UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-15465
Banyan Strategic Realty Trust
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Massachusetts 36-3375345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 South Wacker Drive, Chicago, IL 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (312) 553-9800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ X ]. NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Shares of beneficial interest outstanding as of February 27, 1998:
13,268,316. The aggregate market value of the Registrant's shares of
beneficial interest held by non-affiliates on such date was approximately
$79,611,475.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit index located on page 53 of sequentially numbered pages.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . .11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . .11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .11
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . .13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . .20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . .40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . .40
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE
REGISTRANT. . . . . . . . . . . . . . . . . . . . . .41
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . .43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . .52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . .53
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . .56
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Registrant, Banyan Strategic Realty Trust (the "Trust"), is a
Massachusetts business trust, organized pursuant to a Declaration of Trust
filed March 14, 1986 under the name VMS Strategic Land Trust. The Trust
has amended its Declaration of Trust on several occasions including an
amendment to change its name to Banyan Strategic Realty Trust in 1993. The
Trust now operates under an Amended and Restated Declaration of Trust (the
"Declaration").
As of December 31, 1997, the Trust owned, through various subsidiaries
or partnerships which it controls, interests in industrial, residential,
office and retail real estate assets located throughout the Midwestern and
Southeastern portion of the United States. In particular, the Trust's real
estate interests include seven flex/industrial complexes aggregating
1,361,100 square feet of gross leasable area, four apartment complexes
consisting of a total of 864 units, ten office sites consisting of
1,193,800 square feet of gross leasable area and one retail center which
contains 321,800 square feet of gross leasable area. The Trust has elected
to be taxed as a real estate investment trust ("REIT") under Internal
Revenue Code Sections 856-860 and therefore, does not generally incur a
Trust level tax liability so long as 95% of its taxable income is
distributed to shareholders and it meets certain asset and income tests as
well as other requirements. The Trust has made distributions equal to
$0.10 per share for the last thirty consecutive quarters through the
quarter ending December 31, 1997.
The Trust was originally established to invest primarily in short-
term, junior and pre-construction mortgage loans to borrowers which planned
to acquire and develop strategically located properties not then utilized
at their highest and most profitable use. In early 1990, the Trust, in
response to the majority of its borrowers' decisions to cease making
payments on their mortgage loans due to their liquidity problems, ceased
making new mortgage loans. The trustees established and implemented the
Principal Recovery Plan in order to preserve and protect the Trust's
assets. Subsequently, the independent trustees authorized management to
begin reinvestment of the cash generated by the Principal Recovery Plan.
Certain statements in this Annual Report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Discussions containing forward-
looking statements may be found in this section and in the section headed
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Without limiting the foregoing, words such as "anticipates,"
"expects," "intends," "plans" and similar expressions are intended to
identify forward-looking statements. These statements are subject to a
number of risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements. See "Factors
Affecting the Trust's Business Plan" below. The Trust undertakes no
obligation to update these forward-looking statements to reflect future
events or circumstances.
BUSINESS
The Trust's current business plan is to acquire additional real estate
assets and to manage these new acquisitions as well as its existing
portfolio of properties in a manner which will increase the Trust's cash
flow and shareholder value. In executing its business plan, the Trust
intends to invest its cash and cash equivalents in excess of operating
reserves in new real estate assets, to reinvest the proceeds from the sale
or refinancing of its existing properties and to raise new capital (debt,
equity or both).
<PAGE>
During the year ended December 31, 1997, the Trust acquired ownership
interest in the properties commonly known as the Phoenix Business Park,
Butterfield Office Plaza, Country Creek Apartments, Willowpark Apartments,
Winchester Run Apartments, Woodrun Village Apartments, Southlake Corporate
Center, University Square Business Center, Technology Center and Airways
Plaza Office Center, and sold its interests in Hallmark Village Apartments,
the H Street Venture and the Colonial Courts of Westland Apartments. See
Item 7, "Management's Discussion and Analysis", for further details
regarding these acquisition and disposition activities. During this same
period, the Trust increased its line of credit with American National Bank
(the "Revolving Line") from $20 million to $30 million and extended its
maturity until May 1999, raised approximately $10 million through the sale
of shares of beneficial interest and obtained a commitment from the
purchaser of those shares to provide an unsecured loan to the Trust in the
amount of $20 million (the "Unsecured Loan") that, upon shareholder
approval, can be converted into preferred shares or common shares of
beneficial interest in the Trust. As part of its 1997 Annual Meeting to be
held in the Spring of 1998, the Trust plans to solicit proxies from its
shareholders to, among other things, authorize the issuance of preferred
stock and approve the issuance of shares issuable upon conversion of the
aforementioned Unsecured Loan. As of December 31, 1997, the book value of
the twenty-two operating properties, net of accumulated depreciation, is
$149,311,660. See Item 2, "Properties", for a detailed listing of the
Trust's property interests.
The Trust expects to fund its future liquidity needs with the cash
flow generated by its operating properties, cash proceeds derived from the
mortgage financing secured by certain previously unencumbered property
interests, draws on its Revolving Line, draws on the Unsecured Loan,
interest earned on the Trust's short-term investments and newly raised
capital (debt, equity or both). These sources, as well as the Trust's cash
and cash equivalents in excess of operating reserves, are expected to be
sufficient to meet its reasonably anticipated needs for liquidity and
capital resources in the near future and to provide cash proceeds for
distributions to shareholders. The Trust plans to continue making
additional investments in operating properties utilizing cash proceeds to
be provided from the capital sources described above. In the event
additional capital cannot be obtained, the Trust's ability to make future
real estate acquisitions would be impaired. The other sources of cash
described above are expected to provide the Trust with the cash necessary
to meet its operating expenses and other general corporate needs and to
continue the $0.10 per share quarterly distribution throughout 1998. See
"Factors Affecting the Trust's Business Plan" below for a discussion of the
factors which may influence the Trust's ability to achieve this plan.
OTHER INFORMATION
The Trust's business and real estate property operations are not
seasonal and compete on the basis of rental rates and property operations
with similar types of properties in the vicinities in which the Trust's
properties are located.
The Trust has no real property investments located outside the United
States. The Trust does not segregate revenue or assets by geographic
region, since in management's view, such a presentation would not be
significant to an understanding of the Trust's business or financial
results taken as a whole.
The Trust has twenty-one employees, four of whom serve as executive
officers. The fifth executive officer is not an employee of the Trust, but
provides services to the Trust as an "independent contractor".
The Trust reviews and monitors compliance with federal, state and
local provisions which have been enacted or adopted regulating the
discharge of material into the environment, or otherwise relating to the
protection of the environment. For the year ended December 31, 1997, the
Trust did not incur any material capital expenditures for environmental
control facilities nor does it anticipate making any such expenditures for
the year ended December 31, 1998.
<PAGE>
ACQUISITION SUBSEQUENT TO DECEMBER 31, 1997
Peachtree Pointe Office Park
On January 20, 1998, the Trust acquired a 100% fee simple ownership
interest in five one-story office buildings commonly known as Peachtree
Pointe Office Park located in Norcross, Georgia, a northeast suburb of
Atlanta, for a purchase price of approximately $4.5 million. The property
contains approximately 71,700 net rentable square feet, was constructed in
1982 and was 92% occupied with 23 tenants at the time of acquisition. The
Trust funded the acquisition from its cash reserves as well as by utilizing
a draw upon its Revolving Line of $3.4 million.
<PAGE>
<TABLE>
ITEM 2. PROPERTIES
As of December 31, 1997, the Trust owned interests, directly or indirectly through its wholly owned
subsidiaries, in the properties set forth in the table below:
<CAPTION>
Name and Location Date Property
of Property Size Acquired Description (a) Type
- ----------------- ---------- ---------- -------------------- -----------
<S> <C> <C> <C> <C>
Milwaukee Industrial 235,800 sq. ft. 04/30/93 A 1% General and 84%
Properties g.l.a. Limited Partner interest
Metropolitan in a joint venture (b)(c) Flex/Industrial
Milwaukee, WI
Elmhurst Metro Court 140,800 sq. ft. 11/30/93 A 1% General and 84%
Elmhurst, IL g.l.a. Limited Partner interest
in a joint venture (b)(c) Flex/Industrial
Colonial Penn Building 79,200 sq. ft. 03/22/94 Fee ownership of land and
Tampa Bay, FL g.l.a. improvements Office
Florida Power and 83,100 sq. ft. 03/22/94 Fee ownership of land and
Light Building g.l.a. improvements Office
Sarasota, FL
Willowbrook 84,300 sq. ft. 06/16/95 A 1% General and 84%
Industrial Court g.l.a. Limited Partner interest
Willowbrook, IL in a joint venture (b)(c) Flex/Industrial
Northlake Tower 321,800 sq. ft. 07/28/95 Leasehold interest pursuant
Shopping Center g.l.a. to a ground lease and
Atlanta, GA ownership of improvements
(through a 1% General and
80.9% Limited Partner
interest) in a joint venture
(b)(d) Retail
Quantum Business Center 182,200 sq. ft. 09/26/95 Fee ownership of land and
Louisville, KY g.l.a. improvements Flex/Industrial
<PAGE>
Name and Location Date Property
of Property Size Acquired Description (a) Type
- ----------------- ---------- ---------- -------------------- -----------
Lexington Business 308,800 sq. ft. 12/05/95 Fee ownership of land and
Center g.l.a. improvements Flex/Industrial
Lexington, KY
Newtown Distribution 87,100 sq. ft. 12/05/95 Fee ownership of land and
Center g.l.a. improvements Flex/Industrial
Lexington, KY
Woodcrest Office Park 265,900 sq. ft. 12/19/95 A 1% General and 84%
Tallahassee, FL g.l.a. Limited Partner interest
in a joint venture (b)(e) Office
Midwest Office Center 77,000 sq. ft. 4/18/96 A 1% General and 84%
Oakbrook Terrace, IL g.l.a. Limited Partner interest
in a joint venture (b) Office
6901 Riverport Drive 322,100 sq. ft. 11/19/96 Leasehold interest pursuant
Louisville, KY g.l.a. to bond financing and
ownership of improvements Flex/Industrial
Phoenix Business Park 110,600 sq. ft. 01/15/97 Fee ownership of land and
Atlanta, GA g.l.a. improvements Office
Butterfield Office
Plaza 200,800 sq. ft. 04/30/97 Fee ownership of land and
Oak Brook, IL g.l.a. improvements Office
Woodrun Village
Apartments 192 Units 05/22/97 Fee ownership of land and
Yukon, OK improvements Residential
Country Creek
Apartments 320 Units 05/22/97 Fee ownership of land and
Oklahoma City, OK improvements Residential
Willowpark Apartments 160 Units 05/22/97 Fee ownership of land and
Lawton, OK improvements Residential
Winchester Run
Apartments 192 Units 05/22/97 Fee ownership of land and
Oklahoma City, OK improvements Residential
<PAGE>
Name and Location Date Property
of Property Size Acquired Description (a) Type
- ----------------- ---------- ---------- -------------------- -----------
Southlake Corporate
Center 56,200 sq. ft. 07/30/97 Fee ownership of land and
Morrow, GA g.l.a. improvements Office
University Square
Business Center 184,700 sq. ft. 08/26/97 Fee ownership of land and
Huntsville, AL g.l.a. improvements Office
Technology Center 48,500 sq. ft. 08/26/97 Leasehold interest pursuant
Huntsville, AL g.l.a. to a ground lease and
ownership of improvements Office
Airways Plaza
Office Center 87,800 sq. ft. 12/10/97 Fee ownership of land and
Memphis, TN g.l.a. improvements Office
<FN>
- ---------------
(a) Reference is made to Note 5 "Investment in Real Estate", of Notes to Consolidated Financial Statements
filed with this annual report for additional description of these real property investments.
(b) In all of its partnerships, the Trust is the managing general partner and retains sole authority over all
significant decisions.
(c) Pursuant to the partnership agreement, prior to distributing cash flow from operations, the Trust's 84% and
1% partnership interests are paid an annual 12% preferred return on their respective net capital contributed to
the partnership. The joint venture partner then receives an 11% preferred return on the joint venture partner's
net capital contributed, after which cash flow from operations is distributed pro-rata based on each partner's
respective ownership interest. Cash proceeds from either the sale or refinancing of the partnership properties
will be used (i) to pay any unpaid preferred returns first to the Trust, and then to the joint venture partner;
(ii) to return net capital contributed pro-rata to the Trust and the joint venture partner; (iii) to pay up to a
$1,200,000 preference to the Trust (which may be reduced by the application of prior cash flow payments but not
below $700,000) and subsequently a $300,000 preference to the joint venture partner; and (iv) to distribute 65% of
the remaining cash to the Trust and the balance to the joint venture partner.
(d) Pursuant to the partnership agreement, prior to distributing cash flow from operations, the Trust's 80.9%
and 1% partnership interests are paid an annual 12% preferred return on their respective net capital contributed
to the partnership. Thereafter, the Trust's joint venture partner receives a 12% preferred return on its net
capital contributed. Thereafter, cash flow from operations is distributed pro-rata based on each partner's
respective ownership interest. Cash proceeds from either the sale or refinancing of the partnership property will
be used (i) to pay any of the Trust's unpaid preferred returns; (ii) to return net capital contributed by all
partners; (iii) to pay any of the venture partner's unpaid preferred returns and (iv) to distribute the remaining
cash based on ownership interests until the Trust has received an overall return of 15% on its invested capital.
Thereafter, the Trust will receive 71.9% of the excess cash and the balance will be paid to the joint venture
partner.
<PAGE>
(e) Pursuant to the partnership agreement, prior to distributing cash flow from operations, the Trust's 84% and
1% partnership interest are paid an annual 12% preferred return on the average unreturned Initial Capital
Contribution to the partnership. Thereafter, the Trust's joint venture partner receives a 12% preferred return on
his average unreturned Initial Capital Contribution to the Partnership. Thereafter, cash flow from operations is
distributed pro-rata based on each partner's respective ownership interest. Cash proceeds from either the sale or
refinancing of the partnership properties will be used (i) to pay any of the Trust's unpaid preferred returns;
(ii) to return net capital contributed by the Trust; (iii) to pay any amounts necessary for the Trust to have
received a 15% cumulative return on its net total average unreturned capital contributed; (iv) to pay the joint
venture partner's unpaid preferred returns; (v) to return the joint venture partner's net capital contributed; and
(vi) the remaining cash will be distributed pro-rata based on each partner's ownership interest.
</TABLE>
<PAGE>
<TABLE>
The following is a list of occupancy levels as of the end of each quarter for 1997 and 1996 at each of the
Trust's operating properties:
<CAPTION>
1996 1997
------------------------------- -------------------------------
at at at at at at at at
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
----- ---- ---- ----- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FLEX/INDUSTRIAL
- ---------------
Milwaukee Industrial Properties
Metro Milwaukee, WI . . . . . . . . 98% 100% 100% 100% 100% 93% 87% 87%
Elmhurst Metro Court
Elmhurst, IL. . . . . . . . . . . . 92% 92% 86% 92% 96% 96% 90% 93%
Willowbrook Industrial Court
Willowbrook, IL . . . . . . . . . . 77% 100% 90% 93% 100% 100% 100% 100%
Quantum Business Center
Louisville, KY. . . . . . . . . . . 92% 93% 94% 93% 90% 82% 91% 91%
6901 Riverport Drive
Louisville, KY. . . . . . . . . . . N/A N/A N/A 100% 100% 100% 100% 100%
Lexington Business Center
Lexington, KY . . . . . . . . . . . 80% 80% 91% 95% 95% 95% 95% 93%
Newtown Distribution Center
Lexington, KY . . . . . . . . . . . 95% 97% 97% 89% 85% 85% 85% 92%
OFFICE
- ------
Colonial Penn Bldg.
Tampa Bay, FL . . . . . . . . . . . 100% 100% 100% 100% 100% 100% 100% 100%
Florida Power & Light Building
Sarasota, FL. . . . . . . . . . . . 93% 93% 98% 98% 98% 98% 99% 100%
Woodcrest Office Park
Tallahassee, FL . . . . . . . . . . 93% 94% 91% 95% 94% 94% 93% 92%
Midwest Office Center
Oakbrook Terrace, IL. . . . . . . . N/A 96% 97% 96% 94% 96% 96% 96%
<PAGE>
1996 1997
------------------------------- -------------------------------
at at at at at at at at
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
----- ---- ---- ----- ---- ---- ----- -----
Phoenix Business Park
Atlanta, GA . . . . . . . . . . . . N/A N/A N/A N/A 99% 100% 100% 92%
Butterfield Office Plaza
Oak Brook, IL . . . . . . . . . . . N/A N/A N/A N/A N/A 94% 93% 97%
Southlake Corporate Center
Morrow, GA. . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A 100% 96%
University Square Business Center
Huntsville, AL. . . . . . . . . . . N/A N/A N/A N/A N/A N/A 90% 92%
Technology Center
Huntsville, AL. . . . . . . . . . . N/A N/A N/A N/A N/A N/A 100% 100%
Airways Plaza Office Center
Memphis, TN . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A N/A 100%
RETAIL
- ------
Northlake Tower Shopping Center
Atlanta, GA . . . . . . . . . . . . 98% 98% 98% 98% 99% 99% 99% 99%
RESIDENTIAL
- -----------
Country Creek Apartments
Oklahoma City, OK . . . . . . . . . N/A N/A N/A N/A N/A 90% 99% 96%
Willowpark Apartments
Lawton, OK. . . . . . . . . . . . . N/A N/A N/A N/A N/A 87% 98% 93%
Winchester Run Apartments
Oklahoma City, OK . . . . . . . . . N/A N/A N/A N/A N/A 89% 99% 97%
Woodrun Village Apartments
Yukon, OK . . . . . . . . . . . . . N/A N/A N/A N/A N/A 97% 99% 98%
<PAGE>
1996 1997
------------------------------- -------------------------------
at at at at at at at at
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
----- ---- ---- ----- ---- ---- ----- -----
PROPERTIES SOLD
- ---------------
Colonial Courts of Westland Apartments
Columbus, OH. . . . . . . . . . . . 95% 94% 92% 95% 93% 94% N/A N/A
Hallmark Village Apartments
Clarksville, IN . . . . . . . . . . 82% 82% 84% 82% N/A N/A N/A N/A
Victor Building, Office Building
Washington, D.C.. . . . . . . . . . 53% 51% 52% 64% 67% 67% N/A N/A
<FN>
A "N/A" indicates that the property was not owned by the Trust at the end of the quarter.
The occupancy levels are based on the total number of units for the apartment complexes and the gross leasable
area occupied at each office, industrial and retail property space as of the end of each quarter. Historically,
occupancy levels generally do not fluctuate significantly during the quarter.
</TABLE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Trust is not aware of any material pending legal proceedings as of
February 27, 1998, nor were any proceedings terminated during the quarter
ended December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust did not submit any matter to a vote of its shareholders
during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS
The Trust's shares are included for quotation on the NASDAQ National
Market (symbol - VLANS changed to BSRTS on March 2, 1998). The table below
shows the quarterly high and low bid prices reported by NASDAQ and the
amount of cash distributions paid per share for the years ended
December 31, 1997 and 1996:
1997
----
Quarter Share Per Share Declaration
Ended Price Distributions Date
- ------- ----- ------------- -----------
3/31 High $5.00 $0.10 4/8/97
Low $3.75
6/30 High $4.62 $0.10 7/3/97
Low $3.62
9/30 High $5.50 $0.10 10/7/97
Low $4.00
12/31 High $6.87 $0.10 1/7/98
Low $5.06
1996
----
Quarter Share Per Share Declaration
Ended Price Distributions Date
- ------- ----- ------------- -----------
3/31 High $4.875 $0.10 4/8/96
Low $3.750
6/30 High $4.500 $0.10 7/9/96
Low $3.938
9/30 High $4.625 $0.10 10/4/96
Low $4.000
12/31 High $5.000 $0.10 1/9/97
Low $3.875
On January 7, 1998, the Trust declared a cash distribution for the
quarter ended December 31, 1997 of $0.10 per share payable February 20,
1998 to shareholders of record on January 22, 1998.
During 1997 and 1996, the Trust paid distributions equal to $0.40 per
share. A total of $0.38 and $0.13, respectively, of the distributions paid
represented a return of capital.
The Trust's ability to make future distributions to its shareholders
is dependent upon, among other things: (i) sustaining the operating
performance of its existing real estate investments through scheduled
increases in base rents under existing leases and through general
improvement in the real estate markets where the Trust's properties are
located reflected in changes in base rents attributable to new or
replacement leases; (ii) the operating performance of future acquisitions
and (iii) the Trust's level of operating expenses.
As of February 27, 1998, there were 3,808 record holders of shares of
beneficial interest.
SHARE PURCHASE AGREEMENT AND CONVERTIBLE TERM LOAN AGREEMENT
On October 14, 1997, the Trust entered into a Share Purchase Agreement
(the "Agreement") with a group of accredited investors (as defined in
Section 501 of Regulation D) (the "Purchasers") under which the Trust sold
2,192,501 shares of beneficial interest at $5.00 per share, for an
aggregate sale price of approximately $11 million. The shares were issued
to the Purchasers in a transaction exempt from registration under Section
4(2) of the Securities Act of 1933, as amended. The agent representing the
Purchasers has a pre-existing relationship with members of the Trust's
management. The Trust paid $0.6 million of commission to Leveraged Equity
Management, $0.5 million to Josephthal Lyon and Ross Incorporated for
financial advisory and other services rendered in connection with the
transaction and $0.3 million of other costs in connection with the
transaction. None of these costs were paid to officers or affiliates of
the Trust. The net sales proceeds were used to repay draws totaling $9.0
million on the Trust's Revolving Line, with the remainder used for general
working capital. Amounts repaid under the Revolving Line may be re-
borrowed until May 31, 1998 and utilized to acquire additional real estate
property interests.
Simultaneously with the execution of the Agreement, the Trust also
entered into a Convertible Term Loan Agreement ("the Loan Agreement") with
the Purchasers. Under this agreement, the Purchasers agreed to provide an
unsecured convertible loan to the Trust in the amount of $20,000,000 (the
"Unsecured Loan") of which $10,000,000 must be borrowed by March 31, 1998
and the remainder by October 14, 1998. On March 30, 1998, the Loan
Agreement was amended to extend the date by which the first $10,000,000
must be borrowed from March 31, 1998 to June 30, 1998. As of December 31,
1997, the Trust had not borrowed any amounts under the loan. Loan proceeds
may be used by the Trust only to purchase real estate property interests.
The Loan Agreement contains a number of covenants and limitations customary
for agreements of this nature including covenants related to net worth and
debt coverage. Interest is payable quarterly on the last day of the
calendar quarter, at 12% per annum. Draws on the loan mature on September
30, 2002 with no prepayment of the loan permitted prior to September 30,
1999, although the Purchasers may accelerate maturity upon the sale of
substantially all of the assets of the Trust.
Assuming shareholder approval, the Purchasers may convert all or part
of the amounts funded on the Unsecured Loan into preferred stock at a
conversion price of $100 per share or into common shares at a conversion
price of $5.15 per share. Preferred shares are convertible to common
shares at the rate of approximately 19.4 common shares for each share of
preferred stock, a price equal to $5.15 per share. The convertible
preferred shares will be entitled to receive, upon declaration by the
Trust, cash distributions at an annual rate of 10% per annum calculated on
their stated value of $100 per share. Distributions on preferred shares
will be cumulative from the date of issuance whether or not there are funds
legally available for the payment thereof and must be paid prior to paying
any distributions to the holders of common shares. Finally, for thirty
days after expiration of the loan commitment, the Purchasers may purchase
preferred shares to the extent that any part of the $20,000,000 loan is not
then outstanding in an amount equal to the unfunded portion at a price
equal to $100 per preferred share. Prior to shareholder approval, the
Purchasers may also convert loans outstanding to common shares at any time,
if that conversion will not cause total shareholdings of the Purchasers to
exceed 19.9% of the issued and outstanding shares as of October 14, 1997.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (1)
<CAPTION>
For the Years Ended December 31,
1997 1996 1995 1994 1993
------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues. . . . . . . . . $ 28,784,900 $21,404,318 $12,902,369 $8,833,801 $4,127,149
Income (Loss) before
Net Gains and
Extraordinary
Item (2) .. . . . . . 2,729,062 (1,757,260) 2,190,755 (958,600) (617,272)
Net Income (Loss) . . . . 3,546,282 (1,757,260) 2,600,045 (912,492) (617,272)
Earnings Per Share of
Beneficial Interest -
Basic and Diluted:
Income (Loss) before
Net Gains and Extra-
ordinary Item (2). . . $ 0.24 $ (0.17) $ 0.21 $ (0.09) $ (0.06)
============ =========== =========== ========== ==========
Net Income (Loss) . . . $ 0.32 $ (0.17) $ 0.25 $ (0.09) $ (0.06)
============ =========== =========== ========== ==========
<PAGE>
For the Years Ended December 31,
1997 1996 1995 1994 1993
------------- ------------- ----------- ------------ ------------
BALANCE SHEET DATA
(at year end)
Mortgage Loans
Receivable, Net (3) . . $ -- $ -- $ 5,433,094 $ 5,136,229 $ 4,891,462
Investment in Real
Estate, Net . . . . . . 149,385,842 102,489,727 87,862,970 40,161,412 21,769,471
Investment in Real
Estate Ventures . . . . -- 5,713,759 8,895,678 10,697,791 13,668,332
Total Assets. . . . . . . 159,633,628 116,534,205 110,764,772 74,084,351 69,360,043
Mortgage Loans and
Bonds Payable . . . . . 92,117,777 59,081,023 49,022,181 13,400,695 3,986,373
Shareholders'
Equity. . . . . . . . . 62,315,210 50,934,438 56,875,404 58,440,712 63,541,645
OTHER DATA
Funds From Operations
(4) . . . . . . . . . . $ 5,843,472 $ 3,689,010 $ 3,333,940 $ 2,800,422 $ 792,692
Cash Flows From:
Operating Activities. . 8,135,152 5,401,784 2,847,228 3,373,522 2,194,055
Investing Activities. . (27,066,123) (6,269,271) (31,690,611) (6,548,238) (2,070,065)
Financing Activities. . 19,554,299 (827,468) 19,574,428 4,437,942 (1,442,522)
Real Estate Net
Operating Income (5). . 14,339,311 9,497,917 5,360,807 4,087,680 1,125,220
Number of Property
Interests Owned . . . . 22 15 13 8 6
Weighted Average
Number of Shares. . . . 11,149,982 10,478,410 10,474,079 10,471,102 10,518,047
Cash Distribution
Per Share of
Beneficial
Interest (6) . . . . . $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40
<PAGE>
<FN>
- ------------
(1) The above selected financial data should be read in conjunction with the consolidated financial statements
and the related notes appearing elsewhere in this annual report.
(2) Net gains include gain on disposition of investment in real estate, loss on disposition of investment in
real estate venture and gain on disposition of partnership interest.
(3) Represents the carrying amount of the mortgage loans, which is equal to the face amount of the loans plus
unamortized loan fees, net of loan discounts of $1,436,587, $1,808,716 and $2,116,636 for 1995, 1994 and 1993,
respectively. See Note 2, Mortgage Loans Receivable, of Notes to Consolidated Financial Statements for further
details.
(4) Due to certain unique operating characteristics of real estate companies, The National Association of Real
Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a standard known as "Funds from
Operations", or "FFO" for short, which it believes more accurately reflects the operating property performance of
a REIT such as the Trust. As defined by NAREIT, FFO means net income computed in accordance with generally
accepted accounting principles, less extraordinary, unusual and nonrecurring items, excluding gains (or losses)
from debt restructuring and sales of property plus depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures in which the REIT holds an interest. The Trust has adopted the
NAREIT definition for computing FFO because management believes that, subject to the following limitations, FFO
provides a basis for comparing the performance and operations of the Trust to those of other REIT's. The
calculation of FFO may vary from entity to entity in that capitalization and expense policies may vary from entity
to entity. Items which are capitalized do not decrease FFO whereas items that are expensed decrease FFO. As
such, the presentation of FFO by the Trust may not be comparable to other similarly titled measures presented by
other REIT's. FFO is not intended to be an alternative to Net Income as an indication of the Trust's performance
nor to Cash Flows from Operating Activities (as determined by GAAP) as a measure of the Trust's capacity to pay
distributions.
Calculation of Funds from Operations for the years ended December 31, 1997, 1996, 1995, 1994 and 1993:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Income (Loss). . . . . . . . . . . $3,546,282 $(1,757,260) $2,600,045 $ (912,492) $(617,272)
Plus: Depreciation and
Amortization Expense . . . . . . . . 3,500,591 2,483,534 1,385,374 945,692 267,061
Less: Minority Interest Share
of Depreciation and
Amortization Expense . . . . . . . . (274,642) (240,695) (115,231) (44,444) (19,025)
Less: Recovery of Losses on
Loans, Notes and
Interest Receivable. . . . . . . . . (161,539) (16,569) (164,958) (57,226) (57,072)
Franchise Tax Fee Accrued. . . . . . . 50,000 40,000 38,000 -- --
Valuation Allowance Included
in Operations of
Real Estate Venture. . . . . . . . . -- 3,180,000 -- 2,915,000 1,219,000
Net Gain on Disposition of Investment
in Real Estate, Disposition
of Investment in Real Estate
Venture and Disposition of
Partnership Interest . . . . . . . . (881,375) -- (409,290) (46,108) --
Extraordinary Item,
Net of Minority Interest . . . . . . 64,155 -- -- -- --
---------- ----------- ---------- ---------- ---------
Funds From Operations. . . . . . . . . $5,843,472 $ 3,689,010 $3,333,940 $2,800,422 $ 792,692
========== =========== ========== ========== =========
<FN>
(5) Real estate net operating income ("RENOI") is defined as total revenue excluding income on investments less
operating property expenses, repairs and maintenance, real estate taxes, ground lease expense and depreciation
and amortization.
(6) Based on 11,149,982 weighted average shares outstanding for 1997, 10,478,410 weighted average shares
outstanding for 1996, 10,474,079 weighted average shares outstanding for 1995, 10,471,102 weighted average shares
outstanding for 1994, and 10,518,047 weighted average shares outstanding for 1993.
</TABLE>
<PAGE>
<TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and
1996.
<CAPTION>
1997
For the three months ended:
-----------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenue $ 5,893,886 $ 6,746,542 $ 7,875,130 $ 8,269,342
Recovery of Losses on Loans, Notes
and Interest Receivable -- -- -- 161,539
Operating Expenses (5,352,505) (6,183,169) (7,051,112) (7,077,394)
----------- ----------- ----------- -----------
Operating Income 541,381 563,373 824,018 1,353,487
Minority Interest in Consolidated
Partnerships (166,743) (144,983) (151,747) (126,850)
Income (Loss) of Real Estate Ventures 30,363 20,419 (13,656) --
----------- ----------- ----------- -----------
Income before Net Gains and
Extraordinary Item 405,001 438,809 658,615 1,226,637
Net Gain (Loss) on Disposition of
Investment in Real Estate,
Disposition of Investment in Real
Estate Venture and Disposition of
Partnership Interest 3,788 -- 1,071,858 (194,271)
Extraordinary Item, Net of
Minority Interest -- -- -- (64,155)
----------- ----------- ----------- -----------
Net Income $ 408,789 $ 438,809 $ 1,730,473 $ 968,211
=========== =========== =========== ===========
<PAGE>
1997
For the three months ended:
-----------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ------------ ------------ ------------
Earnings Per Share of
Beneficial Interest -
Basic and Diluted:
Income before Net Gains
and Extraordinary Item $ 0.04 $ 0.04 $ 0.06 $ 0.09
=========== =========== =========== ===========
Net Income $ 0.04 $ 0.04 $ 0.16 $ 0.08
=========== =========== =========== ===========
1996
For the three months ended:
-----------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ------------ ------------ ------------
Total Revenue $ 5,176,653 $ 5,440,777 $ 5,284,942 $ 5,501,946
Recovery of Losses on Loans, Notes
and Interest Receivable -- -- 14,059 2,510
Operating Expenses (4,572,252) (4,783,524) (4,829,093) (5,210,655)
----------- ----------- ----------- -----------
Operating Income 604,401 657,253 469,908 293,801
Minority Interest in Consolidated
Partnerships (102,553) (117,934) (128,903) (132,021)
Income (Loss) of Real Estate Ventures (38,307) (58,707) 19,649 (3,223,847)
----------- ----------- ----------- -----------
Net Income (Loss) (1) $ 463,541 $ 480,612 $ 360,654 $(3,062,067)
=========== =========== =========== ===========
<PAGE>
1996
For the three months ended:
-----------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ------------ ------------ ------------
Earnings Per Share of Beneficial
Interest - Basic and Diluted $ 0.04 $ 0.05 $ 0.03 $ (0.29)
=========== =========== =========== ===========
<FN>
(1) Net Income for each of the three months ended March 31, 1996, June 30, 1996 and September 30, 1996 has been
reduced by $162,500 or $0.016 per share, and net income for the three months ended December 31, 1996 has been
increased by $487,500 or $0.047 per share, from the amounts originally reported as a result of changes in the
timing for recognizing certain incentive compensation expense. In the fourth quarter of 1996, the Trust recorded
incentive compensation expense in the amount of $650,000 which was the cumulative amount earned as of December 31,
1996 by its president pursuant to his employment agreement with the Trust. Under the employment agreement,
incentive compensation was earned based on appreciation in the Trust's properties (measured by comparing current
market value to the Trust's acquisition cost) during the period January 1, 1993 through August 31, 1997. Prior to
1996, no expense was recorded related to this aspect of his contract because many properties in the portfolio at
that time had been recently acquired. Thus, the Trust had no reason to believe that these properties had
appreciated in any material amount. During 1996, management believes that certain of the properties in the
Trust's portfolio began to increase in value due to improvements in operations, reductions in interest rates and
other improvements in general economic conditions, necessitating the accrual of expense. Therefore, although the
above cumulative incentive amount was recorded in the fourth quarter of 1996, the Trust retrospectively determined
that the composition of the Trust's portfolio throughout the year required that the expense be measured and
recorded in earlier quarters of 1996. This adjustment had no effect on net income for the year ended December 31,
1996.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Certain statements in this Annual Report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Discussions containing forward-
looking statements may be found in this section and in the section headed
"Business." Without limiting the foregoing, words such as "anticipates,"
"expects," "intends," "plans" and similar expressions are intended to
identify forward-looking statements. These statements are subject to a
number of risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements. See also "Factors
Affecting the Trust's Business Plan" below. The Trust undertakes no
obligation to update these forward-looking statements to reflect future
events or circumstances.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents consist of cash and short-term investments.
The Trust's cash and cash equivalents balance at December 31, 1997 and 1996
was $4,428,588 and $3,805,260, respectively. The increase in total cash
and cash equivalents of $623,328 is due to $8,135,152 generated from
operating activities and $19,554,299 of cash obtained by financing
activities, which exceeds the $27,066,123 used in investing activities.
Cash Flows From Operating Activities: Net cash provided by operating
activities increased by approximately $2.7 million for the year ended
December 31, 1997 to approximately $8.1 million from approximately $5.4
million for the same period in 1996. This increase is primarily due to the
net operating income generated by the properties acquired in 1997 and 1996.
See Results of Operations below for further discussion of the operations of
the Trust's real estate assets.
Cash Flows From Investing Activities: During the year ended
December 31, 1997, the Trust utilized approximately $27.1 million in
investing activities compared to utilizing approximately $6.3 million in
investing activities for the same period in 1996. Cash flow was utilized
during the year ended December 31, 1997 to acquire the Phoenix Business
Park property in January 1997, the Butterfield Office Plaza in April 1997,
the four Oklahoma apartment complexes in May 1997, the Southlake Corporate
Center in July 1997, the University Square Business Center and Technology
Center in August 1997, and Airways Plaza in December 1997 for an aggregate
use of cash from investing activities of approximately $37.5 million. In
addition, The Trust used cash to make capital improvements at its various
properties in the amount of approximately $2.5 million during 1997. These
outflows of cash were partially offset by approximately $6.1 million in
proceeds received from the March 11, 1997 sale of the Trust's interest in
the Hallmark Village property, approximately $5.5 million received from the
sale of the H Street Assemblage land parcel and the Victor Building during
the second and third quarters of 1997 and approximately $0.9 million
received from the September 25, 1997 sale of its partnership interest in
the Colonial Courts Apartments. See Property Acquisitions and Other
Information for further information regarding the assets purchased during
1997. During the year ended December 31, 1996, the Trust acquired the
Midwest Office Center and 6901 Riverport Drive properties for approximately
$9.3 million, made capital improvements of approximately $2.0 million and
paid approximately $0.3 million of liabilities assumed at the acquisition
of various real estate assets. These outflows of cash for the year ended
December 31, 1996 were offset by the receipt of approximately $5.4 million
as a result of the sale of the Trust's interest in the Karfad Loan
Portfolio.
<PAGE>
Cash Flows From Financing Activities: For the year ended December 31,
1997, the Trust generated cash flows from financing activities of
approximately $19.6 million compared to utilizing approximately $0.8
million for the year ended December 31, 1996. The cash flow provided by
financing activities for the year ended December 31, 1997 was primarily due
to the receipt of approximately $10.0 million of net proceeds from issuance
of shares (see "Share Purchase Agreement and Convertible Term Loan
Agreement" in Part II, Item 5, Market for the Registrant's Shares and
Related Shareholder Matters) and approximately $64.5 million of proceeds
from mortgage loans, which represents draws upon the Trust's line of credit
with American National Bank (the "Revolving Line") primarily used to
purchase the Phoenix Business Park property, the Butterfield Office Plaza,
the Oklahoma Apartment Portfolio, Southlake Corporate Center, University
Square Business Center, Technology Center and Airways Plaza for
approximately $36.9 million, financing of Butterfield Office Plaza pursuant
to a $10.0 million first mortgage loan collateralized by the property and
refinancing of Northlake Tower pursuant to $17.6 million first mortgage
loan collaterized by a leasehold interest in property.
Partially offsetting these sources was the payment of principal on
bonds and mortgage loans in the amount of approximately $47.5 million,
$36.2 million of which represents payments against the Trust's Revolving
Line as follows: (i) $5.7 million as a result of the sales proceeds
received from the Hallmark property sale in March 1997; (ii) $5.5 million
as a result of the H Street Assemblage property sales proceeds received in
March and July 1997; (iii) $9.9 million as a result of the Butterfield
Office Plaza financing; (iv) $9.0 million as a result of proceeds from
issuance of shares; (v) $6.1 million as a result of Northlake refinancing;
and the balance representing a repayment of first mortgage on Northlake
Tower in the amount of $10.4 million and scheduled principal payments
related to other bonds and mortgage loans in the amount of $1.0 million.
As a result of the above transactions, the amount available on the
Revolving Line was $20.9 million at December 31, 1997. In addition, the
Trust paid distributions aggregating approximately $4.5 million, paid
approximately $1.2 million of deferred financing costs and paid
distributions to minority partners of approximately $1.7 million.
The cash flows used for financing activities for the year ended
December 31, 1996 was primarily used for principal payments on mortgage
loans and bonds payable aggregating approximately $11.6 million, $10.9
million of which represents a paydown of the Trust's Revolving Line and
approximately $0.7 million of which represents principal payments on
additional mortgage loans and bonds payable. In addition, the Trust paid
approximately $0.6 million of deferred financing costs, distributions to
shareholders of approximately $4.2 million and distributions to minority
partners of approximately $0.4 million. Partially offsetting these uses
was the receipt of approximately $15.9 million of proceeds from mortgage
loans payable, approximately $7.3 million of which consisted of proceeds
from a first mortgage loan secured by the Woodcrest property, approximately
$3.3 million of which consisted of proceeds from a first mortgage loan
secured by the Midwest Office property and the balance of which was drawn
on the Trust's Revolving Line. During the year ended December 31, 1996,
the Trust also executed a first mortgage loan secured by the Florida Power
and Light building in the amount of $6.2 million and utilized the proceeds
from the loan to reduce its borrowing on the Trust's Revolving Line.
LINE OF CREDIT
On December 13, 1994, the Trust executed a Revolving Line of Credit
with American National Bank of Chicago ("ANB") in the amount of $15
million. The Revolving Line has been amended several times. Under the
latest amendment dated April 19, 1997, the Trust was permitted to borrow up
to $30 million under a revolving facility through November 30, 1997 with a
maturity of all unpaid balances by November 30, 1998. On November 13,
1997, the Trust exercised its option to extend both the revolving facility
and the maturity of the loan for an additional six months until May 31,
1998 and May 31, 1999, respectively. On May 31, 1998, the Revolving Line
<PAGE>
will convert to a one year, interest only, term loan due May 31, 1999. The
Trust is presently involved in negotiations to continue a revolving
facility beyond May 31, 1998. There can be no assurance that the loan will
be extended on terms acceptable to the Trust, if at all. During the term
of the Revolving Line, the Trust must pay interest only at a rate of LIBOR
plus 2.25% or Prime plus .25% at the election of the Trust. As of December
31, 1997, the LIBOR based rate paid by the Trust was 7.9% and the Prime
rate was 8.75%. In addition, the Trust is required to pay the Bank an
unused facility fee of .5% per annum multiplied by the average portion of
the Revolving Line that is undrawn from time to time. As of December 31,
1997, the Trust had an outstanding balance of $9.1 million of the $30
million available under the Revolving Line.
The Trust's objective is to provide cash distributions to its
shareholders from cash generated from the Trust's operations. Cash
generated from operations is not equivalent to the Trust's net operating
income as determined under generally accepted accounting principles. Due
to certain unique operating characteristics of real estate companies, the
National Association of Real Estate Investment Trusts ("NAREIT"), an
industry trade group, has promulgated a standard known as "Funds from
Operations", or "FFO" for short, which it believes more accurately reflects
the operating property performance of a REIT such as the Trust. As defined
by NAREIT, FFO means net income computed in accordance with generally
accepted accounting principles, less extraordinary, unusual and
nonrecurring items, excluding gains (or losses) from debt restructuring and
sales of property plus depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures in which the REIT holds
an interest. The Trust has adopted the NAREIT definition for computing FFO
because management believes that, subject to the following limitations, FFO
provides a basis for comparing the performance and operations of the Trust
to those of other REIT's. The calculation of FFO may vary from entity to
entity in that capitalization and expense policies may vary from entity to
entity. Items which are capitalized do not decrease FFO whereas items that
are expensed decrease FFO. As such, the presentation of FFO by the Trust
may not be comparable to other similarly titled measures presented by other
REIT's. FFO is not intended to be an alternative to Net Income as an
indication of the Trust's performance nor to Cash Flows from Operating
Activities (as determined by GAAP) as a measure of the Trust's capacity to
pay distributions.
For the years ended December 31, 1997, 1996 and 1995, the Trust's
operations generated FFO of $5.8 million, $3.7 million and $3.3 million,
respectively. FFO increased for the year ended December 31, 1997 as
compared to the years ended December 31, 1996 and 1995 as a result of the
Trust's 1995, 1996 and 1997 property acquisitions.
FFO for the years ended December 31, 1997, 1996, and 1995 is
calculated as follows:
1997 1996 1995
------------ ----------- -----------
Net Income (Loss) $ 3,546,282 $ (1,757,260) $ 2,600,045
Plus:
Depreciation expense 3,276,991 2,355,360 1,300,205
Depreciation included
in Operations of
Real Estate Ventures 15,238 30,475 50,382
Lease Commission
Amortization 208,362 97,699 34,787
<PAGE>
1997 1996 1995
------------ ----------- -----------
Less:
Minority Interest
Share of Depreci-
ation Expense (253,749) (228,011) (110,813)
Minority Interest
Share of Lease
Commission
Amortization (20,893) (12,684) (4,418)
Recovery of Losses
on Loans, Notes
and Interest
Receivable (161,539) (16,569) (164,958)
Franchise Tax Fees
Accrued 50,000 40,000 38,000
Valuation Allowance
Included in Operations
of Real Estate Venture -- 3,180,000 --
Net Gain on Disposition
of Investment in
Real Estate, Disposition
of Investment in Real
Estate Venture and
Disposition of
Partnership Interest (881,375) -- (409,290)
Extraordinary Item, Net
of Minority Interest 64,155 -- --
------------ ------------ ------------
Funds From Operations $ 5,843,472 $ 3,689,010 $ 3,333,940
============ ============ ============
Cash Flows Provided By
(Used For):
Operating Activities $ 8,135,152 $ 5,401,784 $ 2,847,228
Investing Activities $(27,066,123) $ (6,269,271) $(31,690,611)
Financing Activities $ 19,554,299 $ (827,468) $ 19,574,428
The Trust expects to fund its future liquidity needs with the cash
flow obtained from its operating properties, cash proceeds derived from
mortgage financing either on a long term basis or utilizing the Revolving
Line, (currently secured by the Trust's Colonial Penn, Phoenix Business
Park, Lexington, Newtown, Southlake and Technology Center properties), if
continued beyond May 31, 1998, cash proceeds from the Trust's Unsecured
Loan and interest earned on the Trust's short-term investments. The Trust
believes that these sources, as well as the Trust's cash and cash
equivalents, are sufficient to meet the Trust's reasonably anticipated
needs for liquidity and capital resources in the near future and to provide
cash proceeds for distributions to shareholders.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Trust's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions and invoices, or engage in similar normal
business activities.
By June 30, 1998, the Trust expects to have completed the upgrade of
its accounting and financial modeling software programs in order to
eliminate the impact of the Year 2000 on its computer operations. The cost
associated with these upgrades is not expected to be material and would not
cause reported financial information to be less indicative of the Trust's
future operating results or financial condition. Furthermore, because the
Trust utilizes third party property management firms to perform certain
property level accounting functions, their ability to address the effect of
the Year 2000 Issue with respect to their computerized accounting systems
may have an impact on the Trust. The Trust, however, feels that the
ability of its property managers to resolve the Year 2000 Issue will also
have an immaterial impact on the Trust's financial condition. The Trust
believes that because it has the right to cancel its property management
contracts on 30 day notice, at no cost to the Trust, those property
managers who do not address the Year 2000 Issue can be replaced with ones
that have systems that comply. The Trust is currently in the process of
determining whether or not each of its property managers have properly
addressed the Year 2000 Issue. The Trust cannot quantify the potential
costs and uncertainties associated with this computer program flaw at this
times as it relates to other organizations that it relies upon other than
the aforementioned, but does not anticipate that the effect of this
computer program flaw on the operations of the Trust will be significant.
RESULTS OF OPERATIONS
GENERAL
At December 31, 1997, the Trust owned seven flex/industrial complexes
aggregating 1,361,100 square feet of gross leasable area, four apartment
complexes consisting of a total of 864 units, ten office properties
consisting of 1,193,800 square feet of gross leasable area and one retail
center containing 321,800 square feet of gross leasable area. During 1995,
the Trust acquired Willowbrook Industrial Court, Northlake Tower Shopping
Center, Quantum Business Center, Lexington Distribution Center, Newtown
Distribution Center and the Woodcrest Office Park property. During 1996,
the Trust acquired the Midwest Office Center and 6901 Riverport Drive
properties and sold its interest in the Karfad loan portfolio to an
unaffiliated third party. During 1997, the Trust acquired Phoenix Business
Park, Butterfield Office Plaza, the Oklahoma Apartment Portfolio, Southlake
Corporate Center, University Square Business Center, Technology Center and
Airways Plaza properties, and sold its interest in Hallmark Village
Apartments, H Street Venture and Colonial Courts Apartments. See Property
Acquisitions and Other Information below for a more detailed description of
the assets acquired during 1997.
The Trust is entitled to receive a cumulative preferred return of 12%
compounded annually on its total capital contribution in each of the joint
ventures holding title to the Milwaukee Industrial, Elmhurst Metro Court,
Willowbrook Industrial Court, Midwest Office Center, Northlake Tower
Shopping Center, Woodcrest Office Park and Hallmark Village Apartments
properties. During the year ended December 31, 1997, all of the aforesaid
properties, with the exception of Hallmark Village, generated sufficient
cash flow from operations to pay the Trust in excess of its 12% preferred
return earned on contributed equity. The Trust sold its interest in the
Hallmark Village property on March 11, 1997. See Item 1, "Business", for
further details.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Real estate net operating income before interest expense ("RENOI")
(herein defined as total revenue excluding income on investments less
operating property expenses, repairs and maintenance, real estate taxes,
ground lease expense and depreciation and amortization) increased by
approximately $4.8 million or 50.5% from $9.5 million in 1996 to $14.3
million in 1997. The Trust's acquisitions during 1996 and 1997 described
above accounted for approximately $4.6 million of this increase.
Negatively impacting this increase was the elimination in 1997 of
approximately $0.4 million of interest income and amortized discount on
mortgage loans realized during 1996 on the Karfad loans and the decrease in
RENOI of $0.6 million from properties sold in 1997. On a "same store"
basis (comparing the results of operations of the properties owned during
the year ended December 31, 1997, with the results of operations of the
same real estate assets owned during the year ended December 31, 1996) the
RENOI increased by $1.1 million, or 12.6% from $8.7 million in 1996 to $9.8
million in 1997. See below for further discussions of the changes in
revenues and expenses for the period.
Total revenues increased by approximately $7.4 million or 34.6% to
$28.8 million from $21.4 million due primarily to the acquisition and sale
of certain properties after January 1, 1996 which, when combined, accounted
for approximately $6.5 million or 87.8% of this increase. On a "same-
store" basis, total property revenues increased by approximately $1.2
million or 7.2% to $17.9 million from $16.7 million. This increase in same
store properties is due in part to an increase in total revenue at the
Trust's Lexington property of approximately $0.4 million as a result of a
new lease signed in 1996 for approximately 46,900 square feet of gross
leasable area. In addition, operating cost reimbursements increased by
approximately $0.2 million. The remainder of the increase in same store
properties is due to an increase in rental rates. Partially offsetting
these increases in total revenues was a decrease in interest and amortized
discount on mortgage loans of approximately $0.4 million.
Total operating expenses which include Operating Property Expenses,
Repairs and Maintenance, Real Estate Taxes and Ground Lease Expense,
increased by approximately $1.4 million to $10.7 million from $9.3 million.
Virtually all of the increase is due to the 1996 and 1997 acquisitions
mentioned above, net of properties sold.
Interest expense increased by approximately $2.4 million primarily due
to additional loans obtained to finance new acquisitions.
The total increase in depreciation and amortization of approximately
$1.0 million consists of an increase of approximately $0.3 million for
"same-store" properties, and approximately $0.7 million for new properties,
net of properties sold. The increase for same store properties relates to
additional improvements and lease commissions paid for these properties.
An increase in amortization of deferred loan fees and financing costs
of approximately $0.2 million relates primarily to costs of obtaining new
loans to finance new acquisitions.
Total general and administrative expenses increased by approximately
$1.2 million due to higher legal fees and payroll costs due to additional
staffing required as a result of acquiring and managing the additions to
the Trust's real estate portfolio. Furthermore, the increase is due to an
increase in incentive compensation earned by Mr. Levine, the Trust's
president. During the year ended December 31, 1997, the Trust accrued $0.4
million relating to incentive compensation earned by Mr. Levine based on
1997 operating results plus $0.8 million of incentive compensation based on
the estimated unrealized gain on the Trust's assets. See Item 11,
Executive Compensation for further details regarding incentive compensation
earned and paid during 1997 as well as modifications made to the
President's employment contract with the Trust.
During the year ended December 31, 1997, the Trust realized net income
from the operation of real estate ventures of $37,126 compared to a net
loss of ($3,301,212) for the same period in 1996. The net income from
operations of real estate ventures for the year ended December 31, 1997
represents the income realized from the Trust's 53% interest in the real
estate venture known as the H Street Venture. The net loss in 1996 is due
primarily to a reduction in the book value of the H Street Assemblage
during 1996 in the amount of $6.0 million, of which approximately $3.2
million is the Trust's share. The H Street Venture owned a 55,900 square
foot office building (the "Victor Building") and an adjacent land parcel
consisting of 36,100 square feet (the "H Street Assemblage") located in
Washington, D.C. On March 20, 1997, the H Street Venture sold
approximately 3,500 square feet of the H Street Venture's land to the
United States General Services Administration on behalf of the United
States of America ("GSA") for a purchase price of approximately $1.7
million. GSA also paid the H Street Venture approximately $0.2 million as
reimbursement of expenses that the H Street Venture incurred in
anticipation of this transaction. The H Street Venture received net
proceeds of approximately $1.8 million, of which approximately $1.0 million
was distributed to the Trust. The Trust recognized no gain or loss on this
sale. On July 29, 1997, the H Street Venture sold the remaining land and
the Victor Building to an unaffiliated third party for $9.0 million The
Trust received net sales proceeds of approximately $4.5 million and
recognized a loss on disposition of approximately $0.1 million. The sales
proceeds generated as a result of this sale were used to paydown the
Trust's Revolving Line. These proceeds were subsequently reborrowed to
fund acquisitions of additional real estate investments.
The factors discussed above resulted in consolidated net income of
approximately $3.5 million or $0.32 per share for the year ended
December 31, 1997 as compared to consolidated net loss of approximately
$1.8 million or ($0.17) per share for the year ended December 31, 1996.
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Real estate net operating income before interest expense increased
from approximately $5.4 million in 1995 to approximately $9.5 million in
1996. Acquisitions made during 1995 and 1996 contributed approximately
$4.9 million to net operating income in 1996 offset by a decrease of
approximately $594,000 in interest and amortized discount on mortgage loans
which resulted from the sale of the Karfad loans. See below for further
discussions of the changes in revenues and expenses for the year ended
December 31, 1996 as compared to the year ended December 31, 1995.
Total revenues increased by approximately $8.5 million to $21,404,318
from $12,902,369 primarily due to the acquisitions made during 1995 and
1996 which accounted for approximately $9.2 million of this increase during
the year ended December 31, 1996. On a "same-store" basis (comparing the
results of operations of the properties owned during the year ended
December 31, 1996, with the results of operations of the same properties
owned during the year ended December 31, 1995), property revenues increased
from $8,590,000 in 1995 to $8,930,000 in 1996 or approximately $340,000, a
4% increase. This increase in property revenue was due primarily to an
increase in average occupancy at the Colonial Courts of Westland apartments
of 94% for the year ending December 31, 1996 as compared to 90% for the
same period in 1995 and contractual rent increases at the Trust's
industrial and office properties. Partially offsetting these improvements
was a decrease in interest and amortized discount on mortgage loans of
approximately $594,000 and a decrease in income on investments of
approximately $475,000. Interest and amortized discount on mortgage loans
decreased due to the Trust's termination of the amortization of the
purchase discount as of January 1, 1996 on the Karfad Loan and sale of the
loan portfolio. Interest income on investments decreased due to the
reduction in cash available for investment resulting primarily from the
investment of cash in the assets acquired during 1996 and the last seven
months of 1995 and the reduction of indebtedness under the Revolving Line.
Total expenses increased by approximately $8.8 million to $19,378,955
from $10,596,213 due primarily to the acquisitions made during 1995 and
1996 which accounted for approximately $6.7 million of this increase during
the year ended December 31, 1996. On a "same-store" basis, total expenses
increased from $7,909,000 in 1995 to $10,017,000 in 1996 or approximately
$2.1 million, a 27% increase. This increase in total expenses is due
primarily to increases in general and administrative and interest expense.
General and administrative expenses increased as a result of an increase in
executive incentive compensation earned on the Trust's investment
activities. During the year ended December 31, 1996, the Trust accrued
approximately $399,000 relating to incentive compensation earned by Mr.
Levine, the Trust's president, based on the 1996 actual results of the
Trust's investments. In addition, the Trust accrued an additional $650,000
of incentive compensation expenses reflecting the estimated unrealized gain
on the Trust's real estate assets. In 1995, the Trust accrued
approximately $75,000 related to incentive compensation. See Item 11,
Executive Compensation, for further details regarding incentive
compensation earned and modifications made to the president's employment
contract with the Trust. Interest expense increased by approximately
$321,000 as a result of the Trust's execution of a mortgage loan in the
amount of $6,200,000 collateralized by the Florida Power and Light property
during March 1996. In addition, a decrease in recoveries of amounts
previously charged against losses on loans, notes, and interest receivable
of $164,958 during 1995 as compared to $16,569 during 1996, which resulted
from distributions in respect of the Trust's interest in the liquidating
trust, also contributed to the increase in total expenses. See Property
Acquisitions and Other Information below for further details regarding the
Trust's interest in the liquidating trust. The remaining increase in total
expenses on a "same-store" basis, resulted from increases in repairs and
maintenance, property operating and depreciation and amortization expense
for the properties owned by the Trust prior to January 1, 1995.
<PAGE>
During the year ended December 31, 1996, the Trust realized a net loss
from the operation of real estate ventures of ($3,301,212) compared to
income of $62,713 for the same period in 1995. This net loss during 1996
represents the Trust's share (53%) of the loss incurred by the real estate
venture known as the H Street Venture. The net income from operations of
real estate ventures of $62,713 for the year ended December 31, 1995
resulted from the income from operations of the Plaza at Westminster
property of $24,950 and income from operations of $37,763 on the H Street
Assemblage. The Plaza at Westminster property was sold in June 1995 to an
unaffiliated third party. The Trust recognized a gain on sale of $409,290.
The net loss in 1996 is due primarily to a reduction in the book value of
the H Street Assemblage during 1996, in the amount of $6,000,000, of which
$3,180,000 is the Trust's share. The H Street Venture's carrying value for
the property after this reduction was based on the anticipated cumulative
sales proceeds pursuant to an agreement with an unaffiliated third party
and the sale of a portion of the H Street Venture's land to the United
States General Services Administration discussed above.
The factors discussed above resulted in a consolidated net loss of
($1,757,260) or ($0.17) per share for the year ended December 31, 1996 as
compared to consolidated net income of $2,600,045 or $0.25 per share for
the year ended December 31, 1995.
PROPERTY ACQUISITIONS AND OTHER INFORMATION
ACQUISITION ACTIVITIES:
During the year ended December 31, 1997, the Trust acquired interests
in several properties. The table below presents a summary of 1997
acquisitions.
<PAGE>
<TABLE>
<CAPTION>
Acquisition
Purchase Financing
Property's Name Sq. Ft./ Date of Price (in millions)
and Location # of Units Acquisition (in millions) (1) Description
- --------------- ---------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Phoenix Business Park
Atlanta, Georgia 110,600 01/15/97 $ 5.5 Three-building office/
industrial complex;
13 tenants at the time
of acquisition
Butterfield Office Plaza
Oak Brook, Illinois 200,800 04/30/97 $15.1 Three-story office build-
ing; 50 tenants at the
time of acquisition
Woodrun Village Apartments
Yukon, Oklahoma 192 05/22/97 $ 4.6 $3.6 (2) Apartment complex
Country Creek Apartments
Oklahoma City, Oklahoma 320 05/22/97 $ 7.5 $5.9 (2) Apartment complex
Willowpark Apartments
Lawton, Oklahoma 160 05/22/97 $ 4.5 $3.5 (2) Apartment complex
Winchester Apartments
Oklahoma City, Oklahoma 192 05/22/97 $ 4.5 $3.6 (2) Apartment complex
Southlake Corporate Center
Morrow, Georgia 56,200 07/30/97 $ 4.5 Three-story office build-
ing; 16 tenants at the
time of acquisition
University Square
Business Center
Huntsville, Alabama 184,700 08/26/97 $ 7.3 $5.0 (3) Six one-story office
buildings; 57 tenants at
the time of acquisition
<PAGE>
Acquisition
Purchase Financing
Property's Name Sq. Ft./ Date of Price (in millions)
and Location # of Units Acquisition (in millions) (1) Description
- --------------- ---------- ----------- ------------- ------------- -----------
Technology Center
Huntsville, Alabama 48,500 08/26/97 $ 2.5 Three-story office
building; 2 tenants at
the time of acquisition
Airways Plaza Office Center
Memphis, Tennessee 87,800 12/10/97 $ 3.2 Five one-story office
buildings; 3 tenants at
----- ----- the time of acquisition
Total $59.2 $21.6
===== =====
<FN>
(1) Represents the amount of permanent mortgage financing assumed at the time of acquisition. All other
additional acquisition costs were paid by either a draw upon the Trust's line of credit or from cash and cash
equivalents.
(2) At the time of the acquisition, the Trust assumed Oklahoma Housing Financing Agency Revenue bond financing
with a combination of fixed rate, tax-exempt and taxable bonds. Approximately $14.6 million of the assumed debt
is tax-exempt and matures on October 1, 2025. The tax exempt portion do not amortize until November 1, 2005, at
which date the interest rates will be reset based upon current rates at that time and the principal balance will
amortize over the remaining twenty years of the term of the bonds. The taxable portion of approximately $2.0
million is fully amortizing over the ten years ending November 1, 2005. The combined effect of the financing
provides a fixed interest rate of 7.3% until November 1, 2005. A prepayment penalty exists on the bonds for any
unscheduled principal payment made prior to September 30, 2005. The prepayment penalty at acquisition was
approximately 9.8% of the total outstanding principal balance and decreases each year through September 2005 by
approximately one percent. There is no prepayment penalty after September 30, 2005.
(3) The Trust assumed an existing mortgage loan with an outstanding principal balance of approximately $5.0
million. The mortgage loan matures in January 2007, bears interest at a fixed rate of 8.89% per annum and
requires monthly payments of principal and interest based upon a twenty-five year amortization schedule with a
balloon payment of approximately $4.1 million due upon maturity.
</TABLE>
<PAGE>
OTHER:
The Trust has received cash of $309,285, $58,658 and $562,337 during
1997, 1996 and 1995, respectively, in respect of its interest in a
liquidating trust established for the benefit of the unsecured creditors
(including the Trust) of VMS Realty Partners and its affiliates ("VMS").
The Trust has recorded $161,539, $16,569 and $164,958, respectively, of
these amounts as recovery of losses on mortgage loans, notes and interest
receivable in its consolidated statement of income and expenses. The
remainder of the amount received, $587,214, was recorded as a liability to
the Class Action Settlement Fund representing the Trust's share of amounts
due under the terms of the previously settled VMS securities litigation, of
which $493,685 was paid and the remaining $93,529 is included in the
liabilities on the Trust's December 31, 1997 balance sheet.
FACTORS AFFECTING THE TRUST'S BUSINESS PLAN
GENERAL FACTORS AFFECTING SHARE PRICE. The market price of the Shares
may fluctuate in response to a variety of factors, including but not
limited to: (i) variations in the Trust's quarterly operating results
including changes in FFO; (ii) the gain or loss of tenants at the Trust's
properties; (iii) general risks, changes or trends in the real estate
industry; (iv) increased competition with other entities or persons engaged
in the same business; (v) legislative or regulatory changes; (vi)
fluctuations in interest rates; and (vii) a change in management of the
Trust. In addition, the stock market has in the past experienced extreme
price and volume fluctuations which have affected the market price of
securities of companies for reasons frequently unrelated to the operating
performance of these companies. These broad market fluctuations may
adversely affect the market price of the Shares.
FACTORS AFFECTING OPERATING RESULTS. The factors which may affect the
Trust's liquidity and capital resources as well as results of operations,
include but are not limited to: (i) the Trust's ability to obtain
additional capital by securing long-term mortgage financing for its
Lexington, Newtown, Phoenix Business Center, Southlake Corporate Center,
Technology Center, Colonial Penn Office Building and Airways Plaza
properties on terms acceptable to the Trust; (ii) the Trust's ability to
extend the Revolving Line beyond May 31, 1998 on terms and conditions
acceptable to the Trust or to replace it with a similar revolving credit
facility; (iii) the Trust's ability to deploy cash available for investment
in operating properties generating yields greater than the interest rate
paid by the Trust on its indebtedness; (iv) the continued occupancy by, and
the financial solvency of, the major tenants at the Trust's Colonial Penn,
Florida Power and Light, Woodcrest Office Park, 6901 Riverport Drive,
Technology Center and Airways Plaza properties; (v) the Trust's ability to
re-lease space as leases expire on terms at least as favorable as the terms
of existing leases since approximately 17% of the tenant leases at the
Trust's properties are scheduled to expire in 1998 (management believes
that the Trust's "in place" Base Rents are generally below market rates);
and (vi) market conditions and rental rates where the Trust's properties
are located.
GENERAL REAL ESTATE INVESTMENT RISKS. Real property investments are
subject to certain risks that may not always be predictable or
controllable. The cash flow generated by, and potential capital
appreciation realized from, real property investments may be adversely
affected by the national and regional economic climate (which, in turn, may
be adversely impacted by plant closings, industry slow-downs, income tax
rates, interest rates, demographic changes and other factors), local real
estate conditions (such as oversupply of, or reduced demand for rental
space in the area), the attractiveness of the properties, zoning and other
regulatory restrictions, competition from other land developers or
developments, increased operating costs (including maintenance costs,
insurance premiums and real estate taxes), perceptions by tenants or
potential buyers of the safety, convenience and attractiveness of the
property and the ability of the owner of the property to provide capable
<PAGE>
management and adequate maintenance. In light of the foregoing factors,
there can be no assurance that the cash flow generated by, and capital
appreciation realized from, the Trust's properties will be sufficient to
cover expenses or recover costs or provide a return of or on capital.
The cash flow generated by, or capital appreciation from, real
property investments may also be adversely affected by changes in
governmental regulations, zoning or tax laws, potential environmental or
other legal liabilities and changes in interest rates. Real estate
investments are also relatively illiquid. Therefore, the Trust's ability to
vary its portfolio promptly in response to changes in economic or other
conditions is limited, which may result in losses if the Trust is forced to
sell a property.
RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF MANY OF THE
PROPERTIES; LACK OF OPERATING HISTORY. The Trust acquired all of its
properties within the last five years, and acquired eighteen of its
properties since June of 1995. The most recently acquired properties may
have characteristics or deficiencies unknown to the Trust that may impact
their value or revenue potential. In addition, it is possible that the
operating performance of the most recently acquired properties may decline.
The Trust is currently experiencing a period of rapid growth. As the
Trust acquires additional properties, the Trust will be subject to risks
associated with managing new properties, including lease-up and tenant
retention. In addition, the Trust's ability to manage its growth
effectively will require it to successfully integrate its new acquisitions
into its existing management structure. No assurances can be given that
the Trust will be able to successfully integrate such properties or
effectively manage additional properties, or that newly acquired properties
will perform as expected.
POTENTIAL INABILITY TO REPAY OR REFINANCE INDEBTEDNESS AT MATURITY.
The Trust is subject to risks normally associated with debt financing,
including the risk that the Trust's cash flow will be insufficient to meet
required payments of principal and interest, the risk that any indebtedness
will not be able to be refinanced or that the terms of any such refinancing
will be less favorable than the terms of the expiring indebtedness. The
Trust anticipates that scheduled principal payments and loan maturities due
in connection with the Trust's indebtedness will total approximately $4.8
million and $10.5 million for the fiscal years ended December 31, 1998 and
December 31, 1999, respectively. The loan secured by Milwaukee Property in
the amount of $3.6 million will mature in 1998, and the Revolving Line in
the amount of $9.1 million, assuming no additional draws, will mature in
1999. Although the Trust may seek to renew or extend the line, there can
be no assurance that the Trust will be able to negotiate an extension or
renewal for terms and conditions acceptable to the Trust, if at all. If
the Trust is unable to renew or extend the line, the Trust will be required
to repay the amounts outstanding as of May 31, 1998 to ANB by May 31, 1999.
Although the Trust will seek an alternative source of funds, should it be
unable to renegotiate or extend the line, there can be no assurance that
financing would be available on acceptable terms and conditions, if at all.
POTENTIAL EFFECT OF RISING INTEREST RATES ON TRUST'S VARIABLE RATE
DEBT. Advances under the Revolving Line bear interest at variable rates
and the interest rate payable on the Riverport bonds issued for the benefit
of the Trust are subject to periodic adjustments based on the then current
market interest rates. In addition, the Trust may incur other variable
rate indebtedness in the future. Increases in interest rates on such
indebtedness would increase the Trust's interest expense, which could
adversely affect the Trust's financial condition and results of operations.
See "--Liquidity and Capital Resources" above.
<PAGE>
CONCENTRATION OF TENANTS AT SIGNIFICANT PROPERTIES. At each of the
Trust's Colonial Penn, Florida Power and Light, Woodcrest Office Park, 6901
Riverport Drive, Technology Center and Airways Plaza properties, one or two
tenants occupy all or a substantial majority of the leased space. If one
or more of the tenants at these properties were to default on its lease or
file for bankruptcy or reorganization, the Trust's revenues could be
reduced, particularly if the Trust were unable to re-lease the vacant space
on comparable terms and conditions. Therefore, the bankruptcy or default
by one of these tenants could have an adverse effect on the Trust's
financial condition and results of operations. See Portfolio Summary
Schedule in Other Information for information regarding lease expirations
at the properties.
COMPETITION FOR TENANTS. The Trust competes with numerous other
entities in attracting tenants to lease its space. Some of the competing
properties may be newer, better located or owned by parties better
capitalized than the Trust. An increase in the number of competitive
properties in a particular area could have a material adverse effect on:
(i) the ability to lease space in the properties (or in newly acquired or
developed properties); and (ii) the rents charged.
COMPETITION IN ACQUIRING PROPERTY. In seeking to acquire additional
property, the Trust competes with many other entities, some of which have
greater financial and managerial resources than the Trust. There can be no
assurance that the Trust will be able to acquire additional properties on
terms and conditions which are consistent with the Trust's business plan,
if at all.
RESTRICTIONS ON RE-LEASING SPACE. Tenant leases often grant tenants
the exclusive right to sell certain types of merchandise or provide certain
types of services within a property, or limit other tenants' rights to sell
such merchandise or provide such services. Certain leases at Northlake
Tower Shopping Center contain these types of restrictions, which may limit
the number and types of prospective tenants for vacant space at this
property.
SUBSTANTIAL DEBT OBLIGATIONS. As of December 31, 1997, the Trust's
indebtedness (Mortgage Loans Payable and Bonds Payable) aggregated
approximately $92.1 million and the ratio of debt to net assets for the
Trust was 58%. Debt as a percentage of total market capitalization as of
December 31, 1997 assuming a $5.25 share price was 57%. The Trust's
ability to service its debts and other obligations when they become due
depends on, among other things, the Trust's ability to secure additional
capital and the properties' ability to generate sufficient cash flow to
meet the Trust's cash needs for operating expenses and debt service
payments. Certain expenditures, such as loan payments and real estate
taxes, are not necessarily decreased by events adversely affecting revenues
or expenses at the property level. If the Trust fails to make required
payments on its indebtedness, the Trust could lose the property securing
these obligations, which would have a material adverse effect on the
Trust's financial condition and results of operations.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT -- TAX
LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REIT. The Trust
has elected to be taxed as a REIT under Sections 856 through 860 of the
Code, and the Trust believes that it has been organized and has operated in
such a manner so as to qualify as a REIT for federal income tax purposes.
Although the Trust believes that it will remain organized and will continue
to operate so as to qualify as a REIT, no assurance can be given that the
Trust has so qualified or will be able to remain so qualified. Qualifica-
tion as a REIT involves the satisfaction of numerous requirements (in
certain instances, on an annual and quarterly basis) set forth in highly
technical and complex Code provisions for which there are only limited
judicial and administrative interpretations, and may be affected by various
<PAGE>
factual matters and circumstances not entirely within the Trust's control.
In the case of a REIT, such as the Trust, that holds a substantial portion
of its assets in partnership form, the complexity of these Code provisions
and the applicable Treasury Regulations that have been promulgated
thereunder is even greater. Further, no assurance can be given that future
legislation, new Treasury Regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. The Trust, however, is not aware of any pending proposal to
amend the tax laws that would materially and adversely affect its ability
to operate in such a manner so as to qualify as a REIT.
If the Trust were to fail to qualify as a REIT with respect to any
taxable year, the Trust would not be allowed a deduction in computing its
taxable income from amounts distributed to its shareholders, and would be
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates. As a result, any
net earnings of the Trust available for investment or distribution to
Shareholders would be reduced for the year or years involved because of the
Trust's additional tax liability, and distributions to Shareholders would
no longer be required to be made. Moreover, unless entitled to relief
under certain statutory provisions, the Trust would also be ineligible for
qualification as a REIT for the four taxable years following the year
during which such qualification was lost. Although the Trust believes it
has operated and currently intends to operate in a manner designed to allow
it to continue to qualify as a REIT, future economic, market, legal, tax or
other considerations may cause it to determine that it is in the best
interests of the Trust and its shareholders to revoke the REIT election.
EFFECT OF REIT DISTRIBUTION REQUIREMENTS. To maintain its status as a
REIT for federal income tax purposes, the Trust generally will be required
each year to distribute to its shareholders at least 95% of its taxable
income (excluding any net capital gain and after certain adjustments). In
addition, the Trust will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to
any calendar year are less than the sum of 85% of its ordinary income for
such year plus 95% of its capital gain net income for such year plus 100%
of its undistributed income from prior taxable years.
The Trust intends to make distributions to its shareholders to comply
with the 95% distribution requirement of the Code and to avoid the
nondeductible excise tax described above. The Trust anticipates that cash
flow from operations, will be sufficient to enable it to pay its operating
expenses and meet the distribution requirements of a REIT, but no
assurances can be given that this will be the case. In addition,
differences in timing between: (i) the actual receipt of income and the
actual payments of expenses; and (ii) the inclusion of such income and the
deduction of such expenses in arriving at taxable income of the Trust could
leave the Trust without sufficient cash to enable it to meet the REIT
distribution requirements. Accordingly, the Trust could be required to
borrow funds or liquidate investments on adverse terms to comply with such
requirements. The requirement to distribute a substantial portion of the
Trust's taxable income could also cause the Trust to be required to
distribute amounts that would otherwise be spent on future acquisitions,
unanticipated capital expenditures or repayment of debt, which would
necessitate additional borrowings or sales of assets to fund the costs of
such items and could restrict the Trust's ability to expand at a pace
necessary to remain competitive.
LIFE OF THE TRUST. Under the Declaration of Trust, the Trustees are
required to use reasonable efforts to terminate the Trust by October 17,
2001; provided that the Trustees are required to determine in good faith
that the termination is in the shareholders' best interests. This
provision may result in the Trust: (i) being unable to obtain capital,
either debt or equity or renew existing financing on terms and conditions
acceptable to the Trust, if at all; (ii) liquidating properties at prices
below those which might prevail if the Trust was not forced to terminate.
Any of these factors could have an adverse effect on the Trust's financial
condition and results of operations.
<PAGE>
POTENTIAL INCREASES IN CERTAIN TAXES AND REGULATORY COMPLIANCE COSTS.
Increases in income, service or transfer taxes are generally not passed
through to tenants under leases and may, therefore, adversely affect the
Trust's cash flow and its ability to make distributions to shareholders.
The Trust's properties are also subject to various federal, state and local
regulatory requirements, such as those imposed by the Americans with
Disabilities Act (the "ADA"), which require all public accommodations and
commercial facilities to meet certain federal standards related to access
and use by disabled persons, and state and local fire and life safety
standards. Failing to comply with the ADA could result in the imposition
of fines by governmental authorities or an award of damages to private
litigants. The Trust believes that its existing properties are in
substantial compliance with these regulatory requirements. However,
existing statutes or rules may be amended or new statutes or rules may be
adopted, each of which may have an adverse effect on the Trust's financial
condition and results of operations.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean
up hazardous or toxic substances or petroleum product releases at a given
property and may be held liable to a governmental entity or to third
parties for property damage and for investigation and clean-up costs that
these parties incur in connection with any environmental contamination.
These laws typically impose clean-up responsibility and liability without
regard to whether the owner knew of or caused the presence of the
contaminants, and the liability under these laws has been interpreted to be
joint and several unless the harm is divisible and there is a reasonable
basis for allocating responsibility. The costs of investigating,
remediating or removing substances may be substantial, and the presence of
these substances, or the failure to properly remediate the contamination on
a property, may adversely affect the owner's ability to sell or rent the
property or to borrow using the property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removing
or remediating a release of hazardous or toxic substances at the disposal
or treatment facility, whether or not the person owns or operates the
facility. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs incurred
in connection with the contamination. Finally, the owner of a site may be
subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such site.
The Trust is not aware of any environmental liability that the Trust
believes would have a material adverse effect on the Trust's business,
assets or results of operations taken as a whole. There can be no
assurance, however, that the Trust would have knowledge of all conditions
giving rise to potential environmental liabilities subsequent to its
acquisition of a property since the Trust has ordered Phase I Environmental
Assessments only as part of its acquisition due diligence for each of its
properties and has only ordered Phase II Environmental Assessments in
limited circumstances when circumstances indicate. Moreover, there can be
no assurance that: (i) future laws, ordinances or regulations will not
impose any material environmental liability; or (ii) the current
environmental condition of the Trust's properties will not be affected by
tenants, by the condition of land or operations in the vicinity of the
Trust's properties (such as the presence of underground storage tanks), or
by third parties unrelated to the Trust. Any expenditures associated with
environmental liabilities of the Trust could have an adverse effect on the
Trust's financial condition and results of operations.
OTHER INFORMATION
The following supplemental information has been provided by the Trust
to furnish the reader of this Report an expanded understanding of the
properties owned as of December 31, 1997.
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
PORTFOLIO SUMMARY
December 31, 1997
<CAPTION>
Scheduled Lease
Net Carrying Expirations
Value Occu- -------------------------
Square --------------------- pancy After
Footage Dollars Sq Ft % 1998 1999 1999
------- --------- ----- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
FLEX/INDUSTRIAL
- ---------------
Milwaukee
Industrial
Properties
Milwaukee, WI 235,800 $ 5,610,000 $23.79 87% 32% 12% 43%
Elmhurst Metro
Court
Elmhurst, IL 140,800 5,057,000 35.92 93% 38% 23% 32%
Willowbrook
Industrial Court
Willowbrook, IL 84,300 3,844,000 45.60 100% 55% 15% 30%
Quantum Business
Center
Louisville, KY 182,200 4,946,000 27.15 91% 40% 23% 28%
6901 Riverport
Drive
Louisville, KY 322,100 9,780,000 30.36 100% 0% 0% 100%
Lexington
Business Center
Lexington, KY 308,800 7,171,000 23.22 93% 6% 3% 84%
Newtown Distri-
bution Center
Lexington, KY 87,100 3,464,000 39.77 92% 66% 10% 16%
--------- ----------- ------ ---- ---- ---- ----
Sub-total 1,361,100 $39,872,000 $29.29 94% 24% 10% 60%
--------- ----------- ------ ---- ---- ---- ----
<PAGE>
Scheduled Lease
Net Carrying Expirations
Value Occu- -------------------------
Square --------------------- pancy After
Footage Dollars Sq Ft % 1998 1999 1999
------- --------- ----- ----- ---- ---- -----
OFFICE
- ------
Colonial Penn
Building
Tampa, FL 79,200 $7,860,000 $99.24 100% 0% 0% 100%
Florida Power
& Light Building
Sarasota, FL 83,100 9,384,000 112.92 100% 0% 0% 100%
Woodcrest Office
Park
Tallahassee, FL 265,900 11,436,000 43.01 92% 16% 19% 57%
Midwest Office
Center
Oakbrook
Terrace, IL 77,000 5,047,000 65.55 96% 27% 19% 50%
Phoenix Business
Park
Atlanta, GA 110,600 5,419,000 49.00 92% 0% 11% 81%
Butterfield
Office Plaza
Oak Brook, IL 200,800 15,077,000 75.08 97% 14% 23% 60%
Southlake
Corporate Center
Morrow, GA 56,200 4,464,000 79.43 96% 8% 4% 84%
University Square
Business Center
Huntsville, AL 184,700 7,359,000 39.84 92% 30% 15% 47%
Technology Center
Huntsville, AL 48,500 2,526,000 52.08 100% 0% 0% 100%
Airways Plaza
Office Center
Memphis, TN 87,800 3,161,000 36.00 100% 3% 93% 4%
--------- ----------- ------ ---- ---- ---- ----
Sub-total 1,193,800 $71,733,000 $60.09 95% 13% 20% 62%
--------- ----------- ------ ---- ---- ---- ----
<PAGE>
Scheduled Lease
Net Carrying Expirations
Value Occu- -------------------------
Square --------------------- pancy After
Footage Dollars Sq Ft % 1998 1999 1999
------- --------- ----- ----- ---- ---- -----
RETAIL
- ------
Northlake
Tower Shopping
Center
Atlanta, GA 321,800 $ 16,902,000 $52.52 99% 2% 5% 92%
--------- ------------ ------ ---- ---- ---- ----
Total 2,876,700 $128,507,000 $44.67 95% 17% 13% 65%
========= ============ ====== ==== ==== ==== ====
RESIDENTIAL
- -----------
Net Carrying Value
Resi- ------------------- Occu-
dential Per pancy
Units Dollars Unit %
-------- -------- ----- -----
Country Creek
Apartments
Oklahoma City,
OK 320 7,406,000 $23,144 96%
Willowpark
Apartments
Lawton, OK 160 4,414,000 27,588 93%
Winchester Run
Apartments
Oklahoma City,
OK 192 4,452,000 23,188 97%
Woodrun Village
Apartments
Yukon, OK 192 4,532,000 23,604 98%
--- ------------ ------- ---
Total 864 $ 20,804,000 $24,079 96%
=== ============ ======= ===
PORTFOLIO TOTAL $149,311,000 95%
============ ===
</TABLE>
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
COMPARISON OF AVERAGE RENTS
<CAPTION>
Average Average
Square Footage "In Place" Market
Property Type (Note 1) Base Rents (2) Base Rents
- ------------- -------------- -------------- ----------
<S> <C> <C> <C>
Flex/Industrial 1,335,735 $4.52 $4.56
Office 1,114,611 7.98 9.35
Retail 321,800 8.73 9.98
---------- ----- -----
Total 2,772,146 $6.40 $7.12
========== ===== =====
Average
"In Place"
Rents Per Market
Unit Rent
Units (Note 3) Per Unit
----------- ----------- ----------
Residential 864 $378 $423
=== ==== ====
<FN>
(1) The In Place Rents for approximately 105,000 square feet of the portfolio have been excluded from the
above calculation because the lease terms relative to that space are unique compared to the market. It is the
Trust's view that inclusion of these rents in the above computation would make the analysis less meaningful.
(2) Depending on lease terms at individual properties, the average In Place rents may reflect either gross
rental rates (where the owner pays operating expenses) or net rental rates (where the tenant pays operating
expenses).
(3) A portion of the difference between the above In Place Rents and Market Rents per unit is attributable
to the difference in the size of the Trust's rental units compared to the size of other similar units in the
market place. The Trust's In Place Rents adjusted for the size differential are 5% to 7% below the Market.
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on Page F-1 of this
Report.
See Item 6, Selected Financial Data, for the supplemental financial
information specified by Item 302 of Regulation S-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, the accountants
on any matter of accounting principles, practices or financial statement
disclosure.
<PAGE>
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
The trustees and executive officers of the Trust are as follows:
Walter E. Auch, Sr. Trustee
Norman M. Gold Trustee
Marvin A. Sotoloff Trustee
Leonard G. Levine President
Neil D. Hansen First Vice President
Robert G. Higgins Vice President and
Secretary/
General Counsel
Joel L. Teglia Vice President/
Chief Financial Officer
Jay E. Schmidt Vice President/Investments
WALTER E. AUCH, SR., age 76, was the chairman and chief executive
officer of the Chicago Board Options Exchange from 1979 to 1986. Prior to
that time, he was executive vice president, director and a member of the
executive committee of Paine Weber. Mr. Auch is a director of Pimco L.P.,
Geotek Industries, Smith Barney Concert Series Funds, Smith Barney Trak
Fund, Nicholas Applegate Funds and Fort Dearborn Fund, and a trustee of
Hillsdale College and the Arizona Heart Institute. Mr. Auch has been a
trustee of the Trust since 1986. Mr. Auch is also a director of Semele
Group, Inc. (f/k/a Banyan Strategic Land Fund II) and a director of Legend
Properties, Inc. (f/k/a Banyan Mortgage Investment Fund).
NORMAN M. GOLD, age 67, is a senior partner in the law firm of
Altheimer & Gray and has actively practiced law for over 40 years,
specializing in tax, corporate and real estate law. Mr. Gold is also a
trustee of New Plan Realty Trust. Mr. Gold has been a trustee of the Trust
since 1986. Mr. Gold is a certified public accountant and a member of the
Chicago and American Bar Associations.
MARVIN A. SOTOLOFF, age 54, is chairman and chief executive officer of
Equity Resources Ltd., a company involved in commercial real estate
brokerage, leasing and development. Prior to joining Equity Resources
Ltd., Mr. Sotoloff was the regional vice president of Premisys Real Estate
Services, Inc., a division of the Prudential Realty Group, and was
executive vice president of The Palmer Group Ltd. He is a past president
of the Chicago Office Leasing Brokers Association, a licensed real estate
broker and a member of the Illinois and Pennsylvania Bar Associations. Mr.
Sotoloff has been a trustee of the Trust since 1986.
LEONARD G. LEVINE, age 51, has been president of the Trust since 1990.
He received a B.S./B.A. Degree in Accounting from Roosevelt University and
a Masters Degree in Taxation from DePaul University. His areas of
specialty include real estate syndications, estate planning and taxation of
closely-held corporations. Mr. Levine is also a certified public
accountant and a licensed real estate broker.
NEIL D. HANSEN, age 51, has been first vice president of the Trust
since 1991. He received a B.S. Degree in Finance from the University of
Illinois and a Master of Management Degree from Northwestern University.
He is a certified public accountant.
<PAGE>
ROBERT G. HIGGINS, age 46, has been vice president and general counsel
of the Trust and secretary of the Trust since 1995. From 1990 to 1992, Mr.
Higgins was a contract partner at the law firm of Chapman and Cutler. Mr.
Higgins' legal experience has concentrated in the areas of real estate
development, finance, acquisition, land use, sales, lending, syndications,
general corporate and business practice. Mr. Higgins is admitted to the
bar in the States of Illinois, Minnesota and Texas. He received a B.A.
Degree in Government from the University of Notre Dame and a J.D. from
Loyola University of Chicago. Although Mr. Higgins is an executive officer
of the Trust, he is not an employee of the Trust. Mr. Higgins is the sole
proprietor of a law practice known as Robert G. Higgins, Attorney at Law.
JOEL L. TEGLIA, age 36, has been vice president and chief financial
officer of the Trust since 1994. Prior to assuming the responsibilities of
his current position, Mr. Teglia held the position of Controller for Banyan
Management Corp. from 1991 to 1994. He received a B.B.A. Degree in
Accounting from the University of Notre Dame. Mr. Teglia is a certified
public accountant.
JAY E. SCHMIDT, age 46, became vice president of the Trust in 1995.
Prior to being appointed as vice president of the Trust, Mr. Schmidt served
as vice president of acquisitions for Banyan Management Corp. since 1992 as
an acquisition executive on behalf of the Trust. Prior to 1992, Mr.
Schmidt was an independent real estate consultant and broker and a vice
president of Mortgage Guaranty Insurance Corporation, Milwaukee, Wisconsin.
He received a B.A. degree in Government from Franklin & Marshall College
and a J.D. from the University of Wisconsin. Mr. Schmidt is admitted to
the bar in the State of Wisconsin and is a licensed real estate broker.
<PAGE>
<TABLE>
ITEM 11. EXECUTIVE COMPENSATION
A. TRUSTEE COMPENSATION
The Trustees are paid an annual fee of $15,000, payable quarterly, plus $875 for each board meeting,
including meetings of the audit committee, attended in person and $250 an hour for each board meeting, including
meetings of the audit committee, attended via telephonic conference call. In addition, each Trustee is reimbursed
for out-of-pocket expenses incurred in attending meetings of the board.
B. EXECUTIVE COMPENSATION
Compensation paid to executive officers of the Trust for the years ended December 31, 1997, 1996 and 1995 are
as follows:
<CAPTION>
Annual Compensation Long-Term Compensation
-----------------------------------------------------------------------------------
Awards Payouts
---------------------- ------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All other
Compen- Stock Options/ LTIP Compen-
Year Salary Bonus (3) sation Awards (4) SARs (#) Payouts sation
---- -------- --------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leonard G. Levine, 1997 $195,540 $ -- -- $2,319,292 -- $ -- --
President and Chief 1996 $189,247 $ -- -- $ 7,700 -- $ 66,985 --
Executive Officer 1995 $184,812 $ -- -- $ 24,900 -- $111,739 --
(1)
Jay E. Schmidt, 1997 $165,281 $35,000 (5) -- -- -- -- --
Vice President/ 1996 $154,615 $65,000 -- -- -- -- --
Investments 1995 $148,136 $27,000 -- -- -- -- --
Neil D. Hansen 1997 $192,546 $20,000 -- -- -- -- --
First Vice President/ 1996 -- -- -- -- -- -- --
Asset Management 1995 -- -- -- -- -- -- --
(2)
Joel L. Teglia 1997 $ 95,160 $10,000 -- -- -- -- --
Vice President/ 1996 -- -- -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- -- -- --
(2)
<PAGE>
<FN>
- ----------
(1) See discussion below under "Employment Agreements".
(2) Compensation for these executives of the Trust for 1996 and 1995 was less than $100,000 per individual.
(3) For 1997, 1996 and 1995, bonus for all employees other than Mr. Levine were discretionary and based on job
performance pursuant to an annual review.
(4) As of the fiscal year ended December 31, 1997, Mr. Levine owned 503,504 shares of beneficial interest which
were restricted until September 29, 1997, the vesting date for these shares. The value of these shares as of
December 31, 1997 was $2,643,396 and Mr. Levine owns all of these shares free of any vesting conditions. Since
the issuance of these shares, Mr. Levine has been and will continue to be entitled to all dividends or other
distributions in respect of such shares.
(5) The $27,000 bonus represents Mr. Schmidt's 1994 bonus paid in 1995. During 1996, Mr. Schmidt was paid a
bonus equal to $30,000 for the year ended December 31, 1995 and $35,000 for the year ended December 31, 1996.
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENTS. The Trust has entered into an employment
agreement with only one of the executives named above, Leonard G. Levine.
Mr. Levine has served as the Trust's President and Chief Executive Officer
since 1990 and recently entered into a new agreement with the Trust to
continue in that position through December 31, 2001. Under the new
agreement, which was signed on March 11, 1998, but which became
retroactively effective as of October 1, 1997, the Trust will pay Mr.
Levine a base salary equal to $200,000 per year during the first two and
one-quarter years of the contract, increasing to $210,000 per year during
the last two years of the agreement. In addition, Mr. Levine may also earn
incentive compensation during each year of the agreement equal to 62.5% of
the base salary for that year subject to the Trust achieving certain
predetermined levels of "funds from operations." The Trust has also
granted Mr. Levine non-qualified stock options to purchase an aggregate of
350,000 shares of the Trust's common shares of beneficial interest at an
exercise price equal to $5.50 per share.
Options to purchase 100,000 shares vested and became exercisable upon
execution of the agreement. Options to purchase an additional 100,000
shares will vest and become exercisable in 25,000 share increments at the
end of each calendar year of the agreement with the first increment of
25,000 shares vesting and becoming exercisable on December 31, 1998.
Options to purchase an additional 50,000 shares will vest and become
exercisable if during any consecutive thirty (30) trading days during the
term of the agreement the closing price of the common shares averages $8.50
per share. Options to purchase an additional 100,000 shares will vest and
become exercisable on a proportionate basis if during any thirty (30)
consecutive trading days during the term of the agreement the closing price
of the shares averages more than $8.50 per share with full vesting
occurring with respect to 75,000 shares if the closing price averages $9.00
per share and $10.00 per share with respect to the other 25,000 shares.
The number of shares underlying the options and the exercise price of each
option are subject to adjustment from time to time if the Trust: (i) issues
or sells additional common shares of beneficial interest in exchange for
consideration at a price less than the prevailing market price of the
Trust's shares at the time of issuance; (ii) issues or sells warrants with
exercise prices less than the prevailing market price; (iii) declares a
dividend or otherwise makes a distribution to the holders of its common
shares in the form of additional common shares; (iv) subdivides its
outstanding common shares of beneficial interest into a larger number of
common shares; or (v) combines its outstanding common shares into a smaller
number of common shares. All of the options must be exercised by October
1, 2007, except that if Mr. Levine dies or becomes permanently disabled
during the term of the agreement, then all options which have vested must
be exercised within one year of death or permanent disability. In
addition, upon death or permanent disability, all options not otherwise
vested, but which would or will vest within six months following the date
of death or permanent disability either by passage of time or satisfaction
of the various performance standards will be deemed vested and become
exercisable within the same one-year time period.
The agreement also requires the Trust to provide Mr. Levine with both
life and disability insurance benefits during the term of the agreement, as
well as all non-wage benefits provided by the Trust to its other salaried
employees. The agreement grants the Trust the right to terminate Mr.
Levine's employment if the Trust does not achieve certain earnings targets
in each fiscal year within thirty (30) calendar days after the Trust files
its annual report on Form 10-K with the Securities and Exchange Commission
for the preceding year. The Trust may also terminate Mr. Levine if he is
convicted of, or has a civil judgment rendered against him for, theft or
embezzlement of the Trust's property, is convicted of a felony resulting in
injury to the Trust's business property or reputation, if a civil judgment
is rendered that Mr. Levine breached his duty of loyalty to the Trust or if
an arbitrator determines that Mr. Levine has refused to perform, or
willfully failed to perform, his material duties under the agreement or
committed intentional acts that caused material damage to the Trust's
business or properties or performed his material duties in a manner that
constituted gross negligence.
<PAGE>
Mr. Levine has the right to terminate the agreement upon ninety (90)
days' notice to the Trust for any reason (the "Notice Termination"), or
upon a "Change of Control" or "Constructive Termination." For these
purposes, "Change of Control" will be deemed to have occurred if the
members of the board of trustees as of October 1, 1997 fail to constitute a
majority of the members of the Board, except for board members consented to
by Mr. Levine, or if the Shareholders of the Trust adopt a plan of
liquidation or take other action having the effect of a plan of liquidation
without the recommendation and approval of the Board. A "Constructive
Termination" will be deemed to have occurred if Mr. Levine's authority is
materially reduced or if there is a material adverse change in his working
conditions or if the Trust requires him to relocate from the Chicago
metropolitan area. If Mr. Levine terminates the agreement upon a "Change
of Control" or is deemed to suffer a "Constructive Termination" the Trust
will be obligated to pay Mr. Levine all amounts which would have been paid
under the agreement. For purposes of making this calculation, the Trust
will be deemed to have satisfied all standards applicable to the payment of
incentive compensation and all options granted will become vested and
immediately exercisable. If Mr. Levine is not employed by the Trust on
January 1, 2002, pursuant to a written employment agreement, and has not
then died or become permanently disabled, the Trust is obligated to pay Mr.
Levine $210,000, unless the agreement has previously been terminated by the
Trust either due to the Trust's failing to achieve certain performance
standards or for "Just Cause" or by Mr. Levine by a Notice Termination.
During the fiscal year ended December 31, 1997, Mr. Levine was
compensated, through September 30, 1997, pursuant to the terms of an
agreement executed as of January 1, 1990 and subsequently amended which was
replaced by the agreement described above. Mr. Levine was paid a base
salary during the nine months ended September 30, 1997 equal to $195,540 on
a per annum basis. Mr. Levine was also entitled to receive compensation
under an incentive program based on recoveries by the Trust on "foreclosed
real estate assets" owned by the Trust as of December 31, 1992 and on the
performance of the Trust's reinvestment activities commencing as of January
1, 1993.
Specifically, Mr. Levine was able to earn incentive compensation based
upon disposition of foreclosed real estate assets equal to: (i) 1% of the
amount of the Trust's secured claims existing as of January 1, 1990 which
were converted into cash on or after January 1, 1993; and (ii) 3% of the
Trust's unsecured claims existing as of January 1, 1990 which were
converted into cash on or after January 1, 1993. Further, Mr. Levine was
able to earn annual incentive compensation based upon the performance of
the Trust's "reinvestment activities" by comparing the yield on these
activities to the yield on five-year Treasury Notes plus 100 basis points
("investment hurdle") as of January 1 of each year (commencing as of
January 1, 1993) equal to: (i) $500 for each basis point by which the
Trust's rate of return from reinvestment activities exceeded the investment
hurdle up to 500 basis points; and (ii) $250 per each basis point by which
the rate of return from reinvestment activities exceeded the investment
hurdle plus 500 basis points. All incentive compensation earned on
reinvestment activities was to be paid 80% in cash and 20% in shares
("Award Shares") of the Trust on March 15 of the year following the period
for which the incentive was earned. The agreement also provided that as
soon as practicable after December 31, 1997, the aggregate incentive
compensation paid in respect of reinvestment activities would be computed
on a cumulative basis covering the period January 1, 1993 through
December 31, 1997 or the date of employment termination. For purposes of
the cumulative computation, the Trust was deemed to realize all profits and
gains on the reinvestment activities, but which were not actually realized.
As described above, since this cumulative computation exceeded the actual
amount paid to Mr. Levine, the Trust awarded Mr. Levine additional shares
of the Trust equal in value to the excess compensation owed to Mr. Levine
(the "Additional Incentive Compensation"). For these purposes, the shares
were valued at a price equal to $3.75 per share. If the calculation had
resulted in Mr. Levine receiving more incentive compensation during the
term of the agreement than otherwise reflected by the cumulative
computation, Mr. Levine would have been required to forfeit shares to the
Trust equal in value to the excess. For these purposes, the number of the
<PAGE>
shares would be valued at the average price at which they were issued to
Mr. Levine under the agreement.
On September 3, 1997, the Trust and Mr. Levine further amended the old
agreement based on an analysis performed by the Trust which indicated that
the Trust would owe Mr. Levine Additional Incentive Compensation at the end
of calendar year 1997 based on projections of the Trust's asset values. In
an effort to remove the uncertainty this may have caused in the Trust's
discussions with potential investors, the Trust and Mr. Levine agreed to
fix the amount of Additional Incentive Compensation as well as incentive
compensation due Mr. Levine for the period January 1, 1997 through
August 31, 1997. Under this amendment, the Trust agreed to issue 400,000
shares of beneficial interest in the Trust in respect of this compensation.
For purposes of this issuance, the shares were issued at a price equal to
the average closing price of the Trust's shares for the five business days
ended August 31, 1997, which was $4.812 per share.
C. EXECUTIVE AND DIRECTORS STOCK OPTION PLAN
On May 14, 1997, the Board of Trustees (the "Board") adopted and on
July 8, 1997, the shareholders of the Trust approved, the 1997 Omnibus
Stock and Incentive Plan (the "Plan") which allows the Trust to make stock-
based awards as part of its employee and Trustee compensation program.
Under the Plan, the Trust is authorized to issue up to one million shares
of the Trust's beneficial interest in the form of incentive stock options,
non-statutory stock options, stock appreciation rights, performance shares
and units.
Under the Plan, each person serving as a Trustee on the tenth business
day after the final adjournment of the Trust's annual meeting will receive
options to acquire 2,000 shares. Stock options granted to the Trustees
will vest and be exercisable in installments as follows: (i) 50% of the
number of shares commencing on the first anniversary of the date of grant;
and (ii) the remainder commencing on the second anniversary of the date of
grant. On July 22, 1997, each of the three Trustees received options to
acquire 2,000 shares at $4.50 per share (the closing price on the day of
the grant of the options).
The Board administers the Plan and has the authority to determine,
among other things, the individuals to be granted options, the exercise
price at which shares may be acquired, the number of shares subject to
options and the exercise period of each option. The Board is granted
discretion to determine the term of each option granted under the Plan to
employees, executives and Trustees, but in no event will the term exceed
ten years and one day from the date of the grant. On July 8, 1997, the
Board granted initial options to purchase a total of 41,000 shares at an
exercise price of $4.08 per share (the closing price on the day of the
grant of the options) to various executives and employees of the Trust
exclusive of Leonard G. Levine, who was granted options pursuant to his
Employment Agreement. On November 19, 1997, the board granted options to
purchase a total of 133,000 shares at an exercise price of $6.375 per share
(the closing price on the date of the grant of the options) to various
executives and employees of the Trust exclusive of Leonard G. Levine.
Pursuant to the terms of the Plan, options for all shares granted under the
Plan to executives and employees will generally be exercisable and vest in
installments as follows: (i) 33.3% of the number of shares commencing on
the first anniversary of the date of grant; (ii) an additional 33.3% of the
shares commencing on the second anniversary of the date of the grant; and
(iii) the remainder of the shares commencing on the third anniversary of
the date of grant.
Stock Options granted or exercised by executive officers for the year
ended December 31, 1997, are as follows:
<PAGE>
<TABLE>
<CAPTION>
Stock Option Grants in 1997 Fiscal Year
---------------------------------------
(a) (b) (c) (d) (e)
Potential Realized
Value at Assumed
Annual Rates of Stock
Number of % of Total Price Appreciations
Securities Options for Option Term
Underlying Granted to -----------------------
Options Employees in Exercise or Expiration (f) (g)
Name Granted Fiscal Year Base Price Date 5% 10%
- ---- ---------- ------------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Leonard G. Levine 350,000 67% $5.50 Oct 1, 2007 $1,210,622 $3,067,954
Jay E. Schmidt 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512
20,000 4% $6.38 Nov 18, 2007 $ 80,184 $ 203,202
Neil D. Hansen 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512
20,000 4% $6.38 Nov 18, 2007 $ 80,184 $ 203,202
Robert G. Higgins 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512
20,000 4% $6.38 Nov 18, 2007 $ 80,184 $ 203,202
Joel L. Teglia 5,000 1% $4.08 Jul 7, 2007 $ 12,829 $ 32,512
15,000 3% $6.38 Nov 18, 2007 $ 60,138 $ 152,402
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises During 1997
and December 1997 Option Values
--------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised Options In-the-Money Options
at December 31 at December 31
------------------- ---------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ---- -------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Leonard G. Levine -- $ -- 100,000/ 250,000 (1) $0 / $0
Jay E. Schmidt -- $ -- 0/ 25,000 $0 / $5,850
Neil D. Hansen -- $ -- 0/ 25,000 $0 / $5,850
Robert G. Higgins -- $ -- 0/ 25,000 $0 / $5,850
Joel L. Teglia -- $ -- 0/ 20,000 $0 / $5,850
<FN>
(1) Reflects options granted under Mr. Levine's contract which was executed on
March 11, 1998, effective as of October 1, 1997.
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 27, 1998
regarding the number and percentage of outstanding shares of the Trust
beneficially owned by: (i) each Trustee; (ii) each executive officer;
(iii) all Trustees and executive officers as a group; and (iv) entities
that are known by the Trust to be the beneficial owners of more than 5% of
the shares of beneficial interest. Share amounts and percentages shown for
each person or entity are adjusted to give effect to common shares that are
not outstanding but may be acquired by a person or entity upon exercise of
all options exercisable by such entity or person within 60 days of
February 27, 1998. However, those common shares are not deemed to be
outstanding for the purpose of computing the percentage of outstanding
shares beneficially owned by any other person.
Amount of
Title of Name and Address of Beneficial Percentage
Class Beneficial Owners Ownership of Shares
- -------- ------------------- ---------- ----------
Shares of FMR Corp. (1) 1,110,550 8.4%
Beneficial Fidelity Management
Interest & Research Company
Fidelity Low-Priced
Stock Fund
Fidelity Management
Trust Company
Edward C. Johnson 3d
Abigail P. Johnson
82 Devonshire Street
Boston, MA 02109
Shares of Magten Asset Management 1,897,605 14.3%
Beneficial Corp. (2)
Interest Mellon Bank, N.A. as Trustee
for the General Motors
Employees Domestic Group
Pension Trust
General Motors Investment
Management Corporation
350 East 21st Street
New York, NY 10010
Shares of Morgens Waterfall Income 2,192,501 16.6%
Beneficial Partners, L.P. (3)
Interest Restart Partners, L.P.
Restart Partners II, L.P.
Restart Partners III, L.P.
Restart Partners IV, L.P.
Restart Partners V, L.P.
Endowment Restart, L.L.C.
10 East 50th Street
New York, NY 10022
Shares of Leonard G. Levine, 612,504 (5) 4.6%
Beneficial President (4)
Interest
Shares of Neil D. Hansen, 13,688 Less than 1%
Beneficial First Vice President (4)
Interest
<PAGE>
Amount of
Title of Name and Address of Beneficial Percentage
Class Beneficial Owners Ownership of Shares
- -------- ------------------- ---------- ----------
Shares of Jay E. Schmidt 2,001 Less than 1%
Beneficial Vice President (4)
Interest
Shares of Joel L. Teglia 1,206 Less than 1%
Beneficial Vice President and
Interest Chief Financial Officer (4)
Shares of Robert G. Higgins 1,081 (6) Less than 1%
Beneficial Vice President (4)
Interest
Shares of All Trustees and 630,480 4.7%
Beneficial Officers of the Trust,
Interest as a group (8 persons)
- --------------------
(1) FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson (who
together with other members of the Johnson family may be deemed to form a
controlling group with respect to FMR Corp.) have filed reports with the
Commission pursuant to Section 13(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), indicating combined ownership of
five percent (5%) or more of the outstanding common shares. As of the
Record Date, Fidelity Management & Research Company, an investment adviser
registered under the Investment Advisers Act of 1940 (the "1940 Act"), and
Fidelity Low-Priced Stock Fund, an investment company which it serves as
investment adviser, owned 991,750 shares or 7.47% of the outstanding common
shares. Edward C. Johnson 3d and FMR Corp. each has sole dispositive power
over these 991,750 shares, but neither has sole voting power over these
shares. As of the Record Date, Fidelity Management Trust Company, a
wholly-owned subsidiary of FMR Corp., owned 118,800 shares or .9% of the
outstanding common shares as a result of serving as investment manager of
institutional accounts. Edward C. Johnson 3d and FMR Corp. each has sole
voting and dispositive power over these 118,800 common shares.
(2) Magten Asset Management Corp. ("Magten") is an investment adviser
registered under the 1940 Act. Magten has filed reports with the
Commission pursuant to Section 13(d) of the Exchange Act, indicating
ownership of five percent (5%) or more of the outstanding common shares.
Magten has shared dispositive power over 1,897,605 common shares, and
shared voting power over 1,436,005 common shares. The General Motors
Employees Domestic Group Pension Trust (the "GM Trust") receives investment
management services from General Motors Investment Management Corporation
(the "GM Adviser"), an investment adviser registered under the 1940 Act.
Magten provides investment management services to the GM Trust. The GM
Trust and the GM Adviser have shared voting and dispositive powers over
651,055 common shares, or 4.9% of the outstanding common shares. Each of
the GM Trust and the GM Adviser disclaims beneficial ownership of these
shares.
(3) Certain affiliates of Morgens, Waterfall, Vintiadis & Company,
Inc. ("MW"), have filed reports with the Securities and Exchange Commission
(the "SEC") pursuant to Section 13(d) of the Securities Exchange Act of
1934, as amended, indicating combined ownership of five percent (5%) or
more of the outstanding shares of the Trust. As of the Record Date, the
following affiliates had indicated ownership interests: (i) Morgens
Waterfall Income Partners, L.P., owns 83,315 shares, or a 0.6% ownership
interest; (ii) Restart Partners, L.P., owns 418,768 shares, or a 3.2%
ownership interest; (iii) Restart Partners II, L.P., owns 692,830 shares,
or a 5.2% ownership interest; (iv) Restart Partners III, L.P., owns 482,350
shares, or a 3.7% ownership interest; (v) Restart Partners IV, L.P., owns
304,758 shares, or a 2.3% ownership interest; vi) Restart Partners V, L.P.,
<PAGE>
owns 100,855 shares, or a .8% ownership interest; (vii) Endowment Restart,
L.L.C., owns 109,625 shares, or a .8% ownership interest. Although John C.
Waterfall and Edwin H. Morgens do not directly own any shares, each of them
may be deemed an indirect beneficial owner of 2,192,501 shares by virtue of
their effective control over the operation of each of the affiliated
entities listed above. Furthermore, Morgens Waterfall Capital, L.L.C., may
be deemed an owner of 83,315 shares by virtue of its position as general
partner of Morgens Waterfall Income Partners, L.P.
(4) The business address for Messrs. Levine, Hansen, Schmidt, Teglia
and Higgins is 150 S. Wacker Drive, Suite 2900, Chicago, Illinois 60606.
(5) Represents 512,504 shares of beneficial interest plus 100,000
vested options to purchase common shares at an exercise price of $5.50 per
share.
(6) Includes 217 shares owned by Mr. Higgins' daughter. Mr. Higgins
disclaims beneficial ownership of these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 1997, the Trust began paying employees directly
in contrast to the prior practice of reimbursing Banyan Management Corp.
("BMC") on an hourly basis for the services of BMC's personnel. In prior
years, these payroll costs along with administrative costs were allocated
to the Trust and other entities to which BMC provided administrative
services based upon the actual number of hours spent by BMC personnel on
matters related to that particular entity in relation to the total number
of BMC personnel hours. From January 1, 1997 through September 30, 1997,
the Trust shared only certain administrative items such as office rent and
office expenses with other companies for which BMC provided services.
These costs were shared based upon the total hours worked by employees of
the Trust relative to total hours worked by employees of BMC and the Trust
combined. The Trust's allocable share of costs for the years ended
December 31, 1997, 1996 and 1995, amounted to $403,100, $1,275,374 and
$1,443,434, respectively. Beginning October 1, 1997, the Trust paid all of
its administrative costs directly and no longer shared these costs with
other companies.
As of December 15, 1997, all shareholders of BMC, other than the
Trust, had terminated their administrative services relationship with, and
had surrendered their respective ownership interest in BMC, making the
Trust the sole remaining shareholder of BMC. As of this date, BMC merged
into a wholly-owned subsidiary of the Trust, BSRT Management Corp. As a
result of the merger, the Trust assumed current liabilities of $101,526,
cash of $83,178 and other assets of $64,171. BSRT Management Corp. paid a
dividend to the Trust in the amount of $150,000 representing a distribution
of its accumulated earnings and profits. This amount has been included in
Other Income of the Trust.
During the fiscal year ended December 31, 1997, the Trust paid no
salary to, but purchased legal services from Robert G. Higgins, the Trust's
Vice President, Secretary and General Counsel. Fees for legal services
totaled $337,672. The Trust also provides Mr. Higgins with office space
and equipment. Mr. Higgins pays no rent, as such, to the Trust for the use
of office space and equipment. Instead, Mr. Higgins provides the Trust
with a 20% discount for all time billed to the Trust by Mr. Higgins and his
employees. Mr. Higgins also reimburses the Trust for the cost of two full
time and certain part-time employees. In addition, during the fiscal year
ended December 31, 1997, the Trust paid Adam Levine, the son of the Trust's
President and Chief Executive Officer, $65,200 for services rendered to the
Trust as an employee.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
Exhibit 10 (viii) First Amendment to Convertible Term Loan
Agreement dated as of March 30, 1998 made by and
among Banyan Strategic Realty Trust and theEntities Listed on the
Signature Page therein, as Lenders
Exhibit (21) Subsidiaries of Banyan Strategic Realty Trust
Exhibit (27) Financial Data Schedule
The following exhibits are incorporated by reference from the Trust's
Registration Statement on Form S-11 (file number 33-4169), referencing the
exhibit number used in such Registration Statement.
Exhibit (3)(b) By-Laws dated March 13, 1986.
(3)(c)
and (3)(d) Amended and Restated Declaration of Trust dated
as of August 8, 1986, as amended on March 8, 1991 and May 1, 1993.
(10) Material Contracts
(i) Employment Agreement of Leonard G. Levine
dated March 11, 1998.
Amended Employment Agreement of
Leonard G. Levine dated January 1, 1990.
Second Amended and Restated Employment
Contract of Leonard G. Levine dated December 31, 1992.
Amendment to Second Amended and Restated
Employment Agreement of Leonard G. Levine dated March 19, 1997.
Second Amendment to Second Amended and
Restated Employment Agreement
(ii) Amendment to Loan Agreement dated
December 1, 1994; Second Amendment to Loan Agreement dated December 21,
1994; Third Amendment to Loan Agreement dated December 18, 1995; and Fourth
Amendment to Loan Agreement dated January 7, 1997 regarding the
Registrant's Revolving Line of Credit with American National Bank and Trust
Company of Chicago.
<PAGE>
(iii) First Amendment to Note dated
December 18, 1995 and Second Amendment to Note dated January 7, 1997
regarding the Registrant's Revolving Line of Credit with American National
Bank and Trust Company of Chicago.
(iv) Fifth Amendment to Loan Agreement dated
March 7, 1997 and Sixth Amendment to Loan Agreement dated April 29, 1997
regarding the Registrant's Revolving Line of Credit with American National
Bank and Trust Company of Chicago.
(v) Amended and Restated Note ($20,000,000)
dated April 29, 1997 and Note ($10,000,000) dated April 29, 1997 regarding
the Registrant's Revolving Line of Credit with American National Bank and
Trust Company of Chicago.
(vi) Seventh Amendment to Loan Agreement dated
July 29, 1997 regarding the Registrant's Revolving Line of Credit with
American National Bank and Trust Company of Chicago.
(vii) 1997 Omnibus Stock and Incentive Plan
dated July 9, 1997.
(viii) Convertible Term Loan Agreement dated as
of October 10, 1997 among Banyan Strategic Realty Trust, as Borrower, and
the Lenders listed therein, as Lenders
(ix) Share Purchase Agreement by and among
Banyan Strategic Realty Trust and the Purchasers listed on the signature
page attached thereto dated as of October 10, 1997
(x) Registration Rights Agreement dated as of
October 10, 1997 between Banyan Strategic Realty Trust and the Purchasers
listed on the Signature Pages attached thereto
Exhibit 99(7) Press Release dated February 12, 1998.
Exhibit 99(8) Press Release dated March 2, 1998.
(b) The following reports on Form 8-K were filed during the quarter ended
December 31, 1997:
A report on Form 8-K was filed on October 14, 1997 wherein Item 5
disclosed terms of the Share Purchase Agreement and the Convertible Term
Loan Agreement with Morgens.
A report on Form 8-K was filed on October 30, 1997 wherein Item 5
disclosed the Trust's third quarter results and the terms of the new
employment agreement with the Trust's President and Chief Executive
Officer, Leonard G. Levine.
A report on Form 8-K was filed on December 15, 1997 wherein
Item 5 disclosed the Registrant's acquisition of the Airways Plaza
property.
(c) See Item 14(a)(3) above.
(d) None.
<PAGE>
SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BANYAN STRATEGIC REALTY TRUST
By: /s/ Leonard G. Levine Date: April 17, 1998
Leonard G. Levine, President
PURSUANT to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Leonard G. Levine Date: April 17, 1998
Leonard G. Levine, President
By: /s/ Joel L. Teglia Date: April 17, 1998
Joel L. Teglia, Vice President
of Finance and Administration,
Chief Financial and Accounting Officer
By: /s/ Norman M. Gold Date: April 17, 1998
Norman M. Gold, Trustee
By: /s/ Walter E. Auch, Sr. Date: April 17, 1998
Walter E. Auch, Sr., Trustee
By: /s/ Marvin A. Sotoloff Date: April 17, 1998
Marvin A. Sotoloff, Trustee
<PAGE>
BANYAN STRATEGIC REALTY TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Auditors F-2
Consolidated Balance Sheets, December 31, 1997 and 1996 F-3 to F-4
Consolidated Statements of Income and Expenses For
the Years Ended December 31, 1997, 1996 and 1995 F-5 to F-6
Consolidated Statements of Shareholders' Equity For
the Years Ended December 31, 1997, 1996 and 1995 F-7
Consolidated Statements of Cash Flows For the Years
Ended December 31, 1997, 1996 and 1995 F-8 to F-10
Notes to Consolidated Financial Statements F-11 to F-38
All schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule
or because the information required is included in the consolidated
financial statements and notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF BANYAN STRATEGIC REALTY TRUST
We have audited the accompanying consolidated balance sheets of Banyan
Strategic Realty Trust as of December 31, 1997 and 1996, and the related
consolidated statements of income and expenses, shareholders' equity and
cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Banyan Strategic Realty Trust at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 9, 1998
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
- ------
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . $ 4,428,588 $ 3,805,260
Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,491,621 529,112
Interest Receivable on Investments. . . . . . . . . . . . . . . . . . 48,927 46,313
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 813,052 805,562
------------ ------------
6,782,188 5,186,247
------------ ------------
Investment in Real Estate, at cost:
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,142,879 16,956,094
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,458,751 85,210,415
Building Improvements . . . . . . . . . . . . . . . . . . . . . . . 4,418,008 5,015,673
------------ ------------
156,019,638 107,182,182
Less: Accumulated Depreciation. . . . . . . . . . . . . . . . . . . (6,633,796) (4,692,455)
------------ ------------
149,385,842 102,489,727
------------ ------------
Investment in Real Estate Venture . . . . . . . . . . . . . . . . . . -- 5,713,759
Deferred Financing Costs (Net of Accumulated
Amortization of $1,112,345 and $722,925,
Respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,269,026 1,326,489
Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,196,572 1,817,983
------------ ------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $159,633,628 $116,534,205
============ ============
<PAGE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, December 31,
1997 1996
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities
Accounts Payable and Accrued Expenses . . . . . . . . . . . . . . . . $ 1,857,581 $ 2,481,253
Accrued Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . 795,950 763,238
Mortgage Loans Payable. . . . . . . . . . . . . . . . . . . . . . . . 70,503,284 48,181,023
Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,614,493 10,900,000
Accrued Interest Payable. . . . . . . . . . . . . . . . . . . . . . . 296,454 237,922
Unearned Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 276,386 248,748
Security Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 710,865 473,758
------------ ------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 96,055,013 63,285,942
------------ ------------
Minority Interest in Consolidated Partnerships. . . . . . . . . . . . 1,263,405 2,313,825
Shareholders' Equity
Shares of Beneficial Interest, No Par
Value, Unlimited Authorization;
14,761,850 and 12,001,620 Shares
Issued, respectively. . . . . . . . . . . . . . . . . . . . . . . . 119,013,405 106,694,912
Accumulated Deficit . . . . . . . . . . . . . . . . . . . . . . . . . (49,332,246) (48,394,525)
Treasury Shares at Cost, 1,522,649 Shares . . . . . . . . . . . . . . (7,365,949) (7,365,949)
------------ ------------
Total Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . 62,315,210 50,934,438
------------ ------------
Total Liabilities and Shareholders' Equity. . . . . . . . . . . . . . $159,633,628 $116,534,205
============ ============
Book Value Per Share of Beneficial Interest
(13,239,201 and 10,478,971 Shares
Outstanding, respectively) . . . . . . . . . . . . . . . . . . . . $ 4.71 $ 4.86
============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Rental Income . . . . . . . . . . . . . . . . . . . $ 25,369,761 $ 18,606,996 $10,118,609
Operating Cost Reimbursement. . . . . . . . . . . . 2,440,623 1,936,392 918,914
Miscellaneous Tenant Income . . . . . . . . . . . . 707,659 259,844 194,335
Interest and Amortized Discount on Mortgage Loans . -- 441,725 1,036,052
Income on Investments and Other Income. . . . . . . 266,857 159,361 634,459
----------- ----------- -----------
Total Revenue . . . . . . . . . . . . . . . . . . . . 28,784,900 21,404,318 12,902,369
----------- ----------- -----------
EXPENSES
Operating Property Expenses . . . . . . . . . . . . 5,205,965 4,296,266 2,785,740
Repairs and Maintenance . . . . . . . . . . . . . . 2,594,960 2,378,139 1,256,444
Real Estate Taxes . . . . . . . . . . . . . . . . . 1,994,481 1,748,105 1,153,797
Interest. . . . . . . . . . . . . . . . . . . . . . 6,447,278 4,011,218 1,583,645
Ground Lease. . . . . . . . . . . . . . . . . . . . 892,933 871,471 376,130
Depreciation and Amortization . . . . . . . . . . . 3,490,393 2,453,059 1,334,992
General and Administrative. . . . . . . . . . . . . 4,314,816 3,125,509 2,036,367
Amortization of Deferred Loan Fees
and Financing Costs . . . . . . . . . . . . . . . 723,354 511,757 234,056
Recovery of Losses on Loans, Notes and
Interest Receivable . . . . . . . . . . . . . . . (161,539) (16,569) (164,958)
----------- ----------- -----------
Total Expenses. . . . . . . . . . . . . . . . . . . . 25,502,641 19,378,955 10,596,213
----------- ----------- -----------
Income Before Minority Interest, Income
(Loss) from Operations of Real Estate Ventures,
Net Gains and Extraordinary Item. . . . . . . . . . 3,282,259 2,025,363 2,306,156
Minority Interest in Consolidated Partnerships. . . . (590,323) (481,411) (178,114)
Income (Loss) from Operations of Real Estate Ventures 37,126 (3,301,212) 62,713
----------- ----------- -----------
Income (Loss) before Net Gains and
Extraordinary Item. . . . . . . . . . . . . . . . . 2,729,062 (1,757,260) 2,190,755
Net Gain on Disposition of Investment in Real Estate,
Disposition of Investment in Real Estate Venture
and Disposition of Partnership Interest . . . . . . 881,375 -- 409,290
----------- ----------- -----------
Income (Loss) Before Extraordinary Item . . . . . . . 3,610,437 (1,757,260) 2,600,045
Extraordinary Item, Net of Minority Interest. . . . . (64,155) -- --
----------- ----------- -----------
Net Income (Loss) . . . . . . . . . . . . . . . . . . $ 3,546,282 $(1,757,260) $ 2,600,045
=========== =========== ===========
<PAGE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES - CONTINUED
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Earnings Per Share of Beneficial Interest -
Basic and Diluted:
Income (Loss) before Net Gains
and Extraordinary Item. . . . . . . . . . . . . . $ 0.24 $ (0.17) $ 0.21
=========== =========== ===========
Net Income (Loss) . . . . . . . . . . . . . . . . . $ 0.32 $ (0.17) $ 0.25
=========== =========== ===========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Shares of
Beneficial Interest
------------------------- Accumulated Treasury
Shares Amount Deficit Shares Total
--------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Shareholders' Equity,
January 1, 1995. . . . . . . 11,993,751 $106,662,313 $(40,855,652) $(7,365,949) $58,440,712
Award Shares Issued . . . . . 6,036 24,899 -- -- 24,899
Net Income. . . . . . . . . . -- -- 2,600,045 -- 2,600,045
Distributions Paid. . . . . . -- -- (4,190,252) -- (4,190,252)
---------- ------------ ------------ ----------- ------------
Shareholders' Equity,
December 31, 1995. . . . . . 11,999,787 106,687,212 (42,445,859) (7,365,949) 56,875,404
Award Shares Issued . . . . . 1,833 7,700 -- -- 7,700
Net Loss. . . . . . . . . . . -- -- (1,757,260) -- (1,757,260)
Distributions Paid. . . . . . -- -- (4,191,406) -- (4,191,406)
---------- ------------ ------------ ----------- ------------
Shareholders' Equity,
December 31, 1996. . . . . . 12,001,620 106,694,912 (48,394,525) (7,365,949) 50,934,438
Issuance of Shares,
net of issuance costs. . . . 2,264,595 9,999,199 -- -- 9,999,199
Award Shares Issued . . . . . 495,635 2,319,294 -- -- 2,319,294
Net Income. . . . . . . . . . -- -- 3,546,282 -- 3,546,282
Distributions Paid. . . . . . -- -- (4,484,003) -- (4,484,003)
---------- ------------ ------------ ----------- ------------
Shareholders' Equity,
December 31, 1997. . . . . . 14,761,850 $119,013,405 $(49,332,246) $(7,365,949) $ 62,315,210
=========== ============ ============ =========== ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . $ 3,546,282 $(1,757,260) $ 2,600,045
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
Recovery of Losses on Loans, Notes and
Interest Receivable . . . . . . . . . . . . . . . (161,539) (16,569) (164,958)
Extraordinary Item, net of Minority Interest. . . 64,155 -- --
Net Gain on Disposition of Investment in
Real Estate, Disposition of Investment
in Real Estate Venture and Disposition of
Partnership Interest. . . . . . . . . . . . . . . (881,375) -- (409,290)
Amortization of Premium on Investment Securities. . -- -- 10,596
Depreciation and Amortization . . . . . . . . . . . 4,213,747 2,964,816 1,569,048
Amortization of Discount on Mortgage Loans
Receivable. . . . . . . . . . . . . . . . . . . . -- (34,547) (372,129)
Net Loss (Income) From Operation of
Real Estate Ventures. . . . . . . . . . . . . . . (37,126) 3,301,212 (62,713)
Minority Interest Participation in
Consolidated Partnerships . . . . . . . . . . . . 590,323 481,411 178,114
Incentive Compensation Expense. . . . . . . . . . . 1,213,098 729,700 3,500
Net Change In:
Restricted Cash . . . . . . . . . . . . . . . . . . (546,350) (149,542) (212,047)
Interest Receivable on Mortgage Loans
and Investments . . . . . . . . . . . . . . . . . (2,614) 84,819 6,154
Accounts Receivable . . . . . . . . . . . . . . . . (12,838) (666,396) (420,357)
Other Assets. . . . . . . . . . . . . . . . . . . . (528,361) (598,688) (1,035)
Accounts Payable and Accrued Expenses . . . . . . . 422,866 721,126 (42,961)
Accrued Interest Payable. . . . . . . . . . . . . . 73,086 130,597 67,320
Accrued Real Estate Tax Payable . . . . . . . . . . 4,027 54,267 10,753
Unearned Revenue. . . . . . . . . . . . . . . . . . 44,272 158,310 70,709
Security Deposits . . . . . . . . . . . . . . . . . 133,499 (1,472) 16,479
----------- ----------- -----------
Net Cash Provided By Operating Activities . . . . . . 8,135,152 5,401,784 2,847,228
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate Assets . . . . . . . . . (37,536,796) (9,313,282) (34,761,337)
(Investments In) Distributions From Real
Estate Ventures, Net. . . . . . . . . . . . . . . 289,758 (119,293) 56,558
<PAGE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Proceeds from Sale of Mortgage Loans
Receivable . . . . . . . . . . . . . . . . . . . . $ -- $ 5,440,047 $ --
Proceeds From Sale of Investment in
Real Estate Venture . . . . . . . . . . . . . . . 5,457,402 -- 2,217,558
Additions to Investment in Real Estate. . . . . . . (2,498,723) (1,968,835) (1,183,619)
Payment of Liabilities Assumed at Acquisition
of Real Estate Assets . . . . . . . . . . . . . . 34,471 (339,219) 34,585
Proceeds From Sale of Investment in Real Estate . . 6,141,719 -- --
Recovery of Losses on Loans, Notes and
Interest Receivable . . . . . . . . . . . . . . . 161,539 16,569 164,958
Proceeds from Sale of Partnership Interest. . . . . 884,507 -- --
Principal Payments of Investment Securities . . . . -- 22,365 --
Proceeds from Sale and Maturities of
Investment Securities . . . . . . . . . . . . . . -- 817,314 2,500,000
Purchase of Investment Securities . . . . . . . . . -- (839,679) (1,493,360)
Principal Collections on Mortgage Loans
Receivable. . . . . . . . . . . . . . . . . . . . -- 14,742 43,817
Due from Affiliates . . . . . . . . . . . . . . . . -- -- 730,229
----------- ----------- -----------
Net Cash Used In Investing Activities . . . . . . . . (27,066,123) (6,269,271) (31,690,611)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Bonds and Mortgage Loans Payable. . . 64,470,000 15,945,000 22,750,000
(Distributions To) Investment From
Minority Partners . . . . . . . . . . . . . . . . (1,681,010) (357,684) 1,797,135
Deferred Financing Costs. . . . . . . . . . . . . . (1,200,425) (637,220) (597,134)
Principal Payments on Mortgage Loans and
Bonds Payable . . . . . . . . . . . . . . . . . . (47,549,462) (11,586,158) (185,321)
Distributions Paid to Shareholders. . . . . . . . . (4,484,003) (4,191,406) (4,190,252)
Shares Issued, net of Issuance Costs. . . . . . . . 9,999,199 -- --
----------- ----------- -----------
Net Cash Provided By (Used In) Financing Activities . 19,554,299 (827,468) 19,574,428
----------- ----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents. 623,328 (1,694,955) (9,268,955)
Cash and Cash Equivalents at Beginning of Year. . . . 3,805,260 5,500,215 14,769,170
----------- ----------- -----------
Cash and Cash Equivalents at End of Year. . . . . . . $ 4,428,588 $ 3,805,260 $ 5,500,215
=========== =========== ===========
<PAGE>
BANYAN STRATEGIC REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Supplemental Information:
Interest Paid During the Year . . . . . . . . . . . $ 6,374,192 $ 3,880,621 $ 1,650,965
=========== =========== ===========
Non-cash financing activities:
Financing assumed upon acquisition
of real estate. . . . . . . . . . . . . . . . . . $ 21,616,216 $ 5,700,000 $13,056,807
=========== =========== ===========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Banyan Strategic Realty Trust (the "Trust") was organized as a
business trust under the laws of the Commonwealth of Massachusetts,
pursuant to a Declaration of Trust filed March 14, 1986 under the name VMS
Strategic Land Trust.
The accompanying consolidated financial statements include the
accounts of the Trust, its wholly-owned subsidiaries and its controlled
Partnerships. In all of its partnerships, the Trust is the managing
general partner and retains sole authority over all significant decisions.
All intercompany balances and transactions have been eliminated in
consolidation. Investment in Real Estate Venture was accounted for on the
equity method.
B. DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related
loans using the level yield method.
C. INVESTMENT IN REAL ESTATE
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
("FAS 121"). Under FAS 121, the Trust is required to write down the value
of a particular property when indicators of impairment are present and the
property's expected undiscounted cash flows are not sufficient to recover
the property's carrying amount. The Trust adopted FAS 121 effective
January 1, 1995 with no effect on the 1995 consolidated financial
statements. During the quarter ended December 31, 1996, the venture owning
the H Street Assemblage property recorded a valuation allowance of
$6,000,000, of which the Trust's share was $3,180,000 based on the fair
market value of the property as measured by the anticipated cumulative
sales proceeds pursuant to contractual sales agreements pending as of that
date compared to the property's carrying value. See Note 9, Investment in
Joint Venture, for further details. The Trust classifies its real estate
properties as held for sale when its Board of Trustees has authorized the
sale and an active program to find a buyer has been initiated. The Trust
currently classifies none of its properties as held for sale.
D. REVENUE RECOGNITION
Interest income is recorded when earned.
E. MARKET VALUE ADJUSTMENT OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107"),
"Disclosures about Fair Value of Financial Instruments," requires entities
to disclose the fair value of all financial assets and liabilities for
which it is practicable to estimate. Fair value is defined in FAS 107 as
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale. The Trust believes the carrying amount of its financial instruments
approximates fair value at December 31, 1997 and 1996, because (i) the
fixed rates on mortgage loans payable are comparable to rates currently
offered in the market, (ii) the rates on the line of credit and bonds
payable are variable and (iii) the maturities of the Trust's cash
equivalents are relatively short. The Trust has no other financial
instruments.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. INCOME TAXES
For the years ended December 31, 1997, 1996 and 1995, the Trust
continued to be treated as a real estate investment trust ("REIT") under
Internal Revenue Code Sections 856-860. In order to qualify, the Trust is
required to distribute at least 95% of its taxable income to shareholders,
meet asset and income tests and comply with certain other requirements.
As of December 31, 1997, Investment in Real Estate has a gross and net
basis, respectively, of $156,019,638 and $149,385,842, respectively, for
income tax purposes. Additionally, investment in liquidating trust with a
tax basis of $675,142 has not been accorded any value for financial
reporting purposes.
As of December 31, 1997, the Trust has a net operating loss carry-
forward of approximately $19,196,000 which will expire in 2005, 2006, 2008
and 2012.
G. CASH EQUIVALENTS
The Trust considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash and cash equivalents.
H. RESTRICTED CASH
Restricted cash represents amounts held by lenders to provide for
future real estate tax expenditures and tenant improvements, utility
deposits and security deposits. Certain of these amounts may be reduced
upon the fulfillment of certain conditions.
I. USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
J. RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported
1996 and 1995 consolidated financial statements in order to provide
comparability with the 1997 consolidated financial statements. These
reclassifications have not changed the 1996 or 1995 results.
K. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share". Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth the computation of basic and diluted earnings per share:
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Income (Loss) before Net Gains and
Extraordinary Item. . . . . . . . . . . . . . . . . . $ 2,729,062 $(1,757,260) $ 2,190,755
Net Gains (a). . . . . . . . . . . . . . . . . . . . . 881,375 -- 409,290
Extraordinary Item, Net of Minority Interest . . . . . (65,155) -- --
----------- ----------- -----------
Net Income (Loss) . . . . . . . . . . . . . . . . . $ 3,545,282 $(1,757,260) $ 2,600,045
=========== =========== ===========
Denominator:
Denominator for basic earnings per
weighted-average shares. . . . . . . . . . . . . . . 11,149,982 10,478,410 10,474,079
Effect of dilutive securities:
Employee stock options . . . . . . . . . . . . . . . 4,942 -- --
Convertible debt . . . . . . . . . . . . . . . . . . 90,318 -- --
----------- ----------- -----------
Dilutive potential common shares . . . . . . . . . . . 95,260 -- --
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions . 11,245,242 10,478,410 10,474,079
=========== =========== ===========
Basic and Diluted Earnings Per Share:
Income (Loss) before Net Gains and
Extraordinary Item . . . . . . . . . . . . . . . . . $ 0.24 $ (0.17) $ 0.21
Net Gains (a) . . . . . . . . . . . . . . . . . . . . 0.08 -- 0.04
Extraordinary Item, Net of Minority Interest. . . . . -- -- --
----------- ----------- -----------
Net Income (Loss) . . . . . . . . . . . . . . . . $ 0.32 $ (0.17) $ 0.25
=========== =========== ===========
<PAGE>
<FN>
(a) Net gains include gain on disposition of investment in real estate, loss on disposition of investment in real
estate venture and gain on disposition of partnership interest.
For additional information relating to employee stock options and convertible debt, see notes 7 and 14.
Options to purchase 133,000 common shares at $6.375 per share were outstanding during 1997 but were not included in
the computation of diluted earnings per share because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be antidilutive.
</TABLE>
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. MORTGAGE LOANS RECEIVABLE
Karfad Associates (the "Borrower"), which was indebted to the Trust
pursuant to the Karfad loan in the original principal amount of $5,849,266
(the "Loan"), failed to make the required interest payments due on the
first of each month from January through May of 1996 resulting in a
foreclosure and a direct action against the guarantors. On May 17, 1996,
the Trust entered into a Settlement Agreement (the "Agreement") and two
loan sale agreements with the Borrower and a party affiliated with the
Borrower pursuant to which the Karfad loan, as well as four related loans
to parties affiliated with the Borrower (collectively the "Loan
Portfolio"), were to be sold at an amount equal to the Trust's December 31,
1995 carrying value for the Loan Portfolio totalling approximately
$5,440,000. On June 28 and July 31, 1996, the Trust completed the sale of
the Loan Portfolio. In addition, the Borrower made all interest payments
due pursuant to the terms of the original remaining four loans in the Loan
Portfolio and the Loan from January 1, 1996 through the date of sale in the
amount of approximately $407,000. As a result of the Agreement, the Trust
terminated the recognition of income from the amortization of the Loan's
purchase discount effective January 1, 1996. As of July 31, 1996, the
Trust had no further interest in the Loan Portfolio.
1996
-----------
Reconciliation of Net Investment in
Mortgage Loans Receivable:
Balance at Beginning of Year. . . . . . . . . . . . $5,433,094
Additions During Year:
Amortization of Discount on
Mortgage Loans Receivable . . . . . . . . . 34,547
----------
Deductions During Year:
Proceeds From Sale of
Mortgage Loans Receivable . . . . . . . . . (5,440,047)
Principal Collections on
Mortgage Loans. . . . . . . . . . . . . . . (14,742)
Amortization of Deferred
Loan Costs. . . . . . . . . . . . . . . . . (12,852)
----------
(5,467,641)
----------
Balance at End of Year. . . . . . . . . . . . . . $ --
==========
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. MORTGAGE LOANS AND BONDS PAYABLE
The properties of the Trust as described below are subject to mortgage loans and bonds payable at
December 31, 1997 and 1996 as follows:
Mortgage Mortgage
Loans and Loans and
Bonds Bonds
Payable Payable
Balance Balance Annual Final Estimated 1997
Property Pledged as of as of Interest Maturity Periodic Balloon Interest
as Collateral 12/31/97 12/31/96 Rate Date Payment Payment Expense
- ---------------- ----------- ---------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST MORTGAGES:
Milwaukee Industrial
Properties,
Metropolitan
Milwaukee, WI (a) $ 3,598,585 $ 3,707,416 8% 10/01/98 $ 33,458 $3,511,074 $291,935
Elmhurst Metro
Court
Elmhurst, IL (b). 3,854,097 3,908,390 8.83% 01/01/00 33,103 3,730,074 342,549
Colonial Courts
of Westland Apts.,
Columbus, OH (c). -- 5,500,000 (c) 12/01/24 (c) N/A 203,942
Willowbrook
Industrial
Court,
Willowbrook,
IL (d). . . . . . 2,544,848 2,590,983 8.5% 07/01/02 22,050 2,281,280 218,137
Northlake Tower
Shopping Center,
Atlanta, GA . . . -- 10,350,000 8.5% 08/01/05 73,313 N/A 863,298
Northlake Tower
Shopping Center
Atlanta, GA (e) . 17,600,000 -- 7.64% 12/01/27 124,753 123,963 75,994
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Mortgage Mortgage
Loans and Loans and
Bonds Bonds
Payable Payable
Balance Balance Annual Final Estimated 1997
Property Pledged as of as of Interest Maturity Periodic Balloon Interest
as Collateral 12/31/97 12/31/96 Rate Date Payment Payment Expense
- ---------------- ----------- ---------- --------- --------- --------- ---------- ----------
Quantum Business
Center,
Jefferson County,
KY . . . . . . . $2,571,355 $2,634,563 8% 04/25/01 $22,641 $2,320,254 $208,059
Florida Power and
Light Building
Sarasota, FL (f). 6,003,256 6,118,702 7.21% 03/13/03 46,070 5,254,660 437,393
Woodcrest Office
Park
Tallahassee, FL
(d) . . . . . . . 7,118,495 7,212,899 8.25% 08/01/03 57,163 6,434,628 591,548
Midwest Office
Center
Oakbrook
Terrace, IL (d) . 3,191,086 3,258,070 7.13% 05/01/03 24,760 2,741,057 229,741
6901 Riverport
Drive
Louisville, KY
(g) . . . . . . . 5,100,000 5,400,000 (g) 12/01/14 (g) (g) 311,754
Butterfield
Office Center
Oak Brook, IL . . 9,978,345 -- 7.67% 9/01/04 71,089 9,217,929 261,782
University Square
Business Center
Huntsville, AL. . 4,943,217 -- 8.89% 01/01/07 41,584 4,137,404 153,969
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Mortgage Mortgage
Loans and Loans and
Bonds Bonds
Payable Payable
Balance Balance Annual Final Estimated 1997
Property Pledged as of as of Interest Maturity Periodic Balloon Interest
as Collateral 12/31/97 12/31/96 Rate Date Payment Payment Expense
- ---------------- ----------- ---------- --------- --------- --------- ---------- ----------
Country Creek
Apartments
Oklahoma City,
OK (h). . . . . . $5,883,349 -- 7.3% (h) 10/01/25 $41,267 N/A $287,498
Willowpark
Apartments
Lawton, OK (h). . 3,504,557 -- 7.3% (h) 10/01/25 24,582 N/A 171,225
Winchester
Apartments
Oklahoma City,
OK (h). . . . . . 3,533,925 -- 7.3% (h) 10/01/25 24,788 N/A 172,690
Woodrun
Apartments
Yukon, OK (h) . . 3,592,662 -- 7.3% (h) 10/01/25 25,199 N/A 175,561
FIRST MORTGAGE
LINE OF CREDIT:
Collateralized
by the Trust's
various property
interests (i) . . 9,100,000 8,400,000 (i) 5/31/99 (i) 9,100,000 1,450,173
----------- ----------- ----------
$92,117,777 $59,081,023 $6,447,278
=========== =========== ==========
</TABLE>
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The principal balance of the Trust's mortgage loans and bonds are
scheduled to be repaid as follows:
1998 . . . . . . . . . . . $ 4,835,177
1999 . . . . . . . . . . . 10,453,421
2000 . . . . . . . . . . . 5,097,676
2001 . . . . . . . . . . . 1,452,852
2002 . . . . . . . . . . . 3,790,245
Thereafter . . . . . . . . . . . 66,488,406
-----------
Total . . . . . . . . . . . $92,117,777
===========
(a) The loan contains a prepayment penalty which is based on a formula to
provide yield maintenance protection to the lender.
(b) The loan contains a prepayment penalty of 5% of the outstanding
principal loan balance in year one, decreasing by 1% thereafter through the
loan's maturity date.
(c) On April 15, 1996, the partnership replaced the original letter of
credit with an irrevocable letter of credit in the amount of $5,624,315
issued by Citizens National Bank of Evansville ("Replacement LOC"). The
bonds were also secured by a first mortgage on the Colonial Courts
property. The Replacement LOC was collaterized by an irrevocable direct
pay letter of credit in the amount of $5,624,315 provided by the Federal
Home Loan Bank of Indianapolis ("FHLB"). The Replacement LOC and the FHLB
letter of credit had a term of five years with an option for an additional
five year term. The annual fee for the Replacement LOC was equal to one
percent (1%) of the letter of credit amount or $56,243. The annual fee for
the FHLB letter of credit was approximately $2,800. In consideration of
PHC General Partnership's ("PHC") assistance in obtaining the Replacement
LOC and in accordance with the Trust's obligations under the partnership
agreement, the Trust increased the limited partnership interest of PHC in
the BSRT Colonial Courts Limited Partnership from 10% to 25%. The PHC
ownership percentage change became effective May 1, 1996 for financial
reporting purposes. Subsequent to that date, the Trust adjusted the
allocation of income, loss and cash flow to reflect the modified ownership
percentages. The change in ownership, however, did not effect the Trust's
or PHC's historical GAAP or tax basis in the partnership. On September 25,
1997, the Trust sold its 75% interest in the Colonial Courts partnership to
Colonial L.L.C., an entity affiliated with PHC.
(d) The loan contains a prepayment penalty of 7% of the outstanding
principal loan balance in year one, decreasing by 1% thereafter through the
loan's maturity date.
(e) During 1997, the Trust obtained new financing for Northlake Tower
Shopping Center. The loan is collateralized by a leasehold interest in the
property. The terms of the loan agreement do not allow for any prepayments
during the first three years of the loan. Starting with the fourth year of
the loan, the loan can be prepaid in whole, but not in part subject to
prepayment premium equal to greater of (A) 1% of outstanding balance or (B)
Yield maintenance amount (except there is no prepayment penalty if the loan
is repaid during the 90 day period prior to scheduled maturity). The Trust
wrote off unamortized deferred financing costs relating to the old loan and
recognized an extraordinary loss, net of minority interest, of $64,155.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(f) The loan contains a prepayment penalty which is based on a formula to
provide yield maintenance protection to the lender.
The Trust, at its discretion, has the right to adjust the interest
rate ("Adjusted Interest Rate") on the loan on April 1, 2001. The Adjusted
Interest Rate is computed based at a rate of 300 basis points over the two-
year U.S. Treasury rate as of December 18, 2000.
(g) The Trust acquired a 100% leasehold interest in the property
encumbered by tax-exempt Industrial Revenue Bond financing issued by
Jefferson County, Kentucky. The lease requires monthly payment of variable
rate interest which is due the first of each month and annual principal
payments in the amount of $300,000 which are due and payable each December
1 to and including December 1, 2014, the maturity date. Under the terms of
the lease, the lease payments are equal to the required principal and
interest payments on the bonds. An irrevocable letter of credit was issued
as additional collateral for the bond financing which matures in December
1999. The bank issuing the letter of credit has a secured interest in the
property. The annual fee for the letter of credit is equal to 1.5% of the
letter of credit amount. The variable interest rate on the bonds as of
December 1997 was 3.9%.
(h) At the time of the acquisition, the Trust assumed Oklahoma Housing
Financing Agency Revenue bond financing with a combination of fixed rate,
tax-exempt and taxable bonds. Approximately $14.6 million of the assumed
debt is tax-exempt and matures on October 1, 2025. The tax exempt portion
does not amortize until November 1, 2005, at which date the interest rates
will be reset based upon current rates at that time and the principal
balance will amortize over the remaining twenty years of the term of the
bonds. The taxable portion of approximately $2.0 million is fully
amortizing over the ten years ending November 1, 2005. The blended
interest rate on the taxable and tax exempt bonds is equal to 7.3% until
November 1, 2005. A prepayment penalty exists on the bonds for any
unscheduled principal payment made prior to September 30, 2005. The
prepayment penalty at acquisition was approximately 9.8% of the total
outstanding principal balance and decreases each year through September
2005 by approximately one percent. There is no prepayment penalty after
September 30, 2005.
(i) On December 13, 1994, the Trust executed a Revolving Line of Credit
(the "Revolving Line") with American National Bank of Chicago ("ANB") in
the amount of $15 million. The Revolving Line has been amended several
times to modify the terms of the loan. Under the latest amendment dated
April 19, 1997, the Trust was permitted to borrow up to $30 million under a
revolving facility through November 30, 1997 with a maturity of all unpaid
balances by November 30, 1998. On November 13, 1997, the Trust exercised
its option to extend both the revolving facility and the maturity of the
loan for an additional six months until May 31, 1998 and May 31, 1999,
respectively. On May 31, 1998, the Revolving Line will convert to a one
year, interest only, term loan. During the term of the Revolving Line, the
Trust must pay interest only at a rate equal to LIBOR plus 2.25% or ANB's
Prime plus .25% at the election of the Trust. As of December 31, 1997, the
LIBOR based rate paid by the Trust was 7.9% and the Prime based rate was
8.75%. In addition, the Trust is required to pay an unused facility fee
equal to .5% per annum multiplied by the average portion of the Revolving
Line that is undrawn from time to time.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. GROUND LEASE
On July 28, 1995, BSRT/M&J Northlake Limited Partnership, a joint
venture between a subsidiary of the Trust and M&J Wilkow Retail Ltd.,
acquired a leasehold interest in a shopping center in Atlanta, Georgia.
The lease expires in 2067. The ground lease requires annual lease payments
of $600,000 or $50,000 per month through October 4, 2007 plus 7% of total
annual gross rental income commencing when gross rental income exceeds
$2,000,000 from the operations of the Northlake Property. The ground lease
also requires that the Trust pay property operating expenses, including
real estate taxes. The base rent is reset in 2007 based upon a market rent
within a contractually defined range.
On November 19, 1996, the Trust acquired a 100% leasehold interest in
the property located at 6901 Riverport Drive (the "Riverport Property")
located in Louisville, Kentucky. The property is encumbered by tax-exempt
Industrial Revenue Bond financing with an outstanding principal balance at
the time of the acquisition in the amount of $5,700,000 issued by Jefferson
County, Kentucky. The lease assumed requires monthly payment of variable
rate interest which is due the first of each month and annual principal
payments in the amount of $300,000 which are due and payable each
December 1 to and including December 1, 2014, the maturity date. Under the
terms of the lease, the lease payments are equal to the required principal
and interest payments on the bonds.
On August 26, 1997, the Trust acquired a 100% ground lessee's interest
in the Technology Center located in Huntsville, Alabama, pursuant to a
ground lease from the Industrial Development Board of the City of
Huntsville. The lease expires on January 1, 2003. There are no rental
payments due under the lease agreement and the real estate taxes are abated
during the term of the lease. The lease grants the Trust a purchase option
on January 1, 2003 for approximately $50,000.
5. INVESTMENT IN REAL ESTATE
As of December 31, 1997, the Trust's investment in real estate
consisted of the following:
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<CAPTION>
Costs
Capitalized
Initial costs Subsequent Gross Amount at which Carried
to the Trust to Acquisition at December 31, 1997 (a)(b)(c)
---------------------- --------------- ---------------------------------
Building Building Building Accumu-
Property & Location/ & & & lated
Date of Construction/ Improve- Improve- Improve- Deprecia-
Date Acquired Land ments Land ments Land ments Total tion
- ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Milwaukee
Industrial
Properties
Milwaukee, WI
1973-1980
4/30/93 $ 532,800 $5,242,243 $ -- $685,457 $532,800 $5,927,700 $6,460,500 $850,561
Elmhurst
Metro Court
Elmhurst, IL
1982
11/30/93 1,615,360 3,604,359 -- 288,392 1,615,360 3,892,751 5,508,111 450,520
Colonial Penn
Building
Tampa Bay, FL
1984
3/22/94 1,189,300 7,366,210 -- -- 1,189,300 7,366,210 8,555,510 695,628
Florida Power
& Light
Building
Sarasota, FL
1991
3/22/94 1,700,000 8,366,921 -- 145,841 1,700,000 8,512,762 10,212,762 829,243
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Costs
Capitalized
Initial costs Subsequent Gross Amount at which Carried
to the Trust to Acquisition at December 31, 1997 (a)(b)(c)
---------------------- --------------- ---------------------------------
Building Building Building Accumu-
Property & Location/ & & & lated
Date of Construction/ Improve- Improve- Improve- Deprecia-
Date Acquired/ Land ments Land ments Land ments Total tion
- ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ----------
Willowbrook
Industrial Court
Willowbrook, IL
1979
6/16/95 $962,500 $2,961,179 $ -- $194,756 $962,500 $3,155,935 $4,118,435 $273,728
Northlake Tower
Shopping Center
Atlanta, GA
1983-1984
7/28/95 (f) -- 17,143,993 -- 861,479 -- 18,005,472 18,005,472 1,103,354
Quantum Busi-
ness Center
Jefferson County,
KY
1976-1980
9/26/95 900,000 4,164,685 -- 142,569 900,000 4,307,254 5,207,254 260,920
Lexington
Business Center
Lexington, KY
1985
12/05/95 1,330,000 5,753,284 -- 455,582 1,330,000 6,208,866 7,538,866 367,581
Newtown Distri-
bution Center
Lexington, KY
1981-1982
12/5/95 355,000 3,234,143 -- 47,459 355,000 3,281,602 3,636,602 173,415
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Costs
Capitalized
Initial costs Subsequent Gross Amount at which Carried
to the Trust to Acquisition at December 31, 1997 (a)(b)(c)
---------------------- --------------- ---------------------------------
Building Building Building Accumu-
Property & Location/ & & & lated
Date of Construction/ Improve- Improve- Improve- Deprecia-
Date Acquired Land ments Land ments Land ments Total tion
- ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ----------
Woodcrest
Office Park
Tallahassee, FL
1967-1989
12/19/95 $3,080,000 $7,967,657 $ -- $910,063 $3,080,000 $8,877,720 $11,957,720 $522,233
Midwest Office
Center
Oakbrook Terrace, IL
1979
4/18/96 2,396,100 2,591,138 -- 203,767 2,396,100 2,794,905 5,191,005 143,756
6901 River-
port Drive
Louisville, KY
1985
11/19/96 1,750,000 8,241,747 -- 20,080 1,750,000 8,261,827 10,011,827 231,513
Phoenix
Business Park
Atlanta, GA
1979
1/15/97 (d) 1,717,218 3,776,441 -- 17,159 1,717,218 3,793,600 5,510,818 91,674
Butterfield
Office Plaza
Oak Brook, IL
1974
4/30/97 (d) 4,812,802 10,255,306 -- 190,214 4,812,802 10,445,520 15,258,322 180,836
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Costs
Capitalized
Initial costs Subsequent Gross Amount at which Carried
to the Trust to Acquisition at December 31, 1997 (a)(b)(c)
---------------------- --------------- ---------------------------------
Building Building Building Accumu-
Property & Location/ & & & lated
Date of Construction/ Improve- Improve- Improve- Deprecia-
Date Acquired Land ments Land ments Land ments Total tion
- ------------------ ----------- ----------- ------ --------- ---------- ----------- ----------- ----------
Woodrun Village
Apartments
Yukon, OK
1985
5/22/97 (d) $338,684 $4,244,178 $ -- $19,873 $338,684 $4,264,051 $4,602,735 $71,908
Country Creek
Apartments
Oklahoma City, OK
1985
5/22/97 (d) 506,308 6,981,737 -- 36,478 506,308 7,018,215 7,524,523 118,552
Winchester Run
Apartments
Oklahoma City, OK
1985
5/22/97 (d) 272,815 4,231,120 -- 20,037 272,815 4,251,157 4,523,972 72,246
Willowpark
Apartments
Lawton, OK
1985
5/22/97 (d) 137,492 4,330,479 -- 20,353 137,492 4,350,832 4,488,324 73,996
Southlake
Corporate Center
Morrow, GA
1989
7/30/97 (d) 750,000 3,745,761 -- 7,015 750,000 3,752,776 4,502,776 39,043
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Costs
Capitalized
Initial costs Subsequent Gross Amount at which Carried
to the Trust to Acquisition at December 31, 1997 (a)(b)(c)
---------------------- --------------- ---------------------------------
Building Building Building Accumu-
Property & Location/ & & & lated
Date of Construction/ Improve- Improve- Improve- Deprecia-
Date Acquired Land ments Land ments Land ments Total tion
- ------------------ ------ ----------- ------ --------- ---------- ----------- ----------- ----------
Technology Center
Huntsville, AL
1990
8/26/97 (e)(f) $ -- $2,546,942 $ -- $ -- $ -- $2,546,942 $2,546,942 $21,150
University Square
Business Center
Huntsville, AL
1984-1987
8/26/97 (d) 1,387,000 5,950,345 -- 74,664 1,387,000 6,025,009 7,412,009 52,769
Airways Plaza
Office Center
Memphis, TN
1982
12/10/97 (d) 409,500 2,755,731 -- -- 409,500 2,755,731 3,165,231 4,130
Other (g) -- -- -- 79,922 -- 79,922 79,922 5,040
----------- ------------ ---- ---------- ----------- ------------ ------------ ----------
$26,142,879 $125,455,599 $-- $4,421,160 $26,142,879 $129,876,759 $156,019,638 $6,633,796
=========== ============ ==== ========== =========== ============ ============ ==========
<FN>
- --------------------
(a) The aggregate cost of the above real estate at December 31, 1997 for Federal income tax purposes is
$156,019,638. For further details regarding encumbrances on the Trust's properties see Note 3, Mortgage Loans and
Bonds Payable.
(b) Reconciliation of real estate owned:
</TABLE>
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Balance at Beginning of Year. . . . . . . . $107,182,182 $ 90,200,065 $41,198,302
Acquisitions During Year (1). . . . . . . . 59,153,012 15,013,282 47,818,144
Sale of Property (2). . . . . . . . . . . . (12,814,279) -- --
Additions During Year . . . . . . . . . . . 2,498,723 1,968,835 1,183,619
------------ ------------ -----------
Balance at End of Year. . . . . . . . . . . $156,019,638 $107,182,182 $90,200,065
============ ============ ===========
<FN>
(1) In 1997, in addition to these capitalized costs, the Trust assumed $598,347 of net
operating liabilities at acquisition.
(2) In connection with the sale of Colonial Courts and Hallmark Apartments, the Trust transferred
$107,135 of net operating liabilities.
(c) Depreciation expense is computed using the straight line method. Rates used in the determination of
depreciation are based upon the estimated useful life of the asset, primarily 40 years.
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Accumulated Depreciation:
Beginning of Year . . . . . . . . . . . . . $4,692,455 $2,337,095 $1,036,890
Depreciation Expense. . . . . . . . . . . . 3,282,032 2,355,360 1,300,205
Sale of Property. . . . . . . . . . . . . . (1,340,691) -- --
---------- ---------- ----------
Balance at End of Year. . . . . . . . . . . $6,633,796 $4,692,455 $2,337,095
========== ========== ==========
<FN>
(d) The Trust acquired a 100% fee ownership interest in these properties during the year ended December 31,
1997.
(e) The Trust acquired a 100% ground Lessee's interest in the Technology Center on August 26, 1997.
(f) The property is subject to a ground lease. See note 4 for more information.
(g) Other includes corporate furniture, fixtures and equipment.
</TABLE>
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. DISPOSITION ACTIVITIES
The Trust disposed of its interests in Hallmark Village Apartments on
March 11, 1997, the H Street Venture on March 20, 1997 and on July 29, 1997
and Colonial Courts property on September 25, 1997. The interests in
Hallmark Village Apartments and the H Street Venture were sold to
unaffiliated third parties and the interest in Colonial Courts property was
sold to an affiliate of PHC General Partnership who held a 25% ownership
interest in the property. The Trust received net sales proceeds of
approximately $6.1 million and recognized a gain of $3,800 from the sale of
Hallmark Village Apartments, received net sales proceeds of approximately
$5.5 million and recognized a loss of $61,000 on the sale of its investment
in H Street Venture and received net sales proceeds of approximately $0.9
million and recognized a gain on sale of its partnership interest in
Colonial Courts property of $938,000. In addition, upon Colonial Courts
closing, the Trust received a distribution of its percentage ownership
interest in the Partnership's cash reserves of approximately $0.3 million,
which, when added to net closing proceeds, resulted in a total payment to
the Trust of approximately $1.2 million.
7. SHARE PURCHASE AGREEMENT AND CONVERTIBLE TERM LOAN AGREEMENT
On October 14, 1997, the Trust entered into a Share Purchase Agreement
(the "Agreement") with a group of accredited investors (the "Purchasers")
under which the Trust sold 2,192,501 shares of beneficial interest at $5.00
per share, for an aggregate sale price of approximately $11 million. The
Trust paid approximately $1.4 million of other transaction costs in
connection with the transaction. The net sales proceeds were used to repay
draws totaling $9.0 million on the Trust's Revolving Line, with the
remainder used for general working capital. Amounts repaid under the
Revolving Line may be re-borrowed until May 31, 1998 and utilized to
acquire additional real estate property interests.
Simultaneously with the execution of the Agreement, the Trust also
entered into a Convertible Term Loan Agreement ("the Loan Agreement") with
the Purchasers. Under this agreement, the Purchasers agreed to provide an
unsecured convertible loan to the Trust in the amount of $20,000,000 (the
"Unsecured Loan") of which $10,000,000 must be borrowed by March 31, 1998
and the remainder by October 14, 1998. As of December 31, 1997, the Trust
had not borrowed any amounts under the loan. Loan proceeds may be used by
the Trust only to purchase real estate property interests. The Loan
Agreement contains a number of covenants and limitations customary for
agreements of this nature including covenants related to net worth and debt
coverage. Interest is payable quarterly on the last day of the calendar
quarter, at 12% per annum. Draws on the loan mature on September 30, 2002
with no prepayment of the loan permitted prior to September 30, 1999,
although the Purchasers may accelerate maturity upon the sale of
substantially all of the assets of the Trust.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Assuming shareholder approval, the Purchasers may convert all or part
of the amounts funded on the Unsecured Loan into preferred stock at a
conversion price of $100 per share or into common shares at a conversion
price equal to $5.15 per share. Preferred shares are convertible into
common shares at the rate of approximately 19.4 common shares for each
share of preferred stock equal to a price of $5.15 per share. The
convertible preferred shares will be entitled to receive, upon declaration
by the Trust, cash distributions at an annual rate of 10% per annum
calculated on their stated value of $100 per share. Distributions on
preferred shares will be cumulative from the date of issuance whether or
not there are funds legally available for the payment thereof and must be
paid prior to paying any distributions to the holders of common shares.
Finally, for thirty days after expiration of the loan commitment, the
Purchasers may purchase preferred shares to the extent that any part of the
$20,000,000 loan is not then outstanding in an amount equal to the unfunded
portion at a price equal to $100 per preferred share. Prior to shareholder
approval, the Purchasers may also convert loans outstanding to common
shares at any time, if that conversion will not cause total shareholdings
of the Purchasers to exceed 19.9% of the issued and outstanding shares as
of October 14, 1997.
8. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Condensed Summary information
presents the results of operations of the Trust as if (i) the Trust entered
into a Share Purchase Agreement and repaid $9 million of debt on January 1,
1997 and 1996; (ii) the Trust acquired all of the acquisition properties on
January 1, 1997 and 1996; and (iii) the Trust disposed of the disposition
properties and the mortgage note receivable at the beginning of each period
presented.
The unaudited Pro Forma Condensed Summary information is not
necessarily indicative of what the actual results of operations would have
been for the years ended December 31, 1997 and 1996 assuming the issuance
of shares and repayment of debt with the proceeds, purchase of acquisition
properties, and sale of disposition properties and mortgage note receivable
had been consummated at the beginning of each period presented, nor does it
purport to represent the future operations of the Trust.
Year Ended December 31,
(Unaudited)
-----------------------------
1997 1996
----------- -----------
Revenues. . . . . . . . . . . . . $32,422,344 $30,459,844
Net Income. . . . . . . . . . . . $ 4,390,093 $ 4,523,649
Earnings Per Share
of Beneficial Interest - Basic. $ 0.33 $ 0.34
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. INVESTMENT IN JOINT VENTURE
H STREET ASSEMBLAGE
On December 11, 1990, the Trust acquired title to the property known
as the Victor Building located in Washington D.C. Pursuant to an agreement
with Banyan Strategic Land Fund II ("BSLFII"), which had acquired an
adjacent parcel of land on June 5, 1992, the Trust and BSLFII formed a
joint venture (the "Venture") to pursue development rights of their
combined ownership interest (the "H Street Assemblage"). The Trust had a
53% interest in the Venture while BSLFII owned the remaining 47%. This
property consists of 17,000 square feet of undeveloped land in downtown
Washington, D.C. plus an approximately 55,900 square foot office building.
The entire property is zoned for office development.
During the quarter ended December 31, 1996, the Venture recorded a
valuation allowance in the amount of $6,000,000 as a result of an agreement
with United States General Services Administration ("GSA") and a sales
contract with an unaffiliated third party to purchase the H Street
Assemblage. The Trust's share, $3,180,000, was included in the loss from
operations of real estate ventures in the Trust's 1996 Statement of Income
and Expenses. The Venture's carrying value for the property after the
write down was based on the anticipated cumulative sales proceeds pursuant
to a sales contract with an unaffiliated third party and an agreement with
GSA. The reduction in the carrying value of $6,000,000 reflected the
carrying costs and closing costs the Venture incurred in order to complete
the aforementioned transactions.
On March 20, 1997, the Venture sold approximately 3,500 square feet of
the Venture's land to GSA for a purchase price of $1,680,000. GSA also
paid the Venture $150,000 as reimbursement of expenses that the Venture
incurred in anticipation of this transaction. The Venture received net
sales proceeds of approximately $1,829,000, of which approximately $969,000
was the Trust's share. The Trust recognized no gain or loss on the sale.
On July 29, 1997, the Venture sold the remaining land and the Victor
Building to an unaffiliated third party for $9,000,000. The Trust received
net sales proceeds of approximately $4,489,000 and recognized a loss on
disposition of approximately $61,000. As of July 29, 1997, the Trust had
no further ownership interest in the H Street Assemblage property.
Summary financial information for the H Street Assemblage as of
December 31, 1997, 1996 and 1995 is as follows:
<PAGE>
<TABLE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Investment Property Net . . . . . . . . . . $ -- $ 9,981,527 $16,039,027
Other Assets. . . . . . . . . . . . . . . . -- 251,403 255,923
Other Liabilities . . . . . . . . . . . . . -- (218,306) (276,780)
Venture Partners' Equity. . . . . . . . . . -- (4,300,865) (7,122,492)
----------- ----------- -----------
Trust's Equity . . . . . . . . . . . . $ -- $ 5,713,759 $ 8,895,678
=========== =========== ===========
Total Revenues . . . . . . . . . . . . $ 286,652 $ 529,931 $ 469,337
=========== =========== ===========
Net Income (Loss). . . . . . . . . . . $ 446,047 $(6,228,702) $ 71,252
=========== =========== ===========
</TABLE>
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. TRANSACTIONS WITH AFFILIATES
Effective January 1, 1997, the Trust began paying employees directly
in contrast to the prior practice of reimbursing Banyan Management Corp.
("BMC") on an hourly basis for the services of BMC's personnel. In prior
years, these payroll costs along with administrative costs were allocated
to the Trust and other entities to which BMC provided administrative
services based upon the actual number of hours spent by BMC personnel on
matters related to that particular entity in relation to the total number
of BMC personnel hours. From January 1, 1997 through September 30, 1997,
the Trust shared only certain administrative items such as office rent and
office expenses with other companies for which BMC provided services.
These costs were shared based upon the total hours worked by employees of
the Trust relative to total hours worked by employees of BMC and the Trust
combined. The Trust's allocable share of costs for the years ended
December 31, 1997, 1996 and 1995, amounted to $403,100, $1,275,374 and
$1,443,434, respectively. Beginning October 1, 1997, the Trust paid all of
its administrative costs directly and no longer shared these costs with
other companies.
As of December 15, 1997, all shareholders of BMC, other than the
Trust, had terminated their administrative services relationship with and
had surrendered their respective ownership interest in BMC, making the
Trust the sole remaining shareholder of BMC. As of this date, BMC merged
into a wholly-owned subsidiary of the Trust, BSRT Management Corp. As a
result of the merger, the Trust assumed current liabilities of $101,526,
cash of $83,178 and other assets of $64,171. BSRT Management Corp. paid a
dividend to the Trust in the amount of $150,000 representing a distribution
of its accumulated earnings and profits. This amount has been included in
Other Income of the Trust.
During the year ended December 31, 1997, the Trust paid no salary to,
but purchased legal services from an executive officer of the Trust. Fees
for legal services totaled $337,672. The executive pays no rent, as such,
to the Trust for the use of office space or equipment but does afford the
Trust a 20% discount for all time billed to the Trust by the executive and
his employees. The executive also reimburses the Trust for the cost of two
full time and certain part time employees. The amounts paid to the
executive for the years ended December 31, 1996 and 1995 were paid as
salaries and are included in the costs allocated to the Trust from BMC.
11. DISTRIBUTIONS PAID AND PAYABLE
To qualify as a REIT, the Trust must distribute at least 95% of its
"REIT Taxable Income" to shareholders. A portion of the distributions paid
during the subsequent year may be allocable to taxable income earned in the
prior year. Of the $4,484,003 of 1997 distributions paid, $282,851
represented ordinary income and $4,201,152 represented a return of capital.
Of the $4,191,406 of 1996 distributions paid, $2,841,813 represented
ordinary income and $1,349,593 represented a return of capital.
On January 7, 1998, the Trust declared a cash distribution for the
fourth quarter ended December 31, 1997, of $0.10 per share payable
February 20, 1998 to shareholders of record on January 22, 1998.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. MINIMUM RENTALS UNDER OPERATING LEASES
The Trust receives rental income from the rental of retail, office and
flex/industrial space under operating leases. The following is minimum
future base rentals (excluding amounts representing executory costs such as
taxes, maintenance and insurance) on operating leases for the Trust's
industrial, office and retail projects held at December 31, 1997:
1998 . . . . . . $ 24,025,134
1999 . . . . . . 19,623,007
2000 . . . . . . 13,743,038
2001 . . . . . . 9,200,111
2002 . . . . . . 6,385,087
Thereafter . . . 17,023,304
------------
$ 89,999,681
============
No single tenant at the Trust's operating properties produced ten
percent or more of total income from property operating activities.
The Trust is subject to the usual business risks regarding the
collection of the above-mentioned rentals.
13. RECOVERY OF LOSSES ON LOANS, NOTES, INTEREST RECEIVABLE
The Trust has received cash of $309,285, $58,658 and $562,337 during
1997, 1996 and 1995, respectively, in respect of its interest in a
liquidating trust established for the benefit of the unsecured creditors
(including the Trust) of VMS Realty Partners and its affiliates ("VMS").
The Trust has recorded $161,539, $16,569 and $164,958, respectively, of
these amounts as recovery of losses on mortgage loans, notes and interest
receivable in its consolidated statement of income and expenses. The
remainder of the amount received, $587,214, was recorded as a liability to
the Class Action Settlement Fund representing the Trust's share of amounts
due under the terms of the previously settled VMS securities litigation, of
which $493,685 was paid and the remaining $93,529 is included in the
liabilities on the Trust's December 31, 1997 balance sheet.
14. OMNIBUS STOCK AND INCENTIVE PLAN
On May 14, 1997, the Board of Trustees (the "Board") adopted and on
July 8, 1997, the shareholders of the Trust approved, the 1997 Omnibus
Stock and Incentive Plan (the "Plan") which allows the Trust to make stock-
based awards as part of its employee and Trustee compensation program.
Under the Plan, the Trust is authorized to issue up to one million shares
of the Trust's beneficial interest in the form of incentive stock options,
non-statutory stock options, stock appreciation rights, performance shares
and units.
The Trust has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for options granted under the Plan because,
as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation",
("SFAS No. 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the options granted under the Plan is equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The effects on 1997 and 1996 pro forma net income and pro forma
earnings per common share of amortizing to expense the estimated fair value
of stock options are not necessarily representative of the effects on net
income to be reported in future years due to such things as the vesting
period of the stock options, and the potential for issuance of additional
stock options in future years. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the
options' vesting period.
FIXED STOCK OPTIONS
Under the Plan, each person serving as a Trustee on the tenth business
day after the final adjournment of the Trust's annual meeting will receive
options to acquire 2,000 shares. Stock options granted to the Trustees
have a term of 10 years and will vest and be exercisable in installments as
follows: (i) 50% of the number of shares commencing on the first
anniversary of the date of grant; and (ii) the remainder commencing on the
second anniversary of the date of grant. On July 22, 1997, each of the
three Trustees received options to acquire 2,000 shares at $4.50 per share
(the closing price on the day of the grant of the options).
The Board administers the Plan and has the authority to determine,
among other things, the individuals to be granted options, the exercise
price at which shares may be acquired, the number of shares subject to
options and the vesting requirements and the exercise period of each
option. The Board is granted discretion to determine the term of each
option granted under the Plan to employees, executives and Trustees, but in
no event will the term exceed ten years and one day from the date of the
grant. On July 8, 1997, the Board granted initial options to purchase a
total of 41,000 shares at an exercise price of $4.08 per share (the closing
price on the day of the grant of the options) to various executives and
employees of the Trust except for Leonard G. Levine, who was granted
options pursuant to his Employment Agreement. On November 19, 1997, the
Board granted options to purchase a total of 133,000 shares at an exercise
price of $6.375 per share (the closing price on the date of the grant of
the options) to various executives and employees of the Trust except for
Leonard G. Levine who has been granted additional options under the terms
of a new employment agreement executed on March 11, 1998. Options for the
shares granted under the Plan to executives and employees on July 6, 1997
and November 19, 1997 have a term of 10 years and will be exercisable and
vest in installments as follows: (i) 33.3% of the number of shares
commencing on the first anniversary of the date of grant; (ii) an
additional 33.3% of the shares commencing on the second anniversary of the
date of the grant; and (iii) the remainder of the shares commencing on the
third anniversary of the date of grant. Under the new employment agreement
between the Trust and Leonard G. Levine, effective retroactively to
October 1, 1997, the Board granted options to purchase total of 200,000
shares to Mr. Levine at an exercise price of $5.50 per share. Pursuant to
the Employment Agreement, the options granted have a term of 10 years and
will be exercisable and vest as follows: (i) 100,000 at the time of
execution of the agreement; (ii) 25,000 on December 31, 1998, 1999, 2000
and 2001. In addition, certain target stock price performance options were
granted pursuant to the Employment Agreement (see below).
The unaudited pro forma information regarding net income and earnings
per share is required by SFAS No. 123, and has been determined as if the
Trust had accounted for its options under the fair value method of that
statement. The fair value for the options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1997; risk free interest rates of 5.58%;
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
dividend yields of 7.19%; volatility factors of the expected market price
of the Trust's common stock of .225; and a weighted-average expected life
of the options of 9.8 years. The pro forma expense would be $63,573 for
the year ended December 31, 1997.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models, such as the Black-Scholes model, require the input of highly
subjective assumptions including the expected stock price volatility.
Because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's view, the existing models do not
necessarily provide a reliable single measure of the fair value of the
options granted under the Plan.
A summary of the Trust's fixed stock option activity, and related
information for the year ended December 31, 1997 follows:
Weighted
Shares Average
Subject Exercise Price
to Option Per Share
---------- --------------
Balance at December 31, 1996. . . . . -- $ --
Options granted . . . . . . . . . 380,000 5.637
Options canceled. . . . . . . . . (5,000) 4.08
-------- --------
Balance at December 31, 1997. . . . . 375,000 $ 5.658
======== ========
At December 31, 1997, options on 100,000 shares (with an average
exercise price of $5.50 per share) were exercisable and options on 625,000
shares were available for future grant. Exercise prices for options
outstanding at December 31, 1997 ranged from $4.08 to $6.375 per share.
The remaining weighted-average contractual life of these options was 9.76
years. The weighted average grant date fair value of all options granted
during the year is $0.54.
TARGET STOCK PRICE PERFORMANCE OPTIONS
The exercise price of each target stock price performance option
granted is equal to the market price of the Trust's common shares on the
date of grant and vests as the Trust's common share price achieves certain
pre-established targets which were set on the date of grant. In
conjunction with the March 11, 1998 signing of an employment agreement
between the Trust and Leonard G. Levine, effective retroactively to October
1, 1997, the Board granted Mr. Levine stock options to purchase an
aggregate of 150,000 shares of the Trust's common shares of beneficial
interest at an exercise price equal to $5.50 per share. Options to
purchase 50,000 shares will vest and become exercisable if during any
consecutive thirty (30) trading days during the term of the agreement the
closing price of the common shares averages $8.50 per share. Options to
purchase an additional 100,000 shares will vest and become exercisable on a
proportionate basis if during any thirty (30) consecutive trading days
during the term of the agreement the closing price of the shares averages
more than $8.50 per share with full vesting occurring with respect to
75,000 shares if the closing price averages $9.00 per share, and $10.00 per
share with respect to the other 25,000 shares. The number of shares
underlying the options and the exercise price of each option are subject to
adjustment from time
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
to time if the Trust: (i) issues or sells additional common shares of
beneficial interest in exchange for consideration at a price less than the
prevailing market price of the Trust's common shares at the time of
issuance: (ii) issues or sells warrants with exercise prices less than the
prevailing market price at the time of issuance; (iii) declares a dividend
or otherwise makes a distribution to the holders of its beneficial interest
in the form of additional common shares; (iv) subdivides its outstanding
common shares of beneficial interest into a larger number of common shares;
or (v) combines its outstanding common shares into a smaller number of
common shares. All of the options must be exercised by October 1, 2007,
except that if Mr. Levine dies or becomes permanently disabled during the
term of the agreement, then all options which have vested must be exercised
within one year of death or permanent disability. In addition, upon death
or permanent disability, all options not otherwise vested, but which would
or will vest within six months following the date of death or permanent
disability either by passage of time or satisfaction of the various
performance standards will be deemed vested and become exercisable within
the same one-year time period.
The fair value of each option granted to Mr. Levine under his new
employment agreement was estimated on the date of grant using a modified
Black-Scholes option-pricing model which, in addition to the required
inputs, takes into consideration the target stock price (or barrier) which
must be attained. The following weighted average assumptions were
incorporated into the model for options granted in 1997; risk-free interest
rate of 5.92%; expected dividend yield of 7.21%; expected lives of 10
years; and a volatility factor of the expected market price of the Trust's
common shares of .225. The unaudited pro forma expense would be $8,460 for
the year ended December 31, 1997.
A summary of Trust's target stock price performance option activity,
and related information for the year ended December 31, 1997 follows:
Weighted
Shares Average
Subject Exercise Price
to Options Per Share
---------- --------------
Balance at December 31, 1996. . . . . -- $ --
Options granted . . . . . . . . . . 150,000 5.500
------- ------
Balance at December 31, 1997. . . . . 150,000 $5.500
======= ======
At December 31, 1997, no options were exercisable except that Mr.
Levine's new agreement was executed on March 11, 1998 and became
retroactively effective to October 1, 1997. Exercise prices for options
outstanding at December 31, 1997 were $5.50 per share. The remaining
weighted-average contractual life of these options was 9.8 years. The
weighted average grant date fair value of all options granted during the
year is $0.96.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
15. DISTRIBUTION REINVESTMENT AND SHARE PURCHASE PLAN
On April 23, 1997, the Trust filed a Registration Statement on Form S-
3 under the Securities Act of 1933 in order to register the Trust's Shares
issuable pursuant to its Distribution Reinvestment and Share Purchase Plan
(the "DRIP Plan"). The DRIP Plan allows shareholders of the Trust to: (i)
automatically reinvest the cash distributions on all, or part, of the
shares registered in their names and (ii) make cash investments of not less
than $5.00 per investment nor more than $120,000 per calendar year. Shares
purchased pursuant to the DRIP Plan will be issued directly by the Trust at
either (i) 97% of the average closing sales price of the shares as reported
on the NASDAQ National Market on the last five business days preceding the
relevant investment date in the case of reinvested cash distributions or
(ii) 100% of the aforementioned average closing price in the case of cash
investments. For the year ended December 31, 1997, the Trust issued 72,094
shares of beneficial interest pursuant to the DRIP Plan and received total
proceeds of $379,387.
16. AWARD SHARES AND WEIGHTED AVERAGE SHARES OUTSTANDING
Pursuant to the March 19, 1997 Amendment and the September 3, 1997
Second Amendment to the Second Amended and Restated Employment Agreement of
Leonard G. Levine, the Trust's president, and pursuant to the shareholder
approval which was obtained at the Trust's July 8, 1997 annual meeting, all
incentive compensation earned by Mr. Levine on the performance of the
Trust's assets acquired subsequent to January 1, 1993 ("Reinvestment
Activities") for the fiscal years ended December 31, 1996 and 1997 has been
paid in shares of the Trust's stock ("Award Shares").
On July 9, 1997, the Trust issued 95,635 Award Shares effective
retroactively to March 15, 1997 to Mr. Levine, representing Mr. Levine's
incentive compensation earned on Reinvestment Activities for the fiscal
year ending December 31, 1996 (the "1996 Award Shares"). On September 3,
1997, the Trust issued 400,000 Award Shares representing the final payment
and settlement of Mr. Levine's compensation earned on Reinvestment
Activities for the fiscal year ending December 31, 1997 and for cumulative
incentive compensation for the period January 1, 1993 through August 31,
1997 (the "Final Award Shares"). Prior to the September 3, 1997 Amendment,
Mr. Levine would have been entitled to receive shares in respect of
additional compensation which would have been determined as of December 31,
1997 and issued and paid no later than March 1998. The issuance of the
Final Award Shares fixed the amount of compensation that the Trust had been
accruing through December 31, 1997. The 95,635 Award Shares were valued at
$4.125 per share, or $394,494. The 400,000 Final Award Shares were valued
at $4.812 per share, or $1,924,800 of which $650,000 was expensed in 1996,
and the balance was ratably expensed during 1997. The 1996 Award Share
price of $4.125 was based upon the average closing price of the Trust's
shares for the five business days ending December 31, 1996. The Final
Award Shares price of $4.812 was based on the average closing price of the
Trust's shares for the five business days ending August 31, 1997. The 1996
Award Shares and Final Award Shares are included in the total shares
outstanding of the Trust when calculating Net Income Per Share of
Beneficial Interest Based on Weighted Average Number of Shares Outstanding.
All of the Award Shares issued prior to January 1, 1997 and 20% of
Award Shares issued for the fiscal year ended December 31, 1996 were held
in escrow by the Trust, through the vesting date, September 29, 1997.
Subsequent to that date, Mr. Levine became fully vested and the Award
Shares were immediately transferred and are otherwise freely alienated
subject to compliance with registration requirements of the federal and
state securities laws or exemptions therefrom.
<PAGE>
BANYAN STRATEGIC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
17. LITIGATION
The Trust is involved in various litigation arising in the ordinary
course of business. Although the final outcome of these matters cannot be
determined, based on the facts presently known, it is management's opinion
that the final resolution of these matters will not have an adverse effect
on the Trust's financial position or results of operations.
18. SUBSEQUENT EVENTS
Peachtree Pointe Office Park
On January 20, 1998, the Trust acquired a 100% ownership interest in
five one-story office buildings known as Peachtree Pointe Office Park
located in Norcross, Georgia, a northeast suburb of Atlanta, for a purchase
price of approximately $4.5 million. The Trust funded the acquisition from
its cash reserves as well as by utilizing a draw upon its Revolving Line of
$3.4 million.
EXHIBIT 10 (VIII)
- -----------------
FIRST AMENDMENT TO
CONVERTIBLE TERM LOAN AGREEMENT
THIS FIRST AMENDMENT TO CONVERTIBLE TERM LOAN AGREEMENT (this "First
Amendment"), dated as of March 30, 1998, is made by and among BANYAN
STRATEGIC REALTY TRUST, a Massachusetts business trust ("Company"), and THE
ENTITIES LISTED ON THE SIGNATURE PAGES HEREOF (Collectively, "Lenders"),
with reference to the following Recitals:
RECITALS:
A. Company and Lenders are parties to that certain Convertible
Term Loan Agreement dated as of October 10, 1997 (the "Loan Agreement").
Initially capitalized terms used in this First Amendment and not otherwise
defined herein shall have the meaning given such terms in the Loan
Agreement, unless the context clearly indicates otherwise.
B. Section 2.1A of the Loan Agreement provides that the Lenders'
aggregate Loan commitments will be reduced to $10,000,000 on March 31,
1998. Company desires to extend the date on which the Loan Commitments
will be so reduced and Lenders are agreeable to extending that date on the
terms and conditions set forth in this First Amendment.
NOW, THEREFORE, with reference to the foregoing Recitals, and for
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Company and Lenders hereby agree as follows:
1. Section 2.1A of the Loan Agreement is hereby amended by
deleting therefrom clause (ii) in its entirety and substituting the
following therefor:
"(ii) reduced to each Lender's Pro Rata Share of $10,000,000 (or such
lesser amount of Loan Commitments that shall be outstanding on June
30, 1998) on June 30, 1998."
2. Except as expressly modified by this First Amendment, Company
and Lenders acknowledge and agree that the Loan Agreement and the other
Loan Documents are unmodified and remain in full force and effect. Company
hereby ratifies and affirms its obligations under the Loan Agreement (as
modified by this First Amendment) and the other Loan Documents.
3. This First Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed as original, but
all such counterparts together shall constitute one and the same
instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature
pages are physically attached to the same document.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
COMPANY: BANYAN STRATEGIC REALTY TRUST,
a Massachusetts business trust
By: /s/ Neil D. Hansen
Printed Name: Neil D. Hansen
Title: Vice President
AGENT: MORGENS, WATERFALL, VINTIADIS & COMPANY, INC.,
a New York corporation
By: /s/ Stuart B. Brown
Stuart B. Brown
Title: Authorized Agent
<PAGE>
LENDERS: RESTART PARTNERS, L.P.,
a Delaware limited partnership
By: PRIME GROUP L.P.,
a Delaware limited partnership,
its General Partner
By: PRIME GROUP, INC.,
a Delaware corporation,
its General Partner
By: Stuart B. Brown
(whose signature appears below),
Authorized Agent
RESTART PARTNERS II, L.P.,
a Delaware limited partnership
By: PRIME GROUP II, L.P.,
a Delaware limited partnership,
its General Partner
By: PRIME GROUP, INC.,
a Delaware corporation
its General Partner
By: Stuart B. Brown
(whose signature appears below),
Authorized Agent
RESTART PARTNERS III, L.P.,
a Delaware limited partnership
By: PRIME GROUP III, L.P.,
a Delaware limited partnership,
its General Partner
By: PRIME GROUP, INC.,
a Delaware corporation,
its General Partner
By: Stuart B. Brown
(whose signature appears below),
Authorized Agent
RESTART PARTNERS IV, L.P.,
a Delaware limited partnership
By: PRIME GROUP IV, L.P.,
a Delaware limited partnership,
its General Partner
By: PRIME GROUP, INC.,
a Delaware corporation,
its General Partner
By: Stuart B. Brown
(whose signature appears below),
Authorized Agent
RESTART PARTNERS V, L.P.,
a Delaware limited partnership
By: PRIME GROUP V, L.P.,
a Delaware limited partnership,
its General Partner
<PAGE>
By: PRIME GROUP, INC.,
a Delaware corporation
its General Partner
By: Stuart B. Brown
(whose signature appears below),
Authorized Agent
ENDOWMENT RESTART LLC,
a Delaware limited liability company
By: ENDOWMENT PRIME LLC
a Delaware limited liability company,
its Managing Member
By: Stuart B. Brown
(whose signature appears below),
Authorized Agent
MORGENS WATERFALL INCOME PARTNERS, L.P.,
a New York limited partnership
By: MW CAPITAL, LLC,
a Delaware limited liability company,
its General Partner
By: Stuart B. Brown
(whose signature appears below)
Authorized Agent
/s/ Stuart B. Brown
Stuart B. Brown
for the entities and in the capacities described
above
EXHIBIT 21
- ----------
SUBSIDIARIES OF BANYAN STRATEGIC REALTY TRUST
NAME OF SUBSIDIARY STATE OF ORGANIZATION
------------------- ----------------------
Banyan/Morgan Milwaukee Limited Partnership Illinois
Banyan/Morgan Willowbrook Limited Partnership Illinois
BSLT Milwaukee Corp. Illinois
BSRT Commerce Center Corp. Illinois
BSRT Fountain Square Corp. Illinois
BSRT Lexington Trust Massachusetts
BSRT Lexington B Corp. Illinois
BSRT/M&J Northlake Limited Partnership Illinois
BSRT Merger Corp. Illinois
BSRT Newtown Trust Massachusetts
BSRT Northlake Festival Corp. Illinois
BSRT Kentucky Management Corp. Illinois
BSRT Riverport Trust Massachusetts
BSRT/STM Business Center Trust Massachusetts
BSRT Willburr Corp. Illinois
BSRT Woodcrest Office Corp. Illinois
BSRT Woodcrest Office Park Limited Partnership Illinois
BSRT Phoenix Business Park Corp. Illinois
Banyan/Morgan MOC Limited Partnership Illinois
BSRT Brook Corp. Illinois
BSRT Oklahoma Woodrun Corp. Illinois
BSRT Oklahoma Willowpark Corp. Illinois
BSRT Oklahoma Country Creek Corp. Illinois
BSRT Oklahoma Winchester Run Corp. Illinois
BSRT UPREIT Corp. Illinois
BSRT UPREIT Limited Partnership Illinois
BSRT Butterfield Office Plaza, L.L.C. Illinois
BSRT Southlake L.L.C. Illinois
BSRT University Square L.L.C. Illinois
BSRT Technology Center L.L.C. Illinois
BSRT Airways Plaza L.L.C. Illinois
BSRT Management Corp. Illinois
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BANYAN
STRATEGIC REALTY TRUST'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,428,588
<SECURITIES> 0
<RECEIVABLES> 861,979
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,290,567
<PP&E> 156,019,638
<DEPRECIATION> (6,633,796)
<TOTAL-ASSETS> 159,633,628
<CURRENT-LIABILITIES> 3,226,371
<BONDS> 21,614,493
<COMMON> 62,315,210
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY>159,633,628
<SALES> 0
<TOTAL-REVENUES> 28,784,900
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,055,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,447,278
<INCOME-PRETAX> 3,610,437
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,610,437
<DISCONTINUED> 0
<EXTRAORDINARY> (64,155)
<CHANGES> 0
<NET-INCOME> 3,546,282
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
