-----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, R0Cr3Uo4WTPiWOUPuq7LZNy/UvPGDr5JKpt++alkCxrYJnsdRgggFtFSVE8CVGhj gEU7A02Lj6abcpJOLGjZTg== 0000950152-96-001927.txt : 19960501 0000950152-96-001927.hdr.sgml : 19960501 ACCESSION NUMBER: 0000950152-96-001927 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960430 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REALTY REFUND TRUST CENTRAL INDEX KEY: 0000082473 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 346647590 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07062 FILM NUMBER: 96553579 BUSINESS ADDRESS: STREET 1: 1385 EATON CENTER STREET 2: 1111 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2167717663 MAIL ADDRESS: STREET 1: 1385 EATON CENTER STREET 2: 1111 SUPERIOR AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114 10-K 1 REALTY REFUND TRUST 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended January 31, 1996 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from _______ to _______. Commission File No. 1-7062 REALTY REFUND TRUST - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) OHIO 34-6647590 - --------------------------------- ------------------------------- (State or Other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 1385 Eaton Center Cleveland, Ohio 44114 - --------------------------------------- ------------------------------- (Address of Principal Executive Office) (ZIP Code) (216) 771-7663 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered - ------------------- ------------------------------------ Shares of Beneficial Interest New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 _____ [Cover Continued on Following Page] 2 [Cover Continued From Previous Page] 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] Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 18, 1996: $ 5,432,864 --------- DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Notice of Annual Meeting and Proxy Statement dated April 5, 1996, as supplemented by a Supplement to Proxy Statement dated April 11, 1996--Part III. The Trust Performance Graph contained in the Registrant's Notice of Annual Meeting and Proxy Statement dated April 5, 1996, as supplemented by a Supplement to Proxy Statement dated April 11, 1996, shall not be deemed incorporated by reference herein. Portions of the Registrant's 1996 Annual Report--Parts I and II. -2- 3 PART I ------ Item 1. BUSINESS. --------- Introduction. - ------------- The Registrant is an unincorporated Ohio real estate investment trust under a Declaration of Trust dated April 28, 1971 and has elected to be taxed as a real estate investment trust, as that term is used in Sections 856-860 of the Internal Revenue Code. The Registrant historically has specialized in wrap-around mortgage lending, whereby the borrower is offered a total mortgage loan (the wrap-around loan), the principal amount of which loan equals the balance outstanding on an existing prior mortgage loan on the borrower's property, plus an additional amount supplied by the Registrant, on existing income-producing commercial, industrial and multi-unit residential real property. Typically, a wrap-around loan made by the Registrant is subordinate to the lien of the existing prior mortgage loan that remains on the property. In addition to mortgage investments, the Trustees in 1990 authorized the Registrant to pursue equity investments in shopping center, multi-family residential, office building, industrial and warehouse properties. The Registrant made no mortgage loans during the fiscal year ended January 31, 1996. Both of the Registrant's existing loans are scheduled to mature in fiscal year 1997. Accordingly, the Registrant in fiscal year 1996 retained Brown, Gibbons, Lang & Company, L.P., to review the options available to the Registrant in respect of the future operations of the Registrant. These options include the merger, sale or restructuring of the Registrant, new financing sources, both public and private, and the liquidation of the Registrant. Wrap-Around Financing and Other Mortgage Loans. - ----------------------------------------------- Wrap-around financing is desirable for a borrower in those cases in which an existing mortgage has an interest rate below presently prevailing interest rates or in which replacing an existing mortgage is either prohibited entirely or involves a pre-payment penalty. The decline in recent years in prevailing interest rates coupled with the low cost of traditional refinancing has decreased significantly the desirability of wrap-around financing as a form of refinancing. -3- 4 In certain cases, the Registrant has provided refinancing in the form of junior mortgage loans. Such mortgages are substantially similar to the Registrant's wrap-around mortgages except that the stated principal amount of the mortgage is only the amount advanced by the Registrant. The Registrant still requires the borrower to remit to the Registrant an amount equal to the principal and interest payments due on the prior mortgage loan in addition to the payments required on the junior mortgage. In general, the income-producing properties which secure the Registrant's loans tend to be relatively large. As of January 31, 1996, the Registrant had investments in two wrap-around loans. The Registrant's original cash investments in these loans were $9,000,000 and $6,500,000. The following table sets forth the geographic distribution of the Registrant's loans as of January 31, 1996:
State Number of Loans ----- --------------- Ohio 1 Texas 1
A partnership in which an affiliate of Alan M. Krause, a Trustee and the Chairman and Co-Chief Executive Officer of the Registrant, is general partner accounted for 25.9% of the Registrant's loan investment portfolio (after consideration of the applicable valuation allowance) as of January 31, 1996. See "Properties - Toledo, Ohio". In general, the Registrant is not dependent upon a single borrower or a very few borrowers for making any future loans. As of January 31, 1996, the Registrant's loans receivable totalled $17,422,010, all of which represented loans secured by wrap-around mortgages. Loans payable underlying these wrap-around mortgages totalled $7,732,450. The Registrant's net investment in its loans receivable at January 31, 1996 totalled $9,689,560. Assuming that all of the mortgages remain in existence until their respective scheduled maturity dates in fiscal 1997, a total of $17,116,000 of these loans receivable would be payable to the Registrant in lump sum "balloon" payments at such maturities. The ability of a borrower to satisfy the obligation to pay the lump sum at maturity applicable to its property may be dependent upon the borrower's ability to obtain refinancing. For a detailed analysis of these totals and a description of the periodic payment terms and maturity dates of the Registrant's loans receivable as of January 31, 1996, see Note 10 of Notes to Financial Statements set forth on page 16 of the Registrant's 1996 Annual Report (Exhibit 13), which information is incorporated herein by reference. -4- 5 Equity Investments. - ------------------- In July 1992, the Registrant, through a wholly-owned corporate subsidiary, took title in lieu of foreclosure to the leasehold estate in the Chicago office building upon which the Registrant previously had mortgage loans. At January 31, 1992, the Registrant's net investment in the Chicago office building was approximately $11,261,900, net of senior mortgage loans of approximately $942,000. The Registrant's investment was written down to $7,260,000, based upon the report of an independent real estate appraisal firm, with a corresponding charge to the Registrant's operations in the third quarter of fiscal 1993. In the first quarter of fiscal year 1994, the Registrant, through a wholly-owned corporate subsidiary, consummated the purchase of an 83% interest in the underlying fee simple estate in the property for approximately $897,000. In April 1996, the Registrant, through a wholly-owned corporate subsidiary, consummated the purchase of the remaining 17% interest in the underlying fee simple estate for approximately $275,000. Net book value for the Chicago office building, improvements and land as of January 31, 1996 (including a $3,000,000 valuation allowance established to reduce the carrying value of the property to its current estimated net realizable value) was $6,396,364. While the Registrant presently is operating the office building, its present intention is to seek a purchaser and not to hold the building as a long-term investment. The Registrant currently has no other equity investments in real estate. The Board of Trustees has authorized, and the Registrant's investment advisor is exploring opportunities for, equity investments by the Registrant, as well as mortgage loan opportunities, in shopping centers, multi-family residential, hospitality and other types of properties. Competition and Inflation. - -------------------------- In connection with its investments, the Registrant competes against banks, insurance companies, savings and loan associations, mortgage bankers, pension funds and other lenders and investors, including a number of other real estate investment trusts, many of which are larger and have substantially greater financial resources than the Registrant. The principal elements of competition include the amount, maturity, interest rate, debt service charged and other terms of a refinancing, and whether the personal liability of a borrower is required in addition to the mortgage lien on the refinanced property. In respect of equity investments, the Registrant will compete against insurance companies, pension funds, other real estate investment trusts, limited partnerships, private investors, owner-operators and numerous other potential -5- 6 investors, many of which may have greater financial resources and more experience than the Registrant. The Registrant's Chicago property has, and it is expected that any additional rental properties acquired by the Registrant will have, substantial competition from similar properties in the vicinity. To the extent the Registrant has acquired or acquires commercial properties, the success of the Registrant will depend, in part, upon the ability of its tenants in competing with businesses similar to those conducted by the tenants and upon other factors which may affect the economic viability of the tenants. Generally, inflation affects the Registrant as it affects its borrowers and the underlying real estate collateral. Although this type of collateral traditionally has been able to sustain itself during periods of inflation, there has been a significant down-turn in market values of real property in the United States over the past few years. The Registrant is unable to predict future real estate market conditions. Advisory Agreement And Advisor. - ------------------------------- The Registrant has an Advisory Agreement with Mid-America ReaFund Advisors, Inc. (the "Advisor") which provides for the Advisor's services as the investment advisor and administrator of the day-to-day investment operations of the Registrant and pursuant to which the Advisor is responsible for providing the Registrant with a continuing and suitable investment program. Therefore, the Registrant employs no persons on a full-time basis. The Registrant's Chairman and President are the sole shareholders of the Advisor. The Advisory Agreement is renewable annually and can be terminated upon 60 days' notice by the Registrant and 120 days' notice by the Advisor. The Advisor receives, subject to certain limitations, an annual fee equal to 1% of the average invested assets for the year (as defined in the Advisory Agreement) and an annual incentive fee equal to 10% of the amount by which the net profits (as defined in the Advisory Agreement) of the Registrant exceeds 8% of the average net worth for the year, and 10% of any realized net capital gains of the Registrant. Lines Of Credit. - ---------------- The Registrant has an agreement with National City Bank (the "Bank") providing for a secured revolving line of credit. The loan agreement provides for borrowings at either the Bank's prime lending rate or a fixed rate equal to 1.5% over the LIBOR then in effect throughout the term of the loan agreement, which expires on July 31, 1996. Maximum availability under the line of credit is $7,000,000. Among other provisions, the loan agreement provides for a borrowing base equal to 83.3% of the Registrant's -6- 7 investments (as defined) and $3,000,000 of availability for working capital, with the remainder available for new investments. The loan agreement also provides that the Registrant cannot permit its net worth (including subordinated debt) to be less than $8,500,000 or its total debt (excluding wrap-around mortgages) and senior indebtedness to exceed 300% and 225%, respectively, of its net worth. At January 31, 1996, the Registrant had borrowed $6,295,000 under this line of credit. On March 16, 1993, the Registrant sold a $5,000,000 secured note (the "Note") to Mr. Krause at par. The Note bears interest at the prime lending rate of the Bank, and will mature on August 31, 1996. The Note is secured by a lien on the assets of the Registrant, which lien is subordinate to the prior lien of the Bank. In connection with the closing of the sale of the Note, the Registrant's Trustees received the written opinion of an independent investment banking firm that the terms of such sale were fair, from a financial point of view, to the other Shareholders of the Registrant. The proceeds of the sale of the Note were used to reduce the outstanding indebtedness of the Registrant to the Bank under its secured revolving line of credit. At March 18, 1996, the outstanding principal balance of the Note was $4,500,000. Item 2. PROPERTIES. ----------- The Registrant maintains its headquarters in leased facilities in Cleveland, Ohio which it shares with the Advisor. The Registrant owns no real property other than the Chicago office building. See "Business-Equity Investments". The following is a detailed description of the property owned by the Registrant as well as the properties underlying each of the Registrant's mortgage loans. All of the information set forth below in respect of the Registrant's mortgage loans has been furnished by the respective borrowers. Financial information concerning the Chicago office building as well as the Registrant's wrap-around mortgages, including the mortgage loans underlying such wrap-around mortgages, is outlined in Notes 3, 4, 9, 10 and 12, respectively, to Notes to Financial Statements set forth on Pages 14 and 16, respectively, of the Registrant's 1996 Annual Report (Exhibit 13), which information hereby is incorporated by reference. 1. CHICAGO, ILLINOIS - OFFICE BUILDING. This office building, known as The Carbide and Carbon Building, is located at 230 North Michigan Avenue in downtown Chicago, and is a thirty-eight story steel frame, concrete and stone structure. The building has a total rentable floor area of approximately 192,000 square feet and is approximately 64 years old. In the opinion of the Registrant's management, the building is covered adequately by insurance. -7- 8 The general market for office leasing in downtown Chicago is very competitive. According to the fourth quarter 1995 Building Owners and Managers Association of Chicago occupancy survey, the overall occupancy in the area where this building is located, the Central Business District/East Loop, was 79.77%, an increase of .35% since the fourth quarter of 1994 and .17% since the fourth quarter of 1993. Occupancy for Class C Buildings has decreased to approximately 82.6%. A Class C Building generally is described as an older building in need of some repair and/or renovation. The following table sets forth the average occupancy rate and average rent per square foot for this building as of December 31 for the years indicated:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Average Occupancy 59.0% 61.0% 57.0% 55.0% 63.6% Rate Average Rent Per $15.50 $16.19 $15.99 $16.15 $16.35 Square Foot
No tenant occupies 10% or more of the rentable square footage of the building. The following table sets forth further information concerning the office building leases:
Year of Number Net Percentage Lease of Square Annual of Gross Expiration Tenants Feet Rent Annual Rent - ---------- ------- ---- ---- ----------- 1996 18 16,732 $276,468.00 15.33% 1997 10 11,986 $196,692.00 10.90% 1998 19 39,040 $565,368.00 31.34% 1999 9 14,812 $269,112.00 14.92% 2000 6 16,369 $344,760.00 19.11% 2001 3 7,484 $134,940.00 7.48% 2002 0 0 $ 0 0 2003 1 105.9 $ 18,691.00 1.04% 2004 0 0 $ 0 0 2005 0 0 $ 0 0
For federal income tax purposes, the Registrant's tax basis in the building, improvements and land is $9,672,000 less accumulated depreciation on the building and improvements as of January 31, 1996 of $691,000. For federal income tax purposes, the Registrant depreciates the building and improvements using the straight line method over a life of 40 years. -8- 9 The real estate tax rate is $199.13 per $1,000 of assessed valuation. The current annual real estate taxes are $448,049. 2. TOLEDO, OHIO - OFFICE BUILDING. This office building, known as The Fiberglas Tower, is located at 319 Madison Avenue, Toledo, Ohio, and is a thirty-story structure having a total rentable floor area of approximately 332,570 square feet. The building is owned by Riverview Tower Limited Partnership, a limited partnership of which an affiliate of Mr. Krause is a general partner. The building is 25 years old and was acquired by the borrower on July 31, 1985. In the opinion of the Registrant's management, the building is covered adequately by insurance. At January 31, 1996, the outstanding principal balance of the Registrant's loan was $4,506,055 (net of a valuation allowance of $5,000,000) and interest accrued thereon at 8.70%. This loan is payable in monthly installments of approximately $128,000 until maturity thereof on December 31, 1996, at which time the entire principal sum including unpaid interest will be due. In connection with the extension of such loan maturity to December 31, 1996, the Borrower was required to make principal payments of $1,350,000, $850,000 and $850,000 in June 1994, January 1995 and January 1996, respectively. The Owens-Corning Corporation ("Owens"), a manufacturer of fiberglass products, occupies 100% of the building's office space under leases dated May 1, 1967 and April 30, 1981, respectively and a lease amendment and extension agreement dated June 4, 1994 (collectively, the "Owens Lease"). Pursuant to the Owens Lease and two additional agreements for basement storage space, Owens leases the entire rentable floor area of the building at an annual base rent of $2,261,000. The initial term of the Owens Lease expired on December 31, 1994; however, Owens and the borrower have negotiated an extension of such lease until December 31, 1996 with two six-month renewal options. In October 1993, Owens announced that it would be relocating from the building to another facility. Relocation is expected to be completed in 1996. Such relocation, when it occurs, will impact directly the borrower's ability to meet timely its loan obligations to the Registrant. In the event that the borrower defaults in its obligations to the Registrant, the Registrant may be faced with a write-down of this investment. The borrower is unable to determine competitive conditions affecting office space which might exist at the time Owens relocates from this building. In view of the fact that such loan was made on a non-recourse basis, the Registrant has established a valuation allowance to reflect the Registrant's current estimate of the net proceeds of a sale of the building. The following table sets forth the average occupancy -9- 10 rate and average rent per square foot as of December 31 for the years indicated:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Average Occupancy 100% 100% 99% 99% 99% Rate Average Rent Per $17.29 $22.43 $11.81 $12.07 $11.62 Square Foot
For federal income tax purposes, the borrower's tax basis in the property is $16,705,077, less accumulated depreciation as of December 31, 1995 equal to $9,598,758. The borrower depreciates the building using the straight-line method over a life of 19 years. The borrower also depreciates various building improvements using the straight line method over lives of 10 years. The effective real estate tax rate is $65.68 per $1,000 of assessed valuation. The current annual real estate taxes are $286,871. 3. FORT WORTH, TEXAS - OFFICE BUILDING. This facility is located on a portion of the General Dynamics West Campus, Fort Worth, Texas, and consists of a 44.3 acre site on which is located three buildings having a total rentable floor area of approximately 550,500 square feet. The facility is owned by Pacific Place Partners, LTD., a Texas limited partnership. The facility is approximately five years old and was acquired by the borrower in November 1991. At January 31, 1995, the outstanding principal balance of the Registrant's loan was $12,915,955 and interest accrued thereon at 11.4%. This loan is payable in monthly installments of principal and interest of approximately $625,000 until maturity thereof on October 31, 1996, at which time the entire principal sum remaining unpaid will be due. General Dynamics Corporation ("General Dynamics"), a defense contractor, leased the entire facility until March 1, 1993, at which time General Dynamics assigned all of its right, title and interest in, to and under the lease to Lockheed Corporation. However, General Dynamics remains liable for all promises, covenants, conditions and agreements to be kept, made or performed by Lockheed Corporation under the lease. The lease permits Lockheed Corporation to use the facility for general business office purposes, including engineering facilities, computer software development facilities and storage facilities incidental to such uses. However, the property may not be used -10- 11 for chemical laboratories. The term of the lease expires in November 1996. Annual rent for the first lease year was approximately $11,500,000 and for each lease year thereafter is approximately $7,500,000. The borrower is unable to determine competitive conditions which might exist at the time the lease expires. For federal income tax purposes, the borrower's tax basis in the property, which was acquired in a Section 1031 exchange, is $48,404,030, less accumulated depreciation and amortization of deferred charges as of December 31, 1994 equal to $11,240,841. The borrower depreciates the three buildings using the straight line method over lives of 15 years. Personal property is depreciated using the declining balance method over lives of five years. The effective real estate tax rate is $30.50 per $1,000 of assessed valuation. The current annual real estate taxes are $323,093. Item 3. LEGAL PROCEEDINGS. ------------------ The Registrant is not a party to any material pending legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ---------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------ The age (as of March 18, 1996), business experience during the past five years and offices presently held by each of the Registrant's executive officers are reported below. The Registrant's By-Laws provide that officers shall hold office until their successors are duly elected and qualified and that any officer may be removed from office at any time by the Registrant's Trustees. ALAN M. KRAUSE: Age 66; Chairman of the Board of Trustees and Co-Chief Executive Officer of the Registrant since 1990 and prior thereto Vice Chairman of the Board of Trustees of the Registrant since 1971. Chairman of the Board and Co-Chief Executive Officer of Mid-America ReaFund Advisors, Inc. (Advisor to the Registrant) since 1990. Principal, The Mid-America Companies (real estate ownership) since prior to 1983 and President, The Mid-America Management Corporation (real estate management) since 1983. -11- 12 JAMES H. BERICK: Age 62; President, Treasurer and Co-Chief Executive Officer of the Registrant since 1990 and prior thereto Vice Chairman of the Board of Trustees and Secretary of the Registrant since 1971. President, Co-Chief Executive Officer and Treasurer of Mid-America ReaFund Advisors, Inc. (Advisor to the Registrant) since 1990. Chairman, Berick, Pearlman & Mills Co., L.P.A. (attorneys) since 1986. PART II ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK ---------------------------------------- AND RELATED SECURITY HOLDER MATTERS ----------------------------------- The Registrant's shares of beneficial interest are traded on the New York Stock Exchange under the symbol "RRF". As of March 18, 1996, the Registrant had approximately 632 shareholders. The following table sets forth the high and low sales prices of the Registrant's shares of beneficial interest, as well as dividends declared thereon, for the last two fiscal years:
Price Range ----------- Fiscal Year 1995 High Low Dividends - ---------------- ---- --- --------- First Quarter 7 5/8 7 .20 Second Quarter 8 1/4 7 1/8 .20 Third Quarter 8 3/8 8 1/4 .20 Fourth Quarter 8 1/2 7 3/4 .20 Fiscal Year 1996 High Low Dividends - ---------------- ---- --- --------- First Quarter 8 5/8 7 3/8 .20 Second Quarter 8 1/8 7 1/4 .10 Third Quarter 8 4 1/2 .10 Fourth Quarter 7 4 3/8 .10
Item 6. SELECTED FINANCIAL DATA. ----------------------- Information in response to this item is set forth on page 4 of the Registrant's 1996 Annual Report (Exhibit 13), which information is incorporated herein by reference. -12- 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- OPERATING RESULTS AND FINANCIAL POSITION. ---------------------------------------- Information in response to this Item is set forth on pages 5 through 8 of the Registrant's 1996 Annual Report (Exhibit 13), which information is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- The financial statements of the Registrant and the notes thereto appear on pages 9 through 18 of the Registrant's 1996 Annual Report, which information is incorporated herein by reference. The other financial statements and schedules required herein are filed as "Financial Statement Schedules" pursuant to Item 14 of this Report. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ---------------------------------------------------- None. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. -------------------------------------------------- Information in response to this Item is set forth under the caption "Election of Trustees" in the Registrant's proxy statement dated April 5, 1996, as supplemented by that Supplement to Proxy Statement dated April 11, 1996 (Exhibit 99(a)), which information is incorporated herein by reference. The information required by this Item in respect of Executive Officers is set forth on Page 13 of this Form 10-K and is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION. ---------------------- Information in response to this Item is set forth under the caption "Compensation of Trustees and Executive Officers" in the Registrant's proxy statement dated April 5, 1996, as supplemented by that Supplement to Proxy Statement April 11, 1996 (Exhibit 99(a)), which information is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN ----------------------------- BENEFICIAL OWNERS AND MANAGEMENT. -------------------------------- Information in response to this Item is set forth under the caption "Ownership of Shares of Beneficial Interest" in the -13- 14 Registrant's proxy statement dated April 5, 1996, as supplemented by that Supplement to Proxy Statement dated April 11, 1996 (Exhibit 99(a)), which information is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ---------------------------------------------- Information in response to this Item is set forth under the caption "Certain Transactions" in the Registrant's proxy statement dated April 5, 1996, as supplemented by that Supplement to Proxy Statement dated April 11, 1996 (Exhibit 99(a)), which information is incorporated herein by reference. PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS --------------------------------------------------- ON FORM 8-K. ------------ (a) 1. See the Index to Financial Statements set forth on page 21 hereof for a list of financial statements and financial schedules included or incorporated herein by reference. 2.1 The Financial Statements of Riverview Tower Limited Partnership, a borrower of the Registrant (which financial statements were audited by such borrower's auditors), are set forth as Exhibit 99(b). 2.2 The Financial Statements of Pacific Place Partners, LTD., a borrower of the Registrant (which financial statements were audited by such borrower's auditors), are set forth as Exhibit 99(c). 3. The exhibits filed as part of this report are set forth on the Exhibit Index on pages 16 through 20 hereof and each management contract or compensatory plan or arrangement required to be filed as an exhibit hereto has been marked with an asterisk on the Exhibit Index. (b) No current reports on Form 8-K were filed during the last quarter of fiscal year 1996. -14- 15 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REALTY REFUND TRUST Dated: April 29, 1996 By: /s/ Alan M. Krause ------------------ Alan M. Krause, Chairman By: /s/ James H. Berick ------------------- James H. Berick, 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. Dated: April 29, 1996 /s/ James H. Berick ------------------- James H. Berick, Trustee, Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer Dated: April 29, 1996 /s/ Alan M. Krause ------------------ Alan M. Krause, Trustee and Principal Executive Officer Frank L. Kennard, Trustee Alvin M. Kendis, Trustee Samuel S. Pearlman, Trustee Dated: April 29, 1996 By: /s/ Alan M. Krause ------------------ Alan M. Krause, Attorney-In-Fact Powers of attorney authorizing Alan M. Krause to sign this Form 10-K on behalf of Trustees of the Registrant are being filed with the Securities and Exchange Commission herewith (Exhibit 24). -15- 16 Index of Exhibits -----------------
Exhibit Number - ------ 3(a) First Amended and Restated Declaration of Trust (incorporated by reference to Exhibit 3.1 of Registration Statement No. 2-40238 effective June 17, 1971). 3(b) By-Laws (incorporated by reference to Exhibit 3.2 of the Registrant's Current Report on Form 8-K dated February 12, 1985 and filed with the Securities and Exchange Commission on February 13, 1985). 10(a)* Form of Advisory Agreement between the Registrant and the Advisor (incorporated by reference to Exhibit 12.1 of Registration Statement No. 2-40238 effective June 17, 1971). 10(b)* Amendment dated June 1, 1987 to Advisory Agreement between Registrant and the Advisor (incorporated by reference to Exhibit 10(b) of the Registrant's Form 10-K for the fiscal year ended January 31, 1994). 10(c)* Amendment dated June 1, 1988 to Advisory Agreement between the Registrant and the Advisor (incorporated in Exhibit 10(c) of the Registrant's Form 10-K for fiscal year ended January 31, 1995). 10(d)* Amendment dated June 1, 1989 to Advisory Agreement between the Registrant and the Advisor (incorporated by reference to Exhibit 10(d) of the Registrant's Form 10-K for the fiscal year ended January 31, 1990). 10(e)* Amendment dated June 1, 1990 to Advisory Agreement between the Registrant and the Advisor (incorporated by reference to Exhibit 10(e) of the Registrant's Form 10-K for the fiscal year ended January 31, 1991). 10(f)* Amendment dated June 1, 1991 to Advisory Agreement between the Registrant and the Advisor (incorporated by reference to Exhibit 10(f) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992).
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10(g)* Amendment dated June 1, 1992 to Advisory Agreement between the Registrant and the Advisor (incorporated by reference to Exhibit 10(g) of the Registrant's Form 10-K for the fiscal year ended January 31, 1993). 10(h)* Amendment dated June 1, 1993 to Advisory Agreement between the Registrant and the Advisor (incorporated by reference to Exhibit 10(h) of the Registrant's Form 10-K for the fiscal year ended January 31, 1994). 10(i)* Amendment dated June 1, 1994 to Advisory Agreement between the Registrant and the Advisor (incorporated by reference to Exhibit 10(i) of Registrant's Form 10-K for fiscal year ended January 31, 1995). 10(j)* Amendment dated June 1, 1995 to Advisory Agreement between the Registrant and the Advisor. 10(k) Credit Agreement dated July 18, 1990 between the Registrant and the Bank (incorporated by reference to Exhibit 10(f) of the Registrant's Form 10-K for the fiscal year ended January 31, 1991). 10(l) Extension Agreement dated June 27, 1991 to Credit Agreement between the Registrant and the Bank (incorporated by reference to Exhibit 10(g) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992). 10(m) Amendment and Waiver Agreement dated as of July 7, 1992 to Credit Agreement between the Registrant and the Bank (incorporated by reference to Exhibit 10.5 of the Registrant's Current Report on Form 8-K dated March 16, 1993 and filed with the Securities and Exchange Commission on March 24, 1993). 10(n) Security Agreement (Promissory Notes) dated as of July 7, 1992 between Registrant and the Bank (incorporated by reference to Exhibit 10.6 of the Registrant's Current Report on Form 8-K dated March 16, 1993 and filed with the Securities and Exchange Commission on March 24, 1993). 10(o) Second Amendment dated March 16, 1993 to Credit Agreement between the Registrant and the Bank (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K dated March 16, 1993 and filed with the Securities and Exchange Commission on March 24, 1993).
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10(p) Third Amendment dated as of July 28, 1994 between the Registrant and the Bank (incorporated by reference to Exhibit 10(o) of the Registrant's Form 10-K for the fiscal year ended January 31, 1995). 10(q) Security Agreement (Promissory Notes) dated as of March 16, 1993 between Registrant and the Bank (incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K dated March 16, 1993 and filed with the Securities and Exchange Commission on March 24, 1993). 10(r) Fourth Amendment dated as of July 27, 1995 between the Registrant and the Bank. 10(s) Fifth Amendment dated as of January 29, 1996 between Registrant and the Bank. 10(t) Sixth Amendment dated April 16, 1996 between Registrant and the Bank. 10(u) Security Agreement (Inventory, Receivables and Equipment) dated as of March 16, 1993 between Registrant and Bank (incorporated by reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K dated March 16, 1993 and filed with the Securities and Exchange Commission on March 24, 1993). 10(v) Secured Note Purchase Agreement dated March 16, 1993 between the Registrant and Alan M. Krause (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated March 16, 1993 and filed with the Securities and Exchange Commission on March 24, 1993). 10(w)* Employment Agreement dated January 22, 1990 between the Registrant and Alan M. Krause (incorporated by reference to Exhibit 10(i) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992). 10(x)* Amendment No. 1 dated June 1, 1990 to Employment Agreement between the Registrant and Alan M. Krause (incorporated by reference to Exhibit 10(j) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992). 10(y)* Amendment No. 2 dated June 1, 1991 to Employment Agreement between the Registrant and Alan M. Krause (incorporated by reference to Exhibit 10(k) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992).
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10(z)* Amendment No. 3 dated June 1, 1992 to Employment Agreement between the Registrant and Alan M. Krause (incorporated by reference to Exhibit 10(s) of the Registrant's Form 10-K for the fiscal year ended January 31, 1993). 10(aa)* Amendment No. 4 dated June 1, 1993 to Employment Agreement between the Registrant and Alan M. Krause (incorporated by reference to Exhibit 10(u) of the Registrant's Form 10-K for the fiscal year ended January 31, 1994). 10(bb)* Amendment No. 5 dated June 1, 1994 to Employment Agreement between the Registrant and Alan M. Krause (incorporated by reference to Exhibit 10(x) of the Registrant's Form 10-K for the fiscal year ended January 31, 1995). 10(cc)* Amendment No. 6 dated June 1, 1995 to Employment Agreement between Registrant and Alan M. Krause. 10(dd)* Employment Agreement dated January 22, 1990 between the Registrant and James H. Berick (incorporated by reference to Exhibit 10(l) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992). 10(ee)* Amendment No. 1 dated June 1, 1990 to Employment Agreement between the Registrant and James H. Berick (incorporated by reference to Exhibit 10(m) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992). 10(ff)* Amendment No. 2 dated June 1, 1991 to Employment Agreement between the Registrant and James H. Berick (incorporated by reference to Exhibit 10(n) of the Registrant's Form 10-K for the fiscal year ended January 31, 1992). 10(gg)* Amendment No. 3 dated June 1, 1992 to Employment Agreement between the Registrant and James H. Berick (incorporated by reference to Exhibit 10(w) of the Registrant's Form 10-K for the fiscal year ended January 31, 1993). 10(hh)* Amendment No. 4 dated June 1, 1993 to Employment Agreement between the Registrant and James H. Berick (incorporated by reference to Exhibit 10 (z) of the Registrant's Form 10-K for the fiscal year ended January 31, 1994).
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10(ii)* Amendment No. 5 dated June 1, 1994 to Employment Agreement between the Registrant and James H. Berick (incorporated by reference to Exhibit 10(dd) of the Registrant's Form 10-K for the fiscal year ended January 31, 1995). 10(jj)* Amendment No. 6 dated June 1, 1995 to Employment Agreement between the Registrant and James H. Berick. 13 The Registrant's 1996 Annual Report. 24 Powers of Attorney. 27** Financial Data Schedule. 99(a) Notice of Annual Meeting and Proxy Statement dated April 5, 1996 and Supplement to Proxy Statement dated April 11, 1996. 99(b) Financial Statements of Riverview Tower Limited Partnership as at December 31, 1994 and 1995. 99(c) Financial Statements of Pacific Place Partners, Ltd. as at December 31, 1994 and 1995. *Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. **Filed only in electronic format pursuant to Item 601(b)(27) of Regulation S-K.
-20- 21 REALTY ReFUND TRUST ------------------- LIST OF FINANCIAL STATEMENTS AND SCHEDULE ----------------------------------------- The following financial statements of Realty ReFund Trust are included in Item 8: Report of Independent Public Accountants Balance Sheets -- January 31, 1996 and 1995 Statements of Operations -- For the Years Ended January 31, 1996, 1995 and 1994 Statements of Shareholders' Equity -- For the Years Ended January 31, 1996, 1995 and 1994 Statements of Cash Flows -- For the Years Ended January 31, 1996, 1995 and 1994 Notes to Financial Statements -- January 31, 1996, 1995 and 1994 The following financial statement schedule of Realty ReFund Trust is included in Item 14(a)1.: Schedule III -- Real Estate and Accumulated Depreciation All other schedules are omitted, as the information is not required or is otherwise furnished. -21- 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Trustees, Realty ReFund Trust: We have audited the accompanying balance sheets of Realty ReFund Trust (an Ohio unincorporated business trust) as of January 31, 1996 and 1995, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended January 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The summarized financial data contained in Note 12 are based on the financial statements of Riverview Tower Limited Partnership and Pacific Place Partners, Ltd. which were audited by other auditors. Their reports have been furnished to us and our opinion, insofar as it relates to the data in Note 12, is based solely on the reports of the other auditors. 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, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Realty ReFund Trust as of January 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)1. of this Form 10-K is the responsibility of the Trust's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ------------------------ Cleveland, Ohio, February 26, 1996. -22- 23 SCHEDULE III REALTY ReFUND TRUST ------------------- REAL ESTATE AND ACCUMULATED DEPRECIATION ---------------------------------------- AS OF JANUARY 31, 1996 ----------------------
Cost Capitalized Gross Amount to Initial Cost Subsequent to Which Carried at to Trust Acquisition Close of Period ------------------------ ------------------------ ------------------------------------ Buildings and Carrying Buildings and Total Encumbrances Land Improvements Improvements Costs Land Improvements (A) (B) ------------ -------- ------------- ------------ -------- -------- ------------- ---------- Office Building -- Chicago, Illinois $ -- $897,436 $7,260,000 $ -- $ -- $897,436 $6,291,164 $7,188,600 ======= ======== ========== ======= ======= ======== ========== ========== (A) Reconciliation of total cost and accumulated depreciation.
Year Accumulated Construction Date Depreciation Completed Acquired Life ------------ ------------ -------- ------ Office Building -- Chicago, Illinois $792,236 $ -- (C) (D) ======== ======= ===== (A) Reconciliation of total cost and accumulated depreciation.
1996 1995 1994 ------------------------ ------------------------ ------------------------ Total Accumulated Total Accumulated Total Accumulated Cost Depreciation Cost Depreciation Cost Depreciation ---------- ------------ ---------- ------------ ---------- ------------ BALANCE, beginning of year $9,009,696 $359,439 $8,387,719 $ 29,256 $7,401,863 $ 2,746 ADDITIONS DURING PERIOD: Building improvements 491,599 -- 107,000 -- -- -- Tenants improvements 687,305 -- 514,977 -- 88,420 -- Acquisition of land -- -- -- -- 897,436 -- Depreciation expense -- 432,797 -- 330,183 -- 26,510 DEDUCTIONS DURING PERIOD: Writedown to estimated net realizable value (E) (3,000,000) -- -- -- -- -- ---------- -------- ---------- -------- ---------- ------- BALANCE, end of year $7,188,600 $792,236 $9,009,696 $359,439 $8,387,719 $29,256 ========== ======== ========== ======== ========== ======= (B) For federal income tax purposes, the aggregate cost is $9,672,000 at January 31, 1996. (C) Building tile was accepted in July 1992. Land was acquired in March and April 1993. (D) Commencing February 1, 1994, building and building improvements are being depreciated on a straight-line basis over 30 years. Tenant improvements are depreciated on a straight-line basis over the related lease terms, which range from five to fifteen years. (E) In fiscal 1996, the Trust recorded a $3,000,000 provision to reduce the carrying value of the real estate held for sale to its estimated net realizable value. The amount of the writedown was based upon the Trust's estimate of the amount of net proceeds which would be realized upon the sale of the real estate.
-23- EX-10.J 2 EXHIBIT 10(J) 1 Exhibit 10(j) Amendment Dated June 1, 1995 to Advisory Agreement Between the Registrant and the Advisor. 2 [ReaFund LOGO] Realty ReFund Trust / 1385 Eaton Center / 1111 Superior Avenue Cleveland, Ohio 44114/216-771-7663 Fax /216-861-4929 June 1, 1995 Mid-America ReaFund Advisors, Inc. 1385 Eaton Center Cleveland, Ohio 44114 Attention: James H. Berick, President Dear Jim: Please be advised that the Trustees of Realty ReFund Trust (the "Trust") have agreed to extend the Advisory Agreement between Mid-America ReaFund Advisors, Inc. (the "Adviser") and the Trust, for an additional term of one (1) year expiring June, 1996, on the same terms, conditions and provisions contained in the original Agreement as extended from time to time. If this Agreement to extend meets with the approval of the Adviser, please acknowledge the same on the copy of this letter enclosed for that purpose. Very truly yours, Realty ReFund Trust By Alan M. Krause ------------------------------ Alan M. Krause Chairman And Christine Turk ------------------------------ Christine Turk Secretary /ct Enclosure The foregoing extension is hereby accepted. Mid-America ReaFund Advisors, Inc. By James H. Berick ------------------------------ James H. Berick, President EX-10.R 3 EXHIBIT 10(R) 1 Exhibit 10 (r) Fourth Amendment dated as of July 27, 1995 between the Registrant and the Bank 2 FOURTH AMENDMENT This Fourth Amendment (this "Amendment") is executed in Cleveland, Ohio on July 27, 1995, by and between REALTY REFUND TRUST ("Borrower") and NATIONAL CITY BANK ("Bank"). PRELIMINARY STATEMENTS A. Borrower and Bank entered into a Credit Agreement dated as of July 18, 1990, wherein Bank established a contingent revolving credit facility for Borrower in a principal amount not to exceed Thirty Million Dollars ($30,000,000), which Credit Agreement was amended pursuant to the Amendment and Waiver dated as of July 7, 1992 the Second Amendment dated as of March 16, 1993, and the Third Amendment dated as of July 28, 1994, respectively (the Credit Agreement, as amended, the "Agreement"). B. Borrower and Bank wish to further amend the Agreement on the terms and conditions set forth hereinafter. AGREEMENT For valuable consideration as hereinafter granted each to the other and intending to be legally bound hereby, the parties acknowledge the preliminary statements and, effective as of the date hereof, amend the terms, conditions, and provisions of the Agreement as follows: 1. Effective as of September 1, 1995 (instead of August 1, 1995) the amount of the "subject commitment" (as defined in the Agreement) shall be reduced to Ten Million Dollars ($10,000,000). 2. Subsection 5A.07 is hereby deleted and replaced in its entirety by the following: 5A.07 SEPTEMBER 1, 1995 BALANCE -- If, on September 1, 1995, the then outstanding balance of the subject indebtedness exceeds Ten Million Dollars ($10,000,000). IN WITNESS WHEREOF, Borrower and Bank have executed this Amendment at the time and place first above mentioned. Address: REALTY REFUND TRUST 1385 Eaton Center By: JAMES H. BERICK 1111 Superior Avenue ------------------------- Cleveland, Ohio 44114 Name: James H. Berick ----------------------- Title: President ---------------------- Address: NATIONAL CITY BANK 1900 East Ninth Street By: JOHN R. FRANZEN Attn: Real Estate Industries Division ------------------------- Cleveland, Ohio 44114-3484 Name: John R. Franzen ----------------------- Title: Vice President ----------------------
EX-10.S 4 EXHIBIT 10(S) 1 Exhibit 10(s) Fifth Amendment dated as of January 29, 1996 between Registrant and Bank. 2 FIFTH AMENDMENT --------------- This Fifth Amendment (this "Amendment") is executed in Cleveland, Ohio on January 29, 1996, by and between REALTY REFUND TRUST ("Borrower") and NATIONAL CITY BANK ("National City"). PRELIMINARY STATEMENTS A. Borrower and National City entered into a Credit Agreement dated as of July 18, 1990, wherein National City established a contingent revolving credit facility for Borrower in a principal amount not to exceed Thirty Million Dollars ($30,000,000), which Credit Agreement was amended pursuant to the Amendment and Waiver dated as of July 7, 1992, the Second Amendment dated as of March 16, 1993, the Third Amendment dated as of July 28, 1994, and the Fourth Amendment dated as of July 27, 1995, respectively (the Credit Agreement, as amended, the "Agreement"). B. Borrower and National City wish to further amend the Agreement on the terms and conditions set forth hereinafter. AGREEMENT For valuable consideration as hereinafter granted each to the other and intending to be legally bound hereby, the parties acknowledge the preliminary statements and amend the terms, conditions, and provisions of the Agreement as follows: 1. Effective as of the date hereof, the amount of the "subject commitment" (as defined in the Agreement) shall be reduced to Eight Million Five Hundred Thousand Dollars ($8,500,000). 2. Subsection 2B.06 (captioned "AMOUNT") is hereby rewritten in its entirety to read as follows: 2B.06 AMOUNT -- No subject loan shall be made if, after giving effect thereto, the aggregate unpaid principal balance of the subject loans would exceed the lesser of the amount of the subject commitment then in effect or the borrowing base then in effect; provided, however, that the proceeds of any subject loans made on or after the date hereof may be used, with the prior approval of Bank, only to purchase eligible investments or to make capital and tenant improvements, except for subject loans up to a maximum amount outstanding at any time of Two Hundred Fifty Thousand Dollars, which may be used without obtaining the prior approval of Bank. 3. Subsection 3D.06 of the Agreement (captioned "WORTH") is hereby amended its entirety to read as follows: 3 3D.06 WORTH -- Borrower shall not suffer or permit its net worth at any time to be less that Twelve Million Dollars ($12,000,000). This provision shall be tested as of the end of each quarter of each of Borrower's fiscal years; provided, however, that this provision shall not be deemed to have been satisfied until Bank has received Borrower's quarterly or annual report described in subsection 3A.01 for the end of the quarter in question which establishes that this provision has been satisfied. IN WITNESS WHEREOF, Borrower and National City have executed this Amendment at the time and place first above mentioned. Address: REALTY REFUND TRUST James H. Berick 1385 Eaton Center By:___________________________ 1111 Superior Avenue James H. Berick Cleveland, Ohio 44114 Name: ________________________ President Title: _______________________ Address: NATIONAL CITY BANK 1900 East Ninth Street John R. Franzen Attn: Real Estate Industries Division By:___________________________ Cleveland, Ohio 44114-3484 John R. Franzen Name: ________________________ Vice President Title: _______________________ 2 EX-10.E 5 EXHIBIT 10(E) 1 Exhibit 10(t) Sixth Amendment dated April 16, 1996 between Registrant and the Bank. 2 SIXTH AMENDMENT --------------- This Sixth Amendment (this "Amendment") is executed in Cleveland, Ohio on April 16, 1996, by and between REALTY REFUND TRUST ("Borrower") and NATIONAL CITY BANK ("National City"). PRELIMINARY STATEMENTS A. Borrower and National City entered into a Credit Agreement dated as of July 18, 1990, wherein National City established a contingent revolving credit facility for Borrower in a principal amount not to exceed Thirty Million Dollars ($30,000,000), which Credit Agreement was amended pursuant to the Amendment and Waiver dated as of July 7, 1992, the Second Amendment dated as of March 16, 1993, the Third Amendment dated as of July 28, 1994, the Fourth Amendment dated as of July 27, 1995, and the Fifth Amendment dated as of January 29, 1996, respectively (the Credit Agreement, as amended, the "Agreement"). B. Borrower and National City wish to further amend the Agreement on the terms and conditions set forth hereinafter. AGREEMENT For valuable consideration as hereinafter granted each to the other and intending to be legally bound hereby, the parties acknowledge the preliminary statements and amend the terms, conditions, and provisions of the Agreement as follows: 1. Effective as of the date hereof the amount of the "subject commitment" (as defined in the Agreement) shall be reduced to Seven Million Dollars ($7,000,000). 2. Subsection 3D.06 of the Agreement (captioned "WORTH") is hereby amended its entirety to read as follows: 3D.06 WORTH -- Borrower shall not suffer or permit its net worth at any time to be less that Eight Million Five Hundred Thousand Dollars ($8,500,000). This provision shall be tested as of the end of each quarter of each of Borrower's fiscal years; provided, however, that this provision shall not be deemed to have been satisfied until Bank has received Borrower's quarterly or annual report described in subsection 3A.01 for the end of the quarter in question which establishes that this provision has been satisfied. 3 IN WITNESS WHEREOF, Borrower and National City have executed this Amendment at the time and place first above mentioned. Address: REALTY REFUND TRUST James H. Berick 1385 Eaton Center By:___________________________ 1111 Superior Avenue James H. Berick Cleveland, Ohio 44114 Name: ________________________ President Title: _______________________ Address: NATIONAL CITY BANK 1900 East Ninth Street John R. Franzen Attn: Real Estate Industries Division By:___________________________ Cleveland, Ohio 44114-3484 John R. Franzen Name: ________________________ Vice President Title: _______________________ 2 EX-10.CC 6 EXHIBIT 10(CC) 1 Exhibit 10(cc) Amendment No. 6 Dated June 1, 1995 to Employment Agreement Between the Registrant and Alan M. Krause. 2 AMENDMENT NO. 6 TO ------------------ EMPLOYMENT AGREEMENT -------------------- This Amendment No. 6 to Employment Agreement made as of June 1, 1995 between REALTY ReFUND TRUST, an unincorporated association in the form of a business trust organized under the laws of the State of Ohio having its principal business address at 1385 Eaton Center, Cleveland, Ohio 44114 (the "Trust") and ALAN M. KRAUSE ("Employee"). RECITALS -------- The Trust and Employee entered into an Employment Agreement dated as of January 22, 1990. As of June 1, 1994, the Employment Agreement was amended to extend its term to January 21, 2005 (subject to the provisions for earlier termination contained at Section 5 of the Employment Agreement). The January 22, 1990 Employment Agreement, as amended, is herein referred to as the "Employment Agreement". The parties desire to extend the term of the Employment Agreement by re-establishing the expiration date thereof. 3 AGREEMENTS ---------- NOW, THEREFORE, in consideration of the foregoing, and their mutual covenants and agreements herein contained, the parties hereto do hereby agree as follows: 1. The Trust and Employee agree to and do hereby amend the Employment Agreement so that: (a) Section 2 on page 3 of the Employment Agreement stating: "2. Term ---- . . . this Agreement shall commence upon the execution hereof and shall continue through and including the 21st day of January, 2005." is replaced in its entirety as though originally set forth therein with: "2. Term ---- . . . this Agreement shall commence upon the execution hereof and shall continue through and including the 21st day of January, 2006." and, b) Section 6 on page 5 of the Employment Agreement stating: -2- 4 "6. Covenant Against Competition ---------------------------- (A) During the period commencing with the date hereof and continuing until the latter of the expiration of the term of this Agreement or until January 21, 2005 if this Agreement shall be terminated for the reasons specified in Section 5(a) (i) hereof . . . " is replaced in its entirety as though originally set forth therein with: "6. Covenant Against Competition ---------------------------- (A) During the period commencing with the date hereof and continuing until the latter of the expiration of the term of this Agreement or until January 21, 2006 if this Agreement shall be terminated for the reasons specified in Section 5(A) (i) hereof . . . " 2. Except as herein specifically amended, all of the terms and conditions of the Employment Agreement are hereby ratified and confirmed and the Employment Agreement is hereby incorporated to the same extent as if fully rewritten herein. IN WITNESS WHEREOF, the parties hereto have caused this -3- 5 Amendment No. 6 to Employment Agreement to be duly executed as of June 1, 1995. REALTY ReFUND TRUST By: /s/ Alan M. Krause ------------------------- Alan M. Krause, Chairman And: /s/ Christine Turk ------------------------ Christine Turk, Secretary THE TRUST /s/ James H. Berick ---------------------------- JAMES H. BERICK EMPLOYEE -4- EX-10.JJ 7 EXHIBIT 10(JJ) 1 Exhibit 10(jj) Amendment No. 6 Dated June 1, 1995 to Employment Agreement Between the Registrant and James H. Berick 2 AMENDMENT NO. 6 TO ------------------ EMPLOYMENT AGREEMENT -------------------- This Amendment No. 6 to Employment Agreement made as of June 1, 1995 between REALTY ReFUND TRUST, an unincorporated association in the form of a business trust organized under the laws of the State of Ohio having its principal business address at 1385 Eaton Center, Cleveland, Ohio 44114 (the "Trust") and JAMES H. BERICK ("Employee"). RECITALS -------- The Trust and Employee entered into an Employment Agreement dated as of January 22, 1990. As of June 1, 1994, the Employment Agreement was amended to extend its term to January 21, 2005 (subject to the provisions for earlier termination contained at Section 5 of the Employment Agreement). The January 22, 1990 Employment Agreement, as amended, is herein referred to as the "Employment Agreement". The parties desire to extend the term of the Employment Agreement by re-establishing the expiration date thereof. 3 AGREEMENTS ---------- NOW, THEREFORE, in consideration of the foregoing, and their mutual covenants and agreements herein contained, the parties hereto do hereby agree as follows: 1. The Trust and Employee agree to and do hereby amend the Employment Agreement so that: (a) Section 2 on page 3 of the Employment Agreement stating: "2. Term . . . this Agreement shall commence upon the execution hereof and shall continue through and including the 21st day of January, 2005." is replaced in its entirety as though originally set forth therein with: "2. Term . . . this Agreement shall commence upon the execution hereof and shall continue through and including the 21st day of January, 2006." and, (b) Section 6 on page 5 of the Employment Agreement stating: -2- 4 "6. Covenant Against Competition (A) During the period commencing with the date hereof and continuing until the latter of the expiration of the term of this Agreement or until January 21, 2005 if this Agreement shall be terminated for the reasons specified in Section 5(a) (i) hereof. . . " is replaced in its entirety as though originally set forth therein with: "6. Covenant Against Competition (A) During the period commencing with the date hereof and continuing until the latter of the expiration of the term of this Agreement or until January 21, 2006 if this Agreement shall be terminated for the reasons specified in Section 5(A) (i) hereof. . ." 2. Except as herein specifically amended, all of the terms and conditions of the Employment Agreement are hereby ratified and confirmed and the Employment Agreement is hereby incorporated to the same extent as if fully rewritten herein. IN WITNESS WHEREOF, the parties hereto have caused this -3- 5 Amendment No. 6 to Employment Agreement to be duly executed as of June 1, 1995. REALTY ReFUND TRUST By: /s/ James H. Berick ------------------------ James H. Berick, President And: /s/ Christine Turk ----------------------- Christine Turk, Secretary THE TRUST /s/ Alan M. Krause --------------------------- ALAN M. KRAUSE EMPLOYEE -4- EX-13 8 EXHIBIT 13 1 Exhibit 13 The Registrant's 1996 Annual Report 2 EXHIBIT 13 1996 REALTY REFUND TRUST [PHOTO 1: Photo of ten-key tape and a pencil tip superimposed on two buildings] REALTY REFUND TRUST Annual Report for the year ended January 31, 1996 [STYLIZED REALTY REFUND TRUST LOGO] [OUTSIDE FRONT COVER] 3 [Photo 2: Circular photo of a portion of a ten-key tape and pencil tip] Realty ReFund Trust About Realty ReFund Trust Realty ReFund Trust has specialized in the refinancing of existing income producing commercial, industrial and multi-unit residential property by supplementing or replacing existing financing. The Trust's primary refinancing tool has been the "wrap-around" mortgage loan. The wrap-around refinancing technique enables both the Trust and its borrower to utilize the leverage available in the existing first mortgage on the borrower's property. The Trust offers a borrower a new mortgage loan (a wrap-around loan) on that property, the principal amount of which equals the balance outstanding on that property's existing mortgage loan plus an additional amount supplied by the Trust. With its current cycle of investments winding down, Realty ReFund is reviewing all of its options as to how to proceed, including: merger; sale; restructuring; new financing sources, both public and private; and liquidation of the Trust. Established in 1971, Realty ReFund Trust has elected to be taxed as a real estate investment trust as that term is used in Sections 856-860 of the Internal Revenue Code of 1954, as amended. Contents Letter to Shareholders................................................ 1-3 Selected Financial Data............................................... 4 MD&A.................................................................. 5-8 Balance Sheets........................................................ 9 Statements of Operations.............................................. 10 Statements of Shareholders' Equity.................................... 11 Statements of Cash Flows.............................................. 12 Notes................................................................. 13-18 Report of Independent Public Accountants.............................. 19 Trustees and Officers................................................. 20
[INSIDE FRONT COVER] 4 To Our Shareholders SHAREHOLDERS For the year ended January 31, 1996, Realty ReFund Trust reported a loss of $(7.40) per share on a net loss of $(7,554,351) compared to prior year's earnings of $0.66 per share on net income of $670,945. Revenues for the year were $5,430,006 versus $6,692,051 in 1995. For the fourth quarter ended January 31, 1996, the Trust reported a loss of $(2.87) per share on a net loss of $(2,927,661), compared to prior year's earnings of $0.15 per share on net income of $153,473. The year-to-date and fourth quarter losses reported in the current year resulted from the valuation allowances, totaling $8 million, established during the year on two properties. Later in this letter, we will detail our decisions to establish these allowances. As you know, Realty ReFund Trust includes Funds From Operations ("FFO") in its financial reports to account for the depreciation taken on its equity investment in Chicago. Essentially, FFO is the sum of the net income plus depreciation and valuation allowances less capital gains. Like many other REITs which have equity investments in real estate, we use FFO to provide you with a more accurate measurement of our year-to-year performance.
Year ended January 31, 1996 1995 - -------------------------------------------------------------------------------- Net income (loss) $(7,554,351) $670,945 Funds From Operations 710,522 914,728 Income (loss) per share (7.40) .66 Funds From Operations per share .70 .90 Dividend per share .50 .80
Three months ended January 31, 1996 1995 - -------------------------------------------------------------------------------- Net income (loss) $(2,927,661) $153,473 Funds From Operations 141,262 215,756 Income (loss) per share (2.87) .15 Funds From Operations per share .14 .21 Dividend per share .10 .20
1 5 During the calendar year of 1995, the Trust paid dividends of $.60, of which 97.4 percent was taxable and 2.6 percent was non-taxable as a return of capital. Toledo Property In the second quarter of 1995, Realty ReFund Trust established a valuation allowance of $5 million in respect of its mortgage loan on the Riverview Tower. Riverview Tower Limited Partnership, the owner of this property and a borrower from the Trust, is seeking to sell this property. In view of the fact that our loan was made on a non-recourse basis, we have written down the value of the loan to reflect our current estimate of its market value. The current book value of the Trust's investment on this property is approximately $1.4 million. Chicago Property Our property enhancement program for the Carbide and Carbon Building in Chicago continued to produce positive results last year. For the year ended January 31, 1996, the Trust maintained operating profits, before the deductions for depreciation and amortization of tenant improvements and leasing commissions, for the second consecutive year. As you will recall, this property was running at a substantial loss when Realty ReFund took title to it in mid-1992. Unfortunately, Chicago's office building market has not improved as quickly as was projected earlier. Accordingly, the Trust established a valuation allowance of $3 million in the fourth quarter to reflect our current estimate of the market value of this property should it become necessary to sell it prematurely. Loans Paid Off During The Year As previously announced, the mortgage loan to American Motor Inns in Sarasota and Orlando, Florida was paid in full at its maturity in August 1995. The net proceeds of approximately $3.5 million were used to reduce bank debt. The mortgage loan on the shopping center in Saginaw, Michigan was prepaid in full in September 1995. The net proceeds of approximately $2.0 million also were applied to reduce bank debt. 2 6 BOARD RE-ELECTED The Trust held its 24th annual meeting on May 15, 1995. At the meeting, the shareholders re-elected Realty ReFund's Board of Trustees. Management and the Trustees appreciate this vote of confidence. 98TH CONSECUTIVE DIVIDEND PAID The Board of Trustees declared a cash dividend of $.10 per share for the quarter ended January 31, 1996 which was paid on March 15, 1996 to shareholders of record on March 8, 1996. The Trustees will continue to review future dividend payments on a quarter-to-quarter basis. INVESTMENT BANK RETAINED -- OUTLOOK At the recommendation of its Board of Trustees, Realty ReFund retained the investment banking firm of Brown, Gibbons, Lang & Company, L.P., in August 1995 to review the future direction of the Trust. With our current cycle of investments winding down, the Trust has come to a crossroads. Brown, Gibbons has been asked to review all of the Trust's options as how to proceed, including: merger; sale; restructuring; new financing sources, both public and private; and liquidation of the Trust. Since that time, we have received well over 100 inquiries and have had numerous plans suggested involving Realty ReFund. We currently are investigating each proposal and will make our final recommendations to the Board. The Trust plans to act swiftly should we find a plan that will enhance shareholder value. If no such plan should become available in the reasonably near future, the Trust will determine which of its available options to pursue, including the possibility of an orderly liquidation. We will keep you abreast of our findings and thank you for your continued loyalty and support. /s/Alan M. Krause Alan M. Krause Chairman and Co-Chief Executive Officer /s/James H. Berick James H. Berick President and Co-Chief Executive Officer 3 7 Selected Financial Data The following selected financial data of Realty ReFund Trust for the five years ended January 31, 1996, have been derived from the audited financial statements of the Trust, which have been audited by Arthur Andersen LLP, independent public accountants. All of the data should be read in conjunction with the respective financial statements and related notes included herein. SELECTED FINANCIAL DATA
For the fiscal years ended January 31, 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Total revenues $ 5,430,006 $ 6,592,051 $ 7,645,790 $ 6,979,119 $ 4,525,660 -------------------------------------------------------------------------- Income (loss) before unusual item $(7,554,351) $ 670,945 $ 955,121 $(3,535,366) $ 1,755,862 Unusual item -- write-off of deferred costs associated with failed mergers -- -- -- 1,007,609 -- -------------------------------------------------------------------------- Net income (loss) $(7,554,351) $ 670,945 $ 955,121 $(4,542,975) $ 1,755,862 -------------------------------------------------------------------------- Earnings per share $ (7.40) $ .66 $ .94 $ (4.45) $ 1.72 -------------------------------------------------------------------------- Cash dividends paid and declared per share $ .50 $ .80 $ .86 $ 1.09 $ 1.72 -------------------------------------------------------------------------- Total assets $24,555,330 $45,165,356 $65,264,638 $70,428,842 $78,638,206 -------------------------------------------------------------------------- Bank and other borrowings $10,795,000 $16,810,000 $24,575,000 $23,525,000 $21,050,000 --------------------------------------------------------------------------
4 8 Management's Discussion and Analysis of Operating Results and Financial Position All references are to the Trust's fiscal year ended January 31, 1996, as compared to 1995 or the fiscal year ended January 31, 1995, as compared to 1994. Results of Operations and Financial Position Following is an analysis of the net interest income earned on each loan in the Trust's portfolio during 1996, 1995 and 1994: OPERATIONS AND FINANCIAL POSITION ANALYSIS OF NET INTEREST INCOME BY LOAN
AVERAGE LOANS AVERAGE LOANS AVERAGE NET INTEREST INTEREST NET INTEREST AVERAGE DESCRIPTION RECEIVABLE(a) PAYABLE(a) INVESTMENT(b) INCOME EXPENSE INCOME YIELD (c) - --------------------------------------------------------------------------------------------------------------------------------- 1996 - --------------------------------------------------------------------------------------------------------------------------------- Wrap-Around mortgage loans: Fort Worth, Texas $15,814,885 $ 7,456,734 $8,358,151 $1,766,385 $ 617,123 $1,149,262 13.8%(d) Toledo, Ohio 10,624,356 3,496,911 7,127,445 932,605 209,872 722,733 10.1 Other mortgage loans: Saginaw, Michigan 2,015,912 -- 2,015,912 149,299 -- 149,399 14.8(e) Sarasota/Orlando, Florida 3,771,941 -- 3,771,941 207,167 -- 207,167 11.0(f) Loan prepayment fees and other income N/A N/A N/A 76,749 N/A 76,749 N/A ---------------------- Totals $3,132,205 $ 826,995 ---------------------- 1995 - --------------------------------------------------------------------------------------------------------------------------------- Wrap-Around mortgage loans: Fort Worth, Texas $21,361,623 $12,920,553 $8,441,070 $2,107,216 $1,061,892 $1,045,324 12.4%(d) Dallas, Texas 5,459,109 4,059,109 1,400,000 131,102 90,276 40,826 11.7(d)(g) Toledo, Ohio 12,727,848 4,153,957 8,573,891 1,120,698 249,722 870,976 10.2 Akron, Ohio 9,261,264 1,880,494 7,380,770 143,469 27,032 116,437 7.1(g) Other mortgage loans: Saginaw, Michigan 2,041,089 -- 2,041,089 128,074 -- 128,074 12.5(e) Sarasota/Orlando, Florida 3,863,138 -- 3,863,138 424,417 -- 424,417 11.0 Loan prepayment fees and other income N/A N/A N/A 217,620 N/A 217,620 N/A ---------------------- Totals (h) $4,272,596 $1,428,922 ---------------------- 1994 - --------------------------------------------------------------------------------------------------------------------------------- Wrap-Around mortgage loans: Fort Worth, Texas $26,623,341 $17,952,191 $8,671,150 $2,431,184 $1,463,929 $ 967,255 11.1%(d) Dallas, Texas 5,477,869 4,077,869 1,400,000 522,617 377,099 145,518 10.4(d) Toledo, Ohio 13,894,571 4,772,525 9,122,046 1,213,338 287,239 926,099 10.2 Akron, Ohio 9,602,352 2,427,999 7,174,353 700,502 139,626 560,876 7.8 Other mortgage loans: Sarasota/Orlando, Florida 3,974,234 - 3,974,234 436,692 - 436,692 11.0 Other income N/A N/A N/A 28,764 N/A 28,764 N/A ---------------------- Totals (h) $5,333,097 $2,267,893 ----------------------
(a) Based upon average month-end balances outstanding during each fiscal year. (b) Average loans receivable less average loans payable. (c) Net interest income divided by average net investment. (d) The Trust's net investment in these loans bears interest at variable rates based on specified increments over the prime lending rate. As the prime lending rate increased in fiscal 1996 and 1995, the average yield on these loans fluctuated accordingly. Reference should be made to the schedule of investments in loans receivable included in Note 10 to the financial statements. (e) This loan was outstanding for approximately six months in 1996 and 1995. The average yield represents an annualized yield. (f) This loan was outstanding for approximately six months in 1996. The average yield represents an annualized yield. (g) These loans were outstanding for approximately three months in 1995. The average yield represents an annualized yield. (h) Mortgage interest expense related to the Chicago, Illinois real estate held for sale has been excluded from the above analysis. 5 9 Management's Discussion and Analysis of Operating Results and Financial Position MANAGEMENT'S DISCUSSION AND ANALYSIS In July 1995, the Trust established a valuation allowance of $5,000,000 on its investment in the Toledo, Ohio wrap-around mortgage loan. The owner of the property and borrower from the Trust, Riverview Tower Limited Partnership, a related party, is pursuing, among other things, any possible opportunities for a sale of the property. As the Trust's loan was made on a nonrecourse basis, the Trust has written down its investment to reflect the estimated sales price of the property and the estimated net proceeds which would be received by the Trust on its investment. As the Trust continues to receive, on a timely basis, all required monthly payments of principal and interest on the mortgage loan, interest income continues to be recognized based upon the contractual terms of the mortgage loan. This wrap-around mortgage loan matures in December 1996. In July 1992, the Trust accepted title in lieu of foreclosure on a commercial building in Chicago, Illinois. At the time of title acceptance, the Trust recorded a provision to write down its investment to estimated net realizable value as it was the Trust's intention to sell the real estate. Since that time, the carrying value of the investment has increased as a result of considerable investment in building and tenant improvements. To date, the Trust has not received a firm offer for the sale of the property. Based on both current market conditions for similar commercial property in Chicago and the current operating performance of the property, the Trust recorded a $3,000,000 valuation allowance in the fourth quarter of fiscal 1996 to reduce the carrying value of the property to its current estimated net realizable value. The amount of the writedown is based upon the Trust's best estimate of the amount of net proceeds which would be realized upon sale of the real estate in the near term future. Interest income on mortgage loans receivable decreased in 1996 as compared to 1995 due to the prepayment of the Akron, Ohio and Dallas, Texas wrap-around mortgage loans in April and May 1994, respectively, principal prepayments aggregating $3,050,000 received on the Toledo, Ohio wrap-around mortgage loan in fiscal years 1996 and 1995, principal repayment of $2,000,000 received on the Saginaw, Michigan loan, the maturity of the Sarasota and Orlando, Florida loan in August 1995 and the normal amortization of mortgage loan balances. In addition, fiscal 1995 included loan prepayment income of $190,000 as compared to $59,000 for fiscal 1996. Interest expense on mortgage loans payable decreased in 1996 as compared to 1995, due to the prepayments of the loans underlying the Akron, Ohio and Dallas, Texas wrap-around loan investments and the normal amortization of mortgage loan balances. Interest expense on bank borrowings decreased in 1996 as compared to 1995 due to lower average borrowing levels. The proceeds received in 1996 and 1995 in connection with various loan principal repayments were utilized to reduce bank borrowings. The effect of lower average borrowing levels more than offset the effect of higher bank interest rates. Interest expense on the note payable to related party increased due to higher interest rates. For 1996, the real estate held for sale incurred an operating loss of $304,000, excluding the $3,000,000 provision to write down the asset carrying value, but including depreciation and amortization charges of $458,000. These results compare unfavorably with the 1995 building operating loss of $175,000, which included depreciation and amortization charges of $336,000. When the effects of depreciation and amortization charges are removed, operating results are very comparable. Depreciation and amortization charges increased considerably in 1996 due to the high level of investment in building and tenant improvements. The fee to the investment advisor decreased in 1996 as compared to 1995 due to the reduction in the Trust's investment in mortgage loans. 6 10 Other operating expenses decreased in 1996 as compared to 1995 due to lower levels of legal and professional fees. Such expenses were greater than normal in 1995 due to a higher level of legal activity. Interest income on mortgage loans receivable decreased in 1995 as compared to 1994 due to the prepayment of the Akron, Ohio and Dallas, Texas wrap-around mortgage loans in April and May 1994, respectively, and the normal amortization of mortgage loan balances. The decrease was offset partially by the effect of higher prime lending rates on variable rate mortgage loans, prepayment fees and other income aggregating approximately $190,000 related to the previously mentioned loan prepayments and interest income on the Saginaw, Michigan loan made in July 1994. Interest expense on mortgage loans payable decreased in 1995 as compared to 1994, due to the prepayments of the loans underlying the Akron, Ohio and Dallas, Texas wrap-around loan investments and the normal amortization of mortgage loan balances. Interest expense on bank borrowings decreased in 1995 as compared to 1994 due to lower average borrowing levels. The proceeds from the Akron, Ohio and Dallas, Texas loan prepayments were utilized to reduce bank borrowings. The effect of lower average borrowing levels more than offset the effect of higher bank interest rates. Interest expense on the note payable to related party increased due to higher interest rates. Commencing February 1, 1994, the Trust began providing for depreciation on the Chicago building held for sale. For 1995, the building incurred an operating loss of $175,000, including depreciation and amortization charges of $336,000. These results compared favorably with the 1994 building operating loss of $108,000, which included amortization charges of $27,000, when the effect of depreciation and amortization was removed. The improvement in building operating results was attributable primarily to lower levels of repair and maintenance expenditures in 1995. Other operating expenses increased in 1995 due to higher levels of legal and professional fees. LIQUIDITY To maintain its tax-exempt status, the Trust is required to distribute at least 95% of its taxable income to its shareholders. It is currently the policy of the Trust to distribute sufficient dividends to maintain its tax-exempt status. As a result of the substantial loss in 1993, the Trust has available approximately $4.6 million of net operating loss carryforwards for income tax purposes. The loss carryforwards can be used to reduce future dividend payment requirements and still allow the Trust to maintain its tax-exempt status. The Trustees will assess the level of dividends to be declared on a quarterly basis. For 1996 as compared to 1995, net cash provided by operating activities increased due to the receipt of $300,000 in February 1995 for the reimbursement of building repairs and maintenance expenses and decreased levels of payments to the investment advisor and other suppliers. These factors more than offset the effects of greater amounts of prepayment and other income recognized in 1995 on the Akron, Ohio and Dallas, Texas loan prepayments and the reduction in net interest received in 1996. Cash flows from investing activities decreased considerably in 1996 due to the Akron, Ohio and Dallas, Texas wrap-around mortgage loan prepayments in 1995. The Trust's aggregate net investment in these loans was approximately $8,800,000. In 1996, the Sarasota and Orlando, Florida mortgage loan was retired at its maturity and the Saginaw, Michigan loan was prepaid in full. The Trust's aggregate investment in these loans was approximately $5,700,000. In addition, the Trust increased expenditures for tenant and building improvements at the Chicago property in 1996. Cash used for financing activities decreased in 1996 as compared to 1995 due to the lower level of net proceeds received from the loan repayments being available to pay down bank borrowings and a decrease in dividends paid. The Trust made principal payments of $500,000 on the note payable to related party in 1996, pursuant to the terms thereof. 7 11 For 1995 as compared to 1994, net cash provided by operating activities decreased as higher levels of payments to the investment advisor and other suppliers more than offset the improved operating performance of the Chicago building and the receipt of prepayment and other fees on the Akron, Ohio and Dallas, Texas loan prepayments. Cash from investing activities increased considerably in 1995 due to the Akron, Ohio ($7,400,000 net investment) and Dallas, Texas ($1,400,000 net investment) loan prepayments, additional principal amortization ($2,200,000) received on the Toledo, Ohio loan pursuant to a loan extension agreement, the normal amortization of mortgage loan balances and a lower level of expenditures for land and building and tenant improvements at the Chicago property. A partially offsetting factor was the use of $2,050,000 of funds in 1995 for a new loan on a shopping center in Saginaw, Michigan. Cash from financing activities decreased in 1995 as compared to 1994 as the proceeds from the Akron, Ohio and Dallas, Texas loan prepayments and the additional principal amortization received on the Toledo, Ohio loan were utilized to reduce bank borrowings. In 1994, the Trust obtained $5,000,000 of borrowings from a related party. In connection with the Trust's wrap-around loans, while the entire debt service is received in cash, the Trust is obligated to the borrower to make debt service payments on the underlying indebtedness. Additionally, the Trust will be funding any operating deficits of the Chicago building until such time as it is sold. The Trust's primary sources of funds are a bank line of credit in the amount of $7,000,000 and repayments of mortgage loans receivable. The credit agreement is used to fund any operating deficits of the Chicago building and for working capital. The credit agreement expires in July 1996. The Trust is discussing with the lending bank the extension of the expiration date of the credit agreement. In light of the repayments of mortgage loans receivable, the accrued loss on the Toledo, Ohio investment and the writedown of the carrying value of the real estate held for sale, the Trust's lending bank has agreed to reduce the Trust's minimum required net worth requirement (as defined in the credit agreement) to $8,500,000. As of January 31, 1996, the Trust had available $705,000 under the bank credit agreement. INFLATION Generally, inflation affects the Trust as it affects its borrowers and the underlying real estate collateral. This type of collateral traditionally has been able to sustain itself during periods of inflation. OTHER In March 1995, FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was issued. The Trust will be required to adopt this standard in the first quarter of fiscal 1997. Pursuant to this standard, long-lived assets to be disposed of are to be reported at the lower of carrying amount or fair value less incremental direct costs to sell. Long-lived assets to be disposed of shall not be depreciated while being held for disposal. The Trust's real estate held for sale is within the scope of FAS No. 121. As a result of the writedown recorded by the Trust on the real estate held for sale in the fourth quarter of fiscal 1996, adoption of FAS No. 121 should not have a material impact on the Trust's financial condition and results of operations except that beginning in the first quarter of fiscal year 1997, the Trust will no longer provide depreciation on the real estate held for sale. 8 12 Balance Sheets The accompanying notes to financial statements are an integral part of these balance sheets. BALANCE SHEETS
As of January 31, 1996 1995 - --------------------------------------------------------------------------------------------------------- ASSETS Investments: Loans receivable $12,915,955 $24,476,670 Loan receivable from related party, net of valuation allowance of $5,000,000 at January 31, 1996 4,506,055 11,033,109 - --------------------------------------------------------------------------------------------------------- 17,422,010 35,509,779 - --------------------------------------------------------------------------------------------------------- Real estate held for sale, net of accumulated depreciation and amortization of $793,000 and $360,000 at January 31, 1996 and 1995, respectively, and a $3,000,000 valuation allowance at January 31, 1996 6,396,364 8,650,257 - --------------------------------------------------------------------------------------------------------- Other assets: Cash 16,285 39,073 Interest receivable and other assets 720,671 966,247 - --------------------------------------------------------------------------------------------------------- $24,555,330 $45,165,356 ----------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Loans payable underlying wrap-around mortgages $4,577,187 $10,264,669 Loan payable underlying wrap-around mortgage to related party 3,155,263 3,832,317 Note payable to bank 6,295,000 11,810,000 Note payable to related party 4,500,000 5,000,000 Deposits and accrued expenses 1,480,061 1,543,828 - --------------------------------------------------------------------------------------------------------- 20,007,511 32,450,814 - --------------------------------------------------------------------------------------------------------- Shareholders' Equity: Shares of beneficial interest without par value; unlimited authorization; 1,020,586 shares outstanding in 1996 and 1995 4,547,819 12,714,542 - --------------------------------------------------------------------------------------------------------- $24,555,330 $45,165,356 =============================
9 13 Statements of Operations The accompanying notes to financial statements are an integral part of these statements. STATEMENTS OF OPERATIONS
For the years ended January 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Revenue: Interest income from loans receivable $ 2,199,600 $ 3,151,628 $ 4,119,759 Interest income from loan receivable from related party 932,605 1,120,968 1,213,338 Rental revenue from real estate held for sale 2,297,801 2,319,455 2,312,693 - -------------------------------------------------------------------------------------------------------------- 5,430,006 6,592,051 7,645,790 - -------------------------------------------------------------------------------------------------------------- Expenses: Provision for writedown of loan receivable from related party 5,000,000 -- -- Provision for writedown of real estate held for sale 3,000,000 -- -- Interest on loans underlying wrap-around mortgages 617,123 1,218,159 2,029,240 Interest on loan underlying wrap-around mortgage to related party 209,872 249,722 287,239 Interest on note payable to bank 717,550 793,731 964,910 Interest on note payable to related party 427,445 411,944 338,077 Fee to related party investment advisor 223,278 294,115 279,938 Legal expense to related party 20,000 41,000 54,000 Operating expenses of real estate held for sale 2,144,150 2,157,957 2,394,279 Depreciation of building held for sale 264,873 243,783 -- Amortization of tenant improvements and deferred leasing commissions 192,719 92,309 26,510 Other operating expenses 167,347 418,386 316,476 - -------------------------------------------------------------------------------------------------------------- 12,984,357 5,921,106 6,690,669 - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ (7,554,351) $ 670,945 $ 955,121 =========================================== Earnings per share $ (7.40) $ .66 $ .94 =========================================== Cash dividends per share: Paid $ .40 $ .60 $ .68 Declared .10 .20 .18 - -------------------------------------------------------------------------------------------------------------- $ .50 $ .80 $ .86 ===========================================
10 14 Statements of Shareholders' Equity The accompanying notes to financial statements are an integral part of these statements. STATEMENTS OF SHAREHOLDERS' EQUITY
Shares of Total Beneficial Undistributed Shareholders' For the years ended January 31, 1996, 1995 and 1994 Interest Net Income Equity - ------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1993 $ 12,833,678 $ -- $ 12,833,678 Net income -- 955,121 955,121 Cash dividends paid -- (949,145) (949,145) - ------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1994 12,833,678 5,976 12,839,654 Net income -- 670,945 670,945 Cash dividends paid (119,136) (676,921) (796,057) - ------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1995 12,714,542 -- 12,714,542 Net loss (7,554,351) -- (7,554,351) Cash dividends paid (612,372) -- (612,372) - ------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1996 $ 4,547,819 $ -- $ 4,547,819 ============================================
11 15 Statements of Cash Flows The accompanying notes to financial statements are an integral part of these statements. STATEMENTS OF CASH FLOWS
For the years ended January 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Interest received $ 3,190,122 $ 3,946,514 $ 4,999,019 Interest paid (2,018,092) (2,709,753) (3,552,499) Cash payments to investment advisor and other suppliers (626,188) (784,514) (184,830) Rental revenue received from real estate held for sale 2,240,784 2,319,157 2,306,103 Cash payments for operating costs of real estate held for sale (1,726,371) (2,268,734) (2,413,637) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,060,255 502,670 1,154,156 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Principal collected on mortgage loans receivable 13,087,769 23,158,635 6,391,543 Principal payments on mortgage loans payable (6,364,536) (12,439,672) (6,547,638) Payments for tenant and building improvements (1,178,904) (621,977) (985,856) Investments in mortgage loans receivable -- (2,050,000) -- - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 5,544,329 8,046,986 (1,141,951) - ----------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net bank repayments (5,515,000) (7,765,000) (3,950,000) Payment of cash dividends (612,372) (796,057) (949,145) Net borrowings from (repayments to) related party (500,000) -- 5,000,000 Payment of financing fees -- -- (109,526) - ----------------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (6,627,372) (8,561,057) (8,671) - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (22,788) (11,401) 3,534 Cash at beginning of year 39,073 50,474 46,940 - ----------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 16,285 $ 39,073 $ 50,474 =========================================== Reconciliation of net income (loss) to net cash provided by operating activities: Net income (loss) $ (7,554,351) $ 670,945 $ 955,121 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for writedown of loan receivable from related party 5,000,000 -- -- Provision for writedown of real estate held for sale 3,000,000 -- -- Depreciation of building held for sale 264,873 243,783 -- Amortization of deferred financing costs, leasing commissions and tenant improvement costs 192,719 131,257 97,087 Amortization of deferred loan fees (18,000) (27,234) (71,640) Deferral of interest income -- (137,596) (273,735) Decrease (increase) in interest receivable and other assets 220,781 (636,221) 78,250 Increase (decrease) in deposits and accrued expenses (45,767) 257,736 369,073 - ----------------------------------------------------------------------------------------------------------------------- $ 1,060,255 $ 502,670 $ 1,154,156 ============================================
12 16 Notes to Financial Statements January 31, 1996, 1995 and 1994 NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Realty ReFund Trust (the Trust) historically has specialized in mortgage financing as its investment vehicle, refinancing existing income-producing commercial, industrial and multi-unit residential real property by supplementing or replacing existing financing. The primary refinancing technique which the Trust has employed is wrap-around mortgage lending, which is discussed in Note 2. The Trust has pursued other refinancing techniques, including, but not limited to, first or junior mortgages which have various durations and may or may not be self-liquidating. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Investments in Wrap-Around Mortgages and Related Underlying Loans In a wrap-around mortgage structure, the principal amount secured by the mortgage note held by the Trust is equal to the outstanding balance under the prior mortgage loan plus the amount of funds advanced by the Trust. The notes held by the Trust are subordinate to the underlying prior indebtedness. The Trust agrees with the borrower to make principal and interest payments to the holder of the existing prior mortgage, but only to the extent scheduled payments are received from the borrower and no other default exists. Generally, the Trust has the right to pay off the prior indebtedness and succeed to its priority. The mortgage notes held by the Trust generally are coterminous with the underlying prior indebtedness and provide for lump-sum payments by the borrower upon maturity. Scheduled minimum payments during the five years ending January 31, 2001 are approximately as follows:
Principal Payments ------------------------------------- Year Ending Due to Trust on Due from Trust January 31, Loan Receivable on Loans Payable - ------------------------------------------------------- 1997 $22,422,000 $5,297,000 1998 -- 764,000 1999 -- 811,000 2000 -- 861,000 2001 -- -- ----------- ----------
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 114, "Accounting by Creditors for Impairment of a Loan." This standard allows a creditor to measure the impairment of a loan based on the fair value of the collateral if a loan is collateral dependent. FAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," issued in October 1994, amends FAS No. 114 to allow a creditor to use existing methods for recognizing interest income on impaired loans. The Trust adopted the provisions of FAS Nos. 114 and 118 in fiscal 1996. See Note 3 for a discussion of the impairment of the Trust's loan on the Toledo, Ohio property. Principles of Consolidation The financial statements include the accounts of the Trust and its wholly owned subsidiaries RRF LP I, Inc. and RRF LP II, Inc. All significant intercompany transactions and balances have been eliminated in the accompanying financial statements. Depreciation and Amortization Commencing February 1, 1994, the Trust began recording depreciation on the Chicago building held for sale. Depreciation is being provided on a straight-line basis over the 30-year estimated economic life of the building. Accumulated depreciation of the building and building improvements at January 31, 1996 and 1995 was $509,000 and $244,000, respectively. Included in real estate held for sale at January 31, 1996 and 1995 are tenant improvement costs of $1,360,000 and $672,000, respectively, which are being amortized on a straight-line basis over the related lease terms, which range from five to fifteen years. Accumulated amortization of such costs was $284,000 and $116,000 at January 31, 1996 and 1995, respectively. Included in interest receivable and other assets at January 31, 1996 and 1995 are deferred leasing commissions of $307,000 and $162,000, respectively, which are being amortized on a straight-line basis over the related lease terms. Accumulated amortization of such deferred costs at January 31, 1996 and 1995 is $31,000 and $6,000, respectively. Earnings Per Share Earnings per share have been computed based on the weighted average number of shares outstanding during the periods. Earnings per share for 1996, 1995 and 1994 were based upon 1,020,586 shares. During these periods the Trust had no potentially dilutive securities outstanding. 13 17 Statements of Cash Flows The Trust considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Fair Value of Financial Instruments The Trust was required to adopt the provisions of FAS No. 107, "Disclosures about Fair Value of Financial Instruments" in fiscal 1996. The standard requires the Trust to disclose in its financial statements or notes thereto, the fair value of assets and liabilities which meet the standard's definition of financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: Loans receivable -- fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Mortgage loans payable, notes payable to bank and related party -- fair value is estimated by discounting the future cash flows using the current rates which would be available to the Trust for similar loans having the same remaining maturities. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In July 1995, the Trust established a valuation allowance of $5,000,000 on its investment in the Toledo, Ohio wrap-around mortgage loan. At January 31, 1996, the Trust's net investment in the wrap-around loan (amount of mortgage loan receivable less (i) the recorded loan loss reserve and (ii) the underlying mortgage loan payable balance) is approximately $1,351,000. As discussed further in Note 3, the amount which the Trust will ultimately realize on the loan investment could differ materially in the near term from the amount assumed in arriving at the provision for writedown of the loan investment. As discussed further in Note 4, in the fourth quarter of fiscal 1996, the Trust established a valuation allowance of $3,000,000 to write down the Chicago real estate held for sale to its estimated net realizable value. Although the amount of the provision recorded was based upon market information currently available to the Trust, if the real estate is sold, actual net sales proceeds could differ materially from the amounts used by the Trust in determining the amount of the provision recorded in fiscal 1996. New Accounting Principles In March 1995, FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was issued. The Trust will be required to adopt this standard in the first quarter of fiscal 1997. Pursuant to this standard, long-lived assets to be disposed of are to be reported at the lower of carrying amount or fair value less incremental direct costs to sell. Long-lived assets to be disposed of shall not be depreciated while being held for disposal. The Trust's real estate held for sale (discussed in Note 4) is within the scope of FAS No. 121. As a result of the writedown recorded by the Trust in the fourth quarter of fiscal 1996, adoption of FAS No. 121 should not have a material impact on the Trust's financial condition and results of operations except that beginning in the first quarter of fiscal year 1997, the Trust will no longer provide depreciation on the real estate held for sale. 3. LOAN IMPAIRMENT: In July 1995, the Trust established a valuation allowance of $5,000,000 on its investment in the Toledo, Ohio wrap-around mortgage loan. The commercial building securing the loan is owned by a partnership of which a corporation owned by the chairman of the Trust is the general partner. The loan is scheduled to mature in December 1996. The owner of the property is pursuing, among other things, the sale of the property. As the Trust's loan was made on a nonrecourse basis, the Trust has written down its investment to reflect the estimated sale price of the property, and the estimated net proceeds which would be received by the Trust as repayment of its loan. As the Trust continues to receive, on a timely basis, all required monthly payments of principal and interest on the mortgage loan, interest income continues to be recognized based on the contractual terms of the mortgage loan. 4. REAL ESTATE HELD FOR SALE: In July 1992, the Trust accepted title in lieu of foreclosure on a commercial building in Chicago, Illinois. At the time of title acceptance, the Trust recorded a provision to write down its investment to estimated net realizable value as it was the Trust's intention to sell the real estate. Since that time, the carrying value of the investment increased as a result of considerable investment in building and tenant improvements. To date, the Trust has not received a firm offer for the sale of the real estate. Based on both current market conditions for similar commercial property in Chicago and the current operating performance of the property, the Trust established a valuation allowance of $3,000,000 in the fourth quarter of fiscal 1996 to reduce the carrying value of the property to its current estimated net realizable value. The amount of the writedown is based upon the Trust's best estimate of the amount of net proceeds which would be realized upon sale of the real estate in the near term future. 14 18 5. NOTE PAYABLE TO BANK: The Trust has a revolving credit agreement with a bank. At the option of the Trust, borrowings against the credit agreement bear interest at either the bank's prime lending rate or a fixed rate equal to 1.5% over LIBOR. A commitment fee of 3/8% is payable on the unused portion of the credit agreement. Among other provisions, the credit agreement provides that the Trust cannot permit its net worth, including subordinated debt, to be less than $12 million and that total debt, excluding wrap-around mortgages, and senior indebtedness are limited to 300% and 225%, respectively, of the Trust's net worth. As a result of the writedown provisions recorded in fiscal 1996 with respect to the Toledo, Ohio loan investment and the Chicago, Illinois real estate held for sale, certain provisions of the credit agreement were modified. Specifically, the minimum net worth requirement was reduced from $12 million to $8.5 million. As amended, the credit agreement provides for borrowings of up to $7 million. As of January 31, 1996, the Trust had borrowed $6,295,000 under this agreement. At January 31, 1996, the Trust had available $705,000 under the amended terms of the agreement. The Trust's credit agreement expires on July 31, 1996. The Trust is discussing with the lending bank the extension of the expiration date of the credit agreement. For the years ended January 31, 1996, 1995 and 1994, the average daily bank borrowings were $9,431,000, $12,427,000 and $20,075,000, respectively, with a weighted average interest rate (actual interest expense divided by average daily borrowings) of 7.6%, 6.4% and 4.8%, respectively. The weighted average interest rates on bank borrowings outstanding at January 31, 1996 and 1995 were 7.1% and 7.3%, respectively. As of January 31, 1996, the prime rate was 8.5%. 6. NOTE PAYABLE TO RELATED PARTY: In March 1993, the Trust sold a $5,000,000 secured note to the Chairman of the Trust, at par. The note bears interest at the prime lending rate and had a stated maturity date of August 1994. As the Trust's bank credit agreement was extended to July 1996, the Trust exercised its option to extend the maturity of the note. Pursuant to the terms of the note, the Trust made principal payments of $500,000 for the year ended January 31, 1996. The note is subordinate to the Trust's bank line of credit. 7. FEDERAL INCOME TAXES: No provision for current or deferred income taxes has been made by the Trust on the basis that it qualifies under Sections 856-860 of the Internal Revenue Code as a real estate investment trust and has distributed or will distribute all of its taxable income for the year ended January 31, 1996 to shareholders. The primary differences between the income tax and financial reporting bases of the Trust's assets and liabilities relate the Toledo, Ohio loan investment and the Chicago, Illinois real estate held for sale. The aggregate $8,000,000 valuation allowances recorded on these assets in fiscal 1996 will not be deductible for income tax purposes until such time as actually realized by the Trust. On February 26, 1996, the Trustees declared a dividend, payable on March 15, 1996, in the amount of $.10 per share of beneficial interest, totaling $102,000. The total dividends per share applicable to operating results for the year ended January 31, 1996, including the declaration on February 26, 1996, amount to $.50 per share. An income tax net operating loss of approximately $4,600,000 was incurred in fiscal 1993 and is available for carryforward until fiscal 2008. A portion of the dividends paid in the calendar period 1993-1995 represents a return of capital primarily as a result of the net operating loss in 1993, and for 1994 and 1995, depreciation deductions for tax reporting purposes on the building held for sale. The quarterly allocation of cash dividends paid per share for individual shareholders' income tax purposes was as follows:
Calendar 1995 Calendar 1994 Calendar 1993 ------------------------------------------------------------------------------------------------ Month Ordinary Return of Total Ordinary Return of Total Ordinary Return of Total Paid Income Capital Paid Income Capital Paid Income Capital Paid - ----------------------------------------------------------------------------------------------------------- March $.195 $.005 $.20 $.121 $.059 $.18 $.148 $.102 $.25 June .195 .005 .20 .135 .065 .20 .148 .102 .25 September .097 .003 .10 .135 .065 .20 .148 .102 .25 December .097 .003 .10 .135 .065 .20 .106 .074 .18 - ----------------------------------------------------------------------------------------------------------- $.584 $.016 $.60 $.526 $.254 $.78 $.550 $.380 $.93 ------------------------------------------------------------------------------------------------
The tax status of distributions to shareholders in calendar 1996 will be dependent on the level of the Trust's earnings in that year. If taxable income of the Trust exceeds dividends paid in calendar 1996, such dividends will represent ordinary income to the recipients irrespective of the net operating loss carryforward. 15 19 8. ADVISORY AGREEMENT/EMPLOYMENT AGREEMENTS: The Trust has an Advisory Agreement with Mid-America ReaFund Advisors, Inc. (the Advisor) which provides for the administration of the day-to-day investment operations of the Trust. The Advisor is an entity which is jointly owned by the present Chairman and President of the Trust. Under the terms of this agreement, the Advisor is to receive, subject to certain limitations, a monthly fee equal to 1/12 of 1% of invested assets, as defined in the agreement, and an annual incentive fee equal to (a) 10% of the amount by which the net income of the Trust exceeds 8% of the average net worth for the year and (b) 10% of the difference between net realized capital gains less accumulated net realized capital losses, as defined. For any fiscal year in which operating expenses of the Trust exceed certain thresholds specified in the agreement, the Advisor is required to refund to the Trust the amount of such excess. For fiscal years 1996 and 1994, operating expenses exceeded the specified thresholds by approximately $18,000 and $22,000, respectively. There was no refund requirement with respect to fiscal 1995. The Chairman and President of the Trust have employment agreements with the Trust, expiring in 2006, each of which have been extended in the past and are expected to be extended in the future. The employment agreements provide that these individuals will receive no compensation from the Trust as long as the Advisory Agreement is in effect. However, should the Advisor no longer provide services to the Trust, these individuals will then be compensated, collectively, upon the same annual basis as the Advisor would have been compensated under the current terms of the Advisory Agreement had it remained in effect. 9. LOANS PAYABLE: As of January 31, 1996, the Trust had outstanding the following mortgage loans payable:
Principal Balance as of Total Installments of Principal Location January 31, 1996 and Interest Per Year Interest Rate Maturity Date - ------------------------------------------------------------------------------------------------------------------------------- Office buildings - Fort Worth, Texas $4,577,187 $4,577,187 8.11% October 1996 Toledo, Ohio 3,155,263 890,340 6.05% December 1999 - ------------------------------------------------------------------------------------------------------------------------------- $7,732,450 $5,467,527 ===============================================================================================================================
10. INVESTMENTS IN LOANS RECEIVABLE: As of January 31, 1996, the Trust had outstanding the following loans receivable. The Trust's net investment in each of the wrap-around mortgages is subordinate to underlying prior indebtedness.
Balance, January 31, 1996 -------------------------------------------------------------------- Underlying Trust's Loans Wrap-Around Trust's Net Original Net Description Receivable (a) Mortgages Investment Investment - ---------------------------------------------------------------------------------------------- Wrap-Around mortgages: Office buildings - Fort Worth, Texas $12,915,955 $4,577,187 $8,338,768 $ 9,000,000 Toledo, Ohio 4,506,055 3,155,263 1,350,792 6,500,000 -------------------------------------------------------------------- $17,422,010 $7,732,450 $9,689,560 $15,500,000 ==================================================================== Lump-Sum Amounts At Maturity ------------------------------ Year-End Due to Due From Trust Interest Rate Final Trust on Underlying on Loans Maturity Loans Loans Description Receivable Date Receivable Payable - --------------------------------------------------------------------------------------- Wrap-Around mortgages: Office buildings - Fort Worth, Texas 11.4% October 1996 $ 8,268,000 $ -- Toledo, Ohio 8.7% December 1996 8,848,000 -- ---------------------------- $17,116,000 $ -- ============================
Description Periodic Payment Terms (b) - ---------------------------------------------------------------------------------------------------- Wrap-Around mortgages: Office buildings - Fort Worth, Texas Principal and interest payable in monthly installments of approximately $625,000 through October 1996; remaining principal payable at maturity; prepayment privilege with a penalty, as defined, until maturity. Toledo, Ohio Payable in monthly installments of approximately $128,000 inclusive of interest at 10% on the Trust's net investment through December 1996; required borrower to make principal prepayments of $1,350,000 and $850,000 in June 1994 and January 1995, respectively, and $850,000 in January 1996; remaining principal due at maturity; prepayment penalty of 1% until maturity. Thirty days' prior written notice must be given to the Trust by mortgagor of intention to prepay mortgage loan.
16 20 10. INVESTMENTS IN LOANS RECEIVABLE (continued):
Reconciliation of Mortgage Loans Receivable 1996 1995 1994 - --------------------------------------------------------------------------------------------- Balance, beginning of period $35,509,779 $56,480,818 $62,598,626 ------------------------------------------- Additions: Office buildings (c) -- 137,596 273,735 Shopping center -- 2,050,000 -- ------------------------------------------- -- 2,187,596 273,735 ------------------------------------------- Collections of principal: Office buildings 7,255,186 8,245,258 5,682,838 Shopping centers 2,029,068 9,332,144 576,142 Motels 3,803,515 117,280 105,115 Apartments -- 5,463,953 27,448 ------------------------------------------- 13,087,769 23,158,635 6,391,543 ------------------------------------------- Valuation allowance on loan receivable from related party (Note 3) 5,000,000 -- -- ------------------------------------------- Balance, end of period $17,422,010 $35,509,779 $56,480,818 ===========================================
(a) For the Fort Worth, Texas loan receivable, represents investment for both financial reporting and federal income tax purposes. The federal income tax basis of the Toledo, Ohio loan investment is $9,506,055 (Note 7). (b) Unless otherwise stated, ninety days prior written notice must be given to the Trust by mortgagor of intention to prepay a mortgage loan. (c) Represents deferred interest applicable to existing loans. 11. RELATED PARTY TRANSACTIONS: The Trust recorded provisions of $20,000, $41,000 and $54,000 in fiscal years 1996, 1995 and 1994, respectively, for legal services provided by a law firm of which the President of the Trust and another Trustee are principals. The Trust has an investment in a wrap-around mortgage loan on a commercial building located in Toledo, Ohio owned by a partnership of which the present Chairman of the Trust is the general partner. As of January 31, 1996, the related party loan receivable and underlying loan payable were approximately $4,506,000 (net of a $5,000,000 valuation allowance discussed in Note 3) and $3,155,000, respectively, while at January 31, 1995, the related party loan receivable and underlying loan payable were approximately $11,033,000 and $3,832,000, respectively. In the years ended January 31, 1996, 1995 and 1994, the Trust earned approximately $933,000, $1,121,000 and $1,213,000 of interest income on this loan, respectively, of which payment of approximately $138,000 and $274,000 was deferred and added to the principal balance of the mortgage loan receivable for the years ended 1995 and 1994, respectively. The Trust incurred interest expense of approximately $210,000, $250,000 and $287,000 in connection with the related underlying loan payable for the years ended January 31, 1996, 1995 and 1994, respectively. 12. SUMMARIZED FINANCIAL INFORMATION - RIVERVIEW TOWER LIMITED PARTNERSHIP AND PACIFIC PLACE PARTNERS, LTD.: As required by the Securities and Exchange Commission, the following is summarized financial information for Riverview Tower Limited Partnership, the borrower under the Toledo, Ohio wrap-around mortgage loan and Pacific Place Partners, Ltd., the borrower under the Fort Worth, Texas, wrap-around mortgage loan. Both Riverview Tower Limited Partnership and Pacific Place Partners, Ltd. were audited by other auditors. (000's omitted) Riverview Tower Limited Partnership
December 31, -------------------- 1995 1994 - ---------------------------------------------------------- Escrow receivable $ 149 $ 163 Land, building, improvements and equipment, net 12,231 12,603 Other assets 283 25 - ---------------------------------------------------------- Total assets $12,663 $12,791 ==========================================================
December 31, ----------------------- 1995 1994 - --------------------------------------------------------------------------- Accounts payable and accrued expenses $ 516 $ 684 Mortgage payable to Realty ReFund Trust 10,414 11,937 - --------------------------------------------------------------------------- 10,930 12,621 Partners' equity (deficit) 1,733 170 - --------------------------------------------------------------------------- Total liabilities and partners equity $12,663 $12,791 ===========================================================================
Year Ended December 31, ----------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------ Gross revenues $ 6,102 $ 7,497 $ 3,792 Operating expenses 3,179 2,724 2,549 Depreciation and amortization 416 438 438 Interest expense 944 1,141 1,214 - ------------------------------------------------------------------------ Net income (loss) $ 1,563 $ 3,194 $ (409) ========================================================================
17 21 12. SUMMARIZED FINANCIAL INFORMATION (continued): PACIFIC PLACE PARTNERS, LTD.
December 31, ------------------ 1995 1994 - ------------------------------------------------------------- Land, building and equipment, net $38,671 $41,369 Other assets 210 259 - ------------------------------------------------------------- Total assets $38,881 $41,628 =============================================================
December 31, ----------------------- 1995 1994 - --------------------------------------------------------------------- Accrued expenses $ 91 $ 80 Deferred rent 666 1,466 Mortgage payable 34,113 36,975 - --------------------------------------------------------------------- 34,870 38,521 Partners' capital 4,011 3,107 - --------------------------------------------------------------------- Total liabilities and partners equity $38,881 $41,628 =====================================================================
Year ended December 31, ------------------------ 1995 1994 1993 - ---------------------------------------------------------------- Gross revenues $8,302 $8,302 $8,327 General and administrative expenses 20 1 24 Depreciation and amortization expense 2,744 2,744 2,744 Interest expense 4,634 4,982 5,303 - ---------------------------------------------------------------- Net income (loss) $ 904 $ 575 $ 256 ================================================================
13. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts and fair values of the Trust's significant financial instruments at January 31, 1996 are as follows:
Carrying Amount Fair Value ============================================================================= Loans receivable $17,422,010 $17,319,000 Mortgage loans payable 7,732,450 7,630,000 Notes payable to bank 6,295,000 6,295,000 Notes payable to related party 4,500,000 4,500,000
14. QUARTERLY RESULTS (UNAUDITED): The following is an unaudited summary of the results of operations, by quarter, for the fiscal years ended January 31, 1996 and 1995. Management believes that all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of such interim results have been included. The results of operations for any interim period are not necessarily indicative of those for the entire fiscal year.
Quarter ended ------------------------------------------------------ Fiscal 1996 April 30 July 31 October 31 January 31 - ---------------------------------------------------------------------------------------------------------------------- Total revenues $ 1,415,062 $ 1,450,595 $ 1,353,540 $ 1,210,809 ====================================================================================================================== Total revenues less interest expense on mortgage loans and operating expenses, depreciation and amortization expenses of real estate held for sale 554,846 532,258 519,210 394,955 ====================================================================================================================== Provision for writedown of loan receivable from related party -- (5,000,000) -- -- ====================================================================================================================== Provision for writedown of real estate held for sale -- -- -- (3,000,000) ====================================================================================================================== Net income (loss) $ 141,138 $(4,899,455) $ 131,626 $(2,927,661) ====================================================================================================================== Earnings per share $ .14 $ (4.80) $ .13 $ (2.87) ====================================================================================================================== Dividends declared per share $ .20 $ .10 $ .10 $ .10 ======================================================================================================================
Quarter ended ------------------------------------------------- Fiscal 1995 April 30 July 31 October 31 January 31 - ----------------------------------------------------------------------------------------------------------------- Total revenues $1,928,865 $1,582,849 $1,551,252 $1,529,085 ================================================================================================================= Total revenues less interest expense on mortgage loans and operating expenses, depreciation and amortization expenses of real estate held for sale 863,328 584,636 531,956 650,201 ================================================================================================================= Net income $ 226,161 $ 147,829 $ 143,482 $ 153,473 ================================================================================================================= Earnings per share $ .22 $ .14 $ .14 $ .15 ================================================================================================================= Dividends declared per share $ .20 $ .20 $ .20 $ .20 =================================================================================================================
18 22 Report of Independent Public Accountants REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND TRUSTEES,REALTY REFUND TRUST: We have audited the accompanying balance sheets of Realty ReFund Trust (an Ohio unincorporated business trust) as of January 31, 1996 and 1995, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended January 31, 1996. 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. The summarized financial data contained in Note 12 are based on the financial statements of Riverview Tower Limited Partnership and Pacific Place Partners, Ltd. which were audited by other auditors. Their reports have been furnished to us and our opinion, insofar as it relates to the data in Note 12, is based solely on the reports of the other auditors. 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, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Realty ReFund Trust as of January 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Cleveland, Ohio, February 26, 1996. 19 23 Trustees and Officers, Corporate Data TRUSTEES AND OFFICERS ALAN M. KRAUSE Chairman and Co-Chief Executive Officer of the Trust and Mid-America ReaFund Advisors, Inc. (advisor to Trust); Principal, The Mid-America Companies (real estate ownership); President, The Mid-America Management Corporation (real estate management) JAMES H. BERICK President, Co-Chief Executive Officer and Treasurer of the Trust and Mid-America ReaFund Advisors, Inc. (advisor to Trust); Chairman, Berick, Pearlman & Mills Co., L.P.A. (attorneys) ALVIN M. KENDIS Retired; formerly Of Counsel, McDonald, Hopkins, Burke & Haber, Co., L.P.A. (attorneys) FRANK L. KENNARD Retired; formerly Senior Vice President, The Huntington National Bank SAMUEL S. PEARLMAN Principal, Berick, Pearlman & Mills Co., L.P.A. (attorneys) MARK S. MISENCIK Vice President of the Trust CHRISTINE TURK Secretary of the Trust TIMOTHY M. BAIRD Controller of the Trust CORPORATE DATA CORPORATE HEADQUARTERS 1385 Eaton Center Cleveland, Ohio 44114 216.771.7663 INVESTMENT ADVISOR Mid-America ReaFund Advisors, Inc. 1385 Eaton Center Cleveland, Ohio 44114 216.771.7663 TRANSFER AGENTS & REGISTRARS OF SHARES The Huntington National Bank Columbus, Ohio Chemical Mellon Shareholder Services New York, New York Telecommunications Devices for the Deaf can be reached at 800.231.5469 STOCK LISTING New York Stock Exchange Symbol: RRF INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP GENERAL COUNSEL Berick, Pearlman & Mills Co., L.P.A. Cleveland, Ohio Shareholders who would like to receive, without charge, the Trust's annual report on Form 10-K filed with the Securities and Exchange Commission should write to: Realty ReFund Trust 1385 Eaton Center Cleveland, Ohio 44114 Attn.: Timothy M. Baird 20 24 Realty ReFund Trust Realty ReFund Trust 1385 Eaton Center Cleveland, Ohio 44114 [Recycle Symbol] Printed on Recycled Paper [OUTSIDE BACK COVER] EX-24 9 EXHIBIT 24 1 Exhibit 24 POWER OF ATTORNEY ----------------- The undersigned Trustee of Realty ReFund Trust, an Ohio unincorporated association in the form of a business trust ("Trust"), which Trust anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for its year ended January 31, 1996, hereby constitutes and appoints JAMES H. BERICK and ALAN M. KRAUSE, and each of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned and in my name, place and stead, as Trustee of said Trust, said Annual Report and any and all amendments and exhibits thereto, and any and all applications and documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report, with full power and authority to do and perform any and all acts and things whatsoever requisite, necessary or advisable to be done in the premises, as fully and for all intents and purposes as the undersigned could do if personally present, hereby approving the acts of said attorneys, and any of them and any such substitute. IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of February, 1996. /s/ Samuel S. Pearlman ----------------------------- Samuel S. Pearlman 2 POWER OF ATTORNEY ----------------- The undersigned Trustee of Realty ReFund Trust, an Ohio unincorporated association in the form of a business trust ("Trust"), which Trust anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for its year ended January 31, 1996, hereby constitutes and appoints JAMES H. BERICK, ALAN M. KRAUSE and SAMUEL S. PEARLMAN, and each of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned and in my name, place and stead, as Trustee of said Trust, said Annual Report and any and all amendments and exhibits thereto, and any and all applications and documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report, with full power and authority to do and perform any and all acts and things whatsoever requisite, necessary or advisable to be done in the premises, as fully and for all intents and purposes as the undersigned could do if personally present, hereby approving the acts of said attorneys, and any of them and any such substitute. IN WITNESS WHEREOF, I have hereunto set my hand this 13th day of March, 1996. /s/ Frank L. Kennard --------------------------- Frank L. Kennard 3 POWER OF ATTORNEY ----------------- The undersigned Trustee of Realty ReFund Trust, an Ohio unincorporated association in the form of a business trust ("Trust") , which Trust anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for its year ended January 31, 1996, hereby constitutes and appoints JAMES H. BERICK, ALAN M. KRAUSE and SAMUEL S. PEARLMAN, and each of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned and in my name, place and stead, as Trustee of said Trust, said Annual Report and any and all amendments and exhibits thereto, and any and all applications and documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report, with full power and authority to do and perform any and all acts and things whatsoever requisite, necessary or advisable to be done in the premises, as fully and for all intents and purposes as the undersigned could do if personally present, hereby approving the acts of said attorneys, and any of them and any such substitute. IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of February, 1996. /s/ Alvin M. Kendis --------------------------- Alvin M. Kendis EX-27 10 EXHIBIT 27
5 BALANCE SHEET AS OF JANUARY 31, 1996 AND 1995 AND STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 31, 1996 1995 AND 1994. 0000082473 REALTY REFUND TRUST YEAR JAN-31-1996 FEB-1-1995 JAN-31-1996 16,285 0 22,422,010 5,000,000 0 0 7,189,364 793,000 24,555,330 0 18,527,450 4,547,819 0 0 0 24,555,330 0 5,430,006 0 0 6,012,367 5,000,000 1,971,990 (7,554,351) 0 (7,554,351) 0 0 0 (7,554,351) (7.40) (7.40) THE REGISTRANT UTILIZES AN UNCLASSIFIED BALANCE SHEET THEREFORE THE CAPTIONS "TOTAL CURRENT ASSETS" AND "TOTAL CURRENT LIABILITIES" ARE NOT APPLICABLE.
EX-99.A 11 EXHIBIT 99 (A) 1 Exhibit 99-A [REALTY REFUND TRUST LOGO] NOTICE OF ANNUAL MEETING OF SHAREHOLDERS Notice is hereby given that the Annual Meeting of Shareholders of Realty ReFund Trust will be held at the Sheraton Cleveland City Centre, 777 St. Clair Ave., N.E., Cleveland, Ohio on Monday, May 15, 1996 at 11:30 A.M., local time, for the purpose of considering and acting upon: 1. The election of five (5) Trustees, each to hold office until the next Annual Meeting of Shareholders and until his successor shall be elected and qualified; and 2. The transaction of any other business which properly may come before the meeting and any adjournments thereof. Shareholders of Realty ReFund Trust of record at the close of business on March 18, 1996 are entitled to vote at the Annual Meeting and any adjournments thereof. By order of the Board of Trustees CHRISTINE TURK Secretary Cleveland, Ohio April 5, 1996 SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. 2 April 5, 1996 [REALTY REFUND TRUST LOGO] REALTY REFUND TRUST 1385 Eaton Center Cleveland, Ohio 44114 PROXY STATEMENT The accompanying proxy is solicited by the Trustees of Realty ReFund Trust (the "Trust") for use at the Annual Meeting of Shareholders to be held on May 15, 1996 and any adjournments thereof. Shareholders of record at the close of business on March 18, 1996 (the record date) will be entitled to vote at the Annual Meeting and at any adjournments thereof. At that date the Trust had issued and outstanding 1,020,586 Shares of Beneficial Interest. Each such Share is entitled to one vote on all matters properly coming before the Annual Meeting. At least 510,294 Shares of Beneficial Interest of the Trust must be represented at the Annual Meeting in person or by proxy in order to constitute a quorum for the transaction of business. This Proxy Statement and the accompanying form of proxy were first mailed to Shareholders on April 5, 1996. ELECTION OF TRUSTEES At this Annual Meeting, five Trustees are to be elected for a term expiring at the 1997 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified. Unless a Shareholder requests that voting of the proxy be withheld for any one or more of the nominees for Trustee in accordance with the instructions set forth on the proxy, it presently is intended that Shares of Beneficial Interest represented by proxies solicited hereby will be voted for the election as Trustees of the five nominees named in the table below. All nominees have consented to being named in this Proxy Statement and to serve if elected. Should any nominee subsequently decline or be unable to accept such nomination or to serve as a Trustee, an event which the Trustees do not now expect, the persons voting the Shares of Beneficial Interest represented by proxies solicited hereby may either vote such Shares for a slate of five persons which includes a substitute nominee or for a reduced number of nominees, as they may deem advisable. 1 3 The information concerning the nominees set forth in the following table is based in part on information received from the respective nominees and in part on the Trust's records.
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS, FIRST AGE AS OF MARCH 18, 1996 BECAME NAME OF NOMINEE AND DIRECTORSHIPS HELD TRUSTEE - ------------------------- --------------------------------------------- --------- Alan M. Krause Chairman and Co-Chief Executive Officer of 1971 the Trust since 1990 and, prior thereto, Vice Chairman of the Trust; Chairman of Mid- America ReaFund Advisors, Inc. since 1990 (investment advisor to the Trust); Principal, The Mid-America Companies (real estate ownership); President, The Mid-America Management Corporation (real estate man- agement). Age 66. James H. Berick President and Treasurer of the Trust since 1971 1990 and, prior thereto, Vice Chairman and Secretary of the Trust; President and Trea- surer of Mid-America ReaFund Advisors, Inc. since 1990 (investment advisor to the Trust); Chairman, Berick, Pearlman & Mills Co., L.P.A. (attorneys). Mr. Berick is a Director or Trustee of MBNA Corporation, A. Schulman, Inc., The Tranzonic Companies, and The Town and Country Trust. Age 62. Alvin M. Kendis* Retired. Formerly, of Counsel, McDonald, 1971 Hopkins, Burke & Haber Co., L.P.A. (attor- neys). Age 77. Frank L. Kennard* Retired. Formerly, Senior Vice President, The 1971 Huntington National Bank. Age 73. Samuel S. Pearlman* Principal, Berick, Pearlman & Mills Co., 1990 L.P.A. (attorneys). Age 53. - --------------- *Member of the Audit Committee.
The Trustees held four meetings during the year ended January 31, 1996. The Trustees do not have a standing nominating or compensation committee. All incum- 2 4 bent Trustees attended all of such meetings and all meetings of committees of the Trustees on which they served during the year. The Audit Committee has the responsibility of recommending to the Trustees the selection of the Trust's independent auditors, reviewing the scope and results of audit and non-audit services, and reviewing internal accounting controls. The Audit Committee met twice during the fiscal year. James H. Berick and Samuel S. Pearlman are the Chairman and a principal, respectively, of the law firm of Berick, Pearlman & Mills Co., L.P.A., general counsel to the Trust, which received legal fees from the Trust during the year ended January 31, 1996. COMPENSATION OF TRUSTEES AND EXECUTIVE OFFICERS The aggregate compensation, consisting exclusively of Trustees' fees, paid by the Trust to all Trustees as a group (five persons) for the year ended January 31, 1996 was $15,000. The Trust pays Trustees' fees to each Trustee, other than Messrs. Krause and Berick, in the amount of $250 per month plus $500 for each month in which a Trustee attends a Board meeting. TRUST PERFORMANCE GRAPH The following graph compares total Shareholder returns over the last five fiscal years to the Standard & Poor's 500 Stock Index ("S&P 500") and the National Association of Real Estate Investment Trusts, Inc.'s Total Return Indexes for mortgage real estate investment trusts ("NAREIT"). Total return values for the S&P 500, NAREIT and the Trust were calculated based upon market weighting at the beginning of the period and include reinvestment of dividends. The Shareholder return shown on the following graph is not necessarily indicative of future performance. 3 5 The following graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent the Trust specifically incorporates this information by reference and otherwise shall not be deemed filed under such Acts.
Measurement Period (Fiscal Year Covered) TRUST S&P 500 NAREIT 1/31/91 100.00 100.00 100.00 1/31/92 159.21 122.70 130.84 1/31/93 93.14 135.60 133.63 1/31/94 78.39 153.02 149.06 1/31/95 94.60 153.90 115.77 1/31/96 84.78 213.16 186.46
CERTAIN TRANSACTIONS The Trust is a party to an Advisory Agreement under which the Trust receives certain services from Mid-America ReaFund Advisors, Inc. ("MARA"), a corporation owned by Alan M. Krause and James H. Berick. The Advisory Agreement provides that MARA, under the supervision of the Trustees, serves as investment adviser and consultant in connection with the policy decisions to be made by the Trustees of the Trust and as administrator of the day-to-day investment operations of the Trust. In return for MARA's services, the Advisory Agreement provides, in part, that MARA is to receive (a) a monthly fee of 1/12th of 1% of the average book value of the invested assets of the Trust during the next preceding month; (b) 15% of the commitment fees 4 6 received by the Trust for any stand-by or gap commitment relating to a mortgage loan which is not closed; and (c) an incentive fee equal to 10% of the amount, if any, by which the net profits of the Trust exceed 8% of the average monthly net worth of the Trust for the year. MARA will refund to the Trust the amount, if any, by which the operating expenses of the Trust in any fiscal year exceed the lesser of (x) 1 1/2% of the invested assets of the Trust for such fiscal year or (y) the greater of (i) 1 1/2% of the average month-end net assets of the Trust for such fiscal year or (ii) 25% of the net income of the Trust for such fiscal year. The Trust paid an aggregate amount of $223,278 to MARA for services rendered under the Advisory Agreement during the year ended January 31, 1996. Each of Messrs. Krause and Berick has an employment agreement with the Trust, expiring in 2006, which provides that he will receive no compensation from the Trust as long as the Advisory Agreement is in effect. Should MARA no longer provide such services, Messrs. Krause and Berick will then be compensated, collectively, upon the same annual basis as is MARA with each to receive, as long as he continues to be employed pursuant to his employment agreement, an amount equal to (a) if both of Messrs. Krause and Berick continue their employment with the Trust, one-half of the compensation that would have been paid to MARA or (b) if only one of Messrs. Krause and Berick continues his employment with the Trust, the full amount of the compensation that would have been paid to MARA. The Trust has a wrap-around mortgage loan on an office building in Toledo, Ohio owned by Riverview Tower Limited Partnership, a limited partnership of which an affiliate of Mr. Krause is a general partner. The loan bears interest at a rate per annum equal to 10%. The maturity date of this loan has been extended to December 31, 1996. During the year ended January 31, 1996, the largest principal balance of the loan was $10,978,235 and the largest amount of the Trust's net investment in the loan was $7,200,521. As of March 18, 1996, the outstanding principal balance of the loan was $9,447,767 and the Trust's net investment in the loan was $6,350,521. On March 16, 1993, the Trust borrowed $5,000,000 from Mr. Krause by selling to him the Trust's $5,000,000 note (the "Note") at par. The Note bears interest at the base lending rate of National City Bank, Cleveland, Ohio ("NCB") and will mature on August 31, 1996. During the year ended January 31, 1996, the largest principal balance under the Note was $5,000,000. As of March 18, 1996, the outstanding principal balance under the Note was $4,500,000. The Note is secured by a lien on the assets of the Trust, which lien is subordinate to the prior lien of NCB. In connection with the closing of such financing, the Trustees received the written opinion of an independent investment banking firm that the terms of such financing were fair, from a financial point of view, to the other Shareholders of the Trust. The proceeds of the 5 7 sale of the Note were used to reduce the Trust's outstanding indebtedness to NCB under its revolving line of credit. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS Mr. Krause has been both an owner and an investor in a significant number of real estate projects and, directly or through affiliates, is a general partner in numerous real estate partnerships. A property owned by one of such real estate partnerships was sold in 1994 through foreclosure. OWNERSHIP OF SHARES OF BENEFICIAL INTEREST The following table sets forth information as of March 18, 1996 in respect of any persons known to the Trustees to be the "beneficial" owner of more than 5% of the Trust's Shares and the number of the Trust's Shares owned "beneficially" by each Trustee and nominee, and the Trustees, nominees and executive officers as a group. FIVE PERCENT BENEFICIAL OWNER; AND BENEFICIAL OWNERSHIP OF TRUSTEES, NOMINEES AND EXECUTIVE OFFICERS
SHARES % OF BENEFICIALLY OUTSTANDING NAME OWNED SHARES - ----------------------------------- ---------- ---------- Alan M. Krause(1) 183,001 17.9% James H. Berick 14,780(2) 1.4% Alvin M. Kendis 1,000 (3) Frank L. Kennard 1,000 (3) Samuel S. Pearlman 750 (3) Trustees, Nominees and Executive Officers as a group (five persons) 200,531(2) 19.6% - --------------- (1) Mr. Krause is the only person known to the Trust who beneficially owns more than 5% of the Trust's outstanding Shares. Mr. Krause's address is 600 Eaton Center, Cleveland, Ohio 44114. (2) Includes 100 Shares owned by Mr. Berick's wife, 80 Shares owned by Mr. Berick's adult children and 14,000 Shares owned by a partnership of which Mr. Berick's adult children are partners, as to all of which Mr. Berick disclaims beneficial ownership. (3) Less than 1%.
6 8 SELECTION OF ACCOUNTANTS The Trustees have selected Arthur Andersen LLP as independent auditors to examine the books, records and accounts of the Trust for the fiscal year ending January 31, 1997. Arthur Andersen LLP was the independent auditors of the Trust for the fiscal year ended January 31, 1996 and is considered by the Trustees to be well qualified. Representatives of Arthur Andersen LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions. OTHER MATTERS The Trustees know of no matters to be presented for action at the Annual Meeting other than those described in this Proxy Statement. Should other matters come before the meeting, the Shares represented by proxies solicited hereby will be voted with respect thereto in accordance with the best judgment of the proxy holders. SHAREHOLDER PROPOSALS If a Shareholder intends to present a proposal at the next Annual Meeting of Shareholders, presently scheduled for May 15, 1997, it must be received by the Trust for consideration for inclusion in the Trust's Proxy Statement and form of proxy relating to that meeting on or before December 9, 1996. REVOCATION OF PROXIES A proxy may be revoked at any time before a vote is taken or the authority granted is otherwise exercised. Revocation may be accomplished by the execution of a later proxy with regard to the same shares or by giving notice in writing or in open meeting. SOLICITATION OF PROXIES The cost of soliciting proxies will be borne by the Trust. The Trust may pay compensation for the solicitation of proxies and will pay brokers, nominees, fiduciaries and custodians their reasonable expenses for sending proxy material to principals and obtaining their instructions. In addition to solicitation by mail, proxies may be solicited in person, by telephone or telegraph, or by Trustees and officers of the Trust. By order of the Board of Trustees CHRISTINE TURK Secretary April 5, 1996 7 9 REALTY REFUND TRUST P R O X Y ------------------------------------ THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES
The undersigned hereby appoints ALAN M. KRAUSE, JAMES H. BERICK and SAMUEL S. PEARLMAN as Proxies, each with the full power to appoint his substitute, and hereby authorizes them to represent and to vote, as designated below, all the shares of beneficial interest of Realty ReFund Trust held of record by the undersigned on March 18, 1996, at the annual meeting of shareholders to be held on May 15, 1996, or at any adjournments thereof. 1. Election of Trustees. FOR all nominees listed below / / WITHHOLD AUTHORITY / / (except as marked to the contrary below) to vote for all nominees listed below
Alan M. Krause, James H. Berick, Alvin M. Kendis, Frank L. Kennard and Samuel S. Pearlman (Instruction: To withhold authority to vote for any Individual nominee, write that nominee's name on the space provided below.) ----------------------------------------------------------------- 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. (Continued, and to be signed, on the other side) THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ITEM 1. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. Dated: _________________, 1996 ______________________________ Signature ______________________________ Signature if held jointly Please Sign and Return the Proxy Card Promptly PLEASE SIGN AND RETURN THIS PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING YOU MAY NEVERTHELESS VOTE IN PERSON IF YOU ATTEND 10 [REALTY REFUND TRUST LOGO] Realty Refund Trust 1385 Eaton Center 1111 Superior Avenue Cleveland, Ohio 44114 216-771-7663 Fax 216-861-4929 SUPPLEMENT TO PROXY STATEMENT DATED APRIL 5, 1996 The Proxy Statement of Realty ReFund Trust (the "Trust"), dated April 5, 1996, is hereby supplemented to add the following information under the heading "Ownership of Shares of Beneficial Interest": Based upon a Report on Schedule 13D dated August 8, 1995, as amended on December 6, 1995 (the "Schedule"), filed with the Securities and Exchange Commission, Mr. Dan Z. Bochner beneficially owns 132,300 of the Trust's Shares, constituting 12.96% of the Trust's outstanding Shares. Mr. Bochner represented in the Schedule that his acquisition of such Shares was solely for investment. The Schedule reports Mr. Bochner's business address as being 9480 Charleville Boulevard, #18, Beverly Hills, California 90212. This Supplement to Proxy Statement was first mailed to Shareholders on April 11, 1996. REALTY REFUND TRUST April 11, 1996 EX-99.B 12 EXHIBIT 99(B) 1 Exhibit 99(b) Financial Statements of Riverview Tower Limited Partnership as at December 31, 1994 and 1995 2 RIVERVIEW TOWER LIMITED PARTNERSHIP LIMITED PARTNERSHIP FINANCIAL STATEMENTS As At December 31, 1994 3 MALITZ, WEINSTEIN & RUBIN Co. RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP December 31, 1994 INDEX ----- AUDITORS' REPORT BALANCE SHEET EXHIBIT A As At December 31, 1994 ANALYSIS OF PARTNERS' EQUITY SCHEDULE A-1 For The Year Ended December 31, 1994 STATEMENT OF OPERATIONS EXHIBIT B For The Year Ended December 31, 1994 STATEMENT OF CHANGES IN CASH POSITION EXHIBIT C For The Year Ended December 31, 1994 NOTES TO FINANCIAL STATEMENTS EXHIBIT D SCHEDULE OF PROPERTY AND EQUIPMENT EXHIBIT E For The Years Ended December 31, 1992, 1993 and 1994 SCHEDULE OF ACCUMULATED DEPRECIATION AND AMORTIZATION EXHIBIT F OF PROPERTY AND EQUIPMENT For The Years Ended December 31, 1992, 1993 and 1994
4 MALITZ, WEINSTEIN & RUBIN CO. CERTIFIED PUBLIC ACCOUNTANTS 3690 ORANGE PLACE - SUITE 250 CLEVELAND, OHIO 44122-4422 TELEPHONE (216) 464-9560 TELECOPIER (216) 464-2887 [Letterhead] February 24, 1995 INDEPENDENT AUDITOR'S REPORT RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP We have audited the accompanying balance sheet of Riverview Tower Limited Partnership, A Limited Partnership, as of December 31, 1994, and the related statements of partners' equity, operations and changes in cash position for the year then ended. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. We conducted our audit 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 overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Riverview Tower Limited Part- nership, A Limited Partnership, as at December 31, 1994, and the results of its Operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The information contained in Exhibits E and F is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the audit- ing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Malitz, Weinstein & Rubin Co. 5 MALITZ, WEINSTEIN & RUBIN CO . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP BALANCE SHEET Exhibit A As At December 31, 1994 -----------------------
ASSETS ------ Cash $ 150. Accounts Receivable 183. Escrow Receivable 163,377. Prepaid Expenses 24,248. Property and Equipment 6,705,077. Less: Accumulated Depreciation and Amortization (4,102,470.) ------------- TOTAL ASSETS $12,790,565. ============ LIABILITIES AND PARTNERS' EQUITY -------------------------------- LIABILITIES Accounts Payable $ 320,001. Accrued Interest and Real Estate Taxes 360,280. Security Deposits 2,482. Mortgage Payable 11,937,438. ----------- Total Liabilities $12,620,201. PARTNERS' EQUITY - SCHEDULE A-1 170,364. ------------ TOTAL LIABILITIES AND PARTNERS' EQUITY $12,790,565. ============
SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 6 MALITZ, WEINSTEIN & RUBIN CO . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP ANALYSIS OF PARTNERS' EQUITY Schedule A-1 For The Year Ended December 31, 1994
BALANCE NET BALANCE BEGINNING INCOME ENDING --------- ------ ------ GENERAL PARTNERS $ (403,183.) $ 283,918. $(119,265.) LIMITED PARTNERS (2,620,485.) 2,910,114. 289,629. ------------ ------------ --------- TOTALS $(3,023,668.) $ 3,194,032. $ 170.364. ============ ============ ==========
SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 7 MALITZ, WEINSTEIN & RUBIN CO. . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP STATEMENT OF OPERATIONS Exhibit B For The Year Ended December 31, 1994
INCOME Rentals $ 4,314,541. Excess Operating and Tax Charges 2,656,961. Garage 382,448. Antenna 142,841. ----------- Total Income $ 7,496,791. OPERATING EXPENSES Custodial and Manager $ 302,628. Elevator Maintenance 114,630. Insurance 71,410. Management Fees 120,000. Office Expense 67,249. Professional Fees 43,406. Repairs and Maintenance 900,374. Supplies (29,272.) Taxes - Real Estate 271,360. Taxes - Other 2,659. Travel 155. Utilities 854,087. General Expenses 4,891. ---------- Total Operating Expenses 2,723,577. ------------ INCOME BEFORE INTEREST EXPENSE, DEPRECIATION AND AMORTIZATION $ 4,773,214. LESS: Interest Expense 1,140,730. ------------ INCOME BEFORE DEPRECIATION AND AMORTIZATION $ 3,632,484. LESS: Depreciation and Amortization 438,452. ------------ NET INCOME FOR THE YEAR $ 3,194,032. ============
SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 8 MALITZ, WEINSTEIN & RUBIN CO. . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP STATEMENT OF CHANGES IN CASH POSITION Exhibit C For The Year Ended December 31, 1994 CASH GENERATED BY OPERATIONS: Net Income $ 3,194,032. Depreciation Amortization 438,452. ----------- Total $ 3,632,484. CHANGES IN OPERATING ASSETS AND LIABILITIES: Current Assets - (Increase) Decrease Receivables $ 323. Prepaids and Escrows Current Liabilities - Increase (Decrease) (4,987.) Accounts Payable (1,772,043.) Security Deposits 2,482. Accrued Expenses and Taxes (46,094.) ----------- Total (1,820,319.) ------------ NET CASH PROVIDED BY OPERATIONS $ 1,812,165. INVESTING ACTIVITIES -0- FINANCING ACTIVITIES Decrease In Debt (1,821,177.) ------------ INCREASE (DECREASE) IN CASH $ (9,012.) CASH BALANCE - BEGINNING 9,162 ------------ CASH BALANCE - ENDING $ 150. ============ SUPPLEMENTAL DISCLOSURE Cash Paid During The Year For Interest $ 1,112,312. ============
SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 9 MALITZ, WEINSTEIN & RUBIN CO. . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Exhibit D NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------- Accounting Method ----------------- The Partnership keeps its records and prepares its financial statements on the accrual basis. Property and Equipment ---------------------- The fixed assets are recorded at cost and are being depreciated as follows:
Buildings 40 Years Straight-Line Building Improvements 40 Years Straight-Line Equipment and Improvements 10 Years Straight-Line
NOTE 2 - TRANSACTIONS WITH RELATED PARTY - ---------------------------------------- The property, which is located in Toledo, Ohio is managed by the Mid America Management Corporation. Accounts Payable in the amount of $137,244. are due to the management company. SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 10 MALITZ, WEINSTEIN & RUBIN CO. . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Exhibit D (Continued) NOTE 3 - MORTGAGE PAYABLE - ------------------------- The land and buildings owned by the Company are encumbered by mortgages securing two notes; one to New York Life Insurance (due in 1999) and the other to Realty Refund Trust (due in 1996). One of the limited partners of the partnership is also Chairman of the Board of Realty Refund Trust. The Company has a fixed monthly principal and interest payment of $74,195. on the first mortgage plus an interest only payment on the Realty Refund note at 10% per annum. In addition, the Company has agreed to pay $850,000. against the outstanding amount due on January 1, 1995 and January 1, 1996. The Company has also agreed to deposit with Realty Refund Trust in escrow all excess cash flow. The funds will be made available for tenant improvements or third party leasing commissions. The amount due for 1994 is $304,291. NOTE 4 - LEASE AMENDMENT AND EXTENSION - -------------------------------------- On June 2, 1994, the Company modified its lease with Owens-Corning Fiberglass Corporation as follows: The tenant has extended its lease to December 31, 1996 and agreed to a lease extension fee of $5,000,000. payable June, 1994, January, 1995 and January, 1996. There were also modifications of lease and operating expense payment terms. SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 11 MALITZ, WEINSTEIN & RUBIN CO. . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP SCHEDULE OF PROPERTY AND EQUIPMENT Exhibit E For The Years Ended December 31, 1992, 1993 and 1994
1992 ---- BALANCE AT BEGINNING ADDITIONS BALANCE AT END OF PERIOD AT COST RETIREMENTS OF PERIOD --------- ------- ----------- --------- Building $13,771,320. $13,771,320. Building Improvements 1,473,220. $ 1,473,220. Equipment 551,143. 551,143. Land 887,000. 887,000. ----------- ------ ----------- ----------- Total $16,682,683. $ -0- $ -0- $16,682,683. =========== ======= =========== =========== 1993 ---- Building $13,771,320. $13,771,320. Building Improvements 1,473,220. 1,473,220. Equipment 551,143. $22,394. 573,537. Land 887,000. 887,000. ----------- ------- ----------- ----------- Total $16,682,683. $22,394. $ -0- $16,705,077. =========== ======= =========== =========== 1994 ---- Building $13,771,320. $13,771,320. Building Improvements 1,473,220. 1,473,220. Equipment 573,537. 573,537. Land 887,000. 887,000. ------------ ------- ----------- ----------- Total $16,705,077. $ -0- $ -0- $16,705,077. =========== ======= =========== ===========
SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 12 MALITZ, WEINSTEIN & RUBIN CO. . CERTIFIED PUBLIC ACCOUNTANTS . CLEVELAND, OHIO RIVERVIEW TOWER LIMITED PARTNERSHIP A LIMITED PARTNERSHIP SCHEDULE OF ACCUMULATED DEPRECIATION AND AMORTIZATION Exhibit F OF PROPERTY AND EQUIPMENT For The Years Ended December 31, 1992, 1993 and 1994 1992 ----
BALANCE ADDITIONS AT BEGINNING CHARGED TO BALANCE AT END PERIOD COSTS & EXPENSES RETIREMENTS OF PERIOD ------------ ---------------- ----------- -------------- Building $2,233,494. $344,283. $2,567,777. Building Improvements 231,217. 36,816. 268,033. Equipment 333,522. 56,234. 389,756. ---------- -------- -------- ---------- Total $2,798,233. $437,333. $ -0- $3,225,566. ========== ======== ======== ========== 1993 ---- Building $2,567,777. $344,283. $2,912,060. Building Improvements 268,033. 36,816. 304,849. Equipment 389,756. 57,353. 447,109. ---------- -------- -------- ---------- Total $3,225,566. $438,452. $ -0- $3,664,018. ========== ======== ======== ========== 1994 ---- Building $2,912,060. $344,283. $3.256,343. Building Improvements 304,849. 36,816. 341,665. Equipment 447,109. 57,353. 504,462. ---------- -------- -------- ---------- Total $3,664,018. $438,452. $ -0- $4,102,470. ========== ======== ======== ==========
SEE ACCOUNTANTS REPORT LETTER AND NOTES TO FINANCIAL STATEMENTS 13 THE RIVERVIEW TOWER LIMITED PARTNERSHIP FINANCIAL REPORT - INCOME TAX BASIS DECEMBER 31, 1995 14 THE RIVERVIEW TOWER LIMITED PARTNERSHIP CONTENTS
- ----------------------------------------------------------------------------------- Page ---- AUDITORS' REPORT ON THE FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS: Statement of assets, liabilities and partners' deficit - income tax basis 2 Statement of revenues and expenses - income tax basis 3 Statement of partners' deficit - income tax basis 4 Statement of cash flows - income tax basis 5 Notes to financial statements 6-8
15 [LOGO] HAUSSER + TAYLOR - ------------------------------------------------------------------------------- 1400 NORTH POINT TOWER, CLEVELAND OHIO 44114-1152 216/523-1900 FAX: 216/522-1490 Partners The Riverview Tower Limited Partnership Cleveland, Ohio Independent Auditors' Report ---------------------------- We have audited the accompanying statement of assets, liabilities and partners' deficit income tax basis of The Riverview Tower Limited Partnership as of December 31, 1995, and the related statements of revenues and expenses, partners' deficit, and cash flows - income tax basis for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. As described in the notes to the financial statements, the Partnership's policy is to prepare its financial statements on the accounting basis used for income tax purposes, which is a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities, and partners' deficit of The Riverview Tower Limited Partnership as of December 31, 1995, and its revenues and expenses, partners' deficit, and cash flows for the year then ended, on the basis of accounting described in the Organization and Summary of Significant Accounting Policies. /s/ Hausser and Taylor Cleveland, Ohio February 23, 1996 -1- BUSINESS ADVISORS AND CERTIFIED PUBLIC ACCOUNTANTS / MEMBERS OF MOORES ROWLAND INTERNATIONAL CLEVELAND CANTON COLUMBUS ELYRIA 16 THE RIVERVIEW TOWER LIMITED PARTNERSHIP STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' DEFICIT - INCOME TAX BASIS
December 31, 1995 ----------------- ASSETS - ------ RENTAL PROPERTY Land $ 887,000 Building and improvements 15,264,693 Equipment 598,257 ----------- Total 16,749,950 Less accumulated depreciation 9,598,758 ----------- Net rental property $ 7,151,192 OTHER ASSETS Cash 150 Accounts receivable 44,533 Prepaid expenses 22,846 Real estate escrow 149,017 Capital reserve escrow 214,291 ----------- Total other assets 430,837 ----------- $ 7,582,029 =========== LIABILITIES AND PARTNERS' DEFICIT - -------------------------------- LIABILITIES Accounts payable $ 148,316 Accrued interest and real estate taxes 365,075 Security deposits 2,482 Mortgage notes payable 10,413,780 ----------- Total liabilities $10,929,653 PARTNERS' DEFICIT (3,347,624) ----------- $ 7,582,029 ===========
The accompanying notes are an integral part of these financial statements. -2- 17 THE RIVERVIEW TOWER LIMITED PARTNERSHIP STATEMENT OF REVENUES AND EXPENSES - INCOME TAX BASIS Year Ended December 31, 1995 ----------------------------
REVENUES Rental income $3,631,044 Garage 390,413 Antenna 154,855 Excess operating and other pass through charges 1,925,473 --------- Total revenues $ 6,101,785 OPERATING EXPENSES Custodial and manager expenses 180,286 Elevator maintenance 123,746 Insurance 70,302 Management fees 120,000 Office expense and miscellaneous 128,220 Office salaries 55,132 Professional fees 34,623 Repairs and maintenance 743,561 Security expense 22,419 Sellers' fee 90,000 Supplies 36,462 Taxes - payroll 15,726 Taxes - personal property 2,427 Taxes - real estate 286,871 Travel 1,696 Utilities 1,267,731 --------- Total operating expenses 3,179,202 --------- NET OPERATING INCOME 2,922,583 --------- INTEREST EXPENSE 944,283 --------- INCOME BEFORE DEPRECIATION AND AMORTIZATION 1,978,300 --------- DEPRECIATION AND AMORTIZATION 778,933 --------- NET INCOME $ 1,199,367 ===========
The accompanying notes are an integral part of these financial statements. -3- 18 THE RIVERVIEW TOWER LIMITED PARTNERSHIP STATEMENT OF PARTNERS' DEFICIT - INCOME TAX BASIS Year Ended December 31, 1995 ----------------------------
Balance Net Balance Beginning Income Distributions Ending --------- ------ ------------- ------ GENERAL PARTNERS $ (552,055) $ 159,916 $ (392,139) LIMITED PARTNERS (3,994,936) 1,039,451 (2,955,485) ----------- ----------- ----------- TOTAL $(4,546,991) $ 1,199,367 $ -- $(3,347,624) =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -4- 19 THE RIVERVIEW TOWER LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS - INCOME TAX BASIS Year Ended December 31, 1995 ----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,199,367 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization $ 778,933 Changes in assets and liabilities: Increase in accounts receivable (44,350) Decrease in prepaid expenses 1,402 Decrease in escrow receivables (199,931) Decrease in accounts payable (171,685) Increase in accrued interest and taxes 4,795 ---------- Total adjustments 369,164 ----------- Net cash provided by operating activities 1,568,531 CASH FLOWS FROM INVESTING ACTIVITIES Building improvements and equipment purchases (44,873) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (1,523,658) ----------- NET CHANGE IN CASH - CASH - BEGINNING OF YEAR 150 ----------- CASH - END OF YEAR $ 150 =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 944,283
The accompanying notes are an integral part of these financial statements. -5- 20 THE RIVERVIEW TOWER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Purpose -- The Riverview Tower Limited Partnership is an Ohio limited partnership formed for the purpose of owning, leasing and operating an office building in Toledo, Ohio. The Partnership commenced operations on July 26, 1985. B. Basis of Accounting - The Partnership's policy is to prepare its financial statements on the basis of accounting used for income tax purposes. This basis of accounting differs from generally accepted accounting principles primarily as follows: Assets will be depreciated over a time period shorter than their estimated useful lives. C. Concentration Account - An affiliate of the general partner utilizes a concentration account for the various properties it manages. In this way excess cash for all properties may be invested on a short term basis and cash disbursements made on behalf of each separate partnership are funded when necessary. D. Property and Improvements - The building and related improvements are being depreciated on straight-line or accelerated cost recovery methods over periods dictated by statutory requirements. E. Income Taxes - No provision for income taxes is necessary because any income or loss is includible in the tax returns of the partners. F. Adjustments Necessary to Conform with Generally Accepted Accounting Principles (GAAP) - As stated in the auditors' report and previously in Note 1 of the Notes to Financial Statements, the Partnership has used various depreciation and amortization methods which do not conform to generally accepted accounting principles (GAAP). Had the Partnership conformed to GAAP the accumulated depreciation and amortization and partners' capital accounts would be reflected as follows:
Beginning Ending ----------- ----------- BALANCE SHEET Accumulated depreciation and $ 4,102,470 $ 4,518,193 amortization =========== =========== Partners' capital $ 170,364 $ 1,732,941 =========== =========== STATEMENT OF OPERATIONS Net income for the year $ 1,562,577 ===========
-6- 21 THE RIVERVIEW TOWER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2. MORTGAGE NOTES PAYABLE The land and building owned by the Partnership are encumbered by mortgages securing two notes; one to New York Life Insurance (due in 1999) and the other to Realty Refund Trust (due in 1996). One of the limited partners of the Partnership is also Chairman of the Board of Realty Refund Trust. The Partnership has a fixed monthly principal and interest payment of $74,195 on the first mortgage plus an interest only payment on the Realty Refund note at 10% per annum. In addition, the Partnership has paid $850,000 against the outstanding amount due on January 1, 1996. Principal payments on the mortgage note payable as of December 31, 1995 are as follows:
1996 $ 7,854,792 1997 756,263 1998 803,308 1999 999,417 ----------- Total $10,413,780 ===========
The fair value of the Partnership's long-term debt is estimated based on borrowing rates currently available to the partnership for bank loans with similar terms and maturities and approximates the carrying value. NOTE 3. TRANSACTIONS WITH RELATED PARTY The property is managed by the Mid-America Management Corporation. Accounts receivable in the amount of $41,405 are due from the management company. The Partnership is obligated to pay a management fee to Mid-America Management Corporation for certain services with respect to the operations of the Partnership. The amount of the fee included in expense for the year ended December 31, 1995 is $120,000. NOTE 4. OPERATING LEASES The Partnership's operating revenue is principally obtained from tenants through rental payments as provided for under noncancelable operating leases. The tenant leases typically provide for fixed minimum rent and reimbursement of real estate taxes and operating costs. -7- 22 THE RIVERVIEW TOWER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4. OPERATING LEASES (CONTINUED) The following is a schedule of minimum future rentals on noncancelable operating leases as of December 31, 1995 for the next five years:
1996 $ 2,418,850 1997 137,660 1998 42,700 1999 19,540 2000 19,200 ----------- Total $ 2,637,950 ===========
NOTE 5. LEASE AMENDMENT AND EXTENSION On June 2, 1994, the Partnership modified its lease with Owens-Corning Fiberglas Corporation as follows: The tenant has extended its lease to December 31, 1996 and agreed to a lease extension fee of $5,000,000 payable as follows:
June 1994 $2,000,000 January 1995 1,500,000 January 1996 1,500,000 ---------- Total $5,000,000 ==========
There were also modifications of lease and operating expense payment terms. NOTE 6. SUBSEQUENT EVENTS The Partnership's principal tenant has not renewed its lease and is expected to vacate the premises during 1996. The Partnership has listed the building with a broker and is attempting to dispose of the property. -8- 23 [LOGO] Hausser + Taylor - ------------------------------------------------------------------------------- 1400 NORTH POINT TOWER, CLEVELAND, OHIO 44114-1152 216/523-1900 FAX: 216/522-1490 March 20, 1996 Mr. Alan M. Krause Managing Partner Riverview Towers Ltd. Partnership 600 Eaton Center 1111 Superior Avenue Cleveland, Ohio 44114 Dear Mr. Krause: You have asked us to schedule the amount due Realty Refund Trust re: the financing agreement with Riverview.
Income Before Depreciation and Amortizafion $ 1,978,300 Building Improvements and Equipment Purchases (44,873) Reduction of Mortgage Principal (1,523,658) ----------- Excess Amount Due Realty Refund Trust 409,769 Provision for Federal Income Tax 239,873 ----------- Excess Due Realty Refund Trust $ 169,896 ===========
Very truly yours, HAUSSER + TAYLOR /s/ Charles P. Malitz --------------------- Charles P. Malitz Partner CPM/js BUSINESS ADVISORS AND CERTIFIED PUBLIC ACCOUNTANTS /MEMBERS OF MOORES ROWLAND INTERNATIONAL CLEVELAND CANTON COLUMBUS ELYRIA EX-99.C 13 EXHIBIT 99(C) 1 Exhibit 99(c) Financial Statements of Pacific Place Partners, Ltd. as at December 31, 1994 and 1995 2 REPORT OF --------- PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- DECEMBER 31, 1994 ----------------- 3 KONOWITZ, KAHN & COMPANY, P.C. - ------------------------------------------------------------------------------ Certified Public Accountants INDEPENDENT AUDITORS' REPORT ---------------------------- To the Partners of Pacific Place Partners, LTD. We have audited the accompanying balance sheet of Pacific Place Partners, LTD. (A Texas Limited Partnership) as of December 31, 1994 and 1993, and the related statements of income, partners capital, and cash flows for the years then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. The 1992 financial statements of Pacific Place Partners, LTD were audited by other accountants, whose report dated February 19, 1993 expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pacific Place Partners, LTD., as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Konowitz, Kahn & Company, P.C. - ---------------------------------- February 11, 1995 110 Washington Avenue [LOGO] (203) 239-6888 P.O. Box 190 Bridgeport (203) 366-6888 North Haven, CT 06473 Fax (203) 234-1553 4 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- BALANCE SHEET -------------
As At As At As At December 31, 1994 December 31, 1993 December 31, 1992 ----------------- ----------------- ----------------- ASSETS ------ CURRENT ASSETS: Cash $ 3,883 $ 4,593 $ 3,089 ----------- ----------- ----------- PROPERTY AND EQUIPMENT: Land 5,000,000 5,000,000 5,000,000 Building 35,912,072 35,912,072 35,912,072 Equipment 9,000,000 9,000,000 9,000,000 ----------- ----------- ----------- Total 49,912,072 49,912,072 49,912,072 Less: Accuutlated depreciation 8,543,039 5,845,237 3,147,435 ----------- ----------- ----------- Net Book Value of Property and Equipment 41,369,033 44,066,835 46,764,637 ----------- ----------- ----------- OTHER ASSETS: Financing fees (net of accumulated amortization of $129,333, $87,833 and $46,333) 78,167 119,667 161,167 Acquisition fees (net of accumulated amortization of $15,203, $10,390 and $5,577) 177,297 182,110 186,923 ----------- ----------- ----------- Total Other Assets 255,464 301,777 348,090 ----------- ----------- ----------- TOTAL ASSETS $41,628,380 $44,373,205 $47,115,816 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 5 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- BALANCE SHEET -------------
As At As At As At December 31, 1994 December 31, 1993 December 31, 1992 ----------------- ----------------- ----------------- LIABILITIES AND PARTNERS' CAPITAL --------------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 2,861,851 $ 2,514,736 $ 2,209,722 Accrued interest 80,112 85,561 75,291 Deferred rent 799,590 799,590 766,268 ---------- ---------- ---------- Total Current Liabilities 3,741,553 3,399,887 3,051,281 ---------- ---------- ---------- LONG TERM LIABILITIES: Mortgage payable 36,974,896 39,489,632 41,699,354 Less: Current portion 2,861,851 2,514,736 2,209,722 ---------- ---------- ---------- 34,113,045 36,974,896 39,489,632 Deferred rent 1,465,916 2,265,506 3,065,072 Less: Current portion 799,590 799,590 766,268 ---------- ---------- ---------- 666,326 1,465,916 2,298,804 ---------- ---------- ---------- Total Long-Term Liabilities 34,779,371 38,440,812 41,788,436 ---------- ---------- ---------- Total Liabilities 38,520,924 41,840,699 44,839,717 PARTNERS' CAPITAL 3,107,456 2,532,506 2,276,099 ---------- ---------- ---------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $41,628,380 $44,373,205 $47,115,816 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 6 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- STATEMENT OF INCOME -------------------
For the Years Ended December 31, 1994 December 31, 1993 December 31, 1992 ----------------- ----------------- ----------------- INCOME: Rental income $ 8,301,639 $ 8,301,614 $ 8,301,663 Miscellaneous - 25,000 6,050 ----------- ----------- ----------- Total Income 8,301,639 8,326,614 8,307,713 ----------- ----------- ----------- EXPENSES: Interest 4,981,864 5,302,597 5,825,836 Amortization 46,313 46,313 46,313 Depreciation 2,697,802 2,697,802 2,697,802 Legal -- 20,992 3,892 Miscellaneous expenses 710 2,503 - ----------- ----------- ----------- Total Expenses 7,726,689 8,070,207 8,573,843 ----------- ----------- ----------- NET INCOME (LOSS) $ 574,950 $ 256,407 $ (266,130) =========== =========== ============
The accompanying notes are an integral part of these financial statements. 7 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) --------------------------- STATEMENT OF CHANGES IN PARTNERS' CAPITAL -----------------------------------------
For the Years Ended December 31, 1994 December 31, 1993 December 31, 1992 ----------------- ----------------- ----------------- PARTNERS' CAPITAL - Beginning of Year $ 2,532,506 $ 2,276,099 $ 2,542,229 NET INCME (LOSS) 574,950 256,407 (266,130) ----------- ----------- ------------ PARTNERS' CAPITAL - End of Year $ 3,107,456 $ 2,532,506 $ 2,276,099 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 8 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- STATEMENT OF CASH FLOWS -----------------------
For the Years Ended December 31, 1994 December 31, 1993 December 31, 1992 ----------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 574,950 $ 256,407 $ (266,130) Adjustments to reconcile net ------------ ----------- ----------- income (loss) to net cash provided by operating activities: Depreciation 2,697,802 2,697,802 2,697,802 Amortization 46,313 46,313 46,313 Increase (Decrease) in Liabilities: Accrued expenses (5,449) 10,270 75,291 Deferred rent (799,590) (799,566) 2,532,012 ------------ ----------- ----------- Total Adjustments 1,939,076 1,954,819 5,351,418 ------------ ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,514,026 2,211,226 5,085,288 CASH FLOWS USED IN FINANCING ACTIVITIES: Principal payments on long-term debt (2,514,736) (2,209,722) (5,083,129) ------------ ----------- ----------- NET (DECREASE) INCREASE IN CASH (710) 1,504 2,159 CASH AT BEGINNING OF THE YEAR 4,593 3,089 930 ------------ ----------- ----------- CASH AT THE END OF THE YEAR $ 3,883 $ 4,593 $ 3,089 ============ =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 4,987,313 $ 5,292,326 $ 5,750,545
The accompanying notes are an integral part of these financial statements. 9 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ---------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 1994 ----------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property and Equipment - ---------------------- The partnership is computing depreciation using the straight-line method over the estimtated useful lives of the assets over a period of 5-40 years. Expenditures of maintenance, repairs and improvements which do not materially extend the useful lives of the property are charged to earnings. Income Taxes - ------------ No provision for income taxes is made in the financial statements of the partnership because, as a partnership, it is not subject to income tax, as the tax effect of its activities accrue to the partners. Amortization - ------------ Fees and expenses incurred in connection with placing the underlying financing in the amount of $207,500 are being amortized over five years on a straight-line basis. Expenses incurred in acquiring the property in the amount of $192,500 are being amortized over forty years on a straight-line basis. Statement of Cash Flows - ----------------------- For purposes of the statement of cash flows, cash consists of unrestricted cash in a checking account. Credit Risk-Economic Dependency - ------------------------------- On March 1, 1993, Lockheed Corporation purchased the Fort Worth Division of General Dynamics (the sole tenant). Lockheed purchased all of the assets held by the division and assumed all of the liabilities, including those under the lease with the Partnership. In the process of Lockheed's assumption of the General Dynamics Lease, the Partnership was able to negotiate a Consent Agreement which granted Lockheed the right to assume the Lease so long as General Dynamics remains jointly liable under the lease. As of December 31, 1994, two years remain on the lease. There are no renewal options in the lease agreement. 10 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 1994 ----------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Partnership Income - ------------------ The income of the partnership differs from the taxable ordinary income of the partnership on the federal income tax return due to tax laws regarding deferred expenses and depreciation.
Income Reported on Tax Return $ 679,185 Items (Non-Deductible) Deductible on Tax Return: Deferred Rent 799,590 Depreciation (903,825) --------- Income Per Financial Statements $ 574,950 =========
NOTE 2 - THE PARTNERSHIP The partnership was formed on April 1, 1983 under the laws of the State of Texas for the purpose of acquiring, owning, and operating a twenty-story office building located in Dallas, Texas. On November 25, 1991, the partnership conveyed its land, building and personal property to 1910 Associates, LTD. (1910) in exchange for land, buildings and personal property located in Fort Worth, Texas. That transaction was reported as qualifying for nonrecognition of gain for income tax purposes. ICA Pacific Place, Inc. , is the general partner of the partnership. NOTE 3 - MORTGAGE PAYABLE The partnership is indebted to 1910 Associates, LTD. under a wrap-around mortgage agreement in the initial amount of $48,187,500. The loan bears interest at 13% per annum during the initial five year term. Payment terms call for monthly payments in the amount of $958,333.33 for the first twelve months and $625,170.70 for the succeeding forty-eight months. During the initial term of the loan, the debt service payments are equal to the rental payments. The note is secured by the partnership's land, buildings, and equipment under a Deed of Trust. The tenant is making payments directly to the mortgagees. The underlying mortgagees, Principal Mutual Life Insurance Company, Realty Refund Trust and Prentiss/Copley Investment Group are secured by liens, security interests and collateral assignments of rents and leases. The initial term of the wrap loan is five years but may be extended under certain conditions. The two extension periods are for five and fifteen years, respectively. 11 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) --------------------------- NOTES TO FINANCIAL STATEMENTS ------------------------------ DECEMBER 31, 1994 ----------------- NOTE 3 - MORTGAGE PAYABLE (Continued) Maturities of long-term debt are as follows:
Year Ending December 31, - ------------------------ 1995 $ 2,861,851 1996 34,113,045 ----------- $36,974,896 ===========
12 REPORT OF --------- PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- DECEMBER 31, 1995 ----------------- 13 KONOWITZ, KAHN & COMPANY, P.C. - ------------------------------------------------------------------------------ Certified Public Accountants INDEPENDENT AUDITORS' REPORT ---------------------------- To the Partners of Pacific Place Partners, LTD. (A Texas Limited Partnership) We have audited the accompanying balance sheets of Pacific Place Partners, LTD. (A Texas Limited Partnership), as at December 31, 1995, 1994 and 1993, and the related statements of income, partners capital, and cash flows for the years then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pacific Place Partners, LTD. (A Texas Limited Partnership), as at December 31, 1995, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Konowitz, Kahn & Company, P.C. - --------------------------------- February 19, 1996 110 Washington Avenue (203)239-6888 P.O. Box 190 [LOGO] Bridgeport (203)366-6888 North Haven, CT 06473 Fax (203)234-1553 14 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- BALANCE SHEET -------------
As At As At As At December 31, 1995 December 31, 1994 December 31, 1993 ASSETS ----------------- ----------------- ----------------- ------ CURRENT ASSETS: Cash $ 828 $ 3,883 $ 4,593 ----------- ----------- ----------- PROPERTY AND EQUIPMENT: Land 5,000,000 5,000,000 5,000,000 Building 35,912,072 35,912,072 35,912,072 Equipment 9,000,000 9,000,000 9,000,000 ----------- ----------- ----------- Total 49,912,072 49,912,072 49,912,072 Less: Accumulated depreciation 11,240,841 8,543,039 5,845,237 ----------- ----------- ----------- Net Book Value of Property and Equipment 38,671,231 41,369,033 44,066,835 ----------- ----------- ----------- OTHER ASSETS: Financing fees (net of accumulated amortization of $170,833, $129,333 and $87,833) 36,667 78,167 119,667 Acquisition fees (net of accumulated amortization of $20,016, $15,203, and $10,390) 172,484 177,297 182,110 ----------- ----------- ----------- Total Other Assets 209,151 255,464 301,777 ----------- ----------- ----------- TOTAL ASSETS $38,881,210 $41,628,380 $44,373,205 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 15 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ---------------------------- BALANCE SHEET -------------
As At As At As At December 31, 1995 December 31, 1994 December 31, 1993 ----------------- ----------------- ----------------- LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 2,684,407 $ 2,861,851 $ 2,514,736 Accrued interest 73,912 80,112 85,561 Deferred rent 666,325 799,590 799,590 Other liabilities 16,570 - - ----------- ----------- ----------- Total Current Liabilities 3,441,214 3,741,553 3,399,887 ----------- ----------- ----------- LONG-TERM LIABILITIES: Mortgage payable 34,113,045 36,974,896 39,489,632 Less: Current portion 2,684,407 2,861,851 2,514,736 ----------- ----------- ----------- 31,428,638 34,113,045 36,974,896 Deferred rent 666,325 1,465,916 2,265,506 Less: Current portion 666,325 799,590 799,590 ----------- ----------- ----------- - 666,326 1,465,916 ----------- ----------- ----------- Total Long-Term Liabilities 31,428,638 34,779,371 38,440,812 ----------- ----------- ----------- Total Liabilities 34,869,852 38,520,924 41,840,699 PARTNERS' CAPITAL 4,011,358 3,107,456 2,532,506 ----------- ----------- ----------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $38,881,210 $41,628,380 $44,373,205 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 16 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- STATEMENT OF INCOME -------------------
For the Years Ended December 31, 1995 December 31, 1994 December 31, 1993 ----------------- ----------------- ----------------- INCOME: Rental income $8,301,639 $8,301,639 $8,301,614 Miscellaneous - - 25,000 ---------- ---------- ---------- Total Income 8,301,639 8,301,639 8,326,614 ---------- ---------- ---------- EXPENSES: Interest 4,633,997 4,981,864 5,302,597 Amortization 46,313 46,313 46,313 Depreciation 2,697,802 2,697,802 2,697,802 Legal 15,845 - 20,992 Miscellaneous expenses 3,780 710 2,503 ---------- ---------- ---------- Total Expenses 7,397,737 7,726,689 8,070,207 ---------- ---------- ---------- NET INCOME $ 903,902 $ 574,950 $ 256,407 ========== ========== ==========
The accompanying notes are an integral part of these financial statements 17 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ---------------------------- STATEMENT OF CHANGES IN PARTNERS' CAPITAL -----------------------------------------
For the Years Ended December 31,1995 December 31,1994 December 31,1993 ---------------- ---------------- ---------------- PARTNERS' CAPITAL - Beginning of Year $3,107,456 $2,532,506 $2,276,099 NET INCOME 903,902 574,950 256,407 ---------- ---------- ---------- PARTNERS' CAPITAL - End of Year $4,011,358 $3,107,456 $2,532,506 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 18 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- STATEMENT OF CASH FLOWS -----------------------
For the Years Ended December 31,1995 December 31,1994 December 31,1993 ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 903,902 $ 574,950 $ 256,407 Adjustments to reconcile net ----------- ----------- ----------- income to net cash provided by operating activities: Depreciation 2,697,802 2,697,802 2,697,802 Amortization 46,313 46,313 46,313 Increase (Decrease) in Liabilities: Accrued expenses (6,201) (5,449) 10,270 Deferred rent (799,590) (799,590) (799,566) Other liabilities 16,570 -- -- ----------- ----------- ----------- Total Adjustments 1,954,894 1,939,076 1,954,819 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,858,796 2,514,026 2,211,226 CASH FLOWS USED IN FINANCING ACTIVITIES: Principal payments on long-term debt (2,861,851) (2,514,736) (2,209,722) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (3,055) (710) 1,504 CASH AT THE BEGINNING OF THE YEAR 3,883 4,593 3,089 ----------- ----------- ----------- CASH AT THE END OF THE YEAR $ 828 $ 3,883 $ 4,593 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 19 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ---------------------------- STATEMENT OF CASH FLOWS -----------------------
For the Years Ended December 31, 1995 December 31, 1994 December 31, 1993 ----------------- ----------------- ----------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $4,640,198 $4,987,313 $5,292,326
The accompanying notes are an integral part of these financial statements. 20 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- NOTES TO THE FINANCIAL STATEMENTS --------------------------------- DECEMBER 31, 1995 ----------------- NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTY AND EQUIPMENT - ---------------------- The partnership is computing depreciation using the straight-line method over the estimated useful lives of the assets over a period of 5-40 years. Expenditures of maintenance, repairs and improvements which do not materially extend the useful lives of the property are charged to earnings. INCOME TAXES - ------------ No provision for income taxes is made in the fmancial statements of the partnership because, as a partnership, it is not subject to income tax, as the tax effect of its activities accrue to the partners. AMORTIZATION - ------------ Fees and expenses incurred in connection with placing the underlying financing in the amount of $207,500 are being amortized over five years on a straight-line basis. Expenses incurred in acquiring the property in the amount of $192,500 are being amortized over forty years on a straight-line basis. STATEMENT OF CASH FLOWS - ----------------------- For purposes of the statement of cash flows, cash consists of unrestricted cash in a checking account. CREDIT RISK-ECONOMIC DEPENDENCY - ------------------------------- On March 1, 1993, Lockheed Corporation purchased the Fort Worth Division of General Dynamics (the sole tenant). Lockheed purchased all of the assets held by the division and assumed all of the liabilities, including those under the lease with the Partnership. In the process of Lockheed's assumption of the General Dynamics Lease, the Partnership was able to negotiate a Consent Agreement which granted Lockheed the right to assume the Lease so long as General Dynamics remains jointly liable under the lease. As of December 31, 1995, 11 months remain on the lease. There are no renewal options in the lease agreement. 21 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ---------------------------- NOTES TO THE FINANCIAL STATEMENTS --------------------------------- DECEMBER 31, 1995 ----------------- NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) On November 17, 1995, the general partner wrote to inform the limited partners of the sole tenants' decision not to continue the lease beyond November, 1996. The general partner concurrently sought and subsequently obtained the permission of a majority of limited partners to sell the entire rental property, subject to certain conditions stated in that letter, for a price of at least $19,500,000. If that were to occur, the general partner anticipates being able to settle the partnership's outstanding debt for an amount which would allow the distribution of cash to all partners, but such distribution is likely to be significantly less than each partner's capital. If the property is not sold, it would eventually be subject to foreclosure by the wrap mortgage holder, if as is considered likely, no satisfactory tenant can be found to lease the property under terms necessary to service the debt. In such event, the general partner similarly anticipates settling the partnership's debt for an amount which would allow for a smaller distribution to partners, but in neither case is the resolution of debt or a distribution assured. PARTNERSHIP INCOME - ------------------ The income of the partnership differs from the taxable ordinary income of the partnership on the federal income tax return due to tax laws regarding deferred expenses and depreciation.
Income Reported on Tax Return $ 1,263,651 Items (Non-Deductible) Deductible on Tax Return: Deferred Rent 799,590 Depreciation (1,159,339) ---------- Income Per Financial Statements 903,902 ==========
NOTE 2 - THE PARTNERSHIP The partnership was formed on April 1, 1983 under the laws of the State of Texas for the purpose of acquiring, owning, and operating a twenty-story office building located in Dallas, Texas. On November 25, 1991, the partnership conveyed its land, building and personal property to 1910 Associates, LTD. (1910) in exchange for land, buildings and personal property located in Fort Worth, Texas. That transaction was reported as qualifying for nonrecognition of gain for income tax purposes. ICA Pacific Place, Inc., is the general partner of the partnership. 22 PACIFIC PLACE PARTNERS, LTD. (A TEXAS LIMITED PARTNERSHIP) ----------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 1995 ----------------- NOTE 3 - MORTGAGE PAYABLE The partnership is indebted to 1910 Associates, LTD. under a wrap-around mortgage agreement in the initial amount of $48,187,500. The loan bears interest at 13% per annum during the initial five year term. Payment terms call for monthly payments in the amount of $958,333.33 for the first twelve months and $625,170.70 for the succeeding forty-eight months. During the initial term of the loan, the debt service payments are equal to the rental payments. The note is secured by the partnership's land, buildings, and equipment under a Deed of Trust. The tenant is making payments directly to the mortgagees. The underlying mortgagees, Principal Mutual Life Insurance Company, Realty Refund Trust and Prentiss/Copley Investment Group are secured by liens, security interests and collateral assignments of rents and leases. The initial term of the wrap loan is five years but may be extended under certain conditions. The general partner believes the partnership will satisfy the requirements for renewal eligibility as of November 30, 1996, when the initial five year period ends. The two extension periods are for five and fifteen years, respectively. Maturities of long-term debt are as follows: YEAR ENDING DECEMBER 31, ------------------------ 1996 $34,113,045 ----------- $34,113,045 =========== -----END PRIVACY-ENHANCED MESSAGE-----