0000950123-95-002581.txt : 19950914 0000950123-95-002581.hdr.sgml : 19950914 ACCESSION NUMBER: 0000950123-95-002581 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950908 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RPS REALTY TRUST CENTRAL INDEX KEY: 0000842183 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 136908486 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-10093 FILM NUMBER: 95571873 BUSINESS ADDRESS: STREET 1: 733 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2123708585 MAIL ADDRESS: STREET 1: 733 THIRD AVE STREET 2: 24TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 10-K405/A 1 AMENDMENT NO. 3 TO FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------- FORM 10-K/A3 AMENDMENT TO APPLICATION OR REPORT FILED PURSUANT TO SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 RPS REALTY TRUST (Exact name of registrant as specified in charter) The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of the Annual Report on Form 10-K for the fiscal year ended December 31, 1994 as set forth in the pages attached hereto: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) All Financial Statements 2 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. RPS REALTY TRUST (Registrant) Date: September 8, 1995 By: /s/Edwin R. Frankel -------------------- Edwin R. Frankel Senior Vice President and Treasurer (Principal Financial and Accounting Officer) 3 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(i) All Financial Statements RPS REALTY TRUST AND SUBSIDIARIES TABLE OF CONTENTS
PAGE INDEPENDENT AUDITORS' REPORT FS-2 FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992: Consolidated Balance Sheets FS-3 Consolidated Statements of Income FS-4 Consolidated Statements of Shareholders' Equity FS-5 Consolidated Statements of Cash Flows FS-6 Notes to Consolidated Financial Statements FS-7
4 [DELOITTE & TOUCHE LLP LETTERHEAD] Two World Financial Center Telephone:(212)436-2000 New York, New York 10281-1414 Facsimile:(212)436-5000 INDEPENDENT AUDITORS' REPORT To the Board of Trustees of RPS Realty Trust: We have audited the accompanying consolidated balance sheets of RPS Realty Trust and subsidiaries (the "Trust") as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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, such consolidated financial statements present fairly, in all material respects, the financial position of RPS Realty Trust and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP ------------------------- February 27, 1995 (except for Note 16, which is dated April 10, 1995) FS-2 5 RPS REALTY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993
ASSETS 1994 1993 MORTGAGE LOANS RECEIVABLE - Net of allowance for possible loan losses of $11,657,236 in 1994 and $23,724,537 in 1993 $ 41,891,769 $100,692,130 INVESTMENT IN REAL ESTATE - Net 56,109,381 33,740,202 SHORT-TERM INVESTMENTS 73,781,582 37,747,388 INTEREST AND ACCOUNTS RECEIVABLE 8,607,992 9,977,893 CASH 802,384 1,053,375 DEFERRED ACQUISITION EXPENSES - Net of accumulated amortization of $1,319,706 in 1994 and $1,121,842 in 1993 2,352,107 2,549,971 OTHER ASSETS 2,625,607 659,037 ------------ ------------ TOTAL ASSETS $186,170,822 $186,419,996 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Distributions payable $ 2,279,394 $ 2,285,058 Deposits on sale of loans -- 1,365,042 Accounts payable and accrued expenses 1,292,260 1,430,273 Mortgages payable -- 5,027,023 ------------ ------------ Total liabilities 3,571,654 10,107,396 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY 182,599,168 176,312,600 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $186,170,822 $186,419,996 ============ ============
See notes to consolidated financial statements. FS-3 6 RPS REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1994 1993 1992 REVENUES: Interest income: Mortgage loans $ 8,597,619 $13,990,819 $20,037,918 Short-term investments 2,604,284 1,104,562 1,598,437 Additional contingent interest and prepayment premium income 8,405,813 3,433,116 5,250,000 Rental income 6,764,394 4,086,850 2,579,905 Gain on sale of marketable securities -- 3,942,513 -- Dividend income -- 395,185 351,000 Other 34,651 15,460 40,000 ----------- ----------- ----------- 26,406,761 26,968,505 29,857,260 ----------- ----------- ----------- EXPENSES: Losses on disposition of real estate/loans 227,708 -- 919,471 Allowance for possible loan losses 2,500,000 15,000,000 12,955,100 Interest on note payable -- 2,019,710 1,928,453 Interest on mortgages payable 426,414 603,152 721,031 General and administrative 2,086,318 1,912,228 2,054,377 Payroll and related 1,811,485 1,723,528 1,765,933 Property operating 1,529,731 1,206,002 725,786 Real estate tax 1,235,961 704,228 396,015 Depreciation 749,404 550,527 359,467 Amortization of deferred acquisition expense 197,864 197,864 197,864 ----------- ----------- ----------- 10,764,885 23,917,239 22,023,497 ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEMS 15,641,876 3,051,266 7,833,763 ----------- ----------- ----------- EXTRAORDINARY ITEMS -- -- 1,005,073 ----------- ----------- ----------- NET INCOME $15,641,876 $ 3,051,266 $ 8,838,836 =========== =========== =========== Per share: Income before extraordinary items $ .55 $ .11 $ .27 Extraordinary items -- -- .04 ----------- ----------- ----------- Net income $ .55 $ .11 $ .31 =========== =========== ===========
See notes to consolidated financial statements. FS-4 7 RPS REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
ADDITIONAL TOTAL NUMBER OF PAID-IN CUMULATIVE CUMULATIVE SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS DISTRIBUTIONS EQUITY BALANCE, JANUARY 1, 1992 28,653,021 $2,865,302 $195,591,125 $60,209,549 $ (67,494,562) $191,171,414 Shares repurchased and retired (56,700) (5,670) (287,461) - - (293,131) Net income - - - 8,838,836 - 8,838,836 Cash distributions declared - - - - (17,158,168) (17,158,168) Reversal of reserve for estimated merger costs ---------- ---------- ------------ ----------- ------------- ------------ BALANCE, DECEMBER 31, 1992 28,596,321 2,859,632 195,303,664 69,048,385 (84,652,730) 182,558,951 Shares repurchased and retired (43,400) (4,340) (147,750) - - (152,090) Net income - - - 3,051,266 - 3,051,266 Cash distributions declared - - - - (9,145,527) (9,145,527) ---------- ---------- ------------ ----------- ------------- ------------ BALANCE, DECEMBER 31, 1993 28,552,921 2,855,292 195,155,914 72,099,651 (93,798,257) 176,312,600 Shares repurchased and retired (60,500) (6,050) (231,683) (237,733) Net income 15,641,876 15,641,876 Cash distributions declared (9,117,575) (9,117,575) ---------- ---------- ------------ ----------- ------------- ------------ BALANCE, DECEMBER 31, 1994 28,492,421 $2,849,242 $194,924,231 $87,741,527 $(102,915,832) $182,599,168 ========== ========== ============ =========== ============= ============
See notes to consolidated financial statements. FS-5 8 RPS REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,641,876 $ 3,051,266 $ 8,838,836 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 2,500,000 15,000,000 12,955,100 Loss on disposition of real estate 227,708 -- -- Amortization of deferred acquisition expense 197,864 197,864 197,864 Depreciation 749,404 550,527 359,467 Gain on sale of marketable securities -- (3,942,513) -- Extraordinary items -- -- (1,005,073) Changes in operating assets and liabilities: Interest and accounts receivable (391,122) 444,197 (3,766,367) Other assets (2,131,770) (166,789) 67,752 Interest on note payable -- (6,532,559) (504,047) Deposits on sale of loans -- 1,365,042 -- Accounts payable and accrued expenses (2,342,457) (32,985) 44,875 ------------ ------------ ------------ Net cash provided by operating activities 14,451,503 9,934,050 17,188,407 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Satisfaction of mortgage loans receivable 45,903,575 16,902,474 10,675,000 Investment in mortgage loans receivable -- (3,064,000) (7,937,641) Investment in real estate (8,832,548) (1,426,743) (115,000) Proceeds from sale of marketable securities -- 9,294,453 -- Sale of real estate 112,500 -- -- Return on marketable securities -- -- 48,060 ------------ ------------ ------------ Net cash provided by investing activities 37,183,527 21,706,184 2,670,419 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends declared and paid (9,123,239) (11,149,917) (17,166,673) Shares repurchased (237,734) (152,090) (293,131) Repayment of note payable -- (14,482,500) (9,767,500) Repayment of mortgages payable (6,490,854) (4,703,555) (6,218,437) ------------ ------------ ------------ Net cash used in financing activities (15,851,827) (30,488,062) (33,445,741) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,783,203 1,152,172 (13,586,915) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 38,800,763 37,648,591 51,235,506 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 74,583,966 $ 38,800,763 $ 37,648,591 ============ ============ ============ CASH AND CASH EQUIVALENTS, END OF YEAR: Cash $ 802,384 $ 1,053,375 $ 1,068,367 Short-term investments 73,781,582 37,747,388 36,580,224 ------------ ------------ ------------ $ 74,583,966 $ 38,800,763 $ 37,648,591 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 426,414 $ 9,155,421 $ 3,153,531 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Investment in real estate $ 14,626,242 $ 8,490,000 $ 7,400,000 Investment in limited partnership -- 460,000 -- Mortgages payable assumed (1,463,831) (3,498,907) (984,019) Interest and accounts receivable (1,761,023) (2,806,571) (515,599) Use of allowance for possible loan losses 14,567,301 6,155,478 300,382 Gross mortgages receivable exchanged for real estate (9,500,000) (8,800,000) (5,600,000) Mortgage receivable exchanged (3,000,000) -- -- Net mortgages receivable sold (13,829,129) -- -- Accounts payable (839,402) -- -- Deposit on sale of loans 1,365,042 -- -- Other assets (165,200) -- --
See notes to consolidated financial statements. FS-6 9 RPS REALTY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES RPS Realty Trust (the "Trust"), a Massachusetts business trust, was formed on June 21, 1988 to be a diversified, growth-oriented real estate investment trust. a. Income Tax Status - The Trust conducts its operations with the intent of meeting the requirements applicable to a real estate investment trust ("REIT") under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). For the year ended December 31, 1994, the Trust intends to distribute all of its taxable income prior to filing its tax return. See Note 15 for current year developments. b. Principles of Consolidation - The consolidated financial statements include the accounts of the Trust and all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. c. Cash Equivalents - Short-term investments are considered cash equivalents for purposes of the statement of cash flows and consist primarily of highly liquid investments at December 30, 1994 having original maturities of less than three months. d. Investment in Real Estate - Investment in real estate is stated at the lower of cost less accumulated depreciation or market. Depreciation is calculated using the straight-line method over the estimated useful life of the property. The market value for real estate is determined based on independent appraisals obtained for the property. Additions and improvements which extend the estimated useful life of the property are capitalized. Repairs and maintenance are expensed. In the event it appears that the cost less accumulated depreciation cannot be recovered through operations and/or a sale over a reasonable future period, then it will be considered probable that an impairment that is other than temporary has occured and the net cost less accumulated depreciation will be written down to market value and a new cost basis will be established. e. Investment in Mortgage Loans Receivable - Investments in mortgage loans receivable are stated at the lower of the carrying amount of the loan or the market value of the underlying real estate. Market values are determined based upon accepted appraisal techniques including present value of expected cash flows for the underlying real estate and other observable market comparables. An allowance for possible loan losses is established based upon a review of each of the properties in the Trust's portfolio. In performing the review, management considers the estimated net realizable value of the property or collateral as well as other factors, such as the current occupancy, the amount and status of senior debt, if any, the prospects for the property, the credit worthiness and current financial position of the borrower and the economic situation in the region where the property is located. Because this determination of net realizable value is based upon future economic events, the amounts ultimately realized at disposition may differ materially from the carrying value as of December 31, 1994. f. Income Recognition - Current interest income on mortgage loans is recognized on the accrual method during the periods in which the mortgage loans are outstanding. Deferred interest, due at the maturity of the mortgage loan, is recognized as income based on the interest method using the implicit rate of interest on the mortgage loan. Contingent and additional contingent income and prepayment premium income are recognized as cash is received. g. Deferred Advisory Fees - Deferred advisory fees were paid to buy out the management contracts of the advisors to the predecessor entities of the Trust in connection with its formation in 1988. Such amounts are being amortized over periods of 13 to 20 years representing the expected period over which such fees would have been paid. h. Transaction Costs - Direct costs associated with the proposed Ramco Transaction have been capitalized and are included in other assets. Depending upon the outcome of the transaction these costs will either be allocated as part of the purchase price of the assets acquired or expensed in their entirety. FS-7 10 i. Income Per Share - The weighted average number of shares outstanding used in computing income per share for the years ended December 31, 1994, 1993 and 1992 were 28,494,379, 28,582,344 and 28,599,637, respectively. The stock options outstanding at December 31, 1994, 1993 and 1992 were not considered in computing income per share since there was no dilutive effect for the years then ended. j. Reclassifications - Certain reclassifications have been made to prior year financial statements to conform with current year's presentation. 2. MORTGAGE LOANS RECEIVABLE The principal amounts of the Trust's mortgage loans receivable at December 31, 1994 and 1993 are summarized below:
INTEREST RATE(B) CURRENT DECEMBER 31, 1994 RATE AT -------------------------------------------- DECEMBER 31, AVERAGE MATURITY AMOUNT ALLOWANCE NET DESCRIPTION AVERAGE 1994 ACCRUED DATE ADVANCED FOR LOSS CARRYING AMOUNT Shopping centers/retail: Coral Way 9.00% 9.00% -- 3/95 $ 3,000,000 0 3,000,000 Holiday Park 8.25 9.50 -- 12/95 1,916,564 0 1,916,554 Branhaven Plaza 11.19 10.50 2.25 8/99 2,800,000 0 2,800,000 Plainview Shopping Center 12.50 12.50 2.00 1/99 -- 0 0 Janss Mall 12.20 11.75 3.00 11/99 -- 0 0 Norgate Plaza 12.60 12.50 2.00 11/99 -- 0 0 Madison Heights(j) 9.30 9.50 2.70 9/94 1,550,000 (1,875,900) (325,900) The Tackett Center 11.33 11.00 2.00 11/00 -- 0 0 Chester Springs 11.92 11.25 3.50 12/00 -- 0 0 1733 Massachusetts Avenue 8.58 8.00 1.42 6/99 2,200,000 0 2,200,000 Tampa Plaza 10.52 9.00 2.00 5/01 -- 0 0 Mt. Morris Commons 11.20 10.50 2.00 7/01 2,700,000 (1,000,000) 1,700,000 Copps Hill Plaza 6.00 6.00 0.50 7/96 3,563,948 0 3,563,948 Hylan Center (e) 12.00 7.50 4.50 1/01 25,000,000 (3,000,336) 21,999,664 Office buildings: NCR Building (d) 10.00 10.00 -- 7/94 468,493 0 468,493 New England Telephone Co 6.92 8.27 3.58 12/99 3,000,000 (2,800,000) 200,000 Wellesley Plaza 10.67 10.00 1.13 7/00 -- 0 0 1-5 Wabash Avenue 5.00 5.00 -- 3/96 2,850,000 0 2,850,000 Industrial/commercial: Meadowlands Industrial Park II 17.43% 17.43% - 1/99 $ - $ 0 $ 0 Simmons Mfg. Warehouse 10.00 10.00 2.00% 8/01 1,500,000 0 1,500,000 Loan secured by first lien: Rector (e) 6.00 6.00 - 4/04 3,000,000 (2,000,000) 1,000,000 Additional amounts assigned based on experience 0 (981,000) (981,000) ----------- ------------ ----------- 53,549,005 (11,657,236) 41,891,769 =========== =========== ==========
FS-8 11
DECEMBER 31, 1993 (A)(C)(H) ------------------------------------------------------ AMOUNT ALLOWANCE NET DESCRIPTION ADVANCED FOR LOSS CARRYING AMOUNT Shopping centers/retail: Coral Way $ 3,000,000 0 3,000,000 Holiday Park 1,916,564 0 1,916,564 Branhaven Plaza 2,800,000 0 2,800,000 Plainview Shopping Center 5,250,000 0 5,250,000 Janss Mall 21,090,000 (4,599,537) 16,490,463 Norgate Plaza 2,500,000 (500,000) 2,000,000 Madison Heights 1,550,000 (1,300,000) 250,000 The Tackett Center 3,400,000 (1,631,000) 1,769,000 Chester Springs 7,000,000 0 7,000,000 1733 Massachusetts Avenue 2,200,000 0 2,200,000 Tampa Plaza 8,000,000 (3,119,000) 4,881,000 Mt. Morris Commons 2,700,000 (1,000,000) 1,700,000 Copps Hill Plaza 3,641,610 0 3,641,010 Hylan Center (e) -- (3,500,000) 27,500,000 Office buildings: NCR Building (d) 468,493 0 468,493 New England Telephone Co 3,000,000 (2,400,000) 600,000 Wellesley Plaza 5,200,000 (5,075,000) 125,000 1-5 Wabash Avenue 2,850,000 0 2,850,000 Industrial/commercial: Meadowlands Industrial Park II 15,350,000 0 15,350,000 Simmons Mfg. Warehouse 1,500,000 0 1,500,000 Loan secured by first lien: Rector (e) 31,000,000 0 0 Additional amounts assigned based on experience 0 (600,000) (600,000) ------------ ------------ ------------- 124,416,667 (23,724,537) 100,692,130 ============ ============ =============
Deferred interest due at maturity of the mortgage loans is recognized as income based on the interest method. The amounts currently recognized, which are included on the consolidated balance sheet in Interest and Accounts Receivable, through December 31, 1994 and 1993, are as follows:
December 31, December 31, 1994 1993 Holiday Park $ 67,080 $ 67,080 Branhaven Plaza 267,329 203,573 Plainview Shopping Center -- 598,557 Norgate Plaza -- 98,455 Madison Heights 128,933 128,933 Chester Springs -- 671,994 1733 Massachusetts Avenue 325,786 297,054 Mt. Morris Commons 52,923 52,923 Hylan Center 6,275,000 -- New England Telephone Co. 407,284 407,284 Simmons Mfg. Warehouse 100,352 77,009 Rector -- 2,980,669 ---------- ---------- Total $7,624,687 $5,583,531 ========== ==========
(a) Of the 13 loans outstanding, 5 are wraparound mortgage loans and 8 are first mortgage loans. The wraparound mortgage loans are subordinate to prior liens held by others with no recourse to the Trust. Such prior liens are not liabilities of the Trust and, therefore, are not reflected in the accompanying financial statements. (b) In addition to fixed interest, the Trust is entitled, on certain loans, to contingent interest in an amount equal to a percentage of the gross rent received by the borrower from the property securing the mortgage above a base amount, payable annually, and additional contingent interest based on a predetermined multiple of the contingent interest or a percentage of the net value of the property at such date, payable at maturity (equity participation). Contingent interest in the amount of $440,688, $578,027 and $467,080 was received for the years ended December 31, 1994, 1993 and 1992, respectively. Additional contingent interest of $5,505,813, $3,433,116 and $3,250,000 was received in the years ended December 3l, 1994, 1993 and 1992, respectively. Additionally, the Trust received prepayment premium income (in lieu of equity participations) of $2,900,000 and $2,000,000 for the years ended December 31, 1994 and 1992, respectively. (c) The aggregate cost for Federal income tax purposes approximates that used for financial reporting. (d) The NCR mortgage loan represented a transaction in which, for accounting purposes, the Trust was considered to have substantially the same risks and potential rewards as the borrower and, accordingly, was accounted for as an investment in real estate rather than a loan. Although the transaction was structured as a loan due to the terms of the zero coupon mortgage, it was not readily determinable at inception that the borrower would continue to maintain a minimum investment in the property. Therefore, under the method of accounting applicable to this loan, the Trust recognized as revenue the lesser of the amount of interest as contractually provided for in the mortgage, or the actual operations of the underlying property inclusive of depreciation expense and interest expense on any senior indebtedness. Under the terms of the loan agreement, the Trust was entitled to accrued interest of $498,896 for the year ended December 31, 1992, which was not recognized as a result of the accounting policy described above (Note 3e). FS-9 12 (e) The interest income from this loan represented more than 10 percent of the Trust's total revenue for the years ended December 31, 1992. The mortgage receivable balance also represents more than 10 percent of the Trust's total assets at December 31, 1994 and 1993. (f) As of December 31, 1994 and 1993, the Trust had five and ten, respectively, loans that were in arrears (three monthly payments or more) or otherwise considered to be "problem loans" by the Trust. The aggregate gross principal amounts of these loans, together with receivables relating to such loans comprised of accrued interest and payments made on behalf of the borrowers for mortgage payments relating to such properties, total $42,311,106 and $93,609,900, representing 23.0% and 47.2% of the Trust's invested assets at December 31, 1994 and 1993, respectively. At December 31, 1994 and 1993, the Trust was not accruing current and deferred interest on four and eight of the above-mentioned loans, in the aggregate approximate principal amounts of $10,250,000 and $56,940,000, respectively. In addition, as of such dates, the Trust was not accruing deferred interest on one and one additional loan, respectively, in the aggregate approximate principal amount of $25,000,000 and $3,000,000, respectively. The Trust has an allowance for possible loan losses of $11,657,236 and $23,724,537 at December 31, 1994 and 1993, and recognized a loan loss of $919,471 during the year ended December 31, 1992. (g) An allowance for possible loan losses is established based upon a review of each of the properties in the Trust's portfolio. In performing the review, management considers the estimated net realizable value of the property or collateral as well as other factors, such as the current occupancy, the amount and status of senior debt, if any, the prospects for the property, the credit worthiness and current financial position of the borrower and the economic situation in the region where the property is located. Because this determination of net realizable value is based upon future economic events, the amounts ultimately realized at disposition may differ materially from the carrying value as of December 31, 1994. The allowance is indicative of the continued and protracted declines in values of commercial real estate throughout the country resulting in part from the general economic decline and the lack of available credit sources for real estate. The allowance is inherently subjective and is based on management's best estimates of current conditions and assumptions about expected future conditions. (h) A summary of mortgage receivable loan activity for the years ended December 31, 1994 and 1993 is as follows:
DECEMBER 31, 1994 1993 Balance, beginning of year $ 100,692,130 $ 130,595,126 Mortgage loans issued -- 3,064,000 Mortgage loan satisfaction (56,300,361) (19,546,996) Provision for possible loan losses (2,500,000) (15,000,000) Transfer of allowance for possible loan losses to investment in real estate -- 1,580,000 ------------- ------------- Balance, end of year $ 41,891,769 $ 100,692,130 ============= =============
(i) Impairment of Loans - In May 1993, the Financial Accounting Standards Board issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan," which requires creditors to account for loans at the present value of their future cash flows or at the fair value of the collateral, if the loan is collateral dependent. The adoption of the statement is required for years beginning after December 15, (j) Allowance for loss at December 31, 1994 includes accrued interest. FS-10 13 1994. The Trust has not adopted the provisions of this statement and does not expect the adoption of this statement to have a significant impact on the carrying value of the loans. 3. PREPAYMENTS AND OTHER ACTIVITY a. On January 3, 1994, the Trust sold the following mortgage loans: (i) its wrap-around mortgage loan secured by the Tampa Plaza shopping center located in Northridge, California (the "Tampa Loan"); (ii) its wrap-around mortgage loan secured by the Wellesley Plaza office building located in Los Angeles, California (the "Wellesley Loan"); and (iii) its first mortgage loan secured by the Tackett Center mixed-use retail center located in Palm Springs, California (the "Tackett Loan"). On January 7, 1994, the Trust sold its first mortgage loan secured by the Janss Mall shopping center located in Thousand Oaks, California (the "Janss Mall Loan", and collectively, the "California Mortgage Loans"). The California Mortgage Loans at closing had an approximate aggregate outstanding balance of $39,698,000 before taking into consideration allowance for possible losses of approximately $14,567,000. The Tampa, Tackett and Janss Mall Loans were sold pursuant to a competitive offering process, pursuant to which bids for each of the Loans were solicited; the Wellesley Loan was offered in the competitive offering process, but was sold in an arms-length negotiation outside of the competitive offering process. Secured Capital Corp. of Los Angeles, California acted as the Trust's representative with respect to the offering and sale of the California Mortgage Loans. In the aggregate, the Trust received cash proceeds of $25,500,000 from the sale of the California Mortgage Loans, before deduction of costs, fees and expenses relating to such transactions, including the payment of a fee to Secured Capital Corp. b. On January 25, 1994, the Trust restructured its mortgage loan in the original principal amount of $31,000,000 which was secured by a collateral assignment of mortgages on two properties, an office building located on Rector Street, New York City (the "Rector Property") and a shopping center located on Hylan Boulevard, Staten Island, New York (the "Hylan Center"). Pursuant to the restructuring, the Trust received a direct assignment of the first mortgage with a principal amount of $25,000,000 and accrued interest of $7,881,250 secured by the Hylan Center and retained the collateral assignment of the Rector Property mortgage, the principal amount of which was reduced to $3,000,000. The holder of the first mortgage secured by the Rector Property has granted the Trust a pledge of a senior participation interest in such mortgage. In addition, upon a foreclosure, the Trust will obtain a direct first mortgage secured by the Rector Property. The restructuring was completed in October 1994. c. On June 30, 1994, Norgate Shops, Corp., a wholly-owned subsidiary of the Trust, acquired title to the Norgate Shopping Center property. The property was subject to a first mortgage in the approximate amount of $1,463,830, which the Trust pre-paid at the time of such acquisition. d. On July 12, 1994, Chester Plaza Shops, Inc., a wholly-owned subsidiary of the Trust acquired title to the Chester Springs Shopping Center, an approximately 216,000 square foot community-type shopping center located in Chester, New Jersey. The purchase price for the property was approximately $18,262,000. e. On August 15, 1994 the Trust received proceeds of $18,354,047 from the prepayment of the Meadowlands Industrial Park mortgage loan. The proceeds consisted of the repayment of the principal loan balance of $15,350,000, payment of current interest of $104,047 and prepayment premium income (in lieu of equity participation) of $2,900,000. FS-11 14 f. On September 29, 1994, the Trust received proceeds of $11,805,825 from the prepayment of the Plainview Shopping Center mortgage loan. The proceeds consisted of the repayment of the principal loan balance of $5,250,000, payment of accrued interest of $994,187, current interest of $55,825 and additional contingent interest (equity participation) of $5,505,813. g. On March 5, 1993, Lantana Plaza Shops, Inc., a wholly-owned subsidiary of the Trust, acquired title to the Lantana Shopping Center property. The property was subject to a first mortgage in the amount of $3,464,246. The Trust exercised its right to prepay the mortgage on May 24, 1993. h. On March 15, 1993, the Trust funded a $3,000,000 first mortgage loan secured by the Coral Way Plaza Shopping Center. The loan bears current interest at 9 percent and matures in March 1995. i. The Trust entered into a Settlement Agreement (the "Agreement") as of April 30, 1993 with respect to the note it held secured by a mortgage on 5 and 9 North Wabash Avenue, Chicago, Illinois. Pursuant to the Agreement, (a) a subsidiary of the Trust received title by deed in lieu of foreclosure to the property at 9 North Wabash Avenue, b) the Trust received $1,350,000 and c) another subsidiary of the Trust received a 20% limited partnership interest in a newly organized limited partnership which owns 5 North Wabash Avenue. The Trust will continue to hold a note secured by a first mortgage on 5 North Wabash Avenue in the reduced amount of $3,450,000. The note bears interest at 5% per annum, matures on March 31, 1996 and is non-amortizing, except for a $600,000 principal reduction payment made on December 20, 1993. The maturity date of the note may be extended to March 31, 1997 at the option of the borrower under the note, provided, among other things, that the principal amount of the note is reduced by an additional $600,000 payment prior to its initial maturity. Interest during the extension period shall be at 7% per annum. As to the limited partnership interest to be held by a subsidiary of the Trust, no distributions shall be made with respect thereto until the maturity or earlier repayment of the mortgage loan held by the Trust. Thereafter, other than distributions of net operating income, the Trust will not receive cash distributions from refinancing or a sale of the property on account of its limited partnership interest until the general and initial limited partner of the limited partnership have received $1,550,000 and any payments reducing the Trust loan balance below $3,450,000 in aggregate distributions from such sources. The transaction closed on July 7, 1993 and resulted in a taxable loss approximating $4,500,000, which amount was previously recognized for accounting purposes in 1992. j. On May 20, 1993, the Trust executed a contract to purchase the Chester Springs Shopping Center, an approximately 216,000 square foot community-type shopping center located in Chester, New Jersey. The Trust exercised its right of first refusal contained in its mortgage documents relating to the property. The closing date for the transaction was July 12, 1994. The purchase price for the property was approximately $18,262,000. k. On July 2, 1993, the Trust received proceeds of $3,506,713 from the partial prepayment of the NCR mortgage loan. The original principal balance of $2,300,000 was reduced to $468,493. The remaining principal amount matures on December 31, 1995 and bears current interest of 10% payable quarterly. Also included in the proceeds was approximately $1,675,000 of deferred interest. l. On August 23, 1993, the Trust exercised its right to receive rental payments pursuant to an Assignment of Rents for its approximately $2,500,000 mortgage loan secured by the Norgate FS-12 15 Plaza Shopping Center property. On September 21, 1993, a foreclosure action was commenced by the Trust, and on motion by the Trust a Receiver was appointed. On February 8, 1994, the first mortgagee joined the action in order to foreclose its mortgage, and the Trust currently is proceeding with its foreclosure action. m. On December 30, 1993, the Trust received proceeds of $18,028,776 from the prepayment of the Sayre Woods mortgage loan. The proceeds consisted of the repayment of the principal loan balance of $13,080,000, payment of accrued interest of $1,183,990, current interest of $118,354, contingent interest of $213,316 and additional contingent interest (equity participation) of $3,433,116. n. On January 31, 1992, the Trust increased its existing $7,500,000 wraparound mortgage loan by $2,000,000 to the borrower on the Tel-Twelve Mall at a current interest rate of 12 percent. In addition, the borrower was given the right to prepay the entire loan together with the payment of $3,250,000 in additional contingent interest on or before December 31, 1992. In consideration for this right the Trust received $2,000,000 in additional contingent interest (equity participation). On May 19, 1992, the Trust received proceeds of $15,181,346 from the prepayment of the mortgage loan. The proceeds consisted of accrued interest of $2,092,500, current interest of $144,480, contingent interest of $194,366 and additional contingent interest (equity participation) of $3,250,000 and repayment of the principal loan balance of $9,500,000. o. On May 11, 1992, the Trust funded an additional $4,690,000 on the $16,500,000 Janss Mall wraparound mortgage loan which enabled the owners of the Janss Mall property to repay in full the outstanding first mortgage secured by such property and allowed in the Trust to acquire a consolidated first mortgage loan position of $21,190,000. The additional funding carries a current interest rate of 1 percent above the prime rate of a major banking institution with a minimum rate of 9 percent and a maximum rate of 12 percent. p. On June 1, 1992, the Saratoga Building Inc., a subsidiary of the Trust, acquired the deed to the 222 East Saratoga Street property ("the Saratoga Property") in lieu of payment of the mortgage loan that the Trust held on the property. The mortgage indebtedness owed to the Trust by the prior owner amounted to $2,850,154. q. On June 12, 1992, the Trust exercised its right to receive rental payments pursuant to an Assignment of Rents under its approximately $3,000,000 first mortgage loan secured by the Trinity Corners property. On July 1, 1992, the borrower under such loan filed for protection under the bankruptcy code. On December 30, 1992, Trinity Shops, Inc., a wholly owned subsidiary of the Trust, acquired the deed to Trinity Corners Shopping Center (the "Trinity Property"), pursuant to a bankruptcy court action sale. Pursuant to the terms of such acquisition, the mortgage indebtedness of $3,209,317 (including accrued interest) owed to the Trust by the prior owner of the Trinity Property was credited against the purchase price of the Trinity Property. r. On September 21, 1992, the Trust restructured the loan secured by the Copps Hill Plaza property. Total mortgage indebtedness owed to the Trust comprised of accrued interest and payments made on behalf of the borrower, relating to such property totaled $3,981,077. On September 30, 1992 and December 20, 1992, the Trust received principal payments of $200,000 and $175,000, respectively, from the borrower pursuant to the terms of such restructured loan. The current loan balance of $3,606,077, as restructured now, bears interest at the rate of 6 percent per annum and matures July 1996. FS-13 16 s. On December 30, 1992, the Commack Site, Inc., a wholly owned subsidiary of the Trust, acquired certain real property located in Commack, New York (the "Commack Property") for a purchase price of approximately $2,900,000, including the existing mortgage indebtedness secured by the Commack Property. In connection with the acquisition of the Commack Property, the Trust assigned the Church Street Judgment to the seller's designee (Note 8). t. On December 31, 1992, the Trust restructured wrap-around the loan secured by the Holiday Park property. Total mortgage indebtedness including accrued interest and payments made on behalf of the borrower relating to such property totaled $2,716,564. Also on such date the Trust received an $800,000 principal payment. The current loan balance of $1,916,564, as restructured, now bears interest at a minimum rate of 7 percent and matures on December 31, 1995. FS-14 17 4. INVESTMENT IN REAL ESTATE
INITIAL COST TO COMPANY CAPITAL GROSS ACCUMULATED DATE PREDICTABLE DESCRIPTION LAND BUILDING IMPROVEMENTS AMOUNT(1) DEPRECIATION ACQUIRED LIFE Sunshine Plaza $ 1,748,000 $ 7,452,000 $ 522,781 $ 9,722,781 $ 578,815 12/19/91 40 Shopping Center Tamarack, Florida Crofton Plaza 3,201,000 6,499,000 945,119 10,645,119 619,159 5/01/91 40 Shopping Center Crofton, Maryland Commack Shopping Center 1,160,000 1,740,000 - 2,900,000 88,813 12/30/92 40 Commack, New York Trinity Shopping Center 1,250,000 1,250,000 499,318 2,999,318 82,756 12/30/92 40 Pound Ridge, New York Lantana Shopping Center 2,589,810 2,600,190 436,077 5,626,077 130,145 3/01/93 39 Lantana Florida 9 North Wabash 2,319,900 980,100 - 3,300,000 36,648 7/01/93 39 Chicago, Illinois Norgate Shopping Center 1,260,000 2,940,000 77,528 4,277,528 37,775 6/01/94 39 Indianapolis, Indiana Chester Shopping Center Chester, New Jersey 4,930,740 13,331,260 107,711 18,369,711 157,042 7/15/94 39 ----------- ------------ --------- ------------ --------- Totals $18,459,450 $36,792,550 $2,588,534 $57,840,534 $1,731,153 =========== =========== ========== =========== ==========
1994 1993 1992 REAL ESTATE OWNED: Balance at beginning of year: $34,751,743 $26,415,000 $18,900,000 Acquired Properties 22,462,000 8,490,000 7,400,000 Capital Improvements 996,791 1,426,743 115,000 Disposition of Saratoga (3) (370,000) - - ------------ ------------ ------------ 57,840,534 36,331,743 26,415,000 Allowance for Impairment - (1,580,000) - ------------- ------------ ----------- Balance at end of year $57,840,534 $34,751,743 $26,415,000 =========== =========== =========== ACCUMULATED DEPRECIATION: Balance at beginning of year: $ 1,011,541 $ 461,014 $ 101,547 Depreciation Expense (2) 749,404 550,527 359,467 Disposition of Saratoga (3) (29,792) - - ---------- ----------- ------------ Balance at end of year $ 1,731,153 $ 1,011,541 $ 461,014 =========== =========== ===========
(1) Aggregate cost for Federal income tax purposes approximates $57,840,534. (2) Properties are depreciated over an estimated life of 39 or 40 years using the straight-line method. (3) On September 28, 1994 the Trust sold the capital stock of The Saratoga Building, Inc., a wholly owned subsidiary of the Trust for $12,500. The Trust had previously provided an allowance for impairment of $1,580,000 against this asset. The sale resulted in an additional loss of approximately $227,708. FS-15 18 RENTALS UNDER OPERATING LEASES The following is a schedule by years of minimum future rentals on noncancelable operating leases at December 31, 1994:
YEAR ENDING DECEMBER 31, AMOUNT 1995 $ 5,468,129 1996 4,827,161 1997 4,320,375 1998 3,763,684 1999 2,975,203 Later Years 9,015,510 ----------- $30,370,062 ===========
5. MARKETABLE SECURITIES During the period May 21, 1993 through December 31, 1993, the Trust received cumulative proceeds of $9,294,453 representing the sale of all 270,000 of its shares of common stock at an average price of $34.42 per share. The Trust realized a gain from these sales of $3,942,513. 6. NOTE PAYABLE On December 28, 1993 (the "Repurchase Date"), the first date on which the Trust was permitted to do so, the Trust exercised its option to redeem in full Reissued Note Number 5 ("the Note") issued pursuant to the Note Issuance Agreement dated as of December 28, 1988 among Integrated Resources, Inc., Resources Pension Advisory Corp. and the Trust, made to the order of Anchor National Life Insurance Company ("Anchor"). The Note, which was scheduled to mature in December 2001, accrued simple interest at an interest rate that increased semi-annually, so as to be the equivalent of 9.5% per annum, compounded semi-annually. On the Repurchase Date, the Trust paid to Anchor $23,034,769, representing the outstanding principal amount on the Note and accrued interest to the Repurchase Date. 7. MORTGAGE PAYABLE Mortgages payable consists of the following:
DECEMBER 31, 1994 1993 Crofton, 8.78 percent, maturing March 1, 2006 $ - $5,027,023 ---- ---------- $ - $5,027,023 ==== ==========
On September 30, 1994, the Trust exercised its right to prepay the $4,868,046 first mortgage loan relating to the Crofton Plaza Shopping Center property. The property is owned by a wholly-owned subsidiary of the Trust. On January 26, 1993, the Trust exercised its right to prepay the $984,019 first mortgage loan relating to the Commack Property, which property is owned by a wholly-owned Subsidiary of the Trust. FS-16 19 On April 29, 1992, the Trust exercised its option to purchase the first mortgage loan relating to the Sunshine Plaza Shopping Center, which property is owned by a wholly-owned subsidiary of the Trust. The purchase price of $7,000,000 represented a $222,500 discount from the principal and interest accrued totaling $7,222,500. Such discount was recorded as an extraordinary item. 8. SHARE PURCHASE RIGHTS On December 6, 1989, the Trust's Board of Trustees (the "Board") declared a dividend distribution of one share purchase right for each outstanding share of beneficial interest, $.10 par value per share, to shareholders of record at the close of business on December 18, 1989. These rights may be exercised to purchase one share of beneficial interest at a price of $20 per share, subject to adjustment, under certain specified conditions at the Board's option. These rights are not exercisable or transferable apart from the shares of beneficial interest until the distribution date, which is the earlier of (i) 10 days following a public announcement that any person or group has acquired beneficial ownership of 20 percent or more of the outstanding shares (the "Share Acquisition Date"), (ii) 10 days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20 percent or more of the outstanding shares or (iii) the day the Board determines that any person or group has become the beneficial owner of an amount of shares the Board determines to be substantial (which amount shall in no event be less than 10 percent of the shares outstanding) and the Board shall determine that such beneficial ownership is intended to cause the Trust to repurchase the shares owned by such person or group or is reasonably likely to cause a material adverse impact on the Trust's business. The rights, which do not have voting rights, expire on December 6, 1999 and may be redeemed by the Trust at a price of $.01 per right at any time until rights expire or, if earlier, 10 days following the Share Acquisition Date. Upon the occurrence of certain events following the distribution date, the holder of each right will have the right to receive, upon exercise, shares (or, in certain circumstances, cash, property or other securities of the Trust) having a value equal to two times the exercise price of the right. In certain events in which the Trust is not a surviving entity or has transferred 50 percent or more of its assets or earnings power, the rights will entitle the holder, upon exercise, to receive equity securities of the acquiring company having a value equal to two times the exercise price of the right. 9. STOCK OPTION PLANS a. 1989 Trustees' Stock Option Plan - On April 4, 1989, the Board approved the establishment of the 1989 Trustees' Stock Option Plan (the "Plan") which permits the Trust to grant options to purchase up to 350,000 shares of beneficial interest in the Trust at the fair market value at the date of the grant. Each member of the Board who is not an officer or employee of the Trust is eligible to participate in the Plan. Each participant is granted an option to purchase that number of shares equal to 0.1 percent of the shares then outstanding on each of (a) the later of (i) November 28, 1989 or (ii) the date on which the participant first becomes a member of the Board and (b) the second anniversary of the date of the preceding grant. In October 1991, the Board modified and amended the Plan to provide that the remaining options due to be issued after October 8, 1991 be issued pro rata to each of the eligible Trustees. Options granted under the Plan become exercisable, with respect to 50 percent of the shares covered thereby, on the first anniversary of the date of grant and on a cumulative basis with respect to the remaining shares on the second anniversary of the date of grant. Options granted under this plan expire ten years from the date of grant. FS-17 20 The Trust has 350,000 options outstanding under the Plan at December 31, 1994. The fair market value of the shares and exercise price of such options at the dates of grant ranged from $5.25 to $5.75. b. 1989 Employee's Stock Option Plan - On June 21, 1989, the Board approved the establishment of the 1989 Employee Stock Option Plan which permits the Trust to grant options to purchase up to 1,550,000 shares of beneficial interest in the Trust at the fair market value at the date of grant. The options are exercisable each year starting one year from the date of grant, on a cumulative basis, at the annual rate of 20 percent of the total number of shares covered by the option. Options granted under the plan expire 10 years from the date of grant. On December 6, 1989, 1,355,000 options were granted. At December 31, 1994 and 1993, 1,325,000 and 1,355,000 options were outstanding under such plan. The fair market value of the shares and exercise price of these options at the date of the grant was $5.75. At December 31, 1994, there were 1,325,000 shares of common stock reserved for exercise of stock options. 10. COMMITMENTS a. The Trust's lease for office space terminates on April 30, 1995. Annual rental payment, including electricity, was $194,666. Additionally, the Trust has a second lease on a month to month basis. Current monthly rental payments under such lease are $1,284. In March 1995 the Trust entered into a lease for approximately 4,863 sq. ft. of office space at 747 3rd Ave. New York, New York. The term of the lease commences on April 1, 1995, at an annual base rental of $145,890. The lease will expire on April 30, 1996, unless extended by the Trust for an additional one-year term. b. The President and Chairman of the Trust have entered into long-term employment agreements effective December 28, 1988. Each of the employment agreements is for a term of 10 years, unless terminated earlier by reason of death or disability of the officer or for cause by the Trust. They are entitled to receive their base salary, distribution incentive bonus and origination bonuses. Additionally, in accordance with the terms of their respective agreements, the occurrence of certain events, including the sale of substantially all of the Trust's assets, a significant change in the Trust's ownership or a change in the Trust's operations such that it is no longer primarily in the business of mortgage lending will result in additional compensation to be paid. c. On April 4, 1989, the Board approved the establishment of a 401(k) employee savings plan and a discretionary profit-sharing retirement plan for employees meeting certain service requirements. FS-18 21 11. DIVIDENDS/DISTRIBUTIONS TO SHAREHOLDERS Under the Internal Revenue Code, a REIT must meet certain qualifications, including a requirement that it distribute annually to its shareholders at least 95 percent of its taxable income. The Trust's policy is to distribute to shareholders all taxable income. Dividend distributions for the years ended December 31, 1994 and 1993 are summarized as follows:
DIVIDEND RECORD DATE DISTRIBUTIONS PAYMENT DATE April 28, 1994 .08 May 17, 1994 July 28, 1994 .08 August 17, 1994 October 27, 1994 .08 November 16, 1994 December 28, 1994 .08 January 27, 1995 April 27, 1993 .08 May 18, 1993 July 23, 1993 .08 August 13, 1993 October 26, 1993 .08 November 17, 1993 December 30, 1993 .08 January 27, 1994
The difference, if any, between dividends declared and net income result from timing differences related to the recognition of income and expenses between financial reporting and income tax purposes. 12. DIVIDEND REINVESTMENT PLAN The Trust has a dividend reinvestment plan that allows for participating shareholders to have their dividend distributions automatically invested in additional shares of beneficial interest in the Trust based on the average price of the shares acquired for the distribution. 13. SHARE REPURCHASES In April 1990, the Board of Trustees approved a $6,000,000 share repurchase program for the purchase of the Trust's shares at prevailing market prices. Pursuant to this program, during 1992, the Trust purchased 56,700 shares at prices ranging from $4.92 to $5.29 per share. The Trust purchased 43,400 shares at prices ranging from $3.42 to $3.79 per share during 1993. The Trust purchased 60,500 shares at prices ranging from $3.79 to $4.04 during 1994. 14. FINANCIAL INSTRUMENTS The market value of the Trust's mortgage loans and receivables relating to such loans as of December 31, 1994 and 1993 is estimated to be approximately $47,000,000 and $117,000,000, respectively. At December 31, 1994, the aggregate estimated fair market value of four of the Trust's thirteen mortgage loans exceeded the aggregate carrying value of $8,616,564 by $1,328,028. The remaining nine mortgage loans are stated at their fair market value. At December 31, 1993, the aggregate estimated fair market value of seven of the Trust's twenty-one mortgage loans exceeded the aggregate carrying value of $36,216,564 by $16,967,886. The remaining fourteen mortgage loans are stated at their fair market value. The estimated market value has been determined by the Trust, using available market information, methodologies deemed reasonable by the Trust and the present value of estimated future cash flows using a discount rate commensurate with the risks involved. Estimated market values represent management's estimate as of the date of the valuation and are based on facts and conditions existing on the date of the valuation and on a number of assumptions concerning future circumstances, which assumptions may or may not prove to be accurate. The Trust believes that the estimated market value as stated is not necessarily indicative of the price the Trust could realize if it were actively attempting to sell the mortgages in its portfolio. FS-19 22 15. INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"). The adoption of the statement is required for years beginning after December 15, 1992. The Trust is a public enterprise and is not subject to income taxes, as discussed under Income Tax Status above (Note 1). In accordance with SFAS 109, the net differences between the Trust's assets and liabilities for tax purposes and financial reporting purposes are as follows:
1994 1993 Net assets, financial statements $ 182,599,168 $ 176,312,600 Interest 5,100,000 6,000,000 Allowance for loan losses 6,700,000 24,100,000 Deferred interest (8,800,000) (8,700,000) Amortization of organization expenses (3,200,000) (2,700,000) Other 1,600,000 1,600,000 -------------- -------------- Net assets, tax reporting $ 183,999,168 $ 196,612,600 ============== ==============
During the third quarter of 1994, RPS may have inadvertently violated the "75% Asset Test" contained in Internal Revenue Code Section 856 (c)(5)(A) because the Company held more than 25% of the value of its gross assets in overnight Treasury Bill repurchase transactions. In Revenue Ruling 77-59, the IRS ruled that Treasury Bill repurchase transactions are neither government securities nor cash items and therefore do not qualify for the 75% Asset Test. Management believes that the IRS position in Revenue Ruling 77-59 is incorrect. Management further believes that even if the IRS position in Revenue Ruling 77-59 were to be upheld, RPS' inadvertent failure to satisfy the 75% Asset Test for one quarter was due to reasonable cause and not to willfull neglect and, therefore, the mitigation provisions of Internal Revenue Code Section 856 (g)(4) should apply to permit RPS to continue to be taxed as a REIT. RPS has already filed its 1994 tax return and has requested the IRS to enter into a closing agreement to the effect that it may continue to be taxed as a REIT, notwithstanding the holding in Revenue Ruling 77-59. Should the IRS deny RPS' request for relief, the Company intends to seek a judicial determination that it may continue to qualify as a REIT. If RPS does not ultimately prevail in its position, it would be taxable as a regular "C" corporation for 1994 but, because of the incurrence of a net operating loss for such year, would have no federal income tax liability for 1994. In addition, if deemed a regular "C" corporation, the Company would have a deferred tax asset of approximately $1.2 million which would be offset by a valuation allowance of approximately $1.2 million. However, it is anticipated that RPS would have a state and local tax liability of approximately $400,000 for 1994. 16. RAMCO TRANSACTION On April 10, 1995, the Trust and Ramco-Gershenson, Inc. ("Ramco") and its affiliates (the "Ramco Group") entered into an agreement relating to the acquisition through an operating partnership (the "Operating Partnership") controlled by the Trust of substantially all of the real estate assets as well as the business operations of Ramco (the "Transaction"). As part of the Transaction, the Trust will succeed to the ownership of interests in 22 shopping center and retail properties (the "Ramco Properties"), as well as 100% of the non-voting stock and 5% of the voting stock of Ramco (representing in excess of 99% of the economic interests of Ramco). The Trust will contribute transfer to the Operating Partnership six retail properties (the "RPS Properties") and $75,000,000 in cash (less expenses paid by the Trust in connection with the Transaction). Following the closing of the Transaction, Ramco will manage the Ramco Properties, the RPS Properties and properties of certain third parties and other Ramco affiliates. Upon consummation of the Transaction, the Trust will be the sole general partner of and a limited partner in the Operating Partnership and initially will hold approximately 74.1% of the interests therein. The members of the Ramco Group will be limited partners in the Operating Partnership and will initially hold, in the aggregate, approximately 25.9% of the interests therein. The exact number of units of limited partnership ("OP Units") to be received by the Trust and members of the Ramco Group will be determined based upon the relative agreed upon values of the assets to be contributed by the parties. The Ramco Group can also increase its interest in the Operating Partnership based on the future performance of certain of the Ramco Properties; such performance incentives could increase the Ramco Group's interest in the Operating Partnership to approximately 32.1% in the aggregate. The Ramco Group's OP Units will be exchangeable for shares of the Trust commencing one year after consummation of the Transaction, subject to purchase of such OP Units for cash by the Trust, at the Trust's option. As part of the Transaction, it is anticipated that (i) the Trust's state of organization will be changed from Massachusetts to Maryland and the Trust will change its name to Ramco-Gershenson Properties Trust and (ii) the Trust will implement a four-for-one reverse stock split. Upon consummation of the Transaction, it is contemplated that four of the nine current members of the Board of Trustees will resign and will be replaced by four individuals designated by the Ramco Group, two of whom will be independent of the Trust, Ramco and their respective affiliates. In addition, the five current principal executive officers of Ramco will become executive officers of the Trust and will be responsible for the management of the Trust's real estate operation. The agreement governing the share purchase rights described in Note 8, was amended in connection with the Transaction described above, to include Ramco and the members of the Ramco Group from the definitions of "Acquiring Person" and "Beneficial Owner" under such agreement for purposes of such Transaction. In connection with the Transaction, and as a condition thereto, the Trust will transfer its remaining mortgage loan portfolio, as well as certain other assets, to a newly-formed Maryland real estate investment trust, and thereafter will distribute the shares after taking into account the reverse stock split referred to above, of the new REIT to the Trust's shareholders. FS-20 23 17. SUBSEQUENT EVENTS On March 1, 1995, the Trust received proceeds of $3,021,000 from the prepayment of the Coral Way Shopping Center Mortgage loan. The proceeds consisted of the repayment of the principal loan balance of $3,000,000 and current interest of $21,000. On February 14, 1995, the holder of the first mortgage loan secured by the Madison Heights Shopping Center, whose loan was superior to the Trust's wraparound mortgage loan with respect to such property, foreclosed upon such property. The shopping center has been sold at auction and the interest of the Trust has been thereby eliminated. The allowance for possible loan losses includes an allowance of $1,875,900 which represents the outstanding principal balance plus accrued interest that will be written off upon foreclosure. No additional loss will be recognized at the date of foreclosure. 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED --------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1994 1993 1994 1993 1994 1993 1994 1993 Revenues $4,041,221 $4,292,708 $3,596,750 $4,755,592 $15,217,749 $ 7,535,090 $ 3,551,041 $10,385,115 ---------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- Net income(loss)(1) $2,298,555 $2,213,210 $1,943,874 $2,278,216 $12,695,481 $(9,811,447) $(1,296,034) $ 8,371,287 ========== ========== ========== ========== =========== =========== =========== =========== Per share: Net income(loss) $ .08 $ .08 $ .07 $ .08 $ .44 $ (.35) $ (.04) $ .30 ========== ========== ========== ========== =========== =========== =========== ===========
Notes: (1) During the third quarter of 1993 and the fourth quarter of 1994, the Trust recorded a provision for possible loan losses of $15,000,000 and $2,500,000, respectively. FS-21