Placement (net of offering costs of $67,993 500,000 5,000 3,977,007 -0- Shares Issued through the Exercise of Stock Options 131,500 1,315 829,390 -0- Distributions -0- -0- (1,754,280) -0- Payments on Loans to Officers, Directors and Key Employees -0- -0- -0- 109,063 Net Income -0- -0- -0- -0- Stock Based Compensation Expense -0- -0- 36,350 -0- Unrealized Net Holding Gains on Securities Available for Sale Net of Reclassification Adjustment -0- -0- -0- -0- ___________ _________ ___________ ____________ Balance September 30, 2004 17,290,323 $172,903 $92,262,871 $(1,215,938) ========== ======== =========== ===========
See Accompanying Notes to the Consolidated Financial Statements Page 48
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY CONSOLIDATE STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002, CONT'D. Accumulated Other Undistributed Comprehensive Comprehensive Income Income (Loss) Income _____________ _______________ _____________ Balance September 30, 2001 $ -0- $ 1,542,045 Shares Issued in Connection with the Dividend Reinvestment and Stock Purchase Plan -0- -0- Shares Issued through the Exercise of Stock Options -0- -0- Distributions (4,478,145) -0- Payments on Loans to Officers, Directors and Key Employees -0- -0- Net Income 4,478,145 -0- $ 4,478,145 Unrealized Net Holding Gains on Securities Available for Sale Net of Reclassification Adjustment -0- 302,884 302,884 ____________ __________ __________ Balance September 30, 2002 -0- 1,844,929 $ 4,781,029 ========== Shares Issued in Connection with the Dividend Reinvestment and Stock Purchase Plan -0- -0- Shares Issued in Connection with a Private Placement (net of offering costs of $106,826) -0- -0- Shares Issued through the Exercise of Stock Options -0- -0- Distributions (6,120,343) -0- Payments on Loans to Officers, Directors and Key Employees -0- -0- Net Income 6,120,343 $ 6,120,343 Stock Based Compensation Expense -0- -0- Unrealized Net Holding Gains on Securities Available for Sale Net of Reclassification Adjustment -0- 984,910 984,910 __________ __________ __________ Balance September 30, 2003 -0- 2,829,839 $ 7,105,253 ========== Shares Issued in Connection with the Dividend Reinvestment and Stock Purchase Plan -0- -0- Shares Issued in Connection with a Private Placement (net of offering costs of $67,993) -0- -0- Shares Issued through the Exercise of Stock Options -0- -0- Distributions (7,672,635) -0- Payments on Loans to Officers, Directors and Key Employees -0- -0- Net Income 7,672,635 -0- $7,672,635 Stock Based Compensation Expense -0- -0- Unrealized Net Holding Gains on Securities Available for Sale Net of Reclassification Adjustment -0- (1,141,835) (1,141,835) __________ __________ __________ Balance September 30, 2004 $ -0- $ 1,688,004 $ 6,530,800 ============ ========== ==========
See Accompanying Notes to the Consolidated Financial Statements Page 49
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 _____ _____ _____ CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 7,672,635 $ 6,120,343 $ 4,478,145 Noncash Items Included in Net Income: Depreciation 4,045,821 3,560,146 2,941,097 Amortization 280,205 253,786 187,323 Stock Based Compensation Expense 36,350 6,825 -0- Loss on Sales of Assets- Investment Property -0- -0- 175,376 Gains on Securities Transactions, Net (1,744,630) (1,018,862) (909,704) Changes in: Interest & Other Receivables (76,942) (455,651) (62,104) Prepaid Expenses 29,634 (79,776) 15,583 Other Assets and Lease Costs (391,570) 723,574 (170,304) Other Liabilities 533,907 615,513 136,631 __________ _________ _________ NET CASH PROVIDED FROM OPERATING ACTIVITIES 10,385,410 9,725,898 6,792,043 __________ _________ _________ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Real Estate (17,656,561) (26,200,000) (31,400,000) Capital Improvements & Purchases of Equipment (498,733) (1,023,225) (120,915) Proceeds from Sale of Assets-Investment -0- -0- 2,019,270 Property Purchase of Securities Available for Sale (8,033,630) (16,286,262) (5,706,901) Proceeds from Sale of Securities Available for Sale 10,973,706 8,092,425 4,643,905 __________ __________ __________ NET CASH USED IN INVESTING ACTIVITIES (15,215,218) (35,417,062) (30,564,641) ___________ __________ __________ CASH FLOW FROM FINANCING ACTIVITIES Proceeds from Mortgages 12,800,000 19,100,000 23,350,000 Proceeds from Loans 19,704,069 20,972,865 16,070,530 Principal Payments on Mortgages (6,178,336) (6,410,864) (5,554,591) Principal Payments of Loans (29,405,896) (19,423,406) (13,500,024) Financing Costs on Debt (262,971) (366,642) (341,772) Proceeds from Issuance of Common Stock 12,982,710 16,777,987 8,271,484 Proceeds from Exercise of Options 830,705 52,875 178,125 Dividends Paid (5,895,077) (4,659,667) (4,244,523) Payments on Loans to Officers, Directors and Key Employees 109,063 25,000 89,362 __________ __________ __________ NET CASH PROVIDED FROM FINANCING ACTIVITIES 4,684,267 26,068,148 24,318,591 __________ __________ __________ Net (Decrease) Increase in Cash and Cash Equivalents (145,541) 376,984 545,993 Cash and Cash Equivalents at Beginning of Year 1,070,556 693,572 147,579 __________ __________ __________ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 925,015 $ 1,070,556 $ 693,572 ========== ========== ==========
See Accompanying Notes to the Consolidated Financial Statements Page 50 MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Business Monmouth Real Estate Investment Corporation and its wholly-owned subsidiary, MRC I LLC (the Company) operates as a real estate investment trust (REIT) deriving its income primarily from real estate rental operations. As of September 30, 2004 and 2003, rental properties consist of thirty-four and thirty-three commercial holdings, respectively. These properties are located in New Jersey, New York, Pennsylvania, North Carolina, Mississippi, Massachusetts, Kansas, Iowa, Missouri, Illinois, Michigan, Nebraska, Florida, Virginia, Ohio, Connecticut, Wisconsin, Maryland and Arizona. The Company also owns a portfolio of investment securities. On May 15, 2003, Monmouth Real Estate Investment Corporation changed its state of incorporation from Delaware to Maryland (the Reincorporation). Use of Estimates In preparing the financial statements, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Principles of Consolidation The consolidated financial statements include the Company and its wholly-owned subsidiary. The Company formed a wholly-owned subsidiary, MRC I, LLC (a Wisconsin limited liability company) in 2001, to purchase the Cudahy, Wisconsin property. All intercompany transactions and balances have been eliminated in consolidation. Buildings, Improvements and Equipment Buildings, improvements and equipment are stated at the lower of depreciated cost or net realizable value. Depreciation is computed based on the straight-line method over the estimated useful lives of the assets utilizing a half-year convention in the year of purchase. These lives range from 5 to 40 years. The Company accounts for its undivided interest in the Somerset, NJ property based upon its pro rata share of assets, liabilities, revenues and expenses. If there is an event or change in circumstances that indicates that the basis of an investment property may not be recoverable, management assesses the possible impairment of value through evaluation of the estimated future cash flows of the property, on an undiscounted basis, as compared to the property's current carrying value. A property's carrying value would be adjusted to fair value, if necessary, to reflect an impairment in the value of the property. Page 51 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D.) Acquisitions Upon acquisition of a property, the Company allocates the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings, leasing commissions and intangible assets including in-place leases and above market and below market leases. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property determined by third party appraisal of the property obtained in conjunction with the purchase. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term. The purchase price is further allocated to in-place lease values based on management's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Acquired above and below market leases are amortized over the remaining non-cancelable terms of the respective leases. The value of in-place lease intangibles, which is included as a component of Other Assets, is amortized to expense over the remaining lease term. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, leasing commissions above and below market leases and the in-place lease value is immediately charged to expense. Investment in Hollister `97, LLC The Company's 25% investment in Hollister `97, LLC is accounted for under the equity method. Under the equity method, the initial investment is recorded at cost. The carrying amount of the investment is increased or decreased to reflect the Company's share of income or loss and is also reduced to reflect any dividends received. An unrelated New Jersey limited partnership owns the remaining 75%. Securities Available for Sale The Company classifies its securities among three categories: Held-to- maturity, trading and available-for-sale. The Company's securities at September 30, 2004 and 2003 are all classified as available-for-sale and are carried at fair value based on quoted market prices. Gains or losses on the sale of securities are calculated based on the average cost method and are accounted for on a trade date basis. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Shareholders' Equity until realized. A decline in the market value of any security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. Any impairment would be charged to earnings and a new cost basis for the security established. Page 52 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D.) Derivative Financial Instruments During the current year, the Company invested in futures contracts of ten-year treasury notes to reduce exposure of the debt securities portfolio to market rate fluctuations. These futures contracts do not qualify for hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138 and No. 149. The contracts are marked-to-market and the unrealized gain or loss is recorded in the income statement in gain on securities transactions, net with corresponding amounts recorded in other assets or other liabilities on the balance sheet. Gain or loss on settled futures contracts are also recorded as a component of gain on securities transactions, net. Cash Equivalents Cash equivalents consist of money market funds. Lease Costs and Financing Costs Costs incurred in connection with the execution of leases are deferred and are amortized over the term of the respective leases. Unamortized lease costs are charged to expense upon cancellation of leases prior to the expiration of lease terms. Costs incurred in connection with obtaining mortgages and other financings and refinancings are deferred and are amortized over the term of the related obligations. Unamortized costs are charged to expense upon prepayment of the obligation. Revenue Recognition Rental income from tenants with leases having scheduled rental increases are recognized on a straight-line basis over the term of the lease. Leases typically provide for reimbursement of real estate taxes, insurance, and other operating costs. These occupancy charges are recognized as earned. Gains and Deferred Gains on Installment Sales Gains on the sale of real estate investments are recognized by the full accrual method when the criteria for the method are met. Generally, the criteria are met when the profit on a given sale is determinable, and the seller is not obliged to perform significant activities after the sale to earn the profit. Alternatively, when the foregoing criteria are not met, the Company recognizes gains by the installment method. Net Income Per Share Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period (16,206,433, 13,844,056 and 11,177,294 in 2004, 2003 and 2002, respectively). Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus the weighted-average number of net shares that would be issued upon exercise of stock options pursuant to the treasury stock method (16,290,284, 13,872,650 and 11,196,388 in 2004, 2003 Page 53
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D.) and 2002, respectively). Options in the amount of 83,851, 28,594 and 19,094 are included in the diluted weighted average shares outstanding for 2004, 2003 and 2002, respectively. Stock Option Plan Prior to October 1, 2002 the Company's stock option plan was accounted for under the intrinsic value based method as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". As such, compensation expense was recorded on the date of grant only if the current market price on the underlying stock exceeded the exercise price. Included in Note 7 to these Consolidated Financial Statements are the assumptions and methodology for the pro forma disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," detailed below which assumes the fair value based method of accounting had been adopted for all periods presented. The Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation" on October 1, 2002. Under the prospective method of adoption selected by the Company under the provisions of SFAS No. 148. "Accounting for Stock Based Compensation, Transition and Disclosure", compensation costs of $36,350 and $6,825 have been recognized in 2004 and 2003, respectively, as follows: 2004 2003 2002 ______ _____ _____ Net income prior to stock Based compensation expense $7,708,985 $6,127,168 $4,478,145 Stock based compensation expense (36,350) (6,825) (-0-) __________ __________ __________ Net income as reported 7,672,635 6,120,343 4,478,145 Compensation expenses if the Fair value method had been applied to grants in 2002 (-0-) (29,250) (20,840) _________ ________ __________ Net Income Pro forma $7,672,635 $6,091,093 $4,457,305 ========== ========= ========== Net Income Per Share - As Reported Basic $ .47 $ .44 $ .40 Diluted .47 .44 .40 Net Income Per Share - Pro Forma Basic $ .47 $ .44 $ .40 Diluted .47 .44 .40
Page 54 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D.) Income Tax The Company has elected to be taxed as a Real Estate Investment Trust (REIT) under Sections 856-860 of the Internal Revenue Code. The Company will not be taxed on the portion of its income which is distributed to shareholders, provided it distributes at least 90% of its taxable income, has at least 75% of its assets in real estate investments and meets certain other requirements for qualification as a REIT. The Company is subject to franchise taxes in some of the states in which the Company owns property. Comprehensive Income Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items that are otherwise recorded directly in equity, such as unrealized gains or losses on securities available for sale. Reclassifications Certain amounts in the consolidated financial statements for the prior years have been reclassified to conform to the financial statement presentation for the current year. Page 55
NOTE 2 - REAL ESTATE INVESTMENTS The following is a summary of the cost and accumulated depreciation of the Company's land, buildings, improvements and equipment at September 30, 2004 and 2003: Buildings, Improvements, Accumulated Land And Equipment Depreciation September 30, 2004 NEW JERSEY; Freehold Corporate Office Equipment $ -0- $ 50,469 $ 8,009 Ramsey Industrial Building 52,639 1,358,148 788,787 Somerset (1) Shopping Center 55,182 1,155,061 977,298 South Brunswick Industrial Building 1,128,000 4,386,885 1,602,808 PENNSYLVANIA: Monaca Industrial Park 330,772 2,146,214 1,463,946 NEW YORK Orangeburg Industrial Building 694,720 2,977,372 1,122,575 NORTH CAROLINA: Fayetteville Industrial Building 172,000 4,485,245 860,041 Greensboro Industrial Building 327,100 1,868,700 679,016 Monroe Industrial Building 500,000 4,981,022 319,283 Winston-Salem Industrial Building 980,000 5,610,000 359,600 MISSISSIPPI: Jackson Industrial Building 218,000 1,350,187 451,739 Richland Industrial Building 211,000 1,267,000 322,666 MASSACHUSETTS: Franklin Industrial Building 566,000 4,148,000 1,116,725 KANSAS: Wichita Industrial Building 268,000 1,542,245 411,662 Edwardsville Industrial Building 1,185,000 5,815,148 223,635 IOWA: Urbandale Industrial Building 310,000 1,760,736 473,428 MISSOURI: Liberty Industrial Building 723,000 6,510,546 1,085,004 O'Fallon Industrial Building 264,000 3,309,000 804,526 St. Joseph Industrial Building 800,000 11,753,964 1,054,790 VIRGINIA: Industrial Charlottesville Building 1,170,000 2,845,000 401,214 Richmond Industrial Building 1,160,000 6,416,305 577,327 ILLINOIS: Burr Ridge Industrial Building 270,000 1,236,599 206,044 Schaumburg Industrial Building 1,039,800 3,694,320 710,421 Granite City Industrial Building 340,000 12,046,675 772,484 Elgin Industrial Building 1,280,000 5,529,488 354,440 MICHIGAN: Romulus Industrial Building 531,000 ,665,961 612,845 FLORIDA: Jacksonville Industrial Building 1,165,000 4,682,029 661,442 Ft. Myers Industrial Building 1,910,000 2,499,093 96,117 Tampa Industrial Building 5,000,000 12,656,561 162,286 NEBRASKA: Omaha Industrial Building 1,170,000 4,425,500 624,081 OHIO: Union Township Industrial Building 695,000 4,362,353 398,753 CONNECTICUT: Newington Industrial Building 410,000 2,966,486 266,090 WISCONSIN: Cudahy Industrial Building 980,000 5,139,321 459,358 MARYLAND: Beltsville Industrial Building 3,200,000 5,958,773 534,742 ARIZONA: Tolleson Industrial Building 1,320,000 13,329,000 512,629 _________ __________ _________ Total at September 30, 2004 $ 30,426,213 $ 157,929,406 $ 21,475,811 ========== =========== ==========
(1) This represents the Company's 2/3 undivided interest in the property. Page 56
NOTE 2 - REAL ESTATE INVESTMENTS, (CONT'D.) Buildings, Improvements, Accumulated September 30, 2003 Land And Equipment Depreciation NEW JERSEY: Ramsey Industrial Building $ 52,639 $ 1,358,148 $ 745,203 Somerset(1) Shopping Center 55,182 1,152,220 932,992 South Brunswick Industrial 1,128,000 4,386,885 1,444,378 Building PENNSYLVANIA: Monaca Industrial 330,772 2,106,056 1,366,207 Park NEW YORK: Orangeburg Industrial 694,720 2,977,373 1,028,039 Building NORTH CAROLINA: Fayetteville Industrial 172,000 4,485,245 745,055 Building Greensboro Industrial 327,100 1,853,700 615,757 Building Monroe Industrial 500,000 4,981,022 191,570 Building Winston-Salem Industrial 980,000 5,610,000 215,760 Building MISSISSIPPI: Jackson Industrial 218,000 1,340,001 404,543 Building Richland Industrial 211,000 1,195,000 291,095 Building MASSACHUSETTS: Franklin Industrial 566,000 4,148,000 1,010,371 Building KANSAS: Wichita Industrial 268,000 1,542,245 371,121 Building Edwardsville Industrial 1,185,000 5,815,148 74,535 Building IOWA: Urbandale Industrial 310,000 1,760,736 428,283 Building MISSOURI: Liberty Industrial 723,000 6,510,546 918,074 Building O'Fallon Industrial 264,000 3,309,000 719,686 Building St. Joseph Industrial 800,000 11,753,964 753,422 Building VIRGINIA: Charlottesville Industrial 1,170,000 2,845,000 328,266 Building Richmond Industrial 1,160,000 6,416,305 412,291 Building ILLINOIS: Burr Ridge Industrial 270,000 1,236,599 174,338 Building Schaumburg Industrial 1,039,800 3,694,320 615,699 Building Granite City Industrial 340,000 12,046,675 463,412 Building Elgin Industrial 1,280,000 5,529,488 212,664 Building MICHIGAN: Romulus Industrial 531,000 3,665,961 518,850 Building FLORIDA: Jacksonville Industrial 1,165,000 4,671,136 539,208 Building Ft. Myers Industrial 1,910,000 2,499,093 32,040 Building NEBRASKA: Omaha Industrial 1,170,000 4,425,500 510,614 Building OHIO: Union Township Industrial 695,000 4,150,873 299,977 Building CONNECTICUT: Newington Industrial 410,000 2,966,486 189,804 Building WISCONSIN: Cudahy Industrial 980,000 5,053,615 323,903 Building MARYLAND: Beltsville Industrial 3,200,000 5,958,773 381,959 Building ARIZONA Tolleson Industrial 1,320,000 13,329,000 170,874 Building ___________ ___________ ___________ Total at $ 25,426, 213 $ 144,774,112 $ 17,429,990 September 30, 2003 =========== =========== ===========
(1) This represents the Company's 2/3 undivided interest in this property. Page 57 NOTE 3 - ACQUISITIONS AND DISPOSITIONS Fiscal 2004 On February 23, 2004, the Company purchased a 170,779 square foot industrial building in Tampa, Florida. This building is 100% net-leased to FedEx Ground Package System, Inc., a subsidiary of Federal Express Corporation (FDX), for 15 years. The purchase price including closing costs was approximately $17,657,000. The Company paid approximately $400,000 in cash, obtained a mortgage of $12,800,000, and obtained $4,500,000 from its margin loan. The mortgage payable is at a rate of 6% and matures on March 1, 2019. Fiscal 2003 On November 6, 2002, the Company purchased a 288,211 square foot manufacturing and warehouse facility in Tolleson, Arizona. This facility is 100% net leased to Western Container Corporation, which manufactures plastic bottles for Coca-Cola soft drink products for 10 years. The lease is guaranteed by Coca-Cola Enterprises. The purchase price was approximately $14,800,000. The Company paid approximately $550,000 in cash, borrowed approximately $2,200,000 against its security portfolio with Prudential Securities, used approximately $1,100,000 of its revolving credit line with Fleet Bank and obtained a mortgage of approximately $10,950,000. This mortgage payable is at an interest rate of 5.8% and is due November 1, 2012. On November 21, 2002 the Company purchased a 90,020 square foot warehouse facility in Fort Meyers, Florida. This warehouse facility is 100% net leased to Fed Ex Ground Package System, Inc., a subsidiary of Federal Express Corporation for 10 years. The purchase price was approximately $4,400,000. The Company paid approximately $1,200,000 in cash, and obtained a mortgage of approximately $3,200,000. This mortgage payable is at a rate of 6.33% and matures December 1, 2012. On April 1, 2003, the Company purchased a 179,280 square foot industrial building in Wyandotte County, in the City of Edwardsville, Kansas. This industrial building is 100% net-leased to Carlisle Tire and Wheel Company, for 10 years. The purchase price was approximately $7,000,000. To fund this purchase, the Company used approximately $2,050,000 of its revolving credit line with Bank of America and assumed a mortgage of $4,950,000. This mortgage payable is at an interest rate of 7.375% and is due in 2017. NOTE 4 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK The Company has approximately 3,734,000 square feet of property, of which approximately 1,223,000 square feet or 33% is leased to Federal Express Corporation and subsidiaries (14% to FDX and 19% to FDX subsidiaries) and approximately 274,000 square feet, or 7%, is leased to Keebler Company. Rental and occupancy charges from Federal Express Page 58 NOTE 4 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK(CONT'D) Corporation and subsidiaries totaled approximately $8,252,000, $7,205,000 and $6,317,000 for the years ended September 30, 2004, 2003 and 2002, respectively. Rental and occupancy charges from Keebler Company, (a subsidiary of the Kellogg Company) totaled approximately $1,978,000, $2,281,000 and $2,159,000 for the years ended September 30, 2004, 2003 and 2002, respectively. During 2004, 2003 and 2002, rental income and occupancy charges from properties leased to these companies approximated 48%, 48%, 52% of total rental and occupancy charges, respectively. Information on these tenants is provided below. The information has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed. S&P Credit Rating at Tenant September 30,2004 Federal Express Corporation (FDX) BBB/Stable/NR Kellogg Company (K) BBB+/Stable/A-2 NOTE 5 - SECURITIES AVAILABLE FOR SALE Dividend income for the years ended September 30, 2004, 2003 and 2002 amounted to $1,693,650, $1,346,706 and $915,904, respectively. Interest income for the years ended September 30, 2004, 2003 and 2002 amounted to $107,457, $341,742 and $111,316, respectively. The Company received proceeds of $10,973,706, $8,092,425, and $4,643,905, on sales or redemptions of securities available for sale during 2004, 2003 and 2002, respectively. The Company recorded the following Gain on Securities Transactions, net: 2004 2003 2002 ____ ____ ____ Gross realized gains $2,078,697 $1,074,554 $976,544 Gross realized losses (2,971) (55,692) (66,840) Net loss on closed futures contracts (208,182) -0- -0- Unrealized loss on open futures contracts (30,235) -0- -0- Impairment loss (122,914) -0- -0- _________ _________ _________ Total Gain on Securities Transactions, net $1,714,395 $1,018,862 $909,704 ========== ========= ========= During September, 2004, the Company invested in futures contracts of ten- year treasury notes with a notional amount of $9,000,000 with the objective of reducing the exposure of the debt securities portfolio to market rate fluctuations. Changes in the market value of these derivatives have been recorded in gain on securities available for sale transactions, net with corresponding amounts recorded in other liabilities on the balance sheet. The fair value of the Page 59 NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D) derivatives at September 30, 2004 was a loss of $30,235 and is included in gain on securities transactions, net. During 2004, the Company recorded a realized loss of $208,182 on settled futures contracts, which is included in gain on securities transactions, net. During the year ended September 30, 2004, the Company recognized a loss of $122,914 due to a write down to the carrying value of securities available for sale which was considered other than temporarily impaired. The Company's securities available for sale consist primarily of debt securities and common and preferred stock of other REITs. The Company does not own more than 10% of the outstanding shares of any of these securities, nor does it have controlling financial interest. The following is a listing of investments in debt and equity securities at September 30, 2004:
Estimated Description Shares Cost Fair Value ___________ ______ _____ __________ Equity Securities - Preferred Stock: AMB Property Corp 6.5% Sr L 4,000 $ 100,000 $ 99,160 Apartment Inv and Mgt Co 10.00 % Cl R 3,000 80,250 80,010 Apartment Inv and Mgt Co 8% Cl T 16,000 400,000 398,880 Apartment Inv and Mgt Co 8.75% Cl D 11,300 280,965 285,551 Ashford Hospitality 8.55% Sr F 4,000 100,000 101,640 Boykin Lodging 10.5% Sr A 5,200 133,560 150,020 Brandywine Realty Trust 7.375% Sr D 10,000 250,000 252,000 BRE Properties 6.75% Sr C 10,000 250,000 247,200 Carramerica Realty 7.5% Sr E 8,000 200,000 211,680 CBL & Associates 7.75% Sr C 8,000 200,000 209,680 CBL & Associates 8.75% Sr B 4,100 207,315 220,375 Commercial Net Lease 9% Sr A 1,000 26,248 27,250 Corporate Office Properties 7.5% Sr H 10,000 250,000 250,000 Developers Diversified 7.375% Sr H 25,000 625,000 637,750 Developers Diversified 7.5% Sr I 4,000 100,000 101,480 Developers Diversified 8% Sr G 4,000 100,000 105,560 Developers Diversified 8.6% Sr F 2,000 49,762 53,600 Duke Realty Corporation 6.5% Sr K 4,000 100,000 98,160 Duke Realty Corporation 6.625% Sr J 4,000 100,000 99,640 Equity Inns 8.75% Sr B 30,000 750,000 792,000 Equity Residential 9.125% Sr C 1,000 27,040 27,360
Page 60 NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D) Estimated Description Shares Cost Fair Value ___________ ______ ____ __________ FelCor Lodging $1.95 Sr A 13,000 296,414 314,600 FelCor Lodging 9% Sr B 11,500 261,127 294,400 G & L Realty 10.25% Sr A 1,000 23,320 25,290 Glenborough Realty 7.75% Sr A 14,960 345,024 375,646 Glimcher Realty 8.125% Sr G 4,000 100,000 101,800 Health Care Reit 7.625% Sr F 4,000 100,000 99,000 Health Care Reit 7.875% Sr D 14,000 351,000 354,760 Healthcare Properties 7.1% Sr F 11,000 275,000 276,760 Healthcare Properties 7.25% Sr E 5,000 125,000 129,200 Highwood Properties Inc. 8% Sr D 8,500 203,920 212,075 Hospitality Properties 8.875% Sr B 6,000 152,131 164,400 Host Marriott Corp 10% Cl C 1,000 25,600 26,920 Host Marriott Corp 8.875% ClE 4,000 100,000 110,240 HRPT Properties 8.75% Sr B 15,000 378,730 409,050 HRPT Properties 9.875% Sr A 5,500 145,660 150,040 Innkeepers USA 8% Sr C 4,000 100,000 101,200 iStar Financial 7.875% Sr E 20,000 500,000 503,800 Kramont Realty Trust 8.25% SrE 10,000 250,000 265,700 Lasalle Hotel Properties 10.25% Sr A 14,500 367,245 404,550 Lexington Corporate Properties 8.04% Sr B 20,000 500,000 517,000 LTC Properties 8% Sr F 10,000 250,000 254,200 Maguire Properties Inc 7.625% Sr A 12,800 314,736 318,720 Mid America Apt Communities 8.3% Sr H 10,000 254,500 257,700 Mills Corp 9% Sr B 18,000 467,975 489,240 Mills Corp 9% Sr C 24,500 633,495 673,750 New Plan Excel 7.625% Sr E 14,000 352,200 363,720 Omega Healthcare 8.375% Sr D 10,000 250,000 260,500 Pennsylvania Reit 11% Sr A 10,000 458,810 595,000 Post Properties 7.625% Sr B 8,000 197,370 209,600 Prologis 6.75% Sr G 8,000 200,000 199,120 PS Business Parks 7% Sr H 8,000 200,000 196,000 PS Business Parks 7.95% Sr K 4,000 100,000 104,200 Public Storage 6.5% Sr W 6,000 150,000 149,040 Ramco-Gershenson 7.95% Sr C 12,500 360,625 380,000 Realty Income Corp 7.375% Sr D 4,000 100,000 104,600 Reckson Assoc 7.625% Sr A 727 14,273 19,004 Page 61 NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D) Estimated Description Shares Cost Fair Value _____________ ______ _____ __________ Shurgard Storage 8.7% Sr C 1,000 26,264 25,550 Sizler Property Investors 9.75% Sr B 1,000 25,000 26,840 SL Green Realty 7.625% Sr C 10,000 250,000 256,300 SL Green Realty 7.875% Sr D 4,000 100,000 102,000 SNH Capital 10.125% Sr Z 6,000 159,004 160,500 _________ _________ Total Equity Securities - Preferred Stock 13,803,563 14,431,011 __________ __________ Equity Securities - Common Stock American Financial Realty Trust 1,000 12,500 14,110 Biomed Realty Trust 8,000 120,004 140,720 BNP Residential Properties 18,000 192,595 246,240 Equity Office Properties 8,000 210,250 218,000 Equity Residential 1,000 27,900 31,000 First Industrial Realty Trust 1,000 33,542 36,900 Getty Realty Corp 41,090 882,360 1,077,380 Health Care Property Investors 21,000 473,632 546,000 Health Care Reit 1,000 30,430 35,200 HRPT Properties 11,000 88,607 120,890 Kramont Realty Trust 10,000 158,876 186,000 Mission West Properties 58,100 601,335 601,335 Monmouth Capital Corp (1) 39,879 138,119 261,235 Nationwide Health Properties Inc 1,000 17,970 20,750 New Plan Excel Realty Trust 40,000 772,381 1,000,000 Omega Healthcare Investors 1,000 9,070 10,760 Price Legacy Corp 2,500 27,724 47,375 Senior Housing Property Trust 1,000 15,280 17,820 Shurgard Storage Centers 1,000 35,456 38,800 Sizeler Property Investors 140,000 1,184,292 1,302,000 United Dominion Realty Trust 1,000 19,326 19,830 US Restaurant Properties 1,000 15,764 16,890 Windrose Medical Properties 1,000 10,600 12,990 _________ _________ Total Equity Securities - Common Stock 5,078,013 6,002,225 __________ __________ Debt Securities: Monmouth Capital Corp Conv SubDebenture (1) 500,000 500,000 545,844 Page 62
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D) Estimated Description Shares Cost Fair Value ___________ ______ ____ _________ Due 10/23/2013 8% coupon Sizeler Prop Investors Conv Sub Debenture Due 7/15/2009 9% coupon 2,034,000 2,014,690 2,105,190 _________ _________ Total Debt Securities 2,514,690 2,651,034 __________ _________ Total Securities Available for Sale $ 21,396,266 $ 23,084,270 ========== ==========
(1) Investment is an affiliate. See Note No. 9 for further discussion. The following is a isting of investments in debt and equity securities at September 30, 2003:
Estimated Description Shares Cost Fair Value ___________ _____ _____ __________ Equity Securities - Preferred Stock: Alexandria Real Estate 9.5% Sr A 2,000 46,695 52,700 AMB Property Corp 6.5% Sr L 4,000 100,000 100,000 Apartment Inv and Mgt Co 10.00 % Cl R 3,000 80,250 79,800 Apartment Inv and Mgt Co 8% Cl T 16,000 400,000 400,000 Apartment Inv and Mgt Co 8.75% Cl D 11,300 280,965 283,065 Archstone Smith 8.75% Sr D 2,000 51,491 51,880 Boykin Lodging 10.5% Sr A 5,200 133,560 139,880 Carramerica Realty 7.5% Sr E 8,000 200,000 202,400 CBL & Associates 7.75% Sr C 8,000 200,000 205,600 CBL & Associates 8.75% Sr B 4,100 207,315 221,810 Commercial Net Lease 9% Sr A 1,000 26,248 26,750 Crown American 11% 10,000 458,810 575,000 Developers Diversified 7.375% SrH 25,000 625,000 622,500 Developers Diversified Dep Shares Cl F 2,000 49,762 52,960 Developers Diversified 8% Sr G 4,000 100,000 105,000 Duke Realty Corporation 6.625% Sr J 4,000 100,000 99,720 Equity Inns 8.75% Sr B 30,000 750,000 775,500 Equity Office Trust 8.625% Sr C 1,000 26,000 25,380 Equity Residential 9.125% Sr 1,000 27,040 27,600 FelCor Lodging $1.95 Sr A 3,000 55,208 68,520 FelCor Lodging 9% Sr B 21,500 488,127 529,115
Page 63
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D) Estimated Description Shares Cost Fair Value ____________ ______ _____ __________ First Industrial Realty 7.95% Sr D 7,000 175,480 175,070 G & L Realty 10.25% Sr A 1,000 23,320 24,890 Glenborough Realty 7.75% Sr A 21,900 505,061 524,943 Glimcher Realty 8.125% Sr G 23,500 574,291 590,085 Health Care Reit 7.875% Sr D 14,000 351,000 357,000 Healthcare Properties 8.7% Sr B 1,000 17,932 24,980 Healthcare Properties 7.25% Sr E 5,000 125,000 129,250 Highwood Properties Inc. 8% Sr D 8,500 203,920 210,800 Hospitality Properties 9.5% Sr A 10,000 210,133 257,500 Hospitality Properties 8.875% Sr B 6,000 152,131 159,900 Host Marriott Corp 10% Cl C 1,000 25,600 25,000 HRPT Properties 8.75% Sr B 15,000 378,730 402,150 HRPT Properties 9.875% Sr A 5,500 145,660 148,775 Innkeepers USA 8.625% Sr A 31,500 772,961 790,650 iStar Financial 9.20% Sr C 1,000 17,708 25,300 iStar Financial 8% Sr D 6,000 89,641 150,840 iStar Financial 7.875% Sr E 20,000 500,000 509,000 Kramont Realty Trust 9.5% SrD 54,700 1,259,352 1,394,850 Lasalle Hotel Properties 10.25% Sr A 14,500 376,245 391,500 Lexington Corporate Properties 8.04% Sr B 20,000 500,000 525,000 Mid America Apt Communities 8.3% Sr H 10,000 254,500 261,800 Mills Corp 9% Sr B 18,000 467,975 478,800 Mills Corp 9% Sr C 24,500 633,495 654,150 New Plan Excel 7.625% Sr E 14,000 352,200 371,000 Post Properties 7.625% Sr B 8,000 197,370 204,800 Post Properties 7.625% Sr C 1,000 23,440 24,750 Prime Retail 10.5% Sr A 1,000 15,433 18,100 Prime Retail 8.5% Sr B 8,000 26,720 56,400 Reckson Associates 7.625% SrA 1,000 18,707 24,750 Shurgard Storage 8.7% Sr C 1,000 26,264 25,450 Sizler PropertyInvestors 9.75% Sr B 1,000 25,000 28,250 SNH Capital 10.125% Sr Z 6,000 159,004 159,720 Sovran Self Storage 9.85% Sr B 2,000 39,115 53,480 Vornado Realty Trust 8.5% Sr C 14,000 326,910 360,360 Winston Hotels 9.25% Sr A 12,000 286,835 302,880 __________ __________ Total Equity Securities - Preferred Stock 13,663,604 14,487,353 __________ __________
Page 64 NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D)
Estimated Description Shares Cost Fair Value ___________ ______ ____ ________ Equity Securities - Common Stock American Financial Realty Trust 1,000 12,500 14,100 BNP Residential Properties 18,000 192,595 189,900 Crown American Realty Trust 30,000 245,694 357,000 Equity Office Properties Trust 8,000 210,250 220,240 First Industrial Realty Trust 1,000 28,400 32,070 Gabels Residential Trust 1,000 24,859 32,320 Getty Realty Corp 20,090 404,344 492,205 Health Care Property Investors 25,000 883,627 1,167,500 Healthcare Realty Trust Inc. 10,400 286,930 332,592 HRPT Properties 89,000 706,726 813,460 Humphrey Hospitality 10,000 26,932 29,690 Lasalle Hotel Properties 9,000 115,824 155,970 Mid Atlantic Realty Trust 1,000 9,582 21,000 Monmouth Capital Corp (1) 37,071 131,531 188,689 Nationwide Health Properties Inc 21,500 294,425 376,035 New Plan Excel Realty Trust 62,000 1,126,498 1,444,600 Price Legacy Corp 10,000 27,724 35,000 Sizeler Property Investors 105,500 894,676 1,105,668 Senior Housing Property Trust 29,000 339,222 417,890 Trizec Properties 35,000 379,371 429,100 United Mobile Homes Inc.(1) 60,200 651,145 907,214 Urstadt Biddle Properties 9,500 50,920 123,975 __________ __________ Total Equity Securities - Common Stock 7,043,775 8,886,218 __________ __________ Debt Securities: Sizeler Prop Investors Convertible Subordinated Debenture, due 7/15/2009, 9% coupon callable 5/1/05 at 100.00 1,914,000 1,884,333 2,047,980 _________ _________ Total Debt Securities 1,884,333 2,047,980 _________ _________ Total Securities Available for Sale $22,591,712 $ 25,421,551 ========== ========== (1) Investment is an affiliate. See Note No. 9 for further discussion.
Page 65 NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D) The Company had eleven securities that were temporarily impaired investments at September 30, 2004. The individual unrealized losses were 2% or less of original cost. The following is a summary: Less than 12 Months 12 months or longer ___________________ ____________________ Description of Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Preferred stock $1,666,210 $14,040 $25,550 $714 __________ ________ ________ _______ Total $1,666,210 $14,040 $25,550 $714 ========== ======== ======== ======= The Company had margin loan balances of $1,261,901 and $8,512,853 at September 30, 2004 and 2003, respectively, which were collateralized by the securities portfolio. Page 66
NOTE 6 - MORTGAGE NOTES AND LOANS PAYABLE The following is a summary of mortgage notes payable at September 30, 2004 and 2003: Fixed Maturity Balance Balance Property Rate Date 9/30/04 9/30/03 ________ ____ _____ _______ _______ Richland, MS 7.50% 06/01/04 $ -0- $207,819 Franklin, MA 7.00% 10/01/04 -0- 414,965 Orangeburg, NY 7.00% 10/01/04 -0- 364,498 Urbandale, IA 7.00% 10/01/04 -0- 182,989 Fayetteville, NC 7.80% 08/01/06 2,668,864 2,801,133 O'Fallon, MO 8.50% 12/01/07 860,835 1,095,093 Jackson, MS 8.50% 08/01/08 308,344 373,626 Winston Salem, NC 7.10% 02/01/12 4,480,339 4,607,334 Schaumburg, IL 8.48% 07/01/12 2,340,730 2,545,793 Tolleson, AZ 5.80% 11/01/12 10,146,307 10,615,499 Ft. Myers, FL 6.33% 12/01/12 3,045,095 3,131,807 Liberty, MO 7.065% 03/01/13 3,355,368 3,637,322 Romulus, MI 7.56% 07/01/13 1,996,698 2,151,940 Burr Ridge, IL 8.00% 01/01/14 821,422 883,861 Omaha, NE 7.15% 01/01/14 3,014,301 3,236,441 Charlottesville, VA 6.90% 07/01/14 2,087,804 2,233,032 Union Township, OH 8.25% 03/01/15 2,435,553 2,577,450 Richmond, VA 6.12% 12/01/15 4,647,320 4,928,959 St. Joseph, MO 8.12% 03/01/16 7,591,972 7,980,478 Beltsville, MD 7.53% 05/01/16 5,157,949 5,427,127 Cudahy, WI 8.15% 05/01/16 3,679,198 3,862,951 Newington, CT 8.10% 05/01/16 2,127,778 2,235,607 Granite City, IL 7.11% 11/01/16 8,349,161 8,770,809 Jacksonville, FL 6.92% 12/01/16 3,209,738 3,440,326 Monroe, NC 7.11% 12/01/16 3,574,850 3,753,546 Elgin, IL 6.97% 05/01/17 4,520,616 4,735,617 Edwardsville, KS 7.375% 07/01/17 4,507,576 4,713,277 Tampa, FL 6.00% 03/01/19 12,603,145 -0- __________ __________ Total Mortgage Notes Payable $97,530,963 $90,909,299 =========== ===========
Page 67 NOTE 6 - MORTGAGE NOTES AND LOANS PAYABLE (CONT'D) Principal on the foregoing debt is scheduled to be paid as follows: Year Ending September 30, 2005 $5,484,926 2006 8,265,536 2007 6,167,311 2008 6,309,231 2009 6,664,665 Thereafter 64,639,294 ___________ $97,530,963 =========== Line of Credit In May 2003, the Company received a line of credit (the line) from PNC Bank (the Bank), which replaced the line with Bank of America. The amount of the facility was $10,000,000 during the first year and $15,000,000 thereafter and matures in May 2006. The interest rate charged on the new line is the Bank's prime rate. The interest rate as of September 30, 2004 and 2003 was 4.50% and 4% respectively. The amount outstanding on the new line at September 30, 2004 and 2003 was $1,361,198 and $3,361,198, respectively. Margin Loans During fiscal 2004 and 2003, the Company purchased securities on margin. The interest rate charged on the margin loan was 3.5% and 2.75% at September 30, 2004 and 2003, respectively and are due on demand. At September 30, 2004 and 2003, the margin loans amounted to $1,261,901 and $8,512,853, respectively and are collateralized by the Company's securities portfolio. The Company must maintain a coverage ratio of approximately 50%. Other In connection with the St. Joseph, Missouri property, the Company issued a $500,000 note to Butler at an interest rate of 8.12% due February 29, 2016. The balance of this note at September 30, 2003 was $450,875. The Company prepaid this note on October 21, 2003 for a discounted amount of $439,555 pursuant to an agreement with Butler. NOTE 7 - STOCK OPTION PLAN On April 24, 1997, the shareholders approved and ratified the Company's 1997 Stock Option Plan (the Plan) authorizing the grant to officers, directors and key employees options to purchase up to 750,000 shares of common stock. On April 25, 2002, the shareholders approved an increase to the number of shares of common stock under the Plan to 1,500,000 shares. Options may be granted any time up to December 31, 2006. No option shall be available for exercise beyond ten years. All options are exercisable after one year from the date of grant. Page 68 NOTE 7 - STOCK OPTION PLAN (CONT'D) The option price shall not be below the fair market value at date of grant. Canceled or expired options are added back to the "pool" of shares available under the Plan. The Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation" on October 1, 2002. During the year ended September 30, 2004, 13 directors, officers, and employees were granted options to purchase 240,000 shares. The fair value of those options was $99,334 based on the assumptions noted below and is being amortized over the 1-year vesting period. The fair value of each option grant is estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted-average assumptions used for grants in 2004, 2003, and 2002: 2004 2003 2002 ____ ____ ____ Dividend yield 7.46% 8.0% 8.0% Expected volatility 17.40% 13.3% 13.0% Risk-free interest rate 3.90% 3.4% 3.4% Expected lives (years) 8 8 5 During the year ended September 30, 2004, four directors and officers exercised their stock options and purchased 131,500 shares for a total of $830,705. Page 69
NOTE 7 - STOCK OPTION PLAN (CONT'D) A summary of the status of the Company's stock option plan as of September 30, 2004, 2003 and 2002 is as follows: 2004 2003 2002 _____ _____ _____ Weighted Weighted Weighted Average Average Average 2004 Exercise 2003 Exercise 2002 Exercise Shares Price Shares Price Shares Price _______ _______ _______ _______ ______ ________ Outstanding at beginning of year 500,500 $6.83 465,000 $6.80 385,000 $6.19 Granted 240,000 7.54 65,000 6.90 365,000 7.06 Exercised (131,500) 6.32 (9,500) 5.57 (255,000) 6.34 Expired -0- -0- (20,000) 7.25 (30,000) 5.94 _________ ________ ________ Outstanding at end of year 609,000 7.22 500,500 6.83 465,000 6.80 ======== ======== ======== Exercisable at end of year 369,000 435,500 100,000 ======== ======== ======== Weighted- average fair value of options granted during the year .41 .14 .12 ======== ======== ========
The following is a summary of stock options outstanding as of September 30, 2004: Date of Number of Number of Option Expiration Grant Grants Shares Price Date ________ ________ _________ ______ __________ 6/20/01 1 5,000 5.85 6/20/06 10/4/01 1 65,000 6.765 10/4/06 6/21/02 13 234,000 7.13 6/21/10 1/22/03 1 65,000 6.90 1/22/11 5/20/04 12 175,000 7.41 5/20/12 8/3/04 1 65,000 7.89 8/3/12 _________ 609,000 =========== As of September 30, 2004, there were 495,000 shares available for grant under this plan. Page 70 NOTE 8 - INCOME FROM LEASES The Company derives income primarily from operating leases on its commercial properties. In general, these leases are written for periods up to ten years with various provisions for renewal. These leases generally contain clauses for reimbursement (or direct payment) of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Minimum rents due under noncancellable leases at September 30, 2004 are scheduled as follows: 2005 - $17,855,000; 2006 - $16,920,000; 2007 - $15,028,000; 2008 - $13,307,000; 2009 - $11,515,000; thereafter - $38,669,000. NOTE 9 - RELATED PARTY TRANSACTIONS Eugene W. Landy received $16,000, $17,500 and $16,300 during 2004, 2003 and 2002 as Director. The firm of Eugene W. Landy received $17,500, $17,500, and $- 0- during 2004, 2003 and 2002, respectively, as legal fees. On January 1, 2004, Eugene W. Landy's Employment Agreement with the Company was amended to extend for five years to December 31, 2009. Mr. Landy's amended Employment Agreement provides for (1) an increase in his annual base compensation from $150,000 to $175,000; (2) an increase in his severance payment from $300,000 payable $100,000 a year for three years to $500,000 payable $100,000 a year for five years; and (3) an increase from $40,000 a year to $50,000 a year of his pension benefits payable for ten years; and (4) an extension of three years of his pension payments. The Company accrued additional compensation expense related to the pension benefits of $141,000. Mr. Landy receives bonuses and customary fringe benefits, including health insurance and five weeks vacation. Additionally, there will be bonuses voted by the Board of Directors. The Employment Agreement is terminable by either party at any time subject to certain notice requirements. Effective January 15, 2004, the Company and Cynthia J. Morgenstern entered into a three-year employment agreement under which Ms. Morgenstern receives an annual base salary of $160,000, increasing to $176,000 in 2005 and to $194,000 in 2006, plus bonuses and customary fringe benefits, including health insurance, four weeks vacation and the use of an automobile. If there is a voluntary or involuntary termination of employment, due to merger or change in control, Ms. Morgenstern, shall be entitled to receive one year's compensation at the date of termination. In the event of her disability, her salary will continue for a period of two years. Ms. Morgenstern received $16,000, $17,500 and $5,500 during 2004, 2003 and 2002, respectively, as Director. This agreement was amended September 16, 2004 to purchase disability insurance for Ms. Morgenstern. In the event of a disability exceeding 90 days, Ms. Morgenstern will receive lost wages from a disability policy, not her salary for two years. Daniel D. Cronheim is a Director of the Company and Executive Vice President of David Cronheim Company. Cronheim Management Services, a division of David Cronheim Company, received the sum of $299,392, $258,626 and $245,597 for management fees during the years ended 2004, 2003 and 2002, respectively. Effective August 1, 1998, the Company entered into a management contract with Cronheim Management Services. Under this contract, Cronheim Management Services receives 3% of gross rental income on certain properties for management fees. The David Cronheim Company received $132,185, $14,377 and $20,194 in lease brokerage Page 71 NOTE 9 - RELATED PARTY TRANSACTIONS (CONT'D) commissions in 2004, 2003 and 2002, respectively. Daniel Cronheim received $16,000, $16,150 and $16,300 for Director and Committee fees in 2004, 2003 and 2002, respectively. The Company operates as part of a group of three public companies (all REITs) which includes the Company, United Mobile Homes, Inc. and Monmouth Capital Corporation (the affiliated companies). Some general and administrative expenses are allocated among the affiliated companies based on use or services provided. Allocations of salaries and benefits are made based on the amount of the employees' time dedicated to each affiliated company. There are two Directors of the Company who are also Directors and shareholders of United Mobile Homes, Inc. and there are two Directors of the Company who are also Directors and shareholders of Monmouth Capital Corporation. The Company holds common stock of the affiliated companies in its securities portfolios. See Note No. 5 for holdings. The Company sold on the open market 60,200, 40,000 and 42,000 shares of United Mobile Homes, Inc. during 2004, 2003, and 2002, respectively and recorded a gain on sale of $312,661, $230,152, and $105,902 during 2004, 2003, and 2002, respectively. During 2004 and 2003, the Company purchased 2,808 and 4,791 shares, respectively, through the Monmouth Capital Dividend Reinvestment Plan. During 2004 the Company invested $500,000 in the Monmouth Capital Corporation Convertible Subordinated Debenture. NOTE 10 - TAXES Income Tax The Company has elected to be taxed as a Real Estate Investment Trust under the applicable provisions of the Internal Revenue Code and the comparable New Jersey Statutes. Under such provisions, the Company will not be taxed on that portion of its taxable income distributed currently to shareholders, provided that at least 90% of its taxable income is distributed. As the Company has and intends to continue to distribute all of its income currently, no provision has been made for income taxes. Federal Excise Tax The Company does not have a Federal excise tax liability for the calendar years 2004, 2003 and 2002, since it intends to or has distributed all of its annual income. Page 72 NOTE 11 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN/EQUITY The Company implemented a dividend reinvestment and stock purchase plan (the DRIP) effective December 15, 1987. Under the terms of the DRIP and subsequent offerings, shareholders who participate may reinvest all or part of their dividends in additional shares of the Company at approximately 95% of market price. According to the terms of the DRIP, shareholders may also purchase additional shares, at a price of approximately 95% of market by making optional cash payments monthly. Amounts received, including dividend reinvestment of $3,531,838, $3,327,957 and $2,263,827 in 2004, 2003 and 2002, respectively, and shares issued in connection with the Plan for the years ended September 30, 2004, 2003 and 2002 were as follows: 2004 2003 2002 Amounts Received $12,532,541 $11,887,869 $10,535,311 Shares Issued 1,568,174 1,691,148 1,613,020 In January 2004, the Company issued 500,000 shares in a private placement for consideration of $4,050,000 or $8.10 per share. The proceeds of the private placement were used for working capital and to pay down the Company's outstanding credit facility and margin loan. The Company incurred approximately $67,993 in offering costs related to this private placement which were recorded as a reduction to Additional Paid-In Capital. On February 27, 2003, the Company sold 1,257,253 shares in a private placement for cash of $8,324,901 or $6.6215 a share. The proceeds of the private placement were used to pay down the Company's outstanding credit facility and working capital. The Company paid $106,826 in offering costs which were recorded as a reduction to Additional Paid-In Capital. Page 73 NOTE 12 - DISTRIBUTIONS The following cash distributions were paid to shareholders during the years ended September 30, 2004 and 2003: 2004 2003 ____ ____ Quarter Ended Amount Per Share Amount Per Share ______ _________ ______ _________ December 31 $2,206,622 $ .145 $1,815,746 $.145 March 31 2,331,098 .145 1,898,483 .145 June 30 2,403,361 .145 2,113,024 .145 September 30 2,485,834 .145 2,160,371 .145 _________ _________ _________ ________ $9,426,915 $ .58 $7,987,624 $ .58 ========= ========= ========= ========= On October 1, 2004, the Company declared a cash dividend of $.145 per share to be paid on December 15, 2004 to shareholders of record November 15, 2004. NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company is required to disclose certain information about fair values of financial instruments, as defined in Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." Limitations Estimates of fair value are made at a specific point in time based upon where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. For a portion of the Company's financial instruments, no quoted market value exists. Therefore, estimates of fair value are necessarily based on a number of significant assumptions (many of which involve events outside the control of management). Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties, future expected loss experience and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only and, therefore, cannot be compared to the historical accounting model. Use of different assumptions or methodologies is likely to result in significantly different fair value estimates. The fair value of cash and cash equivalents approximates their current carrying amounts since all such items are short-term in nature. The fair value of securities available for sale is based upon quoted market values. The fair value of variable rate mortgage notes payable and loans payable approximate their current carrying amounts since such amounts payable are at approximately a weighted-average current market rate of interest. At September 30, 2004, the Page 74 NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT"D) fair value (estimated based upon expected cash outflows discounted at current market rates) and carrying value of fixed rate mortgage notes payable amounted to $100,508,994 and $97,530,963, respectively. At September 30, 2003, the fair value and carrying value of fixed rate mortgage notes payable amounted to $95,315,781 and $90,909,299, respectively. NOTE 14 - CASH FLOW AND COMPREHENSIVE INCOME INFORMATION Cash paid during the years ended September 30, 2004, 2003 and 2002, for interest was $6,977,419, $6,885,146 and $6,030,744, respectively. During 2004, 2003 and 2002, the Company had $3,531,838, $3,327,957 and $2,263,827, respectively, of dividends which were reinvested that required no cash transfers. The following are the reclassification adjustments related to securities available for sale included in Other Comprehensive Income. 2004 2003 2002 ____ ____ ____ Unrealized holding gains arising during the year $ 602,795 $ 2,003,772 $ 1,212,588 Less: reclassification adjustment for gains realized in income (1,744,630) (1,018,862) (909,704) _________ _________ _________ Net unrealized (loss) gains $(1,141,835) $ 984,910 $ 302,884 ========= ========= ========= NOTE 15 - SUBSEQUENT EVENTS On October 28, 2004, the Company purchased a 60,361 square foot industrial building in Denver, Colorado. The building is 100% net-leased to FedEx Ground Package System, Inc., a subsidiary of Federal Express Corporation (FDX) for ten years. The purchase price including closing costs was approximately $5,125,000. The Company paid approximately $75,000 in cash, obtained a mortgage of $3,625,000, and obtained $1,425,000 from its margin loan. The mortgage is payable at a rate of 6.07% and matures on November 1, 2019. In November, 2004, the Company was notified by its month to month tenant at its Jackson, MS property that they would be vacating its space effective December 8, 2004. The Company has yet to re-lease the space. Page 75 NOTE 15 - SUBSEQUENT EVENTS (CONT"D) On December 6, 2004, the Company purchased a 306,000 square foot industrial building in Hanahan, South Carolina. The building is 100% net-leased to Norton Naughton of Squire, Inc. for thirteen years. The purchase price including closing costs was approximately $14,000,000. The Company paid approximately $200,000 in cash, assumed a mortgage of $8,677,500, and obtained $5,122,500 from its line of credit. The mortgage is payable at a rate of 7.36% and matures on May 1, 2017. Page 76
REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III SEPTEMBER 30, 2004 Column A Column B Column C Column D ________ ________ ____________ ________ capitalization Initial Cost Buildings and Subsequent to Description Encumbrances Land Improvements Acquisition ___________ __________ _________ __________ ___________ Shopping Center Somerset, NJ $ -0- $ 55,182 $ 637,097 $ 517,964 Industrial Building Ramsey, NJ -0- 52,639 291,500 1,066,648 Monaca, PA -0- 330,772 878,081 1,248,911 Orangeburg, NY -0- 694,720 2,977,372 -0- South Brunswick, NJ -0- 1,128,000 4,087,400 299,485 Greensboro, NC -0- 327,100 1,853,700 15,000 Jackson, MS 308,344 218,000 1,233,500 116,687 Franklin , MA -0- 566,000 4,148,000 -0- Wichita, KS -0- 268,000 1,518,000 24,245 Urbandale, IO -0- 310,000 1,758,000 2,736 Richland, MS -0- 211,000 1,195,000 72,000 O'Fallon, MO 860,835 264,000 3,302,000 7,000 Fayetteville, NC 2,668,864 172,000 4,467,885 17,360 Schaumburg, IL 2,340,730 1,039,800 3,694,320 -0- Burr Ridge, IL 821,422 270,000 1,236,599 -0- Romulus, MI 1,996,698 531,000 3,653,883 12,078 Liberty, MO 3,355,368 723,000 6,510,546 -0- Omaha, NE 3,014,301 1,170,000 4,425,500 -0- Charlottesville, 2,087,804 1,170,000 2,845,000 -0- VA Jacksonville, FL 3,209,738 1,165,000 4,668,080 13,949 Union City, OH 2,435,553 695,000 3,342,000 1,020,353 Richmond, VA 4,647,320 1,160,000 6,413,305 3,000 St. Joseph, MO 7,591,972 800,000 11,753,964 -0- Newington, CT 2,127,778 410,000 2,961,000 5,486 Cudahy, WI 3,679,198 980,000 5,050,997 88,324 Beltsville, MD 5,157,949 3,200,000 5,958,773 -0- Granite City,IL 8,349,161 340,000 12,046,675 -0- Monroe, NC 3,574,850 500,000 4,981,022 -0- Winston-Salem, NC 4,480,339 980,000 5,610,000 -0- Elgin, IL 4,520,616 1,280,000 5,529,488 -0- Tolleson, AZ 10,146,307 1,320,000 13,329,000 -0- Ft. Myers, FL 3,045,095 1,910,000 2,499,093 -0- Edwardsville, KS 4,507,576 1,185,000 5,815,148 -0- Tampa, FL 12,603,145 5,000,000 12,656,561 -0- ____________ __________ ___________ _________ $ 97,530,963 $ 30,426,213 $153,328,489 $ 4,531,226 =========== ========== =========== ==========
*Buildings and improvements reacquired in 1986. **Property was renovated in 2001. Page 77A REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III SEPTEMBER 30, 2004 Column A Column E (1) (2) ________ _____________________________________________ Gross Amount at Which Carried September 30, 2004
Description Land Bldg & Imp Total ___________ ________ __________ __________ Shopping Center Somerset, NJ $ 55,182 $ 1,155,061 $ 1,210,243 Industrial Building Ramsey, NJ 52,639 1,358,148 1,410,787 Monaca, PA 330,772 2,126,992 2,457,764 Orangeburg, NY 694,720 2,977,372 3,672,092 South Brunswick, NJ 1,128,000 4,386,885 5,514,885 Greensboro, NC 327,100 1,868,700 2,195,800 Jackson, MS 218,000 1,350,187 1,568,187 Franklin , MA 566,000 4,148,000 4,714,000 Wichita, KS 268,000 1,542,245 1,810,245 Urbandale, IO 310,000 1,760,736 2,070,736 Richland, MS 211,000 1,267,000 1,478,000 O'Fallon, MO 264,000 3,309,000 3,573,000 Fayetteville, NC 172,000 4,485,245 4,657,245 Schaumburg, IL 1,039,800 3,694,320 4,734,120 Burr Ridge, IL 270,000 1,236,599 1,506,599 Romulus, MI 531,000 3,665,961 4,196,961 Liberty, MO 723,000 6,510,546 7,233,546 Omaha, NE 1,170,000 4,425,500 5,595,500 Charlottesville, VA 1,170,000 2,845,000 4,015,000 Jacksonville, FL 1,165,000 4,682,029 5,847,029 Union City, OH 695,000 4,362,353 5,057,353 Richmond, VA 1,160,000 6,416,305 7,576,305 St. Joseph, MO 800,000 11,753,964 12,553,964 Newington, CT 410,000 2,966,486 3,376,486 Cudahy, WI 980,000 5,139,321 6,119,321 Beltsville, MD 3,200,000 5,958,773 9,158,773 Granite City, IL 340,000 12,046,675 12,386,675 Monroe, NC 500,000 4,981,022 5,481,022 Winston-Salem, NC 980,000 5,610,000 6,590,000 Elgin, IL 1,280,000 5,529,488 6,809,488 Tolleson, AZ 1,320,000 13,329,000 14,649,000 Ft. Myers, FL 1,910,000 2,499,093 4,409,093 Edwardsville, KS 1,185,000 5,815,148 7,000,148 Tampa, FL 5,000,000 12,656,561 17,656,561 __________ __________ ___________ $ 30,426,213 $157,859,715 $ 188,285,928 ========== =========== ===========
*Buildings and improvements reacquired in 1986. **Property was renovated in 2001. Page 77B
REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III SEPTEMBER 30, 2004 Column A Column F Column G Column H Column I ________ ________ ________ ________ ________ Accumulated Date of Deprecia- Construc- Date Depreciable Description tion tion Acquired Life ___________ ____________ ________ ________ _______ Shopping Center Somerset, NJ $ 977,298 1970 1970 10-33 Industrial Building 1969 1969 7-40 Ramsey, NJ 788,787 Monaca, PA 1,444,724 1977 1977* 5-31.5 Orangeburg, NY 1,122,575 1990 1993 31.5 South Brunswick, NJ 1,602,808 1974 1993 31.5 Greensboro, NC 679,016 1988 1993 31.5 Jackson, MS 451,739 1988 1993 39 Franklin , MA 1,116,725 1991 1994 39 Wichita, KS 411,662 1995 1994 39 Urbandale, IO 473,428 1985 1994 39 Richland, MS 322,666 1986 1994 39 O'Fallon, MO 804,526 1989 1994 39 Romulus, MI 612,845 1998 1998 39 Liberty, MO 1,085,004 1997 1998 39 Omaha, NE 624,081 1999 1999 39 Charlottesville, VA 401,214 1998 1999 39 Jacksonville, FL 661,442 1998 1999 39 Union City, OH 398,753 1999 2000 39 Richmond, VA 577,327 2000 2001 39 St. Joseph, MO 1,054,790 2000 2001 39 Newington, CT 266,090 2001 2001 39 Cudahy, 459,358 2001 2001 39 Beltsville, MD 534,742 2000 2001 39 Granite City, IL 772,484 2001 2001 39 Monroe, NC 319,283 2001 2001 39 Winston-Salem, NC 359,600 2001 2002 39 Elgin, IL 354,440 2002 2002 39 Tolleson, AZ 512,629 2002 2002 39 Ft. Myers, FL 96,117 1974** 2002 39 Edwardsville, KS 223,635 2002 2003 39 Tampa, FL 162,286 2004 2004 39 ___________ $ 21,448,580 ===========
*Buildings and improvements reacquired in 1986. **Property was renovated in 2001. Page 77C
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY SCHEDULE III EAL ESTATE AND ACCUMULATED DEPRECIATION,(CONT'D.) (1) Reconciliation REAL ESTATE INVESTMENTS 9/30/04 9/30/03 9/30/02 ________ ________ ________ Balance-Beginning of Year $170,181,103 $142,957,878 $113,971,563 Additions: Acquisitions 17,656,561 26,058,241 31,274,685 Improvements 448,264 1,164,984 246,230 __________ __________ __________ Total Additions 18,104,825 27,223,225 31,520,915 Sales -0- -0- (2,534,600) __________ __________ ____________ Balance-End of Year $188,285,928 $ 170,181,103 $ 142,957,878 ============ ============ ============ ACCUMULATED DEPRECIATION 9/30/2004 9/30/2003 9/30/2002 _________ _________ _________ Balance - Beginning of the year $17,410,768 $13,850,622 $11,249,479 Depreciation 4,037,812 3,560,146 2,941,097 Sales -0- -0- (339,954) _________ _________ __________ Balance-End of Year $ 21,448,580 $ 17,410,768 $ 13,850,622 ========== ========== ==========
Page 78
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY NOTES TO SCHEDULE III SEPTEMBER 30, (1) Reconciliation 2004 2003 2002 ____ _____ _____ Balance - Beginning of Year $170,181,103 $142,957,878 $113,971,563 ___________ __________ ___________ Additions: Ramsey, NJ -0- -0- 3,997 Somerset, NJ 2,840 3,314 30,488 Monaca, PA 40,158 5,450 154,154 Orangeburg, NY -0- -0- -0- South Brunswick, NJ -0- 196,287 45,237 Greensboro, NC 15,000 -0- -0- Jackson, MS 10,186 105,415 -0- Franklin, MA -0- -0- 0- Wichita, KA -0- 24,245 -0- Urbandale, IA -0- -0- 2,736 Richland, MS 72,000 -0- -0- O'Fallon, MO -0- -0- 7,000 Fayetteville, NC -0- 17,360 -0- Schaumburg, IL -0- -0- -0- Burr Ridge, IL -0- -0- -0- Romulus, MI -0- -0- -0- Liberty, MO -0- -0- -0- Omaha, NE -0- -0- -0- Charlottesville, VA -0- -0- -0- Jacksonville, FL 10,893 3,056 -0- Union Township, OH 211,481 808,873 -0- Richmond, VA -0- 3,000 -0- St. Joseph, MO -0- -0- -0- Newington, CT -0- 5,486 -0- Cudahy, WI 85,706 -0- 2,618 Beltsville, MD -0- -0- -0- Granite City, IL -0- (7,502) 12,394,175 Monroe, NC -0- -0- 5,481,022 Winston Salem, NC -0- -0- 6,590,000 Elgin, IL -0- -0- 6,809,488 Tolleson, AZ -0- 14,649,000 -0- Ft. Myers, FL -0- 4,409,093 -0- Edwardsville, KS -0- 7,000,148 -0- Tampa, FL $ 17,656,561 -0- -0- ___________ __________ ___________ Total Additions 18,104,825 27,223,225 31,520,915 ___________ __________ ___________ Sales: Virginia Beach, VA -0- -0- (2,534,600) ___________ __________ ___________ Balance - End of Year $ 188,285,928 $ 170,181,103 $ 142,957,878 =========== ========== ===========
(2) The aggregate cost for Federal tax purposes approximates historical cost. Page 79 SIGNATURES Pursuant to the requirements of Section 13 of 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. Date: December 6, 2004 By: /s/Eugene W. Landy Eugene W. Landy, President, Chief Executive Officer and Director Date: December 6, 2004 By: /s/ Anna T. Chew Anna T. Chew, Chief Financial Officer 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 dates indicated. Date: December 6, 2004 By: /s/ Daniel D. Cronheim Daniel D. Cronheim, Director Date: December 6, 2004 By: /s/ Neal Herstik Neal Herstik Date: December 6, 2004 By: /s/ Matthew I. Hirsch Matthew I. Hirsch, Director Date: December 6, 2004 By: /s/ Samuel A. Landy Samuel A. Landy, Director Date: December 6, 2004 By: /s/ Cynthia J. Morgenstern Cynthia J. Morgenstern Executive Vice President and Director Date: December 6, 2004 By: /s/ John R. Sampson John R. Sampson, Director Date: December 6, 2004 By: /s/ Peter J. Weidhorn Peter J. Weidhorn, Director Date: December 6, 2004 By: /s/ Stephen B. Wolgin Stephen B. Wolgin, Director Page 80 EX-10 2 exh10iv122004.txt EX 10 MONMOUTH REAL ESTATE INVESTMENT CORPORATION Employment of the Executive Vice-President-Cynthia J. Mrgenstern AGREEMENT EFFECTIVE JANUARY 15, 2004 as amended September 16, 2004 BY AND BETWEEN: Monmouth Real Estate Investment Corporation, A Maryland Corporation ("Corporation") AND: Cynthia J. Morgenstern ("Employee") Corporation desires to employ Employee to the business of the Corporation and Employee desires to be so employed. The parties agree as follows: 1. Employment. Corporation agrees to employ Employee and Employee agrees to be employed in the capacity as Executive Vice-President for a term of three (3) years effective January 15, 2004 and terminating January 14, 2007. 2. Time and Efforts. Employee shall diligently and conscientiously devote her time and attention and use her best efforts in the discharge of her duties as Executive Vice-President of the Corporation. 3. Board of Directors. Employee should at all times discharge her duties in consultation with and under the supervision of the Board of Directors of the Corporation. In the performance of her duties, Employee shall make her principal office in such place as the Board of Directors of the Corporation and Employee from time to time agree. 4. Compensation. Corporation shall pay to Employee as compensation for her services a base salary, which shall be paid in equal weekly installments, as follows: Page 1 (a.) For the year beginning January 15, 2004 and ending on January 14, 2005, the base salary shall be $160,000 annually; (b.) For the year beginning January 15, 2005 and ending on January 14, 2006, the base salary shall be $176,000 annually; (c.) For the year beginning January 15, 2006 and ending on January 14, 2007, the base salary shall be $194,000 annually; The employee shall purchase a disability insurance policy so that in the event of a disability exceeding 90 days, during which period employee's salary will continue, the employee will receive lost wages from the disability policy. The Corporation will reimburse the employee for the cost of such insurance. Thereafter, the term of this Employment Agreement shall be automatically renewed and extended for successive one-year periods except that either party may, at least ninety (90) days prior to such expiration date or any anniversary thereof, give written notice to the other party electing that this Employment Agreement not be renewed or extended, in which event this Employment Agreement shall expire as of the expiration date or anniversary date, respectively. In the event of a merger of the Corporation, or upon any change of control, defined as either voting control or control of 25% of the Board of Directors by other than the existing directors, Employee shall have the right to extend and renew this Employment Agreement so that the expiration date will be one year from January 14, 2007. If there is a termination of employment for any reason, either involuntary or voluntary, Employee shall be entitled to receive one year's compensation at the date of termination. The compensation is to be at the greater of current compensation or that at the date of merger or change of control. 5. Bonuses. Bonuses shall be paid at the discretion of the Board of Directors or the President. 6. Expenses. Corporation will reimburse Employee for reasonable and necessary expenses incurred by her in carrying out her Page 2 duties under this Agreement. Employee shall present to the Corporation from time to time an itemized account of such expenses in such form as may be required by the Corporation. 7. Vacation. Employee shall be entitled to take four (4) paid weeks vacation per year. 8. Pension. Employee, at her option, may participate in the 401-k plan of United Mobile Homes, Inc., according to its terms. 9. Life and Health Insurance Benefits. Employee shall be entitled during the term of this Agreement to participate in all health insurance and group life insurance benefit plans providing benefits generally applicable to the employees of United Mobile Homes, Inc. as may be modified from time to time. Plan description is detailed in Exhibit A attached. 10. The Employee shall be provided with a company automobile. 11. Notices. All notices required or permitted to be given under this Agreement shall be given by certified mail, return receipt requested, to the parties at the following addresses or such other addresses as either may designate in writing to the other party: Corporation: MREIC Juniper Business Plaza 3499 Route 9N, Suite 3C Freehold, NJ 07728 Employee: Cynthia J. Morgenstern 317 Ace Dr. Wall. NJ 07719 Page 3 12. Governing Law. This Agreement shall be construed and governed in accordance with the laws the State of New Jersey. 13. Entire Contract. This Agreement constitutes the entire understanding and agreement between the Corporation and Employee with regard to all matters herein. There are no other agreements, conditions or representations, oral or written, express or implied, with regard thereto. This agreement may be amended only in writing signed by both parties hereto. IN WITNESS WHEREOF, Corporation has by its appropriate officers signed and affixed its seal and Employee has signed and sealed this Agreement. MONMOUTH REAL ESTATE INVESTMENT CORPORATION (SEAL) By: /s/ Ernest V. Bencivenga Ernest V. Bencivenga, Treasurer By: /s/ Cynthia J. Morgenstern Cynthia J. Morgenstern, Employee Dated: September 16, 2004 Page 4 EX-14 3 exh14122004.txt EX 14 Ver.1, adopted September 23, 2004 MONMOUTH REAL ESTATE INVESTMENT CORPORATION CODE OF BUSINESS CONDUCT AND ETHICS Purpose and Scope This Code of Business Conduct and Ethics ("Code") is intended to document the principles of conduct and ethics to be followed by the directors, officers and employees of Monmouth Real Estate Investment Corporation (the Company), including its principal executive officer and principal financial officer. Its purpose is to: - Promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; - Promote full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the Company; - Promote compliance with applicable governmental rules and regulations; - Provide guidance to directors, officers and employees to help them recognize and deal with ethical issues; - Provide mechanisms to report unethical conduct; and, - Help foster a culture of honesty and accountability. The Company will expect all its directors, officers and employees to comply at all times with the principles in this Code. A violation of this Code by an employee is grounds for disciplinary action up to and including discharge and possible legal prosecution. Page 1 Fair Dealing Each employee will, at all times, deal fairly with the Company's customers, suppliers, competitors and employees. While we expect our employees to make every effort to advance the interests of the Company, we expect them to do so in a manner that is consistent with the highest standards of integrity and ethical dealing. No employee is to take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of facts, or any other unfair-dealing practice. Employees should not accept gifts or personal favors that could in any way, influence, or appear to influence, business decisions in favor of any organization who whom or with which the Company has, or is likely to have, business dealings. Similarly, employees must not accept any other preferential treatment under these circumstances because their position with the Company might be inclined to, or be perceived to, place them under obligation. The Company is an equal opportunity employer and does not discriminate on the basis of race, color, creed, national origin, religion, sex, sexual orientation, marital status, age or non-disqualifying disability. The Company's commitment to equal opportunity extends to all aspects of the employment relationship, including advertising, recruitment, hiring, compensation, benefits, promotion, transfer, layoffs, termination and discipline The Company is committed to an environment that is free from physical, psychological or verbal harassment based on race, sex, national original, or other protected characteristics. Harassment can assume many forms. For example, the Equal Opportunity Employment Commission has defined sexual harassment to include unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature that alters an employee's work environment or employment status. The Company will not tolerate harassment of its employees. Employees who engage in harassment are subject to discipline and possibly discharge. Page 2 Compliance with Laws, Rules and Regulations Employees are expected at all times to comply in all material respects with all applicable laws, rules and regulations. These laws, rules and regulations may sometimes be ambiguous and difficult to interpret. If there are any questions, employees should seek advice from their supervisor or from the general counsel. Directors, officers and employees are required to comply with the Company's Policy Regarding Non-Public Information, and with all other policies applicable to them that are adopted by the Company from time to time. Senior management must be informed at all times of matters which might adversely affect the reputation of the Company, regardless of the source of such information, including governmental and regulatory agencies. All employees must cooperate fully with the Company's independent auditors, regulators and attorneys. All employees must also cooperate fully with the people responsible for preparing reports filed with the Securities and Exchange Commission and all other materials that are made available to the investing public to make sure those people are aware in a timely manner of all information that might have to be disclosed in those reports or other materials or that might affect the way in which information is disclosed in them. The Company's accounting records are relied upon to produce reports for the Company's management, shareholders, creditors, governmental agencies, and others. All Company accounting records, as well as reports produced from those records, must be kept and presented in accordance with the laws of each applicable jurisdiction, and must accurately and fairly reflect in reasonable detail the Company's assets, liabilities, revenues and expenses. As Company employees, we all have the responsibility to ensure that false or intentionally misleading entries are not made in the Company accounting records. We must not permit intentional Page 3 misclassification of transactions as to accounts or accounting periods. All transactions shall be supported by accurate documentation in reasonable detail, recorded in the proper account and in the proper accounting period. Confidentiality Monmouth Real Estate Investment Corporation is a publicly-held company. As such, we must disclose accurate information about our operations on a timely basis. The Company seeks to minimize the risk that certain investors or employees take unfair advantage by trading while in possession of information not yet released to the public. Directors, officers and employees must maintain the confidentiality of all information entrusted to them by the Company or its customers that is treated by them as confidential, except when disclosure is authorized by the Company or legally mandated. Confidential information includes all information that may be of use to the Company's competitors, or that could be harmful to the Company or its customers, if disclosed. Directors, officers and employees will comply with all confidentiality policies adopted by the Company from time to time, and with confidentiality provisions in agreements to which they or the Company are parties. Securities Trading Section 10 (b) of the Securities Exchange Act of 1934 and the rule 10b-5 of the Act make it unlawful for any person directly or indirectly, in connection with the purchase or sale of any security to (1) employ any device, scheme or trick to defraud, or (2) make any untrue statement of a material fact or to omit to state a material fact in order to make the statements made not misleading, or (3) engage in any act, practice or course of business Page 4 which operates or would operate as a fraud or deceit upon any person. Beyond the requirements of the law, the Company endeavors to preserve a fair marketplace for its shareholders. Insider Trading Insider trading is a serious crime. The offense may occur when, for example, a person trades stock while in possession of material nonpublic information about the Company. Information is "material" if it would affect the average person's decision to buy, sell or hold the stock of the Company. Information is nonpublic if it has not been released to the investing public, or if the investing public has not had sufficient time to absorb the details of the information. If you are aware of material information relating to the Company that has not been publicly disseminated for at least two full business days, you are prohibited from purchasing or selling securities, directly or indirectly, and you are prohibited from disclosing such information to any other person so that they may trade in the stock. Do not trade on the basis of any confidential information whether the information relates to the Company, a customer or any other entity contemplating doing business with or currently doing business with the Company or whether you become aware of the information at your job, or outside of your normal working environment. Designated Insiders Directors and senior officers are considered "designated insiders" and the spouses or other associates of such persons are subject to special trading restrictions. Associates include immediate family members and anyone else living in the same household. "Designated insiders" must pre-clear all trades with the Vice President of the Company. "Designated insiders" include all Directors, the Chairman, President, Vice President and Secretary/Treasurer. Page 5 SEC Reporting Obligations Directors and senior officers are designated as "insiders" for purposes of Section 16 reporting obligations, and any ten percent shareholders are subject to two additional requirements. The first is the "short swing" profit rule. Except for certain exempt transactions, any profit deriving from a purchase and sale (or vice-versa) of the Company's securities of which they are deemed to be the beneficial owner, within a six-month period, must be returned to the Company. Additionally, Section 16(a) of the Securities Exchange Act of 1934 requires that SEC forms (including SEC Form 4) be filed any time there is a change in the beneficial interest in the Company's stock of these designated insiders. As a courtesy to these designated insiders, the Company's Shareholder Relations Department will complete these forms. It is imperative that the Company's Shareholder Relations Department be informed immediately of any change in beneficial interest since SEC Form 4 is required to be filed within two (2) business days of the date of any transaction. Conflicts of Interest Directors, officers and employees must do everything they reasonably can to avoid conflicts of interest or the appearance of conflicts of interest. A "conflict of interest" occurs when an individual's private interest is different from the interests of the Company as a whole. Conflict situations include: (1) When a director, officer or employee, or a member of his or her family, will benefit personally from something the director, officer or employee does or fails to do that is not in the best interests of the Company, (2) When an employee, officer or director takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively, and Page 6 (3) When an employee, officer or director, or a member of his or her family, receives personal benefits from somebody other than the Company as a result of his or her position in the Company. Loans to, or guarantees of obligations of, such persons are of special concern. If a conflict of interest becomes unavoidable, a director or the principal executive officer will promptly report the conflict of interest to the Board, an officer other than the principal executive officer will promptly report the conflict of interest to the principal executive officer and any other employee will promptly report the conflict of interest to his or her supervisor. In each instance the director, officer or employee will work with the person or persons to whom a conflict of interest is reported to devise an arrangement by which (1) that person or those persons (or their designee) will monitor the situation which creates, or gives the appearance of creating, a conflict of interest, (2) the director, officer or employee who has a conflict will, to the fullest extent possible, be kept out of any decisions that might be affected by the conflict of interest, (3) arrangements will be made to ensure that the director, officer or employee will not profit personally from the situation that causes the conflict of interest, and (4) every reasonable effort will be made to eliminate the conflict of interest as promptly as possible. Corporate Opportunities No director, officer or employee will: (1) Take for himself or herself personally any opportunity of which he or she becomes aware, or to which he or she obtains access, through the use of corporate property, information or position; (2) Make it possible for somebody other than the Company to take advantage of an opportunity in any of the Company's areas of business of which the director, officer or employee becomes Page 7 aware in the course of his or her activities on behalf of the Company, unless the Company has expressly decided not to attempt to take advantage of the opportunity; (3) Otherwise use corporate property, information, or position for personal gain; or, (4) Compete with the Company generally or with regard to specific transactions or opportunities. Directors, officers and employees owe a duty to the Company to advance its legitimate interests when the opportunit to do so arises. Protection and Proper Use of Company Assets Directors, officers and employees will in all practicable ways protect the Company's assets and ensure their efficient use. Directors, officers and employees will use the Company's assets only for the Company's legitimate business purposes. Change in or Waiver of the Code Any waiver of any provision of this Code must be approved. With regard to any director or officer, approval must be by the Board of Directors, or if a significant number of its members will be personally affected by the waiver, must be approved by a committee consisting entirely of directors who will not be personally affected by the waiver. With regard to any employee who is not an officer of the Company, by the employee's supervisor or such other person as is designated by the chief executive officer of the Company. Page 8 No waiver of any provision of this Code with regard to a director or officer will be effective until that waiver has been reported to the person responsible for the preparation and filing of the Company's reports on Form 8-K (or any successor to that form) in sufficient detail to enable that person to prepare a report on Form 8-K containing any required disclosure with regard to the waiver. The Company will promptly disclose on Form 8-K, by means of the filing of such form and dissemination by the Internet or by other electronic means, any change in or waiver of the Code. Any waiver of provisions of this Code will be reported in filings with the Securities and Exchange Commission and otherwise reported to the Company's stockholders to the full extent required by the rules of the Securities and Exchange Commission and by any applicable rules of any securities exchange or securities quotation system on which the Company's securities are listed or quoted. Compliance Directors, officers and employees must report promptly any violations of this Code (including any violations of the requirement of compliance with law). Failure to report a violation can lead to disciplinary action against the person who failed to report the violation which may be as severe as the disciplinary action against the person who committed the violation. Normally, a possible violation of this Code by an employee other than an officer of the Company should be reported to the supervisor of the employee who commits the violation. However, any employee may report any possible violation to the general counsel of the Company. A possible violation of this Code by a director or an officer of the Company should be reported to the general counsel of the Company. If an employee believes that in a particular situation it would not be appropriate to report a possible violation by a director or officer to the general counsel, the employee may report the possible Page 9 violation to the principal executive officer of the Company, to the Chairman of the Audit Committee of the Company's Board of Directors, or to any other officer or director of the Company to whom the employee believes it would be appropriate to report the possible violation. The identity of the employee who reports a possible violation of this Code by another employee will be kept confidential, except to the extent the employee who reports the possible violation consents to be identified or the identification of that employee is required by law. Possible violations may be reported orally or in writing and may be reported anonymously. Whistleblower Protection The Company shall not discharge, demote, suspend, threaten, harass, or discriminate against any employee who, in good faith, (A) provides information during an investigation, or (B) files, testifies, participates in, or otherwise assists in a proceeding filed, that relates to a violation of an SEC rule, or any Federal law relating to fraud against shareholders when the information is provided to, or conducted by (i) a Federal regulatory or law enforcement agency, (ii) any member or committee of Congress, or (iii) a person with supervisory authority over the employee or who has the authority to investigate, discover or terminate misconduct. Contact Information Within 30 days of adoption of the Code, management will provide all employees with a memo with the contact information for reporting possible violations of this Code or for reporting any complaints regarding accounting, auditing, and internal control. Terms used in this Code Any reference in this Code to the Company is to Monmouth Real Estate Investment Corporation and all its subsidiaries. Page 10 Any reference in this Code to a director, officer or employee of the Company is to a director, officer or employee of Monmouth Real Estate Investment Corporation and all its subsidiaries. EX-23 4 exh232004.txt EX 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Monmouth Real Estate Investment Corporation: We consent to incorporation by reference in the registration statements on Form S-8 (File No. 333-100805), Form S-3 (File No. 333-103216 and No. 333-113547) and Form S-3D (File No. 333-110737) of Monmouth Real Estate Investment Corporation of our report dated December 3, 2004, relating to the consolidated balance sheets of Monmouth Real Estate Investment Corporation and subsidiary as of September 30, 2004 and 2003 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2004, and the related schedule, which report appears in the September 30, 2004 Annual Report on Form 10-K of Monmouth Real Estate Investment Corporation. /s/ KPMG LLP Short Hills, New Jersey December 10, 2004 EX-31.1 5 exhibit31.txt EX 31.1 Exhibit 31.1 CERTIFICATIONS I, Eugene W. Landy, certify that: 1. I have reviewed this annual report on Form 10-K of Monmouth Real Estate Investment Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 6, 2004 By: /s/ Eugene W. Landy Eugene W. Landy President and Chief Executive Officer EX-31.2 6 exhibit312.txt EX 31.2 Exhibit 31.2 CERTIFICATIONS I, Anna T. Chew, certify that: 1. I have reviewed this annual report on Form 10-K of Monmouth Real Estate Investment Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 6, 2004 By: /s/ Anna T. Chew Anna T. Chew Chief Financial Officer EX-32 7 exhibit32.txt EX 32 Exhibit 32 CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Monmouth Real Estate Investment Corporation (the "Company") for the year ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Eugene W. Landy, as President and Chief Executive Officer of the Company, and Anna T. Chew, as Chief Financial Officer, each hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Eugene W. Landy Name: Eugene W. Landy Title: President and Chief Executive Officer Date: December 6, 2004 By: /s/ Anna T. Chew Name: Anna T. Chew Title: Chief Financial Officer Date: December 6, 2004 EX-99 8 exh99acc12804.txt EX 99 Amended as of September 22, 2004 MONMOUTH REAL ESTATE INVESTMENT CORPORATION AUDIT COMMITTEE CHARTER AS AMENDED SEPTEMBER 22, 2004 I. AUDIT COMMITTEE PURPOSE The Audit Committee is appointed by the Board of Directors to assist the Board in fulfilling its oversight responsibilities. The Audit Committee's primary duties and responsibilities are to: . Monitor the integrity of the Company's financial reporting process and systems of internal controls regarding finance, accounting, risk management and legal and SEC compliance. . Monitor the independence and performance of the Company's independent auditors. . Provide an avenue of communication among the independent auditors, management, and the Board of Directors. The Audit Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities and it has direct access to the independent auditors as well as anyone in the organization. The Audit Committee has the ability to retain, at the Company's expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties. II. AUDIT COMMITTEE COMPOSITION AND MEETINGS Audit Committee members shall meet the requirements of the listing standards of the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC). The Audit Committee shall be comprised of three directors as determined by the Board, each of whom shall be independent nonexecutive directors, free from any relationship that would interfere with the exercise of his or her independent judgment. All members of the Committee shall have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements, and at least one member of the Page 1 Committee shall have accounting or related financial management expertise. Audit Committee members shall be appointed by the Board of Directors upon recommendation by the Chairman. If an audit committee Chair is not designated or present, the members of the Committee may designate a Chair by majority vote of the Committee membership. The Committee shall meet at least two times annually, or more frequently as circumstances dictate. The Audit Committee Chair shall prepare and/or approve an agenda in advance of each meeting. The Committee should meet privately in executive session at least annually with management and the independent auditors and as a committee to discuss any matters that the Committee or each of these groups believe should be discussed. The Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. The Committee or its Chair should communicate with management and the independent auditors quarterly to review the Company's financial statements and significant findings based upon the auditors limited review procedures, as considered necessary. III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES Review Procedures 1. Review and reassess the adequacy of this Charter at least annually. Submit the charter to the Board of Directors for approval and have the document published at least every three years in accordance with SEC regulations. 2. Review the Company's annual audited financial statements prior to filing or distribution. Review should include discussion with management and independent auditors of significant issues regarding accounting principles, practices and judgments. Page 2 3. In consultation with management and the independent auditors, consider the integrity of the Company's financial reporting processes and controls. Discuss significant financial risk exposures and the steps management has taken to monitor, control and report such exposures. Review significant findings prepared by the independent auditors together with management's responses. 4. Review with financial management and the independent auditors, the company's quarterly financial results prior to the release of earnings and/or the company's quarterly financial statements prior to filing or distribution, as considered necessary. Discuss any significant changes to the Company's accounting principles and any items required to be communicated by the independent auditors in accordance with SAS 61 (see item 9). The Chair of the Committee may represent the entire Audit Committee for purposes of this review. Independent Auditors 5. The independent auditors are ultimately accountable to the Audit Committee and the Board of Directors. The Audit Committee shall review the independence, and performance of the auditors and annually recommend to the Board of Directors the appointment of the independent auditors or approve any discharge of auditors when circumstances warrant. 6. Approve the fees and other significant compensation to be paid to the independent auditors. 7. On an annual basis, the Committee should review and discuss with the independent auditors all significant relationships they have with the Company that could impair the auditors' independence. 8. Review the independent auditors audit plan-discuss scope, staffing, locations, reliance upon management and general audit approach, as considered necessary. Page 3 9. Discuss certain matters required to be communicated to audit committees in accordance with AICPA SAS 61. 10. Consider the independent auditors' judgments about the quality and appropriateness of the Company's accounting principles as applied in its financial reporting. Legal Compliance 11. On at least an annual basis, review with the Company's inside counsel, and if necessary, outside counsel, any legal matters that could have a significant impact on the organization's financial statements, the Company's compliance with applicable laws and regulations, inquiries received from regulators or governmental agencies. Other Audit Committee Responsibilities 12. Annually prepare a report to shareholders as required by the Securities and Exchange Commission. The report should be included in the Company's annual proxy statement. 13. Perform any other activities consistent with this Charter, the Company's By-laws and governing law, as the Committee or the Board deems necessary or appropriate. 14. Maintain minutes of meetings and periodically report to the Board of Directors on significant results of the foregoing activities. 15. Establish and maintain the procedures for the treatment of complaints regarding accounting, internal control, auditing, including procedures for the anonymous submission of complaints. 16. Perform an annual self-evaluation of the audit committee. Page 4 -----END PRIVACY-ENHANCED MESSAGE-----