-----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, GUQveVLUha22p29+GfvRlde9beCdJU1LGbDu8ezSaFOzYwpxi+5cseIqO9ZZPI9a 0WkLsyqxyPmlrkTLIOIQjA== 0000892626-98-000090.txt : 19980317 0000892626-98-000090.hdr.sgml : 19980317 ACCESSION NUMBER: 0000892626-98-000090 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANYAN STRATEGIC REALTY TRUST CENTRAL INDEX KEY: 0000790817 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 363375345 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15465 FILM NUMBER: 98566369 BUSINESS ADDRESS: STREET 1: 150 S WACKER DR STE 2900 STREET 2: SUITE 2900 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3125539800 FORMER COMPANY: FORMER CONFORMED NAME: BANYAN STRATEGIC LAND TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VMS STRATEGIC LAND TRUST DATE OF NAME CHANGE: 19910325 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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 December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 0-15465 Banyan Strategic Realty Trust ----------------------------------------------------- (Exact name of Registrant as specified in its charter) Massachusetts 36-3375345 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 South Wacker Drive, Chicago, IL 60606 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (312) 553-9800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Shares of Beneficial Interest (Title of Class) 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 preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ]. NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Shares of beneficial interest outstanding as of February 27, 1998: 13,268,316. The aggregate market value of the Registrant's shares of beneficial interest held by non-affiliates on such date was approximately $79,611,475. DOCUMENTS INCORPORATED BY REFERENCE Exhibit index located on page 52 of sequentially numbered pages. TABLE OF CONTENTS PART I ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 4 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . .11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . .11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .11 ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . .13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . .20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . .39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . .39 PART III ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . . . . . . . . . . . .40 ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . .42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . .51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . .52 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . .54 PART I ITEM 1. BUSINESS GENERAL The Registrant, Banyan Strategic Realty Trust (the "Trust"), is a Massachusetts business trust, organized pursuant to a Declaration of Trust filed March 14, 1986 under the name VMS Strategic Land Trust. The Trust has amended its Declaration of Trust on several occasions including an amendment to change its name to Banyan Strategic Realty Trust in 1993. The Trust now operates under an Amended and Restated Declaration of Trust (the "Declaration"). As of December 31, 1997, the Trust owned, through various subsidiaries or partnerships which it controls, interests in industrial, residential, office and retail real estate assets located throughout the Midwestern and Southeastern portion of the United States. In particular, the Trust's real estate interests include seven flex/industrial complexes aggregating 1,361,100 square feet of gross leasable area, four apartment complexes consisting of a total of 864 units, ten office sites consisting of 1,193,800 square feet of gross leasable area and one retail center which contains 321,800 square feet of gross leasable area. The Trust has elected to be taxed as a real estate investment trust ("REIT") under Internal Revenue Code Sections 856-860 and therefore, does not generally incur a Trust level tax liability so long as 95% of its taxable income is distributed to shareholders and it meets certain asset and income tests as well as other requirements. The Trust has made distributions equal to $0.10 per share for the last thirty consecutive quarters through the quarter ending December 31, 1997. The Trust was originally established to invest primarily in short- term, junior and pre-construction mortgage loans to borrowers which planned to acquire and develop strategically located properties not then utilized at their highest and most profitable use. In early 1990, the Trust, in response to the majority of its borrowers' decisions to cease making payments on their mortgage loans due to their liquidity problems, ceased making new mortgage loans. The trustees established and implemented the Principal Recovery Plan in order to preserve and protect the Trust's assets. Subsequently, the independent trustees authorized management to begin reinvestment of the cash generated by the Principal Recovery Plan. Certain statements in this Annual Report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing forward- looking statements may be found in this section and in the section headed "Management's Discussion and Analysis of Financial Condition and Results of Operations". Without limiting the foregoing, words such as "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. These statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. See "Factors Affecting the Trust's Business Plan" below. The Trust undertakes no obligation to update these forward-looking statements to reflect future events or circumstances. BUSINESS The Trust's current business plan is to acquire additional real estate assets and to manage these new acquisitions as well as its existing portfolio of properties in a manner which will increase the Trust's cash flow and shareholder value. In executing its business plan, the Trust intends to invest its cash and cash equivalents in excess of operating reserves in new real estate assets, to reinvest the proceeds from the sale or refinancing of its existing properties and to raise new capital (debt, equity or both). During the year ended December 31, 1997, the Trust acquired ownership interest in the properties commonly known as the Phoenix Business Park, Butterfield Office Plaza, Country Creek Apartments, Willowpark Apartments, Winchester Run Apartments, Woodrun Village Apartments, Southlake Corporate Center, University Square Business Center, Technology Center and Airways Plaza Office Center, and sold its interests in Hallmark Village Apartments, the H Street Venture and the Colonial Courts of Westland Apartments. See Item 7, "Management's Discussion and Analysis", for further details regarding these acquisition and disposition activities. During this same period, the Trust increased its line of credit with American National Bank (the "Revolving Line") from $20 million to $30 million and extended its maturity until May 1999, raised approximately $10 million through the sale of shares of beneficial interest and obtained a commitment from the purchaser of those shares to provide an unsecured loan to the Trust in the amount of $20 million (the "Unsecured Loan") that, upon shareholder approval, can be converted into preferred shares or common shares of beneficial interest in the Trust. As part of its 1997 Annual Meeting to be held in the Spring of 1998, the Trust plans to solicit proxies from its shareholders to, among other things, authorize the issuance of preferred stock and approve the issuance of shares issuable upon conversion of the aforementioned Unsecured Loan. As of December 31, 1997, the book value of the twenty-two operating properties, net of accumulated depreciation, is $149,311,660. See Item 2, "Properties", for a detailed listing of the Trust's property interests. The Trust expects to fund its future liquidity needs with the cash flow generated by its operating properties, cash proceeds derived from the mortgage financing secured by certain previously unencumbered property interests, draws on its Revolving Line, draws on the Unsecured Loan, interest earned on the Trust's short-term investments and newly raised capital (debt, equity or both). These sources, as well as the Trust's cash and cash equivalents in excess of operating reserves, are expected to be sufficient to meet its reasonably anticipated needs for liquidity and capital resources in the near future and to provide cash proceeds for distributions to shareholders. The Trust plans to continue making additional investments in operating properties utilizing cash proceeds to be provided from the capital sources described above. In the event additional capital cannot be obtained, the Trust's ability to make future real estate acquisitions would be impaired. The other sources of cash described above are expected to provide the Trust with the cash necessary to meet its operating expenses and other general corporate needs and to continue the $0.10 per share quarterly distribution throughout 1998. See "Factors Affecting the Trust's Business Plan" below for a discussion of the factors which may influence the Trust's ability to achieve this plan. OTHER INFORMATION The Trust's business and real estate property operations are not seasonal and compete on the basis of rental rates and property operations with similar types of properties in the vicinities in which the Trust's properties are located. The Trust has no real property investments located outside the United States. The Trust does not segregate revenue or assets by geographic region, since in management's view, such a presentation would not be significant to an understanding of the Trust's business or financial results taken as a whole. The Trust has twenty-one employees, four of whom serve as executive officers. The fifth executive officer is not an employee of the Trust, but provides services to the Trust as an "independent contractor". The Trust reviews and monitors compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of material into the environment, or otherwise relating to the protection of the environment. For the year ended December 31, 1997, the Trust did not incur any material capital expenditures for environmental control facilities nor does it anticipate making any such expenditures for the year ended December 31, 1998. ACQUISITION SUBSEQUENT TO DECEMBER 31, 1997 Peachtree Pointe Office Park On January 20, 1998, the Trust acquired a 100% fee simple ownership interest in five one-story office buildings commonly known as Peachtree Pointe Office Park located in Norcross, Georgia, a northeast suburb of Atlanta, for a purchase price of approximately $4.5 million. The property contains approximately 71,700 net rentable square feet, was constructed in 1982 and was 92% occupied with 23 tenants at the time of acquisition. The Trust funded the acquisition from its cash reserves as well as by utilizing a draw upon its Revolving Line of $3.4 million. ITEM 2. PROPERTIES As of December 31, 1997, the Trust owned interests, directly or indirectly through its wholly owned subsidiaries, in the properties set forth in the table below:
Name and Location Date Property of Property Size Acquired Description (a) Type - ----------------- ---------- ---------- -------------------- ----------- Milwaukee Industrial 235,800 sq. ft. 04/30/93 A 1% General and 84% Properties g.l.a. Limited Partner interest Metropolitan in a joint venture (b)(c) Flex/Industrial Milwaukee, WI Elmhurst Metro Court 140,800 sq. ft. 11/30/93 A 1% General and 84% Elmhurst, IL g.l.a. Limited Partner interest in a joint venture (b)(c) Flex/Industrial Colonial Penn Building 79,200 sq. ft. 03/22/94 Fee ownership of land and Tampa Bay, FL g.l.a. improvements Office Florida Power and 83,100 sq. ft. 03/22/94 Fee ownership of land and Light Building g.l.a. improvements Office Sarasota, FL Willowbrook 84,300 sq. ft. 06/16/95 A 1% General and 84% Industrial Court g.l.a. Limited Partner interest Willowbrook, IL in a joint venture (b)(c) Flex/Industrial Northlake Tower 321,800 sq. ft. 07/28/95 Leasehold interest pursuant Shopping Center g.l.a. to a ground lease and Atlanta, GA ownership of improvements (through a 1% General and 80.9% Limited Partner interest) in a joint venture (b)(d) Retail Quantum Business Center 182,200 sq. ft. 09/26/95 Fee ownership of land and Louisville, KY g.l.a. improvements Flex/Industrial Name and Location Date Property of Property Size Acquired Description (a) Type - ----------------- ---------- ---------- -------------------- ----------- Lexington Business 308,800 sq. ft. 12/05/95 Fee ownership of land and Center g.l.a. improvements Flex/Industrial Lexington, KY Newtown Distribution 87,100 sq. ft. 12/05/95 Fee ownership of land and Center g.l.a. improvements Flex/Industrial Lexington, KY Woodcrest Office Park 265,900 sq. ft. 12/19/95 A 1% General and 84% Tallahassee, FL g.l.a. Limited Partner interest in a joint venture (b)(e) Office Midwest Office Center 77,000 sq. ft. 4/18/96 A 1% General and 84% Oakbrook Terrace, IL g.l.a. Limited Partner interest in a joint venture (b) Office 6901 Riverport Drive 322,100 sq. ft. 11/19/96 Leasehold interest pursuant Louisville, KY g.l.a. to bond financing and ownership of improvements Flex/Industrial Phoenix Business Park 110,600 sq. ft. 01/15/97 Fee ownership of land and Atlanta, GA g.l.a. improvements Office Butterfield Office Plaza 200,800 sq. ft. 04/30/97 Fee ownership of land and Oak Brook, IL g.l.a. improvements Office Woodrun Village Apartments 192 Units 05/22/97 Fee ownership of land and Yukon, OK improvements Residential Country Creek Apartments 320 Units 05/22/97 Fee ownership of land and Oklahoma City, OK improvements Residential Willowpark Apartments 160 Units 05/22/97 Fee ownership of land and Lawton, OK improvements Residential Winchester Run Apartments 192 Units 05/22/97 Fee ownership of land and Oklahoma City, OK improvements Residential Name and Location Date Property of Property Size Acquired Description (a) Type - ----------------- ---------- ---------- -------------------- ----------- Southlake Corporate Center 56,200 sq. ft. 07/30/97 Fee ownership of land and Morrow, GA g.l.a. improvements Office University Square Business Center 184,700 sq. ft. 08/26/97 Fee ownership of land and Huntsville, AL g.l.a. improvements Office Technology Center 48,500 sq. ft. 08/26/97 Leasehold interest pursuant Huntsville, AL g.l.a. to a ground lease and ownership of improvements Office Airways Plaza Office Center 87,800 sq. ft. 12/10/97 Fee ownership of land and Memphis, TN g.l.a. improvements Office - --------------- (a) Reference is made to Note 5 "Investment in Real Estate", of Notes to Consolidated Financial Statements filed with this annual report for additional description of these real property investments. (b) In all of its partnerships, the Trust is the managing general partner and retains sole authority over all significant decisions. (c) Pursuant to the partnership agreement, prior to distributing cash flow from operations, the Trust's 84% and 1% partnership interests are paid an annual 12% preferred return on their respective net capital contributed to the partnership. The joint venture partner then receives an 11% preferred return on the joint venture partner's net capital contributed, after which cash flow from operations is distributed pro-rata based on each partner's respective ownership interest. Cash proceeds from either the sale or refinancing of the partnership properties will be used (i) to pay any unpaid preferred returns first to the Trust, and then to the joint venture partner; (ii) to return net capital contributed pro-rata to the Trust and the joint venture partner; (iii) to pay up to a $1,200,000 preference to the Trust (which may be reduced by the application of prior cash flow payments but not below $700,000) and subsequently a $300,000 preference to the joint venture partner; and (iv) to distribute 65% of the remaining cash to the Trust and the balance to the joint venture partner. (d) Pursuant to the partnership agreement, prior to distributing cash flow from operations, the Trust's 80.9% and 1% partnership interests are paid an annual 12% preferred return on their respective net capital contributed to the partnership. Thereafter, the Trust's joint venture partner receives a 12% preferred return on its net capital contributed. Thereafter, cash flow from operations is distributed pro-rata based on each partner's respective ownership interest. Cash proceeds from either the sale or refinancing of the partnership property will be used (i) to pay any of the Trust's unpaid preferred returns; (ii) to return net capital contributed by all partners; (iii) to pay any of the venture partner's unpaid preferred returns and (iv) to distribute the remaining cash based on ownership interests until the Trust has received an overall return of 15% on its invested capital. Thereafter, the Trust will receive 71.9% of the excess cash and the balance will be paid to the joint venture partner. (e) Pursuant to the partnership agreement, prior to distributing cash flow from operations, the Trust's 84% and 1% partnership interest are paid an annual 12% preferred return on the average unreturned Initial Capital Contribution to the partnership. Thereafter, the Trust's joint venture partner receives a 12% preferred return on his average unreturned Initial Capital Contribution to the Partnership. Thereafter, cash flow from operations is distributed pro-rata based on each partner's respective ownership interest. Cash proceeds from either the sale or refinancing of the partnership properties will be used (i) to pay any of the Trust's unpaid preferred returns; (ii) to return net capital contributed by the Trust; (iii) to pay any amounts necessary for the Trust to have received a 15% cumulative return on its net total average unreturned capital contributed; (iv) to pay the joint venture partner's unpaid preferred returns; (v) to return the joint venture partner's net capital contributed; and (vi) the remaining cash will be distributed pro-rata based on each partner's ownership interest.
The following is a list of occupancy levels as of the end of each quarter for 1997 and 1996 at each of the Trust's operating properties:
1996 1997 ------------------------------- ------------------------------- at at at at at at at at 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 ----- ---- ---- ----- ---- ---- ----- ----- FLEX/INDUSTRIAL - --------------- Milwaukee Industrial Properties Metro Milwaukee, WI . . . . . . . . 98% 100% 100% 100% 100% 93% 87% 87% Elmhurst Metro Court Elmhurst, IL. . . . . . . . . . . . 92% 92% 86% 92% 96% 96% 90% 93% Willowbrook Industrial Court Willowbrook, IL . . . . . . . . . . 77% 100% 90% 93% 100% 100% 100% 100% Quantum Business Center Louisville, KY. . . . . . . . . . . 92% 93% 94% 93% 90% 82% 91% 91% 6901 Riverport Drive Louisville, KY. . . . . . . . . . . N/A N/A N/A 100% 100% 100% 100% 100% Lexington Business Center Lexington, KY . . . . . . . . . . . 80% 80% 91% 95% 95% 95% 95% 93% Newtown Distribution Center Lexington, KY . . . . . . . . . . . 95% 97% 97% 89% 85% 85% 85% 92% OFFICE - ------ Colonial Penn Bldg. Tampa Bay, FL . . . . . . . . . . . 100% 100% 100% 100% 100% 100% 100% 100% Florida Power & Light Building Sarasota, FL. . . . . . . . . . . . 93% 93% 98% 98% 98% 98% 99% 100% Woodcrest Office Park Tallahassee, FL . . . . . . . . . . 93% 94% 91% 95% 94% 94% 93% 92% Midwest Office Center Oakbrook Terrace, IL. . . . . . . . N/A 96% 97% 96% 94% 96% 96% 96% 1996 1997 ------------------------------- ------------------------------- at at at at at at at at 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 ----- ---- ---- ----- ---- ---- ----- ----- Phoenix Business Park Atlanta, GA . . . . . . . . . . . . N/A N/A N/A N/A 99% 100% 100% 92% Butterfield Office Plaza Oak Brook, IL . . . . . . . . . . . N/A N/A N/A N/A N/A 94% 93% 97% Southlake Corporate Center Morrow, GA. . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A 100% 96% University Square Business Center Huntsville, AL. . . . . . . . . . . N/A N/A N/A N/A N/A N/A 90% 92% Technology Center Huntsville, AL. . . . . . . . . . . N/A N/A N/A N/A N/A N/A 100% 100% Airways Plaza Office Center Memphis, TN . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A N/A 100% RETAIL - ------ Northlake Tower Shopping Center Atlanta, GA . . . . . . . . . . . . 98% 98% 98% 98% 99% 99% 99% 99% RESIDENTIAL - ----------- Country Creek Apartments Oklahoma City, OK . . . . . . . . . N/A N/A N/A N/A N/A 90% 99% 96% Willowpark Apartments Lawton, OK. . . . . . . . . . . . . N/A N/A N/A N/A N/A 87% 98% 93% Winchester Run Apartments Oklahoma City, OK . . . . . . . . . N/A N/A N/A N/A N/A 89% 99% 97% Woodrun Village Apartments Yukon, OK . . . . . . . . . . . . . N/A N/A N/A N/A N/A 97% 99% 98% 1996 1997 ------------------------------- ------------------------------- at at at at at at at at 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 ----- ---- ---- ----- ---- ---- ----- ----- PROPERTIES SOLD - --------------- Colonial Courts of Westland Apartments Columbus, OH. . . . . . . . . . . . 95% 94% 92% 95% 93% 94% N/A N/A Hallmark Village Apartments Clarksville, IN . . . . . . . . . . 82% 82% 84% 82% N/A N/A N/A N/A Victor Building, Office Building Washington, D.C.. . . . . . . . . . 53% 51% 52% 64% 67% 67% N/A N/A A "N/A" indicates that the property was not owned by the Trust at the end of the quarter. The occupancy levels are based on the total number of units for the apartment complexes and the gross leasable area occupied at each office, industrial and retail property space as of the end of each quarter. Historically, occupancy levels generally do not fluctuate significantly during the quarter.
ITEM 3. LEGAL PROCEEDINGS The Trust is not aware of any material pending legal proceedings as of February 27, 1998, nor were any proceedings terminated during the quarter ended December 31, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Trust did not submit any matter to a vote of its shareholders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS The Trust's shares are included for quotation on the NASDAQ National Market (symbol - VLANS changed to BSRTS on March 2, 1998). The table below shows the quarterly high and low bid prices reported by NASDAQ and the amount of cash distributions paid per share for the years ended December 31, 1997 and 1996: 1997 ---- Quarter Share Per Share Declaration Ended Price Distributions Date - ------- ----- ------------- ----------- 3/31 High $5.00 $0.10 4/8/97 Low $3.75 6/30 High $4.62 $0.10 7/3/97 Low $3.62 9/30 High $5.50 $0.10 10/7/97 Low $4.00 12/31 High $6.87 $0.10 1/7/98 Low $5.06 1996 ---- Quarter Share Per Share Declaration Ended Price Distributions Date - ------- ----- ------------- ----------- 3/31 High $4.875 $0.10 4/8/96 Low $3.750 6/30 High $4.500 $0.10 7/9/96 Low $3.938 9/30 High $4.625 $0.10 10/4/96 Low $4.000 12/31 High $5.000 $0.10 1/9/97 Low $3.875 On January 7, 1998, the Trust declared a cash distribution for the quarter ended December 31, 1997 of $0.10 per share payable February 20, 1998 to shareholders of record on January 22, 1998. During 1997 and 1996, the Trust paid distributions equal to $0.40 per share. A total of $0.38 and $0.13, respectively, of the distributions paid represented a return of capital. The Trust's ability to make future distributions to its shareholders is dependent upon, among other things: (i) sustaining the operating performance of its existing real estate investments through scheduled increases in base rents under existing leases and through general improvement in the real estate markets where the Trust's properties are located reflected in changes in base rents attributable to new or replacement leases; (ii) the operating performance of future acquisitions and (iii) the Trust's level of operating expenses. As of February 27, 1998, there were 3,808 record holders of shares of beneficial interest. SHARE PURCHASE AGREEMENT AND CONVERTIBLE TERM LOAN AGREEMENT On October 14, 1997, the Trust entered into a Share Purchase Agreement (the "Agreement") with a group of accredited investors (as defined in Section 501 of Regulation D) (the "Purchasers") under which the Trust sold 2,192,501 shares of beneficial interest at $5.00 per share, for an aggregate sale price of approximately $11 million. The shares were issued to the Purchasers in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. The agent representing the Purchasers has a pre-existing relationship with members of the Trust's management. The Trust paid $0.6 million of commission to Leveraged Equity Management, $0.5 million to Josephthal Lyon and Ross Incorporated for financial advisory and other services rendered in connection with the transaction and $0.3 million of other costs in connection with the transaction. None of these costs were paid to officers or affiliates of the Trust. The net sales proceeds were used to repay draws totaling $9.0 million on the Trust's Revolving Line, with the remainder used for general working capital. Amounts repaid under the Revolving Line may be re- borrowed until May 31, 1998 and utilized to acquire additional real estate property interests. Simultaneously with the execution of the Agreement, the Trust also entered into a Convertible Term Loan Agreement ("the Loan Agreement") with the Purchasers. Under this agreement, the Purchasers agreed to provide an unsecured convertible loan to the Trust in the amount of $20,000,000 (the "Unsecured Loan") of which $10,000,000 must be borrowed by March 31, 1998 and the remainder by October 14, 1998. As of December 31, 1997, the Trust had not borrowed any amounts under the loan. Loan proceeds may be used by the Trust only to purchase real estate property interests. The Loan Agreement contains a number of covenants and limitations customary for agreements of this nature including covenants related to net worth and debt coverage. Interest is payable quarterly on the last day of the calendar quarter, at 12% per annum. Draws on the loan mature on September 30, 2002 with no prepayment of the loan permitted prior to September 30, 1999, although the Purchasers may accelerate maturity upon the sale of substantially all of the assets of the Trust. Assuming shareholder approval, the Purchasers may convert all or part of the amounts funded on the Unsecured Loan into preferred stock at a conversion price of $100 per share or into common shares at a conversion price of $5.15 per share. Preferred shares are convertible to common shares at the rate of approximately 19.4 common shares for each share of preferred stock, a price equal to $5.15 per share. The convertible preferred shares will be entitled to receive, upon declaration by the Trust, cash distributions at an annual rate of 10% per annum calculated on their stated value of $100 per share. Distributions on preferred shares will be cumulative from the date of issuance whether or not there are funds legally available for the payment thereof and must be paid prior to paying any distributions to the holders of common shares. Finally, for thirty days after expiration of the loan commitment, the Purchasers may purchase preferred shares to the extent that any part of the $20,000,000 loan is not then outstanding in an amount equal to the unfunded portion at a price equal to $100 per preferred share. Prior to shareholder approval, the Purchasers may also convert loans outstanding to common shares at any time, if that conversion will not cause total shareholdings of the Purchasers to exceed 19.9% of the issued and outstanding shares as of October 14, 1997. ITEM 6. SELECTED FINANCIAL DATA (1)
For the Years Ended December 31, 1997 1996 1995 1994 1993 ------------- ------------- ----------- ------------ ------------ OPERATING DATA Revenues. . . . . . . . . $ 28,784,900 $21,404,318 $12,902,369 $8,833,801 $4,127,149 Net Income (Loss) . . . . 3,546,282 (1,757,260) 2,600,045 (912,492) (617,272) Earnings Per Share of Beneficial Interest - Basic and Diluted: Income (Loss) before Net Non-Recurring Gains and Extraordinary Item . . $ 0.24 $ (0.17) $ 0.21 $ (0.09) $ (0.06) ============ =========== =========== ========== ========== Net Income (Loss) . . . $ 0.32 $ (0.17) $ 0.25 $ (0.09) $ (0.06) ============ =========== =========== ========== ========== For the Years Ended December 31, 1997 1996 1995 1994 1993 ------------- ------------- ----------- ------------ ------------ BALANCE SHEET DATA (at year end) Mortgage Loans Receivable, Net (3) . . $ -- $ -- $ 5,433,094 $ 5,136,229 $ 4,891,462 Investment in Real Estate, Net . . . . . . 149,385,842 102,489,727 87,862,970 40,161,412 21,769,471 Investment in Real Estate Ventures . . . . -- 5,713,759 8,895,678 10,697,791 13,668,332 Total Assets. . . . . . . 159,633,628 116,534,205 110,764,772 74,084,351 69,360,043 Mortgage Loans and Bonds Payable . . . . . 92,117,777 59,081,023 49,022,181 13,400,695 3,986,373 Shareholders' Equity. . . . . . . . . 62,315,210 50,934,438 56,875,404 58,440,712 63,541,645 OTHER DATA Funds From Operations (4) . . . . . . . . . . $ 5,843,472 $ 3,689,010 $ 3,333,940 $ 2,846,530 $ 792,692 Cash Flows From: Operating Activities. . 8,135,152 5,401,784 2,847,228 3,373,522 2,194,055 Investing Activities. . (27,066,123) (6,269,271) (31,690,611) (6,548,238) (2,070,065) Financing Activities. . 19,554,299 (827,468) 19,574,428 4,437,942 (1,442,522) Real Estate Net Operating Income (5). . 14,339,311 9,497,917 5,360,807 4,087,680 1,125,220 Number of Property Interests Owned . . . . 22 15 13 8 6 Weighted Average Number of Shares. . . . 11,149,982 10,478,410 10,474,079 10,471,102 10,518,047 Cash Distribution Per Share of Beneficial Interest (6) . . . . . $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 - ------------ (1) The above selected financial data should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this annual report. (2) Net Non-recurring gains include gain on disposition of investment in real estate, loss on disposition of investment in real estate venture and gain on disposition of partnership interest. (3) Represents the carrying amount of the mortgage loans, which is equal to the face amount of the loans plus unamortized loan fees, net of loan discounts of $1,436,587, $1,808,716 and $2,116,636 for 1995, 1994 and 1993, respectively. See Note 2, Mortgage Loans Receivable, of Notes to Consolidated Financial Statements for further details. (4) Due to certain unique operating characteristics of real estate companies, The National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a standard known as "Funds from Operations", or "FFO" for short, which it believes more accurately reflects the operating property performance of a REIT such as the Trust. As defined by NAREIT, FFO means net income computed in accordance with generally accepted accounting principles, less extraordinary, unusual and nonrecurring items, excluding gains (or losses) from debt restructuring and sales of property plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures in which the REIT holds an interest. The calculation of FFO may vary from entity to entity in that capitalization and expense policies may vary from entity to entity. Items which are capitalized do not decrease FFO whereas items that are expensed decrease FFO. As such, the presentation of FFO by the Trust may not be comparable to other similarly titled measures presented by other REIT's. FFO is not intended to be an alternative to Net Income as an indication of the Trust's performance nor to Cash Flows from Operating Activities (as determined by GAAP) as a measure of the Trust's capacity to pay distributions. However, a REIT's distributions can be analyzed in comparison to FFO in a similar manner as a company that is not a REIT would compare its distributions to net operating income. Calculation of Funds from Operations for the years ended December 31, 1997, 1996, 1995, 1994 and 1993:
1997 1996 1995 1994 1993 ---------- ----------- ---------- ---------- --------- Net Income (Loss). . . . . . . . . . . $3,546,282 $(1,757,260) $2,600,045 $ (912,492) $(617,272) Plus: Depreciation and Amortization Expense . . . . . . . . 3,500,591 2,483,534 1,385,374 945,692 267,061 Less: Minority Interest Share of Depreciation and Amortization Expense . . . . . . . . (274,642) (240,695) (115,231) (44,444) (19,025) Less: Recovery of Losses on Loans, Notes and Interest Receivable. . . . . . . . . (161,539) (16,569) (164,958) (57,226) (57,072) Franchise Tax Fee Accrued. . . . . . . 50,000 40,000 38,000 -- -- Valuation Allowance Included in Operations of Real Estate Venture. . . . . . . . . -- 3,180,000 -- 2,915,000 1,219,000 Net Gain on Disposition of Investment in Real Estate, Disposition of Investment in Real Estate Venture and Disposition of Partnership Interest . . . . . . . . (881,375) -- (409,290) -- -- Extraordinary Item, Net of Minority Interest . . . . . . 64,155 -- -- -- -- ---------- ----------- ---------- ---------- --------- Funds From Operations. . . . . . . . . $5,843,472 $ 3,689,010 $3,333,940 $2,846,530 $ 792,692 ========== =========== ========== ========== ========= (5) Real estate net operating income ("RENOI") is defined as total revenue excluding income on investments less operating property expenses, repairs and maintenance, real estate taxes, ground lease expense and depreciation and amortization. (6) Based on 11,149,982 weighted average shares outstanding for 1997, 10,478,410 weighted average shares outstanding for 1996, 10,474,079 weighted average shares outstanding for 1995, 10,471,102 weighted average shares outstanding for 1994, and 10,518,047 weighted average shares outstanding for 1993.
QUARTERLY RESULTS OF OPERATIONS The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996.
1997 For the three months ended: ----------------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ------------ ------------ ------------ Total Revenue $ 5,893,886 $ 6,746,542 $ 7,875,130 $ 8,269,342 Recovery of Losses on Loans, Notes and Interest Receivable -- -- -- 161,539 Operating Expenses (5,352,505) (6,183,169) (7,051,112) (7,077,394) ----------- ----------- ----------- ----------- Operating Income 541,381 563,373 824,018 1,353,487 Minority Interest in Consolidated Partnerships (166,743) (144,983) (151,747) (126,850) Income (Loss) of Real Estate Ventures 30,363 20,419 (13,656) -- ----------- ----------- ----------- ----------- Income before Net Non-Recurring Gains and Extraordinary Item 405,001 438,809 658,615 1,226,637 Net Gain (Loss) on Disposition of Investment in Real Estate, Disposition of Investment in Real Estate Venture and Disposition of Partnership Interest 3,788 -- 1,071,858 (194,271) Extraordinary Item, Net of Minority Interest -- -- -- (64,155) ----------- ----------- ----------- ----------- Net Income $ 408,789 $ 438,809 $ 1,730,473 $ 968,211 =========== =========== =========== =========== 1997 For the three months ended: ----------------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ------------ ------------ ------------ Earnings Per Share of Beneficial Interest - Basic and Diluted: Income before Net Non-Recurring Gains and Extraordinary Item $ 0.04 $ 0.04 $ 0.06 $ 0.09 =========== =========== =========== =========== Net Income $ 0.04 $ 0.04 $ 0.16 $ 0.08 =========== =========== =========== =========== 1996 For the three months ended: ----------------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ------------ ------------ ------------ Total Revenue $ 5,176,653 $ 5,440,777 $ 5,284,942 $ 5,501,946 Recovery of Losses on Loans, Notes and Interest Receivable -- -- 14,059 2,510 Operating Expenses (4,572,252) (4,783,524) (4,829,093) (5,210,655) ----------- ----------- ----------- ----------- Operating Income 604,401 657,253 469,908 293,801 Minority Interest in Consolidated Partnerships (102,553) (117,934) (128,903) (132,021) Income (Loss) of Real Estate Ventures (38,307) (58,707) 19,649 (3,223,847) ----------- ----------- ----------- ----------- Net Income (Loss) (1) $ 463,541 $ 480,612 $ 360,654 $(3,062,067) =========== =========== =========== =========== 1996 For the three months ended: ----------------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ------------ ------------ ------------ Earnings Per Share of Beneficial Interest - Basic and Diluted $ 0.04 $ 0.05 $ 0.03 $ (0.29) =========== =========== =========== =========== (1) Net Income for each of the three months ended March 31, 1996, June 30, 1996 and September 30, 1996 has been reduced by $162,500 or $0.016 per share, and net income for the three months ended December 31, 1996 has been increased by $487,500 or $0.047 per share, from the amounts originally reported as a result of changes in the timing for recognizing certain incentive compensation expense. In the fourth quarter of 1996, the Trust recorded incentive compensation expense in the amount of $650,000 which was the cumulative amount earned as of December 31, 1996 by its president pursuant to his employment agreement with the Trust. Under the employment agreement, incentive compensation was earned based on appreciation in the Trust's properties (measured by comparing current market value to the Trust's acquisition cost) during the period January 1, 1993 through August 31, 1997. Prior to 1996, no expense was recorded related to this aspect of his contract because many properties in the portfolio at that time had been recently acquired. Thus, the Trust had no reason to believe that these properties had appreciated in any material amount. During 1996, management believes that certain of the properties in the Trust's portfolio began to increase in value due to improvements in operations, reductions in interest rates and other improvements in general economic conditions, necessitating the accrual of expense. Therefore, although the above cumulative incentive amount was recorded in the fourth quarter of 1996, the Trust retrospectively determined that the composition of the Trust's portfolio throughout the year required that the expense be measured and recorded in earlier quarters of 1996. This adjustment had no effect on net income for the year ended December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Certain statements in this Annual Report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing forward- looking statements may be found in this section and in the section headed "Business." Without limiting the foregoing, words such as "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. These statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. See also "Factors Affecting the Trust's Business Plan" below. The Trust undertakes no obligation to update these forward-looking statements to reflect future events or circumstances. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents consist of cash and short-term investments. The Trust's cash and cash equivalents balance at December 31, 1997 and 1996 was $4,428,588 and $3,805,260, respectively. The increase in total cash and cash equivalents of $623,328 is due to $8,135,152 generated from operating activities and $19,554,299 of cash obtained by financing activities, which exceeds the $27,066,123 used in investing activities. Cash Flows From Operating Activities: Net cash provided by operating activities increased by approximately $2.7 million for the year ended December 31, 1997 to approximately $8.1 million from approximately $5.4 million for the same period in 1996. This increase is primarily due to the net operating income generated by the properties acquired in 1997 and 1996. See Results of Operations below for further discussion of the operations of the Trust's real estate assets. Cash Flows From Investing Activities: During the year ended December 31, 1997, the Trust utilized approximately $27.1 million in investing activities compared to utilizing approximately $6.3 million in investing activities for the same period in 1996. Cash flow was utilized during the year ended December 31, 1997 to acquire the Phoenix Business Park property in January 1997, the Butterfield Office Plaza in April 1997, the four Oklahoma apartment complexes in May 1997, the Southlake Corporate Center in July 1997, the University Square Business Center and Technology Center in August 1997, and Airways Plaza in December 1997 for an aggregate use of cash from investing activities of approximately $37.5 million. In addition, The Trust used cash to make capital improvements at its various properties in the amount of approximately $2.5 million during 1997. These outflows of cash were partially offset by approximately $6.1 million in proceeds received from the March 11, 1997 sale of the Trust's interest in the Hallmark Village property, approximately $5.5 million received from the sale of the H Street Assemblage land parcel and the Victor Building during the second and third quarters of 1997 and approximately $0.9 million received from the September 25, 1997 sale of its partnership interest in the Colonial Courts Apartments. See Property Acquisitions and Other Information for further information regarding the assets purchased during 1997. During the year ended December 31, 1996, the Trust acquired the Midwest Office Center and 6901 Riverport Drive properties for approximately $9.3 million, made capital improvements of approximately $2.0 million and paid approximately $0.3 million of liabilities assumed at the acquisition of various real estate assets. These outflows of cash for the year ended December 31, 1996 were offset by the receipt of approximately $5.4 million as a result of the sale of the Trust's interest in the Karfad Loan Portfolio. Cash Flows From Financing Activities: For the year ended December 31, 1997, the Trust generated cash flows from financing activities of approximately $19.6 million compared to utilizing approximately $0.8 million for the year ended December 31, 1996. The cash flow provided by financing activities for the year ended December 31, 1997 was primarily due to the receipt of approximately $10.0 million of net proceeds from issuance of shares (see "Share Purchase Agreement and Convertible Term Loan Agreement" in Part II, Item 5, Market for the Registrant's Shares and Related Shareholder Matters) and approximately $64.5 million of proceeds from mortgage loans, which represents draws upon the Trust's line of credit with American National Bank (the "Revolving Line") primarily used to purchase the Phoenix Business Park property, the Butterfield Office Plaza, the Oklahoma Apartment Portfolio, Southlake Corporate Center, University Square Business Center, Technology Center and Airways Plaza for approximately $36.9 million, financing of Butterfield Office Plaza pursuant to a $10.0 million first mortgage loan collateralized by the property and refinancing of Northlake Tower pursuant to $17.6 million first mortgage loan collaterized by a leasehold interest in property. Partially offsetting these sources was the payment of principal on bonds and mortgage loans in the amount of approximately $47.5 million, $36.2 million of which represents payments against the Trust's Revolving Line as follows: (i) $5.7 million as a result of the sales proceeds received from the Hallmark property sale in March 1997; (ii) $5.5 million as a result of the H Street Assemblage property sales proceeds received in March and July 1997; (iii) $9.9 million as a result of the Butterfield Office Plaza financing; (iv) $9.0 million as a result of proceeds from issuance of shares; (v) $6.1 million as a result of Northlake refinancing; and the balance representing a repayment of first mortgage on Northlake Tower in the amount of $10.4 million and scheduled principal payments related to other bonds and mortgage loans in the amount of $1.0 million. As a result of the above transactions, the amount available on the Revolving Line was $20.9 million at December 31, 1997. In addition, the Trust paid distributions aggregating approximately $4.5 million, paid approximately $1.2 million of deferred financing costs and paid distributions to minority partners of approximately $1.7 million. The cash flows used for financing activities for the year ended December 31, 1996 was primarily used for principal payments on mortgage loans and bonds payable aggregating approximately $11.6 million, $10.9 million of which represents a paydown of the Trust's Revolving Line and approximately $0.7 million of which represents principal payments on additional mortgage loans and bonds payable. In addition, the Trust paid approximately $0.6 million of deferred financing costs, distributions to shareholders of approximately $4.2 million and distributions to minority partners of approximately $0.4 million. Partially offsetting these uses was the receipt of approximately $15.9 million of proceeds from mortgage loans payable, approximately $7.3 million of which consisted of proceeds from a first mortgage loan secured by the Woodcrest property, approximately $3.3 million of which consisted of proceeds from a first mortgage loan secured by the Midwest Office property and the balance of which was drawn on the Trust's Revolving Line. During the year ended December 31, 1996, the Trust also executed a first mortgage loan secured by the Florida Power and Light building in the amount of $6.2 million and utilized the proceeds from the loan to reduce its borrowing on the Trust's Revolving Line. LINE OF CREDIT On December 13, 1994, the Trust executed a Revolving Line of Credit with American National Bank of Chicago ("ANB") in the amount of $15 million. The Revolving Line has been amended several times. Under the latest amendment dated April 19, 1997, the Trust was permitted to borrow up to $30 million under a revolving facility through November 30, 1997 with a maturity of all unpaid balances by November 30, 1998. On November 13, 1997, the Trust exercised its option to extend both the revolving facility and the maturity of the loan for an additional six months until May 31, 1998 and May 31, 1999, respectively. On May 31, 1998, the Revolving Line will convert to a one year, interest only, term loan due May 31, 1999. The Trust is presently involved in negotiations to continue a revolving facility beyond May 31, 1998. There can be no assurance that the loan will be extended on terms acceptable to the Trust, if at all. During the term of the Revolving Line, the Trust must pay interest only at a rate of LIBOR plus 2.25% or Prime plus .25% at the election of the Trust. As of December 31, 1997, the LIBOR based rate paid by the Trust was 7.9% and the Prime rate was 8.75%. In addition, the Trust is required to pay the Bank an unused facility fee of .5% per annum multiplied by the average portion of the Revolving Line that is undrawn from time to time. As of December 31, 1997, the Trust had an outstanding balance of $9.1 million of the $30 million available under the Revolving Line. The Trust's objective is to provide cash distributions to its shareholders from cash generated from the Trust's operations. Cash generated from operations is not equivalent to the Trust's net operating income as determined under generally accepted accounting principles. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a standard known as "Funds from Operations", or "FFO" for short, which it believes more accurately reflects the operating property performance of a REIT such as the Trust. As defined by NAREIT, FFO means net income computed in accordance with generally accepted accounting principles, less extraordinary, unusual and nonrecurring items, excluding gains (or losses) from debt restructuring and sales of property plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures in which the REIT holds an interest. The calculation of FFO may vary from entity to entity in that capitalization and expense policies may vary from entity to entity. Items which are capitalized do not decrease FFO whereas items that are expensed decrease FFO. As such, the presentation of FFO by the Trust may not be comparable to other similarly titled measures presented by other REIT's. FFO is not intended to be an alternative to Net Income as an indication of the Trust's performance nor to Cash Flows from Operating Activities (as determined by GAAP) as a measure of the Trust's capacity to pay distributions. However, a REIT's distributions can be analyzed in comparison to FFO in a similar manner as a company that is not a REIT would compare its distributions to net operating income. For the years ended December 31, 1997, 1996 and 1995, the Trust's operations generated FFO of $5.8 million, $3.7 million and $3.3 million, respectively. FFO increased for the year ended December 31, 1997 as compared to the years ended December 31, 1996 and 1995 as a result of the Trust's 1995, 1996 and 1997 property acquisitions. FFO for the years ended December 31, 1997, 1996, and 1995 is calculated as follows: 1997 1996 1995 ------------ ----------- ----------- Net Income (Loss) $ 3,546,282 $ (1,757,260) $ 2,600,045 Plus: Depreciation expense 3,276,991 2,355,360 1,300,205 Depreciation included in Operations of Real Estate Ventures 15,238 30,475 50,382 Lease Commission Amortization 208,362 97,699 34,787 1997 1996 1995 ------------ ----------- ----------- Less: Minority Interest Share of Depreci- ation Expense (253,749) (228,011) (110,813) Minority Interest Share of Lease Commission Amortization (20,893) (12,684) (4,418) Recovery of Losses on Loans, Notes and Interest Receivable (161,539) (16,569) (164,958) Franchise Tax Fees Accrued 50,000 40,000 38,000 Valuation Allowance Included in Operations of Real Estate Venture -- 3,180,000 -- Net Gain on Disposition of Investment in Real Estate, Disposition of Investment in Real Estate Venture and Disposition of Partnership Interest (881,375) -- (409,290) Extraordinary Item, Net of Minority Interest 64,155 -- -- ------------ ------------ ------------ Funds From Operations $ 5,843,472 $ 3,689,010 $ 3,333,940 ============ ============ ============ Cash Flows Provided By (Used For): Operating Activities $ 8,135,152 $ 5,401,784 $ 2,847,228 Investing Activities $(27,066,123) $ (6,269,271) $(31,690,611) Financing Activities $ 19,554,299 $ (827,468) $ 19,574,428 The Trust expects to fund its future liquidity needs with the cash flow obtained from its operating properties, cash proceeds derived from mortgage financing either on a long term basis or utilizing the Revolving Line, (currently secured by the Trust's Colonial Penn, Phoenix Business Park, Lexington, Newtown, Southlake and Technology Center properties), if continued beyond May 31, 1998, cash proceeds from the Trust's Unsecured Loan and interest earned on the Trust's short-term investments. The Trust believes that these sources, as well as the Trust's cash and cash equivalents, are sufficient to meet the Trust's reasonably anticipated needs for liquidity and capital resources in the near future and to provide cash proceeds for distributions to shareholders. IMPACT OF YEAR 2000 In the year 2000, many existing computer programs that use only two digits (rather than four) to identify a year in the date field could fail or create erroneous results if not corrected. This computer program flaw is expected to affect virtually all companies and organizations. The Trust cannot quantify the potential costs and uncertainties associated with this computer program flaw at this time, but does not anticipate that the effect of this computer program flaw on the operations of the Trust will be significant. However, the Trust may be required to spend time and monetary resources addressing any necessary computer program changes. RESULTS OF OPERATIONS GENERAL At December 31, 1997, the Trust owned seven flex/industrial complexes aggregating 1,361,100 square feet of gross leasable area, four apartment complexes consisting of a total of 864 units, ten office properties consisting of 1,193,800 square feet of gross leasable area and one retail center containing 321,800 square feet of gross leasable area. During 1995, the Trust acquired Willowbrook Industrial Court, Northlake Tower Shopping Center, Quantum Business Center, Lexington Distribution Center, Newtown Distribution Center and the Woodcrest Office Park property. During 1996, the Trust acquired the Midwest Office Center and 6901 Riverport Drive properties and sold its interest in the Karfad loan portfolio to an unaffiliated third party. During 1997, the Trust acquired Phoenix Business Park, Butterfield Office Plaza, the Oklahoma Apartment Portfolio, Southlake Corporate Center, University Square Business Center, Technology Center and Airways Plaza properties, and sold its interest in Hallmark Village Apartments, H Street Venture and Colonial Courts Apartments. See Property Acquisitions and Other Information below for a more detailed description of the assets acquired during 1997. The Trust is entitled to receive a cumulative preferred return of 12% compounded annually on its total capital contribution in each of the joint ventures holding title to the Milwaukee Industrial, Elmhurst Metro Court, Willowbrook Industrial Court, Midwest Office Center, Northlake Tower Shopping Center, Woodcrest Office Park and Hallmark Village Apartments properties. During the year ended December 31, 1997, all of the aforesaid properties, with the exception of Hallmark Village, generated sufficient cash flow from operations to pay the Trust in excess of its 12% preferred return earned on contributed equity. The Trust sold its interest in the Hallmark Village property on March 11, 1997. See Item 1, "Business", for further details. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996 Real estate net operating income before interest expense ("RENOI") (herein defined as total revenue excluding income on investments less operating property expenses, repairs and maintenance, real estate taxes, ground lease expense and depreciation and amortization) increased by approximately $4.8 million or 50.5% from $9.5 million in 1996 to $14.3 million in 1997. The Trust's acquisitions during 1996 and 1997 described above accounted for approximately $4.6 million of this increase. Negatively impacting this increase was the elimination in 1997 of approximately $0.4 million of interest income and amortized discount on mortgage loans realized during 1996 on the Karfad loans and the decrease in RENOI of $0.6 million from properties sold in 1997. On a "same store" basis (comparing the results of operations of the properties owned during the year ended December 31, 1997, with the results of operations of the same real estate assets owned during the year ended December 31, 1996) the RENOI increased by $1.1 million, or 12.6% from $8.7 million in 1996 to $9.8 million in 1997. See below for further discussions of the changes in revenues and expenses for the period. Total revenues increased by approximately $7.4 million or 34.6% to $28.8 million from $21.4 million due primarily to the acquisition and sale of certain properties after January 1, 1996 which, when combined, accounted for approximately $6.5 million or 87.8% of this increase. On a "same- store" basis, total property revenues increased by approximately $1.2 million or 7.2% to $17.9 million from $16.7 million. This increase in same store properties is due in part to an increase in total revenue at the Trust's Lexington property of approximately $0.4 million as a result of a new lease signed in 1996 for approximately 46,900 square feet of gross leasable area. In addition, operating cost reimbursements increased by approximately $0.2 million. The remainder of the increase in same store properties is due to an increase in rental rates. Partially offsetting these increases in total revenues was a decrease in interest and amortized discount on mortgage loans of approximately $0.4 million. Total operating expenses which include Operating Property Expenses, Repairs and Maintenance, Real Estate Taxes and Ground Lease Expense, increased by approximately $1.4 million to $10.7 million from $9.3 million. Virtually all of the increase is due to the 1996 and 1997 acquisitions mentioned above, net of properties sold. Interest expense increased by approximately $2.4 million primarily due to additional loans obtained to finance new acquisitions. The total increase in depreciation and amortization of approximately $1.0 million consists of an increase of approximately $0.3 million for "same-store" properties, and approximately $0.7 million for new properties, net of properties sold. The increase for same store properties relates to additional improvements and lease commissions paid for these properties. An increase in amortization of deferred loan fees and financing costs of approximately $0.2 million relates primarily to costs of obtaining new loans to finance new acquisitions. Total general and administrative expenses increased by approximately $1.2 million due to higher legal fees and payroll costs due to additional staffing required as a result of acquiring and managing the additions to the Trust's real estate portfolio. Furthermore, the increase is due to an increase in incentive compensation earned by Mr. Levine, the Trust's president. During the year ended December 31, 1997, the Trust accrued $0.4 million relating to incentive compensation earned by Mr. Levine based on 1997 operating results plus $0.8 million of incentive compensation based on the estimated unrealized gain on the Trust's assets. See Item 11, Executive Compensation for further details regarding incentive compensation earned and paid during 1997 as well as modifications made to the President's employment contract with the Trust. During the year ended December 31, 1997, the Trust realized net income from the operation of real estate ventures of $37,126 compared to a net loss of ($3,301,212) for the same period in 1996. The net income from operations of real estate ventures for the year ended December 31, 1997 represents the income realized from the Trust's 53% interest in the real estate venture known as the H Street Venture. The net loss in 1996 is due primarily to a reduction in the book value of the H Street Assemblage during 1996 in the amount of $6.0 million, of which approximately $3.2 million is the Trust's share. The H Street Venture owned a 55,900 square foot office building (the "Victor Building") and an adjacent land parcel consisting of 36,100 square feet (the "H Street Assemblage") located in Washington, D.C. On March 20, 1997, the H Street Venture sold approximately 3,500 square feet of the H Street Venture's land to the United States General Services Administration on behalf of the United States of America ("GSA") for a purchase price of approximately $1.7 million. GSA also paid the H Street Venture approximately $0.2 million as reimbursement of expenses that the H Street Venture incurred in anticipation of this transaction. The H Street Venture received net proceeds of approximately $1.8 million, of which approximately $1.0 million was distributed to the Trust. The Trust recognized no gain or loss on this sale. On July 29, 1997, the H Street Venture sold the remaining land and the Victor Building to an unaffiliated third party for $9.0 million The Trust received net sales proceeds of approximately $4.5 million and recognized a loss on disposition of approximately $0.1 million. The sales proceeds generated as a result of this sale were used to paydown the Trust's Revolving Line. These proceeds were subsequently reborrowed to fund acquisitions of additional real estate investments. The factors discussed above resulted in consolidated net income of approximately $3.5 million or $0.32 per share for the year ended December 31, 1997 as compared to consolidated net loss of approximately $1.8 million or ($0.17) per share for the year ended December 31, 1996. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Real estate net operating income before interest expense increased from approximately $5.4 million in 1995 to approximately $9.5 million in 1996. Acquisitions made during 1995 and 1996 contributed approximately $4.9 million to net operating income in 1996 offset by a decrease of approximately $594,000 in interest and amortized discount on mortgage loans which resulted from the sale of the Karfad loans. See below for further discussions of the changes in revenues and expenses for the year ended December 31, 1996 as compared to the year ended December 31, 1995. Total revenues increased by approximately $8.5 million to $21,404,318 from $12,902,369 primarily due to the acquisitions made during 1995 and 1996 which accounted for approximately $9.2 million of this increase during the year ended December 31, 1996. On a "same-store" basis (comparing the results of operations of the properties owned during the year ended December 31, 1996, with the results of operations of the same properties owned during the year ended December 31, 1995), property revenues increased from $8,590,000 in 1995 to $8,930,000 in 1996 or approximately $340,000, a 4% increase. This increase in property revenue was due primarily to an increase in average occupancy at the Colonial Courts of Westland apartments of 94% for the year ending December 31, 1996 as compared to 90% for the same period in 1995 and contractual rent increases at the Trust's industrial and office properties. Partially offsetting these improvements was a decrease in interest and amortized discount on mortgage loans of approximately $594,000 and a decrease in income on investments of approximately $475,000. Interest and amortized discount on mortgage loans decreased due to the Trust's termination of the amortization of the purchase discount as of January 1, 1996 on the Karfad Loan and sale of the loan portfolio. Interest income on investments decreased due to the reduction in cash available for investment resulting primarily from the investment of cash in the assets acquired during 1996 and the last seven months of 1995 and the reduction of indebtedness under the Revolving Line. Total expenses increased by approximately $8.8 million to $19,378,955 from $10,596,213 due primarily to the acquisitions made during 1995 and 1996 which accounted for approximately $6.7 million of this increase during the year ended December 31, 1996. On a "same-store" basis, total expenses increased from $7,909,000 in 1995 to $10,017,000 in 1996 or approximately $2.1 million, a 27% increase. This increase in total expenses is due primarily to increases in general and administrative and interest expense. General and administrative expenses increased as a result of an increase in executive incentive compensation earned on the Trust's investment activities. During the year ended December 31, 1996, the Trust accrued approximately $399,000 relating to incentive compensation earned by Mr. Levine, the Trust's president, based on the 1996 actual results of the Trust's investments. In addition, the Trust accrued an additional $650,000 of incentive compensation expenses reflecting the estimated unrealized gain on the Trust's real estate assets. In 1995, the Trust accrued approximately $75,000 related to incentive compensation. See Item 11, Executive Compensation, for further details regarding incentive compensation earned and modifications made to the president's employment contract with the Trust. Interest expense increased by approximately $321,000 as a result of the Trust's execution of a mortgage loan in the amount of $6,200,000 collateralized by the Florida Power and Light property during March 1996. In addition, a decrease in recoveries of amounts previously charged against losses on loans, notes, and interest receivable of $164,958 during 1995 as compared to $16,569 during 1996, which resulted from distributions in respect of the Trust's interest in the liquidating trust, also contributed to the increase in total expenses. See Property Acquisitions and Other Information below for further details regarding the Trust's interest in the liquidating trust. The remaining increase in total expenses on a "same-store" basis, resulted from increases in repairs and maintenance, property operating and depreciation and amortization expense for the properties owned by the Trust prior to January 1, 1995. During the year ended December 31, 1996, the Trust realized a net loss from the operation of real estate ventures of ($3,301,212) compared to income of $62,713 for the same period in 1995. This net loss during 1996 represents the Trust's share (53%) of the loss incurred by the real estate venture known as the H Street Venture. The net income from operations of real estate ventures of $62,713 for the year ended December 31, 1995 resulted from the income from operations of the Plaza at Westminster property of $24,950 and income from operations of $37,763 on the H Street Assemblage. The Plaza at Westminster property was sold in June 1995 to an unaffiliated third party. The Trust recognized a gain on sale of $409,290. The net loss in 1996 is due primarily to a reduction in the book value of the H Street Assemblage during 1996, in the amount of $6,000,000, of which $3,180,000 is the Trust's share. The H Street Venture's carrying value for the property after this reduction was based on the anticipated cumulative sales proceeds pursuant to an agreement with an unaffiliated third party and the sale of a portion of the H Street Venture's land to the United States General Services Administration discussed above. The factors discussed above resulted in a consolidated net loss of ($1,757,260) or ($0.17) per share for the year ended December 31, 1996 as compared to consolidated net income of $2,600,045 or $0.25 per share for the year ended December 31, 1995. PROPERTY ACQUISITIONS AND OTHER INFORMATION ACQUISITION ACTIVITIES: During the year ended December 31, 1997, the Trust acquired interests in several properties. The table below presents a summary of 1997 acquisitions.
Acquisition Purchase Financing Property's Name Sq. Ft./ Date of Price (in millions) and Location # of Units Acquisition (in millions) (1) Description - --------------- ---------- ----------- ------------- ------------- ----------- Phoenix Business Park Atlanta, Georgia 110,600 01/15/97 $ 5.5 Three-building office/ industrial complex; 13 tenants at the time of acquisition Butterfield Office Plaza Oak Brook, Illinois 200,800 04/30/97 $15.1 Three-story office build- ing; 50 tenants at the time of acquisition Woodrun Village Apartments Yukon, Oklahoma 192 05/22/97 $ 4.6 $3.6 (2) Apartment complex Country Creek Apartments Oklahoma City, Oklahoma 320 05/22/97 $ 7.5 $5.9 (2) Apartment complex Willowpark Apartments Lawton, Oklahoma 160 05/22/97 $ 4.5 $3.5 (2) Apartment complex Winchester Apartments Oklahoma City, Oklahoma 192 05/22/97 $ 4.5 $3.6 (2) Apartment complex Southlake Corporate Center Morrow, Georgia 56,200 07/30/97 $ 4.5 Three-story office build- ing; 16 tenants at the time of acquisition University Square Business Center Huntsville, Alabama 184,700 08/26/97 $ 7.3 $5.0 (3) Six one-story office buildings; 57 tenants at the time of acquisition Acquisition Purchase Financing Property's Name Sq. Ft./ Date of Price (in millions) and Location # of Units Acquisition (in millions) (1) Description - --------------- ---------- ----------- ------------- ------------- ----------- Technology Center Huntsville, Alabama 48,500 08/26/97 $ 2.5 Three-story office building; 2 tenants at the time of acquisition Airways Plaza Office Center Memphis, Tennessee 87,800 12/10/97 $ 3.2 Five one-story office buildings; 3 tenants at ----- ----- the time of acquisition Total $59.2 $21.6 ===== ===== (1) Represents the amount of permanent mortgage financing assumed at the time of acquisition. All other additional acquisition costs were paid by either a draw upon the Trust's line of credit or from cash and cash equivalents. (2) At the time of the acquisition, the Trust assumed Oklahoma Housing Financing Agency Revenue bond financing with a combination of fixed rate, tax-exempt and taxable bonds. Approximately $14.6 million of the assumed debt is tax-exempt and matures on October 1, 2025. The tax exempt portion do not amortize until November 1, 2005, at which date the interest rates will be reset based upon current rates at that time and the principal balance will amortize over the remaining twenty years of the term of the bonds. The taxable portion of approximately $2.0 million is fully amortizing over the ten years ending November 1, 2005. The combined effect of the financing provides a fixed interest rate of 7.3% until November 1, 2005. A prepayment penalty exists on the bonds for any unscheduled principal payment made prior to September 30, 2005. The prepayment penalty at acquisition was approximately 9.8% of the total outstanding principal balance and decreases each year through September 2005 by approximately one percent. There is no prepayment penalty after September 30, 2005. (3) The Trust assumed an existing mortgage loan with an outstanding principal balance of approximately $5.0 million. The mortgage loan matures in January 2007, bears interest at a fixed rate of 8.89% per annum and requires monthly payments of principal and interest based upon a twenty-five year amortization schedule with a balloon payment of approximately $4.1 million due upon maturity.
OTHER: The Trust has received cash of $309,285, $58,658 and $562,337 during 1997, 1996 and 1995, respectively, in respect of its interest in a liquidating trust established for the benefit of the unsecured creditors (including the Trust) of VMS Realty Partners and its affiliates ("VMS"). The Trust has recorded $161,539, $16,569 and $164,958, respectively, of these amounts as recovery of losses on mortgage loans, notes and interest receivable in its consolidated statement of income and expenses. The remainder of the amount received, $587,214, was recorded as a liability to the Class Action Settlement Fund representing the Trust's share of amounts due under the terms of the previously settled VMS securities litigation, of which $493,685 was paid and the remaining $93,529 is included in the liabilities on the Trust's December 31, 1997 balance sheet. FACTORS AFFECTING THE TRUST'S BUSINESS PLAN GENERAL FACTORS AFFECTING SHARE PRICE. The market price of the Shares may fluctuate in response to a variety of factors, including but not limited to: (i) variations in the Trust's quarterly operating results including changes in FFO; (ii) the gain or loss of tenants at the Trust's properties; (iii) general risks, changes or trends in the real estate industry; (iv) increased competition with other entities or persons engaged in the same business; (v) legislative or regulatory changes; (vi) fluctuations in interest rates; and (vii) a change in management of the Trust. In addition, the stock market has in the past experienced extreme price and volume fluctuations which have affected the market price of securities of companies for reasons frequently unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Shares. FACTORS AFFECTING OPERATING RESULTS. The factors which may affect the Trust's liquidity and capital resources as well as results of operations, include but are not limited to: (i) the Trust's ability to obtain additional capital by securing long-term mortgage financing for its Lexington, Newtown, Phoenix Business Center, Southlake Corporate Center, Technology Center, Colonial Penn Office Building and Airways Plaza properties on terms acceptable to the Trust; (ii) the Trust's ability to extend the Revolving Line beyond May 31, 1998 on terms and conditions acceptable to the Trust or to replace it with a similar revolving credit facility; (iii) the Trust's ability to deploy cash available for investment in operating properties generating yields greater than the interest rate paid by the Trust on its indebtedness; (iv) the continued occupancy by, and the financial solvency of, the major tenants at the Trust's Colonial Penn, Florida Power and Light, Woodcrest Office Park, 6901 Riverport Drive, Technology Center and Airways Plaza properties; (v) the Trust's ability to re-lease space as leases expire on terms at least as favorable as the terms of existing leases since approximately 17% of the tenant leases at the Trust's properties are scheduled to expire in 1998 (management believes that the Trust's "in place" Base Rents are generally below market rates); and (vi) market conditions and rental rates where the Trust's properties are located. GENERAL REAL ESTATE INVESTMENT RISKS. Real property investments are subject to certain risks that may not always be predictable or controllable. The cash flow generated by, and potential capital appreciation realized from, real property investments may be adversely affected by the national and regional economic climate (which, in turn, may be adversely impacted by plant closings, industry slow-downs, income tax rates, interest rates, demographic changes and other factors), local real estate conditions (such as oversupply of, or reduced demand for rental space in the area), the attractiveness of the properties, zoning and other regulatory restrictions, competition from other land developers or developments, increased operating costs (including maintenance costs, insurance premiums and real estate taxes), perceptions by tenants or potential buyers of the safety, convenience and attractiveness of the property and the ability of the owner of the property to provide capable management and adequate maintenance. In light of the foregoing factors, there can be no assurance that the cash flow generated by, and capital appreciation realized from, the Trust's properties will be sufficient to cover expenses or recover costs or provide a return of or on capital. The cash flow generated by, or capital appreciation from, real property investments may also be adversely affected by changes in governmental regulations, zoning or tax laws, potential environmental or other legal liabilities and changes in interest rates. Real estate investments are also relatively illiquid. Therefore, the Trust's ability to vary its portfolio promptly in response to changes in economic or other conditions is limited, which may result in losses if the Trust is forced to sell a property. RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF MANY OF THE PROPERTIES; LACK OF OPERATING HISTORY. The Trust acquired all of its properties within the last five years, and acquired eighteen of its properties since June of 1995. The most recently acquired properties may have characteristics or deficiencies unknown to the Trust that may impact their value or revenue potential. In addition, it is possible that the operating performance of the most recently acquired properties may decline. The Trust is currently experiencing a period of rapid growth. As the Trust acquires additional properties, the Trust will be subject to risks associated with managing new properties, including lease-up and tenant retention. In addition, the Trust's ability to manage its growth effectively will require it to successfully integrate its new acquisitions into its existing management structure. No assurances can be given that the Trust will be able to successfully integrate such properties or effectively manage additional properties, or that newly acquired properties will perform as expected. POTENTIAL INABILITY TO REPAY OR REFINANCE INDEBTEDNESS AT MATURITY. The Trust is subject to risks normally associated with debt financing, including the risk that the Trust's cash flow will be insufficient to meet required payments of principal and interest, the risk that any indebtedness will not be able to be refinanced or that the terms of any such refinancing will be less favorable than the terms of the expiring indebtedness. The Trust anticipates that scheduled principal payments and loan maturities due in connection with the Trust's indebtedness will total approximately $4.8 million and $10.5 million for the fiscal years ended December 31, 1998 and December 31, 1999, respectively. The loan secured by Milwaukee Property in the amount of $3.6 million will mature in 1998, and the Revolving Line in the amount of $9.1 million, assuming no additional draws, will mature in 1999. Although the Trust may seek to renew or extend the line, there can be no assurance that the Trust will be able to negotiate an extension or renewal for terms and conditions acceptable to the Trust, if at all. If the Trust is unable to renew or extend the line, the Trust will be required to repay the amounts outstanding as of May 31, 1998 to ANB by May 31, 1999. Although the Trust will seek an alternative source of funds, should it be unable to renegotiate or extend the line, there can be no assurance that financing would be available on acceptable terms and conditions, if at all. POTENTIAL EFFECT OF RISING INTEREST RATES ON TRUST'S VARIABLE RATE DEBT. Advances under the Revolving Line bear interest at variable rates and the interest rate payable on the Riverport bonds issued for the benefit of the Trust are subject to periodic adjustments based on the then current market interest rates. In addition, the Trust may incur other variable rate indebtedness in the future. Increases in interest rates on such indebtedness would increase the Trust's interest expense, which could adversely affect the Trust's financial condition and results of operations. See "--Liquidity and Capital Resources" above. CONCENTRATION OF TENANTS AT SIGNIFICANT PROPERTIES. At each of the Trust's Colonial Penn, Florida Power and Light, Woodcrest Office Park, 6901 Riverport Drive, Technology Center and Airways Plaza properties, one or two tenants occupy all or a substantial majority of the leased space. If one or more of the tenants at these properties were to default on its lease or file for bankruptcy or reorganization, the Trust's revenues could be reduced, particularly if the Trust were unable to re-lease the vacant space on comparable terms and conditions. Therefore, the bankruptcy or default by one of these tenants could have an adverse effect on the Trust's financial condition and results of operations. See Portfolio Summary Schedule in Other Information for information regarding lease expirations at the properties. COMPETITION FOR TENANTS. The Trust competes with numerous other entities in attracting tenants to lease its space. Some of the competing properties may be newer, better located or owned by parties better capitalized than the Trust. An increase in the number of competitive properties in a particular area could have a material adverse effect on: (i) the ability to lease space in the properties (or in newly acquired or developed properties); and (ii) the rents charged. COMPETITION IN ACQUIRING PROPERTY. In seeking to acquire additional property, the Trust competes with many other entities, some of which have greater financial and managerial resources than the Trust. There can be no assurance that the Trust will be able to acquire additional properties on terms and conditions which are consistent with the Trust's business plan, if at all. RESTRICTIONS ON RE-LEASING SPACE. Tenant leases often grant tenants the exclusive right to sell certain types of merchandise or provide certain types of services within a property, or limit other tenants' rights to sell such merchandise or provide such services. Certain leases at Northlake Tower Shopping Center contain these types of restrictions, which may limit the number and types of prospective tenants for vacant space at this property. SUBSTANTIAL DEBT OBLIGATIONS. As of December 31, 1997, the Trust's indebtedness (Mortgage Loans Payable and Bonds Payable) aggregated approximately $92.1 million and the ratio of debt to net assets for the Trust was 58%. Debt as a percentage of total market capitalization as of December 31, 1997 assuming a $5.25 share price was 57%. The Trust's ability to service its debts and other obligations when they become due depends on, among other things, the Trust's ability to secure additional capital and the properties' ability to generate sufficient cash flow to meet the Trust's cash needs for operating expenses and debt service payments. Certain expenditures, such as loan payments and real estate taxes, are not necessarily decreased by events adversely affecting revenues or expenses at the property level. If the Trust fails to make required payments on its indebtedness, the Trust could lose the property securing these obligations, which would have a material adverse effect on the Trust's financial condition and results of operations. ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT -- TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REIT. The Trust has elected to be taxed as a REIT under Sections 856 through 860 of the Code, and the Trust believes that it has been organized and has operated in such a manner so as to qualify as a REIT for federal income tax purposes. Although the Trust believes that it will remain organized and will continue to operate so as to qualify as a REIT, no assurance can be given that the Trust has so qualified or will be able to remain so qualified. Qualifica- tion as a REIT involves the satisfaction of numerous requirements (in certain instances, on an annual and quarterly basis) set forth in highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations, and may be affected by various factual matters and circumstances not entirely within the Trust's control. In the case of a REIT, such as the Trust, that holds a substantial portion of its assets in partnership form, the complexity of these Code provisions and the applicable Treasury Regulations that have been promulgated thereunder is even greater. Further, no assurance can be given that future legislation, new Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. The Trust, however, is not aware of any pending proposal to amend the tax laws that would materially and adversely affect its ability to operate in such a manner so as to qualify as a REIT. If the Trust were to fail to qualify as a REIT with respect to any taxable year, the Trust would not be allowed a deduction in computing its taxable income from amounts distributed to its shareholders, and would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. As a result, any net earnings of the Trust available for investment or distribution to Shareholders would be reduced for the year or years involved because of the Trust's additional tax liability, and distributions to Shareholders would no longer be required to be made. Moreover, unless entitled to relief under certain statutory provisions, the Trust would also be ineligible for qualification as a REIT for the four taxable years following the year during which such qualification was lost. Although the Trust believes it has operated and currently intends to operate in a manner designed to allow it to continue to qualify as a REIT, future economic, market, legal, tax or other considerations may cause it to determine that it is in the best interests of the Trust and its shareholders to revoke the REIT election. EFFECT OF REIT DISTRIBUTION REQUIREMENTS. To maintain its status as a REIT for federal income tax purposes, the Trust generally will be required each year to distribute to its shareholders at least 95% of its taxable income (excluding any net capital gain and after certain adjustments). In addition, the Trust will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income for such year plus 95% of its capital gain net income for such year plus 100% of its undistributed income from prior taxable years. The Trust intends to make distributions to its shareholders to comply with the 95% distribution requirement of the Code and to avoid the nondeductible excise tax described above. The Trust anticipates that cash flow from operations, will be sufficient to enable it to pay its operating expenses and meet the distribution requirements of a REIT, but no assurances can be given that this will be the case. In addition, differences in timing between: (i) the actual receipt of income and the actual payments of expenses; and (ii) the inclusion of such income and the deduction of such expenses in arriving at taxable income of the Trust could leave the Trust without sufficient cash to enable it to meet the REIT distribution requirements. Accordingly, the Trust could be required to borrow funds or liquidate investments on adverse terms to comply with such requirements. The requirement to distribute a substantial portion of the Trust's taxable income could also cause the Trust to be required to distribute amounts that would otherwise be spent on future acquisitions, unanticipated capital expenditures or repayment of debt, which would necessitate additional borrowings or sales of assets to fund the costs of such items and could restrict the Trust's ability to expand at a pace necessary to remain competitive. LIFE OF THE TRUST. Under the Declaration of Trust, the Trustees are required to use reasonable efforts to terminate the Trust by October 17, 2001; provided that the Trustees are required to determine in good faith that the termination is in the shareholders' best interests. This provision may result in the Trust: (i) being unable to obtain capital, either debt or equity or renew existing financing on terms and conditions acceptable to the Trust, if at all; (ii) liquidating properties at prices below those which might prevail if the Trust was not forced to terminate. Any of these factors could have an adverse effect on the Trust's financial condition and results of operations. POTENTIAL INCREASES IN CERTAIN TAXES AND REGULATORY COMPLIANCE COSTS. Increases in income, service or transfer taxes are generally not passed through to tenants under leases and may, therefore, adversely affect the Trust's cash flow and its ability to make distributions to shareholders. The Trust's properties are also subject to various federal, state and local regulatory requirements, such as those imposed by the Americans with Disabilities Act (the "ADA"), which require all public accommodations and commercial facilities to meet certain federal standards related to access and use by disabled persons, and state and local fire and life safety standards. Failing to comply with the ADA could result in the imposition of fines by governmental authorities or an award of damages to private litigants. The Trust believes that its existing properties are in substantial compliance with these regulatory requirements. However, existing statutes or rules may be amended or new statutes or rules may be adopted, each of which may have an adverse effect on the Trust's financial condition and results of operations. POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at a given property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs that these parties incur in connection with any environmental contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under these laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocating responsibility. The costs of investigating, remediating or removing substances may be substantial, and the presence of these substances, or the failure to properly remediate the contamination on a property, may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility also may be liable for the costs of removing or remediating a release of hazardous or toxic substances at the disposal or treatment facility, whether or not the person owns or operates the facility. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs incurred in connection with the contamination. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from such site. The Trust is not aware of any environmental liability that the Trust believes would have a material adverse effect on the Trust's business, assets or results of operations taken as a whole. There can be no assurance, however, that the Trust would have knowledge of all conditions giving rise to potential environmental liabilities subsequent to its acquisition of a property since the Trust has ordered Phase I Environmental Assessments only as part of its acquisition due diligence for each of its properties and has only ordered Phase II Environmental Assessments in limited circumstances when circumstances indicate. Moreover, there can be no assurance that: (i) future laws, ordinances or regulations will not impose any material environmental liability; or (ii) the current environmental condition of the Trust's properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Trust's properties (such as the presence of underground storage tanks), or by third parties unrelated to the Trust. Any expenditures associated with environmental liabilities of the Trust could have an adverse effect on the Trust's financial condition and results of operations. OTHER INFORMATION The following supplemental information has been provided by the Trust to furnish the reader of this Report an expanded understanding of the properties owned as of December 31, 1997. BANYAN STRATEGIC REALTY TRUST PORTFOLIO SUMMARY December 31, 1997
Scheduled Lease Net Carrying Expirations Value Occu- ------------------------- Square --------------------- pancy After Footage Dollars Sq Ft % 1998 1999 1999 ------- --------- ----- ----- ---- ---- ----- FLEX/INDUSTRIAL - --------------- Milwaukee Industrial Properties Milwaukee, WI 235,800 $ 5,610,000 $23.79 87% 32% 12% 43% Elmhurst Metro Court Elmhurst, IL 140,800 5,057,000 35.92 93% 38% 23% 32% Willowbrook Industrial Court Willowbrook, IL 84,300 3,844,000 45.60 100% 55% 15% 30% Quantum Business Center Louisville, KY 182,200 4,946,000 27.15 91% 40% 23% 28% 6901 Riverport Drive Louisville, KY 322,100 9,780,000 30.36 100% 0% 0% 100% Lexington Business Center Lexington, KY 308,800 7,171,000 23.22 93% 6% 3% 84% Newtown Distri- bution Center Lexington, KY 87,100 3,464,000 39.77 92% 66% 10% 16% --------- ----------- ------ ---- ---- ---- ---- Sub-total 1,361,100 $39,872,000 $29.29 94% 24% 10% 60% --------- ----------- ------ ---- ---- ---- ---- Scheduled Lease Net Carrying Expirations Value Occu- ------------------------- Square --------------------- pancy After Footage Dollars Sq Ft % 1998 1999 1999 ------- --------- ----- ----- ---- ---- ----- OFFICE - ------ Colonial Penn Building Tampa, FL 79,200 $7,860,000 $99.24 100% 0% 0% 100% Florida Power & Light Building Sarasota, FL 83,100 9,384,000 112.92 100% 0% 0% 100% Woodcrest Office Park Tallahassee, FL 265,900 11,436,000 43.01 92% 16% 19% 57% Midwest Office Center Oakbrook Terrace, IL 77,000 5,047,000 65.55 96% 27% 19% 50% Phoenix Business Park Atlanta, GA 110,600 5,419,000 49.00 92% 0% 11% 81% Butterfield Office Plaza Oak Brook, IL 200,800 15,077,000 75.08 97% 14% 23% 60% Southlake Corporate Center Morrow, GA 56,200 4,464,000 79.43 96% 8% 4% 84% University Square Business Center Huntsville, AL 184,700 7,359,000 39.84 92% 30% 15% 47% Technology Center Huntsville, AL 48,500 2,526,000 52.08 100% 0% 0% 100% Airways Plaza Office Center Memphis, TN 87,800 3,161,000 36.00 100% 3% 93% 4% --------- ----------- ------ ---- ---- ---- ---- Sub-total 1,193,800 $71,733,000 $60.09 95% 13% 20% 62% --------- ----------- ------ ---- ---- ---- ---- Scheduled Lease Net Carrying Expirations Value Occu- ------------------------- Square --------------------- pancy After Footage Dollars Sq Ft % 1998 1999 1999 ------- --------- ----- ----- ---- ---- ----- RETAIL - ------ Northlake Tower Shopping Center Atlanta, GA 321,800 $ 16,902,000 $52.52 99% 2% 5% 92% --------- ------------ ------ ---- ---- ---- ---- Total 2,876,700 $128,507,000 $44.67 95% 17% 13% 65% ========= ============ ====== ==== ==== ==== ==== RESIDENTIAL - ----------- Net Carrying Value Resi- ------------------- Occu- dential Per pancy Units Dollars Unit % -------- -------- ----- ----- Country Creek Apartments Oklahoma City, OK 320 7,406,000 $23,144 96% Willowpark Apartments Lawton, OK 160 4,414,000 27,588 93% Winchester Run Apartments Oklahoma City, OK 192 4,452,000 23,188 97% Woodrun Village Apartments Yukon, OK 192 4,532,000 23,604 98% --- ------------ ------- --- Total 864 $ 20,804,000 $24,079 96% === ============ ======= === PORTFOLIO TOTAL $149,311,000 95% ============ ===
BANYAN STRATEGIC REALTY TRUST COMPARISON OF AVERAGE RENTS
Average Average Square Footage "In Place" Market Property Type (Note 1) Base Rents (2) Base Rents - ------------- -------------- -------------- ---------- Flex/Industrial 1,335,735 $4.52 $4.56 Office 1,114,611 7.98 9.35 Retail 321,800 8.73 9.98 ---------- ----- ----- Total 2,772,146 $6.40 $7.12 ========== ===== ===== Average "In Place" Rents Per Market Unit Rent Units (Note 3) Per Unit ----------- ----------- ---------- Residential 864 $378 $423 === ==== ==== (1) The In Place Rents for approximately 105,000 square feet of the portfolio have been excluded from the above calculation because the lease terms relative to that space are unique compared to the market. It is the Trust's view that inclusion of these rents in the above computation would make the analysis less meaningful. (2) Depending on lease terms at individual properties, the average In Place rents may reflect either gross rental rates (where the owner pays operating expenses) or net rental rates (where the tenant pays operating expenses). (3) A portion of the difference between the above In Place Rents and Market Rents per unit is attributable to the difference in the size of the Trust's rental units compared to the size of other similar units in the market place. The Trust's In Place Rents adjusted for the size differential are 5% to 7% below the Market.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements on Page F-1 of this Report. See Item 6, Selected Financial Data, for the supplemental financial information specified by Item 302 of Regulation S-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in, or disagreements with, the accountants on any matter of accounting principles, practices or financial statement disclosure. PART III ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT The trustees and executive officers of the Trust are as follows: Walter E. Auch, Sr. Trustee Norman M. Gold Trustee Marvin A. Sotoloff Trustee Leonard G. Levine President Neil D. Hansen First Vice President Robert G. Higgins Vice President and Secretary/ General Counsel Joel L. Teglia Vice President/ Chief Financial Officer Jay E. Schmidt Vice President/Investments WALTER E. AUCH, SR., age 76, was the chairman and chief executive officer of the Chicago Board Options Exchange from 1979 to 1986. Prior to that time, he was executive vice president, director and a member of the executive committee of Paine Weber. Mr. Auch is a director of Pimco L.P., Geotek Industries, Smith Barney Concert Series Funds, Smith Barney Trak Fund, Nicholas Applegate Funds and Fort Dearborn Fund, and a trustee of Hillsdale College and the Arizona Heart Institute. Mr. Auch has been a trustee of the Trust since 1986. Mr. Auch is also a director of Semele Group, Inc. (f/k/a Banyan Strategic Land Fund II) and a director of Legend Properties, Inc. (f/k/a Banyan Mortgage Investment Fund). NORMAN M. GOLD, age 67, is a senior partner in the law firm of Altheimer & Gray and has actively practiced law for over 40 years, specializing in tax, corporate and real estate law. Mr. Gold is also a trustee of New Plan Realty Trust. Mr. Gold has been a trustee of the Trust since 1986. Mr. Gold is a certified public accountant and a member of the Chicago and American Bar Associations. MARVIN A. SOTOLOFF, age 54, is chairman and chief executive officer of Equity Resources Ltd., a company involved in commercial real estate brokerage, leasing and development. Prior to joining Equity Resources Ltd., Mr. Sotoloff was the regional vice president of Premisys Real Estate Services, Inc., a division of the Prudential Realty Group, and was executive vice president of The Palmer Group Ltd. He is a past president of the Chicago Office Leasing Brokers Association, a licensed real estate broker and a member of the Illinois and Pennsylvania Bar Associations. Mr. Sotoloff has been a trustee of the Trust since 1986. LEONARD G. LEVINE, age 51, has been president of the Trust since 1990. He received a B.S./B.A. Degree in Accounting from Roosevelt University and a Masters Degree in Taxation from DePaul University. His areas of specialty include real estate syndications, estate planning and taxation of closely-held corporations. Mr. Levine is also a certified public accountant and a licensed real estate broker. NEIL D. HANSEN, age 51, has been first vice president of the Trust since 1991. He received a B.S. Degree in Finance from the University of Illinois and a Master of Management Degree from Northwestern University. He is a certified public accountant. ROBERT G. HIGGINS, age 46, has been vice president and general counsel of the Trust and secretary of the Trust since 1995. From 1990 to 1992, Mr. Higgins was a contract partner at the law firm of Chapman and Cutler. Mr. Higgins' legal experience has concentrated in the areas of real estate development, finance, acquisition, land use, sales, lending, syndications, general corporate and business practice. Mr. Higgins is admitted to the bar in the States of Illinois, Minnesota and Texas. He received a B.A. Degree in Government from the University of Notre Dame and a J.D. from Loyola University of Chicago. Although Mr. Higgins is an executive officer of the Trust, he is not an employee of the Trust. Mr. Higgins is the sole proprietor of a law practice known as Robert G. Higgins, Attorney at Law. JOEL L. TEGLIA, age 36, has been vice president and chief financial officer of the Trust since 1994. Prior to assuming the responsibilities of his current position, Mr. Teglia held the position of Controller for Banyan Management Corp. from 1991 to 1994. He received a B.B.A. Degree in Accounting from the University of Notre Dame. Mr. Teglia is a certified public accountant. JAY E. SCHMIDT, age 46, became vice president of the Trust in 1995. Prior to being appointed as vice president of the Trust, Mr. Schmidt served as vice president of acquisitions for Banyan Management Corp. since 1992 as an acquisition executive on behalf of the Trust. Prior to 1992, Mr. Schmidt was an independent real estate consultant and broker and a vice president of Mortgage Guaranty Insurance Corporation, Milwaukee, Wisconsin. He received a B.A. degree in Government from Franklin & Marshall College and a J.D. from the University of Wisconsin. Mr. Schmidt is admitted to the bar in the State of Wisconsin and is a licensed real estate broker. ITEM 11. EXECUTIVE COMPENSATION A. TRUSTEE COMPENSATION The Trustees are paid an annual fee of $15,000, payable quarterly, plus $875 for each board meeting, including meetings of the audit committee, attended in person and $250 an hour for each board meeting, including meetings of the audit committee, attended via telephonic conference call. In addition, each Trustee is reimbursed for out-of-pocket expenses incurred in attending meetings of the board. B. EXECUTIVE COMPENSATION Compensation paid to executive officers of the Trust for the years ended December 31, 1997, 1996 and 1995 are as follows:
Annual Compensation (1) Long-Term Compensation (1) ----------------------------------------------------------------------------------- Awards Payouts ---------------------- ------------------ (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Securities Annual Restricted Underlying All other Compen- Stock Options/ LTIP Compen- Year Salary Bonus (3) sation Awards (4) SARs (#) Payouts sation ---- -------- --------- ------- ---------- ---------- ------- --------- Leonard G. Levine, 1997 $195,540 $ -- -- $2,319,292 -- $ -- -- President and Chief 1996 $189,247 $ -- -- $ 7,700 -- $ 66,985 -- Executive Officer 1995 $184,812 $ -- -- $ 24,900 -- $111,739 -- (2) Jay E. Schmidt, 1997 $165,281 $35,000 (5) -- -- -- -- -- Vice President/ 1996 $154,615 $65,000 -- -- -- -- -- Investments 1995 $148,136 $27,000 -- -- -- -- -- Neil D. Hansen 1997 $192,546 $20,000 -- -- -- -- -- First Vice President/ 1996 -- -- -- -- -- -- -- Asset Management 1995 -- -- -- -- -- -- -- Joel L. Teglia 1997 $ 95,160 $10,000 -- -- -- -- -- Vice President/ 1996 -- -- -- -- -- -- -- Chief Financial Officer 1995 -- -- -- -- -- -- -- - ---------- (1) Compensation for executives of the Trust other than Mr. Levine for 1997, 1996 and 1995 was less than $100,000 per individual. (2) See discussion below under "Employment Agreements". (3) For 1997, 1996 and 1995, bonus for all employees other than Mr. Levine were discretionary and based on job performance pursuant to an annual review. (4) As of the fiscal year ended December 31, 1997, Mr. Levine owned 503,504 shares of beneficial interest which were restricted until September 29, 1997, the vesting date for these shares. The value of these shares as of December 31, 1997 was $2,643,396 and Mr. Levine owns all of these shares free of any vesting conditions. Since the issuance of these shares, Mr. Levine has been and will continue to be entitled to all dividends or other distributions in respect of such shares. (5) The $27,000 bonus represents Mr. Schmidt's 1994 bonus paid in 1995. During 1996, Mr. Schmidt was paid a bonus equal to $30,000 for the year ended December 31, 1995 and $35,000 for the year ended December 31, 1996.
EMPLOYMENT AGREEMENTS. The Trust has entered into an employment agreement with only one of the executives named above, Leonard G. Levine. Mr. Levine has served as the Trust's President and Chief Executive Officer since 1990 and recently entered into a new agreement with the Trust to continue in that position through December 31, 2001. Under the new agreement, which was signed on March 11, 1998, but which became retroactively effective as of October 1, 1997, the Trust will pay Mr. Levine a base salary equal to $200,000 per year during the first two and one-quarter years of the contract, increasing to $210,000 per year during the last two years of the agreement. In addition, Mr. Levine may also earn incentive compensation during each year of the agreement equal to 62.5% of the base salary for that year subject to the Trust achieving certain predetermined levels of "funds from operations." The Trust has also granted Mr. Levine non-qualified stock options to purchase an aggregate of 350,000 shares of the Trust's common shares of beneficial interest at an exercise price equal to $5.50 per share. Options to purchase 100,000 shares vested and became exercisable upon execution of the agreement. Options to purchase an additional 100,000 shares will vest and become exercisable in 25,000 share increments at the end of each calendar year of the agreement with the first increment of 25,000 shares vesting and becoming exercisable on December 31, 1998. Options to purchase an additional 50,000 shares will vest and become exercisable if during any consecutive thirty (30) trading days during the term of the agreement the closing price of the common shares averages $8.50 per share. Options to purchase an additional 100,000 shares will vest and become exercisable on a proportionate basis if during any thirty (30) consecutive trading days during the term of the agreement the closing price of the shares averages more than $8.50 per share with full vesting occurring with respect to 75,000 shares if the closing price averages $9.00 per share and $10.00 per share with respect to the other 25,000 shares. The number of shares underlying the options and the exercise price of each option are subject to adjustment from time to time if the Trust: (i) issues or sells additional common shares of beneficial interest in exchange for consideration at a price less than the prevailing market price of the Trust's shares at the time of issuance; (ii) issues or sells warrants with exercise prices less than the prevailing market price; (iii) declares a dividend or otherwise makes a distribution to the holders of its common shares in the form of additional common shares; (iv) subdivides its outstanding common shares of beneficial interest into a larger number of common shares; or (v) combines its outstanding common shares into a smaller number of common shares. All of the options must be exercised by October 1, 2007, except that if Mr. Levine dies or becomes permanently disabled during the term of the agreement, then all options which have vested must be exercised within one year of death or permanent disability. In addition, upon death or permanent disability, all options not otherwise vested, but which would or will vest within six months following the date of death or permanent disability either by passage of time or satisfaction of the various performance standards will be deemed vested and become exercisable within the same one-year time period. The agreement also requires the Trust to provide Mr. Levine with both life and disability insurance benefits during the term of the agreement, as well as all non-wage benefits provided by the Trust to its other salaried employees. The agreement grants the Trust the right to terminate Mr. Levine's employment if the Trust does not achieve certain earnings targets in each fiscal year within thirty (30) calendar days after the Trust files its annual report on Form 10-K with the Securities and Exchange Commission for the preceding year. The Trust may also terminate Mr. Levine if he is convicted of, or has a civil judgment rendered against him for, theft or embezzlement of the Trust's property, is convicted of a felony resulting in injury to the Trust's business property or reputation, if a civil judgment is rendered that Mr. Levine breached his duty of loyalty to the Trust or if an arbitrator determines that Mr. Levine has refused to perform, or willfully failed to perform, his material duties under the agreement or committed intentional acts that caused material damage to the Trust's business or properties or performed his material duties in a manner that constituted gross negligence. Mr. Levine has the right to terminate the agreement upon ninety (90) days' notice to the Trust for any reason (the "Notice Termination"), or upon a "Change of Control" or "Constructive Termination." For these purposes, "Change of Control" will be deemed to have occurred if the members of the board of trustees as of October 1, 1997 fail to constitute a majority of the members of the Board, except for board members consented to by Mr. Levine, or if the Shareholders of the Trust adopt a plan of liquidation or take other action having the effect of a plan of liquidation without the recommendation and approval of the Board. A "Constructive Termination" will be deemed to have occurred if Mr. Levine's authority is materially reduced or if there is a material adverse change in his working conditions or if the Trust requires him to relocate from the Chicago metropolitan area. If Mr. Levine terminates the agreement upon a "Change of Control" or is deemed to suffer a "Constructive Termination" the Trust will be obligated to pay Mr. Levine all amounts which would have been paid under the agreement. For purposes of making this calculation, the Trust will be deemed to have satisfied all standards applicable to the payment of incentive compensation and all options granted will become vested and immediately exercisable. If Mr. Levine is not employed by the Trust on January 1, 2002, pursuant to a written employment agreement, and has not then died or become permanently disabled, the Trust is obligated to pay Mr. Levine $210,000, unless the agreement has previously been terminated by the Trust either due to the Trust's failing to achieve certain performance standards or for "Just Cause" or by Mr. Levine by a Notice Termination. During the fiscal year ended December 31, 1997, Mr. Levine was compensated, through September 30, 1997, pursuant to the terms of an agreement executed as of January 1, 1990 and subsequently amended which was replaced by the agreement described above. Mr. Levine was paid a base salary during the nine months ended September 30, 1997 equal to $195,540 on a per annum basis. Mr. Levine was also entitled to receive compensation under an incentive program based on recoveries by the Trust on "foreclosed real estate assets" owned by the Trust as of December 31, 1992 and on the performance of the Trust's reinvestment activities commencing as of January 1, 1993. Specifically, Mr. Levine was able to earn incentive compensation based upon disposition of foreclosed real estate assets equal to: (i) 1% of the amount of the Trust's secured claims existing as of January 1, 1990 which were converted into cash on or after January 1, 1993; and (ii) 3% of the Trust's unsecured claims existing as of January 1, 1990 which were converted into cash on or after January 1, 1993. Further, Mr. Levine was able to earn annual incentive compensation based upon the performance of the Trust's "reinvestment activities" by comparing the yield on these activities to the yield on five-year Treasury Notes plus 100 basis points ("investment hurdle") as of January 1 of each year (commencing as of January 1, 1993) equal to: (i) $500 for each basis point by which the Trust's rate of return from reinvestment activities exceeded the investment hurdle up to 500 basis points; and (ii) $250 per each basis point by which the rate of return from reinvestment activities exceeded the investment hurdle plus 500 basis points. All incentive compensation earned on reinvestment activities was to be paid 80% in cash and 20% in shares ("Award Shares") of the Trust on March 15 of the year following the period for which the incentive was earned. The agreement also provided that as soon as practicable after December 31, 1997, the aggregate incentive compensation paid in respect of reinvestment activities would be computed on a cumulative basis covering the period January 1, 1993 through December 31, 1997 or the date of employment termination. For purposes of the cumulative computation, the Trust was deemed to realize all profits and gains on the reinvestment activities, but which were not actually realized. As described above, since this cumulative computation exceeded the actual amount paid to Mr. Levine, the Trust awarded Mr. Levine additional shares of the Trust equal in value to the excess compensation owed to Mr. Levine (the "Additional Incentive Compensation"). For these purposes, the shares were valued at a price equal to $3.75 per share. If the calculation had resulted in Mr. Levine receiving more incentive compensation during the term of the agreement than otherwise reflected by the cumulative computation, Mr. Levine would have been required to forfeit shares to the Trust equal in value to the excess. For these purposes, the number of the shares would be valued at the average price at which they were issued to Mr. Levine under the agreement. On September 3, 1997, the Trust and Mr. Levine further amended the old agreement based on an analysis performed by the Trust which indicated that the Trust would owe Mr. Levine Additional Incentive Compensation at the end of calendar year 1997 based on projections of the Trust's asset values. In an effort to remove the uncertainty this may have caused in the Trust's discussions with potential investors, the Trust and Mr. Levine agreed to fix the amount of Additional Incentive Compensation as well as incentive compensation due Mr. Levine for the period January 1, 1997 through August 31, 1997. Under this amendment, the Trust agreed to issue 400,000 shares of beneficial interest in the Trust in respect of this compensation. For purposes of this issuance, the shares were issued at a price equal to the average closing price of the Trust's shares for the five business days ended August 31, 1997, which was $4.812 per share. C. EXECUTIVE AND DIRECTORS STOCK OPTION PLAN On May 14, 1997, the Board of Trustees (the "Board") adopted and on July 8, 1997, the shareholders of the Trust approved, the 1997 Omnibus Stock and Incentive Plan (the "Plan") which allows the Trust to make stock- based awards as part of its employee and Trustee compensation program. Under the Plan, the Trust is authorized to issue up to one million shares of the Trust's beneficial interest in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance shares and units. Under the Plan, each person serving as a Trustee on the tenth business day after the final adjournment of the Trust's annual meeting will receive options to acquire 2,000 shares. Stock options granted to the Trustees will vest and be exercisable in installments as follows: (i) 50% of the number of shares commencing on the first anniversary of the date of grant; and (ii) the remainder commencing on the second anniversary of the date of grant. On July 22, 1997, each of the three Trustees received options to acquire 2,000 shares at $4.50 per share (the closing price on the day of the grant of the options). The Board administers the Plan and has the authority to determine, among other things, the individuals to be granted options, the exercise price at which shares may be acquired, the number of shares subject to options and the exercise period of each option. The Board is granted discretion to determine the term of each option granted under the Plan to employees, executives and Trustees, but in no event will the term exceed ten years and one day from the date of the grant. On July 8, 1997, the Board granted initial options to purchase a total of 41,000 shares at an exercise price of $4.08 per share (the closing price on the day of the grant of the options) to various executives and employees of the Trust exclusive of Leonard G. Levine, who was granted options pursuant to his Employment Agreement. On November 19, 1997, the board granted options to purchase a total of 133,000 shares at an exercise price of $6.375 per share (the closing price on the date of the grant of the options) to various executives and employees of the Trust exclusive of Leonard G. Levine. Pursuant to the terms of the Plan, options for all shares granted under the Plan to executives and employees will generally be exercisable and vest in installments as follows: (i) 33.3% of the number of shares commencing on the first anniversary of the date of grant; (ii) an additional 33.3% of the shares commencing on the second anniversary of the date of the grant; and (iii) the remainder of the shares commencing on the third anniversary of the date of grant. Stock Options granted or exercised by executive officers for the year ended December 31, 1997, are as follows:
Stock Option Grants in 1997 Fiscal Year --------------------------------------- (a) (b) (c) (d) (e) Potential Realized Value at Assumed Annual Rates of Stock Number of % of Total Price Appreciations Securities Options for Option Term Underlying Granted to ----------------------- Options Employees in Exercise or Expiration (f) (g) Name Granted Fiscal Year Base Price Date 5% 10% - ---- ---------- ------------- ----------- ------------- ---------- ---------- Leonard G. Levine 350,000 67% $5.50 Oct 1, 2007 $1,210,622 $3,067,954 Jay E. Schmidt 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512 20,000 4% $6.38 Nov 18, 2007 $ 80,184 $ 203,202 Neil D. Hansen 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512 20,000 4% $6.38 Nov 18, 2007 $ 80,184 $ 203,202 Robert G. Higgins 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512 20,000 4% $6.38 Nov 18, 2007 $ 80,184 $ 203,202 Joel L. Teglia 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512 15,000 3% $6.38 Nov 18, 2007 $ 60,138 $ 152,402
Aggregated Option/SAR Exercises During 1997 and December 1997 Option Values -------------------------------------------- Number of Securities Value of Underlying Unexercised Unexercised Options In-the-Money Options at December 31 at December 31 ------------------- --------------------- Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized Unexercisable Unexercisable - ---- -------------- -------- ------------- ------------- Leonard G. Levine -- $ -- 100,000/ 250,000 (1) $0 / $0 Jay E. Schmidt -- $ -- 0/ 25,000 $0 / $5,850 Neil D. Hansen -- $ -- 0/ 25,000 $0 / $5,850 Robert G. Higgins -- $ -- 0/ 25,000 $0 / $5,850 Joel L. Teglia -- $ -- 0/ 20,000 $0 / $4,680 (1) Reflects options granted under Mr. Levine's contract which was executed on March 11, 1998, effective as of October 1, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of February 27, 1998 regarding the number and percentage of outstanding shares of the Trust beneficially owned by: (i) each Trustee; (ii) each executive officer; (iii) all Trustees and executive officers as a group; and (iv) entities that are known by the Trust to be the beneficial owners of more than 5% of the shares of beneficial interest. Share amounts and percentages shown for each person or entity are adjusted to give effect to common shares that are not outstanding but may be acquired by a person or entity upon exercise of all options exercisable by such entity or person within 60 days of February 27, 1998. However, those common shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by any other person. Amount of Title of Name and Address of Beneficial Percentage Class Beneficial Owners Ownership of Shares - -------- ------------------- ---------- ---------- Shares of FMR Corp. (1) 1,110,550 8.4% Beneficial Fidelity Management Interest & Research Company Fidelity Low-Priced Stock Fund Fidelity Management Trust Company Edward C. Johnson 3d Abigail P. Johnson 82 Devonshire Street Boston, MA 02109 Shares of Magten Asset Management 1,897,605 14.3% Beneficial Corp. (2) Interest Mellon Bank, N.A. as Trustee for the General Motors Employees Domestic Group Pension Trust General Motors Investment Management Corporation 350 East 21st Street New York, NY 10010 Shares of Morgens Waterfall Income 2,192,501 16.6% Beneficial Partners, L.P. (3) Interest Restart Partners, L.P. Restart Partners II, L.P. Restart Partners III, L.P. Restart Partners IV, L.P. Restart Partners V, L.P. Endowment Restart, L.L.C. 10 East 50th Street New York, NY 10022 Shares of Leonard G. Levine, 612,504 (5) 4.6% Beneficial President (4) Interest Shares of Neil D. Hansen, 13,688 Less than 1% Beneficial First Vice President (4) Interest Amount of Title of Name and Address of Beneficial Percentage Class Beneficial Owners Ownership of Shares - -------- ------------------- ---------- ---------- Shares of Jay E. Schmidt 2,001 Less than 1% Beneficial Vice President (4) Interest Shares of Joel L. Teglia 1,206 Less than 1% Beneficial Vice President and Interest Chief Financial Officer (4) Shares of Robert G. Higgins 1,081 (6) Less than 1% Beneficial Vice President (4) Interest Shares of All Trustees and 630,480 4.7% Beneficial Officers of the Trust, Interest as a group (8 persons) - -------------------- (1) FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson (who together with other members of the Johnson family may be deemed to form a controlling group with respect to FMR Corp.) have filed reports with the Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), indicating combined ownership of five percent (5%) or more of the outstanding common shares. As of the Record Date, Fidelity Management & Research Company, an investment adviser registered under the Investment Advisers Act of 1940 (the "1940 Act"), and Fidelity Low-Priced Stock Fund, an investment company which it serves as investment adviser, owned 991,750 shares or 7.47% of the outstanding common shares. Edward C. Johnson 3d and FMR Corp. each has sole dispositive power over these 991,750 shares, but neither has sole voting power over these shares. As of the Record Date, Fidelity Management Trust Company, a wholly-owned subsidiary of FMR Corp., owned 118,800 shares or .9% of the outstanding common shares as a result of serving as investment manager of institutional accounts. Edward C. Johnson 3d and FMR Corp. each has sole voting and dispositive power over these 118,800 common shares. (2) Magten Asset Management Corp. ("Magten") is an investment adviser registered under the 1940 Act. Magten has filed reports with the Commission pursuant to Section 13(d) of the Exchange Act, indicating ownership of five percent (5%) or more of the outstanding common shares. Magten has shared dispositive power over 1,897,605 common shares, and shared voting power over 1,436,005 common shares. The General Motors Employees Domestic Group Pension Trust (the "GM Trust") receives investment management services from General Motors Investment Management Corporation (the "GM Adviser"), an investment adviser registered under the 1940 Act. Magten provides investment management services to the GM Trust. The GM Trust and the GM Adviser have shared voting and dispositive powers over 651,055 common shares, or 4.9% of the outstanding common shares. Each of the GM Trust and the GM Adviser disclaims beneficial ownership of these shares. (3) Certain affiliates of Morgens, Waterfall, Vintiadis & Company, Inc. ("MW"), have filed reports with the Securities and Exchange Commission (the "SEC") pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, indicating combined ownership of five percent (5%) or more of the outstanding shares of the Trust. As of the Record Date, the following affiliates had indicated ownership interests: (i) Morgens Waterfall Income Partners, L.P., owns 83,315 shares, or a 0.6% ownership interest; (ii) Restart Partners, L.P., owns 418,768 shares, or a 3.2% ownership interest; (iii) Restart Partners II, L.P., owns 692,830 shares, or a 5.2% ownership interest; (iv) Restart Partners III, L.P., owns 482,350 shares, or a 3.7% ownership interest; (v) Restart Partners IV, L.P., owns 304,758 shares, or a 2.3% ownership interest; vi) Restart Partners V, L.P., owns 100,855 shares, or a .8% ownership interest; (vii) Endowment Restart, L.L.C., owns 109,625 shares, or a .8% ownership interest. Although John C. Waterfall and Edwin H. Morgens do not directly own any shares, each of them may be deemed an indirect beneficial owner of 2,192,501 shares by virtue of their effective control over the operation of each of the affiliated entities listed above. Furthermore, Morgens Waterfall Capital, L.L.C., may be deemed an owner of 83,315 shares by virtue of its position as general partner of Morgens Waterfall Income Partners, L.P. (4) The business address for Messrs. Levine, Hansen, Schmidt, Teglia and Higgins is 150 S. Wacker Drive, Suite 2900, Chicago, Illinois 60606. (5) Represents 512,504 shares of beneficial interest plus 100,000 vested options to purchase common shares at an exercise price of $5.50 per share. (6) Includes 217 shares owned by Mr. Higgins' daughter. Mr. Higgins disclaims beneficial ownership of these shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Effective January 1, 1997, the Trust began paying employees directly in contrast to the prior practice of reimbursing Banyan Management Corp. ("BMC") on an hourly basis for the services of BMC's personnel. In prior years, these payroll costs along with administrative costs were allocated to the Trust and other entities to which BMC provided administrative services based upon the actual number of hours spent by BMC personnel on matters related to that particular entity in relation to the total number of BMC personnel hours. From January 1, 1997 through September 30, 1997, the Trust shared only certain administrative items such as office rent and office expenses with other companies for which BMC provided services. These costs were shared based upon the total hours worked by employees of the Trust relative to total hours worked by employees of BMC and the Trust combined. The Trust's allocable share of costs for the years ended December 31, 1997, 1996 and 1995, amounted to $403,100, $1,275,374 and $1,443,434, respectively. Beginning October 1, 1997, the Trust paid all of its administrative costs directly and no longer shared these costs with other companies. As of December 15, 1997, all shareholders of BMC, other than the Trust, had terminated their administrative services relationship with, and had surrendered their respective ownership interest in BMC, making the Trust the sole remaining shareholder of BMC. As of this date, BMC merged into a wholly-owned subsidiary of the Trust, BSRT Management Corp. As a result of the merger, the Trust assumed current liabilities of $101,526, cash of $83,178 and other assets of $64,171. BSRT Management Corp. paid a dividend to the Trust in the amount of $150,000 representing a distribution of its accumulated earnings and profits. This amount has been included in Other Income of the Trust. During the fiscal year ended December 31, 1997, the Trust paid no salary to, but purchased legal services from Robert G. Higgins, the Trust's Vice President, Secretary and General Counsel. Fees for legal services totaled $337,672. The Trust also provides Mr. Higgins with office space and equipment. Mr. Higgins pays no rent, as such, to the Trust for the use of office space and equipment. Instead, Mr. Higgins provides the Trust with a 20% discount for all time billed to the Trust by Mr. Higgins and his employees. Mr. Higgins also reimburses the Trust for the cost of two full time and certain part-time employees. In addition, during the fiscal year ended December 31, 1997, the Trust paid Adam Levine, the son of the Trust's President and Chief Executive Officer, $65,200 for services rendered to the Trust as an employee. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: Exhibit 10(i) Employment Agreement of Leonard G. Levine dated March 11, 1998. Exhibit (21) Subsidiaries of Banyan Strategic Realty Trust Exhibit (27) Financial Data Schedule Exhibit 99(7) Press Release dated February 12, 1998. Exhibit 99(8) Press Release dated March 2, 1998. The following exhibits are incorporated by reference from the Trust's Registration Statement on Form S-11 (file number 33-4169), referencing the exhibit number used in such Registration Statement. Exhibit (3)(b) By-Laws dated March 13, 1986. (3)(c) and (3)(d) Amended and Restated Declaration of Trust dated as of August 8, 1986, as amended on March 8, 1991 and May 1, 1993. (10) Material Contracts (i) Amended Employment Agreement of Leonard G. Levine dated January 1, 1990. Second Amended and Restated Employment Contract of Leonard G. Levine dated December 31, 1992. Amendment to Second Amended and Restated Employment Agreement of Leonard G. Levine dated March 19, 1997. Second Amendment to Second Amended and Restated Employment Agreement (ii) Amendment to Loan Agreement dated December 1, 1994; Second Amendment to Loan Agreement dated December 21, 1994; Third Amendment to Loan Agreement dated December 18, 1995; and Fourth Amendment to Loan Agreement dated January 7, 1997 regarding the Registrant's Revolving Line of Credit with American National Bank and Trust Company of Chicago. (iii) First Amendment to Note dated December 18, 1995 and Second Amendment to Note dated January 7, 1997 regarding the Registrant's Revolving Line of Credit with American National Bank and Trust Company of Chicago. (iv) Fifth Amendment to Loan Agreement dated March 7, 1997 and Sixth Amendment to Loan Agreement dated April 29, 1997 regarding the Registrant's Revolving Line of Credit with American National Bank and Trust Company of Chicago. (v) Amended and Restated Note ($20,000,000) dated April 29, 1997 and Note ($10,000,000) dated April 29, 1997 regarding the Registrant's Revolving Line of Credit with American National Bank and Trust Company of Chicago. (vi) Seventh Amendment to Loan Agreement dated July 29, 1997 regarding the Registrant's Revolving Line of Credit with American National Bank and Trust Company of Chicago. (vii) 1997 Omnibus Stock and Incentive Plan dated July 9, 1997. (viii) Convertible Term Loan Agreement dated as of October 10, 1997 among Banyan Strategic Realty Trust, as Borrower, and the Lenders listed therein, as Lenders (ix) Share Purchase Agreement by and among Banyan Strategic Realty Trust and the Purchasers listed on the signature page attached thereto dated as of October 10, 1997 (x) Registration Rights Agreement dated as of October 10, 1997 between Banyan Strategic Realty Trust and the Purchasers listed on the Signature Page attached thereto (b) The following reports on Form 8-K were filed during the quarter ended December 31, 1997: A report on Form 8-K was filed on October 14, 1997 wherein Item 5 disclosed terms of the Share Purchase Agreement and the Convertible Term Loan Agreement with Morgens. A report on Form 8-K was filed on October 30, 1997 wherein Item 5 disclosed the Trust's third quarter results and the terms of the new employment agreement with the Trust's President and Chief Executive Officer, Leonard G. Levine. A report on Form 8-K was filed on December 15, 1997 wherein Item 5 disclosed the Registrant's acquisition of the Airways Plaza property. (c) See Item 14(a)(3) above. (d) None. SIGNATURES PURSUANT to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BANYAN STRATEGIC REALTY TRUST By: /s/ Leonard G. Levine Date: March 16, 1998 Leonard G. Levine, President PURSUANT to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Leonard G. Levine Date: March 16, 1998 Leonard G. Levine, President By: /s/ Joel L. Teglia Date: March 16, 1998 Joel L. Teglia, Vice President of Finance and Administration, Chief Financial and Accounting Officer By: /s/ Norman M. Gold Date: March 16, 1998 Norman M. Gold, Trustee By: /s/ Walter E. Auch, Sr. Date: March 16, 1998 Walter E. Auch, Sr., Trustee By: /s/ Marvin A. Sotoloff Date: March 16, 1998 Marvin A. Sotoloff, Trustee BANYAN STRATEGIC REALTY TRUST INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Pages Report of Independent Auditors F-2 Consolidated Balance Sheets, December 31, 1997 and 1996 F-3 to F-4 Consolidated Statements of Income and Expenses For the Years Ended December 31, 1997, 1996 and 1995 F-5 to F-6 Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 1997, 1996 and 1995 F-7 Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995 F-8 to F-10 Notes to Consolidated Financial Statements F-11 to F-38 All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes thereto. REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF BANYAN STRATEGIC REALTY TRUST We have audited the accompanying consolidated balance sheets of Banyan Strategic Realty Trust as of December 31, 1997 and 1996, and the related consolidated statements of income and expenses, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Banyan Strategic Realty Trust at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 9, 1998 BANYAN STRATEGIC REALTY TRUST CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1997 1996 ------------- ------------ ASSETS - ------ Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . $ 4,428,588 $ 3,805,260 Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,491,621 529,112 Interest Receivable on Investments. . . . . . . . . . . . . . . . . . 48,927 46,313 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 813,052 805,562 ------------ ------------ 6,782,188 5,186,247 ------------ ------------ Investment in Real Estate, at cost: Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,142,879 16,956,094 Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,458,751 85,210,415 Building Improvements . . . . . . . . . . . . . . . . . . . . . . . 4,418,008 5,015,673 ------------ ------------ 156,019,638 107,182,182 Less: Accumulated Depreciation. . . . . . . . . . . . . . . . . . . (6,633,796) (4,692,455) ------------ ------------ 149,385,842 102,489,727 ------------ ------------ Investment in Real Estate Venture . . . . . . . . . . . . . . . . . . -- 5,713,759 Deferred Financing Costs (Net of Accumulated Amortization of $1,112,345 and $722,925, Respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,269,026 1,326,489 Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,196,572 1,817,983 ------------ ------------ Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $159,633,628 $116,534,205 ============ ============ BANYAN STRATEGIC REALTY TRUST CONSOLIDATED BALANCE SHEETS - CONTINUED December 31, December 31, 1997 1996 ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Liabilities Accounts Payable and Accrued Expenses . . . . . . . . . . . . . . . . $ 1,857,581 $ 2,481,253 Accrued Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . 795,950 763,238 Mortgage Loans Payable. . . . . . . . . . . . . . . . . . . . . . . . 70,503,284 48,181,023 Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,614,493 10,900,000 Accrued Interest Payable. . . . . . . . . . . . . . . . . . . . . . . 296,454 237,922 Unearned Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 276,386 248,748 Security Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 710,865 473,758 ------------ ------------ Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 96,055,013 63,285,942 ------------ ------------ Minority Interest in Consolidated Partnerships. . . . . . . . . . . . 1,263,405 2,313,825 Shareholders' Equity Shares of Beneficial Interest, No Par Value, Unlimited Authorization; 14,761,850 and 12,001,620 Shares Issued, respectively. . . . . . . . . . . . . . . . . . . . . . . . 119,013,405 106,694,912 Accumulated Deficit . . . . . . . . . . . . . . . . . . . . . . . . . (49,332,246) (48,394,525) Treasury Shares at Cost, 1,522,649 Shares . . . . . . . . . . . . . . (7,365,949) (7,365,949) ------------ ------------ Total Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . 62,315,210 50,934,438 ------------ ------------ Total Liabilities and Shareholders' Equity. . . . . . . . . . . . . . $159,633,628 $116,534,205 ============ ============ Book Value Per Share of Beneficial Interest (13,239,201 and 10,478,971 Shares Outstanding, respectively) . . . . . . . . . . . . . . . . . . . . $ 4.71 $ 4.86 ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
BANYAN STRATEGIC REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES
FOR THE YEARS ENDED DECEMBER 31 ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ REVENUE Rental Income . . . . . . . . . . . . . . . . . . . $ 25,369,761 $ 18,606,996 $10,118,609 Operating Cost Reimbursement. . . . . . . . . . . . 2,440,623 1,936,392 918,914 Miscellaneous Tenant Income . . . . . . . . . . . . 707,659 259,844 194,335 Interest and Amortized Discount on Mortgage Loans . -- 441,725 1,036,052 Income on Investments and Other Income. . . . . . . 266,857 159,361 634,459 ----------- ----------- ----------- Total Revenue . . . . . . . . . . . . . . . . . . . . 28,784,900 21,404,318 12,902,369 ----------- ----------- ----------- EXPENSES Operating Property Expenses . . . . . . . . . . . . 5,205,965 4,296,266 2,785,740 Repairs and Maintenance . . . . . . . . . . . . . . 2,594,960 2,378,139 1,256,444 Real Estate Taxes . . . . . . . . . . . . . . . . . 1,994,481 1,748,105 1,153,797 Interest. . . . . . . . . . . . . . . . . . . . . . 6,447,278 4,011,218 1,583,645 Ground Lease. . . . . . . . . . . . . . . . . . . . 892,933 871,471 376,130 Depreciation and Amortization . . . . . . . . . . . 3,490,393 2,453,059 1,334,992 General and Administrative. . . . . . . . . . . . . 4,314,816 3,125,509 2,036,367 Amortization of Deferred Loan Fees and Financing Costs . . . . . . . . . . . . . . . 723,354 511,757 234,056 Recovery of Losses on Loans, Notes and Interest Receivable . . . . . . . . . . . . . . . (161,539) (16,569) (164,958) ----------- ----------- ----------- Total Expenses. . . . . . . . . . . . . . . . . . . . 25,502,641 19,378,955 10,596,213 ----------- ----------- ----------- Income Before Minority Interest, Income (Loss) from Operations of Real Estate Ventures, Net Non-recurring Gains and Extraordinary Item. . . 3,282,259 2,025,363 2,306,156 Minority Interest in Consolidated Partnerships. . . . (590,323) (481,411) (178,114) Income (Loss) from Operations of Real Estate Ventures 37,126 (3,301,212) 62,713 ----------- ----------- ----------- Income (Loss) before Net Non-Recurring Gains and Extraordinary Item. . . . . . . . . . . . . . . . . 2,729,062 (1,757,260) 2,190,755 Net Gain on Disposition of Investment in Real Estate, Disposition of Investment in Real Estate Venture and Disposition of Partnership Interest . . . . . . 881,375 -- 409,290 ----------- ----------- ----------- Income (Loss) Before Extraordinary Item . . . . . . . 3,610,437 (1,757,260) 2,600,045 Extraordinary Item, Net of Minority Interest. . . . . (64,155) -- -- ----------- ----------- ----------- Net Income (Loss) . . . . . . . . . . . . . . . . . . $ 3,546,282 $(1,757,260) $ 2,600,045 =========== =========== =========== BANYAN STRATEGIC REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES - CONTINUED FOR THE YEARS ENDED DECEMBER 31 ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Earnings Per Share of Beneficial Interest - Basic and Diluted: Income (Loss) before Net Non-Recurring Gains and Extraordinary Item. . . . . . . . . . . . . . $ 0.24 $ (0.17) $ 0.21 =========== =========== =========== Net Income (Loss) . . . . . . . . . . . . . . . . . $ 0.32 $ (0.17) $ 0.25 =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
BANYAN STRATEGIC REALTY TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Shares of Beneficial Interest ------------------------- Accumulated Treasury Shares Amount Deficit Shares Total --------- ------------ ------------- ------------ ----------- Shareholders' Equity, January 1, 1995. . . . . . . 11,993,751 $106,662,313 $(40,855,652) $(7,365,949) $58,440,712 Award Shares Issued . . . . . 6,036 24,899 -- -- 24,899 Net Income. . . . . . . . . . -- -- 2,600,045 -- 2,600,045 Distributions Paid. . . . . . -- -- (4,190,252) -- (4,190,252) ---------- ------------ ------------ ----------- ------------ Shareholders' Equity, December 31, 1995. . . . . . 11,999,787 106,687,212 (42,445,859) (7,365,949) 56,875,404 Award Shares Issued . . . . . 1,833 7,700 -- -- 7,700 Net Loss. . . . . . . . . . . -- -- (1,757,260) -- (1,757,260) Distributions Paid. . . . . . -- -- (4,191,406) -- (4,191,406) ---------- ------------ ------------ ----------- ------------ Shareholders' Equity, December 31, 1996. . . . . . 12,001,620 106,694,912 (48,394,525) (7,365,949) 50,934,438 Issuance of Shares, net of issuance costs. . . . 2,264,595 9,999,199 -- -- 9,999,199 Award Shares Issued . . . . . 495,635 2,319,294 -- -- 2,319,294 Net Income. . . . . . . . . . -- -- 3,546,282 -- 3,546,282 Distributions Paid. . . . . . -- -- (4,484,003) -- (4,484,003) ---------- ------------ ------------ ----------- ------------ Shareholders' Equity, December 31, 1997. . . . . . 14,761,850 $119,013,405 $(49,332,246) $(7,365,949) $ 62,315,210 =========== ============ ============ =========== ============ The accompanying notes are an integral part of the consolidated financial statements.
BANYAN STRATEGIC REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . $ 3,546,282 $(1,757,260) $ 2,600,045 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Recovery of Losses on Loans, Notes and Interest Receivable . . . . . . . . . . . . . . . (161,539) (16,569) (164,958) Extraordinary Item, net of Minority Interest. . . 64,155 -- -- Net Gain on Disposition of Investment in Real Estate, Disposition of Investment in Real Estate Venture and Disposition of Partnership Interest. . . . . . . . . . . . . . . (881,375) -- (409,290) Amortization of Premium on Investment Securities. . -- -- 10,596 Depreciation and Amortization . . . . . . . . . . . 4,213,747 2,964,816 1,569,048 Amortization of Discount on Mortgage Loans Receivable. . . . . . . . . . . . . . . . . . . . -- (34,547) (372,129) Net Loss (Income) From Operation of Real Estate Ventures. . . . . . . . . . . . . . . (37,126) 3,301,212 (62,713) Minority Interest Participation in Consolidated Partnerships . . . . . . . . . . . . 590,323 481,411 178,114 Incentive Compensation Expense. . . . . . . . . . . 1,213,098 729,700 3,500 Net Change In: Restricted Cash . . . . . . . . . . . . . . . . . . (546,350) (149,542) (212,047) Interest Receivable on Mortgage Loans and Investments . . . . . . . . . . . . . . . . . (2,614) 84,819 6,154 Accounts Receivable . . . . . . . . . . . . . . . . (12,838) (666,396) (420,357) Other Assets. . . . . . . . . . . . . . . . . . . . (528,361) (598,688) (1,035) Accounts Payable and Accrued Expenses . . . . . . . 422,866 721,126 (42,961) Accrued Interest Payable. . . . . . . . . . . . . . 73,086 130,597 67,320 Accrued Real Estate Tax Payable . . . . . . . . . . 4,027 54,267 10,753 Unearned Revenue. . . . . . . . . . . . . . . . . . 44,272 158,310 70,709 Security Deposits . . . . . . . . . . . . . . . . . 133,499 (1,472) 16,479 ----------- ----------- ----------- Net Cash Provided By Operating Activities . . . . . . 8,135,152 5,401,784 2,847,228 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Real Estate Assets . . . . . . . . . (37,536,796) (9,313,282) (34,761,337) (Investments In) Distributions From Real Estate Ventures, Net. . . . . . . . . . . . . . . 289,758 (119,293) 56,558 BANYAN STRATEGIC REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Proceeds from Sale of Mortgage Loans Receivable . . . . . . . . . . . . . . . . . . . . $ -- $ 5,440,047 $ -- Proceeds From Sale of Investment in Real Estate Venture . . . . . . . . . . . . . . . 5,457,402 -- 2,217,558 Additions to Investment in Real Estate. . . . . . . (2,498,723) (1,968,835) (1,183,619) Payment of Liabilities Assumed at Acquisition of Real Estate Assets . . . . . . . . . . . . . . 34,471 (339,219) 34,585 Proceeds From Sale of Investment in Real Estate . . 6,141,719 -- -- Recovery of Losses on Loans, Notes and Interest Receivable . . . . . . . . . . . . . . . 161,539 16,569 164,958 Proceeds from Sale of Partnership Interest. . . . . 884,507 -- -- Principal Payments of Investment Securities . . . . -- 22,365 -- Proceeds from Sale and Maturities of Investment Securities . . . . . . . . . . . . . . -- 817,314 2,500,000 Purchase of Investment Securities . . . . . . . . . -- (839,679) (1,493,360) Principal Collections on Mortgage Loans Receivable. . . . . . . . . . . . . . . . . . . . -- 14,742 43,817 Due from Affiliates . . . . . . . . . . . . . . . . -- -- 730,229 ----------- ----------- ----------- Net Cash Used In Investing Activities . . . . . . . . (27,066,123) (6,269,271) (31,690,611) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Bonds and Mortgage Loans Payable. . . 64,470,000 15,945,000 22,750,000 (Distributions To) Investment From Minority Partners . . . . . . . . . . . . . . . . (1,681,010) (357,684) 1,797,135 Deferred Financing Costs. . . . . . . . . . . . . . (1,200,425) (637,220) (597,134) Principal Payments on Mortgage Loans and Bonds Payable . . . . . . . . . . . . . . . . . . (47,549,462) (11,586,158) (185,321) Distributions Paid to Shareholders. . . . . . . . . (4,484,003) (4,191,406) (4,190,252) Shares Issued, net of Issuance Costs. . . . . . . . 9,999,199 -- -- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities . 19,554,299 (827,468) 19,574,428 ----------- ----------- ----------- Net Increase (Decrease) In Cash and Cash Equivalents. 623,328 (1,694,955) (9,268,955) Cash and Cash Equivalents at Beginning of Year. . . . 3,805,260 5,500,215 14,769,170 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year. . . . . . . $ 4,428,588 $ 3,805,260 $ 5,500,215 =========== =========== =========== BANYAN STRATEGIC REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Supplemental Information: Interest Paid During the Year . . . . . . . . . . . $ 6,374,192 $ 3,880,621 $ 1,650,965 =========== =========== =========== Non-cash financing activities: Financing assumed upon acquisition of real estate. . . . . . . . . . . . . . . . . . $ 21,616,216 $ 5,700,000 $13,056,807 =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION Banyan Strategic Realty Trust (the "Trust") was organized as a business trust under the laws of the Commonwealth of Massachusetts, pursuant to a Declaration of Trust filed March 14, 1986 under the name VMS Strategic Land Trust. The accompanying consolidated financial statements include the accounts of the Trust, its wholly-owned subsidiaries and its controlled Partnerships. In all of its partnerships, the Trust is the managing general partner and retains sole authority over all significant decisions. All intercompany balances and transactions have been eliminated in consolidation. Investment in Real Estate Venture was accounted for on the equity method. B. DEFERRED FINANCING COSTS Deferred financing costs are amortized over the term of the related loans using the level yield method. C. INVESTMENT IN REAL ESTATE In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("FAS 121"). Under FAS 121, the Trust is required to write down the value of a particular property when indicators of impairment are present and the property's expected undiscounted cash flows are not sufficient to recover the property's carrying amount. The Trust adopted FAS 121 effective January 1, 1995 with no effect on the 1995 consolidated financial statements. During the quarter ended December 31, 1996, the venture owning the H Street Assemblage property recorded a valuation allowance of $6,000,000, of which the Trust's share was $3,180,000 based on anticipated cumulative sales proceeds pursuant to contractual sales agreements pending as of that date. See Note 9, Investment in Joint Venture, for further details. The Trust classifies its real estate properties as held for sale when its Board of Trustees has authorized the sale and an active program to find a buyer has been initiated. The Trust currently classifies none of its properties as held for sale. D. REVENUE RECOGNITION Interest income is recorded when earned. E. MARKET VALUE ADJUSTMENT OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("FAS 107"), "Disclosures about Fair Value of Financial Instruments," requires entities to disclose the fair value of all financial assets and liabilities for which it is practicable to estimate. Fair value is defined in FAS 107 as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Trust believes the carrying amount of its financial instruments approximates fair value at December 31, 1997 and 1996, because (i) the fixed rates on mortgage loans payable are comparable to rates currently offered in the market, (ii) the rates on the line of credit and bonds payable are variable and (iii) the maturities of the Trust's cash equivalents are relatively short. The Trust has no other financial instruments. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED F. INCOME TAXES For the years ended December 31, 1997, 1996 and 1995, the Trust continued to be treated as a real estate investment trust ("REIT") under Internal Revenue Code Sections 856-860. In order to qualify, the Trust is required to distribute at least 95% of its taxable income to shareholders, meet asset and income tests and comply with certain other requirements. As of December 31, 1997, Investment in Real Estate has a gross and net basis, respectively, of $156,019,638 and $149,385,842, respectively, for income tax purposes. Additionally, investment in liquidating trust with a tax basis of $675,142 has not been accorded any value for financial reporting purposes. As of December 31, 1997, the Trust has a net operating loss carry- forward of approximately $19,196,000 which will expire in 2005, 2006, 2008 and 2012. G. CASH EQUIVALENTS The Trust considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents. H. RESTRICTED CASH Restricted cash represents amounts held by lenders to provide for future real estate tax expenditures and tenant improvements, utility deposits and security deposits. Certain of these amounts may be reduced upon the fulfillment of certain conditions. I. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. J. RECLASSIFICATIONS Certain reclassifications have been made to the previously reported 1996 and 1995 consolidated financial statements in order to provide comparability with the 1997 consolidated financial statements. These reclassifications have not changed the 1996 or 1995 results. K. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share". Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 ----------- ----------- ----------- Numerator: Income (Loss) before Net Non-Recurring Gains and Extraordinary Item. . . . . . . . . . . . . . . . . . $ 2,729,062 $(1,757,260) $ 2,190,755 Net Non-Recurring Gains (a). . . . . . . . . . . . . . 881,375 -- 409,290 Extraordinary Item, Net of Minority Interest . . . . . (65,155) -- -- ----------- ----------- ----------- Net Income (Loss) . . . . . . . . . . . . . . . . . $ 3,545,282 $(1,757,260) $ 2,600,045 =========== =========== =========== Denominator: Denominator for basic earnings per weighted-average shares. . . . . . . . . . . . . . . 11,149,982 10,478,410 10,474,079 Effect of dilutive securities: Employee stock options . . . . . . . . . . . . . . . 4,942 -- -- Convertible debt . . . . . . . . . . . . . . . . . . 90,318 -- -- ----------- ----------- ----------- Dilutive potential common shares . . . . . . . . . . . 95,260 -- -- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions . 11,245,242 10,478,410 10,474,079 =========== =========== =========== Basic and Diluted Earnings Per Share: Income (Loss) before Net Non-Recurring Gains and Extraordinary Item . . . . . . . . . . . . . . . . . $ 0.24 $ (0.17) $ 0.21 Net Non-Recurring Gains (a) . . . . . . . . . . . . . 0.08 -- 0.04 Extraordinary Item, Net of Minority Interest. . . . . -- -- -- ----------- ----------- ----------- Net Income (Loss) . . . . . . . . . . . . . . . . $ 0.32 $ (0.17) $ 0.25 =========== =========== =========== (a) Net non-recurring gains include gain on disposition of investment in real estate, loss on disposition of investment in real estate venture and gain on disposition of partnership interest. For additional information relating to employee stock options and convertible debt, see notes 7 and 14. Options to purchase 133,000 common shares at $6.375 per share were outstanding during 1997 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. MORTGAGE LOANS RECEIVABLE Karfad Associates (the "Borrower"), which was indebted to the Trust pursuant to the Karfad loan in the original principal amount of $5,849,266 (the "Loan"), failed to make the required interest payments due on the first of each month from January through May of 1996 resulting in a foreclosure and a direct action against the guarantors. On May 17, 1996, the Trust entered into a Settlement Agreement (the "Agreement") and two loan sale agreements with the Borrower and a party affiliated with the Borrower pursuant to which the Karfad loan, as well as four related loans to parties affiliated with the Borrower (collectively the "Loan Portfolio"), were to be sold at an amount equal to the Trust's December 31, 1995 carrying value for the Loan Portfolio totalling approximately $5,440,000. On June 28 and July 31, 1996, the Trust completed the sale of the Loan Portfolio. In addition, the Borrower made all interest payments due pursuant to the terms of the original remaining four loans in the Loan Portfolio and the Loan from January 1, 1996 through the date of sale in the amount of approximately $407,000. As a result of the Agreement, the Trust terminated the recognition of income from the amortization of the Loan's purchase discount effective January 1, 1996. As of July 31, 1996, the Trust had no further interest in the Loan Portfolio. 1996 ----------- Reconciliation of Net Investment in Mortgage Loans Receivable: Balance at Beginning of Year. . . . . . . . . . . . $5,433,094 Additions During Year: Amortization of Discount on Mortgage Loans Receivable . . . . . . . . . 34,547 ---------- Deductions During Year: Proceeds From Sale of Mortgage Loans Receivable . . . . . . . . . (5,440,047) Principal Collections on Mortgage Loans. . . . . . . . . . . . . . . (14,742) Amortization of Deferred Loan Costs. . . . . . . . . . . . . . . . . (12,852) ---------- (5,467,641) ---------- Balance at End of Year. . . . . . . . . . . . . . $ -- ========== BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 3. MORTGAGE LOANS AND BONDS PAYABLE The properties of the Trust as described below are subject to mortgage loans and bonds payable at December 31, 1997 and 1996 as follows: Mortgage Mortgage Loans and Loans and Bonds Bonds Payable Payable Balance Balance Annual Final Estimated 1997 Property Pledged as of as of Interest Maturity Periodic Balloon Interest as Collateral 12/31/97 12/31/96 Rate Date Payment Payment Expense - ---------------- ----------- ---------- --------- --------- --------- ---------- ---------- FIRST MORTGAGES: Milwaukee Industrial Properties, Metropolitan Milwaukee, WI (a) $ 3,598,585 $ 3,707,416 8% 10/01/98 $ 33,458 $3,511,074 $291,935 Elmhurst Metro Court Elmhurst, IL (b). 3,854,097 3,908,390 8.83% 01/01/00 33,103 3,730,074 342,549 Colonial Courts of Westland Apts., Columbus, OH (c). -- 5,500,000 (c) 12/01/24 (c) N/A 203,942 Willowbrook Industrial Court, Willowbrook, IL (d). . . . . . 2,544,848 2,590,983 8.5% 07/01/02 22,050 2,281,280 218,137 Northlake Tower Shopping Center, Atlanta, GA . . . -- 10,350,000 8.5% 08/01/05 73,313 N/A 863,298 Northlake Tower Shopping Center Atlanta, GA (e) . 17,600,000 -- 7.64% 12/01/27 124,753 123,963 75,994 BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Mortgage Mortgage Loans and Loans and Bonds Bonds Payable Payable Balance Balance Annual Final Estimated 1997 Property Pledged as of as of Interest Maturity Periodic Balloon Interest as Collateral 12/31/97 12/31/96 Rate Date Payment Payment Expense - ---------------- ----------- ---------- --------- --------- --------- ---------- ---------- Quantum Business Center, Jefferson County, KY . . . . . . . $2,571,355 $2,634,563 8% 04/25/01 $22,641 $2,320,254 $208,059 Florida Power and Light Building Sarasota, FL (f). 6,003,256 6,118,702 7.21% 03/13/03 46,070 5,254,660 437,393 Woodcrest Office Park Tallahassee, FL (d) . . . . . . . 7,118,495 7,212,899 8.25% 08/01/03 57,163 6,434,628 591,548 Midwest Office Center Oakbrook Terrace, IL (d) . 3,191,086 3,258,070 7.13% 05/01/03 24,760 2,741,057 229,741 6901 Riverport Drive Louisville, KY (g) . . . . . . . 5,100,000 5,400,000 (g) 12/01/14 (g) (g) 311,754 Butterfield Office Center Oak Brook, IL . . 9,978,345 -- 7.67% 9/01/04 71,089 9,217,929 261,782 University Square Business Center Huntsville, AL. . 4,943,217 -- 8.89% 01/01/07 41,584 4,137,404 153,969 BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Mortgage Mortgage Loans and Loans and Bonds Bonds Payable Payable Balance Balance Annual Final Estimated 1997 Property Pledged as of as of Interest Maturity Periodic Balloon Interest as Collateral 12/31/97 12/31/96 Rate Date Payment Payment Expense - ---------------- ----------- ---------- --------- --------- --------- ---------- ---------- Country Creek Apartments Oklahoma City, OK (h). . . . . . $5,883,349 -- 7.3% (h) 10/01/25 $41,267 N/A $287,498 Willowpark Apartments Lawton, OK (h). . 3,504,557 -- 7.3% (h) 10/01/25 24,582 N/A 171,225 Winchester Apartments Oklahoma City, OK (h). . . . . . 3,533,925 -- 7.3% (h) 10/01/25 24,788 N/A 172,690 Woodrun Apartments Yukon, OK (h) . . 3,592,662 -- 7.3% (h) 10/01/25 25,199 N/A 175,561 FIRST MORTGAGE LINE OF CREDIT: Collateralized by the Trust's various property interests (i) . . 9,100,000 8,400,000 (i) 5/31/99 (i) 9,100,000 1,450,173 ----------- ----------- ---------- $92,117,777 $59,081,023 $6,447,278 =========== =========== ==========
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The principal balance of the Trust's mortgage loans and bonds are scheduled to be repaid as follows: 1998 . . . . . . . . . . . $ 4,835,177 1999 . . . . . . . . . . . 10,453,421 2000 . . . . . . . . . . . 5,097,676 2001 . . . . . . . . . . . 1,452,852 2002 . . . . . . . . . . . 3,790,245 Thereafter . . . . . . . . . . . 66,488,406 ----------- Total . . . . . . . . . . . $92,117,777 =========== (a) The loan contains a prepayment penalty which is based on a formula to provide yield maintenance protection to the lender. (b) The loan contains a prepayment penalty of 5% of the outstanding principal loan balance in year one, decreasing by 1% thereafter through the loan's maturity date. (c) On April 15, 1996, the partnership replaced the original letter of credit with an irrevocable letter of credit in the amount of $5,624,315 issued by Citizens National Bank of Evansville ("Replacement LOC"). The bonds were also secured by a first mortgage on the Colonial Courts property. The Replacement LOC was collaterized by an irrevocable direct pay letter of credit in the amount of $5,624,315 provided by the Federal Home Loan Bank of Indianapolis ("FHLB"). The Replacement LOC and the FHLB letter of credit had a term of five years with an option for an additional five year term. The annual fee for the Replacement LOC was equal to one percent (1%) of the letter of credit amount or $56,243. The annual fee for the FHLB letter of credit was approximately $2,800. In consideration of PHC General Partnership's ("PHC") assistance in obtaining the Replacement LOC and in accordance with the Trust's obligations under the partnership agreement, the Trust increased the limited partnership interest of PHC in the BSRT Colonial Courts Limited Partnership from 10% to 25%. The PHC ownership percentage change became effective May 1, 1996 for financial reporting purposes. Subsequent to that date, the Trust adjusted the allocation of income, loss and cash flow to reflect the modified ownership percentages. The change in ownership, however, did not effect the Trust's or PHC's historical GAAP or tax basis in the partnership. On September 25, 1997, the Trust sold its 75% interest in the Colonial Courts partnership to Colonial L.L.C., an entity affiliated with PHC. (d) The loan contains a prepayment penalty of 7% of the outstanding principal loan balance in year one, decreasing by 1% thereafter through the loan's maturity date. (e) During 1997, the Trust obtained new financing for Northlake Tower Shopping Center. The loan is collateralized by a leasehold interest in the property. The terms of the loan agreement do not allow for any prepayments during the first three years of the loan. Starting with the fourth year of the loan, the loan can be prepaid in whole, but not in part subject to prepayment premium equal to greater of (A) 1% of outstanding balance or (B) Yield maintenance amount (except there is no prepayment penalty if the loan is repaid during the 90 day period prior to scheduled maturity). The Trust wrote off unamortized deferred financing costs relating to the old loan and recognized an extraordinary loss, net of minority interest, of $64,155. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (f) The loan contains a prepayment penalty which is based on a formula to provide yield maintenance protection to the lender. The Trust, at its discretion, has the right to adjust the interest rate ("Adjusted Interest Rate") on the loan on April 1, 2001. The Adjusted Interest Rate is computed based at a rate of 300 basis points over the two- year U.S. Treasury rate as of December 18, 2000. (g) The Trust acquired a 100% leasehold interest in the property encumbered by tax-exempt Industrial Revenue Bond financing issued by Jefferson County, Kentucky. The lease requires monthly payment of variable rate interest which is due the first of each month and annual principal payments in the amount of $300,000 which are due and payable each December 1 to and including December 1, 2014, the maturity date. Under the terms of the lease, the lease payments are equal to the required principal and interest payments on the bonds. An irrevocable letter of credit was issued as additional collateral for the bond financing which matures in December 1999. The bank issuing the letter of credit has a secured interest in the property. The annual fee for the letter of credit is equal to 1.5% of the letter of credit amount. The variable interest rate on the bonds as of December 1997 was 3.9%. (h) At the time of the acquisition, the Trust assumed Oklahoma Housing Financing Agency Revenue bond financing with a combination of fixed rate, tax-exempt and taxable bonds. Approximately $14.6 million of the assumed debt is tax-exempt and matures on October 1, 2025. The tax exempt portion does not amortize until November 1, 2005, at which date the interest rates will be reset based upon current rates at that time and the principal balance will amortize over the remaining twenty years of the term of the bonds. The taxable portion of approximately $2.0 million is fully amortizing over the ten years ending November 1, 2005. The blended interest rate on the taxable and tax exempt bonds is equal to 7.3% until November 1, 2005. A prepayment penalty exists on the bonds for any unscheduled principal payment made prior to September 30, 2005. The prepayment penalty at acquisition was approximately 9.8% of the total outstanding principal balance and decreases each year through September 2005 by approximately one percent. There is no prepayment penalty after September 30, 2005. (i) On December 13, 1994, the Trust executed a Revolving Line of Credit (the "Revolving Line") with American National Bank of Chicago ("ANB") in the amount of $15 million. The Revolving Line has been amended several times to modify the terms of the loan. Under the latest amendment dated April 19, 1997, the Trust was permitted to borrow up to $30 million under a revolving facility through November 30, 1997 with a maturity of all unpaid balances by November 30, 1998. On November 13, 1997, the Trust exercised its option to extend both the revolving facility and the maturity of the loan for an additional six months until May 31, 1998 and May 31, 1999, respectively. On May 31, 1998, the Revolving Line will convert to a one year, interest only, term loan. During the term of the Revolving Line, the Trust must pay interest only at a rate equal to LIBOR plus 2.25% or ANB's Prime plus .25% at the election of the Trust. As of December 31, 1997, the LIBOR based rate paid by the Trust was 7.9% and the Prime based rate was 8.75%. In addition, the Trust is required to pay an unused facility fee equal to .5% per annum multiplied by the average portion of the Revolving Line that is undrawn from time to time. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 4. GROUND LEASE On July 28, 1995, BSRT/M&J Northlake Limited Partnership, a joint venture between a subsidiary of the Trust and M&J Wilkow Retail Ltd., acquired a leasehold interest in a shopping center in Atlanta, Georgia. The lease expires in 2067. The ground lease requires annual lease payments of $600,000 or $50,000 per month through October 4, 2007 plus 7% of total annual gross rental income commencing when gross rental income exceeds $2,000,000 from the operations of the Northlake Property. The ground lease also requires that the Trust pay property operating expenses, including real estate taxes. The base rent is reset in 2007 based upon a market rent within a contractually defined range. On November 19, 1996, the Trust acquired a 100% leasehold interest in the property located at 6901 Riverport Drive (the "Riverport Property") located in Louisville, Kentucky. The property is encumbered by tax-exempt Industrial Revenue Bond financing with an outstanding principal balance at the time of the acquisition in the amount of $5,700,000 issued by Jefferson County, Kentucky. The lease assumed requires monthly payment of variable rate interest which is due the first of each month and annual principal payments in the amount of $300,000 which are due and payable each December 1 to and including December 1, 2014, the maturity date. Under the terms of the lease, the lease payments are equal to the required principal and interest payments on the bonds. On August 26, 1997, the Trust acquired a 100% ground lessee's interest in the Technology Center located in Huntsville, Alabama, pursuant to a ground lease from the Industrial Development Board of the City of Huntsville. The lease expires on January 1, 2003. There are no rental payments due under the lease agreement and the real estate taxes are abated during the term of the lease. The lease grants the Trust a purchase option on January 1, 2003 for approximately $50,000. 5. INVESTMENT IN REAL ESTATE As of December 31, 1997, the Trust's investment in real estate consisted of the following: BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Costs Capitalized Initial costs Subsequent Gross Amount at which Carried to the Trust to Acquisition at December 31, 1997 (a)(b)(c) ---------------------- --------------- --------------------------------- Building Building Building Accumu- Property & Location/ & & & lated Date of Construction/ Improve- Improve- Improve- Deprecia- Date Acquired Land ments Land ments Land ments Total tion - ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ---------- Milwaukee Industrial Properties Milwaukee, WI 1973-1980 4/30/93 $ 532,800 $5,242,243 $ -- $685,457 $532,800 $5,927,700 $6,460,500 $850,561 Elmhurst Metro Court Elmhurst, IL 1982 11/30/93 1,615,360 3,604,359 -- 288,392 1,615,360 3,892,751 5,508,111 450,520 Colonial Penn Building Tampa Bay, FL 1984 3/22/94 1,189,300 7,366,210 -- -- 1,189,300 7,366,210 8,555,510 695,628 Florida Power & Light Building Sarasota, FL 1991 3/22/94 1,700,000 8,366,921 -- 145,841 1,700,000 8,512,762 10,212,762 829,243 BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Costs Capitalized Initial costs Subsequent Gross Amount at which Carried to the Trust to Acquisition at December 31, 1997 (a)(b)(c) ---------------------- --------------- --------------------------------- Building Building Building Accumu- Property & Location/ & & & lated Date of Construction/ Improve- Improve- Improve- Deprecia- Date Acquired/ Land ments Land ments Land ments Total tion - ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ---------- Willowbrook Industrial Court Willowbrook, IL 1979 6/16/95 $962,500 $2,961,179 $ -- $194,756 $962,500 $3,155,935 $4,118,435 $273,728 Northlake Tower Shopping Center Atlanta, GA 1983-1984 7/28/95 (f) -- 17,143,993 -- 861,479 -- 18,005,472 18,005,472 1,103,354 Quantum Busi- ness Center Jefferson County, KY 1976-1980 9/26/95 900,000 4,164,685 -- 142,569 900,000 4,307,254 5,207,254 260,920 Lexington Business Center Lexington, KY 1985 12/05/95 1,330,000 5,753,284 -- 455,582 1,330,000 6,208,866 7,538,866 367,581 Newtown Distri- bution Center Lexington, KY 1981-1982 12/5/95 355,000 3,234,143 -- 47,459 355,000 3,281,602 3,636,602 173,415 BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Costs Capitalized Initial costs Subsequent Gross Amount at which Carried to the Trust to Acquisition at December 31, 1997 (a)(b)(c) ---------------------- --------------- --------------------------------- Building Building Building Accumu- Property & Location/ & & & lated Date of Construction/ Improve- Improve- Improve- Deprecia- Date Acquired Land ments Land ments Land ments Total tion - ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ---------- Woodcrest Office Park Tallahassee, FL 1967-1989 12/19/95 $3,080,000 $7,967,657 $ -- $910,063 $3,080,000 $8,877,720 $11,957,720 $522,233 Midwest Office Center Oakbrook Terrace, IL 1979 4/18/96 2,396,100 2,591,138 -- 203,767 2,396,100 2,794,905 5,191,005 143,756 6901 River- port Drive Louisville, KY 1985 11/19/96 1,750,000 8,241,747 -- 20,080 1,750,000 8,261,827 10,011,827 231,513 Phoenix Business Park Atlanta, GA 1979 1/15/97 (d) 1,717,218 3,776,441 -- 17,159 1,717,218 3,793,600 5,510,818 91,674 Butterfield Office Plaza Oak Brook, IL 1974 4/30/97 (d) 4,812,802 10,255,306 -- 190,214 4,812,802 10,445,520 15,258,322 180,836 BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Costs Capitalized Initial costs Subsequent Gross Amount at which Carried to the Trust to Acquisition at December 31, 1997 (a)(b)(c) ---------------------- --------------- --------------------------------- Building Building Building Accumu- Property & Location/ & & & lated Date of Construction/ Improve- Improve- Improve- Deprecia- Date Acquired Land ments Land ments Land ments Total tion - ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ---------- Woodrun Village Apartments Yukon, OK 1985 5/22/97 (d) $338,684 $4,244,178 $ -- $19,873 $338,684 $4,264,051 $4,602,735 $71,908 Country Creek Apartments Oklahoma City, OK 1985 5/22/97 (d) 506,308 6,981,737 -- 36,478 506,308 7,018,215 7,524,523 118,552 Winchester Run Apartments Oklahoma City, OK 1985 5/22/97 (d) 272,815 4,231,120 -- 20,037 272,815 4,251,157 4,523,972 72,246 Willowpark Apartments Lawton, OK 1985 5/22/97 (d) 137,492 4,330,479 -- 20,353 137,492 4,350,832 4,488,324 73,996 Southlake Corporate Center Morrow, GA 1989 7/30/97 (d) 750,000 3,745,761 -- 7,015 750,000 3,752,776 4,502,776 39,043 BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Costs Capitalized Initial costs Subsequent Gross Amount at which Carried to the Trust to Acquisition at December 31, 1997 (a)(b)(c) ---------------------- --------------- --------------------------------- Building Building Building Accumu- Property & Location/ & & & lated Date of Construction/ Improve- Improve- Improve- Deprecia- Date Acquired Land ments Land ments Land ments Total tion - ------------------ ------ ----------- ------ --------- ---------- ----------- ----------- ---------- Technology Center Huntsville, AL 1990 8/26/97 (e)(f) $ -- $2,546,942 $ -- $ -- $ -- $2,546,942 $2,546,942 $21,150 University Square Business Center Huntsville, AL 1984-1987 8/26/97 (d) 1,387,000 5,950,345 -- 74,664 1,387,000 6,025,009 7,412,009 52,769 Airways Plaza Office Center Memphis, TN 1982 12/10/97 (d) 409,500 2,755,731 -- -- 409,500 2,755,731 3,165,231 4,130 Other (g) -- -- -- 79,922 -- 79,922 79,922 5,040 ----------- ------------ ---- ---------- ----------- ------------ ------------ ---------- $26,142,879 $125,455,599 $-- $4,421,160 $26,142,879 $129,876,759 $156,019,638 $6,633,796 =========== ============ ==== ========== =========== ============ ============ ========== - -------------------- (a) The aggregate cost of the above real estate at December 31, 1997 for Federal income tax purposes is $156,019,638. For further details regarding encumbrances on the Trust's properties see Note 3, Mortgage Loans and Bonds Payable. (b) Reconciliation of real estate owned:
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1997 1996 1995 ------------ ------------- ------------ Balance at Beginning of Year. . . . . . . . $107,182,182 $ 90,200,065 $41,198,302 Acquisitions During Year (1). . . . . . . . 59,153,012 15,013,282 47,818,144 Sale of Property (2). . . . . . . . . . . . (12,814,279) -- -- Additions During Year . . . . . . . . . . . 2,498,723 1,968,835 1,183,619 ------------ ------------ ----------- Balance at End of Year. . . . . . . . . . . $156,019,638 $107,182,182 $90,200,065 ============ ============ =========== (1) In addition to these capitalized costs, the Trust assumed $598,347 of net operating liabilities at acquisition. (2) In connection with the sale of Colonial Courts and Hallmark Apartments, the Trust transferred $107,135 of net operating liabilities. (c) Depreciation expense is computed using the straight line method. Rates used in the determination of depreciation are based upon the estimated useful life of the asset, primarily 40 years.
1997 1996 1995 ------------ ------------ ------------ Reconciliation of Accumulated Depreciation: Beginning of Year . . . . . . . . . . . . . $4,692,455 $2,337,095 $1,036,890 Depreciation Expense. . . . . . . . . . . . 3,282,032 2,355,360 1,300,205 Sale of Property. . . . . . . . . . . . . . (1,340,691) -- -- ---------- ---------- ---------- Balance at End of Year. . . . . . . . . . . $6,633,796 $4,692,455 $2,337,095 ========== ========== ========== (d) The Trust acquired a 100% fee ownership interest in these properties during the year ended December 31, 1997. (e) The Trust acquired a 100% ground Lessee's interest in the Technology Center on August 26, 1997. (f) The property is subject to a ground lease. See note 4 for more information. (g) Other includes corporate furniture, fixtures and equipment.
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 6. DISPOSITION ACTIVITIES The Trust disposed of its interests in Hallmark Village Apartments on March 11, 1997, the H Street Venture on March 20, 1997 and on July 29, 1997 and Colonial Courts property on September 25, 1997. The interests in Hallmark Village Apartments and the H Street Venture were sold to unaffiliated third parties and the interest in Colonial Courts property was sold to an affiliate of PHC General Partnership who held a 25% ownership interest in the property. The Trust received net sales proceeds of approximately $6.1 million and recognized a gain of $3,800 from the sale of Hallmark Village Apartments, received net sales proceeds of approximately $5.5 million and recognized a loss of $61,000 on the sale of its investment in H Street Venture and received net sales proceeds of approximately $0.9 million and recognized a gain on sale of its partnership interest in Colonial Courts property of $938,000. In addition, upon Colonial Courts closing, the Trust received a distribution of its percentage ownership interest in the Partnership's cash reserves of approximately $0.3 million, which, when added to net closing proceeds, resulted in a total payment to the Trust of approximately $1.2 million. 7. SHARE PURCHASE AGREEMENT AND CONVERTIBLE TERM LOAN AGREEMENT On October 14, 1997, the Trust entered into a Share Purchase Agreement (the "Agreement") with a group of accredited investors (the "Purchasers") under which the Trust sold 2,192,501 shares of beneficial interest at $5.00 per share, for an aggregate sale price of approximately $11 million. The Trust paid approximately $1.4 million of other transaction costs in connection with the transaction. The net sales proceeds were used to repay draws totaling $9.0 million on the Trust's Revolving Line, with the remainder used for general working capital. Amounts repaid under the Revolving Line may be re-borrowed until May 31, 1998 and utilized to acquire additional real estate property interests. Simultaneously with the execution of the Agreement, the Trust also entered into a Convertible Term Loan Agreement ("the Loan Agreement") with the Purchasers. Under this agreement, the Purchasers agreed to provide an unsecured convertible loan to the Trust in the amount of $20,000,000 (the "Unsecured Loan") of which $10,000,000 must be borrowed by March 31, 1998 and the remainder by October 14, 1998. As of December 31, 1997, the Trust had not borrowed any amounts under the loan. Loan proceeds may be used by the Trust only to purchase real estate property interests. The Loan Agreement contains a number of covenants and limitations customary for agreements of this nature including covenants related to net worth and debt coverage. Interest is payable quarterly on the last day of the calendar quarter, at 12% per annum. Draws on the loan mature on September 30, 2002 with no prepayment of the loan permitted prior to September 30, 1999, although the Purchasers may accelerate maturity upon the sale of substantially all of the assets of the Trust. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Assuming shareholder approval, the Purchasers may convert all or part of the amounts funded on the Unsecured Loan into preferred stock at a conversion price of $100 per share or into common shares at a conversion price equal to $5.15 per share. Preferred shares are convertible into common shares at the rate of approximately 19.4 common shares for each share of preferred stock equal to a price of $5.15 per share. The convertible preferred shares will be entitled to receive, upon declaration by the Trust, cash distributions at an annual rate of 10% per annum calculated on their stated value of $100 per share. Distributions on preferred shares will be cumulative from the date of issuance whether or not there are funds legally available for the payment thereof and must be paid prior to paying any distributions to the holders of common shares. Finally, for thirty days after expiration of the loan commitment, the Purchasers may purchase preferred shares to the extent that any part of the $20,000,000 loan is not then outstanding in an amount equal to the unfunded portion at a price equal to $100 per preferred share. Prior to shareholder approval, the Purchasers may also convert loans outstanding to common shares at any time, if that conversion will not cause total shareholdings of the Purchasers to exceed 19.9% of the issued and outstanding shares as of October 14, 1997. 8. PRO FORMA INFORMATION (UNAUDITED) The following unaudited Pro Forma Condensed Summary information presents the results of operations of the Trust as if (i) the Trust entered into a Share Purchase Agreement and repaid $9 million of debt on January 1, 1997 and 1996; (ii) the Trust acquired all of the acquisition properties on January 1, 1997 and 1996; and (iii) the Trust disposed of the disposition properties and the mortgage note receivable at the beginning of each period presented. The unaudited Pro Forma Condensed Summary information is not necessarily indicative of what the actual results of operations would have been for the years ended December 31, 1997 and 1996 assuming the issuance of shares and repayment of debt with the proceeds, purchase of acquisition properties, and sale of disposition properties and mortgage note receivable had been consummated at the beginning of each period presented, nor does it purport to represent the future operations of the Trust. Year Ended December 31, (Unaudited) ----------------------------- 1997 1996 ----------- ----------- Revenues. . . . . . . . . . . . . $32,422,344 $30,459,844 Net Income. . . . . . . . . . . . $ 4,390,093 $ 4,523,649 Earnings Per Share of Beneficial Interest - Basic. $ 0.33 $ 0.34 BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 9. INVESTMENT IN JOINT VENTURE H STREET ASSEMBLAGE On December 11, 1990, the Trust acquired title to the property known as the Victor Building located in Washington D.C. Pursuant to an agreement with Banyan Strategic Land Fund II ("BSLFII"), which had acquired an adjacent parcel of land on June 5, 1992, the Trust and BSLFII formed a joint venture (the "Venture") to pursue development rights of their combined ownership interest (the "H Street Assemblage"). The Trust had a 53% interest in the Venture while BSLFII owned the remaining 47%. This property consists of 17,000 square feet of undeveloped land in downtown Washington, D.C. plus an approximately 55,900 square foot office building. The entire property is zoned for office development. During the quarter ended December 31, 1996, the Venture recorded a valuation allowance in the amount of $6,000,000 as a result of an agreement with United States General Services Administration ("GSA") and a sales contract with an unaffiliated third party to purchase the H Street Assemblage. The Trust's share, $3,180,000, was included in the loss from operations of real estate ventures in the Trust's 1996 Statement of Income and Expenses. The Venture's carrying value for the property after the write down was based on the anticipated cumulative sales proceeds pursuant to a sales contract with an unaffiliated third party and an agreement with GSA. The reduction in the carrying value of $6,000,000 reflected the carrying costs and closing costs the Venture incurred in order to complete the aforementioned transactions. On March 20, 1997, the Venture sold approximately 3,500 square feet of the Venture's land to GSA for a purchase price of $1,680,000. GSA also paid the Venture $150,000 as reimbursement of expenses that the Venture incurred in anticipation of this transaction. The Venture received net sales proceeds of approximately $1,829,000, of which approximately $969,000 was the Trust's share. The Trust recognized no gain or loss on the sale. On July 29, 1997, the Venture sold the remaining land and the Victor Building to an unaffiliated third party for $9,000,000. The Trust received net sales proceeds of approximately $4,489,000 and recognized a loss on disposition of approximately $61,000. As of July 29, 1997, the Trust had no further ownership interest in the H Street Assemblage property. Summary financial information for the H Street Assemblage as of December 31, 1997, 1996 and 1995 is as follows: BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1997 1996 1995 ------------ ------------ ------------ Investment Property Net . . . . . . . . . . $ -- $ 9,981,527 $16,039,027 Other Assets. . . . . . . . . . . . . . . . -- 251,403 255,923 Other Liabilities . . . . . . . . . . . . . -- (218,306) (276,780) Venture Partners' Equity. . . . . . . . . . -- (4,300,865) (7,122,492) ----------- ----------- ----------- Trust's Equity . . . . . . . . . . . . $ -- $ 5,713,759 $ 8,895,678 =========== =========== =========== Total Revenues . . . . . . . . . . . . $ 286,652 $ 529,931 $ 469,337 =========== =========== =========== Net Income (Loss). . . . . . . . . . . $ 446,047 $(6,228,702) $ 71,252 =========== =========== ===========
BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 10. TRANSACTIONS WITH AFFILIATES Effective January 1, 1997, the Trust began paying employees directly in contrast to the prior practice of reimbursing Banyan Management Corp. ("BMC") on an hourly basis for the services of BMC's personnel. In prior years, these payroll costs along with administrative costs were allocated to the Trust and other entities to which BMC provided administrative services based upon the actual number of hours spent by BMC personnel on matters related to that particular entity in relation to the total number of BMC personnel hours. From January 1, 1997 through September 30, 1997, the Trust shared only certain administrative items such as office rent and office expenses with other companies for which BMC provided services. These costs were shared based upon the total hours worked by employees of the Trust relative to total hours worked by employees of BMC and the Trust combined. The Trust's allocable share of costs for the years ended December 31, 1997, 1996 and 1995, amounted to $403,100, $1,275,374 and $1,443,434, respectively. Beginning October 1, 1997, the Trust paid all of its administrative costs directly and no longer shared these costs with other companies. As of December 15, 1997, all shareholders of BMC, other than the Trust, had terminated their administrative services relationship with and had surrendered their respective ownership interest in BMC, making the Trust the sole remaining shareholder of BMC. As of this date, BMC merged into a wholly-owned subsidiary of the Trust, BSRT Management Corp. As a result of the merger, the Trust assumed current liabilities of $101,526, cash of $83,178 and other assets of $64,171. BSRT Management Corp. paid a dividend to the Trust in the amount of $150,000 representing a distribution of its accumulated earnings and profits. This amount has been included in Other Income of the Trust. During the year ended December 31, 1997, the Trust paid no salary to, but purchased legal services from an executive officer of the Trust. Fees for legal services totaled $337,672. The executive pays no rent, as such, to the Trust for the use of office space or equipment but does afford the Trust a 20% discount for all time billed to the Trust by the executive and his employees. The executive also reimburses the Trust for the cost of two full time and certain part time employees. The amounts paid to the executive for the years ended December 31, 1996 and 1995 were paid as salaries and are included in the costs allocated to the Trust from BMC. 11. DISTRIBUTIONS PAID AND PAYABLE To qualify as a REIT, the Trust must distribute at least 95% of its "REIT Taxable Income" to shareholders. A portion of the distributions paid during the subsequent year may be allocable to taxable income earned in the prior year. Of the $4,484,003 of 1997 distributions paid, $282,851 represented ordinary income and $4,201,152 represented a return of capital. Of the $4,191,406 of 1996 distributions paid, $2,841,813 represented ordinary income and $1,349,593 represented a return of capital. On January 7, 1998, the Trust declared a cash distribution for the fourth quarter ended December 31, 1997, of $0.10 per share payable February 20, 1998 to shareholders of record on January 22, 1998. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 12. MINIMUM RENTALS UNDER OPERATING LEASES The Trust receives rental income from the rental of retail, office and flex/industrial space under operating leases. The following is minimum future base rentals (excluding amounts representing executory costs such as taxes, maintenance and insurance) on operating leases for the Trust's industrial, office and retail projects held at December 31, 1997: 1998 . . . . . . $ 24,025,134 1999 . . . . . . 19,623,007 2000 . . . . . . 13,743,038 2001 . . . . . . 9,200,111 2002 . . . . . . 6,385,087 Thereafter . . . 17,023,304 ------------ $ 89,999,681 ============ No single tenant at the Trust's operating properties produced ten percent or more of total income from property operating activities. The Trust is subject to the usual business risks regarding the collection of the above-mentioned rentals. 13. RECOVERY OF LOSSES ON LOANS, NOTES, INTEREST RECEIVABLE The Trust has received cash of $309,285, $58,658 and $562,337 during 1997, 1996 and 1995, respectively, in respect of its interest in a liquidating trust established for the benefit of the unsecured creditors (including the Trust) of VMS Realty Partners and its affiliates ("VMS"). The Trust has recorded $161,539, $16,569 and $164,958, respectively, of these amounts as recovery of losses on mortgage loans, notes and interest receivable in its consolidated statement of income and expenses. The remainder of the amount received, $587,214, was recorded as a liability to the Class Action Settlement Fund representing the Trust's share of amounts due under the terms of the previously settled VMS securities litigation, of which $493,685 was paid and the remaining $93,529 is included in the liabilities on the Trust's December 31, 1997 balance sheet. 14. OMNIBUS STOCK AND INCENTIVE PLAN On May 14, 1997, the Board of Trustees (the "Board") adopted and on July 8, 1997, the shareholders of the Trust approved, the 1997 Omnibus Stock and Incentive Plan (the "Plan") which allows the Trust to make stock- based awards as part of its employee and Trustee compensation program. Under the Plan, the Trust is authorized to issue up to one million shares of the Trust's beneficial interest in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance shares and units. The Trust has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for options granted under the Plan because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the options granted under the Plan is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The effects on 1997 and 1996 pro forma net income and pro forma earnings per common share of amortizing to expense the estimated fair value of stock options are not necessarily representative of the effects on net income to be reported in future years due to such things as the vesting period of the stock options, and the potential for issuance of additional stock options in future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. FIXED STOCK OPTIONS Under the Plan, each person serving as a Trustee on the tenth business day after the final adjournment of the Trust's annual meeting will receive options to acquire 2,000 shares. Stock options granted to the Trustees have a term of 10 years and will vest and be exercisable in installments as follows: (i) 50% of the number of shares commencing on the first anniversary of the date of grant; and (ii) the remainder commencing on the second anniversary of the date of grant. On July 22, 1997, each of the three Trustees received options to acquire 2,000 shares at $4.50 per share (the closing price on the day of the grant of the options). The Board administers the Plan and has the authority to determine, among other things, the individuals to be granted options, the exercise price at which shares may be acquired, the number of shares subject to options and the vesting requirements and the exercise period of each option. The Board is granted discretion to determine the term of each option granted under the Plan to employees, executives and Trustees, but in no event will the term exceed ten years and one day from the date of the grant. On July 8, 1997, the Board granted initial options to purchase a total of 41,000 shares at an exercise price of $4.08 per share (the closing price on the day of the grant of the options) to various executives and employees of the Trust except for Leonard G. Levine, who was granted options pursuant to his Employment Agreement. On November 19, 1997, the Board granted options to purchase a total of 133,000 shares at an exercise price of $6.375 per share (the closing price on the date of the grant of the options) to various executives and employees of the Trust except for Leonard G. Levine who has been granted additional options under the terms of a new employment agreement executed on March 11, 1998. Options for the shares granted under the Plan to executives and employees on July 6, 1997 and November 19, 1997 have a term of 10 years and will be exercisable and vest in installments as follows: (i) 33.3% of the number of shares commencing on the first anniversary of the date of grant; (ii) an additional 33.3% of the shares commencing on the second anniversary of the date of the grant; and (iii) the remainder of the shares commencing on the third anniversary of the date of grant. Under the new employment agreement between the Trust and Leonard G. Levine, effective retroactively to October 1, 1997, the Board granted options to purchase total of 200,000 shares to Mr. Levine at an exercise price of $5.50 per share. Pursuant to the Employment Agreement, the options granted have a term of 10 years and will be exercisable and vest as follows: (i) 100,000 at the time of execution of the agreement; (ii) 25,000 on December 31, 1998, 1999, 2000 and 2001. In addition, certain target stock price performance options were granted pursuant to the Employment Agreement (see below). The unaudited pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Trust had accounted for its options under the fair value method of that statement. The fair value for the options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1997; risk free interest rates of 5.58%; BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED dividend yields of 7.19%; volatility factors of the expected market price of the Trust's common stock of .225; and a weighted-average expected life of the options of 9.8 years. The pro forma expense would be $63,573 for the year ended December 31, 1997. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models, such as the Black-Scholes model, require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's view, the existing models do not necessarily provide a reliable single measure of the fair value of the options granted under the Plan. A summary of the Trust's fixed stock option activity, and related information for the year ended December 31, 1997 follows: Weighted Shares Average Subject Exercise Price to Option Per Share ---------- -------------- Balance at December 31, 1996. . . . . -- $ -- Options granted . . . . . . . . . 380,000 5.637 Options canceled. . . . . . . . . (5,000) 4.08 -------- -------- Balance at December 31, 1997. . . . . 375,000 $ 5.658 ======== ======== At December 31, 1997, options on 100,000 shares (with an average exercise price of $5.50 per share) were exercisable and options on 625,000 shares were available for future grant. Exercise prices for options outstanding at December 31, 1997 ranged from $4.08 to $6.375 per share. The remaining weighted-average contractual life of these options was 9.76 years. The weighted average grant date fair value of all options granted during the year is $0.54. TARGET STOCK PRICE PERFORMANCE OPTIONS The exercise price of each target stock price performance option granted is equal to the market price of the Trust's common shares on the date of grant and vests as the Trust's common share price achieves certain pre-established targets which were set on the date of grant. In conjunction with the March 11, 1998 signing of an employment agreement between the Trust and Leonard G. Levine, effective retroactively to October 1, 1997, the Board granted Mr. Levine stock options to purchase an aggregate of 150,000 shares of the Trust's common shares of beneficial interest at an exercise price equal to $5.50 per share. Options to purchase 50,000 shares will vest and become exercisable if during any consecutive thirty (30) trading days during the term of the agreement the closing price of the common shares averages $8.50 per share. Options to purchase an additional 100,000 shares will vest and become exercisable on a proportionate basis if during any thirty (30) consecutive trading days during the term of the agreement the closing price of the shares averages more than $8.50 per share with full vesting occurring with respect to 75,000 shares if the closing price averages $9.00 per share, and $10.00 per share with respect to the other 25,000 shares. The number of shares underlying the options and the exercise price of each option are subject to adjustment from time BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED to time if the Trust: (i) issues or sells additional common shares of beneficial interest in exchange for consideration at a price less than the prevailing market price of the Trust's common shares at the time of issuance: (ii) issues or sells warrants with exercise prices less than the prevailing market price at the time of issuance; (iii) declares a dividend or otherwise makes a distribution to the holders of its beneficial interest in the form of additional common shares; (iv) subdivides its outstanding common shares of beneficial interest into a larger number of common shares; or (v) combines its outstanding common shares into a smaller number of common shares. All of the options must be exercised by October 1, 2007, except that if Mr. Levine dies or becomes permanently disabled during the term of the agreement, then all options which have vested must be exercised within one year of death or permanent disability. In addition, upon death or permanent disability, all options not otherwise vested, but which would or will vest within six months following the date of death or permanent disability either by passage of time or satisfaction of the various performance standards will be deemed vested and become exercisable within the same one-year time period. The fair value of each option granted to Mr. Levine under his new employment agreement was estimated on the date of grant using a modified Black-Scholes option-pricing model which, in addition to the required inputs, takes into consideration the target stock price (or barrier) which must be attained. The following weighted average assumptions were incorporated into the model for options granted in 1997; risk-free interest rate of 5.92%; expected dividend yield of 7.21%; expected lives of 10 years; and a volatility factor of the expected market price of the Trust's common shares of .225. The unaudited pro forma expense would be $8,460 for the year ended December 31, 1997. A summary of Trust's target stock price performance option activity, and related information for the year ended December 31, 1997 follows: Weighted Shares Average Subject Exercise Price to Options Per Share ---------- -------------- Balance at December 31, 1996. . . . . -- $ -- Options granted . . . . . . . . . . 150,000 5.500 ------- ------ Balance at December 31, 1997. . . . . 150,000 $5.500 ======= ====== At December 31, 1997, no options were exercisable except that Mr. Levine's new agreement was executed on March 11, 1998 and became retroactively effective to October 1, 1997. Exercise prices for options outstanding at December 31, 1997 were $5.50 per share. The remaining weighted-average contractual life of these options was 9.8 years. The weighted average grant date fair value of all options granted during the year is $0.96. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 15. DISTRIBUTION REINVESTMENT AND SHARE PURCHASE PLAN On April 23, 1997, the Trust filed a Registration Statement on Form S- 3 under the Securities Act of 1933 in order to register the Trust's Shares issuable pursuant to its Distribution Reinvestment and Share Purchase Plan (the "DRIP Plan"). The DRIP Plan allows shareholders of the Trust to: (i) automatically reinvest the cash distributions on all, or part, of the shares registered in their names and (ii) make cash investments of not less than $5.00 per investment nor more than $120,000 per calendar year. Shares purchased pursuant to the DRIP Plan will be issued directly by the Trust at either (i) 97% of the average closing sales price of the shares as reported on the NASDAQ National Market on the last five business days preceding the relevant investment date in the case of reinvested cash distributions or (ii) 100% of the aforementioned average closing price in the case of cash investments. For the year ended December 31, 1997, the Trust issued 72,094 shares of beneficial interest pursuant to the DRIP Plan and received total proceeds of $379,387. 16. AWARD SHARES AND WEIGHTED AVERAGE SHARES OUTSTANDING Pursuant to the March 19, 1997 Amendment and the September 3, 1997 Second Amendment to the Second Amended and Restated Employment Agreement of Leonard G. Levine, the Trust's president, and pursuant to the shareholder approval which was obtained at the Trust's July 8, 1997 annual meeting, all incentive compensation earned by Mr. Levine on the performance of the Trust's assets acquired subsequent to January 1, 1993 ("Reinvestment Activities") for the fiscal years ended December 31, 1996 and 1997 has been paid in shares of the Trust's stock ("Award Shares"). On July 9, 1997, the Trust issued 95,635 Award Shares effective retroactively to March 15, 1997 to Mr. Levine, representing Mr. Levine's incentive compensation earned on Reinvestment Activities for the fiscal year ending December 31, 1996 (the "1996 Award Shares"). On September 3, 1997, the Trust issued 400,000 Award Shares representing the final payment and settlement of Mr. Levine's compensation earned on Reinvestment Activities for the fiscal year ending December 31, 1997 and for cumulative incentive compensation for the period January 1, 1993 through August 31, 1997 (the "Final Award Shares"). Prior to the September 3, 1997 Amendment, Mr. Levine would have been entitled to receive shares in respect of additional compensation which would have been determined as of December 31, 1997 and issued and paid no later than March 1998. The issuance of the Final Award Shares fixed the amount of compensation that the Trust had been accruing through December 31, 1997. The 95,635 Award Shares were valued at $4.125 per share, or $394,494. The 400,000 Final Award Shares were valued at $4.812 per share, or $1,924,800 of which $650,000 was expensed in 1996, and the balance was ratably expensed during 1997. The 1996 Award Share price of $4.125 was based upon the average closing price of the Trust's shares for the five business days ending December 31, 1996. The Final Award Shares price of $4.812 was based on the average closing price of the Trust's shares for the five business days ending August 31, 1997. The 1996 Award Shares and Final Award Shares are included in the total shares outstanding of the Trust when calculating Net Income Per Share of Beneficial Interest Based on Weighted Average Number of Shares Outstanding. All of the Award Shares issued prior to January 1, 1997 and 20% of Award Shares issued for the fiscal year ended December 31, 1996 were held in escrow by the Trust, through the vesting date, September 29, 1997. Subsequent to that date, Mr. Levine became fully vested and the Award Shares were immediately transferred and are otherwise freely alienated subject to compliance with registration requirements of the federal and state securities laws or exemptions therefrom. BANYAN STRATEGIC REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 17. LITIGATION The Trust is involved in various litigation arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is Management's opinion that the final resolution of these matters will not have an adverse effect on the Trust's financial position or results of operations. 18. SUBSEQUENT EVENTS Peachtree Pointe Office Park On January 20, 1998, the Trust acquired a 100% ownership interest in five one-story office buildings known as Peachtree Pointe Office Park located in Norcross, Georgia, a northeast suburb of Atlanta, for a purchase price of approximately $4.5 million. The Trust funded the acquisition from its cash reserves as well as by utilizing a draw upon its Revolving Line of $3.4 million. EX-10 2 EXHIBIT 10(i) - ------------- EMPLOYMENT AGREEMENT This Agreement (the "Agreement") is made and entered into as of October 1, 1997 by and between Leonard G. Levine (the "Executive") and Banyan Strategic Realty Trust (the "Trust"). WHEREAS, the Executive has been employed as the Trust's President and Chief Executive Officer pursuant to an employment agreement entered into as of January 1, 1990 and amended December 31, 1992, March 19, 1997 and September 3, 1997 (the "Existing Employment Agreement"). WHEREAS, the Existing Employment Agreement expires on December 31, 1997. WHEREAS, the Trust is desirous of entering into a new employment agreement, effective as of October 1, 1997, with the Executive on the terms and conditions set forth herein; WHEREAS, the Executive is desirous of entering into a new employment agreement, effective as of October 1, 1997, with the Trust on the terms and conditions set forth herein. NOW THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Trust and the Executive do hereby agree as follows: 1. EMPLOYMENT DUTIES. The Trust agrees to employ the Executive as the President and Chief Executive Officer of the Trust to perform such duties as may reasonably be assigned from time to time consistent with this position by the Trust's Board of Trustees (the "Board"). 2. PERFORMANCE. The Executive accepts the appointment described in SECTION 1 of this Agreement and agrees to faithfully and diligently perform the services described therein. 3. TERM. The term of employment under this Agreement shall commence as of October 1, 1997 and shall remain in effect until December 31, 2001, unless sooner terminated as provided herein. 4. SALARY. For the services to be rendered by the Executive hereunder, the Trust shall pay the Executive a salary equal to $200,000 per year increasing to $210,000 per year effective January 1, 2000. All salary payable under this SECTION 4 shall be referred to as "Base Salary." All Base Salary shall be paid in the manner and frequency in which the payroll of the Trust is customarily paid. 5. INCENTIVE COMPENSATION. In addition to the Base Salary described in SECTION 4, the Trust shall pay the Executive additional compensation ("Additional Compensation") for the period 1 October 1, 1997 through December 31, 1998 (being a single fifteen-month period for purposes hereof), and for each calendar year commencing after December 31, 1998, in an amount equal to the product of the Incentive Factor and the Base Amount. To illustrate, if the Trust's actual "Per Common Share Funds from Operations" for the period October 1, 1997 through December 31, 1998 is $1.00 per share (5.263% increase over the Target Amount of $0.95 per share), the Trust will pay Executive an amount equal to 115.789% of the Base Amount or $180,920 as Additional Compensation for this period. For purposes of calculating amounts payable under this SECTION 5: (a) "Base Amount" shall mean sixty-two and one-half percent (62.5%) of the Base Salary for the relevant period. (b) "Incentive Factor" shall equal 1.0, increased by .03 for each one percentage point (1%) that the Trust's actual "Per Common Share Funds from Operations" for the relevant period exceeds the "Target Amount" and decreased (but in no event below zero) by .04 for every one percentage point (1%) that the Trust's actual "Per Common Share Funds from Operations" for the relevant period is below the "Target Amount." (c) "Per Common Share Funds from Operations" shall mean "Funds from Operations" as reported by the Trust for the relevant period in its quarterly and annual reports on Forms 10-Q and 10-K, respectively, as filed by the Trust with the Securities and Exchange Commission (the "SEC") divided by the actual number of common shares outstanding, on a weighted average basis, for the period. (d) "Target Amount" shall mean Per Common Share Funds from Operations equal to: (i) $0.95 per share for the fifteen-month period October 1, 1997 through and including December 31, 1998; (ii) $0.85 per share for the calendar year beginning on January 1, 1999; (iii) $0.90 per share for the calendar year beginning on January 1, 2000; and (iv) $0.95 per share for the calendar year beginning on January 1, 2001; provided, however, that the Target Amount shall be revised to give effect to any Triggering Event described in SECTION 13(a) hereof in the manner described in SECTION 13(d). Payment of any Additional Compensation earned under this SECTION 5 shall be made in cash no later than ten (10) calendar days after filing of the Trust's annual report on Form 10-K with the SEC unless such day is not a business day, in which case payment shall be made on the first business day thereafter. 6. OPTION GRANT. On execution of this Agreement, the Trust shall grant the Executive, non-qualified stock options to purchase an aggregate of 350,000 shares of the Trust's common shares of beneficial interest at an exercise price equal to $5.50 per share (the "Options"); provided, however, that the number of Options and the exercise price thereof shall be adjusted to give effect to the events described in SECTION 13(a) in the manner described in SECTION 13(d). Except as provided in this 2 Agreement, all Options shall be subject to the terms and conditions of the Trust's 1997 Omnibus Stock and Incentive Plan (the "Plan"). Except as provided in SECTIONS 7 and 9 below, the Options shall vest and become exercisable as follows: (a) Options to purchase 100,000 common shares shall vest and become exercisable immediately upon execution of this Agreement (the "Initial Options"); (b) Options to purchase an additional 100,000 common shares shall vest and become exercisable in 25,000 share increments at the end of each calendar year of this Agreement except that the first increment of 25,000 shares shall vest and become exercisable on December 31, 1998 (collectively the "Annual Options"); (c) Options to purchase 50,000 common shares shall vest and become exercisable if the "Last Sale Price" averages at least $8.50 per share (the "Initial Hurdle") during any "Measuring Period"; and (d) Options to purchase an additional 100,000 common shares shall vest and become exercisable in the following manner: (i) If the Last Sales Price averages more than the Initial Hurdle during any "Measuring Period", then 1,500 common shares of beneficial interest shall vest and become exercisable for each $.01 that the Last Sales Price during any "Measuring Period" exceeds the Initial Hurdle, up to a maximum of 75,000 common shares under this subsection (i). (ii) If the Last Sales Price averages more than $9.00 during any "Measuring Period" (the "Second Hurdle"), then 250 common shares of beneficial interest shall vest and become exercisable for each $.01 that the Last Sales Price exceeds the Second Hurdle, up to a maximum of 25,000 common shares under this subsection (ii). For purposes of SECTIONS 6(c) AND (d), "Measuring Period" shall mean any thirty (30) consecutive trading days and "Last Sale Price" shall mean the closing price regular way of the Trust's common shares of beneficial interest as reported by the Nasdaq Stock Market ("Nasdaq") or, if not included on Nasdaq, such other exchange or system on which the Trust's shares may be listed or included for quotation. Option exercise prices, the number of common shares subject to option and the conditions for vesting options shall be subject to adjustment in the manner described in Section 13 upon the occurrence of a Triggering Event. Unless sooner terminated as specifically provided herein, the exercise period of each Option shall terminate ten (10) years from the date hereof. If Executive dies or becomes permanently disabled during the term of this Agreement, then any unexercised Options which have vested must be exercised by Executive or Executive's legal representative within one year of the date of death or permanent disability. Upon death or permanent disability, all Options not otherwise vested, but which would or will vest within six (6) months following the date of death or permanent disability either by passage of time or satisfaction of the performance standards described in 6(d)(i)-(ii) shall be deemed vested and become exercisable as of the date of death or permanent disability. The Options may only be sold, transferred, pledged, assigned or otherwise alienated or hypothecated: (i) by will or the laws of descent and distribution; or (ii) directly or indirectly to members of Executive's "immediate family" as defined in Rule 16a-1(e) of the Securities Exchange Act of 1934, as amended. 3 7. LIFE INSURANCE/DISABILITY BENEFITS. Except as provided herein, during the term of this Agreement, the Trust shall continue to pay all premiums when due on life insurance policy numbers 8783869 and 8636508 and issued by New England Mutual Life Insurance Company, the beneficiaries of which shall be designated by Executive. A copy of the policy schedule and schedule of renewal premiums for each policy is attached hereto as Annex A. If at any time during the term of this Agreement the Executive is permanently unable to perform his duties hereunder by reason of illness, accident or other disability (as confirmed by competent medical evidence) then the Trust shall pay Executive one hundred percent (100%) of his Base Salary then in effect for six months following the date of such disability; (but with no obligation to pay any Incentive Compensation contemplated by SECTION 5 hereof, except for Incentive Compensation previously earned but not paid from the last completed fiscal year, if any) and the Agreement shall then terminate; provided further that Executive shall have all rights granted in SECTION 6 relating to the exercise of Options and as provided therein, except as provided herein, until December 31, 2001, the Trust shall continue to pay all premiums when due on policy number 8,059,767 issued on May 13, 1993 by Massachusetts Mutual Life Insurance Company (f/k/a Connecticut Mutual Life Insurance Company naming Executive as the insured. A copy of the policy specifications is attached hereto as Annex B. 8. OTHER BENEFITS. The Executive shall be eligible for all non- wage benefits the Trust provides generally to its other salaried employees. In addition, the Trust shall reimburse the Executive for reasonable, ordinary and necessary business expenses incurred by the Executive in connection with performing his duties under this Agreement; provided, however, that the Executive shall provide the Trust with an accounting conforming to Internal Revenue Service or other requirements substantiating the nature of all reimbursable expenses. All such reimbursements shall be payable to the Executive within a reasonable time after receipt of the appropriate documentation. 9. TERMINATION. The Trust may only terminate this Agreement or the Executive on the grounds set forth in Sections 9(a) or (b) below which grounds shall be the exclusive basis for such termination. Any termination by the Trust for grounds other than those set forth in Sections 9(a) or (b) shall constitute a material breach of this Agreement. (a) PERFORMANCE TERMINATION. The Trust may terminate this Agreement within a reasonable time after the end of each calendar year (no longer than thirty (30) calendar days after filing of the Trust's annual report on Form 10-K for the prior year with the SEC) if the Trust's basic earnings before interest, taxes, depreciation and amortization ("Basic EBITDA") on a per common share basis as reported by the Trust on its annual report on Form 10-K for the fiscal year then ended are less than the "Basic Earnings Target" for that fiscal year. For purposes of this SECTION 9(a), the "Basic Earnings Target" shall mean: (i) $1.54 per common share for the period October 1, 1997 through December 31, 1998; (ii) $1.39 per common share for the calendar year ending December 31, 1999; and (iii) $1.17 per common share for the calendar year ending December 31, 2000; provided, however, that the Basic Earnings Target for the relevant period shall be adjusted to give effect to any Triggering Event described in SECTION 13(a) hereof in the manner described in SECTION 13(d). 4 (b) TERMINATION FOR JUST CAUSE. The Trust may terminate this Agreement for "Just Cause." For purposes of this SECTION 9(b), "Just Cause" shall mean the occurrence of any one or more of the following events: (i) the conviction or rendering of a civil judgment against the Executive for theft or embezzlement of Trust property; (ii) the rendering of a civil judgment against the Executive for breach of a duty of loyalty owed to the Trust; (iii) conviction of the Executive of a felony resulting in injury to the business, property or reputation of the Trust or any affiliate of the Trust; or (iv) a decision rendered by an arbitrator, in an arbitration to be initiated by the Trust that the Executive shall have refused to or willfully failed to perform his material duties under this Agreement, shall have committed intentional acts that caused material damage to the business or property of the Trust, or performed his material duties under this Agreement in a manner that constituted gross negligence which caused or is causing material damage to the business or property of the Trust. The sole purpose of such arbitration shall be to determine whether the Trust has "Just Cause" to terminate the Agreement or the Executive under (iv) hereof. The Trust shall not terminate the Agreement or Executive for "Just Cause" before the Executive has been convicted or before a civil judgment has been rendered against the Executive or before the Trust has obtained an arbitrator's final decision regarding "Just Cause" as the case may be. If the Trust terminates this Agreement or the Executive for "Just Cause" before obtaining an arbitrator's final decision or before a civil judgment has been rendered, the Trust shall be deemed to immediately and irrevocably waive and release any and all grounds that it has or may have at the time to terminate this Agreement or the Executive for "Just Cause." The arbitration shall be final and binding and held in the City of Chicago before a single arbitrator and in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, except as specifically otherwise provided in this SECTION 9. The arbitrator shall be selected from a group of professionals associated with JAM/Endispute and each party shall have the right to serve document requests and up to twenty-five interrogatories and to take up to three depositions each of which shall last no more than four hours. Except as set forth below, the filing of the arbitration or initiation of a civil proceeding shall not excuse any party from performing its obligations under this Agreement; and during the pendency of the arbitration, all parties shall continue to perform their respective obligations in good faith, subject to any rights to terminate this Agreement that may be available to any party other than for "Just Cause" except that the Trust may suspend or place the Executive on leave, with pay, upon the commencement of any criminal or civil proceeding (including arbitration) alleging any of the events set forth in (i)-(iv) above. (c) TERMINATION BY EXECUTIVE. The Executive may terminate this Agreement: (i) at any time by written notice given to the Trust at least ninety (90) days in advance of the termination date set forth in the notice ("Executive Termination"); (ii) upon a "Change of Control"; or (iii) except for suspension as described in SECTION 9(b) above, if the Executive's authority is materially reduced, if there has been a material adverse change in the Executive's working conditions or if the Trust requires the Executive to relocate from the Chicago metropolitan area and the Executive refuses ("Constructive Termination"). For purposes of this SECTION 9(c), "Change of Control" shall mean: (x) that the members of the Board as 5 of the date of this Agreement fail to constitute a majority of the members of the Board provided that any individual becoming a member of the Board with Executive's consent shall be treated as if he or she were a member of the Board as of the date of this Agreement; or (y) the shareholders of the Trust adopt a plan of liquidation or take other action having the effect of a plan of liquidation without the recommendation or approval of the Board. Upon a Performance Termination described in (a) above, the Trust, as its sole obligation, shall pay Executive the Base Salary in existence at the time of Performance Termination and continue to pay the premiums due on the insurance policies referred to in Section 7 hereof each for a period of twelve (12) months commencing on the date of notice of such termination; provided, however, that Executive must continue to provide the services contemplated by SECTION 1 hereof for at least three (3) months after notice of Performance Termination. If Executive does not provide these services, then the Trust shall be obligated to pay Executive the Base Salary and to continue paying the premiums on the insurance policies for a period of only nine (9) months following the notice of Performance Termination. Upon a Performance Termination, all Annual Options not otherwise vested shall fully vest and become exercisable. All such Annual Options, the Initial Options and any Performance Options which have vested pursuant to SECTION 6(c) AND (d) shall be exercised within one hundred twenty (120) days of notice of termination. Upon a termination for "Just Cause," or in the case of an Executive Termination, the Trust shall have no further obligations hereunder, including any obligation to pay the insurance premiums on the policies referenced in SECTION 7; and all Options which: (i) have vested must be exercised within one hundred twenty (120) days of notice of termination; and (ii) have not vested will be cancelled immediately. If the Trust terminates this Agreement or the Executive for any reason other than as set forth in SECTIONS 9(a) OR (b) herein (including before an arbitrator has issued his or her final decision regarding "Just Cause" pursuant to SECTION 9(b)(iv) or before a court has entered a civil judgment) or if the Executive terminates due to a Change of Control or for a Constructive Termination, the Trust shall, as its sole obligation: (x) immediately pay the Executive all Base Salary which would have been paid to Executive, discounted to present value as described below, had the Agreement not been terminated; (y) immediately pay the Executive all Additional Compensation which would have been paid to Executive, discounted to present value as described below, had the Agreement not been terminated, provided that for these purposes the Trust's actual Per Common Share Funds from Operations shall be deemed to have equaled the Target Amount for each period; and (z) continue paying the premiums on the insurance policies referenced in SECTION 7 hereof; provided that amount of all such Base Salary and Additional Compensation due Executive shall be discounted to present value as of the date of termination utilizing a discount rate equal to the yield on three-month Treasury bills on the date of termination as published in the WALL STREET JOURNAL plus 100 basis points. If the date of termination is not a business day, then such discount rate shall be determined by reference to the Treasury bill yield on the last business day before the termination date. In addition, all Options granted hereunder shall fully vest and become exercisable except that in the case of a termination for a Change of Control, all such Options must be exercised within one year of Executive exercising the right of termination. Nothing contained herein shall excuse the Trust from its obligation to pay any compensation already due the Executive under this Agreement, but not paid, at the time of termination, or from its obligation to 6 provide the Executive with any benefits already due under this Agreement at the time of termination or to become subsequently due under SECTION 12 hereof. 10. SEVERANCE PAY. If the Executive is not employed by the Trust on January 1, 2002 pursuant to a written employment agreement, and has not otherwise died or become permanently disabled, the Trust shall pay the Executive, no later than January 15, 2002, $210,000 unless this Agreement has previously been terminated under SECTION 9(a) (b) OR (c)(i) hereof. 11. OTHER ACTIVITIES OF THE EXECUTIVE. The Executive shall be required to devote such working time and attention to the Trust's business as is necessary to carry out his responsibilities hereunder. The Executive shall not engage in any activity which may be adverse to the Trust's business, appropriate or usurp business opportunities or engage or invest in businesses or assets which compete directly or indirectly with the Trust. Nothing contained herein shall prohibit the Executive from investing in publicly-traded entities which are engaged in lines of businesses similar to the Trust or from engaging in the real estate activities of Oak Realty as such activities are conducted on the date of this Agreement. The Executive shall not become an officer, director or ten percent (10% ) shareholder of any entity with the exception of Oak Realty. These obligations and limitations shall be in addition to those provided by law. 12. INDEMNIFICATION. The Trust shall indemnify and hold harmless the Executive from liabilities which the Executive may incur resulting from or arising out of any act undertaken in connection with the Executive's duties under the Agreement in the same manner and to the same extent as the Trust is permitted to indemnify any trustee or other officer of the Trust under the Trust's Amended and Restated Declaration of Trust, as may be amended. 13. ISSUANCE OF ADDITIONAL SHARES, OPTIONS, STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. (a) TRIGGERING EVENTS. Subject to subsection (c) below, if at any time the Trust shall: (i) issue or sell any additional common shares of beneficial interest in exchange for consideration in an amount per additional share of beneficial interest at a price less than the "Prevailing Market Price" as defined in (f) below; (ii) issue or sell options, warrants or convertible securities to purchase additional common shares of beneficial interest with an exercise price less than such "Prevailing Market Price"; (iii) declare a dividend or otherwise make a distribution to the holders of its common shares of beneficial interest in the form of additional common shares; (iv) subdivide its outstanding common shares of beneficial interest into a larger number of common shares; or (v) combine its outstanding common shares of beneficial interest into a smaller number of common shares, then the adjustments set forth in this Section 13 shall be made. (b) COMPUTATION OF "ANTI-DILUTION FRACTION". An Anti- Dilution Fraction shall be computed, the numerator of which is the sum of (y) the number of common shares of beneficial interest of the Trust outstanding immediately before the occurrence of the 7 Triggering Event times the then Prevailing Market Price, and (z) the minimum total consideration received or to be received by the Trust because of the issuance of additional common shares, options, warrants or convertible securities with respect to common shares and the exercise of such option or warrants or conversion of such securities; and the denominator of which shall be the sum of the number of common shares of beneficial interest of the Trust outstanding after the Triggering Event, including, if any, such additional number of common shares issuable pursuant to exercise of options, warrants or conversions at their minimum exercise or conversion price times the then Prevailing Market Price. (c) Notwithstanding Section 13(a), the issuance of any common shares of beneficial interest of the Trust: (i) under the Plan; (ii) to employees or trustees of the Trust pursuant to any employment contract or arrangements; or (iii) upon conversion or exchange of any indebtedness or preferred stock issued by the Trust in connection with the transaction with a group of investors and completed on October 14, 1997 shall not be deemed to be a Triggering Event under this Agreement because of such events. (d) PRICE AND EXERCISE ADJUSTMENTS. In the event of a Triggering Event, then: (i) the Target Amounts set forth in Section 5(d) shall be adjusted by multiplying the Target Amounts by the Anti-Dilution Fraction; (ii) with respect to Section 6, all option exercise prices and the "Hurdle Amounts" shall be adjusted by multiplying the relevant price or amount by the Anti-Dilution Fraction; and (iii) the Basic Earning Targets set forth in Section 9(a) shall be adjusted by multiplying the Basic Earning Targets by the Anti-Dilution Fraction. (e) The number of Options available under SECTION 6 and not previously exercised to or by the Executive and the number of Options vesting under Section 6(c)-(d) for each $.01 of Last Sales Price shall be adjusted by multiplying the Options by the reciprocal of the Anti-Dilution Fraction. (f) "Prevailing Market Price" for purposes of this SECTION 13 shall mean the average closing price regular way of the Trust's shares of beneficial interest as reported by the Nasdaq or, if not included on the Nasdaq, such other exchange or system on which the Trust's shares may be listed or included for quotation for the 30 trading days prior to the events described in (a)(i)-(ii) hereof. 14. GENERAL PROVISION. (a) NOTICE. Any notice required or permitted hereunder shall be made in writing: (i) either by actual or delivery of the notice into the hands of the party entitled; or (ii) by depositing the notice in the United States mail certified or registered, return receipt requested, all postage prepaid and addressed to the party to whom notice is to be given at the party's respective address set forth below, or such other address as the party may from time to time designate by written notice to the other party. 8 If to the Trust: Banyan Strategic Realty Trust Suite 2900 150 South Wacker Drive Chicago, Illinois 60606 with a copy to: Shefsky & Froelich Ltd. 444 North Michigan Avenue Suite 2500 Chicago, Illinois 60611 Attn: Michael J. Choate, Esq. If to the Executive: Mr. Leonard G. Levine 150 South Wacker Drive Suite 2900 Chicago, Illinois 60606 with a copy to: Alan B. Patzik, Esq. Patzik Frank & Samotny Ltd. 150 S. Wacker Drive Suite 900 Chicago, Illinois 60606 The notice shall be deemed to be received in the case (i) on the date of its actual receipt by the party entitled thereto and in the case of (ii) on the third business day following the date of mailing. (b) AMENDMENT AND WAIVER. No amendment or modification to this Agreement shall be valid or binding on the Trust unless made in writing and signed by an officer of the Trust duly authorized by the Board or upon the Executive unless made in writing and signed by the Executive. The waiver by the Trust or the Executive of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (c) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the Executive's duties and compensation as an executive of the Trust on or after October 1, 1997 and except for a letter dated March 10, 1998 from the 9 Trust to the Executive and a letter dated February 27, 1998 from the Trust to the Executive, there are no representations, warranties, agreements or commitments between the parties hereto with respect to Executive's employment except as set forth herein. (d) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Illinois. (e) If any provision of this Agreement shall, for any reason, be held unenforceable, the provision shall be severed from this Agreement unless, as a result of severance, the Agreement fails to reflect the basic intent of the parties. If the Agreement continues to reflect the basic intent of the parties, then the invalidity of any specific provision shall not affect the enforceability of any other provision herein, and the remaining provisions shall remain in full force and effect. (f) ASSIGNMENT. Except as provided herein, the Executive may not, under any circumstances delegate any of his rights and obligations hereunder without the prior written consent of the Trust. This Agreement and all of the Trust's rights and obligations hereunder may be assigned or transferred by it, in whole or in part, to be binding upon and inure to the benefit of any subsidiary or successor of the Trust. (g) COST OF ENFORCEMENT. In any suit or proceeding seeking to enforce the terms, covenants or conditions of this Agreement, the prevailing parties shall, in addition to all of the remedies and relief that may be available under this Agreement or applicable law, recover his or its reasonable attorneys' fees and costs as shall be determined and awarded by the court or the arbitrator. IN WITNESS WHEREOF, this Agreement is entered into on the day and year first written above. BANYAN STRATEGIC REALTY TRUST By: /s/ Robert G. Higgins ----------------------------------- Its: Vice President, Secretary and General Counsel EXECUTIVE /s/ Leonard G. Levine ----------------------------------- Leonard G. Levine 10 Banyan Strategic Realty Trust 150 South Wacker Drive, Suite 2900 Chicago, Illinois 60606 March 10, 1998 Mr. Leonard G. Levine President Banyan Strategic Realty Trust 150 South Wacker Drive Suite 2900 Chicago, Illinois 60606 Dear Len: As you know, a great deal of time and thought has gone into the negotiations regarding your new employment agreement. We are cognizant of the fact that the financial performance targets contained in Sections 5 and 9 may not, in theory, create the proper incentive for you to seek transactions which may alter the capital structure of the Trust, notwithstanding the possibility that such an action may be in the Trust's long-term interest; particularly if the transaction negatively impacts the Trust's financial performance in the short run. Since there are a myriad of possibilities that may be considered in the future, all of which may impact the Trust's capital structure in varying degrees, it is almost impossible to presently provide for an adjustment upon the happening of certain events. In evaluating any future proposals, we will certainly consider the potential impact on your employment agreement and the appropriateness of adjusting the financial targets so as to continue to align your interests with those of the Trust's other shareholders. We might add that it is possible that certain restructurings may actually benefit you rather than harm your interests. We are sure you understand, however, that circumstances are such that an adjustment may not be appropriate or possible. In the absence of an adjustment, the terms and conditions set forth in the employment agreement will, of course, control. We encourage you to continue to keep an open line of communication with us on this issue so that you do not find your interests diverging from those of the Trust in evaluating future financing transactions which may alter the capital structure of the Trust. We are open to discussing this with you at all times and urge you to keep us aware of your feelings. Respectfully submitted, /s/ Walter E. Auch, Sr. ------------------------------ Walter E. Auch, Sr. /s/ Norman M. Gold ------------------------------ Norman M. Gold /s/ Marvin A. Sotoloff ------------------------------ Marvin A. Sotoloff ACKNOWLEDGED AND AGREED: /s/ Leonard G. Levine - ------------------------------ Leonard G. Levine BANYAN STRATEGIC REALTY TRUST Leonard G. Levine President February 27, 1998 TO: TRUSTEES - BANYAN STRATEGIC REALTY TRUST FROM: Leonard Levine SUBJECT: Oak Realty Activities (March 2, 1998) Pursuant to Section 11 of my Employment Agreement as of October 1, 1997, the following are the real estate activities as of March 2, 1998: 1. Administrative services as a subcontractor to Legend Properties, Trustee of the Partners Liquidating Trust and Chicago Wheaton Liquidating Trust. Please note that there have been no other real estate activities between October 1, 1997 and March 2, 1998 and, at the present time, none are contemplated. LGL/klo cc: Michael Choate Alan Patzik EX-21 3 EXHIBIT 21 - ---------- SUBSIDIARIES OF BANYAN STRATEGIC REALTY TRUST NAME OF SUBSIDIARY STATE OF ORGANIZATION ------------------- ---------------------- Banyan/Morgan Milwaukee Limited Partnership Illinois Banyan/Morgan Willowbrook Limited Partnership Illinois BSLT Milwaukee Corp. Illinois BSRT Commerce Center Corp. Illinois BSRT Fountain Square Corp. Illinois BSRT Lexington Trust Massachusetts BSRT Lexington B Corp. Illinois BSRT/M&J Northlake Limited Partnership Illinois BSRT Merger Corp. Illinois BSRT Newtown Trust Massachusetts BSRT Northlake Festival Corp. Illinois BSRT Kentucky Management Corp. Illinois BSRT Riverport Trust Massachusetts BSRT/STM Business Center Trust Massachusetts BSRT Willburr Corp. Illinois BSRT Woodcrest Office Corp. Illinois BSRT Woodcrest Office Park Limited Partnership Illinois BSRT Phoenix Business Park Corp. Illinois Banyan/Morgan MOC Limited Partnership Illinois BSRT Brook Corp. Illinois BSRT Oklahoma Woodrun Corp. Illinois BSRT Oklahoma Willowpark Corp. Illinois BSRT Oklahoma Country Creek Corp. Illinois BSRT Oklahoma Winchester Run Corp. Illinois BSRT UPREIT Corp. Illinois BSRT UPREIT Limited Partnership Illinois BSRT Butterfield Office Plaza, L.L.C. Illinois BSRT Southlake L.L.C. Illinois BSRT University Square L.L.C. Illinois BSRT Technology Center L.L.C. Illinois BSRT Airways Plaza L.L.C. Illinois BSRT Management Corp. Illinois EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BANYAN STRATEGIC REALTY TRUST'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 12-MOS DEC-31-1997 DEC-31-1997 4,428,588 0 861,979 0 0 5,290,567 156,019,638 (6,633,796) 159,633,628 3,226,371 21,614,493 62,315,210 0 0 0 159,633,628 0 28,784,900 0 0 19,055,363 0 6,447,278 3,610,437 0 3,610,437 0 (64,155) 0 3,546,282 0.32 0.32
EX-99.7 5 EXHIBIT 99.7 - ------------ AT THE COMPANY: AT THE FINANCIAL RELATIONS BOARD: Karen Dickelman Dennis Waite Laura Kuhlmann Susan Steidle Director of General Inquiries Media Inquiries Analyst Inquiries Investor 312 640-6674 312 640-6727 312 640-6774 Relations 312 683-3671 FOR IMMEDIATE RELEASE BANYAN STRATEGIC REALTY TRUST ANNOUNCES FOURTH-QUARTER 1997 TOTAL REVENUES UP 50% TO $8.3 MILLION; FUNDS FROM OPERATIONS CLIMB TO 15.5 CENTS PER SHARE VERSUS YEAR-AGO'S 7 CENTS For Full Year, Total Revenues Rise 35% to $28.8 Million; FFO Climbs 58% to 52 Cents Per Share from 35 Cents Year Earlier; Announces New Trading Symbol Effective March 2, 1998 CHICAGO, February 12, 1998 -- BANYAN STRATEGIC REALTY TRUST (Nasdaq: VLANS) today reported substantially higher total revenues and funds from operations for both its fourth quarter and its full year ended December 31, 1997. Banyan also reported that its overall weighted occupancy level for its 22 properties owned during 1997 averaged 95 percent versus 93 percent for 1996. Banyan also noted that it had acquired 10 properties in 1997, approximately $59 million worth of real estate, adding some 688,600 square feet and 864 apartments to its investment portfolio. FOURTH-QUARTER RESULTS For its fourth quarter, total revenues were $8.2 million, up 50 percent from the $5.5 million reported in the year-earlier's quarter. Funds from operations (FFO) for the fourth quarter totaled $2.0 million, or 15.5 cents per share, against $756,000, or 7 cents per share, in the final quarter of 1996. Net income for the quarter totaled $968,211, or 8 cents per share, compared to a loss of $3,062,067, or a loss of 29 cents per share, in the year-ago quarter. FULL-YEAR RESULTS For the full year, total revenues climbed to $28.8 million, up 35 percent from 1996's $21.4 million. FFO rose 58 percent to $5.8 million from $3.7 million in 1996. On a per-share basis, FFO totaled 52 cents, up 49 percent from the prior year's 35 cents. Net income for 1997 was $3.5 million, or 32 cents per share, versus a loss of $1.8 million, or a loss of 17 cents per share for 1996. - more - BANYAN STRATEGIC REALTY TRUST Banyan also reported that its portfolio properties at year-end 1997 totaled 2,876,600 square feet, up 27 percent from year-end 1996's 2,251,000 square feet. "Very importantly," noted Banyan President and Chief Executive Officer, Leonard G. Levine, "our overall weighted occupancy rate improved during the year, averaging 95 percent at December 31, 1997, against a year- end 1996 level of 93 percent. Additionally, our 'same store' property revenues increased $1.2 million, or 7.2 percent, during 1997 from the previous year." Levine also pointed out that the company's total assets at year-end 1997 were $159.6 million, up 37 percent from the year-ago's $116.5 million. The Trust's net investment in real estate totaled $149.4 million at year-end 1997, up 46 percent from $102.5 million at the end of 1996, and 70 percent above the $87.9 million for year-end 1995. LOOKING AHEAD "Banyan continues to be very well-positioned to enjoy ongoing revenue and cash flow growth for both 1998 and 1999," Levine said. "We expect to acquire new real estate assets during 1998 in excess of those purchased last year." Barring unforeseen developments in the economy, Levine added, such as a hike in interest rates, "we see an approximate 35-to-40 percent growth in funds from operations to a level of 70 cents to 73 cents per share from 52 cents in 1997 and 35 cents in 1996." Levine also noted that the board of trustees is expected to meet within the next 45 days to review the Trust's distribution policy. DRIP PLAN Levine also pointed to the enhanced features of the Trust's Distribution Reinvestment and Share Purchase Plan (DRIP) that enables shareholders of record to increase their ownership in the Trust by reinvesting distributions at a discount to market and without incurring any broker commissions and service fees. Since the enhanced features were introduced in June 1997, the Trust has raised approximately $400,000 in additional capital. Approximately 36 percent of the Trust's registered shareholders are currently participating in the Plan. NEW TRADING SYMBOL The Trust reported that its shares of beneficial interest listed on the Nasdaq Stock Market will begin trading under the new symbol BSRTS on March 2, 1998. Levine indicated that the move from VLANS to BSRTS should make the Trust easier to locate for the investment community. Banyan Strategic Realty Trust is a diversified equity Real Estate Investment Trust (REIT) with a portfolio that includes primarily light industrial/warehouse and suburban office buildings, as well as retail and residential properties. The properties are located in major metropolitan areas and mid-to-small second tier markets primarily in the Midwest and Southeast United States. Currently, the Trust has 13,239,730 shares of beneficial interest outstanding. - more - BANYAN STRATEGIC REALTY TRUST Some of the statements contained in the foregoing are forward-looking statements. Words such as "believes," "intends," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements which are subject to a number of risks and uncertainties, including, among other things, general real estate investment risks, lack of operating history associated with recent acquisitions, potential inability to repay or finance indebtedness at maturity, increases in interest rates, competition for property acquisitions, adverse consequences of failure to qualify as a REIT, and possible environmental liabilities. Reference is made to the annual report on Form 10-K filed by the Trust, specifically under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting the Trust's Business Plan" for a more complete discussion of these risk factors. The Trust undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. See Banyan's Website at http://www.banyanreit.com for complete company information. For further information regarding Banyan free of charge via fax, dial 1-800-PRO-INFO and enter "VLANS." BANYAN STRATEGIC REALTY TRUST
Three Months Ended Years Ended 12/31/97 12/31/96 12/31/97 12/31/96 ----------- ----------- ----------- ----------- Total revenue . . . . . . . . . . . . . . . . $ 8,269,342 $ 5,501,946 $28,784,900 $21,404,318 Recovery of losses on loans, notes and interest receivable . . . . . . . 161,539 2,510 161,539 16,569 Operating expenses. . . . . . . . . . . . . . (7,077,394) (5,210,655) (25,664,180) (19,395,524) ----------- ----------- ----------- ----------- Operating income. . . . . . . . . . . . . . . 1,353,487 293,801 3,282,259 2,025,363 Minority interest in consolidated partnerships. . . . . . . . . . . . . . . . (126,850) (132,021) (590,323) (481,411) Income (loss) of real estate ventures . . . . -- (3,223,847) 37,126 (3,301,212) Gain on disposition of investment in real estate, disposition of investment in real estate venture and disposition of partnership interest . . (194,271) -- 881,375 -- Extraordinary item, net . . . . . . . . . . . (64,155) -- (64,155) -- ----------- ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . . . $ 968,211 $(3,062,067) $ 3,546,282 $(1,757,260) =========== =========== =========== =========== Net income (loss) per share . . . . . . . . . $ 0.08 $ (0.29) $ 0.32 $ (0.17) =========== =========== =========== =========== FUNDS FROM OPERATIONS Net income (loss) . . . . . . . . . . . . . . $ 968,211 $(3,062,067) $ 3,546,282 $(1,757,260) PLUS: Depreciation expense. . . . . . . . . . . . 916,168 653,139 3,276,991 2,355,360 Depreciation included in operations of real estate ventures . . . . . . . . . -- 7,619 15,238 30,475 Lease commission amortization . . . . . . . 68,163 39,028 208,362 97,699 Three Months Ended Years Ended 12/31/97 12/31/96 12/31/97 12/31/96 ----------- ----------- ----------- ----------- LESS: Minority interest share of depreciation expense . . . . . . . . . . . . . . . . . (56,171) (64,520) (253,749) (228,011) Minority interest share of lease commission amortization . . . . . . . . . (5,842) (4,945) (20,893) (12,684) Recovery of losses on loans, notes and interest receivable . . . . . . . . . (161,539) (2,510) (161,539) (16,569) Franchise tax fees accrued. . . . . . . . . . 12,500 10,000 50,000 40,000 Valuation allowance included in operations of real estate venture . . . . . -- 3,180,000 -- 3,180,000 Gain on disposition of investment in real estate, disposition of investment in real estate venture and disposition of partnership interest . . . . . . . . . . 194,271 -- (881,375) -- Extraordinary item, net . . . . . . . . . . . 64,155 -- 64,155 -- ----------- ----------- ----------- ----------- Funds from operations . . . . . . . . . . . . $ 1,999,916 $ 755,744 $ 5,843,472 $ 3,689,010 =========== =========== =========== ===========
EX-99.8 6 EXHIBIT 99.8 - ------------ AT THE COMPANY: AT THE FINANCIAL RELATIONS BOARD: Karen Dickelman Dennis Waite Laura Kuhlmann Susan Steidle Director of General Inquiries Media Inquiries Analyst Inquiries Investor 312 640-6674 312 640-6727 312 640-6774 Relations 312 683-3671 BANYAN STRATEGIC REALTY TRUST TO BEGIN TRADING UNDER NEW SYMBOL MONDAY, MARCH 2, 1998 FOR IMMEDIATE RELEASE CHICAGO, MARCH 2, 1998 -- BANYAN STRATEGIC REALTY TRUST (Nasdaq: BSRTS) reports that its shares of beneficial interest previously listed on the Nasdaq under the symbol VLANS will begin trading on the Nasdaq under the new symbol BSRTS effective today Monday, March 2, 1998. Leonard G. Levine, President of the Trust, reported that the move from VLANS to BSRTS should make the Trust easier to locate for the investment community. Banyan Strategic Realty Trust is a diversified Equity Real Estate Investment Trust (REIT) with a portfolio that includes primarily light industrial/warehouse and suburban office buildings, as well as retail and residential properties. The properties are located in major metropolitan areas and mid-to-small second tier markets primarily in the Midwest and Southeast United States. The Trust currently, has 13,268,316 shares of beneficial interest outstanding. Some of the statements, expectations and assumptions contained in the foregoing are forward-looking statements that involve a number of risks and uncertainties. Although the Trust has used its best efforts to be accurate in making these forward-looking statements, it is possible that the assumptions made by management may not materialize. The cash flow generated by, or capital appreciation from, real property investment may be adversely affected by change in demographic, local real estate conditions, government regulations, zoning or tax laws, environmental or other legal liabilities and changes in interest rates. See Banyan's Website at http://www.banyanreit.com for complete company information. For further information regarding Banyan free of charge via fax, dial 1-800-PRO-INFO and enter "VLANS." -----END PRIVACY-ENHANCED MESSAGE-----