UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number 0-7589
USP REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Iowa 42-6149662
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4333 Edgewood Road N.E., Cedar Rapids, IA 52499
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 398-8975
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, $1 Par Value
(Title of Class)
Indicate by check-mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period
that the registrant was required to file such reports), and (2)
has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting shares of the registrant
held by non-affiliates at March 3, 1998 was $12,203,931.
The number of shares of beneficial interest of the registrant
outstanding at March 3, 1998 was 3,880,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Part I.
Item I. Business
The Trust
USP Real Estate Investment Trust is an equity-oriented real
estate investment trust organized under the laws of the State of
Iowa pursuant to a Declaration of Trust as amended and restated
through April 23, 1984. The Trust was formed on March 10, 1970
to provide its shareholders with an opportunity to participate in
the benefits of real estate investment and at the same time enjoy
the liquidity and marketability resulting from the ownership of
securities which are publicly-traded.
USP has elected to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code. As a result of this
election, the Trust is not taxed on the portion of its income
which is distributed to shareholders, provided it distributes at
least 95% of its taxable income, has at least 75% of its assets
in real estate investments and meets certain other requirements
for qualification as a real estate investment trust.
The Trust has no employees as all services necessary to conduct
the day-to-day operations are performed by AEGON USA Realty
Advisors, Inc. ("AEGON Realty Advisors") and its affiliates.
(See Note 6 to the Financial Statements.)
Investment Policy
The Trust's primary investment objective is to invest in real
estate which will provide the best available cash flow and offer
prospects for long-term appreciation in value. The Trust
selectively sells property when it is determined that a sales
transaction will economically benefit the Trust through the
realization of capital gains. The Trust does not acquire
property with a view to realizing appreciation from short-term
sales.
The Trust has sought to achieve its investment objectives by
investing principally in the direct ownership of real estate.
Short-term cash investments are made in high-quality commercial
paper, money market funds and certificates of deposit.
Source of Funds and Financing
The principal source of funds for investment by USP was $25
million in proceeds from its initial public offering of shares.
The Trust ceased the issuance of shares from this offering in
1978. The Trust completed a secondary offering of its shares in
1988, raising nearly $10 million. Since substantially all of the
Trust's net income must be distributed to shareholders in order
to qualify as a real estate investment trust, USP has relied
primarily on cash generated from operations and property sales in
excess of shareholder distributions, along with long-term
borrowings secured by mortgages on specific properties, to
finance real estate investments. Outstanding indebtedness of USP
may not, according to the Declaration of Trust, exceed four
hundred percent of the Trust's net assets (shareholders' equity
plus accumulated depreciation). The aggregate principal amount
of long-term mortgage indebtedness and net assets of the Trust as
of December 31, 1997 were $14,140,584 and $27,992,700,
respectively.
The Trust may finance future real estate investments through
additional borrowings secured by mortgages on the Trust's real
estate properties. USP currently has no commitments or
arrangements for any such financing and there can be no assurance
that suitable financing will be available on terms satisfactory
to the Trust in the future. A $500,000 bank line of credit is
available to the Trust on an uncommitted basis, draws against
which must be collateralized by securities or other assets.
Mortgage Loans Receivable
In December 1990, the Trust sold Hickory Hills Shopping Center in
Hillsville, Virginia and College Square Shopping Center in
Jefferson City, Tennessee. The Trust provided mortgage loan
financing for these sales in the amount of $525,000 for Hickory
Hills and $1,125,000 for College Square. The loans matured on
December 20, 1997 and had yielded 9.5% to the Trust. Upon
collection of the remaining principal balance of these loans in
December 1997, the Trust assigned the underlying mortgage loan
payable on College Square (which matures in December 1999) to the
mortgagee. As a result of the assignment, the payoff on the
College Square mortgage loan receivable was reduced by the
outstanding mortgage balance on the underlying College Square
mortgage loan payable.
Competition
USP's portfolio competes with other similar properties in its
respective markets, some of which are newer than the USP
properties. A strengthening U.S. economy, a low level of
commercial real estate construction, and strong leasing efforts
were factors resulting in a strong occupancy of Trust properties
during the last three years. Overall leased occupancy for the
entire portfolio was 87% at December 31, 1997, compared to 88% at
December 31, 1996 and 96% at December 31, 1995.
Item 2. Properties
Real Estate Investments
The Trust has direct ownership of seven commercial real estate
properties. These real estate investments are diversified
geographically with 59% of the portfolio located in the
Southeast, 21% in the Southwest and 20% in the Great Lakes Region
based on the cost of the properties.
Properties owned by the Trust are leased to tenants either on a
managed basis or under net lease arrangements. As the owner of
managed property the Trust receives gross rentals and incurs
operating expenses, such as property taxes, insurance, repairs,
maintenance and common area utilities. Under net lease
arrangements, the tenant, rather than the Trust, pays all
operating expenses related to the leased premises. At December
31, 1997, six commercial properties were being leased on a
managed basis and one property was leased on a net lease basis.
The six managed commercial properties consisted of five shopping
centers and one business park. Managed commercial properties
comprised 95% of the Trust's investment portfolio in 1997, 1996,
and in 1995. Managed commercial properties provided 89% of USP's
annual revenue in 1997, compared to 88% in 1996 and 89% in 1995.
All managed properties have at least one tenant representing 20%
or more of the revenue from that property. The Kroger Company at
Mendenhall Commons in Memphis, Tennessee and Safeway at North
Park Plaza in Phoenix, Arizona each represent approximately 12%
of the total revenue of the Trust under leases expiring in 2012
and 2003, respectively.
The net leased property is an office/warehouse which represented
approximately 5% of the Trust's investment portfolio in 1997,
1996, and in 1995, and generated 7% of the Trust's annual revenue
in 1997 and in 1996, compared to 6% in 1995. Trust properties
and operations are summarized in the table on the next page.
The Trust's real estate investments are not expected to be
substantially affected by current federal, state or local laws
and regulations establishing ecological or environmental
restrictions on the development and operations of such property.
However, the enactment of new provisions or laws may reduce the
Trust's ability to fulfill its investment objectives.
The Trust's properties and operations are summarized in the table
below.
<TABLE>
<S> <C> <C> <C> <C>
Real Estate Cost
at December 31, 1997 Revenue
1997
Amount Percent Amount Percent
Managed
Kingsley Square
Orange Park, Florida $ 5,743,758 14% $ 599,859 12%
First Tuesday Mall
Carrollton, Georgia 7,140,303 18 898,781 18
Geneva Square
Lake Geneva, Wisconsin 6,213,974 15 510,665 10
Mendenhall Commons
Memphis, Tennessee 8,795,032 22 1,012,096 20
North Park Plaza
Phoenix, Arizona 8,680,330 21 1,049,077 21
Presidential Drive
Atlanta, Georgia 1,922,882 5 368,218 8
38,496,279 95 4,438,696 89
Net Leased
Yamaha Warehouse
Cudahy, Wisconsin 2,197,937 5 364,098 7
Trust Operations --- --- 209,293 4
$40,694,216 100% $5,012,087 100%
</TABLE>
<TABLE>
<S> <S> <C> <C> <C> <C>
Largest Tenant
Percent of Percent of
Name of Lease Property Trust
Tenant Expiration Revenue Revenue Revenue
Managed
Kingsley Square
Orange Park, Florida Publix Super Markets 2000 $117,637 20% 2%
First Tuesday Mall
Carrollton, Georgia Winn Dixie 2004 189,690 21 4
Geneva Square
Lake Geneva, Wisconsin Roundy's 2001 228,082 45 5
Mendenhall Commons
Memphis, Tennessee Kroger 2012 587,097 58 12
North Park Plaza
Phoenix, Arizona Safeway 2003 581,028 55 12
Presidential Drive
Atlanta, Georgia H. S. Photo 2000 72,208 20 1
1,775,742 36
Net Leased
Yamaha Warehouse
Cudahy, Wisconsin Yamaha Motor Corp. 1998 364,098 100 7
Trust Operations
$2,139,840 43%
</TABLE>
Recent Transactions
L. Luria and Sons (Luria's) had occupied 23,587 square feet at
Kingsley Square in Orange Park, Florida until it discontinued
operations there in March 1995. Luria's continued to honor its
lease obligations, which expire in March 2010, until paying the
August 1996 rent, after which they discontinued making further
rent payments. Accordingly, the Trust took legal steps to
terminate Luria's right to possession of the premises and has
since been successful in locating a replacement tenant for the
Luria's space. While the Trust continues to pursue a legal
remedy for unpaid rents from Luria's, OfficeMax has begun
occupancy by signing a fifteen year lease dated September 1996
with four five-year options. The Trust incurred lease
commissions and tenant improvements of approximately $868,000 in
order to place OfficeMax in this space.
The Trust previously reported that in January 1996, P.W.
Enterprises filed a Chapter 11 reorganization plan and closed its
63,146 square foot store, representing 44% of the square feet at
Geneva Square in Lake Geneva, Wisconsin. The Trust filed a claim
as an unsecured creditor, limited by law to 15% of the rents owed
for the unexpired lease term, and agreed to accept a 70% payout
in order to gain priority within our creditor class. As a
result, the Trust was entitled to receive $255,000 as soon as
funds were available to pay the claim. The Trust received $7,000
in May 1997. In February 1998, the Trust received the final
settlement of $248,000. The size of this space at Geneva Square,
in relation to the demographics of the Lake Geneva real estate
market, continues to hinder the Trust's ability to locate a
suitable replacement tenant for this vacant space.
As reported in the 1996 Annual Report, Staples, Inc. at North
Park Plaza in Phoenix, Arizona closed its 18,000 square foot
store in February 1996 and moved to a new center in the metro
area. Staples assigned their lease, which runs through July
2003, to the developer of the new center. In 1997, Safeway, the
anchor tenant at North Park, accepted assignment of the Staples
lease and is studying the feasibility of expanding into the
space.
At First Tuesday Mall in Carrollton, Georgia, the Trust has a
lease with Belk Rhodes Co. for 49,836 square feet. In 1997, Belk
Rhodes vacated their space but is expected to continue paying
rent until their lease expires in September 1998. The Trust is
attempting to secure a new tenant for this space.
At Kingsley Square in Orange Park, Florida, the Trust has a lease
with Publix Super Markets for 34,400 square feet. The Trust has
received written notice from Publix that they plan to close their
store between December 1998 and February 1999 as they are moving
to a new location. The Trust anticipates receiving rent from
Publix for the remainder of the lease term, which expires in
February 2000.
The Yamaha Warehouse facility in Cudahy, Wisconsin has a lease
with Yamaha Motor Corporation (Yamaha), its sole tenant. The
lease expires in June 1998. Yamaha has options to extend the
lease for two additional one-year periods by giving the Trust
ninety days written notice. At the time of this report, Yamaha
has not indicated their intent to renew. The Trust expects to
receive written confirmation by the end of March 1998.
The portfolio operating results in the forthcoming year will
greatly depend upon all tenants continuing to pay their rent and
the Trust's ability to renew expiring tenant leases and obtain
new leases at competitive rental rates.
As previously reported, the Board of Trustees has been exploring
various strategic alternatives with the intent to maximize
shareholder value. Raymond James & Associates, Inc. has been
engaged as financial advisor to assist the Trust with these
ongoing efforts. While a number of possibilities are currently
being considered, there is no assurance any transaction will be
consummated.
Item 3. Legal Proceedings
Legal Proceedings
The Trust is not a party to any pending legal proceedings which,
in the opinion of management, are material to the Trust's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters
Distribution Information
The Trust is required to distribute at least 95% of its taxable
income to continue its qualification as a real estate investment
trust. Although the Trust expects to continue making
distributions to shareholders, there is no assurance of future
distributions, since they are dependent upon earnings, cash flow,
the financial condition of the Trust and other factors.
Identification of Market and Price Range
At March 3, 1998, the Trust had 3,880,000 shares of beneficial
interest issued and outstanding to 2,013 shareholders of record.
The Trust's shares of beneficial interest are traded over-the-
counter on The Nasdaq Stock Market under the symbol USPTS. At
March 3, 1998, the Trust's per share high and low sales prices
were $4.6875 and $4.5625, respectively, as obtained from
Wedbush/Morgan Securities, Inc., Newport Beach, California,
Stifel Nicolaus, St. Louis, Missouri, and Herzog, Heine, Geduld,
Inc., New York, New York, the principal market makers for shares
of the Trust. These prices reflect quotations between dealers
without adjustment for retail mark-up, mark-down or commission
and do not necessarily represent actual transactions.
Market Price Range
Over-the-Counter Sales Prices
Quarter Ended High Low Close
1997
March 31 4 11/16 4 1/8 4 1/2
June 30 4 3/4 3 7/8 4 5/8
September 30 5 4 1/4 4 5/8
December 31 5 3/8 4 4 1/8
1996
March 31 4 5/8 3 5/8 3 3/4
June 30 4 3 3/8 3 3/4
September 30 4 3 1/2 3 7/8
December 31 4 1/2 3 3/4 4 3/16
Income Tax Information
The percentages indicated below, multiplied by the amount of
distributions received or reinvested during the year, result in
the amount to be reported for income tax purposes. A Form 1099
is mailed to shareholders at the end of each year reflecting the
distributions paid by the Trust in that year.
Dividend Character
1997 1996 1995
Ordinary
Income 50.75% 86.10% 100.00%
Capital
Gains --- --- ---
Return of
Capital 49.25% 13.90% ---
Total 100.00% 100.00% 100.00%
Distributions paid,
per share $.32 $.32 $.30
Advisor
AEGON USA Realty Advisors, Inc.
Cedar Rapids, Iowa
Property Manager
AEGON USA Realty Management, Inc.
Cedar Rapids, Iowa
Stock Transfer and Dividend Reinvestment Agent
USP Real Estate Investment Trust
c/o Boston EquiServe, L.P.
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
10-K Information
The 1997 Form 10-K filed with the Securities and Exchange
Commission (exclusive of certain exhibits) is available without
charge upon written request to Roger L. Schulz, Controller, USP
Real Estate Investment Trust, 4333 Edgewood Road N.E., Cedar
Rapids, Iowa 52499-5441.
Item 6. Selected Financial Data
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31 1997 1996 1995 1994 1993
Revenue $ 5,012,087 5,217,313 5,618,014 6,179,495 6,272,463
Earnings from Operations $ 637,129 946,230 1,100,149 934,605 715,746
Net Gain on Sale or Disposition of Property $ 259,157 --- 788,588 ---
---
Net Earnings $ 896,286 946,230 1,100,149 1,723,193 715,746
Distributions to Shareholders $ 1,241,600 1,241,600 1,202,800 1,008,800 931,200
Per Share*
Earnings from Operations $ .16 .24 .28 .24 .18
Basic and Diluted Net Earnings $ .23 .24 .28 .44 .18
Distributions to Shareholders $ .32 .32 .31 .26 .24
Real Estate and Mortgage
Loans Receivable $ 28,571,464 29,627,786 30,434,137 31,237,604 35,782,150
Total Assets $ 31,104,418 32,207,728 32,853,270 34,333,593 37,487,867
Mortgage Loans Payable $ 14,140,584 14,819,479 15,271,385 16,853,303 20,387,645
Total Liabilities $ 15,234,470 15,992,466 16,342,638 17,720,310 21,588,977
Shareholders' Equity $ 15,869,948 16,215,262 16,510,632 16,613,283 15,898,890
</TABLE>
*Per share amounts for Earnings from Operations and Basic and
Diluted Net Earnings are based on the weighted average number
of shares outstanding for each period. Per share amounts for
Distributions to Shareholders are based on the actual number of
shares outstanding on the respective record dates.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The discussion that follows should be read in the general context
of the discussion in "Item 1. Business" and "Item 2. Properties."
Results of Operations
The Trust owns shopping centers, an office park and an office
warehouse facility in seven U.S. cities. The Trust's properties
continue to compete with centers and office buildings of similar
size, tenant mix and location. As of December 31, 1997, the
combined leased occupancy of the Trust's seven properties was
87%. Operating results in the forthcoming year will be
influenced by the ability of current tenants to continue paying
rent, and the Trust's ability to renew expiring tenant leases and
obtain new leases at competitive rental rates.
1997 compared to 1996
The Trust's net earnings for the year ended December 31, 1997
were $896,286 ($.23 per share) compared to $946,230 ($.24 per
share) for the year ended December 31, 1996. The net earnings
for 1997 include a realized gain on sale of $259,157 ($.07 per
share), previously deferred from the installment sale of College
Square Shopping Center in 1990. (All per share amounts are on a
basic and diluted basis.) The decrease in net earnings from 1996
to 1997 was primarily due to lower revenue and an increase in
repairs and maintenance expenses.
Rental income was $4,802,974 in 1997 compared to $4,965,259 in
1996. This decline of $162,285 was primarily due to several
tenants who experienced financial difficulties and vacated their
space. Rental income declined by $171,000 at Geneva Square in
Lake Geneva, Wisconsin and by $103,000 at Kingsley Square in
Orange Park, Florida. Rents at Geneva Square decreased primarily
due to P.W. Enterprises filing a Chapter 11 reorganization plan
and vacating their space in January 1996 and MMM Foods
discontinuing their land lease rental payment in October 1996.
Rents decreased at Kingsley Square primarily due to Luria's
discontinuing their rent payments at the end of August 1996. The
Trust has leased the space formerly occupied by Luria's to
OfficeMax, which began paying rent in May 1997. The reduction in
rental income from the above properties was partially offset by
an increase in rents at Mendenhall Commons Shopping Center in
Memphis, Tennessee and Presidential Drive Business Park in
Atlanta, Georgia due to an increase in expense recoveries
(additional rents) and fewer rent write-offs.
Interest income was $209,113 in 1997 compared to $252,054 in
1996, a decrease of 17%, due to a lower balance of funds
available for investment.
Property expenses before depreciation were $1,705,298 in 1997
compared to $1,609,749 in 1996, representing 36% of rental income
for 1997 and 32% of rental income for 1996. Repairs and
maintenance increased by $171,000 or 45% due to tenant remodeling
expenses along with parking lot, sidewalk, and roof repairs. The
increase in repairs and maintenance was partially offset by a
decrease in other property expenses which declined from $236,000
in 1996 to $153,000 in 1997. The decline in other property
expenses in 1997 was primarily due to substantial legal fees
incurred in 1996 related to the bankruptcy of P.W. Enterprises,
litigation with former tenants, property appraisals and various
consulting expenses.
Interest expense declined by $48,000 from 1996 to 1997 due to the
normal amortization of mortgage loans payable. Other
administrative expenses increased by $58,000 due to the
engagement of Raymond James and Associates as financial advisor
to assist the Trust with its ongoing efforts to maximize
shareholder value, and legal expenses in relation to these
efforts.
In December 1990, the Trust sold Hickory Hills Shopping Center in
Hillsville, Virginia and College Square Shopping Center in
Jefferson City, Tennessee. The Trust provided mortgage loan
financing for these sales in the amount of $525,000 for Hickory
Hills and $1,125,000 for College Square. The loans matured on
December 20, 1997 and had yielded 9.5% to the Trust. Upon
collection of the remaining principal balance of these loans in
December 1997, the Trust assigned the underlying mortgage loan
payable on College Square (which matures in December 1999) to the
mortgagee. As a result of the assignment, the payoff on the
College Square mortgage loan receivable was reduced by the
outstanding mortgage balance on the underlying College Square
mortgage loan payable.
1996 compared to 1995
The Trust's net earnings for the year ended December 31, 1996
were $946,230 ($.24 per share) compared to $1,100,149 ($.28 per
share) for the year ended December 31, 1995. (All per share
amounts are on a basic and diluted basis.) The decrease in net
earnings was due to lower rental income, partially offset by
lower property expenses, interest expense and administrative
expenses.
Rental income was $4,965,259 in 1996 compared to $5,366,255 in
1995. This decline in rents of $401,000 was primarily due to
P.W. Enterprises filing a Chapter 11 reorganization plan and
closing its 63,146 square foot store at Geneva Square in January
1996. P.W. Enterprises contributed rents of $37,000 in 1996
compared to $346,000 in 1995. In addition, Luria's, a 23,587
square foot tenant at Kingsley Square, discontinued paying their
rent in August 1996. As a result, rents contributed from Luria's
declined by $47,000 from 1995 to 1996. In addition, expense
recoveries (additional rents) from tenants decreased from 1995 to
1996 primarily due to lower real estate taxes at several
properties. The decline in rents from these items was partially
offset by a $60,000 rent settlement the Trust received from
Eaglesons, a former tenant at North Park Plaza in Phoenix,
Arizona.
Property expenses before depreciation were $1,609,749 in 1996
compared to $1,755,295 in 1995 which represents 32% of rental
income for 1996 and 33% of rental income for 1995. Real estate
taxes decreased by $159,000 or 21% from 1996 to 1995 as a result
of reduction in assessed values due to appeals and reduction in
tax rates. Repairs and maintenance declined by $108,000 or 22%
due to tenant remodeling, painting, and other improvements made
in 1995. Other property expenses increased by $122,000 primarily
due to legal fees related to the bankruptcy of P.W. Enterprises,
litigation with former tenants, property appraisals, and various
consulting expenses.
Interest expense declined due to the normal amortization of
mortgage loans payable.
Cash Flow and Funds from Operations
The Trust has for several years used "funds from operations" as a
measurement of operating performance. Funds from operations is
defined by the Trust as earnings from operations plus
depreciation expense. Funds from operations does not represent
operating income or cash flows from operations as defined by
generally accepted accounting principles, and should not be
construed as an alternative to operating income as an indicator
of operating performance or to cash flows as a measure of
liquidity. Management generally considers funds from operations
to be a useful financial performance measure which, together with
earnings, cash flows and other information, may be used by
investors to evaluate the Trust. Funds from operations as
presented by the Trust may not be comparable to similarly titled
measures reported by other companies. The Trust's funds from
operations for the three years ended December 31, 1997 and other
property information are presented below.
<TABLE>
<S> <C> <C> <C>
Sq. Ft.
Size Lease Expiring
Name and Location (Sq. Ft.) Expiration In 1998
Managed
Kingsley Square, Orange Park, Florida 115,025 1998-2012 6,980
First Tuesday Mall, Carrollton, Georgia 180,371 1998-2006 64,761
Geneva Square, Lake Geneva, Wisconsin 143,676 1998-2002 2,480
Mendenhall Commons, Memphis, Tennessee 80,184 1998-2012 8,370
North Park Plaza, Phoenix, Arizona 99,913 1998-2005 12,264
Presidential Drive Business Park, Atlanta, Georgia 62,445 1999-2003 ---
681,614 94,855
Net Leased
Yamaha Warehouse, Cudahy, Wisconsin 140,040 1998 140,040
140,040 140,040
Total 821,654 234,895
</TABLE>
<TABLE>
<S> <C> <C> <C>
Funds from operations*
Name and Location 1997 1996 1995
Managed
Kingsley Square, Orange Park, Florida 211,012 395,361 406,725
First Tuesday Mall, Carrollton, Georgia 594,006 553,802 504,945
Geneva Square, Lake Geneva, Wisconsin (58,464) 75,381 419,623
Mendenhall Commons, Memphis, Tennessee 320,796 320,673 301,300
North Park Plaza, Phoenix, Arizona 273,077 224,402 223,463
Presidential Drive Business Park, Atlanta, Georgia 124,227 125,145 10,808
1,464,654 1,694,764 1,866,864
Net Leased
Yamaha Warehouse, Cudahy, Wisconsin 208,134 206,014 203,347
208,134 206,014 203,347
Total 1,672,788 1,900,778 2,070,211
Properties sold --- --- ---
Non-property Trust operations, net (229,326) (143,650) (149,059)
Funds from operations 1,443,462 1,757,128 1,921,152
*Earnings from operations plus depreciation
</TABLE>
Liquidity and Capital Resources
The Trust's capital resources consist of its current equity in
real estate investments. The Trust maintains its properties in
good condition and provides adequate insurance coverage.
Liquidity is represented by cash and cash equivalents ($1,606,427
at December 31, 1997), a $500,000 line of credit and the
continued operation of the Trust's real estate portfolio. This
liquidity is considered sufficient to meet current obligations,
which include capital expenditures. During 1997, the Trust
received $1,326,102 from the balloon payments relating to the
mortgage receivables which matured in December 1997 and from the
normal amortization of payments.
Net cash provided by operating activities, as shown in the
Statements of Cash Flows, was $1,318,271 for the year ended
December 31, 1997. Major applications of cash in 1997 included
$1,241,600 for distributions to shareholders, $1,010,937 for
capital expenditures, and $484,914 in principal payments on
mortgage loans payable. The Trust's debt service commitments for
mortgage loans payable are described in Note 7 to the Financial
Statements.
The Publix Super Markets lease at Kingsley Square was extended
effective February 11, 1995 for a five-year term. The lease
extension requires the Trust to contribute up to $250,000 toward
remodeling costs at the Publix store. Since Publix has not yet
remodeled their store and because they have given written notice
of their intent to close their store between December 1998 and
February 1999, the Trust does not anticipate it will be required
to contribute the $250,000. As of December 31, 1997, there were
no other material commitments.
The Board of Trustees continues to monitor occupancies, leasing
activity, overall Trust operations, liquidity, and financial
condition in determining quarterly distributions to shareholders.
Inflation
Low to moderate levels of inflation during the past few years
have favorably impacted the Company's operation by stabilizing
operating expenses. At the same time, low inflation has the
indirect effect of reducing the Company's ability to increase
tenant rents. The Trust's properties have tenants whose leases
include expense reimbursements and other provisions to minimize
the effect of inflation. These factors, in the long run, are
expected to result in more attractive returns from the Trust's
real estate portfolio as compared to short-term investment
vehicles.
Year 2000 Issue
Although the Trust does not employ any computer systems in its
business, the Trust could be adversely affected if the computer
systems used by the Advisor (AEGON USA Realty Advisors, Inc.),
Property Manager (AEGON USA Realty Management, Inc.), and other
service providers do not properly process and calculate date-
related information and data from and after January 1, 2000. The
Advisor and Property Manager are taking steps which they believe
are reasonably designed to address this issue with respect to
computer systems they use and to obtain reasonable assurances
that comparable steps are being taken by the Trust's other major
service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any
adverse impact to the Trust.
Item 8. Financial Statements and Supplementary Data
Balance Sheets
<TABLE>
<S> <C> <C>
December 31,
1997 1996
Assets
Real estate
Land $ 9,666,409 9,666,409
Buildings and improvements 31,027,807 30,016,870
40,694,216 39,683,279
Less accumulated depreciation (12,122,752) (11,316,419)
28,571,464 28,366,860
Mortgage loans receivable,
net of deferred gain --- 1,260,926
Real estate and mortgage loans receivable 28,571,464 29,627,786
Cash and cash equivalents 1,606,427 1,733,640
Rents and other receivables 421,637 443,800
Prepaid and deferred expenses 351,874 255,631
Taxes held in escrow 153,016 146,871
$ 31,104,418 32,207,728
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans payable $ 14,140,584 14,819,479
Accounts payable and accrued expenses 560,917 684,145
Due to affiliates 97,473 46,446
Distribution declared 310,400 310,400
Tenant deposits 80,818 74,217
Other 44,278 57,779
15,234,470 15,992,466
Shareholders' Equity
Shares of beneficial interest, $1 par value,
20,000,000 shares authorized, 3,880,000
shares issued and outstanding 3,880,000 3,880,000
Additional paid-in capital, net of cumulative
distributions in excess of earnings
of $16,411,501 ($16,382,559 in 1996) 11,989,948 12,018,890
Undistributed net earnings --- 316,372
15,869,948 16,215,262
$ 31,104,418 32,207,728
</TABLE>
See the accompanying notes to financial statements.
Statements of Earnings
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1997 1996 1995
Revenue
Rents $ 4,802,974 4,965,259 5,366,255
Interest 209,113 252,054 251,759
5,012,087 5,217,313 5,618,014
Expenses
Property expenses:
Real estate taxes 610,322 595,318 754,144
Repairs and maintenance 549,765 378,432 486,679
Utilities 122,754 123,585 106,028
Management fee 221,935 230,045 250,601
Insurance 47,137 46,411 43,645
Other 153,385 235,958 114,198
Property expenses, excluding depreciation 1,705,298 1,609,749 1,755,295
Depreciation 806,333 810,898 821,003
Total property expenses 2,511,631 2,420,647 2,576,298
Interest 1,443,337 1,491,534 1,562,864
Administrative fee 205,714 202,378 202,410
Other administrative 214,276 156,524 176,293
4,374,958 4,271,083 4,517,865
Earnings from operations 637,129 946,230 1,100,149
Net gain on sale of property 259,157 --- ---
Net earnings $ 896,286 946,230 1,100,149
Basic and diluted net earnings per share $ .23 .24 .28
Distributions to shareholders $ 1,241,600 1,241,600 1,202,800
Distributions to shareholders per share $ .32 .32 .31
</TABLE>
See the accompanying notes to financial statements.
Statements of Cash Flows
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1997 1996 1995
Cash flows from operating activities:
Rents collected $ 4,825,238 5,167,812 5,240,756
Interest received 216,650 250,878 249,863
Payments for operating expenses (2,283,645) (1,889,840) (1,957,514)
Interest paid (1,439,972) (1,484,924) (1,533,082)
Net cash provided by operating activities 1,318,271 2,043,926 2,000,023
Cash flows from investing activities:
Capital expenditures (1,010,937) (31,713) (42,249)
Principal collections on mortgage loans receivable 28,094 27,166 24,713
Principal repayment on mortgage loans receivable 1,298,008 --- ---
Other, net (34,135) 17,144 54,484
Net cash provided by investing activities 281,030 12,597 36,948
Cash flows from financing activities:
Principal portion of scheduled mortgage loan payments (484,914) (451,906) (452,695)
Principal repayment on mortgage loans payable --- --- (1,136,164)
Distributions paid to shareholders (1,241,600) (1,241,600) (1,164,000)
Net cash used by financing activities (1,726,514) (1,693,506) (2,752,859)
Net increase (decrease) in cash and cash equivalents (127,213) 363,017 (715,888)
Cash and cash equivalents at beginning of year 1,733,640 1,370,623 2,086,511
Cash and cash equivalents at end of year $ 1,606,427 1,733,640 1,370,623
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 896,286 946,230 1,100,149
Gain on sale of property (259,157) --- ---
Earnings from operations 637,129 946,230 1,100,149
Add (deduct) reconciling adjustments:
Depreciation 806,333 810,898 821,003
Amortization 3,365 6,610 29,782
Decrease (increase) in rents and other receivables 26,608 171,497 (119,117)
Decrease (increase) in prepaid and deferred expenses (80,011) 17,046 (7,314)
Decrease (increase) in taxes held in escrow (6,145) (4,093) 13,987
Increase (decrease) in accounts payable and accrued expenses (123,228) 57,690 168,508
Increase in due to affiliates 51,027 8,168 1,303
Increase (decrease) in advance rents 3,193 29,880 (8,278)
Net cash provided by operating activities $ 1,318,271 2,043,926 2,000,023
</TABLE>
See the accompanying notes to financial statements.
Statements of Shareholders' Equity
<TABLE>
<S> <C> <C> <C> <C>
Years Ended December 31, 1997, 1996 and 1995
Shares of Additional Undistributed Total
Beneficial Paid-In Net Shareholders'
Interest Capital Earnings Equity
Balance at January 1, 1995 $ 3,880,000 12,018,890 714,393 16,613,283
Net earnings --- --- 1,100,149 1,100,149
Distributions to shareholders --- --- (1,202,800) (1,202,800)
Balance at December 31, 1995 $ 3,880,000 12,018,890 611,742 16,510,632
Net earnings --- --- 946,230 946,230
Distributions to shareholders --- --- (1,241,600) (1,241,600)
Balance at December 31, 1996 $ 3,880,000 12,018,890 316,372 16,215,262
Net earnings --- --- 896,286 896,286
Distribution to Shareholders --- (28,942) (1,212,658) (1,241,600)
Balance at December 31, 1997 $ 3,880,000 11,989,948 --- 15,869,948
</TABLE>
See the accompanying notes to financial statements.
Notes to Financial Statements
1. Accounting Policies
The Trust is predominantly in the business of investing in real
estate. Investments in real estate are stated at cost. The
Trust provides an allowance for valuation of real estate when it
is determined that the values have permanently declined below
recorded book value.
Statement of Financial Accounting Standard No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of
fair value information about financial instruments. The methods
and assumptions used by the Trust in estimating its fair value
disclosures are described in Note 2.
Statement of Financial Accounting Standard No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, was issued during 1995. Statement No. 121
requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No.
121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Trust's adoption of Statement
No. 121 during 1995 had no impact on the Trust's operations for
that year.
Expenditures for repairs and maintenance which do not add to the
value or extend the useful life of property are expensed when
incurred. Additions to existing properties, including
replacements, improvements and expenditures which do add to the
value or extend the useful life of property, are capitalized.
Depreciation is calculated using the straight-line method over
the estimated useful lives of the respective assets.
The Trust follows the operating method of accounting for leases,
whereby scheduled rental income is recognized on a straight-line
basis over the lease term. Contingent rental income is recognized
in the period in which it arises. Interest on mortgage loans
receivable and amortization of discounts are recognized as income
over the period the respective loans are outstanding. The Trust
provides for possible losses on mortgage loans, rents and other
receivables when it is determined that collection of such
receivables is doubtful. Rents and other receivables are stated
net of an allowance for uncollectible accounts of $321,764 in
1997 and $213,347 in 1996. Cash equivalents include investments
with original maturities of three months or less.
Gains on real estate sales are recognized for financial
accounting purposes in accordance with Statement of Financial
Accounting Standard No. 66, Accounting for Sales of Real Estate.
Deferred gains are recognized as income using the installment
method.
Statement of Financial Accounting Standard No. 128, Earnings per
Share, was issued and adopted by the Trust during 1997.
Statement No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per
share. Since the Trust has no potentially dilutive securities
outstanding, basic and diluted net earnings per share in
accordance with Statement No. 128 are the same and do not differ
from amounts previously reported as net earnings per share
(primary earnings per share). Accordingly, basic and diluted net
earnings per share are computed using the weighted average number
of shares outstanding during the year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. The actual
results of the Trust could differ as a result of those estimates.
Certain amounts in the 1996 and 1995 financial statements have
been reclassified to conform to the 1997 financial statement
presentation.
2. Fair Values of Financial Instruments
The following methods and assumptions were used by the Trust in
estimating its fair value disclosures for financial instruments.
Mortgage loans receivable: The fair values of mortgage loans
receivable are estimated utilizing discounted cash flow analysis,
using interest rates reflective of current market conditions and
the risk characteristics of the loans.
Cash and cash equivalents: The carrying amounts of cash and cash
equivalents approximates their fair values.
Mortgage loans payable: The fair values of mortgage loans
payable are estimated utilizing discounted cash flow analysis,
using interest rates reflective of current market conditions and
the risk characteristics of the loans.
The following sets forth a comparison of the fair values and
carrying values of the Trust's financial instruments subject to
the provisions of Statement of Financial Accounting Standard No. 107:
<TABLE>
<S> <C> <C> <C> <C>
1997 1996
Carrying Carrying
Value Fair Value Value Fair Value
Assets
Mortgage loan receivable,
excluding the deferred gain --- --- 1,520,083 1,552,397
Cash and cash equivalents 1,606,427 1,606,427 1,733,640 1,733,640
Liabilities
Mortgage loan payable 14,140,584 14,885,253 14,819,479 15,590,221
</TABLE>
3. Real Estate
Investments in real estate consist entirely of managed and net
leased commercial property. Information regarding the Trust's
investment in each property is presented in the Schedule of Real
Estate and Accumulated Depreciation below.
Schedule of Real Estate and Accumulated Depreciation
<TABLE>
<S> <C> <C> <C> <C>
Initial Cost to Trust
Amount of Buildings & Subsequent Cost
Property Description Encumbrance Land Improvements Capitalized
Managed
Kingsley Square $ 616,322 450,000 3,311,660 1,982,098
Orange Park, FL
First Tuesday Mall 537,840 595,000 4,347,697 2,197,606
Carrollton, GA
Geneva Square 2,828,054 477,166 4,965,000 771,808
Lake Geneva, WI
Mendenhall Commons 3,990,943 3,134,692 5,597,340 63,000
Memphis, TN
North Park Plaza 4,003,513 4,635,147 4,018,353 26,830
Phoenix, AZ
Presidential Drive 742,420 344,582 1,424,300 154,000
Atlanta, GA
12,719,092 9,636,587 23,664,350 5,195,342
Net Leased
Yamaha Warehouse 1,421,492 26,195 755,756 1,415,986
Cudahy, WI
Total $ 14,140,584 9,662,782 24,420,106 6,611,328
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Amount at Which Carried
December 31, 1997 Life
On Which
Depreciation
Buildings & Accumulated Date Date is computed
Property Description Land Improvements Total Depreciation Built Acquired (in years)
Managed
Kingsley Square $ 450,000 5,293,758 5,743,758 2,484,098 1975-76 7/79 10-40
Orange Park, FL
First Tuesday Mall 600,392 6,539,911 7,140,303 3,514,220 1975-78 7/79 10-40
Carrollton, GA
Geneva Square 477,166 5,736,808 6,213,974 2,086,419 1981-82 2/84 10-40
Lake Geneva, WI
Mendenhall Commons 3,134,692 5,660,340 8,795,032 1,235,155 1987 2/89 10-40
Memphis, TN
North Park Plaza 4,633,382 4,046,948 8,680,330 880,789 1963 2/89 10-40
Phoenix, AZ
Presidential Drive 344,582 1,578,300 1,922,882 570,406 1980 12/84 10-35
Atlanta, GA
9,640,214 28,856,065 38,496,279 10,771,087
Net Leased
Yamaha Warehouse 26,195 2,171,742 2,197,937 1,351,665 1971 2/72 15-40
Cudahy, WI
Total $ 9,666,409 31,027,807 40,694,216 12,122,752
</TABLE>
The above properties are all shopping centers except for
Presidential Drive which is a business park and Yamaha Warehouse
which is an office/warehouse.
The activity in real estate and related depreciation for the
three years ended December 31, 1997 is summarized in the table
below.
<TABLE>
<S> <C> <C> <C>
Real Estate Years Ended December 31,
1997 1996 1995
Cost
Beginning of year $ 39,683,279 39,651,566 39,651,566
Additions during year
Improvements 1,010,937 31,713 ---
End of year $ 40,694,216* 39,683,279 39,651,566
Accumulated Depreciation
Beginning of year $ 11,316,419 10,505,521 9,726,767
Additions during year
Depreciation expense 806,333 810,898 821,003
Deductions during year
Asset replacements charged
to accumulated depreciation --- --- (42,249)
End of year $ 12,122,752 11,316,419 10,505,521
</TABLE>
*The aggregate cost for federal income tax purposes is $40,827,926.
Wholly-owned managed properties with an aggregate cost of
$38,496,279 are leased to tenants pursuant to lease agreements
under which the Trust incurs normal real estate operating
expenses associated with ownership. Yamaha Warehouse, a wholly-
owned property with an aggregate cost of $2,197,937 is leased
under a net lease agreement which requires the lessee to pay cash
rental, property taxes and other expenses incurred in connection
with the operation of the property.
In 1997, the Trust incurred capital expenditures of $1,010,937.
The improvements consisted of $833,526 for tenant build-outs
(including $770,526 for OfficeMax at Kingsley Square) and
$177,411 for parking lot and sidewalk improvements at First
Tuesday Mall and at Presidential Drive Business Park.
4. Mortgage Loans Receivable
Mortgage loans receivable consist of notes received from
financing property sales and are secured by the properties sold,
subject to any underlying mortgage loans payable. Mortgage loans
are stated net of unamortized discounts and deferred gains. The
Trust received mortgage loans receivable of $1,650,000 as part of
the consideration for the sales of Hickory Hills and College
Square in 1990 and retained a mortgage payable on the property.
Accordingly, the gain on this sale was deferred. The mortgage
loans receivable matured on December 20, 1997 and had yielded
9.5% to the Trust. Upon the payoff of these mortgage loans
receivable in December 1997, the Trust assigned the underlying
mortgage loan payable on College Square, which matures in
December 1999, to the mortgagee. As a result of the assignment,
the payoff on the College Square mortgage loan receivable was
reduced by the outstanding mortgage payable balance of $193,981.
The activity in mortgage loans receivable for the three years
ended December 31, 1997 is summarized in the table below.
<TABLE>
<S> <C> <C> <C>
Mortgage Loans Receivable
Years Ended December 31,
1997 1996 1995
Principal
Beginning of year $ 1,520,083 1,547,249 1,571,962
Deductions during year
Principal collections (28,094) (27,166) (24,713)
Principal repayment (1,491,989) --- ---
Balance at end of year --- 1,520,083 1,547,249
Deferred gain --- (259,157) (259,157)
Balance, net of deferred gain $ --- 1,260,926 1,288,092
</TABLE>
5. Cash and Cash Equivalents
At December 31, 1997, cash and cash equivalents consisted of cash
of $927 and a money market fund of $1,605,500. At December 31,
1996, cash and cash equivalents consisted of cash of $116,280, a
money market fund of $617,360, and commercial paper of
$1,000,000.
6. Transactions With Affiliates
The Trust has contracted with AEGON USA Realty Advisors, Inc.
("AEGON Realty Advisors") to provide administrative services for
a base fee of 5/8% of the average gross real estate investment
plus 1/4% of the monthly balance of mortgage loans receivable and
an incentive fee of 20% of annual adjusted cash flow from
operations in excess of $.72 per share. If the annual adjusted
cash flow from operations is less than $.72 per share, then the
payment of so much of the base fee is to be deferred so that
revised cash flow from operations will be equal to $.72 per
share; provided, however, in no event shall the amount deferred
exceed 20% of the previously determined base fee. Any deferred
fees may be paid in subsequent years (subject to certain limits).
Annual adjusted cash flow from operations, as defined for
purposes of the incentive fee, includes the net realized gain (or
loss) from the disposition of property, adjusted to exclude
accumulated depreciation (otherwise stated as gain in excess of
cost without reduction for allowable depreciation). The
administrative fee is limited to 1 1/2% of average quarterly net
invested assets. The administrative agreement is for a one-year
term, automatically renewed annually and cancellable by either
party upon 90 days written notice. Amounts paid to AEGON Realty
Advisors for administrative services were: $205,714 for 1997,
$202,378 for 1996, and $202,410 for 1995. No incentive fees were
paid in 1997, 1996 or 1995.
AEGON Realty Advisors also provides real estate acquisition and
disposition services for the Trust. A negotiated fee of 2% to 4%
of the cost is charged for properties acquired. No separate fee
is charged for property dispositions. There were no acquisition
fees paid in 1997, 1996 or 1995.
AEGON USA Realty Management, Inc. ("AEGON Realty Management"), a
wholly-owned subsidiary of AEGON Realty Advisors, provides
property management services to the Trust for a fee of 5% of the
gross income of each managed property. The property management
agreement is for a one-year term, automatically renewed annually
and cancellable upon a 30-day written notice from either party.
Amounts paid to AEGON Realty Management for property management
services were $221,935 for 1997, $230,045 for 1996, and $250,601
for 1995. Pursuant to the property management agreement, on-site
property management wages and salaries incurred by AEGON Realty
Management are reimbursed by the Trust. No wages and salaries
were reimbursed by the Trust for 1997, 1996 or 1995.
AEGON Realty Advisors provides dividend disbursement, stock
certificate preparation, recordkeeping and other shareholder
services to the Company for a quarterly fee of $1.25 per
shareholder account, $.75 per shareholder account for
distributions processed, $.50 per shareholder account for proxy
tabulation, and such other compensation for services performed as
from time to time agreed to by the parties. The Trust paid AEGON
Realty Advisors $21,658, $21,904, and $22,112 in shareholder
service fees for 1997, 1996, and 1995, respectively. AEGON
Realty Advisors has subcontracted with Boston EquiServe, L.P., a
subsidiary of State Street Bank and Trust Company, for delivery
of these services.
On December 31, 1993, the mortgage loan on the Trust's
Presidential Drive property was acquired from the lender by AUSA
Life Insurance Company, Inc., an affiliate of AEGON Realty
Advisors, as part of a large transaction involving the transfer
of loans and securities. Interest paid on the mortgage was
$77,779 in 1997, $80,674 in 1996, and $83,287 in 1995. See Note
6 to the Financial Statements for information on the refinancing
in February 1994 of the mortgage on Geneva Square with PFL Life
Insurance Company ("PFL"), an affiliate of AEGON Realty Advisors
which was extended on March 1, 1996. Interest paid on the
mortgage was $235,842 in 1997, $236,477 in 1996, and $233,351 in
1995.
AEGON Realty Advisors is an indirect wholly-owned subsidiary of
AEGON USA, Inc. which, through other wholly-owned subsidiaries,
beneficially owns approximately 31% of the outstanding shares of
the Trust at December 31, 1997.
7. Mortgage Loans Payable
Mortgage loan obligations, secured by the real estate owned,
carry annual interest rates ranging from 8.3% to 10.5%.
The mortgage loan on Geneva Square matured in February 1994 and
was refinanced with a mortgage loan of $3,000,000 from PFL. In
connection with the loan, a 1% origination fee ($30,000) was paid
to PFL. On March 1, 1996 the Trust exercised an option to extend
the loan for eight years at 8.30%. The loan may be prepaid
without penalty any time prior to September 1, 1998, with yield
maintenance required thereafter. The annual debt service is
$260,295. Information regarding each mortgage is presented in
the Schedule of Mortgage Loans on Real Estate below.
Schedule of Mortgage Loans on Real Estate
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Periodic Payment Terms
Annual
Stated Final Principal Balloon
Property Description Date of Interest Maturity and Interest Payment at Prepayment Penalty
Note Rate Date Maturity Provisions*
Managed
Kingsley Square 2/77 10% 2/02 $ 76,370 $ --- Feb. 97 to Feb. 98
Orange Park, FL penalty is 6.0%,
(two loans) declining .5% per year
to 4% thereafter
8/75 10% 8/00 163,650 --- 5.0%
First Tuesday 4/79 9.25% 4/04 115,128 --- 1.0%
Carrollton, GA
Geneva Square 2/94 8.3% 3/04 260,295 2,626,612 no penalty until 9/98,
Lake Geneva, WI with yield maintenance
thereafter
Mendenhall Commons 2/89 10.25% 3/99 462,396 3,930,120 Feb. 97 to Feb. 98
Memphis, TN penalty is 2%,
declining 1% per year
thereafter
North Park Plaza 2/89 10.5% 3/99 472,008 3,944,537 Feb. 97 to Feb. 98
Phoenix, AZ penalty is 2%,
declining 1% per year
thereafter
Presidential Drive 2/80 10.25% 2/10 107,604 --- Feb. 97 to Feb. 98
Atlanta, GA penalty is 1.5%,
declining .5% per year
to 1% thereafter
1,657,451 10,501,269
Net Leased
Yamaha Warehouse 12/90 10.125% 1/01 159,627 1,366,721 Excess of loan rate
Cudahy, WI over U.S. Treasury Bill
rate
$1,817,078 $11,867,990
</TABLE>
* Percentages are of the principal amount at time of prepayment.
Face Amount Carrying Amount of
of Mortgage Mortgage at
Property Description at Acquisition December 31, 1997
Managed
Kingsley Square $ 700,000 $ 252,281
Orange Park, FL
(two loans)
1,500,000 364,041
First Tuesday 1,120,000 537,840
Carrollton, GA
Geneva Square 3,000,000 2,828,054
Lake Geneva, WI
Mendenhall Commons 4,300,000 3,990,943
Memphis, TN
North Park Plaza 4,300,000 4,003,513
Phoenix, AZ
Presidential Drive 968,935 742,420
Atlanta, GA
15,888,935 12,719,092
Net Leased
Yamaha Warehouse 1,500,000 1,421,492
Cudahy, WI
$ 17,388,935 $ 14,140,584
The activity in mortgage loans payable for the three years ended
December 31, 1997 is summarized in the table below.
<TABLE>
<S> <C> <C> <C>
Mortgage Loans Payable
Years Ended December 31,
1997 1996 1995
Principal
Beginning of year $ 14,819,479 15,271,385 16,860,244
Deductions during year
Principal payments (484,914) (451,906) (452,695)
Prepayments and maturities (193,981) --- (1,136,164)
Balance at end of year 14,140,584 14,819,479 15,271,385
Discount
Beginning of year --- --- (6,941)
Deductions during year
Amortization of discount --- --- 6,941
Balance at end of year --- --- ---
Balance, net of discount $ 14,140,584 14,819,479 15,271,385
</TABLE>
In March 1999, the mortgage loans payable at North Park Plaza and
Mendenhall Commons mature and will require a balloon payment.
The Trust anticipates refinancing these mortgage loans upon
maturity.
Scheduled monthly payments will substantially amortize the
principal balances of the mortgage loans over their respective
terms with the exception of balloon payments at maturity.
Amortized payments on the outstanding balances due in the next
five years, including balloon repayments at maturity, are
summarized as follows:
Amortized Payments
Year Payments at Maturity
1998 $ 441,160 $ ---
1999 374,486 7,874,657
2000 321,961 ---
2001 241,048 1,366,721
2002 187,303 ---
8. Leased Assets
The Trust is lessor of various properties as described in Note 3.
Certain properties are leased to tenants under long-term, non-
cancellable operating lease agreements. Future minimum lease
rentals to be received under the terms of these lease agreements
are as follows:
Year Amount
1998 $3,633,304
1999 2,977,977
2000 2,631,146
2001 2,360,786
2002 1,946,412
2003-2012 8,610,714
Contingent rentals included in income received in connection with
operating leases were $134,343, $101,446, and $106,458 for the
years ended December 31, 1997, 1996 and 1995, respectively. Such
rentals are based principally on tenant sales in excess of
stipulated minimums. In 1997, the Trust derived 10% or more of
its revenue from the Kroger Company at Mendenhall Commons and
from Safeway at North Park Plaza. The revenue from these tenants
was $587,097 and $581,028, respectively. In 1996 and in 1995 the
Trust derived 10% or more of its revenue from the Kroger Company.
The revenue from this tenant for 1996 and 1995 was $646,844 and
$636,898, respectively.
In August 1994, Publix Supermarkets exercised an option to extend
their lease for 34,400 square feet at Kingsley Square. The lease
extension, effective February 11, 1995, has a term of five years
and requires the Trust to contribute up to $250,000 toward
remodeling costs at the Publix store. Since Publix has not yet
remodeled their store and because they have given written notice
of their intent to close the store between December 1998 and
February 1999, it is uncertain when, if at all, this amount will
be paid. Accordingly, this amount has not been recorded in the
financial statements.
9. Federal Income Taxes
The Trust conducts its operations so as to qualify as a real
estate investment trust under the Internal Revenue Code which
requires, among other things, that at least 95% of the Trust's
taxable income be distributed to shareholders. The Trust has
historically distributed all of its taxable income, and did so in
1997 as well. Distributions made in 1995 plus a portion of the
Trust's first distribution in 1996 were used to meet the Internal
Revenue Code distribution requirements for 1995. Accordingly, no
provision has been made for federal income taxes since the Trust
did not have taxable income after the deductions allowed for
distributions to shareholders.
Certain property acquisitions have resulted in the basis of those
properties being determined differently for financial accounting
purposes than for income tax purposes. The differing methods of
determination of basis in these transactions has resulted in the
tax basis of certain properties being higher or lower than the
financial basis. At December 31, 1997 the tax basis of real
estate was $133,710 in excess of the financial basis.
10. Legal Proceedings
The Trust is not a party to any pending legal proceedings which,
in the opinion of management, are material to the Trust's
financial position.
11. Subsequent Events
In January 1996, P.W. Enterprises filed a Chapter 11
reorganization plan and closed its 63,146 square foot store at
Geneva Square. The Trust filed a claim as an unsecured creditor
for rents owed on the unexpired lease. A partial payment of
$7,000 was received in May 1997. In February 1998 the Trust
received $248,000 as a final settlement on this claim. Due to
the uncertainty of collection, the claim was fully reserved as
uncollectible in the accompanying financial statements.
Accordingly, the $248,000 final settlement will be recognized as
revenue in 1998 in accordance with the Trust's accounting
policies.
MMM Foods, operating under a ground lease of an outparcel at
Geneva Square, discontinued rental payments in 1997. The Trust
received an $85,000 settlement in March 1998 for termination of
the ground lease, which was to expire July 2008.
12. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Quarter Ended Year Ended
Year 3/31 6/30 9/30 12/31 12/31
1997
Revenue $ 1,277,422 1,236,318 1,250,455 1,247,892 5,012,087
Earnings from operations $ 163,220 166,302 66,105 241,502 637,129
Net gain on sale of property --- --- --- 259,157 259,157
Net earnings $ 163,220 166,302 66,105 500,659 896,286
Basic and diluted net
earnings per share $ .04 .04 .02 .13 .23
1996
Revenue $ 1,371,756 1,312,030 1,370,969 1,162,558 5,217,313
Earnings from operations $ 294,639 217,624 206,052 227,915 946,230
Net earnings $ 294,639 217,624 206,052 227,915 946,230
Basic and diluted net
earnings per share $ .08 .06 .05 .06 .24
1995
Revenue $ 1,423,777 1,368,427 1,386,977 1,438,833 5,618,014
Earnings from operations $ 301,080 222,437 297,878 278,754 1,100,149
Net earnings $ 301,080 222,437 297,878 278,754 1,100,149
Basic and diluted net
earnings per share $ .08 .06 .08 .07 .28
</TABLE>
Report of Independent Auditors
The Board of Trustees and Shareholders
USP Real Estate Investment Trust
We have audited the accompanying balance sheets of USP Real
Estate Investment Trust as of December 31, 1997 and 1996, and the
related statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of
the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of USP Real Estate Investment Trust at December 31, 1997 and
1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
February 20, 1998
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information About Directors (referred to herein as "Trustees")
Certain information about the nominees for Trustee appears below.
(See "Item 13. Certain Relationships and Related Transactions"
for a description of the Trust's relationship with AEGON USA
Realty Advisors, Inc. and other subsidiaries of AEGON USA, Inc.)
GARY A. DOWNING, age 39, has served as a Trustee of the Trust
since 1989. He is Managing Director of Raymond James &
Associates, Inc. (investment banking), St. Petersburg, Florida,
where he has been employed since 1984. Mr. Downing is a member
of the Audit Committee.
PATRICK E. FALCONIO, age 56, has served as Chairman of the Board
and a Trustee of the Trust since 1988. He is an Executive Vice
President of AEGON USA, Inc. (insurance and financial services),
Cedar Rapids, Iowa, where he has been employed since 1987. Mr.
Falconio is a Director of AEGON USA Realty Advisors, Inc. and
various other subsidiaries of AEGON USA, Inc. He is also
Chairman of the Board of Directors of Cedar Income Fund, Ltd.
(real estate investment company) and a Director of Firstar Bank
Cedar Rapids, N.A. (commercial bank).
EDWIN L. INGRAHAM, age 71, has served as a Trustee of the Trust
since 1984, and as Vice Chairman of the Board of Trustees since
1990. He retired in 1988 as Executive Vice President, Treasurer
and Chief Investment Officer of AEGON USA, Inc., where he had
been employed since 1982. He is a Director of Cedar Income Fund,
Ltd. (real estate investment company). Mr. Ingraham is a member
of the Audit Committee.
SAMUEL L. KAPLAN, age 61, has served as a Trustee of the Trust
since 1983. He has been engaged in the practice of law in
Minneapolis, Minnesota as a member of the firm of Kaplan,
Strangis and Kaplan, P.A. since 1978. Mr. Kaplan is a member of
the Audit Committee.
Information About Executive Officers
Certain information about the executive officers of the Trust who
are not also nominees appears below. The term of office of each
executive officer will expire at the Annual Meeting of the Board
of Trustees which will follow the Annual Meeting of Shareholders.
(See "Item 13. Certain Relationships and Related Transactions"
for a description of the Trust's relationship with AEGON USA
Realty Advisors, Inc. and other subsidiaries of AEGON USA, Inc.)
DAVID L. BLANKENSHIP, age 47, has served as President of the
Trust since 1985. He has been employed by AEGON USA, Inc. since
1977 in various administrative and management positions related
to real estate investment activities and is Chairman of the Board
and President of AEGON USA Realty Advisors, Inc.
MAUREEN DEWALD, age 47, has served as Vice President of the Trust
since 1986 and Secretary since 1985. She has been employed by
AEGON USA, Inc. since 1983 as an attorney for real estate
investment activities and is Senior Vice President, Secretary and
General Counsel of AEGON USA Realty Advisors, Inc.
ALAN F. FLETCHER, age 48, has served as Treasurer of the Trust
since 1986, as Vice President since 1985, as Assistant Secretary
since 1982 and as principal financial officer since 1981. He has
been employed by AEGON USA, Inc. since 1981 in various financial
and administrative positions related to investment activities and
is Senior Vice President and Chief Financial Officer of AEGON USA
Realty Advisors, Inc.
ROGER L. SCHULZ, age 36, has served as Controller and Assistant
Secretary of the Trust since 1995. He has been employed by AEGON
USA, Inc. since 1985 in real estate accounting and financial
reporting activities and is Manager - Financial Reporting for
AEGON USA Realty Advisors, Inc.
Item 11. Executive Compensation
During 1997, each Trustee, with the exception of Mr. Falconio,
received an annual fee of $6,000 plus $750 for each regular or
special meeting attended, as well as $400 per day for inspecting
properties owned by the Trust and $400 for attendance at each
committee meeting as a member, unless held in conjunction with a
meeting of the Board of Trustees. Mr. Falconio has waived all
fees for his services as a Trustee so long as he continues to be
affiliated as an officer or director of AEGON USA, Inc. (see
"Item 10. Directors and Executive Officers of the Registrant").
Total fees paid to all Trustees as a group were $24,750 for 1997.
The executive officers of the Trust receive no cash or deferred
compensation in their capacities as such.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to each
person and group (as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) known by the Trust to be the
beneficial owner of more than five percent (5%) of the
outstanding shares of the Trust as of March 3, 1998.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
AEGON USA, Inc. (1) 1,197,260 30.86%
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Ohio Shareholder Group (2) 323,567 8.34%
(1) AEGON USA, Inc. is an indirect, wholly-owned subsidiary of
AEGON N.V., a holding company organized under the laws of The
Netherlands which is controlled by Vereninging AEGON, an
association organized under the laws of The Netherlands. AEGON
USA, Inc. has sole voting and investment powers with respect to
the above Shares.
(2) The Turkey Vulture Fund XIII, Ltd. (the "Fund"), managed by
Richard M. Osborne, c/o Marc C. Krantz, Kohrman Jackson & Krantz
P.L.L., 1375 East 9th Street, Cleveland, Ohio 44114 and Steven A.
Calabrese, 1110 Euclid Avenue, Suite 300, Cleveland, Ohio 44115
comprise the "Ohio Shareholder Group." The following table sets
forth the number of Shares beneficially owned by each member of
the Ohio Shareholder Group as of December 10, 1997.
Number of Shares Percent
Name Beneficially Owned of Class
Turkey Vulture Fund XIII, Ltd. 315,181 8.12%
Steven A. Calabrese 8,386 .22%
Ohio Shareholder Group 323,567 8.34%
The above members have entered into a voting agreement to vote
their shares together for any matter submitted to a vote of the
Shareholders of the Trust during the term of their agreement.
The above information was obtained from, and is qualified in its
entirety by reference to, Schedule 13D (Amendment No. 3) dated
December 10, 1997 filed with the Securities and Exchange
Commission.
Security Ownership of Management
The following table sets forth the number of Shares of the Trust
beneficially owned as of March 3, 1998 by each Trustee, nominee,
and officer and by all Trustees, nominees and officers as a group
(8 persons). Except as otherwise indicated by footnote, the
individuals have direct ownership of, and sole voting and
investment power with respect to, any Shares beneficially owned
by them. Under rules adopted by the Securities and Exchange
Commission, transactions in Shares of the Trust are reportable by
Trustees and officers on specified forms, and the Trust is
required to disclose any known delinquent filings. A report on
Form 5 was filed late for Mr. Downing, reporting 36 Shares
acquired through the Trust's distribution reinvestment plan.
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
Gary A. Downing(1) 541 *
Patrick E. Falconio(2) 1,199,260 30.91%
Edwin L. Ingraham 1,500 *
Samuel L. Kaplan(3) 10,000 *
David L. Blankenship(4) 1,818 *
Maureen DeWald(5) 7,943 *
Alan F. Fletcher(6) 2,200 *
Roger L. Schulz 100 *
Trustees, nominees and officers as a group 1,223,362 31.53%
(1) Mr. Downing is the beneficial owner of 541 Shares held in an
individual retirement account through the custodian of which
he has sole voting and investment powers with respect to
such Shares.
(2) Mr. Falconio may be deemed to be the beneficial owner
of 1,197,260 Shares beneficially owned by AEGON USA, Inc.
with respect to which he shares voting and investment powers
(see "Principal Shareholders" and "Information About the
Nominees"). Mr. Falconio disclaims beneficial ownership of
such Shares. He may also be deemed to be the beneficial
owner of 2,000 Shares owned by his wife.
(3) Mr. Kaplan may be deemed to be the beneficial owner of
1,500 Shares held in a profit sharing trust for his account.
Such Shares are included in the 10,000 Shares above.
(4) Mr. Blankenship may be deemed to be the beneficial
owner of 1,818 Shares held in custodial accounts for his
children for which he has sole voting and investment powers.
(5) Ms. DeWald is the direct owner of 6,697 Shares for
which she has sole voting and investment powers and may be
deemed to be the beneficial owner of 1,246 Shares held in a
custodial account for her daughter for which she has sole
voting and investment powers.
(6) Mr. Fletcher is the direct owner of 600 Shares for
which he has sole voting and investment powers and is the
beneficial owner of 1,600 Shares held in an individual
retirement account for which he has sole voting and
investment powers through the custodian.
*Such holdings represent less than one percent of the outstanding Shares.
Item 13. Certain Relationships and Related Transactions.
The Trust has no employees and has contracted with various
subsidiaries of AEGON USA, Inc. to provide administrative,
advisory, acquisition, divestiture, property management and
shareholder services to the Trust. A description of the
relationships between AEGON USA, Inc. and its various
subsidiaries and of such subsidiaries' agreements with the Trust
follows. The description of the agreements which follows is
qualified in its entirety by reference to the terms and
provisions of such agreements. (See "Item 12. Security Ownership
of Certain Beneficial Owners and Management" for a description of
the relationship between AEGON USA, Inc. and AEGON N.V.)
Administrative, Advisory and Acquisition Services
AEGON USA Realty Advisors, Inc. ("AEGON Advisors"), is a wholly-
owned subsidiary of AEGON USA, Inc. AEGON Advisors provides
administrative, advisory, acquisition and divestiture services to
the Trust pursuant to an Administrative Agreement. The term of
the Administrative Agreement is for one (1) year and is
automatically renewable each year for an additional year subject
to the right of either party to cancel the Agreement upon 90 days
written notice. The performance of AEGON Advisors' duties and
obligations under the Administrative Agreement has been
guaranteed by AEGON USA, Inc.
Under the Administrative Agreement, AEGON Advisors (a) provides
clerical, administrative and data processing services, office
space, equipment and other general office services necessary for
the Trust's day-to-day operations, (b) provides legal, tax and
accounting services to maintain all necessary books and records
of the Trust and to ensure Trust compliance with all applicable
federal, state and local laws, regulatory reporting requirements
and tax codes, (c) arranges financing for the Trust, including
but not limited to mortgage financing for property acquisition,
(d) obtains property management services for the Trust's
properties and supervises the activities of persons performing
such services, (e) provides monthly reports summarizing the
results of operations and financial conditions of the Trust, (f)
prepares and files all reports to shareholders and regulatory
authorities on behalf of the Trust, (h) prepares and files all
tax returns of the Trust and (i) provides the Trust with property
acquisition and divestiture services.
AEGON Advisors receives fees for its administrative and advisory
services as follows: (a) a base fee, payable monthly, equal to
5/8% per annum of the average monthly gross real estate
investments of the Trust plus 1/4% per annum of the monthly
outstanding principal balance of mortgage loans receivable; and
(b) an incentive fee, payable annually, equal to 20% of the
annual adjusted cash flow from operations in excess of $.72 per
share. If the annual adjusted cash flow from operations is less
than $.72 per share, then the payment of so much of the base fee
is to be deferred so that revised cash flow from operations will
be equal to $.72 per share; provided, however, in no event shall
the amount deferred exceed 20% of the previously determined base
fee. Any deferred fees may be paid in a subsequent year, up to a
maximum of 30% of that year's revised cash flow from operations
in excess of $.72 per share. Annual adjusted cash flow from
operations, as defined for purposes of the incentive fee,
includes the net realized gain (or loss) from the disposition of
property, adjusted to exclude accumulated depreciation (otherwise
stated as gain in excess of cost without reduction for allowable
depreciation). Notwithstanding the foregoing, the combined base
and incentive fees cannot exceed the amount permitted by the
limitation on operating expenses as provided in the Trust's
Declaration of Trust, which limitation is essentially 1 1/2% of
the Trust's average quarterly invested assets, net of
depreciation. In addition, AEGON Advisors is to be paid a
separately negotiated fee of not less than 2% nor more than 4% of
the cost of each property acquired by the Trust as compensation
for acquisition services furnished by it to the Trust.
Administrative fees paid to AEGON Advisors for 1997 were
$205,714. No acquisition fees were paid in 1997.
Management Services
AEGON USA Realty Management, Inc. ("AEGON Management"), is a
wholly-owned subsidiary of AEGON Advisors. AEGON Management
provides management services to the Trust pursuant to a Property
Management Agreement. The term of the Agreement is for one (1)
year and is automatically renewable each year for an additional
year subject to the right of either party to cancel the Agreement
upon 30 days written notice. Under the Management Agreement,
AEGON Management is obligated to (a) procure tenants and execute
leases with respect to Trust properties which are not leased
under net lease arrangements (the "Managed Properties"), (b)
maintain and repair (at the Trust's expense) the Managed
Properties, (c) maintain complete and accurate books and records
of the operations of the Managed Properties, (d) maintain the
Managed Properties in accordance with applicable government rules
and regulations, licensing requirements and building codes, (e)
collect all rents and (f) carry (at the Trust's expense) general
liability, accident, fire and other property damage insurance.
For these services, AEGON Management receives 5% of the gross
income derived from the operation of the Managed Properties.
Management fees paid to AEGON Management for 1997 were $221,935.
Shareholder Services
AEGON Advisors provides shareholder services to the Trust
pursuant to a Shareholder Services Agreement (the "Agreement").
Under the Agreement, AEGON Advisors is obligated to provide
dividend disbursement, stock certificate preparation,
recordkeeping and other shareholder services for which AEGON
Advisors receives the following fees: a quarterly fee of $1.25
per shareholder account based on the number of shareholder
accounts (minimum $1,000 per quarter), a fee of $.75 per
shareholder account for each dividend processed, a fee of $.50
per shareholder account for proxy tabulation, and such other
compensation as from time to time agreed upon by the Trust and
AEGON Advisors. Shareholder service fees paid to AEGON Advisors
for 1997 were $21,658. AEGON Advisors has subcontracted for
stock transfer and dividend disbursement services with Boston
EquiServe, L.P., a subsidiary of State Street Bank and Trust
Company.
Other
On December 31, 1993, the mortgage loan on the Trust's
Presidential Drive property was acquired from the lender by AUSA
Life Insurance Company, Inc., a wholly-owned subsidiary of AEGON
USA, Inc., as part of a large transaction involving the transfer
of loans and securities. The terms of the mortgage loan remained
the same. In February 1994, the Trust refinanced the existing
mortgage loan on its Geneva Square property with a new mortgage
loan from PFL Life Insurance Company ("PFL"), a wholly-owned
subsidiary of AEGON USA, Inc. This $3,000,000 loan was obtained
by the Trust on commercially competitive terms at a fixed
interest rate of 8% and a 1% origination fee ($30,000) was paid
to PFL in connection with the loan. The loan matured on March 1,
1996, and the Trust exercised an option to extend the loan for
eight years at 8.30% based on commercially competitive terms
offered for comparable loans by PFL. The loan may be prepaid
without penalty any time prior to September 1, 1998, with yield
maintenance required thereafter. The aggregate principal amount
of these two mortgage loans as of December 31, 1997 was
$3,570,473. The maximum principal amount of such mortgage
indebtedness outstanding during 1997 was $3,624,751. The Trust
paid $54,277 in principal and $313,621 in interest on such
mortgage indebtedness for 1997.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) List of Documents
The following financial statements are included in Item 8:
1. Financial Statements.
Balance Sheets, December 31, 1997 and 1996.
Statements of Earnings, Years Ended December 31, 1997, 1996, and 1995.
Statements of Cash Flows, Years Ended December 31, 1997, 1996, and 1995.
Statements of Shareholders' Equity, Years Ended December 31, 1997,
1996, and 1995.
Notes to Financial Statements.
Report of Independent Auditors.
2. Financial Statement Schedules.
Financial Statement Schedules. (Included in Notes to Financial Statements)
(III) Schedule of Real Estate and Accumulated Depreciation. Note 3
(IV) Schedule of Mortgage Loans on Real Estate. Note 7
All other schedules have been omitted because they are not
required, or because the required information, where
material, is included in the financial statements or
accompanying notes.
3. Exhibits.
(3) Second Amended and Restated Declaration of Trust currently in effect,
dated October 5, 1972, as amended December 18, 1972, March 3, 1975
and April 23, 1984, incorporated herein by reference to Item 14(a)3,
Exhibit (3) of Form 10-K for the year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19, 1997.
(4) Articles II and III of the Second Amended and Restated Declaration of
Trust currently in effect, dated October 5, 1972, as amended
December 18, 1972, March 3, 1975 and April 23, 1984, incorporated
herein by reference to Item 14(a)3, Exhibit (3) of Form 10-K
for the year ended December 31, 1984.
(10) Administrative Agreement currently in effect, dated January 1, 1984,
incorporated herein by reference to Item 5, Exhibit (28) of Form 8-K
dated January 1, 1984.
(10.1) Property Management Agreement currently in effect, dated July 1, 1981,
as amended November 4, 1982, incorporated herein by reference to
Item 14(a)3, Exhibit (10) of Form 10-K for the year ended
December 31, 1982.
(10.2) Shareholder Services Agreement, currently in effect, dated
January 1, 1991, as amended January 1, 1992 and assigned
January 28, 1992, incorporated herein by reference to Item 14(a)3,
Exhibit (10.2) of Form 10-K for the year ended December 31, 1991.
(b) No reports on Form 8-K were filed during the fourth quarter of 1997.
(c) The required exhibits applicable to this section are listed in
Item 14(a)3.
(d) There are no required financial statement schedules applicable to
this section.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
USP REAL ESTATE INVESTMENT TRUST
/s/ Patrick E. Falconio /s/ Alan F. Fletcher
Patrick E. Falconio Alan F. Fletcher
Chairman of the Board Vice President and Treasurer
(principal executive officer) (principal financial officer)
/s/ Roger L. Schulz
Roger L. Schulz
Controller
(principal accounting officer)
March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and as of the
date indicated.
/s/ Gary A. Downing /s/ Edwin L. Ingraham
Gary A. Downing Edwin L. Ingraham
Trustee Trustee
/s/ Patrick E. Falconio /s/ Samuel L. Kaplan
Patrick E. Falconio Samuel L. Kaplan
Trustee Trustee
March 26, 1998
EXHIBIT INDEX
Exhibit
Item Title or Description
(3) Second Amended and Restated Declaration of Trust
currently in effect, dated October 5,
1972, as amended December 18, 1972,
March 3, 1975 and April 23, 1984,
incorporated herein by reference to Item
14(a)3, Exhibit (3) of Form 10-K for the
year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19, 1997.
(4) Articles II and III of the Second Amended and Restated
Declaration of Trust currently in effect,
dated October 5, 1972, as amended
December 18, 1972, March 3, 1975 and
April 23, 1984, incorporated herein by
reference to Item 14(a)3, Exhibit (3) of
Form 10-K for the year ended December 31,
1984.
(10) Administrative Agreement currently in effect, dated
January 1, 1984, incorporated herein by
reference to Item 5, Exhibit (28) of Form
8-K dated January 1, 1984.
(10.1) Property Management Agreement currently in effect, dated
July 1, 1981, as amended November 4, 1982,
incorporated herein by reference to
Item 14(a)3, Exhibit (10) of Form 10-K for
the year ended December 31, 1982.
(10.2) Shareholder Services Agreement dated January 1, 1991,
as amended January 1, 1992 and assigned January 28,
1992, incorporated herein by reference to
Item 14(a)3, Exhibit (10.2) of Form 10-K
for the year ended December 31, 1991.
All Exhibit Items are omitted from this report, but a copy will
be furnished upon payment of $33.00, representing a charge of
fifty cents ($.50) per page, accompanying a written request to
Roger L. Schulz, Controller, USP Real Estate Investment Trust,
4333 Edgewood Road N.E., Cedar Rapids, IA 52499.
EXHIBIT 3.1
BY-LAWS
OF
USP REAL ESTATE INVESTMENT TRUST
ARTICLE I
OFFICES
The principal office of the Trust shall be located at 4333
Edgewood Road N.E., Cedar Rapids, Iowa. The Trust may have such
other offices, either within or without the State of Iowa, as the
business of the Trust may require from time to time.
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the
shareholders, for the purpose of electing trustees and for such
other business as may come before the meeting, shall be held on
the third Monday in April of each year, at 1:30 P.M., or on such
other date and time as the Board of Trustees shall fix by
resolution. If the day fixed for the annual meeting shall be a
legal holiday, such meeting shall be held on the next succeeding
business day. If the election of trustees shall not be held on
the day designated herein for any annual meeting, or at an
adjournment thereof, the Board of Trustees shall cause the
election to be held at a meeting of the shareholders as soon
thereafter as may be convenient.
Section 2. Special Meeting. Special meetings of the
shareholders may be called as provided in the Declaration of
Trust.
Section 3. Place of Meeting. The Board of Trustees may
designate any place, either within or without the State of Iowa,
as the place of meeting for any annual meeting or for any special
meeting called by the Board of Trustees.
Section 4. Notice of Meeting. Written or printed notice
stating the place, date and time of the meeting, and in the case
of a special meeting, the nature of the business to be transacted
thereat, shall be delivered not less than ten nor more than forty
days before the date of the meeting, either personally or by
mail, by or at the direction of the Chairman of the Board of
Trustees, or the Secretary, or the officer or persons calling the
meeting, to each shareholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, addressed to the
shareholder at the address as it appears on the records of the
Trust, with postage thereon prepaid.
Section 5. Closing of Transfer Books or Fixing of Record
Date. For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders, or
shareholders entitled to receive payment of any dividend or
distribution, or in order to make a determination of shareholders
for any other proper purpose, the Board of Trustees may provide
that the share transfer books shall be closed for a stated period
but not to exceed, in any case, forty days. In lieu of closing
the share transfer books, the Board of Trustees may fix in
advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than forty
days and, for a meeting of shareholders not less than ten days,
immediately preceding such meeting. If the share transfer books
are not closed and no record date is fixed for the determination
of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a
dividend or distribution, the date on which notice of the meeting
is mailed or the date on which the resolution of the Board of
Trustees declaring such dividend or distribution is adopted, as
the case may be, shall be the record date for such determination
of shareholders.
Section 6. Quorum. One-Third (1/3) of the outstanding
shares of the Trust, represented in person or by proxy, shall
constitute a quorum at any meeting of shareholders; provided,
that if less than one-third (1/3) of the outstanding shares are
represented at said meeting, a majority of the shares so
represented may adjourn the meeting from time to time without
further notice. If a quorum is present, the affirmative vote of
the majority of the shares represented at the meeting shall be
the act of the shareholders, unless the vote of a greater number
is required by the Declaration of Trust.
Section 7. Proxies. At all meetings of shareholders, a
shareholder may vote by proxy executed in writing by the
shareholder or by the shareholder's duly authorized attorney-in-
fact. Such proxy shall be filed with the Secretary of the Trust
before or at the time of the meeting.
Section 8. Voting of Shares. Each outstanding share shall
be entitled to one vote upon each matter submitted to vote at a
meeting of shareholders.
Section 9. Voting by Ballot. Voting on any question or in
any election may be via voce unless the presiding officer shall
order, or any shareholder shall demand, that voting be by ballot.
ARTICLE III
TRUSTEES
Section 1. General Powers. The business and affairs of the
Trust shall be managed by its Board of Trustees, which shall have
absolute control over the management and conduct of the business
and affairs of the Trust, subject to the provisions of the
Declaration of Trust.
Section 2. Number, Tenure, and Qualifications. The number
of trustees of the Trust shall be not less than three nor more
than ten, as determined from time to time by the Board of
Trustees. Each trustee shall hold office as provided in the
Declaration of Trust or until a successor shall have been elected
and qualified. Trustees shall be individuals of full age
residing either within or without the State of Iowa. Ownership
of shares in the Trust shall not be a qualification for election
or appointment as a trustee.
Section 3. Regular Meetings. A regular meeting of the
Board of Trustees shall be held without other notice than this by-
law, immediately after, and at the same place as, the annual
meeting of shareholders. The Board of Trustees may provide, by
resolution, the time and place, either within or without the
State of Iowa, for the holding of additional regular meetings
without other notice than such resolution.
Section 4. Special Meetings. Special meetings of the Board
of Trustees may be called by or at the request of the Chairman or
any two trustees. The person or persons authorized to call
special meetings of the Board of Trustees may fix any place,
either within or without the State of Iowa as the place for
holding any special meeting of the Board of Trustees called by
them.
Section 5. Quorum. A majority of the number of current
trustees as determined by these by-laws shall constitute a quorum
for transaction of business at any meeting of the Board of
Trustees, provided, that if less than a majority of such number
of trustees are present at said meeting, a majority of the
trustees present may adjourn the meeting from time to time
without further notice.
Section 6. Manner of Acting. The act of the majority of
the trustees present at a meeting at which a quorum is present
shall be the act of the Board of Trustees, unless the act of a
greater number is required by the Declaration of Trust or these
by-laws.
Section 7. Compensation and Expense Reimbursement. The
trustees shall be entitled to receive reimbursement of reasonable
travel and meeting expenses and such reasonable compensation for
services as trustee as may be determined from time to time by the
Board of Trustees, subject to the limitation provided in the
Declaration of Trust.
Section 8. Vacancies. Any vacancy occurring in the Board
of Trustees shall be filled as provided in the Declaration of
Trust.
ARTICLE IV
OFFICERS
Section 1. Titles. The officers of the Trust shall be
elected by the Board of Trustees and shall be a Chairman, a Vice
Chairman, a President, a Secretary and a Treasurer. The Board of
Trustees may also elect one or more Vice Presidents, a Controller
and such other officers as shall be determined from time to time
by the Board of Trustees. Except for the President and
Secretary, two or more offices may be held by the same person.
Only the Chairman and the Vice Chairman shall be required to be
trustees.
Section 2. Election and Term of Office. The officers of
the Trust shall be elected annually by the Board of Trustees at
the first meeting of the Board of Trustees held after each annual
meeting of shareholders. If the election of officers shall not
be held at such meeting, such election shall be held as soon
thereafter as may be convenient.
Section 3. Removal. Any officer or agent elected or
appointed by the Board of Trustees may be removed by the Board of
Trustees whenever in its judgement the best interests of the
Trust would be served thereby.
ARTICLE V
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Every holder of shares
of beneficial interest in the Trust shall be entitled upon
request to have a certificate, signed by, or in the name of the
Trust by, the Chairman or Vice Chairman of the Board of Trustees,
and the Secretary or an Assistant Secretary of the Trust,
certifying the number of shares in the trust owned by such
holder.
Section 2. Facsimile Signatures. Where a certificate is
countersigned by the transfer agent or a registrar, the
signatures of the officers of the Trust may be facsimiles. In
case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by
the Trust with the same effect as if that person were such
officer at the date of issue.
Section 3. Lost Certificates. The Board of Trustees may
direct a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the Trust
alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of
Trustees may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal
representative, to give the Trust a bond in such sum as it may
direct as indemnity against any claim that may be made against
the Trust with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfer of Shares. Transfers of shares of the
Trust shall be made only on the books of the Trust by the holder
of record thereof or by the holder's legal representative, who
shall furnish proper evidence of authority to transfer, or by a
person thereunto authorized by power of attorney duly executed
and filed with the secretary of the Trust, and on surrender for
cancellation of the certificate (if any) for such shares. The
person in whose name shares stand on the books of the Trust shall
be deemed the owner thereof for all purposes as regards the
Trust.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of
January in each year and end on the last day of December in each
year.
ARTICLE VII
AMENDMENTS
These by-laws may be altered, amended or repealed and new by-
laws may be adopted at any meeting of the Board of Trustees of
the Trust by a majority vote of the Trustees present at the
meeting.
ARTICLE VIII
INDEMNIFICATION
The trustees and shareholders shall be entitled to
indemnification from the Trust as provided in the Declaration of
Trust.
Adopted November 19, 1997.
/S/ Maureen DeWald
Maureen DeWald
Secretary
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