FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
_ X _ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 1997
_____ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ____________ to ____________
Commission File Number 33-99694
METROPOLITAN REALTY COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Michigan 38-3260057
(State of incorporation) (I.R.S. Employer Identification No.)
535 Griswold, Suite 748
Detroit, Michigan 48226
(Address of principal executive offices)
(313) 961-5552
(Registrant's telephone number, including area code)
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 _______
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
METROPOLITAN REALTY COMPANY, L.L.C.
BALANCE SHEET
June 30, 1997 and December 31, 1996
June 30, 1997 December 31, 1996
------------------------------------ ---------------------------------------
Class A Class B Class A Class B
Member Member Member Member
Interest Interest Total Interest Interest Total
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents ....... $ 1,118,415 $ 1,823,515 $ 2,941,930 $ 787,501 $ 22,574,178 $ 23,361,679
Marketable securities ........... 14,002,218 20,285,345 34,287,563 14,661,426 14,661,426
Mortgage notes receivable:
Notes, unaffiliated .......... 25,843,842 25,843,842 25,703,825 25,703,825
Notes, affiliated ............ 4,155,754 4,155,754 4,177,441 4,177,441
Allowance for loan losses .... (1,600,000) (1,600,000) (1,600,000) (1,600,000)
------------ ------------ ------------ ------------
28,399,596 28,399,596 28,281,266 28,281,266
Accrued interest and other
receivables ................... 354,491 352,121 706,612 330,555 330,555
Other assets .................... 41,962 41,962 23,790 23,790
Organization costs, net of
accumulated amortization
of $45,961 at June 30,
1997 and $5,584 at
December 31, 1996 ............. 363,391 363,391 403,768 403,768
------------ ------------ ------------ ------------ ------------ ------------
Total assets ........... $ 43,916,682 $ 22,824,372 $ 66,741,054 $ 44,084,538 $ 22,977,946 $ 67,062,484
============ ============ ============ ============ ============ ============
LIABILITIES AND MEMBERS' EQUITY:
Liabilities:
Accounts payable ............. $ 193,682 $ 18,004 $ 211,686 $ 2,046,201 $ 2,046,201
Due to (from) ................ -- (409,353) $ 409,353 --
Deferred income .............. 139,552 139,552 134,552 134,552
Deposits from borrowers
for property taxes ......... 219,384 219,384 140,682 140,682
Other ........................ 2,335 2,335 3,645 3,645
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities ...... 554,953 18,004 572,957 1,915,727 409,353 2,325,080
------------ ------------ ------------ ------------ ------------ ------------
Commitments ..................... -- -- -- -- -- --
Members' equity:
Class A Members' Equity ...... 43,406,939 43,406,939 42,208,569 42,208,569
Class B Members' Equity ...... 22,792,546 22,792,546 22,568,593 22,568,593
Unrealized holding
gains/(losses) on
marketable securities
available for sale ......... (45,210) 13,822 (31,388) (39,758) (39,758)
------------ ------------ ------------ ------------ ------------ ------------
Total members' equity 43,361,729 22,806,368 66,168,097 42,168,811 22,568,593 64,737,404
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
members' equity ..... $ 43,916,682 $ 22,824,372 $ 66,741,054 $ 44,084,538 $ 22,977,946 $ 67,062,484
============ ============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY COMPANY, L.L.C.
STATEMENT OF OPERATIONS
for the three months and six months ended June 30, 1997 and 1996
Three months ended June 30, 1997 Six months ended June 30, 1997
---------------------------------- ------------------------------
Class A Class B Three months Class A Class B Six months
Member Member ended June Member Member ended
Interest Interest Total 30, 1996 Interest Interest Total June 30, 1996
-------- -------- ----- ------------ -------- -------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income:
Interest income:
From mortgage
notes, unaffiliated $ 649,437 $ 649,437 $ 590,966 $1,321,747 $1,321,747 $1,182,964
From mortgage
notes, affiliated .. 96,119 96,119 97,001 191,429 191,429 194,217
Investment income ...... 273,696 $ 262,152 535,848 216,321 498,971 $ 650,924 1,149,895 482,992
Miscellaneous
income ............... 39,819 -- 39,819 11,723 75,082 -- 75,082 51,800
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total income .... 1,059,071 262,152 1,321,223 916,011 2,087,229 650,924 2,738,153 1,911,973
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
General and
administrative ....... 89,448 9,580 99,028 113,611 239,129 18,010 257,139 238,277
Amortization of
organization costs .... -- 20,190 20,190 -- -- 40,378 40,378 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses ....... 89,448 29,770 119,218 113,611 239,129 58,388 297,517 238,277
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net investment
income ......... $ 969,623 $ 232,382 $1,202,005 $ 802,400 $1,848,100 $ 592,536 $2,440,636 $1,673,696
========== ========== ========== ========== ========== ========== ========== ==========
<FN>
Note: Per share information is no longer relevant as a result of the
restructuring described in Note 2.
The accompanying notes are an integral part of the financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY COMPANY, L.L.C.
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
Six months ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net investment income ..................................... $ 2,440,636 $ 1,673,696
------------ ------------
Adjustments to reconcile net investment income to
net cash provided by operating activities:
Depreciation and amortization expense, net ............... 14,470 (23,700)
Expiration of commitment fees ............................ (23,500) (29,400)
Other .................................................... 9,419 14,197
Increase in assets:
Receivables ........................................... (325,643) (28,747)
Other assets .......................................... (15,259) (28,000)
Increase (decrease) in liabilities:
Accounts payable ...................................... 13,384 (5,438)
Other liabilities ..................................... 77,392 39,875
------------ ------------
Total adjustments ................................. (249,737) (61,213)
------------ ------------
Net cash provided by operating activities ......... 2,190,899 1,612,483
------------ ------------
Cash flows from investing activities:
Purchase of marketable securities ........................ (23,325,738) (4,029,062)
Collections of principal from marketable securities ...... 3,648,138 2,322,463
Loan repayments .......................................... 3,514,390 267,996
Loan disbursements ....................................... (3,630,830) (345,066)
Commitment and loan extension fees received, net ......... 53,500 5,000
Capital expenditures ..................................... (3,896) --
------------ ------------
Net cash used in investing activities ............. (19,744,436) (1,778,669)
------------ ------------
Cash flows from financing activities:
Payments to minority shareholders for surrender of shares (1,847,899) --
Member distributions paid ............................... (1,018,313) --
Dividends paid .......................................... -- (498,539)
------------ ------------
Net cash used in financing activities ............. (2,866,212) (498,539)
------------ ------------
Net decrease in cash and cash equivalents .................. (20,419,749) (664,725)
------------ ------------
Cash and cash equivalents, beginning of period ............. 23,361,679 2,446,221
------------ ------------
Cash and cash equivalents, end of period ................... $ 2,941,930 $ 1,781,496
============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
<PAGE>
METROPOLITAN REALTY COMPANY, L.L.C.
Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation
have been included. Operating results for the three months and
six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31,
1997. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on
Form 10-K for the fiscal year ended December 31, 1996.
The accompanying financial statements as of and for the three
months and six months ended June 30, 1996 reflect certain
reclassifications to be consistent with the presentation adopted
for the three months and six months ended June 30, 1997.
2. Restructuring
The Company, a Delaware limited liability company, is the successor
in interest to Metropolitan Realty Corporation (the "Corporation").
The Corporation, incorporated November 13, 1986, was organized to
qualify as a real estate investment trust ("REIT") under the
provisions of the Internal Revenue Code. On December 6, 1996,
pursuant to the terms of a restructuring agreement, the assets and
liabilities of the Corporation were transferred to Metropolitan
Realty Company, L.L.C. in exchange for Class A Membership Interests
in the Company. Holders of fewer than 50,000 shares of common stock
of the corporation as of October 9, 1996 (the Record Date) received,
upon surrender of their shares, a cash payment in lieu of the
distribution of Class A Membership Interests in the Company. This
amount totaled $1,940,980 and was recorded as a payable of the
Corporation. The Corporation was then dissolved, and the Class A
Membership Interests were distributed pro rata to the Corporation's
shareholders who owned 50,000 shares or more of the Corporation's
common stock.
For financial statement presentation, the assets and liabilities,
with the exception of marketable securities, were transferred to the
Company at their carrying values at the date of distribution.
Marketable securities were recorded at fair market value with the
unrealized loss recorded as a reduction in Class A members' equity.
Concurrently with the consummation of the Restructuring, the Company
offered Class B Membership Interests in a separate offering to
create a new investment pool. The proceeds from the offering of
Class B Membership Interests totaled $22,500,000 and were invested
in money market funds and marketable securities at June 30, 1997.
4
<PAGE>
3. Marketable Securities
Marketable securities available for sale are carried at market value
and unrealized gains and losses are included in a separate component
of total members' equity. Total members' equity at June 30, 1997
includes net unrealized holding losses on marketable securities of
$31,388. Marketable securities at June 30, 1997 and December 31,
1996 consist of Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation mortgage-backed securities and U.S.
Treasury Notes. Realized gains and losses on sales of securities are
determined based upon specific identification.
The net realized loss on the sales of marketable securities included
in investment income in the accompanying statement of operations
aggregated $3,514 and $9,419 for the three and six months ended June
30, 1997, and $8,478 and $14,197 for the three and six months ended
June 30, 1996. At June 30, 1997 and 1996, all marketable securities
are considered available for sale.
5
<PAGE>
4. Mortgage Notes Receivable
Mortgage notes receivable as of the dates indicated are summarized
as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
9.09% Mortgage note receivable, net of loan origination fees of $4,155,754 $4,177,441
$20,512 at June 30, 1997 and $22,976 at December 31, 1996, due
monthly in installments of principal and interest of $35,494 through
December 2000
10.875% Mortgage note receivable, net of loan origination fees of -- 960,439
$5,114 at December 31, 1996, due monthly in varying installments of
principal and interest through December 1999*
9.3752% Mortgage note receivable, net of loan origination fees of 2,083,809 2,093,322
$5,662 at June 30, 1997 and $6,614 at December 31, 1996, due
monthly in installments of principal and interest of $18,298 through
January 2000
9.26% Mortgage note receivable, net of loan origination fees of 1,768,085 1,784,069
$12,222 at June 30, 1997 and $14,185 at December 31, 1996, due
monthly in varying installments of principal and interest through April
2000
8.0% and 9.5% Mortgage note receivable, net of loan origination fees 1,347,738 1,354,681
of $4,296 at June 30, 1997 and $4,882 at December 31, 1996, due
monthly in varying installments of principal and interest through
August 2000
9.25% Mortgage note receivable, net of loan origination fees of 598,941 604,392
$6,317 at June 30, 1997 and $7,187 at December 31, 1996, due
monthly in installments of principal and interest of $5,800 through
September 2000
7.25% Mortgage note receivable, net of loan origination fees of 657,556 661,773
$4,361 at June 30, 1997 and $4,955 at December 31, 1996, due
monthly in varying installments of principal and interest through
October 2000
10.5% Mortgage note receivable, net of loan origination fees of 932,317 935,431
$3,120 at June 30, 1997 and $3,493 at December 31, 1996, due
monthly in varying installments of principal and interest through
December 2000
11.25% Mortgage note receivable, net of loan origination fees of 2,068,348 2,080,277
$9,802 at June 30, 1997 and $11,006 at December 31, 1996, due
monthly in installments of principal and interest of $21,961 through
October 2000
10.25% Mortgage note receivable, net of loan origination fees of 254,267 255,850
$2,746 at June 30, 1997 and $3,072 at December 31, 1996, due
monthly in varying installments of principal and interest through
January 2001
<FN>
- --------
*On April 30, 1997, the outstanding principal balance of this mortgage note
was prepaid. The Company also received a prepayment penalty of approximately
$9,600.
</TABLE>
6
<PAGE>
4. Mortgage Notes Receivable, (continued)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
11.25% Mortgage note receivable, net of loan origination fees of $ 1,551,261 $ 1,560,208
$7,351 at June 30, 1997 and $8,255 at December 31, 1996, due
monthly in installments of principal and interest of $16,471 through
October 2000
9.5% Mortgage note receivable through February 28, 1996 adjusted 706,612 711,498
to 6.75% (based on the U.S. Treasury Securities weekly average yield
adjusted to a constant maturity of 5 years plus 1.5%) on March 1, 1996 to
maturity, net of loan origination fees of $6,765 at June 30, 1997 and $7,606
at December 31, 1996, due monthly in varying installments of principal and
interest through February 2001
9.875% Mortgage note receivable, net of loan origination fees of 2,422,580 2,430,975
$11,751 at June 30, 1997 and $13,095 at December 31, 1996, due
monthly in varying installments of principal and interest through
January 1999
10.25% and 9.75% Mortgage notes receivable, net of loan origination -- 2,292,465
fees of $4,102 at December 31, 1996, due monthly in varying
installments of principal and interest through March 1997
10.25% and 12.25% Mortgage notes receivable, net of loan 2,062,778 2,084,656
origination fees of $2,467 at December 31, 1996, due monthly in
varying installments of principal and interest through May 1997*
10.25% Mortgage note receivable, net of loan origination fees of 1,735,203 1,737,891
$44,545 at June 30, 1997 and $47,332 at December 31, 1996, due
monthly in installments of interest only through April 1995 at which
time varying installments of principal and interest will be due monthly
through April 2003
Bank prime rate plus 1% Mortgage note receivable, net of loan 1,118,062 925,543
origination fees of $23,888 at June 30, 1997 and December 31,
1996, due monthly in installments of interest only until final closing,
at which time payments of principal and interest of $12,355 will
be due monthly through July 2007
10.00% Mortgage note receivable due monthly in installments of 429,975 437,355
principal and interest of $4,889 through August 2000
9.00% Mortgage note receivable, net of loan origination fees of 2,793,000 2,793,000
$57,000 at June 30, 1997 and December 31, 1996, due in monthly
payments of interest only until December 1997 at which time it is
anticipated that it will convert to a permanent loan
10.25% Revolving mortgage note receivable, net of origination fees 3,313,310 --
of $25,000 at June 30, 1997, due in monthly payments of interest ------------ ------------
only until April 2000 at which time outstanding principal is due
29,999,596 29,881,266
Allowance for loan losses (1,600,000) (1,600,000)
------------ ------------
Mortgage notes receivable, net of allowance for loan losses $ 28,399,596 $ 28,281,266
============ ============
<FN>
- --------
*The Company has agreed to extend the maturity date of
this loan from May 1, 1997 to September 1, 1997. All other terms of the
original agreement remain unmodified.
</TABLE>
7
<PAGE>
4. Mortgage Notes Receivable, (continued)
The Company's portfolio of mortgage notes receivable are reported at
their principal outstanding balance net of charge-offs and deferred
loan fees and costs of origination. Interest income is generally
recognized when income is earned using the interest method. Loan
origination fees and certain direct loan origination costs are
deferred and the net amounts are amortized as adjustments of the
loans' yields.
A loan is considered impaired, based on current information and
events, if it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected
future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. The adequacy
of the allowance for loan losses (substantially all of the allowance
is related to the provision for impaired loans as discussed above)
is periodically evaluated by the Company in order to maintain
the allowance at a level that is sufficient to absorb probable
credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of known and inherent risks
in the loan portfolio, including adverse circumstances that may
affect the ability of the borrower to repay interest and/or
principal and the estimated value of collateral. In determining
the allowance for possible losses, the Company has considered
many indicators of value, including market evaluations of
the underlying collateral, the cost of money, operating cash flow
from the property during the projected holding period and expected
capitalization rates applied to the stabilized net operating income
of the specified property.
The allowance for credit losses is established through charges to
earnings in the form of a provision for loan losses. Increases and
decreases in the allowance due to changes in the measurement of
impaired loans are included in the provision for credit losses.
Loans continue to be classified as impaired unless they are brought
fully current and the collection of scheduled interest and principal
is considered probable. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is
charged against the allowance and subsequent recoveries, if any, are
credited to the allowance.
At June 30, 1997, the total recorded investment in impaired loans
was $5,237,075 and the allowance related to these loans totalled
$1,600,000. The average recorded investment in impaired loans was
approximately $5,250,000 with interest income of $133,000 and
$265,000 for the three months and six months ended June 30, 1997.
All impaired loans were classified as earning during 1997, with
interest income recognized on an accrual basis. The Company
believes that the allowance for loan losses of $1,600,000 at
June 30, 1997 is at a level that is sufficient to absorb probable
credit losses in the mortgage loan portfolio.
5. Income Taxes
As a limited liability company, it is intended that the Company will
be classified as a partnership for federal income tax purposes and,
as such, it generally will be treated as a "pass-through" entity
that is not subject to federal income tax. Accordingly, no provision
for income taxes has been made for the three months and six months
ended June 30, 1997. Prior to the restructuring into a limited
liability company, the Company operated at all times to qualify as
a real estate investment trust under provisions of the Internal
Revenue Code. As a real estate investment trust, each year
qualification is met, income is not subject to federal income
tax at the company level, to the extent distributed to shareholders.
8
<PAGE>
6. Distributions
In accordance with the terms of the Operating Agreement, Class A and
Class B members will receive pro rata quarterly distributions of
cash income, less expenses, from their respective class of net
assets within 90 days after the end of each fiscal quarter. The
Operating Agreement also provides for the pass through to Class A
members (commencing in the year 2001, if elected) and Class B
members (commencing in the year 2000), from their respective classes
of net assets, of principal returned with respect to real estate
investments and any cash and cash equivalents which have not been
invested in real estate investments. All distributions are subject
to a determination by the Managing Board that the Company will have
sufficient cash on hand to meet its current and anticipated needs to
fulfill its business purpose. The declared distribution to Class A
and Class B members totaled $839,891 and $368,583, respectively,
for the three months and six months ended June 30, 1997. Of the
declared distribution, $1,018,313 was paid to members on June 26,
1997. The balance, of $190,161, relates to those Class A members
which had not yet exchanged their shares of common stock for
certificates of membership interest in the Company. Prior to the
restructuring of the Company on December 6, 1996, cash dividends
were declared and paid to shareholders on a quarterly basis and
totaled $.11 per share during the three months and six months
ended June 30, 1996.
7. Related Party Transactions
The Company was involved in various transactions with affiliates as
follows:
Consulting fees under a contractual agreement aggregating $13,406
and $23,373 were earned by an officer of the Company during the six
months ended June 30, 1997 and 1996, respectively.
Fees aggregating $27,087 and $11,018 during the six months ended
June 30, 1997 and 1996, respectively were earned by a member manager
of the Company for providing various investment and other services
to the Company.
One of the Company's Managing Board Members is the vice president
of an entity which has a mortgage note with the Company. The
carrying amount of the mortgage note receivable totaled
$4,155,754 at June 30, 1997 and earned the Company $191,429 and
$194,217 during the six months ended June 30, 1997 and 1996,
respectively.
One of the Company's Managing Board Members is a member of a law
firm which provides legal services to the Company. Fees for legal
services provided by the law firm amounted to $41,842 (of
which $14,144 was reimbursed to the Company by borrowers) and
$49,932 for the six months ended June 30, 1997 and 1996,
respectively.
8. Commitments
At June 30, 1997, the Company had outstanding loan commitments
aggregating $1,884,741.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Restructuring
Metropolitan Realty Company, L.L.C., a Delaware limited liability company
(the "Company"), is the successor in interest to Metropolitan Realty
Corporation (the "Corporation"), a Michigan corporation. The Corporation had
operated since 1988 as a qualified real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"), and
invested in commercial real estate mortgages in southeastern Michigan and
other investments. The Company was organized as a Delaware limited liability
company on October 23, 1995 for the purpose of implementing the Restructuring
described below. Prior to the consummation of the Restructuring, the Company
had never conducted any business and had no assets.
At a special meeting of the shareholders of the Corporation held on December
6, 1996, the shareholders of the Corporation approved and adopted the
Agreement and Plan of Dissolution and Restructuring, dated as of September
24, 1996 (the "Restructuring Agreement"), between the Company and the
Corporation. Pursuant to the terms of the Restructuring Agreement, effective
December 6, 1996, the Corporation transferred all of its assets (the "Class A
Assets") to, and the liabilities of the Corporation were assumed by, the
Company in exchange for Class A limited liability company membership
interests (the "Class A Membership Interests") of the Company. The
Corporation was then dissolved, and the Class A Membership Interests were
distributed pro rata to the Corporation's shareholders who owned 50,000
shares or more of the Corporation's common stock beneficially or of record on
October 9, 1996 (the "Record Date") (the "Majority Shareholders") in
liquidation (the "Restructuring"). Holders, beneficially or of record, of
fewer than 50,000 shares of the Corporation's common stock (the "Minority
Shareholders") as of the Record Date received, upon surrender of their
shares, a cash payment equal to the book value of their shares of September
30, 1995 ($9.03 per shares) in lieu of the distribution of Class A Membership
Interests in the Company. These cash payments were made exclusively from the
Class A Assets.
Concurrently with the consummation of the Restructuring, the Company offered
its Class B Membership Interests in a separate offering to create a new
investment pool which is segregated on the books of the Company from the
Class A Assets. The total proceeds of the offering of Class B Membership
Interests were $22,500,000. The net proceeds of the offering of Class B
Membership Interests (the "Class B Assets") will be invested in short-term
investments until such time as the proceeds are invested in real estate
loans.
As a result of the restructuring discussed above, the following presents the
results of operations for the three months and six months ended June 30,
1997, individually, for the Class A and Class B Membership Interests.
Results of Operations, Class A Membership Interests
The Company's net investment in mortgage loans represented 65% and 64% of its
Class A assets, or $28,399,596 and $28,281,266, at June 30, 1997 and December
31, 1996, respectively. The range of yields on outstanding mortgage loans
closed from the Company's inception through June 30, 1997 ranges from 7.06%
to 12.25%. The weighted average yield of mortgage loans was 9.99% at June
30, 1997 as compared to 10.05% at December 31, 1996.
The overall average yield on interest earning Class A assets was 8.97% for the
six months ended June 30, 1997 and 8.75% for the year ended December 31,
1996. The average amount held in marketable
10
<PAGE>
securities, net of unrealized holding gains and losses, for the six months
ended June 30, 1997 was $13.3 million. The average yield (based on total
yield divided by average amount of investments) was 6.6% for the six months
ended June 30, 1997 and 7.03% for the year ended December 31, 1996.
Investment income from marketable securities increased $53,155 to $253,780
for the second quarter of 1997 from $200,625 for the second quarter of 1996.
Of the increase 71,345 was the result of an increase in the average yield
offset by $18,190 resulting from a decrease in the average amount invested.
Investment income from marketable securities increased $29,667 to
$466,575 for the first six months of 1997 from $436,908 for the first six
months of 1996. Of the increase, $73,912 was the result of an increase in the
average yield offset by $44,245 related to a decrease in the average amount
invested.
Investment income from money market securities increased $4,220 to $19,916
for the second quarter of 1997 from $15,696 for the second quarter of 1996.
Of the increase, $6,298 was the result of an increase in the average amount
invested in money market securities offset by a $2,078 decrease in the
average yield. Investment income from money market securities decreased
$13,688 to $32,396 for the first six months of 1997 from $46,084 for the
first six months of 1996. Of the decrease, $8,100 was the result of a decrease
in the average yield and $5,588 was the result of a decrease in the average
amount invested in money market securities.
Interest income from mortgage notes increased $57,589 to $745,556 for the
second quarter of 1997 from $687,967 for the second quarter of 1996. Of the
increase, $74,231 was the result of an increase in the average amount
invested in mortgage notes offset by $16,642 resulting from a decrease in
average yield. Interest income from mortgage notes increased $135,995 to
$1,513,176 for the first six months of 1997 from $1,377,181 for the first six
months of 1996. Of the increase, $154,729 was the result of an increase in the
average amount invested in mortgage notes, offset by $18,734 related to a
decrease in average yield.
Operating expenses decreased $24,163, or 21%, to $89,448 for the second
quarter of 1997 from $113,611 for the second quarter of 1996. This decrease
results primarily from decreased professional fees. Operating expenses
for the six month periods ended June 30, 1997 and 1996 were comparable.
Net investment income increased $167,223, or 21%, to $969,623 for the second
quarter of 1997 from $802,400 for the second quarter of 1996 as a result of
the items discussed above. Net investment income increased $174,404, or 10%,
to $1,848,100 for the first six months of 1997 from $1,673,696 for the first
six months of 1996 as a result of the items discussed above.
Management reviews, on a regular basis, factors which adversely affect its
mortgage loans, including occupancy levels, rental rates and property values.
It is possible that economic conditions in Southeast Michigan and the nation
in general may adversely affect certain of the Company's other loans. The
Company believes that the allowance for loan losses of $1,600,000 at June 30,
1997 is at a level that is sufficient to absorb probable credit losses in the
mortgage loan portfolio.
Results of Operations, Class B Membership Interests
Proceeds of $22,500,000 from the offering of Class B Membership Interests
were received by the Company on December 6, 1996. At June 30, 1997, the net
assets of the Class B investment pool totaled $22,806,368 and were primarily
invested in U.S. Treasury notes and money market funds. Certain
organizational costs of the Class B investment pool have been capitalized at
cost and will be amortized over five years. Net organization costs at June
30, 1997 totaled $363,391. The net
11
<PAGE>
proceeds from the offering of Class B Membership Interests will be invested
in short-term investments until such time as the proceeds are invested in
real estate loans. Investment income and net investment income earned by
Class B Assets for the six months ended June 30, 1997 totaled $650,924 and
$592,536, respectively. The average yield earned on interest earning Class B
assets was 5.85% for the six months ended June 30, 1997.
Although the Company expects to have the balance of its available Class A and
Class B assets fully invested in mortgage loans to real estate projects by
the end of 1999, management will continue its prudent approach of approving
funding only of those loans which meet appropriate underwriting criteria.
Liquidity and Capital Resources
Funds that have not yet been invested in mortgage loans are primarily
invested in marketable mortgage-backed securities and U.S. Treasury Notes
until needed for the Company's operations or investments in mortgage loans.
Income and principal received with respect to the Company's investment in
mortgage loans are also invested in marketable securities pending
distribution to members in accordance with the terms of the Operating
Agreement. At June 30, 1997, the Class A investment pool had $28,399,596
invested in net mortgage loans, $7,563,640 invested in marketable
mortgage-backed securities, $6,438,578 invested in U.S. Treasury Notes and
$859,030 invested in money market funds. The Company does not invest in high
risk, mortgage-backed securities such as interest only strips or residual
traunches. However, there can be no assurance that cash flows will
materialize as scheduled as a result of prepayments of the underlying
mortgages or that the proceeds can be invested in securities that will
provide comparable yields.
At June 30, 1997, the Company had outstanding loan commitments aggregating
$1,884,741. The source of funds to satisfy these commitments will be the
Company's marketable securities. The Company anticipates that its sources of
cash are more than adequate to meet its liquidity needs. During 1997, the
Company made payments from Class A assets to minority shareholders, which
totaled $4,515 and $1,847,899 respectively for the three months and six
months ended June 30, 1997, for the surrender of their shares of common
stock in connection with the restructuring of the Company discussed in Note 2
to the Financial Statements. At June 30, 1997, amounts owed to minority
shareholders in connection with this transaction totaled $93,081 and are
recorded as a liability of the Company.
At June 30, 1997, the Class B investment pool had $20,041,375 invested in
U.S. Treasury Notes, $243,970 invested in marketable mortgage-backed
securities and $1,822,646 invested in money market funds. Certain
organizational costs of the Class B investment pool have been capitalized at
cost and will be amortized over five years.
In accordance with the terms of the Operating Agreement, Class A and Class B
members will receive pro rata quarterly distributions of cash income, less
expenses from their respective class of net assets within 90 days after the
end of each fiscal quarter. The Operating Agreement also provides for the
pass through to Class A members (commencing in the year 2001, if elected) and
Class B members (commencing in the year 2000), from their respective classes
of net assets, of principal returned with respect to real estate investments
and any cash and cash equivalents which have not been invested in real estate
investments. The declared distribution to Class A and Class B members totaled
$839,891 and $368,583, respectively, for the three months and six months
ended June 30, 1997. Of the declared distribution, $1,018,313 was remitted
to members on June 26, 1997. The balance, of $190,161, relates to those Class
A members which had not yet exchanged their shares of common stock for
certificates of membership interest in the Company. Prior to the
restructuring of the Company on December 6, 1996, cash dividends were
declared and paid on a quarterly basis and totaled $.11 per share during
the three months and six months ended June 30, 1996.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METROPOLITAN REALTY COMPANY L.L.C.
Dated: August 11, 1997 By: /s/ Robert G. Jackson
---- ----------------------
Robert G. Jackson, President
(Chief Executive Officer and
Chief Financial Officer)
13
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