<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended January 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from _______ to _______.
Commission File No. 1-7062
REALTY REFUND TRUST
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
OHIO 34-6647590
- --------------------------------- -------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
1385 Eaton Center Cleveland, Ohio 44114
- -------------------------------------- --------------------------------
(Address of Principal Executive Office) (ZIP Code)
(216) 771-7663
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
- ------------------- ------------------------------------
Shares of Beneficial
Interest New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
[Cover Continued on Following Page]
<PAGE> 2
[Cover Continued From Previous Page]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 21, 1997: $4,175,175
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Annual Report--Parts I and II.
-2-
<PAGE> 3
PART I
------
Item 1. BUSINESS.
---------
Introduction.
- -------------
The Registrant is an unincorporated Ohio real estate investment
trust under a Declaration of Trust dated April 28, 1971 and has elected to be
taxed as a real estate investment trust, as that term is used in Sections
856-860 of the Internal Revenue Code.
The Registrant historically specialized in wrap-around
mortgage lending, whereby the borrower is offered a total mortgage loan (the
wrap-around loan), the principal amount of which loan equals the balance
outstanding on an existing prior mortgage loan on the borrower's property, plus
an additional amount supplied by the Registrant, on existing income-producing
commercial, industrial and multi-unit residential real property. Typically, a
wrap-around loan made by the Registrant is subordinate to the lien of the
existing prior mortgage loan that remains on the property.
In addition to mortgage investments, the Trustees in 1990
authorized the Registrant to pursue equity investments in shopping center,
multi-family residential, office building, industrial and warehouse properties.
The Registrant made no mortgage loans during each of the fiscal
years ended January 31, 1997 and January 31, 1996. At February 1, 1996, the
Registrant had two outstanding mortgage loans receivable, both of which
matured in fiscal year 1997.
Following a lengthy period of time during which the Trust
explored various strategies to maximize the value of the Trust to its
shareholders, in August 1996, the Trust began discussions with representatives
of a privately-held Arizona corporation who proposed to restructure the Trust
into an "umbrella partnership REIT" whereby the Trust will be the general
partner and others will be the limited partners in a newly-formed limited
partnership which will invest in hotel properties. After lengthly negotiations,
an agreement in respect of such transactions was executed by all parties on
December 27, 1996. See "The Formation Transactions", below.
Wrap-Around Financing and Other Mortgage Loans.
- -----------------------------------------------
Wrap-around financing is desirable for a borrower in those cases
in which an existing mortgage has an interest rate below presently prevailing
interest rates or in which replacing an existing mortgage is either prohibited
entirely or involves a pre-payment penalty. The decline in recent years in
prevailing interest rates coupled with the low cost of traditional refinancing
has decreased significantly the desirability of wrap-around financing as a form
of refinancing. As of January 31, 1997, the Registrant had no loans receivable.
In September 1996, the Toledo, Ohio loan investment was converted
from a wrap-around mortgage loan to a junior mortgage loan. On September 25,
1996, a principal prepayment of $600,000 was received and approximately $401,000
of escrow funds held by
-3-
<PAGE> 4
the Trust was applied against the mortgage loan receivable balance. The
commercial building that secured the loan was owned by a partnership of which a
corporation owned by Alan M. Krause, a Trustee and the Chairman and Co-Chief
Executive Officer of the Registrant, is general partner. The building was sold
by the partnership. In connection with that sale, the Trust has been released by
the new owner from any claims or liabilities relating to that property, and the
Trust has released its rights to any obligations owed to it by the partnership.
Equity Investments.
- -------------------
In July 1992, the Registrant, through a wholly-owned corporate
subsidiary, took title in lieu of foreclosure to the leasehold estate in the
Chicago office building upon which the Registrant previously had mortgage loans.
At January 31, 1992, the Registrant's net investment in the Chicago office
building was approximately $11,261,900, net of senior mortgage loans of
approximately $942,000. The Registrant's investment was written down to
$7,260,000, based upon the report of an independent real estate appraisal firm,
with a corresponding charge to the Registrant's operations in the third quarter
of fiscal 1993. In the first quarter of fiscal year 1994, the Registrant,
through a wholly-owned corporate subsidiary, consummated the purchase of an 83%
interest in the underlying fee simple estate in the property for approximately
$897,000. In April 1996, the Registrant, through a wholly-owned corporate
subsidiary, consummated the purchase of the remaining 17% interest in the
underlying fee simple estate for approximately $275,000. Net book value for the
Chicago office building, improvements and land as of January 31, 1997 (including
a $3,000,000 and $1,085,000 valuation allowance at January 31, 1996 and 1997,
respectively, established to reduce the carrying value of the property to its
current estimated net realizable value) was $5,599,122. While the Registrant
presently is operating the office building, its present intention is to seek a
purchaser and not to hold the building as a long-term investment.
The Registrant currently has no other equity investments in real estate.
The Formation Transactions
- --------------------------
With the changes in the prevailing interest rate environment
that occurred in the late 1980s and have continued, the wrap-around mortgage has
become a less attractive alternative to potential borrowers than conventional
mortgage refinancing. As a response to such changes, and to the maturation and
winding down of the Trust's existing investment portfolio, the Trustees in 1990
authorized the Trust to explore potential real estate equity investments. By
mid-1994, as the Trust's mortgage portfolio
-4-
<PAGE> 5
continued to mature and wind down, the Trustees determined to expand the scope
of its evaluation of strategic alternatives to include potential sales, mergers
or restructurings of the Trust or an orderly liquidation of the Trust. In August
1995, after several months of consultation, analysis and advice, the Trust
formally retained Brown, Gibbons, Lang & Company, L.P. ("BGL"), an investment
banking firm, to act as its financial advisor in developing and implementing a
strategy to maximize the value of the Trust to its shareholders.
As the Trust's financial advisor, BGL sought out proposals for
potential mergers, sales or other restructurings of the Trust, while continuing
to evaluate the relative potential benefits to shareholders of an orderly
liquidation. BGL received in excess of 100 inquiries on the Trust's behalf, all
of which it reviewed and analyzed. BGL and the Trust's management determined
that, in the majority of cases, such inquiries were too speculative or
otherwise too unattractive to pursue beyond a review of the initial proposal.
The Trust's management, assisted by BGL, pursued approximately
ten of such inquiries past the initial information stage and entered into
confidentiality agreements with the proponents thereof. After exchanging certain
confidential information, the Trust's management, BGL and the proponents
developed and analyzed the proposed structure and terms of the proposals, and
conducted repeated meetings with the proponents' principals and their advisors,
before the Trust's management, with the advice of BGL ultimately determined that
such proposals did not present realistic opportunities for the Trust's
shareholders to realize value in excess of that which the Trust's management
reasonably expected would be available upon a liquidation of the Trust. Such
analyses and determinations were presented to and reviewed with the Trustees on
an ongoing basis.
In August 1996, during the course of its review of the various
proposals and alternatives presented and available to it, the Trust was
approached by representatives of Hospitality Corporation International ("HCI"),
a privately-held Arizona corporation. HCI through affiliated entities, controls
seven all-suite hotel properties, comprising 1,036 hotel studio and two-room
suites, in Tucson, Phoenix, Scottsdale, Tempe, Flagstaff and Yuma, Arizona and
in Ontario, California (the "Hotels"), five of which are owned by partnerships
(the "Hotel Partnerships") and the remaining two of which are owned by
corporations (the "Hotel Companies"). HCI proposed a possible combination of the
Hotels with the Trust. After the exchange of additional confidential
information, the Trust, BGL and HCI's advisors commenced discussions regarding
the potential for adding the Hotels to the Trust's portfolio by means of the
formation of a limited partnership, of which the Trust would be the general
partner and to
-5-
<PAGE> 6
which the Hotels would be contributed. From mid-September 1996 through October
1996 the Trust and HCI discussed, analyzed and developed in detail a proposed
transaction and exchanged and negotiated a series of term sheets setting forth
the structure of the proposed transaction. This process involved a number of
meetings among the Trust's management, BGL, HCI's legal and financial advisors,
and certain members of HCI's senior management team. The Trustees were kept
advised as to the progress of the analysis and negotiations, and provided the
Trust's management with input throughout the preliminary negotiation process.
In late October 1996, the Trust and HCI had reached a preliminary
agreement as to the framework of the proposed transaction. The parties
exchanged and negotiated numerous successive drafts of the Formation Agreement
over a period of two months culminating in the definitive Formation Agreement
being executed by all parties on December 27, 1996.
Pursuant to the Formation Agreement, the parties had until
January 27, 1997 (which date subsequently was extended by mutual agreement to
February 12, 1997) to expand their due diligence investigations. Any party was
free to terminate the Formation Agreement at any time during that period
without penalty or further obligation. During such period, the parties commenced
the drafting and negotiation of the documentation required to implement the
Formation Agreement. The execution of the Formation Agreement was ratified and
approved (subject to shareholder approval (which the Trust will seek at its
annual meeting of shareholders) and other required approvals) by the Trustees on
February 14, 1997, at which time the Trust announced the proposed transaction to
the public, and by HCI's Board of Directors on February 14, 1997.
In general, the Formation Agreement provides that the Trust will
be the general partner, and the investors in the five Hotel Partnerships and one
of the Hotel Companies will be the limited partners, in such newly-formed
limited partnership, thus restructuring the Trust into an "umbrella partnership
REIT", or "UPREIT". This newly-formed limited partnership will own substantial
interests in the five Hotel Partnerships and directly will own the Flagstaff
Hotel, with the remaining Hotel being acquired directly by a newly-formed
subsidiary of the Trust. In addition to this restructuring, the Trust's
investment advisor, Mid-America ReaFund Advisors, Inc. (the "Advisor"), which
presently is owned by the Trust's Co-Chief Executive Officers, will be acquired
by the principals of HCI. Further, such principals will acquire certain
outstanding and newly-issued Common Shares, the existing Trustees will resign
and their positions will be filled by appointees of HCI, and certain other
concurrent transactions will occur, all as described more fully in the
Formation Agreement.
-6-
<PAGE> 7
Competition and Inflation.
- --------------------------
In connection with its investments, the Registrant competes
against banks, insurance companies, savings and loan associations, mortgage
bankers, pension funds and other lenders and investors, including a number of
other real estate investment trusts, many of which are larger and have
substantially greater financial resources than the Registrant. The principal
elements of competition include the amount, maturity, interest rate, debt
service charged and other terms of a refinancing, and whether the personal
liability of a borrower is required in addition to the mortgage lien on the
refinanced property.
In respect of equity investments, the Registrant competes against
insurance companies, pension funds, other real estate investment trusts, limited
partnerships, private investors, owner-operators and numerous other potential
investors, many of which may have greater financial resources and more
experience than the Registrant. The Registrant's Chicago property has, and it is
expected that any additional rental properties acquired by the Registrant will
have, substantial competition from similar properties in the vicinity. To the
extent the Registrant has acquired or acquires commercial properties, the
success of the Registrant will depend, in part, upon the ability of its tenants
in competing with businesses similar to those conducted by the tenants and upon
other factors which may affect the economic viability of the tenants.
Generally, inflation affects the Registrant as it affects its
borrowers and the underlying real estate collateral. Although this type of
collateral traditionally has been able to sustain itself during periods of
inflation, there has been a significant down-turn in market values of real
property in the United States over the past few years. The Registrant is unable
to predict future real estate market conditions.
Advisory Agreement And Advisor.
- -------------------------------
The Registrant has an Advisory Agreement with the Advisor which
provides for the Advisor's services as the investment advisor and administrator
of the day-to-day investment operations of the Registrant and pursuant to which
the Advisor is responsible for providing the Registrant with a continuing and
suitable investment program. Therefore, the Registrant employs no persons on a
full-time basis. The Registrant's Chairman and President are the sole
shareholders of the Advisor.
The Advisory Agreement is renewable annually and can be
terminated upon 60 days' notice by the Registrant and 120 days' notice by the
Advisor. The Advisor receives, subject to certain limitations, an annual fee
equal to 1% of the average invested
-7-
<PAGE> 8
assets for the year (as defined in the Advisory Agreement) and an annual
incentive fee equal to 10% of the amount by which the net profits (as defined in
the Advisory Agreement) of the Registrant exceeds 8% of the average net worth
for the year, and 10% of any realized net capital gains of the Registrant. Under
the terms of the Formation Agreement, the Advisor will be acquired by the
principals of HCI.
Lines Of Credit.
- ----------------
The Registrant had an agreement with National City Bank (the
"Bank") providing for a secured revolving line of credit (the "Credit
Agreement"). The Credit Agreement, originally scheduled to expire in October
1996, was extended to November 1996 to correspond with the extended maturity
date of the Fort Worth, Texas loan receivable. The proceeds from the repayment
of the Fort Worth, Texas loan were utilized, in part, to retire all outstanding
borrowings under the Credit Agreement. Upon retirement of all outstanding
borrowings thereunder, the Credit Agreement expired.
On March 16, 1993, the Registrant sold a $5,000,000 secured note
(the "Note") to Mr. Krause at par. The Note bore interest at the prime lending
rate of the Bank, and was scheduled to mature on August 31, 1996. The Trust has
exercised its option to extend the maturity of the Note. The Note is
secured by a lien on the assets of the Registrant, which lien is subordinate to
the prior lien of the Bank. In connection with the closing of the sale of the
Note, the Registrant's Trustees received the written opinion of an independent
investment banking firm that the terms of such sale were fair, from a financial
point of view, to the other Shareholders of the Registrant. The proceeds of the
sale of the Note were used to reduce the outstanding indebtedness of the
Registrant to the Bank under its secured revolving line of credit. At March 21,
1997, the outstanding principal balance of the Note was $2,300,000.
Item 2. PROPERTIES.
-----------
The Registrant maintains its headquarters in leased facilities in
Cleveland, Ohio which it shares with the Advisor. The Registrant owns no real
property other than the Chicago office building. See "Business-Equity
Investments".
The following is a detailed description of the property owned by
the Registrant. Financial information concerning the Chicago office building is
outlined in Note 4 to Notes to Financial Statements set forth on Page 12 of the
Registrant's 1997 Annual Report (Exhibit 13), which information hereby is
incorporated by reference.
-8-
<PAGE> 9
CHICAGO, ILLINOIS - OFFICE BUILDING. This office building, known as The
Carbide and Carbon Building, is located at 230 North Michigan Avenue in downtown
Chicago, and is a thirty-eight story steel frame, concrete and stone structure.
The building has a total rentable floor area of approximately 192,000 square
feet and is approximately 64 years old. In the opinion of the Registrant's
management, the building is covered adequately by insurance.
The general market for office leasing in downtown Chicago is
very competitive. According to the fourth quarter 1996 Building Owners and
Managers Association of Chicago occupancy survey, the overall occupancy in the
area where this building is located, the Central Business District/East Loop,
was 80.09%, an increase of .32% since the fourth quarter of 1995 and
.67% since the fourth quarter of 1994. A Class C Building generally is
described as an older building in need of some repair and/or renovation.
The following table sets forth the average occupancy rate and
average rent per square foot for this building as of December 31 for the years
indicated:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Occupancy 54.0% 59.0% 61.0% 57.0% 55.0%
Rate
Average Rent Per $15.50 $15.50 $16.19 $15.99 $16.15
Square Foot
</TABLE>
-9-
<PAGE> 10
No tenant occupies 10% or more of the rentable square footage of
the building. The following table sets forth further information concerning the
office building leases:
<TABLE>
<CAPTION>
Year of Number Net Percentage
Lease of Square Annual of Gross
Expiration Tenants Feet Rent Annual Rent
- ---------- ------- ---- ---- -----------
<S> <C> <C> <C> <C>
1997 18 18,939 $300,901.00 15.96%
1998 22 40,491 $595,204.00 31.57%
1999 8 13,927 $256,737.00 13.62%
2000 6 16,369 $344,768.00 18.29%
2001 4 9,347 $172,201.00 9.13%
2002 0 0 $ 0 0
2003 1 1,059 $ 16,467.00 .87%
2004 0 0 $ 0 0
2005 3 6,008 $106,381.00 5.64%
2006 1 1,247 $ 24,067.00 1.28%
2007 1 2,444 $ 68,069.00 3.65%
</TABLE>
For federal income tax purposes, the Registrant's tax basis in
the building, improvements and land is $9,690,000 less accumulated
depreciation on the building and improvements as of January 31, 1997 of
$911,000. For federal income tax purposes, the Registrant depreciates the
building and improvements using the straight line method over a life of 40
years.
The real estate tax rate is $198.52 per $1,000 of assessed
valuation. The current annual real estate taxes are $433,424.
Item 3. LEGAL PROCEEDINGS.
------------------
The Registrant is not a party to any material pending legal
proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The age (as of March 21, 1997), business experience during the
past five years and offices presently held by each of the Registrant's executive
officers are reported below. The Registrant's By-Laws provide that officers
shall hold office until their successors are duly elected and qualified and that
any officer may be removed from office at any time by the Registrant's
Trustees.
-10-
<PAGE> 11
ALAN M. KRAUSE: Age 67; Chairman of the Board of Trustees and
Co-Chief Executive Officer of the Registrant since 1990 and prior thereto Vice
Chairman of the Board of Trustees of the Registrant since 1971. Chairman of the
Board and Co-Chief Executive Officer of Mid-America ReaFund Advisors, Inc.
(Advisor to the Registrant) since 1990. Principal, The Mid-America Companies
(real estate ownership) since prior to 1983 and President, The Mid-America
Management Corporation (real estate management) since 1983.
JAMES H. BERICK: Age 63; President, Treasurer and
Co-Chief Executive Officer of the Registrant since 1990 and prior
thereto Vice Chairman of the Board of Trustees and Secretary of
the Registrant since 1971. President, Co-Chief Executive Officer
and Treasurer of Mid-America ReaFund Advisors, Inc. (Advisor to
the Registrant) since 1990. Chairman, Berick, Pearlman & Mills
Co., L.P.A. (attorneys) since 1986.
PART II
-------
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
----------------------------------------
AND RELATED SECURITY HOLDER MATTERS
-----------------------------------
The Registrant's shares of beneficial interest are traded on the
New York Stock Exchange under the symbol "RRF". As of March 21, 1997, the
Registrant had approximately 543 shareholders of record.
The following table sets forth the high and low sales prices of
the Registrant's shares of beneficial interest, as well as dividends declared
thereon, for the last two fiscal years:
<TABLE>
<CAPTION>
Price Range
-----------
Fiscal Year 1996 High Low Dividends
- ---------------- ---- --- ---------
<S> <C> <C> <C>
First Quarter 8 5/8 7 3/8 .20
Second Quarter 8 1/8 7 1/4 .10
Third Quarter 8 4 1/2 .10
Fourth Quarter 7 4 3/8 .10
Fiscal Year 1997 High Low Dividends
- ---------------- ----- --- ---------
First Quarter 7 1/4 5 3/4 .10
Second Quarter 5 7/8 5 3/8 .10
Third Quarter 6 5 3/8 .10
Fourth Quarter 5 5/8 4 7/8 .10
</TABLE>
-11-
<PAGE> 12
Item 6. SELECTED FINANCIAL DATA.
------------------------
Information in response to this item is set forth on page 2 of
the Registrant's 1997 Annual Report (Exhibit 13), which information is
incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
OPERATING RESULTS AND FINANCIAL POSITION.
-----------------------------------------
Information in response to this Item is set forth on pages 3
through 6 of the Registrant's 1997 Annual Report (Exhibit 13), which information
is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
The financial statements of the Registrant and the notes thereto
appear on pages 7 through 15 of the Registrant's 1997 Annual Report, which
information is incorporated herein by reference.
The other financial statements and schedules required herein are
filed as "Financial Statement Schedules" pursuant to Item 14 of this Report.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
-----------------------------------------------------
None.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
The information required by this Item in respect of Executive
Officers is set forth on Pages 10 through 11 of this Form 10-K and is
incorporated herein by reference.
The information concerning Directors is set forth below and is based in
part of information received from the respective Directors and in part on the
Registrant's records:
-12-
<PAGE> 13
<TABLE>
<CAPTION>
Principal Occupations During Past Five First
Years, Age as of March 21, 1997 and Became
Name and Directorships Held Trustee
- --------------- ----------------------------------------- -------
<S> <C> <C>
Alan M. Krause Chairman and Co-Chief Executive Officer 1971
of the Trust since 1990 and, prior thereto,
Vice Chairman of the Trust; Chairman of
Mid-America ReaFund Advisors, Inc. since
1990 (investment advisor to the Trust);
Principal, The Mid-America Companies
(real estate ownership); President, The
Mid-America Management Corporation (real
estate management). Age 67.
James H. Berick President and Treasurer of the Trust since 1971
1990 and, prior thereto, Vice Chairman and
Secretary of the Trust; President and
Treasurer of Mid-America ReaFund Advisors,
Inc. since 1990 (investment advisor to the
Trust); Chairman, Berick, Pearlman & Mills
Co., L.P.A. (attorneys). Mr. Berick is a
Director or Trustee of MBNA Corporation,
A. Schulman, Inc., The Tranzonic Companies,
and The Town and Country Trust. Age 64.
Alvin M. Kendis* Retired. Formerly, of Counsel, McDonald, 1971
Hopkins, Burke & Haber Co., L.P.A.
(attorneys). Age 78.
Frank L. Kennard* Retired. Formerly, Senior Vice President, 1971
The Huntington National Bank. Age 74.
Samuel S. Pearlman* Principal, Berick, Pearlman & Mills Co., 1991
L.P.A. (attorneys). Age 54.
<FN>
- ---------------
*Member of the Audit Committee.
</TABLE>
Mr. Krause has been both an owner and an investor in a significant
number of real estate projects and, directly or through affiliates, is a general
partner in numerous real estate partnerships. A property owned by one of such
real estate partnerships was sold in 1994 through foreclosure. In 1996, a
receiver was appointed in respect of a property owned by another such
partnership, which property was subsequently conveyed by deed in lieu of
foreclosure to the first mortgage holder.
-13-
<PAGE> 14
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Trust's executive officers and Trustees, and persons who
beneficially own more than 10% of its outstanding Shares, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Dan Z. Bochner, who has reported beneficial ownership of in excess of 10% of the
Trust's outstanding Shares, failed timely to file twelve Forms 4 in respect of
sixty purchase transactions involving the Trust's Shares during the period from
December 1995 through December 1996. Mr. Bochner reported all of such transac-
tions on a Form 4 filed in December 1996. The Trust has no information regarding
whether Mr. Bochner was required to file a Form 5 in respect of the 1996
calendar year.
Item 11. EXECUTIVE COMPENSATION.
-----------------------
The aggregate compensation, consisting exclusively of
Trustees' fees, paid by the Trust to all Trustees as a group (five persons) for
the year ended January 31, 1997 was $15,000.
The Trust pays Trustees' fees to each Trustee, other than
Messrs. Krause and Berick, in the amount of $250 per month plus $500 for each
month in which a Trustee attends a Board meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN
------------------------------
BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------
The following table, together with the accompanying footnotes,
describes the beneficial ownership of the Registrant's Common Shares as of March
21, 1997 (except as otherwise indicated) of (1) each person who was known to
the Registrant to be the beneficial owner of more than five percent (5%) of the
total Shares of the Common Shares issued and outstanding on such date, and (2)
each current Trustee as well as all executive officers and Trustees as a group.
Except as otherwise indicated, the Share figures shown below are based upon
information supplied by the named individuals and group members described in the
table and the Registrant's records.
As used in the table, a person is deemed to be the beneficial
owner of all Shares in respect of which such person has or shares voting or
investment power (regardless of whether such individual is entitled to receive
any economic benefits derived from such shares). As used herein, "voting power"
means the power to vote, or to direct the voting of, shares and "investment
power" means the power to dispose of, or to direct the disposition of, shares.
-14-
<PAGE> 15
<TABLE>
<CAPTION>
NAME OF NO. OF
BENEFICIAL OWNER COMMON SHARES PERCENT
- ---------------- ------------- -------
<S> <C> <C>
Dan Z. Bochner (a)...................234,900 23.0%
Alan M. Krause (b)...................183,001 17.9
James H. Berick (c).................. 600 *
Alvin M. Kendis...................... 1,000 *
Frank L. Kennard..................... 1,000 *
Samuel S. Pearlman................... 750 *
All executive officers and trustees
as a group (five persons) 185,551 19.6%
<FN>
(a) Pursuant to Amendment No. 2 to Schedule 13-D, dated December
26, 1996, filed with the Securities and Exchange Commission
by Dan Z. Bochner. The address for Mr. Bochner is 1618
Cotner Avenue, Los Angeles, California 90025.
(b) The address for Mr. Krause is 1385 Eaton Center, 1111 Supe-
rior Avenue, Cleveland, Ohio 44114.
(c) Does not include 14,000 Common Shares owned by a partnership in which
Mr. Berick's adult children are partners, 100 Common Shares owned by
Mr. Berick's spouse, and 80 Common Shares owned by Mr. Berick's adult
children.
</TABLE>
Change in Control
- -----------------
Under the terms of the Formation Agreement, an affiliate of
HCI will purchase 200,000 presently issued and outstanding shares of the Trust
and may purchase up to 200,000 presently authorized but unissued shares of the
Trust. Further, at the closing date, the Formation Agreement provides for the
replacement of the current members of the Board of Trustees.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The Trust is a party to an Advisory Agreement under which the
Trust receives certain services from the Advisor. The Advisory Agreement
provides that the Advisor, under the supervision of the Trustees, serves as
investment adviser and consultant in connection with the policy decisions to be
made by the Trustees of the Trust and as administrator of the day-to-day invest-
ment operations of the Trust. In return for the Advisor's services, the Advisory
Agreement provides, in part, that the Advisor is to receive (a) a monthly fee of
1/12th of 1% of the average book value of the invested assets of the Trust
during the next preceding month; (b) 15% of the commitment fees received by the
Trust for any stand-by or gap commitment relating to a mortgage loan which is
not closed; and (c) an incentive fee equal to 10% of the amount, if any, by
which the net profits of the
-15-
<PAGE> 16
Trust exceed 8% of the average monthly net worth of the Trust for the year. The
Advisor will refund to the Trust the amount, if any, by which the operating
expenses of the Trust in any fiscal year exceed the lesser of (x) 1 1/2% of the
invested assets of the Trust for such fiscal year or (y) the greater of (i) 1
1/2% of the average month-end net assets of the Trust for such fiscal year or
(ii) 25% of the net income of the Trust for such fiscal year. The Trust paid an
aggregate amount of $140,800 to the Advisor for services rendered under the
Advisory Agreement during the year ended January 31, 1997.
Each of Messrs. Krause and Berick has an employment agreement
with the Trust, expiring in 2007, which provides that he will receive no
compensation from the Trust as long as the Advisory Agreement is in effect.
Should the Advisor no longer provide such services, Messrs. Krause and Berick
will then be compensated, collectively, upon the same annual basis as is the
Advisor with each to receive, as long as he continues to be employed pursuant to
his employment agreement, an amount equal to (a) if both of Messrs. Krause and
Berick continue their employment with the Trust, one-half of the compensation
that would have been paid to the Advisor or (b) if only one of Messrs. Krause
and Berick continues his employment with the Trust, the full amount of the
compensation that would have been paid to the Advisor.
The Trust had a wrap-around mortgage loan on an office
building in Toledo, Ohio owned by Riverview Tower Limited Partnership, a
limited partnership of which an affiliate of Mr. Krause is a general partner.
The loan was retired as of January 31, 1997 by the conveyance by the borrower of
a deed in lieu of foreclosure to the first mortgage holder and a release by the
Trust of its mortgage. At such time, the loan had a principal balance of
$111,000 which amount was charged off by the Trust. The loan bore interest at a
rate per annum equal to 10%. During the year ended January 31, 1997, the largest
principal balance of the loan was $4,447,497 and the largest amount of the
Trust's net investment in the loan was $1,350,522.
On March 16, 1993, the Trust borrowed $5,000,000 from Mr.
Krause by selling to him the Trust's $5,000,000 Note at par. The Note bears
interest at the base lending rate of National City Bank, Cleveland, Ohio.
During the year ended January 31, 1997, the largest principal balance under
the Note was $4,500,000. As of March 21, 1997, the outstanding principal
balance under the Note was $2,300,000. Mr. Krause has agreed to defer the
payment of principal in respect of the note until after the sale by the Trust
of its Chicago office property. The Note is secured by a lien on the assets of
the Trust. In connection with the closing of such financing, the Trustees
received the written opinion of an independent investment banking firm that the
terms of such financing were fair, from a financial point of
-16-
<PAGE> 17
view, to the other Shareholders of the Trust. The proceeds of the sale of the
Note were used to reduce the Trust's outstanding indebtedness to its former bank
under its former revolving line of credit.
James H. Berick and Samuel S. Pearlman are the Chairman and a
principal, respectively, of the law firm of Berick, Pearlman & Mills Co.,
L.P.A., general counsel to the Trust, which received legal fees from the Trust
during the year ended January 31, 1997 in the amount of $67,329.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K.
------------
(a) 1. See the Index to Financial Statements set
forth on page 23 hereof for a list of
financial statements and financial schedules
included or incorporated herein by
reference.
2. The exhibits filed as part of this report
are set forth on the Exhibit Index on pages
19 through 22 hereof and each management
contract or compensatory plan or arrangement
required to be filed as an exhibit hereto
has been marked with an asterisk on the
Exhibit Index.
(b) No current reports on Form 8-K were filed during the
last quarter of fiscal year 1997.
-17-
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REALTY REFUND TRUST
Dated: April 29, 1997 By: /s/ Alan M. Krause
----------------------------
Alan M. Krause, Chairman
By: /s/ James H. Berick
----------------------------
James H. Berick,
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: April 29, 1997 /s/ James H. Berick
----------------------------
James H. Berick, Trustee,
Principal Executive Officer,
Principal Financial Officer
and Principal Accounting
Officer
Dated: April 29, 1997 /s/ Alan M. Krause
----------------------------
Alan M. Krause, Trustee and
Principal Executive Officer
Frank L. Kennard, Trustee
Alvin M. Kendis, Trustee
Samuel S. Pearlman, Trustee
Dated: April 29, 1997 By: /s/ Alan M. Krause
-----------------------
Alan M. Krause,
Attorney-In-Fact
Powers of attorney authorizing Alan M. Krause to sign this Form 10-K on
behalf of Trustees of the Registrant are being filed with the Securities and
Exchange Commission herewith (Exhibit 24).
-18-
<PAGE> 19
Index of Exhibits
-----------------
Exhibit
Number
- ------
3(a) First Amended and Restated Declaration of Trust
(incorporated by reference to Exhibit 3.1 of
Registration Statement No. 2-40238 effective June 17,
1971).
3(b) By-Laws (incorporated by reference to Exhibit 3.2 of the
Registrant's Current Report on Form 8-K dated February 12,
1985 and filed with the Securities and Exchange Commission on
February 13, 1985).
10(a)* Form of Advisory Agreement between the Registrant and
the Advisor (incorporated by reference to Exhibit 12.1
of Registration Statement No. 2-40238 effective June
17, 1971).
10(b)* Amendment dated June 1, 1987 to Advisory Agreement
between Registrant and the Advisor (incorporated by
reference to Exhibit 10(b) of the Registrant's Form 10-
K for the fiscal year ended January 31, 1994).
10(c)* Amendment dated June 1, 1988 to Advisory Agreement
between the Registrant and the Advisor (incorporated in
Exhibit 10(c) of the Registrant's Form 10-K for fiscal
year ended January 31, 1995).
10(d)* Amendment dated June 1, 1989 to Advisory Agreement
between the Registrant and the Advisor (incorporated by
reference to Exhibit 10(d) of the Registrant's Form
10-K for the fiscal year ended January 31, 1990).
10(e)* Amendment dated June 1, 1990 to Advisory Agreement
between the Registrant and the Advisor (incorporated by
reference to Exhibit 10(e) of the Registrant's Form
10-K for the fiscal year ended January 31, 1991).
10(f)* Amendment dated June 1, 1991 to Advisory Agreement
between the Registrant and the Advisor (incorporated by
reference to Exhibit 10(f) of the Registrant's Form
10-K for the fiscal year ended January 31, 1992).
-19-
<PAGE> 20
10(g)* Amendment dated June 1, 1992 to Advisory Agreement
between the Registrant and the Advisor (incorporated by
reference to Exhibit 10(g) of the Registrant's Form
10-K for the fiscal year ended January 31, 1993).
10(h)* Amendment dated June 1, 1993 to Advisory Agreement
between the Registrant and the Advisor (incorporated by
reference to Exhibit 10(h) of the Registrant's Form 10-
K for the fiscal year ended January 31, 1994).
10(i)* Amendment dated June 1, 1994 to Advisory Agreement
between the Registrant and the Advisor (incorporated by
reference to Exhibit 10(i) of Registrant's Form 10-K
for fiscal year ended January 31, 1995).
10(j)* Amendment dated June 1, 1995 to Advisory Agreement
between the Registrant and the Advisor (incorporated by
reference to Exhibit 10(j) of Registrant's Form 10-K
for fiscal year ended January 31, 1996).
10(k)* Amendment dated June 1, 1996 to Advisory Agreement
between the Registrant and the Advisor.
10(l) Secured Note Purchase Agreement dated March 16, 1993
between the Registrant and Alan M. Krause (incorporated
by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K dated March 16, 1993 and
filed with the Securities and Exchange Commission on
March 24, 1993).
10(m)* Employment Agreement dated January 22, 1990 between the
Registrant and Alan M. Krause (incorporated by
reference to Exhibit 10(i) of the Registrant's Form
10-K for the fiscal year ended January 31, 1992).
10(n)* Amendment No. 1 dated June 1, 1990 to Employment
Agreement between the Registrant and Alan M. Krause
(incorporated by reference to Exhibit 10(j) of the
Registrant's Form 10-K for the fiscal year ended
January 31, 1992).
10(o)* Amendment No. 2 dated June 1, 1991 to Employment
Agreement between the Registrant and Alan M. Krause
(incorporated by reference to Exhibit 10(k) of the
Registrant's Form 10-K for the fiscal year ended
January 31, 1992).
-20-
<PAGE> 21
10(p)* Amendment No. 3 dated June 1, 1992 to Employment
Agreement between the Registrant and Alan M. Krause
(incorporated by reference to Exhibit 10(s) of the
Registrant's Form 10-K for the fiscal year ended
January 31, 1993).
10(q)* Amendment No. 4 dated June 1, 1993 to Employment Agree-
ment between the Registrant and Alan M. Krause (incor-
porated by reference to Exhibit 10(u) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1994).
10(r)* Amendment No. 5 dated June 1, 1994 to Employment Agree-
ment between the Registrant and Alan M. Krause (incor-
porated by reference to Exhibit 10(x) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1995).
10(s)* Amendment No. 6 dated June 1, 1995 to Employment Agree-
ment between Registrant and Alan M. Krause (incorpo-
rated by reference to Exhibit 10(cc) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1996).
10(t)* Amendment No. 7 dated June 1, 1996 to Employment Agree-
ment between Registrant and Alan M. Krause.
10(u)* Employment Agreement dated January 22, 1990 between the
Registrant and James H. Berick (incorporated by refer-
ence to Exhibit 10(l) of the Registrant's Form 10-K for
the fiscal year ended January 31, 1992).
10(v)* Amendment No. 1 dated June 1, 1990 to Employment Agree-
ment between the Registrant and James H. Berick (incor-
porated by reference to Exhibit 10(m) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1992).
10(w)* Amendment No. 2 dated June 1, 1991 to Employment Agree-
ment between the Registrant and James H. Berick (incor-
porated by reference to Exhibit 10(n) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1992).
10(x)* Amendment No. 3 dated June 1, 1992 to Employment Agree-
ment between the Registrant and James H. Berick (incor-
porated by reference to Exhibit 10(w) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1993).
-21-
<PAGE> 22
10(y)* Amendment No. 4 dated June 1, 1993 to Employment Agree-
ment between the Registrant and James H. Berick (incor-
porated by reference to Exhibit 10 (z) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1994).
10(z)* Amendment No. 5 dated June 1, 1994 to Employment Agree-
ment between the Registrant and James H. Berick (incor-
porated by reference to Exhibit 10(dd) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1995).
10(aa)* Amendment No. 6 dated June 1, 1995 to Employment Agree-
ment between the Registrant and James H. Berick (incor-
porated by reference to Exhibit 10(jj) of the Regis-
trant's Form 10-K for the fiscal year ended January 31,
1996).
10(bb)* Amendment No. 7 dated June 1, 1996 to Employment Agree-
ment between the Registrant and James H. Berick.
10(cc) Formation Agreement among the Registrant, MARA, Alan M.
Krause, James H. Berick, HCI, InnSuites Hotels, L.L.C.,
James F. Wirth, Tucson Hospitality Properties, Ltd.,
Yuma Hospitality Properties, Ltd., Baseline Hospitality
Properties, Ltd., Northern Phoenix Investment Limited
Partnership, Ontario Hospitality Properties Limited
Partnership, Hulsey Hotels Corporation and Buenaventura
Properties, Inc.
13 The Registrant's 1997 Annual Report.
24 Powers of Attorney.
27** Financial Data Schedule.
*Management contract or compensatory plan or arrangement required
to be filed as an exhibit hereto.
**Filed only in electronic format pursuant to Item 601(b)(27) of
Regulation S-K.
-22-
<PAGE> 23
REALTY ReFUND TRUST
-------------------
LIST OF FINANCIAL STATEMENTS AND SCHEDULE
-----------------------------------------
The following financial statements of Realty ReFund Trust are included in Item
8:
Report of Independent Public Accountants
Balance Sheets -- January 31, 1997 and 1996
Statements of Operations -- For the Years Ended January 31, 1997,
1996 and 1995
Statements of Shareholders' Equity -- For the Years Ended January
31, 1997, 1996 and 1995
Statements of Cash Flows -- For the Years Ended January 31, 1997,
1996 and 1995
Notes to Financial Statements -- January 31, 1997, 1996 and 1995
The following financial statement schedule of Realty ReFund Trust is included in
Item 14(a)1.:
Schedule III -- Real Estate and Accumulated Depreciation
All other schedules are omitted, as the information is not
required or is otherwise furnished.
-23-
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Trustees,
Realty ReFund Trust:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Realty ReFund Trust's annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 14, 1997. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
Item 14(a)1. of this Form 10-K is the responsibility of the Trust's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Cleveland, Ohio
February 14, 1997.
-24-
<PAGE> 25
<TABLE>
<CAPTION>
SCHEDULE III
REALTY ReFUND TRUST
-------------------
REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------
AS OF JANUARY 31, 1997
----------------------
Cost Capitalized
Initial Cost Subsequent to
to Trust Acquisition
---------------------------- ----------------------------
Buildings and Building and
Encumbrances Land Improvements Land Improvements
------------ ---- ------------- ---- ------------
<S> <C> <C> <C> <C> <C>
Office Building--Chicago,
Illinois $ - $ 897,436 $ 7,260,000 $ 287,758 $ (2,053,835)
======= =========== ============= =========== ==============
Gross Amounts at
Which Carried at
Close of Period
---------------------------------------------
Year
Buildings and Total Accumulated Construction Date
Land Improvements (A) (B) Depreciation Completed Acquired Life
---- ------------ ------- ------------ --------- -------- ----
<S> <C> <C> <C> <C> <C>
Office Building--Chicago,
Illinois $ 1,185,194 $ 5,206,164 $ 6,391,358 $ 792,236 $ - (C) (D)
============ ============= ============ =========== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
(A) Reconciliation of total cost and accumulated depreciation.
1997 1996
------------------------- -------------------------
Total Accumulated Total Accumulated
Cost Deprecation Cost Deprecation
----- ----------- ----- -----------
<S> <C> <C> <C> <C>
BALANCE, beginning of year $7,188,600 $792,236 $9,009,696 $359,439
ADDITIONS DURING PERIOD:
Building improvements - - 491,599 -
Tenant improvements - - 687,305 -
Acquisition of land 287,758 - - -
Depreciation expense - - - 432,797
DEDUCTIONS DURING PERIOD:
Writedown to estimated net realizable value (E) (1,085,000) - (3,000,000) -
---------- -------- ---------- --------
BALANCE, end of year $6,391,358 $792,236 $7,188,600 $792,236
========== ======== ========== ========
1995
-------------------------
Total Accumulated
Cost Deprecation
----- -----------
<S> <C> <C>
BALANCE, beginning of year $8,387,719 $ 29,256
ADDITIONS DURING PERIOD:
Building improvements 107,000 -
Tenant improvements 514,977 -
Acquisition of land - -
Depreciation expense - 330,183
DEDUCTIONS DURING PERIOD:
Writedown to estimated net realizable value (E) - -
---------- ---------
BALANCE, end of year $9,009,696 $359,439
========== ========
<FN>
(B) For federal income tax purposes, the aggregate cost is $9,690,000 at January 31, 1997.
(C) Building title was accepted in July 1992. Land was acquired in March and April 1993 and April 1996.
(D) Effective February 1, 1996, the Trust adopted FAS No. 121 and, as a result, no depreciation expense is being
recorded on the real estate held for sale.
(E) In fiscal 1997 and 1996, the Trust recorded a provision of $1,085,000 and $3,000,000, respectively, to reduce
the carrying value of the real estate held for sale to its estimated net realizable value. The amount of each of
the writedowns was based upon the Trust's estimate of the amount of net proceeds which would be realized
upon the sale of the real estate.
</TABLE>
-25-
<PAGE> 1
EXHIBIT 10(k)*
Amendment dated June 1, 1996 to Advisory Agreement between the
Registrant and the Advisor.
<PAGE> 2
June 1, 1996
Mid-America ReaFund Advisors, Inc.
1385 Eaton Center
Cleveland, Ohio 44114
Attention: James H. Berick, President
Dear Jim:
Please be advised that the Trustees of Realty ReFund Trust (the
"Trust") have agreed to extend the Advisory Agreement between Mid-America
ReaFund Advisors, Inc. (the "Adviser") and the Trust, for an additional term of
one (1) year expiring June, 1997, on the same terms, conditions and provisions
contained in the original Agreement as extended from time to time.
If this Agreement to extend meets with the approval of the Adviser,
please acknowledge the same on the copy of this letter enclosed for that
purpose.
Very truly yours,
Realty ReFund Trust
By /s/ Alan M. Krause
Alan M. Krause
Chairman
And /s/ Christine Turk
Christine Turk
Secretary
/ct
Enclosure
The foregoing extension is hereby accepted.
Mid-America ReaFund Advisors, Inc.
By /s/ James H. Berick
James H. Berick, President
<PAGE> 1
EXHIBIT 10(t)*
Amendment No. 7 dated June 1, 1996 to Employment Agreement between
the Registrant and Alan M. Krause.
<PAGE> 2
AMENDMENT NO. 7 TO
EMPLOYMENT AGREEMENT
--------------------
This Amendment No. 7 to Employment Agreement made as of June
1, 1996 between REALTY ReFUND TRUST, an unincorporated association in the form
of a business trust organized under the laws of the State of Ohio having its
principal business address at 1385 Eaton Center, Cleveland, Ohio 44114 (the
"Trust") and ALAN M. KRAUSE ("Employee").
R E C I T A L S
---------------
The Trust and Employee entered into an Employment Agreement
dated as of January 22, 1990. As of June 1, 1995, the Employment Agreement was
amended to extend its term to January 21, 2006 (subject to the provisions for
earlier termination contained at Section 5 of the Employment Agreement). The
January 22, 1990 Employment Agreement, as amended, is herein referred to as the
"Employment Agreement".
The parties desire to extend the term of the Employment
Agreement by re-establishing the expiration date thereof.
A G R E E M E N T S
-------------------
NOW, THEREFORE, in consideration of the foregoing, and their
mutual covenants and agreements herein contained, the parties hereto do hereby
agree as follows:
<PAGE> 3
1. The Trust and Employee agree to and do hereby
amend the Employment Agreement so that:
(a) Section 2 on page 3 of the Employment
Agreement stating:
"2. Term
----
. . . this Agreement shall commence upon
the execution hereof and shall continue
through and including the 21st day of
January, 2006."
is replaced in its entirety as though originally set forth
therein with:
"2. Term
----
. . . this Agreement shall commence upon
the execution hereof and shall continue
through and including the 21st day of
January, 2007."
and,
(b) Section 6 on page 5 of the Employment
Agreement stating:
"6. Covenant Against Competition
----------------------------
(A) During the period commencing with
the date hereof and continuing until the
latter of the expiration of the term of this
Agreement or until January 21, 2006 if this
Agreement shall be terminated for the reasons
specified in Section 5(a)(i) hereof . . . ."
is replaced in its entirety as though originally set forth therein with:
<PAGE> 4
"6. Covenant Against Competition
-----------------------------
(A) During the period commencing with
the date hereof and continuing until the
latter of the expiration of the term of this
Agreement or until January 21, 2007 if this
Agreement shall be terminated for the reasons
specified in Section 5(A)(i) hereof . . ."
2. Except as herein specifically amended, all of the terms and
conditions of the Employment Agreement are hereby ratified and confirmed and the
Employment Agreement is hereby incorporated to the same extent as if fully
rewritten herein.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 7 to Employment Agreement to be duly executed as of June 1, 1996.
REALTY ReFUND TRUST
By: /s/ James H. Berick
-------------------------------
James H. Berick,
President
And: /s/ Christine Turk
-------------------------------
Christine Turk,
Secretary
THE TRUST
/s/ Alan M. Krause
--------------------------------
ALAN M. KRAUSE
EMPLOYEE
<PAGE> 1
EXHIBIT 10(bb)*
Amendment No. 7 dated June 1, 1996 to Employment Agreement
between the Registrant and James H. Berick.
<PAGE> 2
AMENDMENT NO. 7 TO
------------------
EMPLOYMENT AGREEMENT
--------------------
This Amendment No. 7 to Employment Agreement made as of June 1,
1996 between REALTY ReFUND TRUST, an unincorporated association in the form of a
business trust organized under the laws of the State of Ohio having its
principal business address at 1385 Eaton Center, Cleveland, Ohio 44114 (the
"Trust") and JAMES H. BERICK ("Employee").
R E C I T A L S
---------------
The Trust and Employee entered into an Employment Agree ment dated
as of January 22, 1990. As of June 1, 1995, the Employment Agreement was amended
to extend its term to January 21, 2006 (subject to the provisions for earlier
termination contained at Section 5 of the Employment Agreement). The January 22,
1990 Employment Agreement, as amended, is herein referred to as the "Employment
Agreement".
The parties desire to extend the term of the Employment Agreement
by re-establishing the expiration date thereof.
A G R E E M E N T S
-------------------
NOW, THEREFORE, in consideration of the foregoing, and
<PAGE> 3
their mutual covenants and agreements herein contained, the parties hereto do
hereby agree as follows:
1. The Trust and Employee agree to and do hereby amend the
Employment Agreement so that:
(a) Section 2 on page 3 of the Employment Agreement
stating:
"2. Term
----
. . . this Agreement shall commence upon the
execution hereof and shall continue through
and including the 21st day of January, 2006."
is replaced in its entirety as though originally set forth therein with:
"2. Term
----
. . . this Agreement shall commence upon the
execution hereof and shall continue through
and including the 21st day of January, 2007."
and,
b) Section 6 on page 5 of the Employment
Agreement stating:
"6. Covenant Against Competition
----------------------------
(A) During the period commencing with the
date hereof and continuing until the latter of
the expiration of the term of this Agreement or
until January 21, 2006 if this Agreement shall be
terminated for the reasons specified in Section
5(a)(i) hereof . . . ."
is replaced in its entirety as though originally set forth
therein with:
<PAGE> 4
"6. Covenant Against Competition
----------------------------
(A) During the period commencing with the date
hereof and continuing until the latter of the expiration of
the term of this Agreement or until January 21, 2007 if
this Agreement shall be terminated for the reasons
specified in Section 5(A)(i) hereof . . ."
2. Except as herein specifically amended, all of the terms and
conditions of the Employment Agreement are hereby ratified and confirmed and the
Employment Agreement is hereby incorporated to the same extent as if fully
rewritten herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 7 to Employment Agreement to be duly executed as of June 1, 1996.
REALTY ReFUND TRUST
By: /s/ Alan M. Krause
----------------------------
Alan M. Krause,
Chairman
And: /s/ Christine Turk
---------------------------
Christine Turk,
Secretary
THE TRUST
/s/ James H. Berick
---------------------------------
JAMES H. BERICK
EMPLOYEE
<PAGE> 1
EXHIBIT 10(cc)
Formation Agreement among the Registrant, MARA, Alan M.
Krause, James H. Berick, HCI, InnSuites Hotels, L.L.C.,
James F. Wirth, Tucson Hospitality Properties, Ltd.,
Yuma Hospitality Properties, Ltd., Baseline Hospitality
Properties, Ltd., Northern Phoenix Investment Limited
Partnership, Ontario Hospitality Properties Limited
Partnership, Hulsey Hotels Corporation and Buenaventura
Properties, Inc.
<PAGE> 2
FORMATION AGREEMENT
This Formation Agreement is made and entered into this 15th
day of December, 1996, by and among Realty ReFund Trust, an unincorporated Ohio
real estate investment trust having an address at 1385 Eaton Center, Cleveland,
Ohio 44114 ("RRF"); Mid-America ReaFund Advisors, Inc., an Ohio corporation
having an address at 1385 Eaton Center, Cleveland, Ohio 44114 ("MARA");
InnSuites Hotels, L.L.C., an Arizona limited liability company having an address
at Suite 105, 1615 East Northern Avenue, Phoenix, Arizona 85020 ("ISH");
Hospitality Corporation International, an Arizona corporation having an address
at Suite 105, 1615 East Northern Avenue, Phoenix, Arizona 85020 ("HCI"); Alan M.
Krause, a shareholder of RRF and MARA having an address in care of RRF
("Krause"); James H. Berick, a shareholder of MARA having an address in care of
RRF ("Berick"); James Wirth, the President of the managing member of ISH and the
President of HCI having an address in care of HCI ("Wirth"); and the seven
limited partnerships or corporations, as the case may be, listed on Schedule I
hereto (each, a "Hotel Company" and, collectively, the "Hotel Companies"). All
seven of the Hotel Companies are controlled by HCI and/or Wirth or an affiliate,
and each has an address in care of HCI. RRF, MARA, Krause and Berick sometimes
are referred to herein collectively as the "RRF Parties"; Wirth, ISH, HCI and
the Hotel Companies sometimes are referred to herein collectively as the "ISH
Parties".
-1-
<PAGE> 3
R E C I T A L S:
----------------
A. RRF was organized in 1971 and has qualified as a "real
estate investment trust" ("REIT") for federal income tax purposes since its
organization. RRF's shares of beneficial interest, without par value ("RRF
Shares"), currently are listed for trading on the New York Stock Exchange
("NYSE") under the symbol "RRF".
B. The Hotel Companies own and/or manage a total of seven
all-suite hotel properties, comprising 1,037 hotel studio and two-room suites,
in Tucson, Phoenix, Scottsdale, Tempe, Flagstaff and Yuma, Arizona and in
Ontario, California (the "Hotels").
C. HCI wishes to provide, among other things, for the terms of
the transfer of its and its affiliates' ownership interests in the Hotel
Companies to RRF Operating Limited Partnership, a to-be-formed Delaware limited
partnership (the "Operating Partnership"), in which certain of the equity owners
of the Hotel Companies will be the initial limited partners and RRF will be the
general partner.
D. Wirth wishes to provide for the terms of his acquisition of
all of the outstanding capital stock of MARA and the acquisition by him or an
affiliate of 200,000 presently issued and outstanding RRF Shares, and for his
designees to assume majority control of RRF's Board of Trustees.
E. The parties hereto desire that the transactions
contemplated herein regarding the organization of the Operating
-2-
<PAGE> 4
Partnership and the restructuring of the ownership and control of the Hotel
Companies, RRF and MARA (such transactions, collectively, the "Formation") be
implemented through the timely execution and closing of the transactions
contemplated by this Agreement and of the agreements contemplated hereby (this
Agreement and all other agreements and instruments contemplated hereby which are
required to be executed at or prior to the closing of the Formation pursuant to
this Agreement (such date, the "Closing Date") hereinafter are referred to
collectively as the "Transaction Agreements"). Accordingly, the parties hereto
wish to enter into this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual
agreements contained herein, and for other good, valuable and binding
consideration, the receipt and sufficiency of which hereby are acknowledged, and
subject to the terms hereof, the parties hereto, intending legally to be bound,
hereby agree as follows:
Section 1. TRANSACTION AGREEMENTS.
Subject to the fulfillment or waiver of the conditions
specified in Section 7, below, and pursuant to and in accordance with the
Transaction Agreements, at or prior to the Closing Date:
(a) OPERATING PARTNERSHIP AGREEMENT. RRF, HCI and each equity
owner of each Hotel Company which is a limited partnership (each, a
"Partnership Hotel Company") who elects to participate in the Private
Placement (as hereinafter defined)(each, a Participating Equity Owner")
shall execute and enter into an Agreement of Limited Partnership of the
Operating Partnership (the "Operating Partnership Agreement"). The
Operating Partnership Agreement will provide, inter alia, for the
contribution by HCI and each
-3-
<PAGE> 5
Participating Equity Owner of its respective ownership interests in
each Partnership Hotel Company to the Operating Partnership, and for
HCI to make certain representations and warranties to RRF including,
without limitation, as to the material accuracy of all information
furnished to RRF in respect of the Hotel Companies and the Hotels and
as to customary real estate matters. The Operating Partnership
Agreement will specify that the ownership interests of HCI and the
Participating Equity Owners in the Partnership Hotel Companies will be
transferred to the Operating Partnership; that the aggregate ownership
interests of HCI and the Participating Equity Owners in the Operating
Partnership will equal the "ISH Ownership Percentage" (as defined
below); and that the aggregate ownership interest of RRF in the
Operating Partnership will equal the "RRF Ownership Percentage" (as
defined below). The Operating Partnership will issue to RRF, as general
partner, and to the Participating Equity Owners, in the aggregate, as
initial limited partners, such number of general or limited partnership
units, as the case may be, as shall equal the OP RRF Contribution or
the OP Hotel Contribution (each as defined below), respectively,
DIVIDED BY five (5). Each Participating Equity Owner will receive his
ratable proportion of such aggregate number of limited partnership
units. The Operating Partnership Agreement further will provide that
the limited partnership units in the Operating Partnership shall be
convertible into RRF Shares, on a one-for-one basis. Notwithstanding
the foregoing, however, no such conversion will be permitted for a
specific limited partner if RRF determines that such conversion would
be likely to cause RRF no longer to qualify as a REIT. RRF will
contribute to the Operating Partnership, in exchange for its general
partnership interest therein, an amount of its cash and/or other
property in such proportion to its total assets as the Agreed Equity
Value of the Hotels contributed to the Operating Partnership bears to
the ISH Portfolio Value (such proportion, the "Partnership Hotel
Percentage"). An example of the foregoing calculation is set forth on
Schedule III attached hereto.
For purposes of this Agreement, the term "ISH Ownership Percentage"
shall mean the fraction, expressed as a percentage, that is the product
of (i) the "ISH Portfolio Value", which for purposes of this Agreement
shall be the aggregate Agreed Equity Value (as hereinafter defined) of
all seven of the Hotels, DIVIDED BY (ii) the sum of (x) the ISH
Portfolio Value PLUS (y) $5,102,930 [i.e., $5.00 per RRF Share
multiplied by 1,020,586 outstanding RRF Shares](the "RRF Agreed
Value").
-4-
<PAGE> 6
For purposes of this Agreement, the term "RRF Ownership Percentage"
shall mean the fraction, expressed as a percentage, that is the product
of (i) the RRF Agreed Value, DIVIDED BY (ii) the sum of (x) the ISH
Portfolio Value PLUS (y) the RRF Agreed Value.
For purposes of this Agreement, the term "Operating Partnership Value"
shall mean the sum of (x) the aggregate Agreed Equity Value of the
Hotels contributed to the Operating Partnership by the Partnership
Hotel Companies (the "OP Hotel Contribution"), PLUS (y) the product of
the RRF Agreed Value MULTIPLIED BY the Partnership Hotel Percentage
(the "OP RRF Contribution").
For purposes of this Agreement, the term "Agreed Equity Value" shall
mean the appraised value of the Hotels, less outstanding debt to be
assumed.
(b) ACQUISITION OF CORPORATE HOTEL COMPANIES. Each of the two
Hotel Companies which is a corporation (a "Corporate Hotel Company")
shall enter into either an Agreement of Merger (a "Merger Agreement")
and/or a Purchase and Sale Agreement (a "Hotel Purchase Agreement")
with RRF. It is contemplated that the Corporate Hotel Company that owns
the Flagstaff, Arizona Hotel will receive RRF Shares as the
consideration for transfer of that Hotel to RRF, pursuant to either a
Merger Agreement or a Hotel Purchase Agreement, based upon the Agreed
Equity Value of that Hotel and that the Corporate Hotel Company that
owns the Scottsdale, Arizona Hotel will receive a combination of RRF
Shares and cash, in the form of a promissory note or notes of RRF in a
principal amount of up to $4.4 million, bearing interest and otherwise
payable in a manner similar to the terms of the promissory note
referenced in Section 1(f) of this Agreement, as the consideration for
the transfer of that Hotel to RRF pursuant to either a Merger Agreement
or a Hotel Purchase Agreement. The Corporate Hotel Company that owns
the Flagstaff, Arizona Hotel will receive such number of RRF Shares as
shall equal the Agreed Equity Value of such Hotel DIVIDED BY five (5);
the Corporate Hotel Company that owns the Scottsdale, Arizona Hotel
will receive such number of RRF Shares as shall equal the Agreed Equity
Value of such Hotel, MINUS the principal amount of the promissory note
referred to in the preceding sentence, DIVIDED BY five (5).
(c) PURCHASE OF MARA CAPITAL STOCK. Wirth, or an affiliated
nominee, will enter into a Stock Purchase Agreement (the "MARA Purchase
Agreement") with Krause and Berick providing for the purchase by Wirth
(or such affiliated nominee) of all of the outstanding capital stock of
MARA (the "MARA Shares"), free and clear of all liens and
-5-
<PAGE> 7
encumbrances, for a purchase price equal to $750,000, of which $300,000
will be payable in cash on the Closing Date, with the balance payable
in two equal annual installments of $225,000 each, together with
interest on the unpaid amount at 7% per annum, compounded annually and
computed on the basis of a 365-day year. Interest shall be payable
annually, together with the payment of principal then due, on each of
the first two anniversaries of the Closing Date. The obligations of
Wirth (or such affiliated nominee) to Krause and Berick under the MARA
Purchase Agreement will be secured by a pledge of the MARA Shares, and
the MARA Purchase Agreement will provide for the acceleration of all
unpaid amounts thereunder upon any sale, transfer, assignment or pledge
of all or substantially all of the capital stock and/or assets of MARA
to an unaffiliated third party prior to the payment in full of all
amounts owing thereunder to Krause and Berick.
(d) PURCHASE OF OUTSTANDING RRF SHARES. ISH, or an affiliated
nominee, will enter into a Share Purchase Agreement (the "RRF Purchase
Agreement") with Krause providing for the purchase by ISH (or such
affiliated nominee) of 200,000 presently issued and outstanding RRF
Shares held as of the date hereof by Krause and/or certain other
holders of RRF Shares designated by Krause, free and clear of all liens
and encumbrances, for an aggregate purchase price equal to $1,000,000,
which will be payable in cash on the Closing Date.
(e) ISSUANCE OF RRF SHARES. Concurrently with the Formation,
RRF, at Wirth's option, will issue to parties designated by Wirth,
pursuant to an Exchange Agreement between RRF and such parties (the
"Exchange Agreement"), 200,000 presently authorized but unissued RRF
Shares in exchange for $1,000,000 of equity interests in the Hotel
Companies which otherwise would be transferred pursuant to the
Operating Partnership Agreement, the Merger Agreement or the Hotel
Purchase Agreement.
(f) WIRTH OPTION. At his option, Wirth may elect to receive,
in lieu of up to $4,400,000 of consideration otherwise to be received
by him in exchange for his equity interests in the Hotel Companies in
the form of RRF Shares or limited partnership interests in the
Operating Partnership, a payment from the Operating Partnership or RRF
in the form of a promissory note or notes in an aggregate principal
amount not to exceed $4,400,000 of the Operating Partnership or RRF, as
the case may be, bearing interest on the principal amount thereof at
the rate of 7% per annum, compounded annually and computed on the basis
of a 365-day
-6-
<PAGE> 8
year, payable in thirty-six (36) equal monthly installments
of principal and interest.
(g) MARA AND THE OPERATING PARTNERSHIP. Concurrently with the
Formation, RRF's Board of Trustees, acting pursuant to Section 3.4 of
RRF's First Amended and Restated Declaration of Trust, will request,
and MARA will so agree, that MARA enter into an advisory arrangement
with the Operating Partnership that will provide MARA with the same
level of advisory compensation in respect of assets of the Operating
Partnership as MARA currently receives in respect of assets of RRF
pursuant to its Advisory Agreement with RRF.
(h) RELATED ISH ENTITIES. Upon the consummation of the
Formation, Wirth, ISH and/or HCI will make available to MARA such
additional personnel as shall be necessary to enable MARA to provide
appropriate asset management and advisory services to RRF and the
Operating Partnership. Wirth shall cause his affiliate, InnSuites
Innternational Hotels, Inc. ("ISIH"), a to-be-formed Arizona or Nevada
corporation, to enter into substantially identical standard percentage
leases of each Hotel from the Operating Partnership (or RRF, in the
case of the corporate-owned Hotels). The terms of such leases
(including, without limitation, rent, lease term, and provisions for
termination by the Operating Partnership or RRF, as the case may be,)
will be reasonably satisfactory in form and substance to RRF. In
addition, Wirth will cause his affiliates to transfer rights and
resources to ISIH to enable it to provide property management services
and trademark and licensing services, subject to terms and conditions
reasonably satisfactory to RRF in form and substance.
(i) TERMINATION OF KRAUSE AND BERICK EMPLOYMENT AGREEMENTS. At
the Closing Date, Krause and Berick each will execute such documents as
reasonably requested by Wirth in order to effect the termination of
their respective Employment Agreements with RRF, without any cost or
liability to RRF.
Section 2. MANAGEMENT OF RRF. RRF, as of the Closing Date,
shall secure the resignations from its Board of Trustees of each of the current
Trustees other than Alan M. Krause, who will appoint James Wirth, Marc E. Berg,
Mark J. Nasca and Gregory D. Bruhn to fill the vacancies thus created, which
parties will
-7-
<PAGE> 9
expand the size of the Board by one and will appoint M. William Isbell to the
vacancy thus created. Alan M. Krause agrees to continue to serve on RRF's Board
of Trustees until the date of RRF's 1997 Annual Meeting of Shareholders and
agrees to resign at that time unless requested to remain a Trustee, which
request he may accept or decline at his sole option. Wirth, ISH and HCI agree
that they will, or will cause their designees to the Board of Trustees of RRF
and the Board of Directors of MARA, as the case may be, to, enter into
agreements with each of the trustees, officers and directors of RRF and MARA
serving as of the date hereof (each such person, an "Indemnified Person")
whereby RRF and MARA each agree to continue to indemnify each Indemnified Person
to the maximum extent permitted by applicable law from and against any
liability, cost or expense arising out of any act or omission on the part of
such Indemnified Person taken (or alleged to have been taken) at any time in his
or her capacity as a trustee, officer and/or director of RRF and/or MARA, as the
case may be.
Section 3. RRF SHAREHOLDER APPROVAL. RRF shall prepare and,
following completion of the Private Placement (as hereinafter defined), submit
to its shareholders, as promptly as may be practicable, proxy materials
soliciting the approval of such shareholders for the transactions comprising the
Formation. The parties hereto acknowledge that RRF will be required to submit
such proxy materials to the Securities and Exchange Commission and the NYSE for
their respective comment and approval
-8-
<PAGE> 10
prior to the distribution of such materials to its shareholders. Wirth, ISH,
HCI, the Hotel Companies and their respective affiliates, attorneys, accountants
and other advisors each shall cooperate fully in the preparation of said proxy
materials and shall furnish such assistance as RRF reasonably may request in
connection therewith.
RRF shall use all reasonable efforts to obtain SEC and NYSE
clearance of the Proxy Statement and, to the extent required, approval of the
transactions comprising the Formation. Each of ISH and HCI shall furnish all
information concerning it and the Hotel Companies and the holders of equity
interests therein, and RRF shall furnish all information concerning it and the
holders of its shares, as may be required by the Securities Exchange Act of
1934, as amended (the "Exchange Act") or the regulations promulgated thereunder,
or as the other may reasonably request in connection with such actions. As
promptly as practicable after clearance of the Proxy Statement, RRF shall mail
the proxy statement to its shareholders. The Proxy Statement shall include the
recommendation of RRF's Board of Trustees in favor of shareholder approval of
the transactions comprising the Formation.
RRF shall, promptly after the date of this Agreement, take all
action necessary to convene a meeting of RRF's shareholders to act on approval
of the transactions comprising the Formation, and shall consult with ISH and HCI
in connection therewith. RRF shall use its reasonable best efforts to solicit
-9-
<PAGE> 11
from its shareholders proxies in favor of the approval of the transactions
comprising the Formation and to secure the vote or consent of shareholders
required to approve the transactions comprising the Formation. Such solicitation
shall not be commenced by RRF until such time as the Private Placement (as
defined below) shall have been completed, with the closing thereof being subject
only to the consummation of the other transactions contemplated by this
Agreement.
RRF shall, promptly after the date of this Agreement, take all
action necessary to obtain the listing on NYSE of a number of additional shares
of RRF equal to or in excess of the maximum number of RRF shares issuable upon
conversion of partnership interests in the Operating Partnership as contemplated
by Section 1(a) above and in connection with the transactions contemplated by
Sections 1(b) and (e) above and shall consult with HCI and ISH in connection
therewith.
Section 4. APPROVALS OF THE HOTEL COMPANIES.
HCI shall, promptly after the date of this Agreement, prepare
and submit to each equity holder in the Hotel Companies a private placement
memorandum (the "PPM") pursuant to which such equity holders will be offered the
opportunity to exchange their equity interests in the respective Hotel Companies
for partnership interests in the Operating Partnership which shall be
convertible into RRF shares as contemplated by Section 1(a) above and as
provided in the Operating Partnership Agreement (such offer, the "Private
Placement"). The PPM shall also solicit the
-10-
<PAGE> 12
consent of such equity holders to the transactions comprising the Formation to
the extent such consent may be required by the organizational documents of the
respective Hotel Companies. The terms of the Private Placement shall provide,
among other things, that the equity owners in the Hotel Companies shall have the
right to accept the Private Placement, accept cash in an amount determined as
provided in the PPM as an alternative to accepting the Private Placement, or
decline to accept the Private Placement or cash; provided, however, that the PPM
will provide that the Private Placement shall not be concluded unless HCI and
ISH, in consultation with counsel, determine to their satisfaction that the
Private Placement will be effected in compliance with the requirements of Rule
506 under the Securities Act of 1933, as amended (the "Securities Act"),
including, without limitation, the limitation on the number of purchasers set
forth in Rule 506(b)(2). The PPM shall include the recommendation of the general
partners or managing members of each Hotel Company in favor of the exchange and
the Private Placement shall be completed, subject only to the consummation of
the other transactions contemplated by this Agreement.
Each of ISH and HCI shall furnish all information concerning
it and the Hotel Companies and the holders of equity interests therein, and RRF
shall furnish all information concerning it and the holders of its shares for
inclusion in the PPM, as may be required to be included in the PPM by the
Securities Act or the regulations promulgated thereunder, or as
-11-
<PAGE> 13
the other may reasonably request in connection with such actions. RRF, MARA and
their respective affiliates, attorneys, accountants and advisors each shall
cooperate fully in the preparation of said consent materials and furnish such
assistance as HCI reasonably may request in connection therewith.
Section 5. REPRESENTATIONS AND WARRANTIES.
(a) ORGANIZATION AND GOOD STANDING. RRF, MARA, HCI,
ISH, and each Hotel Company each represents and warrants to each of the other
parties hereto that it has been duly organized and is validly existing in good
standing under the laws of its respective jurisdiction of organization. RRF
represents to each of the ISH Parties that: to its best knowledge, it has
maintained continuous qualification as an REIT within the meaning of Sections
856 through 860 of the Internal Revenue Code of 1986, as amended; such
qualification will not be jeopardized by the consummation of the Formation; and
there is not pending, nor to its knowledge is there threatened, any action or
proceeding to effect the delisting of the RRF Shares from the NYSE.
(b) AUTHORITY. Each party hereto represents and warrants to
each of the other parties hereto that, subject only to the receipt of the
approvals described in Sections 3 and 4, above, as applicable, such party has
the power and authority to execute, deliver and perform this Agreement and the
Transaction Agreements to be executed by such party and to consummate the
transactions contemplated hereby and thereby; that this Agreement has been (or,
upon the receipt of such approvals, will be) duly
-12-
<PAGE> 14
and validly executed and delivered on such party's behalf; that each of such
Transaction Agreements to be executed by such party, when executed and
delivered, will be duly authorized, executed and delivered on its behalf; and
that this Agreement is, and when executed and delivered by such party each of
the Transaction Agreements will be, upon the due execution and delivery thereof
by each of the other parties thereto, the legal, valid and binding obligation of
such party, enforceable against such party in accordance with the respective
terms thereof, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement thereof or relating to creditors' rights generally.
(c) CONSENTS. Each party hereto represents and warrants to
each of the other parties hereto that, except as set forth in Sections 3 and 4,
above, as applicable, no consent, approval, permit or order of, nor filing with,
any individual, partnership, corporation, trust or other entity, government
agency or political subdivision, is required in connection with: (i) the
execution, delivery and performance of this Agreement or the Transaction
Agreements by such party or (ii) the consummation by such party of the
transactions contemplated hereby or thereby (including, without limitation, any
required consent of the spouse of any natural person who is a party hereto and
is subject to the community property laws of any jurisdiction), other than any
such consent, approval, permit or order obtained, or filing
-13-
<PAGE> 15
made, prior to the Closing Date in a form reasonably satisfactory to the other
parties hereto. RRF represents and warrants to each of the ISH Parties that the
transactions contemplated hereby will not result in the triggering of any
"poison pill" or similar shareholder rights plan in respect of its securities.
MARA and RRF represent and warrant to each of the ISH Parties that MARA is not
currently in default in its obligations to RRF under the Advisory Agreement
between MARA and RRF, as in effect on the date hereof, that such Advisory
Agreement is enforceable in accordance with its terms, and that the sale of the
MARA Shares pursuant to the MARA Purchase Agreement will transfer to the
purchaser(s) thereof all of the rights which currently inure to the benefit of
Krause and Berick, as the sole shareholders of MARA, in respect of such Advisory
Agreement.
(d) NO VIOLATION. Each party hereto represents and warrants to
each of the other parties hereto that, upon receipt of the approvals
contemplated by Sections 3 and 4, above, and the approvals from mortgage lenders
(the "Lender Approvals") which have a right to approve the transactions
contemplated hereby, as referred to in Section 6(g), below, none of the
execution, delivery and performance by such party of this Agreement or the
execution, delivery or performance by such party of the Transaction Agreements
to be executed by such party, nor the consummation by such party of the
transactions contemplated hereby or thereby, will violate any provision of the
organizational documents of such party or violate or be in
-14-
<PAGE> 16
conflict with, or constitute a default (or an event or condition which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination or acceleration of, or result in the creation or imposition of
any lien or encumbrance under, any agreement, note, mortgage or other instrument
to which such party is a party or by which such party may be bound or subject,
or violate any statutes, orders, rules and regulations promulgated by any
governmental body, or violate any court order or decree binding upon such party.
(e) BROKERS'/FINDERS' FEES. Each party hereto represents and
warrants to each of the other parties hereto that it has not employed a broker
or finder in connection with any transactions contemplated by the Formation
other than, in the case of RRF and MARA: Brown, Gibbons, Lang & Company, L.P.;
and in the case of Wirth, ISH, HCI and the Hotel Companies: JDI Realty, LLC and
Berg Investment Advisers. Each party ("First Party") agrees to indemnify and
hold harmless any other party hereto from and against any claim asserted against
any such other party for a brokerage, agent's, finder's or originator's
commission or other similar compensation in respect of the transaction
contemplated by this Agreement by any person purporting to act on behalf of
First Party.
(f) OWNERSHIP OF MARA SHARES AND RRF SHARES. Each of Krause
and Berick, severally and not jointly, represents and warrants to each of the
ISH Parties that he is the lawful owner of fifty (50) MARA Shares, each such
person's shareholdings
-15-
<PAGE> 17
comprising 50% of the outstanding capital stock of MARA, and that he has good
and marketable title to such MARA Shares, free and clear of any liens,
encumbrances, equities, restrictions and claims of every kind and nature
whatsoever, and that he has full right, power and authority to transfer such
interests as contemplated by the MARA Purchase Agreement. Krause represents and
warrants to each of the ISH Parties that he is the lawful owner as of the date
hereof of approximately 164,000 of the 200,000 RRF shares to be sold to Wirth
pursuant to Section 1(d), above, and that he and each other seller of any of
such RRF Shares has good and marketable title to the RRF Shares to be sold by
such person pursuant to the RRF Purchase Agreement, in each case free and clear
of any liens, encumbrances, equities, restrictions and claims of every kind and
nature whatsoever, and that he and each other seller of any of such RRF Shares
has full right, power and authority to transfer such RRF Shares as contemplated
by the RRF Purchase Agreement.
(g) OWNERSHIP OF THE HOTEL COMPANIES. HCI represents and
warrants to each of the RRF Parties that the ownership of the Hotel Companies as
of the date hereof is as set forth on Schedule I hereto, and that, subject to
the approvals set forth in Section 4, above, and any required Lender Approvals,
the persons or entities indicated thereon have good and marketable title to such
equity interests, free and clear of any liens, encumbrances, equities,
restrictions and claims of every kind and nature whatsoever, and that such
owners have full right, power and
-16-
<PAGE> 18
authority to transfer such interests as contemplated by the Operating
Partnership Agreement, the Merger Agreement and/or the Exchange Agreement, as
the case may be.
(h) INVESTMENT INTENT. Each of Wirth, ISH, and HCI, severally
and not jointly, represents and warrants to each of the RRF Parties and to RRF
for the benefit of the Operating Partnership, that it is acquiring its
respective RRF Shares, MARA Shares and/or limited partnership interests in the
Operating Partnership for its own account for purposes of investment and not
with a view to effecting a public distribution thereof, subject to its
respective rights under the Operating Partnership Agreement to sell or otherwise
transfer such limited partnership interests pursuant to an exemption from
registration under applicable securities laws.
(i) EXECUTION ON BEHALF OF THE HOTEL COMPANIES. Each Hotel
Company represents and warrants to each of the RRF Parties that the general
partners (or managing members) or officers, as the case may be) of such Hotel
Company executing this Agreement will have full power and will have been duly
authorized, as of the Closing Date, in accordance with the organizational
documents of such Hotel Company, to execute on behalf of such Hotel Company the
Transaction Agreements and all other documents and instruments necessary to
effect the intention of the parties hereto to carry out the Formation.
(j) OWNERSHIP OF ASSETS OF RRF. RRF hereby represents and
warrants to each of the ISH Parties that it is the lawful
-17-
<PAGE> 19
owner of each and every asset to be transferred to the Operating Partnership as
contemplated by Section 1(a), above, and has and will have good and marketable
title to such assets, free and clear of any liens, encumbrances, equities,
restrictions and claims of every kind and nature whatsoever, except as set forth
on Schedule II hereto, and that it has and will have full right, power and
authority to transfer such interests as contemplated by the Formation, subject
to the receipt of the shareholder approval specified in Section 3, above.
(k) INSURANCE. RRF hereby represents and warrants to each ISH
Party, and ISH, HCI and each Hotel Company jointly and severally represent to
each RRF Party, that the real property owned by them, respectively, as of the
date hereof is and as of the Closing Date will be fully insured against casualty
loss and that the entity owning the real property in question is the owner and
primary beneficiary of such policies of insurance.
(l) FINANCIAL INFORMATION. Each ISH Party, jointly and
severally, represents to each RRF Party that the financial information furnished
or to be furnished to any RRF Party by or on behalf of any ISH Party is true and
correct in all material respects as of the date thereof and that there has been
no, and as of the Closing Date there will not have been any, material adverse
change in the financial condition or results of operations of any ISH Party or
any Hotel since the dates of any of such financial information which previously
has not been disclosed to the RRF Parties.
-18-
<PAGE> 20
(m) NYSE LISTING. RRF represents to HCI and ISH that the RRF
shares are listed on NYSE and that RRF has received no notice from NYSE
terminating or proposing to terminate or otherwise limit the trading of RRF
shares on NYSE and has no notice that any such termination or limitation is
pending or threatened.
The representations and warranties set forth in this Section 5
shall be deemed to be repeated on and as of the Closing Date.
Section 6. COVENANTS AND OTHER AGREEMENTS.
(a) FURTHER ASSURANCES; ADDITIONAL DOCUMENTATION. From time to
time upon request, and without the granting of further consideration, each of
the parties hereto agrees to execute, deliver and acknowledge any and all such
further instruments and do such further acts as any other party hereto
reasonably may require to evidence or effectuate more fully the transactions
contemplated by this Agreement, the Transaction Agreements and the Formation.
The parties hereto acknowledge and agree that this Agreement sets forth the
documentary framework and the principal terms of the understandings of the
parties in respect of the Formation, that it would be impracticable for this
Agreement to set forth all of the terms to be contained in the Transaction
Agreements, and that each party hereto will negotiate in good faith such terms
of the Transaction Agreements as are not expressly set forth herein.
-19-
<PAGE> 21
(b) THE FORMATION. The parties hereto agree that the sequence
of events constituting the Formation shall be effected as substantially
concurrently as possible on the earliest date as may be practicable following
the receipt of the approvals specified in Sections 3 and 4, above, but not prior
to January 2, 1997.
(c) NOTICE OF SALE. The parties hereto agree to cooperate to
cause the Operating Partnership to prepare a notice of sale of securities on
Securities and Exchange Commission Form D in respect of the distribution of
limited partnership interests in the Operating Partnership to the
partners/members of the Partnership Hotel Companies, and to file such notice as
soon as possible after the Closing Date, but in no event later than 15 days
thereafter.
(d) CONDUCT OF BUSINESS. Each party hereto covenants and
agrees to each of the other parties hereto that, between the date hereof and the
Closing Date, its respective business will continue to be operated in the
regular and ordinary course thereof commensurate with relevant industry
standards, and in connection therewith each such party shall not, without the
prior consent of the other parties hereto:
(i) Sell or transfer any assets other than in the regular
and ordinary course of business or encumber any assets,
whether or not in the regular and ordinary course of
business; provided, however, it is expressly agreed
that RRF shall be entitled to (A) continue to declare
and pay regular dividends of not more than ten cents
per share to its shareholders in accordance with its
past practice in the sole discretion of its Board of
Trustees, and that any such dividend declaration and
-20-
<PAGE> 22
payment shall have no effect on the interest of RRF in the
Operating Partnership set forth in Section 1(a), above, and
(B) consummate a sale of its Chicago office property on such
terms as it may agree to in its sole discretion but at a gross
cash purchase price of not less than $6.0 million, and that
ISH may (C) refinance the existing indebtedness encumbering
the Phoenix Hotel with a new first mortgage loan of not more
than $4.9 million, bearing interest at the rate of 8.5% and
maturing in not more than fifteen (15) years and encumber the
Scottsdale Hotel with up to an additional $4.5 million of
mortgage debt and (D) admit InnSuites Innternational Inns &
Resorts, Inc., an Arizona corporation, as a general partner of
each Hotel Company of which it is not currently a general
partner.
(ii) Terminate or cause or permit the termination of, any contract,
lease or other agreement which in any case either individually
or in the aggregate has a materially adverse effect on the
assets, operations or prospects of such covenanting party.
(iii) Agree to do any of the things specified in (i) or (ii),
above.
Each ISH Party represents and warrants to each RRF Party that the Hotels are
being operated in a manner commensurate with relevant industry standards and
there have not been any changes in basic operating procedures. Between the date
hereof and the Closing Date, each party hereto shall use its respective best
efforts to keep the services of its respective present employees and preserve
their respective present relations with suppliers and other vendors.
(e) RRF INFORMATION IN PROXY STATEMENT AND PPM. None of the
information to be supplied by RRF or any of its accountants, counsel or other
authorized representatives for inclusion in the Proxy Statement or the PPM will,
at the time of the mailing of the Proxy Statement or the PPM, as the case may
-21-
<PAGE> 23
be, and any amendments or supplements thereto, contain any untrue statement of a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, or, at the time of the shareholders' meeting or the conclusion of
the Private Placement, as the case may be, omit to state any material fact
necessary to correct any statement that has become false or misleading, it being
understood and agreed that no representation or warranty is made by RRF with
respect to any information supplied by ISH or HCI or their accountants, counsel
or other authorized representatives. If at any time prior to the Closing Date
any event with respect to RRF shall occur which is or should be described in an
amendment of or supplement to the Proxy Statement or the PPM, such event shall
be so described and the presentation in such amendment or supplement will not
contain any statement which, at the time and in light of the circumstances under
which it is made, is false or misleading in any material respect or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not false or misleading. The Proxy Statement will comply as to form in all
material respects with all applicable laws, including the provisions of the
Exchange Act and the rules and regulations promulgated thereunder.
(f) HCI/ISH INFORMATION IN PROXY STATEMENT AND PPM. None of
the information to be supplied by HCI or ISH or any of
-22-
<PAGE> 24
their accountants, counsel or other authorized representatives for inclusion in
the Proxy Statement or the PPM will, at the time of the mailing of the Proxy
Statement or the PPM, as the case may be, and any amendments or supplements
thereto, contain any untrue statement of a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, or, at the time of the
shareholders' meeting or the conclusion of the Private Placement, as the case
may be, omit to state any material fact necessary to correct any statement that
has become false or misleading, it being understood and agreed that no
representation or warranty is made by HCI or ISH with respect to any information
supplied by RRF or its accountants, counsel or other authorized representatives.
If at any time prior to the Closing Date any event with respect to HCI, ISH, or
the Hotel Companies shall occur which is or should be described in an amendment
of or supplement to the Proxy Statement or the PPM, such event shall be so
described and the presentation in such amendment or supplement will not contain
any statement which, at the time and in light of the circumstances under which
it is made, is false or misleading in any material respect or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
false or misleading. The PPM will comply as to form in all material respects
with all applicable laws,
-23-
<PAGE> 25
including the provisions of the Securities Act and the rules and regulations
promulgated thereunder.
(g) LENDER APPROVALS. The ISH Parties will use their best
efforts to obtain the Lender Approvals as promptly as practicable and, in any
event, prior to the mailing by RRF to its shareholders of the Proxy Statement.
Section 7. CONDITIONS PRECEDENT AND TERMINATION.
(a) CONDITIONS PRECEDENT. The obligations of each of the
parties hereto to consummate the transactions contemplated hereunder are subject
to the satisfaction or waiver of the following conditions at or prior to the
Closing Date:
(i) each of the Transaction Agreements shall be duly executed
and acknowledged by all of the parties thereto;
(ii) any further instruments and acts properly requested
pursuant hereto shall have been executed and delivered or done, as the
case may be;
(iii) the approvals required by Sections 3 and 4, above, shall
have been obtained;
(iv) the representations and warranties contained in Section 5
hereof shall be true and correct in all material respects on the date
hereof and on the Closing Date with the same effect as though such
representations and warranties had been made or given on the Closing
Date;
(v) all of the parties to all of the Transaction Agreements
shall have performed all of their obligations under the Transaction
Agreements to be performed at or prior to the closing of the Formation;
(vi) the following legal opinions and memorandum shall have
been delivered by and to the parties specified below, and such legal
opinions and memorandum shall be reasonably satisfactory in form and
substance to the respective addressees thereof:
(A) counsel for RRF and MARA shall have delivered
its opinion to the ISH Parties in respect of the
-24-
<PAGE> 26
matters relating to RRF and MARA set forth in Sections
5(a), (b), (c) and (d), above;
(B) counsel for the ISH Parties shall have delivered
its opinion to RRF and MARA in respect of the matters set
forth in Sections 5(a), (b), (c), (d) and (i), above, and to
the effect that the Private Placement constitutes a
transaction exempt from the registration requirements of (1)
the Securities Act and (2) all applicable state securities
laws; and
(C) counsel for the Hotel Companies shall have
delivered to RRF and the Operating Partnership a blue- sky
memorandum indicating the basis for compliance with or
exemption from all applicable state securities laws in respect
of the distribution by the Partnership Hotel Companies of
their respective limited partnership interests in the
Operating Partnership to their partners/members;
(vii) the RRF Shares, including the additional RRF Shares
contemplated to be listed by Section 3, above, or otherwise in
connection with the transactions contemplated by this Agreement, shall
be listed on the NYSE and no proceedings shall be pending or, to RRF's
knowledge, threatened, in respect of any delisting or suspension of
listing thereof;
(viii) there shall not be pending an injunction or order or
decree of a court of competent jurisdiction restraining or prohibiting
the consummation of the Formation; and
(ix) no more than thirty-five (35) Participating Equity Owners
shall be persons who do not constitute "accredited investors" as such
term is defined in Securities Act Rule 501.
(b) TERMINATION.
(i) This Agreement shall automatically terminate on March 31,
1997 if the Closing Date shall not have occurred on or before such date, unless
otherwise extended by mutual written agreement of each and every party hereto.
This Agreement may be terminated and the transactions contemplated hereby may be
abandoned at any time prior to the Closing Date by any party by
-25-
<PAGE> 27
the delivery of written notice of termination to each other party hereto,
subject to the expense reimbursement provisions of Section 8(h), below.
(ii) In the event of the termination of this Agreement, this
Agreement forthwith shall become void and of no further force and effect and
there shall be no liability hereunder or thereunder on the part of any party
hereto or any of its affiliates, directors, officers, partners or shareholders,
provided, however, that nothing herein shall relieve any party from liability
for any breach hereof or thereof or from such party's obligations in respect of
reimbursement of expenses set forth in Section 8(h), below.
Section 8. MISCELLANEOUS.
(a) WAIVER. Any failure of any of the parties hereto to comply
with any obligation, covenant, agreement or condition herein may be waived by
the parties entitled to the benefit thereof only by a written instrument signed
by each such party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, representation, warranty, covenant,
agreement or condition shall not operate as a waiver of or estoppel in respect
of any subsequent or other failure.
(b) GOVERNING LAW. THIS FORMATION AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF OHIO REGARDLESS
OF THE LAWS THAT WOULD OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS
OF LAWS. The parties hereto consent to personal jurisdiction in the Court of
Common
-26-
<PAGE> 28
Pleas for Cuyahoga County, Ohio, or the United States District Court for the
Northern District of Ohio, in connection with any claim, allegation, cause of
action or legal proceeding relating in any way to this Agreement. The parties
hereto agree, to the fullest extent permitted by law, to venue in such court, to
waive any claim that such court is an inconvenient forum and to accept service
of process in any such claim, action or proceeding in the manner set forth in
Section 8(f) (in addition to any other means of service permitted by law).
(c) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts, and
delivered by means of facsimile transmission or otherwise, each of which when so
executed and delivered shall be deemed to be an original and all of which when
taken together shall constitute but one and the same agreement.
(d) ASSIGNMENT. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of, and be enforceable by,
the parties hereto and their respective successors and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations herein
shall be assigned or delegated by any party hereto without the prior written
consent of the other parties hereto.
(e) AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
-27-
<PAGE> 29
(f) NOTICES. All notices and other communications hereunder
must be in writing and will be deemed to have been duly given when personally
delivered or on the date of receipt or refusal indicated on the return receipt
if mailed (registered or certified mail, postage prepaid, return receipt
requested) or sent by express courier service to the addresses set forth in the
preamble hereto, with a copy, in the case of notices to any of the ISH Parties,
to James B. Aronoff, Esq., Thompson, Hine & Flory LLP, 3900 Key Tower, 127
Public Square, Cleveland, Ohio 44114, and, in the case of notices to any of the
RRF Parties, to Daniel G. Berick, Esq., Berick, Pearlman & Mills Co., L.P.A.,
1350 Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114.
(g) SEVERABILITY. If any provision of this Agreement shall be
held to be illegal, invalid or unenforceable under any applicable law, then such
contravention or invalidity shall not invalidate the entire Agreement. Such
provision shall be deemed to be modified to the extent necessary to render it
legal, valid and enforceable, and if no such modification shall render it legal,
valid and enforceable, then this Agreement shall be construed as if not
containing the provision held to be invalid, and the rights and obligations of
the parties shall be construed and enforced accordingly.
(h) EXPENSES. RRF shall bear the costs and expenses incurred
by the RRF Parties (except as set forth in the following sentence) in connection
with this Agreement, the Transaction Agreements and the transactions
contemplated hereby and thereby,
-28-
<PAGE> 30
including but not limited to the reasonable fees and expenses of their counsel.
MARA and Krause shall bear the costs and expenses, including but not limited to
the reasonable fees and expenses of their counsel, incurred in connection with
the MARA Purchase Agreement and the RRF Purchase Agreement, respectively. The
ISH Parties shall bear their own costs and expenses incurred in connection with
this Agreement, the Transaction Agreements and the transactions contemplated
hereby and thereby, including but not limited to the reasonable fees and
expenses of their respective counsel. Notwithstanding the foregoing, (i) if
subsequent to the execution hereof, the Formation is not consummated because of
any determination not to proceed with the Formation or other action or omission
by or on behalf of any ISH Party, including a failure of any representation or
warranty made herein by or on behalf of any ISH Party to be true and correct as
of the date hereof or as of the Closing Date (any of the foregoing, an "ISH
Termination") by or on behalf of any ISH Party, then and in such event ISH shall
be obligated to reimburse the RRF Parties for respective costs and expenses
incurred in connection herewith, up to an aggregate maximum of:
(A) $25,000, if such ISH Termination occurs
subsequent to the date which is thirty (30) days
after the date this Agreement is executed by each
party hereto but prior to the occurrence of any of
the events set forth in subclauses (B) through (D)
of this clause (i);
(B) $75,000, if such ISH Termination occurs
subsequent to the initial submission of the proxy
materials referred to in Section 3,
-29-
<PAGE> 31
above, to a financial printer but prior to the
occurrence of any of the events set forth in
subclauses (C) or (D) of this clause (i);
(C) $100,000, if such ISH Termination occurs
subsequent to the initial distribution of the proxy
materials referred to in Section 3, above, to RRF's
shareholders but prior to the occurrence of the
event set forth in subclause (D) of this clause (i);
and
(D) $250,000, if such ISH Termination occurs
subsequent to the receipt by RRF of the approval
required by Section 3, above;
or (ii) if subsequent to the execution hereof, the Formation is not consummated
because of any determination not to proceed with the Formation or other action
or omission by or on behalf of any RRF Party, including a failure of any
representation or warranty made herein by or on behalf of any RRF Party to be
true and correct as of the date hereof or as of the Closing Date (any of the
foregoing, an "RRF Termination") (other than the failure to obtain the
shareholder approval required by Section 3, above, which failure shall not
create the following obligations on the part of RRF), then and in such event RRF
shall be obligated to reimburse the ISH Parties for their respective costs and
expenses incurred in connection herewith, up to an aggregate maximum of:
(A) $25,000, if such RRF Termination occurs
subsequent to the date which is thirty (30) days
after the date this Agreement is executed by each
party hereto but prior to the occurrence of any of
the events set forth in subclauses (B) through (D)
of this clause (ii);
(B) $75,000, if such RRF Termination occurs
subsequent to the initial submission of the proxy
materials referred to in Section 3, above, to a
financial printer but prior to
-30-
<PAGE> 32
the occurrence of any of the events set forth in
subclauses (C) or (D) of this clause (ii);
(C) $100,000, if such RRF Termination occurs
subsequent to the initial distribution of the proxy
materials referred to in Section 3, above, to RRF's
shareholders but prior to the occurrence of the
event set forth in subclause (D) of this clause
(ii);
(D) $250,000, if such RRF Termination occurs
subsequent to the receipt by RRF of the approval
required by Section 3, above.
In addition to the foregoing, should the Formation not be consummated because
the RRF Parties have elected to enter into a transaction substantially similar
to the Formation or otherwise effectuate a sale or change in control of RRF with
any third party prior to March 31, 1997 (an "Outside Transaction"), RRF shall
pay to the ISH Parties an additional aggregate sum of $500,000. RRF agrees that
it will not so elect to enter into an Outside Transaction unless its Board of
Trustees determines, in the exercise of its independent business judgment and
discretion, that it has a fiduciary duty to the holders of the RRF Shares to
enter into such Outside Transaction rather than proceed with the Formation.
Notwithstanding anything herein to the contrary, (x) the
foregoing expense reimbursement obligations of the ISH Parties shall not be
applicable in the event that the ISH Parties determine not to consummate the
Formation as a result of the failure of the RRF Parties to satisfy the
conditions set forth in Sections 7(a)(iii), (vi) or (viii) relating to RRF or in
Section 7(a)(vii) if the RRF Parties have satisfied the remaining
-31-
<PAGE> 33
conditions set forth in Section 7(a) to be satisfied by them; and (y) the
foregoing expense reimbursement obligations of the RRF Parties shall not be
applicable in the event that the RRF Parties determine not to consummate the
Formation as a result of the failure of the ISH Parties to satisfy the
conditions set forth in Sections 7(a)(iii), (vi) or (viii) relating to the ISH
Parties if the ISH Parties have satisfied the remaining conditions set forth in
Section 7(a) to be satisfied by them.
(i) NO SOLICITATION. Each of the RRF Parties agrees that it
will not, after the date hereof and prior to the date of termination of this
Agreement, seek, directly or through agents, representatives or affiliates, or
permit any of its officers or directors to seek (whether in their capacity as
officers or directors or in their individual capacities) or otherwise solicit or
encourage the initiation of inquiries or proposals from any person or persons
(other than the ISH Parties or any of them) to purchase all or a substantial
portion of the assets of any of the RRF Parties or all or a substantial portion
of the capital stock or other securities of any of the RRF Parties or any of
their respective affiliates, or for any of the RRF Parties or any of their
respective affiliates to purchase in one or more related transactions the
capital stock or other securities or assets of persons (other than the ISH
Parties or any of them) whereby any of the RRF Parties would issue (or commit to
issue) shares of its capital stock or other securities or to effect a
consolidation or merger or other business combination or recapitalization (other
-32-
<PAGE> 34
than the transactions comprising the Formation)(an "Acquisition Proposal"). The
RRF Parties shall immediately cease and cause to be terminated all existing
discussions and negotiations, if any, with any parties conducted heretofore with
respect to any Acquisition Proposal (other than the ISH Parties or any of them).
Nothing contained in this Section 8(i) shall prevent the Board of Trustees of
RRF from considering, negotiating, approving and recommending to shareholders of
RRF a bona fide Acquisition Proposal not solicited, directly or indirectly, in
violation of this Agreement, provided the Board of Trustees determines in good
faith that it is required to do so in order to discharge properly its fiduciary
duties.
RRF shall immediately notify the ISH Parties after receipt of
any Acquisition Proposal (whether written or oral), or any modification of or
amendment to any Acquisition Proposal, or any request for any nonpublic
information relating to the RRF parties or any of them in connection with any
Acquisition Proposal or for access to the properties, books or records of the
RRF Parties or any of them by any person or entity that informs the Board of
Trustees or management of RRF or of any of the RRF Parties that it is
considering making or has made an Acquisition Proposal. Such notice to the ISH
Parties shall be made orally and in writing and shall indicate whether RRF is
providing or intends to provide the person making the Acquisition Proposal with
access to information concerning the RRF Parties or any of them, the identity of
the person making the Acquisition Proposal
-33-
<PAGE> 35
and the terms and conditions of the transaction contemplated by the Acquisition
Proposal. Notwithstanding the foregoing, RRF shall not be obligated to inform
the ISH Parties of any unsolicited inquiry received by it in respect of an
Acquisition Proposal if such inquiry is preliminary in nature and RRF responds
to such inquiry by advising the inquiring party that RRF is in exclusive
negotiations regarding the transaction contemplated by this Agreement.
(j) PUBLICITY. The RRF Parties, on the one hand, and the ISH
Parties, on the other hand, agree that neither will make any public statement or
issue any press release disclosing the existence of this Agreement or the terms
hereof without the prior consent of the other, which consent shall not be
unreasonably withheld or delayed.
(k) TRUST DISCLAIMER; PERSONAL LIABILITY. As provided in the
First Amended and Restated Declaration of Trust establishing RRF, dated June 11,
1971, no trustee, officer, shareholder, employee or agent of RRF shall be held
to any personal liability, jointly or severally, for any obligation of, or claim
against, RRF. All persons dealing with RRF in any way shall look only to the
assets of RRF for the payment of any sum or the performance of any obligation.
Wirth and any other officers of any of the ISH Parties executing this Agreement
shall not be held personally liable solely for having so executed this Agreement
in a representative capacity and all persons dealing with the ISH Parties shall
only look to the assets of the ISH
-34-
<PAGE> 36
Parties for the payment of any sum or the performance of any obligation by the
ISH Parties. It is further agreed that the respective personal liability of
Wirth, Krause or Berick for any breach of any representation, warranty or
covenant made by such person in his individual capacity shall be limited to, and
recourse shall be had solely against, (x) in the case of Wirth, the assets of
HCI, and (y) in the case of either Krause or Berick, the assets of MARA; it
being understood that none of the aforesaid persons shall have any personal
liability in respect of any such breach made by an entity for which such person
has signed in a representative capacity.
IN WITNESS WHEREOF, the undersigned have executed this Agreement this
15th day of December, 1996.
REALTY REFUND TRUST INNSUITES HOTELS L.L.C
Innternational Suites Corp.
Managing Member
By: /s/ Alan M. Krause By: /s/ James F. Wirth
----------------------------- -----------------------------
Its: Chairman Its: President
MID-AMERICA REAFUND ADVISORS, INC.
By: /s/ Alan M. Krause /s/ James F. Wirth
----------------------------- -----------------------------
Its: Chairman JAMES F. WIRTH
HOSPITALITY CORPORATION INTERNATIONAL
By: /s/ James F. Wirth
-----------------------------
James F. Wirth, President
/s/ Alan M. Krause /s/ James H. Berick
- ----------------------------- -----------------------------
ALAN M. KRAUSE JAMES H. BERICK
(signatures continued on following page)
-35-
<PAGE> 37
(signatures continued from previous page)
TUCSON HOSPITALITY PROPERTIES, YUMA HOSPITALITY PROPERTIES,
LTD., an Arizona limited LTD., an Arizona limited
partnership partnership
By: Hospitality Corporation By: Hospitality Corporation
International, its general International, its
partner general partner
By: /s/ James F. Wirth By: /s/ James F. Wirth
--------------------------- -------------------------
James F. Wirth, President James F. Wirth, President
BASELINE HOSPITALITY PROPERTIES, NORTHERN PHOENIX INVESTMENT
LTD., an Arizona limited LIMITED PARTNERSHIP, an
partnership Arizona limited partnership
By: Hospitality Corporation By: Hospitality Corporation
International, its general International, its
partner general partner
By: /s/ James F. Wirth By: /s/ James F. Wirth
--------------------------- -------------------------
James F. Wirth, President James F. Wirth, President
ONTARIO HOSPITALITY PROPERTIES, HULSEY HOTELS CORPORATION
LIMITED PARTNERSHIP, an Arizona
limited partnership
By: InnSuites Innternational By: /s/ James F. Wirth
Inns & Resorts, Inc., its ------------------------
general partner James F. Wirth, President
By: /s/ James F. Wirth BUENAVENTURA PROPERTIES, INC.
---------------------------
James F. Wirth, President
By: /s/ James F. Wirth
-------------------------
James F. Wirth, President
-36-
<PAGE> 38
<TABLE>
SCHEDULE I
<CAPTION>
NAME OF ENTITY TYPE OF ENTITY LOCATION OF HOTEL JURISDICTION OF ORGANIZATION
- -------------- -------------- ----------------- ----------------------------
<S> <C> <C> <C>
Tucson Hospitality Limited Partnership Tucson, AZ Arizona
Properties, Ltd.
Yuma Hospitality Limited Partnership Yuma, AZ Arizona
Properties, Ltd.
Baseline Hospitality Limited Partnership Tempe, AZ Arizona
Properties, Ltd.
Northern Phoenix Limited Partnership Phoenix, AZ Arizona
Investment Limited
Partnership
Ontario Hospitality Limited Partnership Ontario, CA Arizona
Properties Limited
Partnership
Hulsey Hotels Corporation Flagstaff, AZ Arizona
Corporation
Buenaventura Corporation Scottsdale, AZ Arizona
Properties, Inc.
</TABLE>
-37-
<PAGE> 39
SCHEDULE II
1. Carbide and Carbon Building (Chicago):
a. Listing Agreement, dated September 27, 1996, between
RRF and CB Commercial. This agreement terminates on
December 31, 1996, unless renewed.
2. Riverview Tower (Toledo):
a. First Mortgage, dated May 1, 1967, securing a loan in the
original principal amount of $12,000,000, in favor of New York
Life Insurance Company. Such loan is in default.
b. Lucas County Common Pleas Court has appointed a
receiver for the building effective November 1, 1996.
-38-
<PAGE> 40
SCHEDULE III
<TABLE>
<CAPTION>
REALTY REFUND TRUST/INNSUITE HOTELS
DEFINED TERMS
($ in thousands)
Calculation
Defined Term Calculation Result
- ---------------------- ---------------- ----------------
<S> <C> <C>
34,740
ISH Ownership Percentage --------------
34,740 + 5,103 87.19%
5,103
RRF Ownership Percentage --------------
34,740 + 5,103 12.81%
RRF Agreed Value 1,020,586*5 $5,103
OP Hotel Contribution N/A $31,405
OP RRF Contribution 5,103*90.40% $4,613
31,405
Partnership Hotel Percentage ------------ 90.40%
34,740
ISH Portfolio Value N/A $34,740
</TABLE>
Note: The above calculations are based on the summary of appraised values and
approximate mortgage balances supplied by JDI Realty.
<PAGE> 41
<TABLE>
<CAPTION>
REALTY REFUND TRUST/INNSUITE HOTELS
Sample Share of OP Unit Calculations
With Partners'
Approximate Total RRF Operating Operating
Appraised Mortgage Agreed Shares of Partnership Partnership
Value Balance Equity Value OP Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tempe $10,715,000 $2,800,000 $7,915,000 1,583,000 20% 712,350 45% 870,650 55%
Tucson 8,715,000 0 8,715,000 1,743,000 22% 610,000 35% 1,132,950 65%
Flagstaff 3,325,000 990,000 2,335,000 467,000 6%
Yuma 9,000,000 4,000,000 5,000,000 1,000,000 13% 400,000 40% 600,000 60%
Phoenix 7,900,000 3,100,000 4,800,000 960,000 12% 921,600 96% 38,400 4%
Scottsdale 7,225,000 6,225,000 1,000,000 200,000 3%
Ontario 8,775,000 3,800,000 4,975,000 995,000 12% 666,650 67% 328,350 33%
------------------------------------------------------------------------------------------------------------
Total ISH $55,655,000 $20,915,000 34,740,000 6,948,000 87% 3,310,650 2,970,350
============================
Realty ReFund Trust 5,102,930 1,020,586 13%
-------------------------------------
$39,842,930 7,968,586 100%
=====================================
With RRF
Shares %
Tempe
Tucson
Flagstaff 467,000 100%
Yuma
Phoenix
Scottsdale 200,000 100%
Ontario
-----------------------------
Total ISH 667,000
<FN>
Note: The above calculations are based on the summary of appraised values and approximate
mortgage balances for the seven "Accountable Properties" supplied by JDI Realty.
</TABLE>
<PAGE> 1
EXHIBIT 13
The Registrant's 1997 Annual Report to Shareholders.
<PAGE> 2
1997 Annual Report
PHOTO: CLOSE-UP OF
GLASS BUILDING
SIDE
Realty Refund Trust
[LOGO]
for the year ended January 31, 1997
[OUTSIDE FRONT COVER]
<PAGE> 3
ABOUT REALTY REFUND TRUST 1997
Realty Refund Trust has specialized in the
refinancing of existing income producing
commercial, industrial and multi-unit residential
property by supplementing or replacing existing
financing. The Trust's primary refinancing tool has
been the "wrap-around" mortgage, which enabled
both the Trust and its borrower to utilize the
leverage available in the existing first mortgage
on the borrower's property.
On February 14, 1997, Realty Refund signed a
definitive agreement to form a limited partnership
with Hospitality Corporation International (HCI).
This newly-formed partnership will acquire several
of HCI's seven all-suite hotel properties in
Arizona and California, as well as certain assets
of the Trust.
Established in 1971, Realty ReFund Trust has
elected to be taxed as a real estate investment
trust as that term is used in Sections 856-860 of
the Internal Revenue Code of 1954, as amended.
Letter to Shareholders.......................1
Selected Financial Data .....................2
MD&A ........................................3 CONTENTS
Balance Sheets ..............................7
Statements of Operations ....................8
Statements of Shareholders' Equity ..........8
Statements of Cash Flows ....................9
Notes ......................................10
Report of Independent Public Accountants....16
Trustees and Officers........INSIDE BACK COVER
[INSIDE FRONT COVER]
<PAGE> 4
TO OUR SHAREHOLDERS
For the year ended January 31, 1997, Realty ReFund Trust (NYSE: RRF) reported a
loss of $(0.87) per share on a net loss of $(888,365) compared to prior year's
net loss of $(7.40) per share on a net loss of $(7,554,351). Funds From
Operations for this period were $308,133, or $0.30 per share, compared to
$710,522, or $0.70 per share, earned in the prior year.
For the fourth quarter ended January 31, 1997, the Trust reported a loss of
$(1.17) per share on a net loss of $(1,190,861) compared to prior year's fourth
quarter net loss of $(2.87) per share on a net loss of $(2,927,661). Funds From
Operations during this period were $5,637, or $0.01 per share, compared to
$141,262, or $0.14 per share, earned in the fourth quarter of the prior year.
The year-to-date and fourth quarter losses reported in the current year resulted
from valuation allowances on two properties totaling approximately $1.2 million.
Included in the allowances is a fourth quarter charge of approximately $1.1
million for an addition to the valuation reserve taken on the Carbide and Carbon
Building in Chicago. Although our property enhancement program for this building
has achieved positive results, the Chicago office building market for this type
of property remains slow to show any signs of marked improvement. In order to
better position the Trust for the proposed transaction detailed later in this
letter, a premature sale of this building seems likely. For that reason, the
Trustees increased the valuation allowance on this property in the fourth
quarter.
Additionally, in the fourth quarter, we took a final write-off on the Riverview
Tower in Toledo of approximately $111,000. This write-off is in connection with
an agreement which ends our involvement with this property. Under the terms of
the agreement, the new owner of Riverview Tower has agreed to release the Trust
from any claims or liabilities relating to the property in exchange for the
release of our mortgage on this property.
During the calendar year of 1996, the Trust paid dividends of $0.40, 100 percent
of which was non-taxable as a return of capital.
TRUST TO FORM LIMITED PARTNERSHIP WITH HCI
On February 14, 1997, the Trust announced that it had signed a definitive
agreement to form a limited partnership with Hospitality Corporation
International (HCI) of Phoenix, Arizona. Under the terms of the agreement, this
newly-formed partnership will acquire several of HCI's seven all-suite hotel
properties in Arizona and California, as well as certain assets of Realty
ReFund. The remaining HCI hotel properties will be acquired by the Trust in
exchange for newly-issued Realty ReFund shares and debt. These seven properties
contain 1,036 suites.
These transactions are subject to approval by our shareholders and the investors
in HCI's hotels. We also will be required to seek approval by the New York Stock
Exchange for the listing of the additional shares to be issued in connection
with these transactions. Brown, Gibbons, Lang & Company, L.P., an independent
investment banking firm we retained in August 1995 to review the future
direction of the Trust, will render its opinion as the fairness of the proposed
transaction, from a financial point of view, to our shareholders.
It is important to remember that there are no assurances that these transactions
will be consummated. In the event that the Trust's agreement with HCI is
terminated, we will continue to review our options, which may include merger or
alternative acquisition possibilities, if any, or liquidation.
BOARD RE-ELECTED
The Trust held its 25th annual meeting on May 15, 1996. At this annual meeting,
Realty ReFund's Board of Trustees were re-elected by the shareholders. On behalf
of our Trustees, we thank you for this vote of confidence.
102ND CONSECUTIVE DIVIDEND PAID
The Board of Trustees declared a cash dividend of $0.10 per share for the
quarter ended January 31, 1997 which was paid on March 17, 1997 to shareholders
of record on March 10, 1997. The Trustees will continue to review future
dividend payments on a quarter-to-quarter basis.
We will keep you informed as to the status of the proposed transaction with HCI,
as well as other corporate developments. As always, we thank you for your
continued loyalty and support.
Sincerely,
/s/ Alan M. Krause
Alan M. Krause
Chairman and Co-Chief Executive Officer
/s/ James H. Berick
James H. Berick
President and Co-Chief Executive Officer
1
<PAGE> 5
SELECTED FINANCIAL DATA
The following selected financial data of Realty ReFund Trust for the five years
ended January 31, 1997, have been derived from the audited financial statements
of the Trust, which have been audited by Arthur Andersen LLP, independent public
accountants. All of the data should be read in conjunction with the respective
financial statements and related notes included herein.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $3,915,506 $ 5,430,006 $ 6,592,051 $ 7,645,790 $ 6,979,119
-------------------------------------------------------------------------
Net income (loss) $ (888,365) $(7,554,351) $ 670,945 $ 955,121 $ (4,542,975)
-------------------------------------------------------------------------
Earnings (loss) per share $ (.87) $ (7.40) $ .66 $ .94 $ (4.45)
-------------------------------------------------------------------------
Cash dividends paid and declared per share $ .40 $ .50 $ .80 $ .86 $ 1.09
-------------------------------------------------------------------------
Total assets $6,416,123 $24,555,330 $45,165,356 $65,264,638 $ 70,428,842
-------------------------------------------------------------------------
Bank and other borrowings $2,300,000 $10,795,000 $16,810,000 $24,575,000 $ 23,525,000
-------------------------------------------------------------------------
</TABLE>
2
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL POSITION
All references are to the Trust's fiscal year ended January 31, 1997, as
compared to 1996 or the fiscal year ended January 31, 1996, as compared to 1995.
RESULTS OF OPERATIONS AND FINANCIAL POSITION
Following is an analysis of the net interest income earned on each loan in the
Trust's portfolio during 1997, 1996 and 1995:
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST INCOME BY LOAN
AVERAGE LOANS AVERAGE LOANS AVERAGE NET INTEREST INTEREST NET INTEREST AVERAGE
DESCRIPTION RECEIVABLE(a) PAYABLE(a) INVESTMENT(b) INCOME EXPENSE INCOME YIELD (c)
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------------------
Wrap-Around Mortgage Loans:
<S> <C> <C> <C> <C> <C> <C> <C>
Fort Worth, Texas $ 9,646,713 $ 2,309,497 $ 7,337,216 $ 1,077,757 $ 150,184 $ 927,573 12.6%(d)(e)
Toledo, Ohio 7,264,866 2,606,559 4,658,307 560,139 89,223 470,916 10.1
--------------------------
Totals $ 1,637,896 $ 239,407
==========================
1996
- ------------------------------------------------------------------------------------------------------------------------------------
Wrap-Around Mortgage Loans:
Fort Worth, Texas $15,814,885 $ 7,456,734 $ 8,358,151 $ 1,766,385 $ 617,123 $1,149,262 13.8%(e)
Toledo, Ohio 10,624,356 3,496,911 7,127,445 932,605 209,872 722,733 10.1
Other Mortgage Loans:
Saginaw, Michigan 2,015,912 -- 2,015,912 149,299 -- 149,399 14.8 (f)
Sarasota/Orlando, Florida 3,771,941 -- 3,771,941 207,167 -- 207,167 11.0 (g)
Loan Prepayment Fees
and Other Income N/A N/A N/A 76,749 N/A 76,749 N/A
--------------------------
Totals $ 3,132,205 $ 826,995
==========================
1995
- ------------------------------------------------------------------------------------------------------------------------------------
Wrap-Around Mortgage Loans:
Fort Worth, Texas $21,361,623 $12,920,553 $ 8,441,070 $ 2,107,216 $1,061,892 $1,045,324 12.4%(e)
Dallas, Texas 5,459,109 4,059,109 1,400,000 131,102 90,276 40,826 11.7 (e)(h)
Toledo, Ohio 12,727,848 4,153,957 8,573,891 1,120,698 249,722 870,976 10.2
Akron, Ohio 9,261,264 1,880,494 7,380,770 143,469 27,032 116,437 7.1 (h)
Other Mortgage Loans:
Saginaw, Michigan 2,041,089 -- 2,041,089 128,074 -- 128,074 12.5 (f)
Sarasota/Orlando, Florida 3,863,138 -- 3,863,138 424,417 -- 424,417 11.0
Loan Prepayment Fees
and Other Income N/A N/A N/A 217,620 N/A 217,620 N/A
--------------------------
Totals $ 4,272,596 $1,428,922
==========================
<FN>
(a) Based upon average month-end balances outstanding during each fiscal year.
(b) Average loans receivable less average loans payable.
(c) Net interest income divided by average net investment.
(d) This loan was outstanding for approximately ten months in 1997. The average yield represents an annualized yield.
(e) The Trust's net investment in these loans bears interest at variable rates based on specified increments over the prime
lending rate.
(f) This loan was outstanding for approximately six months in 1996 and 1995. The average yield represents an annualized yield.
(g) This loan was outstanding for approximately six months in 1996. The average yield represents an annualized yield.
(h) These loans were outstanding for approximately three months in 1995. The average yield represents an annualized yield.
</TABLE>
3
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL POSITION
In September 1996, the Toledo, Ohio loan investment was converted from a
wrap-around mortgage loan to a junior mortgage loan. Accordingly, the Trust's
loan receivable from related party and loan payable underlying mortgage to
related party was reduced by approximately $2,741,000, representing the
underlying mortgage loan balance at the time the status of the Toledo loan was
changed. In addition, a principal prepayment of $600,000 was received and
approximately $401,000 of escrow funds held by the Trust was applied against the
mortgage loan receivable balance. The commercial building that secured the loan
was owned by a partnership of which a corporation owned by the chairman of the
Trust is the general partner. The building was sold by the partnership. In
connection with that sale, the Trust has been released by the new owner from any
claims or liabilities relating to that property, and the Trust has released its
rights to any obligations from the partnership. As a result, in the fourth
quarter of fiscal 1997, the Trust recorded a $111,000 loss provision on the
Toledo, Ohio loan.
In July 1992, the Trust accepted title in lieu of foreclosure on a commercial
building in Chicago, Illinois. At the time of title acceptance, the Trust
recorded a provision to write down its investment to estimated net realizable
value as it was the Trust's intention to sell the real estate. Since that time,
the carrying value of the investment increased as a result of considerable
investment in building and tenant improvements. Based on both market conditions
for similar commercial property in Chicago and the current operating performance
of the property, the Trust recorded a $3,000,000 provision in the fourth quarter
of fiscal 1996 to reduce the carrying value of the property to its then
estimated net realizable value. The amount of the writedown was based upon the
Trust's best estimate of the amount of net proceeds which would be realized upon
sale of the real estate in the near term future. In the fourth quarter of 1997,
the Trust entered into a contract to sell the Chicago building for $6,000,000.
Accordingly, the Trust recorded an additional provision of $1,085,000 to reduce
the carrying value of the real estate held for sale to its estimated net
realizable value based upon the pending contract price and estimated costs
associated with the potential sale. The sale is expected to close in the summer
of 1997.
Interest income on mortgage loans receivable decreased in 1997 as compared to
1996 due to the Sarasota and Orlando, Florida and Saginaw, Michigan loan
repayments in 1996, the maturity of the Fort Worth, Texas loan in November 1996,
the principal prepayments received on the Toledo, Ohio wrap-around mortgage loan
in 1996 and 1997 and the retirement of the Toledo, Ohio loan in 1997. Interest
expense on mortgage loans payable decreased due to the normal amortization of
mortgage loan balances and the conversion of the Toledo, Ohio wrap-around
mortgage loan to a junior mortgage loan in September 1996.
Interest expense on bank borrowings decreased in 1997 as compared to 1996 due to
lower average borrowing levels. In November 1996, the net proceeds received from
the repayment of the Fort Worth, Texas loan were utilized to retire all
outstanding bank borrowings.
Interest expense on the note payable to related party decreased due to quarterly
principal payments of $125,000 in 1997 and lower prime lending rates in the
current year. In addition, a portion of the proceeds from the repayment of the
Fort Worth, Texas loan were utilized to reduce the note by $1,700,000.
The fee to the investment advisor decreased in 1997 as compared to 1996 due to
the reduction in the Trust's investment in mortgage loans. Other operating
expenses increased in 1997 as compared to 1996 due to higher levels of legal and
professional expenses.
For 1997, the real estate held for sale realized net operating income of
approximately $149,000 (excluding the $1,085,000 provision to write down the
asset carrying value), inclusive of amortization charges of $43,000. These
results compare favorably with the 1996 building operating loss of $304,000
(excluding the $3,000,000 provision to write down the asset carrying value),
inclusive of depreciation and amortization charges of $458,000. Amortization and
depreciation expense decreased between periods due to the adoption of Financial
Accounting Standards (FAS) No. 121 discussed below. Rental revenue and operating
expenses were comparable between periods.
In the first quarter of fiscal 1997, the Trust adopted FAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of." Pursuant to this Standard, long-lived assets to be disposed of are to be
reported at the lower of carrying amount or fair value less incremental direct
costs to sell. Long-lived assets
4
<PAGE> 8
to be disposed of shall not be depreciated while being held for disposal. The
Trust's real estate held for sale is within the scope of FAS No. 121. As the
Trust established a $3,000,000 valuation allowance at January 31, 1996 to reduce
the carrying value of the Chicago real estate held for sale to its then
estimated net realizable value, adoption of FAS No. 121 did not have a material
impact on the Trust's financial position or results of operations except that no
depreciation expense was recorded on the real estate held for sale during fiscal
1997.
Interest income on mortgage loans receivable decreased in 1996 as compared to
1995 due to the prepayment of the Akron, Ohio and Dallas, Texas wrap-around
mortgage loans in April and May 1994, respectively, principal prepayments
aggregating $3,050,000 received on the Toledo, Ohio wrap-around mortgage loan in
fiscal years 1996 and 1995, principal repayment of $2,000,000 received on the
Saginaw, Michigan loan, the maturity of the Sarasota and Orlando, Florida loan
in August 1995 and the normal amortization of mortgage loan balances. In
addition, fiscal 1995 included loan prepayment and other income of $190,000 as
compared to $59,000 for fiscal 1996. Interest expense on mortgage loans payable
decreased in 1996 as compared to 1995, due to the prepayments of the loans
underlying the Akron, Ohio and Dallas, Texas wrap-around loan investments and
the normal amortization of mortgage loan balances.
Interest expense on bank borrowings decreased in 1996 as compared to 1995 due to
lower average borrowing levels.
The proceeds received in 1996 and 1995 in connection with various loan principal
repayments were utilized to reduce bank borrowings. The effect of lower average
borrowing levels more than offset the effect of higher bank interest rates.
Interest expense on the note payable to related party increased due to higher
interest rates.
For 1996, the real estate held for sale incurred an operating loss of $304,000
(excluding the $3,000,000 provision to write down the asset carrying value),
inclusive of depreciation and amortization charges of $458,000. These results
compare unfavorably with the 1995 building operating loss of $175,000, which
included depreciation and amortization charges of $336,000. When the effects of
depreciation and amortization expenses are removed, operating results are very
comparable. Depreciation and amortization expenses increased considerably in
1996 due to the high level of investment in building and tenant improvements.
The fee to the investment advisor decreased in 1996 as compared to 1995 due to
the reduction in the Trust's investment in mortgage loans.
Other operating expenses decreased in 1996 as compared to 1995 due to lower
levels of legal and professional fees. Such expenses were greater than normal in
1995 due to a higher level of legal activity.
LIQUIDITY
To maintain its tax-exempt status, the Trust is required to distribute at least
95% of its taxable income to its shareholders.
It is currently the policy of the Trust to distribute sufficient dividends to
maintain its tax-exempt status. The Trust has available approximately $9.5
million of net operating loss carryforwards for income tax purposes. The loss
carryforwards can be used to reduce future dividend payment requirements and
still allow the Trust to maintain its tax-exempt status. The Trustees will
assess the level of dividends to be declared on a quarterly basis.
For 1997 as compared to 1996, net cash provided by operating activities
decreased due to decreased interest income from mortgage loan investments and
the prior year period including the receipt of $300,000 for reimbursement of
building repairs and maintenance expenses.
Cash flows from investing activities increased due to the Fort Worth, Texas
mortgage loan maturing in 1997 as compared to the various mortgage loans
maturing or being prepaid in 1996. The Trust's aggregate investment in these
loans was approximately $8,300,000 and $5,700,000 in 1997 and 1996,
respectively. In 1997, the Trust purchased the remaining fee interest in the
land related to the real estate held for sale. The Trust capitalized no
expenditures for tenant or building improvements in 1997, whereas $1,179,000 of
the tenant and building improvement costs were capitalized in 1996.
Cash used for financing activities increased in 1997 as compared to 1996 as the
net proceeds from the Fort Worth, Texas loan were utilized to reduce bank
borrowings and the note payable to related party.
5
<PAGE> 9
For 1996 as compared to 1995, net cash provided by operating activities
increased due to the receipt of $300,000 in February 1995 for the reimbursement
of building repairs and maintenance expenses. This more than offset the effect
of greater amounts of prepayment and other income recognized in 1995 on the
Akron, Ohio and Dallas, Texas loan prepayments and the reduction in net interest
received in 1996.
Cash flows from investing activities decreased considerably in 1996 due to the
Akron, Ohio and Dallas, Texas wrap-around mortgage loan prepayments in 1995. The
Trust's aggregate net investment in these loans was approximately $8,800,000. In
1996, the Sarasota and Orlando, Florida mortgage loan was retired at its
maturity and the Saginaw, Michigan loan was prepaid in full. The Trust's
aggregate investment in these loans was approximately $5,700,000. In addition,
the Trust increased expenditures for tenant and building improvements at the
Chicago property in 1996.
Cash used for financing activities decreased in 1996 as compared to 1995 due to
the lower level of net proceeds received from the loan repayments being
available to pay down bank borrowings and a decrease in dividends paid. Pursuant
to the terms of the note, the Trust made principal payments of $500,000 on the
note payable to related party in 1996.
The Trust's primary source of funds is cash flow, if any, generated by operating
or selling the Chicago property. If the Chicago property generates cash flow
operating deficits, the Trust must fund such deficits. Additionally, the Trust's
bank credit agreement was retired with the net proceeds received from the
repayment of the Fort Worth, Texas wrap-around mortgage loan in November 1996
and the credit agreement expired. In the opinion of management, available cash
and cash flow from operations will be sufficient to fund cash requirements.
INFLATION
Generally, inflation affects the Trust as it affects its borrowers and the
underlying real estate collateral. This type of collateral traditionally has
been able to sustain itself during periods of inflation.
OTHER
Subsequent to year end, the Trust has signed an agreement to form a limited
partnership with Hospitality Corporation International ("HCI") of Phoenix,
Arizona. Under the terms of the agreement, this newly-formed partnership will
acquire several of HCI's seven all-suite hotel properties in Arizona and
California, as well as certain assets of the Trust. The remaining HCI hotel
properties will be acquired by the Trust in exchange for newly-issued Realty
ReFund Trust shares and debt. These seven HCI properties contain 1,036 suites.
These transactions will be subject to approval by the shareholders of the Trust
and the investors in HCI's hotels. There can be no assurance that the necessary
approvals will be obtained. Should the approvals not be obtained, this agreement
will be terminated. At such time, the Trust would review its options, which may
include merger or alternative acquisition possibilities, if any, or liquidation.
NEW ACCOUNTING PRINCIPLES
In March 1997, FAS No. 128 "Earnings Per Share" was issued. This standard
simplifies the standards for computing earnings per share and provides certain
reporting requirements, as defined. The Trust will be required to adopt this
standard in the first quarter of fiscal 1998. The Trust does not have a complex
capital structure, as such, the adoption of FAS 128 should not have a material
impact on determining earnings per share.
6
<PAGE> 10
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Loan receivable $ -- $ 12,915,955
Loan receivable from related party, net of valuation
allowance of $5,000,000 at January 31, 1996 -- 4,506,055
- -----------------------------------------------------------------------------------------------------------
-- 17,422,010
- -----------------------------------------------------------------------------------------------------------
Real estate held for sale, net of $4,085,000
and $3,000,000 valuation allowance at
January 31, 1997 and 1996, respectively 5,599,122 6,396,364
Other assets:
Cash and cash equivalents 531,997 16,285
Interest receivable and other assets 285,004 720,671
- -----------------------------------------------------------------------------------------------------------
$ 6,416,123 $ 24,555,330
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loan payable underlying wrap-around mortgage $ -- $ 4,577,187
Loan payable underlying wrap-around mortgage to related party -- 3,155,263
Note payable to bank -- 6,295,000
Note payable to related party 2,300,000 4,500,000
Deposits and accrued expenses 864,903 1,480,061
- -----------------------------------------------------------------------------------------------------------
3,164,903 20,007,511
- -----------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Shares of beneficial interest without par value;
unlimited authorization; 1,020,586 shares
outstanding in 1997 and 1996 3,251,220 4,547,819
- -----------------------------------------------------------------------------------------------------------
$ 6,416,123 $ 24,555,330
=======================================
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
7
<PAGE> 11
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Interest income from loans receivable $ 1,077,757 $ 2,199,600 $3,151,628
Interest income from loan receivable from related party 560,139 932,605 1,120,968
Rental revenue from real estate held for sale 2,277,610 2,297,801 2,319,455
- -----------------------------------------------------------------------------------------------------------------
3,915,506 5,430,006 6,592,051
- -----------------------------------------------------------------------------------------------------------------
Expenses:
Provision for writedown of loan receivable from related party 111,498 5,000,000 --
Provision for writedown of real estate held for sale 1,085,000 3,000,000 --
Interest on loans underlying wrap-around mortgages 150,184 617,123 1,218,159
Interest on loan underlying wrap-around mortgage to related party 89,223 209,872 249,722
Interest on note payable to bank 381,368 717,550 793,731
Interest on note payable to related party 332,308 427,445 411,944
Fee to related party investment advisor 169,961 223,278 294,115
Legal expense to related party 56,000 20,000 41,000
Operating expenses of real estate held for sale 2,085,807 2,144,150 2,157,957
Depreciation of building held for sale -- 264,873 243,783
Amortization of tenant improvements
and deferred leasing commissions 43,080 192,719 92,309
Other operating expenses 299,442 167,347 418,386
- -----------------------------------------------------------------------------------------------------------------
4,803,871 12,984,357 5,921,106
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (888,365) $ (7,554,351) $ 670,945
==========================================
Income (loss) per share $ (.87) $ (7.40) $ .66
==========================================
Cash dividends per share
Paid $ .30 $ .40 $ .60
Declared .10 .10 .20
------------------------------------------
$ .40 $ .50 $ .80
==========================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES OF UNDISTRIBUTED TOTAL
BENEFICIAL NET SHAREHOLDERS'
FOR THE YEARS ENDED JANUARY 31, 1997, 1996 AND 1995 INTEREST INCOME EQUITY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 31, 1994 $ 12,833,678 $ 5,976 $ 12,839,654
Net income -- 670,945 670,945
Cash dividends paid (119,136) (676,921) (796,057)
- ----------------------------------------------------------------------------------------------------
Balance, January 31, 1995 12,714,542 -- 12,714,542
Net loss (7,554,351) -- (7,554,351)
Cash dividends paid (612,372) -- (612,372)
- ----------------------------------------------------------------------------------------------------
Balance, January 31, 1996 4,547,819 -- 4,547,819
Net loss (888,365) -- (888,365)
Cash dividends paid (408,234) -- (408,234)
- ----------------------------------------------------------------------------------------------------
Balance, January 31, 1997 $ 3,251,220 $ -- $ 3,251,220
=============================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
8
<PAGE> 12
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Interest received $ 1,701,053 $ 3,190,122 $ 3,946,514
Interest paid (995,294) (2,018,092) (2,709,753)
Cash payments to investment advisor and other suppliers (737,923) (626,188) (784,514)
Rental revenue received from real estate held for sale 2,313,877 2,240,784 2,319,157
Cash payments for operating costs of real estate held for sale (2,153,071) (1,726,371) (2,268,734)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 128,642 1,060,255 502,670
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Principal collected on mortgage loans receivable 14,569,483 13,087,769 23,158,635
Principal payments on mortgage loans payable (4,991,421) (6,364,536) (12,439,672)
Payments for tenant and building improvements -- (1,178,904) (621,977)
Investments in mortgage loans receivable -- -- (2,050,000)
Purchase of fee interest in land (287,758) -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 9,290,304 5,544,329 8,046,986
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Bank borrowings 625,000 2,550,000 5,800,000
Bank repayments (6,920,000) (8,065,000) (13,565,000)
Payment of cash dividends (408,234) (612,372) (796,057)
Principal payments on note payable to related party (2,200,000) (500,000) --
- -------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (8,903,234) (6,627,372) (8,561,057)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash 515,712 (22,788) (11,401)
Cash and Cash Equivalents At Beginning Of Year 16,285 39,073 50,474
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents At End Of Year $ 531,997 $ 16,285 $ 39,073
============================================
Reconciliation of Net Income (Loss) To Net Cash
Provided By Operating Activities:
Net income (loss) $ (888,365) $ (7,554,351) $ 670,945
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Provision for writedown of loan
receivable from related party 111,498 5,000,000 --
Provision for writedown of real estate held for sale 1,085,000 3,000,000 --
Depreciation of building held for sale -- 264,873 243,783
Amortization of tenant improvements and
deferred leasing commissions 43,080 192,719 131,257
Amortization of deferred loan fees (15,000) (18,000) (27,234)
Deferral of interest income -- -- (137,596)
Decrease (increase) in interest receivable and other assets 392,587 220,781 (636,221)
Increase (decrease) in deposits and accrued expenses (600,158) (45,767) 257,736
- -------------------------------------------------------------------------------------------------------------------
$ 128,642 $ 1,060,255 $ 502,670
============================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
9
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997, 1996 AND 1995
1. NATURE OF OPERATIONS
Realty ReFund Trust (the Trust) historically has specialized in mortgage
financing as its investment vehicle, refinancing existing income-producing
commercial, industrial and multi-unit residential real property by supplementing
or replacing existing financing. The primary refinancing technique which the
Trust has employed is wrap-around mortgage lending, which is discussed in Note
2. The Trust has pursued other refinancing techniques, including, but not
limited to, first or junior mortgages which have various durations and may or
may not be self-liquidating. All of its assets in mortgage financing have been
sold and as of January 31, 1997, its sole remaining real estate asset is a
wholly owned commercial office building in Chicago.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS IN WRAP-AROUND MORTGAGES AND RELATED UNDERLYING LOANS
In a wrap-around mortgage structure, the principal amount secured by the
mortgage note held by the Trust is equal to the outstanding balance under the
prior mortgage loan plus the amount of funds advanced by the Trust. The notes
held by the Trust are subordinate to the underlying prior indebtedness. The
Trust agrees with the borrower to make principal and interest payments to the
holder of the existing prior mortgage, but only to the extent scheduled payments
are received from the borrower and no other default exists. Generally, the Trust
has the right to pay off the prior indebtedness and succeed to its priority.
The mortgage notes held by the Trust generally are coterminous with the
underlying prior indebtedness and provide for lump-sum payments by the borrower
upon maturity.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This standard allows a creditor to measure the impairment
of a loan based on the fair value of the collateral if a loan is collateral
dependent. FAS No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," issued in October 1994, amends FAS No. 114
to allow a creditor to use existing methods for recognizing interest income on
impaired loans. The Trust adopted the provisions of FAS Nos. 114 and 118 in
fiscal 1996. See Note 3 for a discussion of the impairment of the Trust's loan
on the Toledo, Ohio property.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Trust and its wholly owned
subsidiaries RRF LP I, Inc. and RRF LP II, Inc. All significant intercompany
transactions and balances have been eliminated in the accompanying financial
statements.
DEPRECIATION AND AMORTIZATION
In the first quarter of fiscal 1997, the Trust adopted FAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Pursuant to this standard, long-lived assets to be disposed of are to be
reported at the lower of carrying amount or fair value less incremental direct
costs to sell. Long-lived assets to be disposed of shall not be depreciated
while being held for disposal. The Trust's real estate held for sale is within
the scope of FAS No. 121. As the Trust established a $3,000,000 valuation
allowance at January 31, 1996 to reduce the carrying value of the real estate
held for sale to its estimated net realizable value, adoption of FAS No. 121 did
not have a material impact on the Trust's financial position or results of
operations except that no depreciation expense was recorded on the real estate
held for sale during fiscal 1997. Accumulated depreciation and amortization of
the real estate held for sale at January 31, 1996 was $793,000.
Included in interest receivable and other assets at January 31, 1997 and 1996
are deferred leasing commissions related to the Chicago office building of
$312,000 and $307,000, respectively, which are being amortized on a
straight-line basis over the related lease terms. Accumulated amortization of
such deferred costs at January 31, 1997 and 1996 is $74,000 and $31,000,
respectively.
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
shares outstanding during the periods. Earnings per share for 1997, 1996 and
1995 were based upon 1,020,586 shares. During these periods the Trust had no
potentially dilutive securities outstanding.
10
<PAGE> 14
STATEMENTS OF CASH FLOWS
The Trust considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Trust adopted the provisions of FAS No. 107, "Disclosures about Fair Value
of Financial Instruments" in fiscal 1996. The standard requires the Trust to
disclose in its financial statements or notes thereto, the fair value of assets
and liabilities which meet the standard's definition of financial instruments.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practical to estimate that
value:
Loans receivable -- fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Mortgage loans payable, notes payable to bank and related party -- fair value
is estimated by discounting the future cash flows using the current rates which
would be available to the Trust for similar loans having the same remaining
maturities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In July 1995, the Trust established a valuation allowance of $5,000,000 on its
investment in the Toledo, Ohio wrap-around mortgage loan. At January 31, 1996,
the Trust's net investment in the wrap-around loan (amount of mortgage loan
receivable less (i) the recorded loan loss reserve and (ii) the underlying
mortgage loan payable balance) was approximately $1,351,000.
In the fourth quarter of fiscal 1996, the Trust established a valuation
allowance of $3,000,000 to write down the Chicago real estate held for sale to
its estimated net realizable value. The building is currently under contract to
be sold and the Trust has recorded an additional valuation allowance of
$1,085,000 at January 31, 1997 to further reduce the real estate held for sale
to its estimated net realizable value. See Note 4 for further discussion.
NEW ACCOUNTING PRINCIPLES
In March 1997, FAS No. 128 "Earnings Per Share" was issued. This standard
simplifies the standards for computing earnings per share and provides certain
reporting requirements, as defined. The Trust will be required to adopt this
standard in the first quarter of fiscal 1998. The Trust does not have a complex
capital structure, as such, the adoption of FAS 128 should not have a material
impact on determining earnings per share.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements to
conform with current year presentation. These reclassifications did not affect
results of operations previously reported.
3. LOAN IMPAIRMENT
In July 1995, the Trust recorded a $5,000,000 loss provision on its investment
in the Toledo, Ohio wrap-around mortgage loan. The owner of the property was
pursuing, among other things, the sale of the property. As the Trust's loan was
made on a nonrecourse basis, the Trust had written down its investment to
reflect the estimated sale price of the property, if any, and the estimated net
proceeds to be received by the Trust as repayment of its loan as of January 31,
1996.
The commercial building that secured the loan was owned by a partnership of
which a corporation owned by the chairman of the Trust is the general partner.
The building was sold by the partnership. In connection with that sale, the
Trust has been released by the new owner from any claims or liabilities relating
to that property, and the Trust has released its rights to any obligations from
the partnership. As a result, in the fourth quarter of fiscal 1997, the Trust
recorded a $111,000 loss provision on the Toledo, Ohio loan based on its final
actual net realized value.
11
<PAGE> 15
4. REAL ESTATE HELD FOR SALE
In July 1992, the Trust accepted title in lieu of foreclosure on a commercial
building in Chicago, Illinois. At the time of title acceptance, the Trust
recorded a provision to write down its investment to estimated net realizable
value as it was the Trust's intention to sell the real estate. Since that time,
the carrying value of the investment increased as a result of considerable
investment in building and tenant improvements.
Based on both market conditions for similar commercial property in Chicago and
the current operating performance of the property, the Trust recorded a
$3,000,000 provision in the fourth quarter of fiscal 1996 to reduce the carrying
value of the property to its then estimated net realizable value. The amount of
the writedown was based upon the Trust's best estimate at January 31, 1996 of
the amount of net proceeds which would be realized upon sale of the real estate
in the near term future.
In the fourth quarter of 1997, the Trust entered into a contract to sell the
Chicago building for $6,000,000. Accordingly, the Trust recorded an additional
provision of $1,085,000 to reduce the carrying value of the real estate held for
sale to its estimated net realizable value based upon the pending contract price
and estimated costs associated with the potential sale. The sale is expected to
close in the summer of 1997.
5. NOTE PAYABLE TO BANK
The Trust's bank credit agreement, originally scheduled to expire in October
1996, was extended to November 1996 to correspond with the extended maturity
date of the Fort Worth, Texas loan receivable. The proceeds from the repayment
of the Fort Worth, Texas loan were utilized, in part, to retire all outstanding
borrowings under the Trust's bank credit agreement. Upon retirement of all
outstanding borrowings thereunder, the Trust's bank credit agreement expired.
For the years ended January 31, 1997, 1996 and 1995, the average daily bank
borrowings were $5,519,000, $9,431,000 and $12,427,000, respectively, with a
weighted average interest rate (actual interest expense divided by average daily
borrowings) of 6.9%, 7.6% and 6.4%, respectively. The weighted average interest
rate on bank borrowings outstanding at January 31, 1996 was 7.1%.
6. NOTE PAYABLE TO RELATED PARTY
In March 1993, the Trust sold a $5,000,000 secured note to the Chairman of the
Trust, at par. The note bears interest at the prime lending rate and had a
stated maturity date of August 1994. The Trust exercised its option to extend
the maturity of the note. Pursuant to the terms of the note, the Trust made
scheduled principal payments of $500,000 for the years ended January 31, 1997
and 1996. In addition, $1,700,000 of the proceeds from the repayment of the Fort
Worth, Texas loan were utilized to reduce the note.
7. FEDERAL INCOME TAXES
No provision for current or deferred income taxes has been made by the Trust.
The Trust has elected to be a real estate investment trust (REIT) and is
therefore subject to the requirements of Sections 856-860 of the Internal
Revenue Code, all of the requirements of which management believes have been met
for the year ended January 31, 1997. As a REIT, the Trust normally distributes
all of its taxable income to its shareholders. For the year ended January 31,
1997, the Trust had a taxable loss of approximately $5,000,000.
The primary differences between the income tax and financial reporting bases is
related to differences between the timing of book provisions for write downs of
real estate and loans and when such amounts are allowed as deductions for
Federal income tax purposes.
12
<PAGE> 16
In fiscal 1997, the net tax deductions related to such amounts were $4,000,000
that relate primarily to amounts that had been expensed in previous years for
book purposes.
On February 14, 1997, the Trustees declared a dividend, payable on March 17,
1997, in the amount of $.10 per share of beneficial interest, totaling $102,000.
The total dividends per share applicable to operating results for the year ended
January 31, 1997, including the declaration on February 14, 1997, amount to $.40
per share.
An income tax net operating loss of approximately $4,476,000, originating in
fiscal 1993, is available for carryforward to fiscal 2008. In addition, the
taxable loss for fiscal 1997 of $5,000,000 will be available for carryforward to
fiscal 2012. The 1996 dividends were 100% return of capital due to the fiscal
1997 taxable loss. The quarterly allocation of cash dividends paid per share for
individual shareholders' income tax purposes was as follows:
<TABLE>
<CAPTION>
CALENDAR 1996 CALENDAR 1995 CALENDAR 1994
----------------------------- --------------------------- --------------------------
MONTH ORDINARY RETURN OF TOTAL ORDINARY RETURN OF TOTAL ORDINARY RETURN OF TOTAL
PAID INCOME CAPITAL PAID INCOME CAPITAL PAID INCOME CAPITAL PAID
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March $-- $.10 $.10 $.195 $.005 $.20 $.121 $.059 $.18
June -- .10 .10 .195 .005 .20 .135 .065 .20
September -- .10 .10 .097 .003 .10 .135 .065 .20
December -- .10 .10 .097 .003 .10 .135 .065 .20
- ------------------------------------------------------------------------------------------------------------------------
$-- $.40 $.40 $.584 $.016 $.60 $.526 $.254 $.78
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax status of distributions to shareholders in calendar 1997 will be
dependent on the level of the Trust's earnings in that year. If taxable income
of the Trust exceeds dividends paid in calendar 1997, such dividends will
represent ordinary income to the recipients irrespective of the net operating
loss carryforward.
8. ADVISORY AGREEMENT/EMPLOYMENT AGREEMENTS
The Trust has an Advisory Agreement with Mid-America ReaFund Advisors, Inc. (the
Advisor) which provides for the administration of the day-to-day investment
operations of the Trust. The Advisor is an entity which is jointly owned by the
present Chairman and President of the Trust. Under the terms of this agreement,
the Advisor is to receive, subject to certain limitations, a monthly fee equal
to 1/12 of 1% of invested assets, as defined in the agreement, and an annual
incentive fee equal to (a) 10% of the amount by which the net income of the
Trust exceeds 8% of the average net worth for the year and (b) 10% of the
difference between net realized capital gains less accumulated net realized
capital losses, as defined. For any fiscal year in which operating expenses of
the Trust exceed certain thresholds specified in the agreement, the Advisor is
required to refund to the Trust the amount of such excess. For fiscal years 1997
and 1996, operating expenses exceeded the specified thresholds by approximately
$6,000 and $18,000, respectively. There was no refund requirement with respect
to fiscal 1995.
The Chairman and President of the Trust have employment agreements with the
Trust, expiring in 2006, each of which have been extended in the past. The
employment agreements provide that these individuals will receive no
compensation from the Trust as long as the Advisory Agreement is in effect.
However, should the Advisor no longer provide services to the Trust, these
individuals will then be compensated, collectively, upon the same annual basis
as the Advisor would have been compensated under the current terms of the
Advisory Agreement had it remained in effect.
13
<PAGE> 17
9. INVESTMENTS IN LOANS RECEIVABLE
RECONCILIATION OF MORTGAGE LOANS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $17,422,010 $35,509,779 $56,480,818
- -------------------------------------------------------------------------------------------------------------
Additions:
Office buildings(a) -- -- 137,596
Shopping center -- -- 2,050,000
- -------------------------------------------------------------------------------------------------------------
-- -- 2,187,596
- -------------------------------------------------------------------------------------------------------------
Collections of principal:
Office buildings 14,569,483 7,255,186 8,245,258
Shopping centers -- 2,029,068 9,332,144
Motels -- 3,803,515 117,280
Apartments -- -- 5,463,953
- -------------------------------------------------------------------------------------------------------------
14,569,483 13,087,769 23,158,635
- -------------------------------------------------------------------------------------------------------------
Elimination of underlying mortgage (Note 10) 2,741,029 -- --
Writedown of loan receivable from related party (Note 3) 111,498 5,000,000 --
- -------------------------------------------------------------------------------------------------------------
Balance, end of period $ -- $17,422,010 $35,509,779
- -------------------------------------------------------------------------------------------------------------
<FN>
(a) Represents deferred interest applicable to existing loans
</TABLE>
10. OTHER RELATED PARTY TRANSACTIONS
The Trust recorded provisions of approximately $56,000, $20,000 and $41,000 in
fiscal years 1997, 1996 and 1995, respectively, for legal services provided by a
law firm of which the President of the Trust and another Trustee are principals.
The Toledo, Ohio loan investment was secured by a commercial building owned by a
partnership of which the present Chairman of the Trust is the general partner.
In September 1996, the Toledo, Ohio loan investment was converted from a
wrap-around mortgage loan to a junior mortgage loan. Accordingly, the Trust's
loan receivable from related party and loan payable under-lying mortgage to
related party were reduced by approximately $2,741,000, representing the balance
of the underlying mortgage loan at the time the status of the Toledo loan was
changed. In addition, a principal prepayment of $600,000 was received and
approximately $401,000 of escrow funds held by the Trust was applied against the
mortgage loan receivable balance. The remaining portion ($111,498) of the loan
was written off in the fourth quarter of fiscal 1997.
In the years ended January 31, 1997, 1996 and 1995, the Trust earned
approximately $560,000, $933,000 and $1,121,000 of interest income on this loan,
respectively, of which payment of approximately $138,000 was deferred and added
to the principal balance of the mortgage loan receivable for the year ended
1995. The Trust incurred interest expense of approximately $89,000, $210,000 and
$250,000 in connection with the related underlying loan payable for the years
ended January 31, 1997, 1996 and 1995, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Trust's significant financial
instruments at January 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- --------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable $ -- $ -- $ 17,422,010 $ 17,319,000
Mortgage loans payable -- -- 7,732,450 7,630,000
Note payable to bank -- -- 6,295,000 6,295,000
Note payable to related party 2,300,000 2,300,000 4,500,000 4,500,000
</TABLE>
14
<PAGE> 18
12. SUBSEQUENT EVENT
Subsequent to year end, the Trust has signed an agreement to form a limited
partnership with Hospitality Corporation International ("HCI") of Phoenix,
Arizona. Under the terms of the agreement, this newly-formed partnership will
acquire several of HCI's seven all-suite hotel properties in Arizona and
California, as well as certain assets of the Trust. The remaining HCI hotel
properties will be acquired by the Trust in exchange for newly-issued Realty
ReFund Trust shares and debt. These seven HCI properties contain 1,036 suites.
These transactions will be subject to approval by the shareholders of the Trust
and the investors in HCI's hotels. There can be no assurance that the necessary
approvals will be obtained. Should the approvals not be obtained, this agreement
will be terminated. At such time, the Trust would review its options, which may
include merger or alternative acquisition possibilities, if any, or liquidation.
13. QUARTERLY RESULTS (UNAUDITED):
The following is an unaudited summary of the results of operations, by quarter,
for the fiscal years ended January 31, 1997 and 1996. Management believes that
all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of such interim results have been included. The results of
operations for any interim period are not necessarily indicative of those for
the entire fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
FISCAL 1997 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $1,082,334 $ 1,107,406 $1,064,527 $ 661,239
Total revenues less interest expense on mortgage -----------------------------------------------------------
loans and operating expenses, and amortization
expense of real estate held for sale $ 408,457 $ 445,805 $ 529,278 $ 163,671
-----------------------------------------------------------
Provision for writedown of loan receivable from related party $ -- $ -- $ -- $ (111,498)
-----------------------------------------------------------
Provision for writedown of real estate held for sale $ -- $ -- $ -- $(1,085,000)
-----------------------------------------------------------
Net income (loss) $ 101,775 $ 98,464 $ 102,258 $(1,190,862)
-----------------------------------------------------------
Earnings (loss) per share $ .10 $ .10 $ .10 $ (1.17)
-----------------------------------------------------------
Dividends declared per share $ .10 $ .10 $ .10 $ .10
-----------------------------------------------------------
QUARTER ENDED
-----------------------------------------------------------
FISCAL 1996 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues $1,415,062 $ 1,450,595 $1,353,540 $ 1,210,809
-----------------------------------------------------------
Total revenues less interest expense on mortgage
loans and operating expenses, depreciation and
amortization expense of real estate held for sale $ 554,846 $ 532,258 $ 519,210 $ 394,955
-----------------------------------------------------------
Provision for writedown of loan receivable from related party $ -- $(5,000,000) $ -- $ --
-----------------------------------------------------------
Provision for writedown of real estate held for sale $ -- $ -- $ -- $(3,000,000)
-----------------------------------------------------------
Net income (loss) $ 141,138 $(4,899,455) $ 131,626 $(2,927,661)
-----------------------------------------------------------
Earnings (loss) per share $ .14 $ (4.80) $ .13 $ (2.87)
-----------------------------------------------------------
Dividends declared per share $ .20 $ .10 $ .10 $ .10
-----------------------------------------------------------
</TABLE>
15
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES OF REALTY REFUND TRUST
We have audited the accompanying balance sheets of Realty ReFund Trust (an Ohio
unincorporated business trust) as of January 31, 1997 and 1996, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended January 31, 1997. These financial statements are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Realty ReFund Trust as of
January 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1997 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
February 14, 1997
16
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
TRUSTEES AND OFFICERS 1997
ALAN M. KRUASE - Chairman and Co-Chief Executive
Officer of the Trust and Mid-America ReaFund
Advisors, Inc. (advisor to Trust); Principal, The
Mid-America Companies (real estate ownership);
President, The Mid-America Management Corporation
(real estate management) - JAMES H. BERICK -
President, Co-Chief Executive Officer and
Treasurer of the Trust and Mid-America ReaFund
Advisors, Inc. (advisor to Trust); Chairman,
Berick, Pearlman & Mills Co., L.P.A. (attorneys) -
ALVIN M. KENDIS - Retired; formerly of Counsel,
McDonald, Hopkins, Burke & Haber, Co., L.P.A.
(attorneys) - FRANK L. KENNARD - Retired; formerly
Senior Vice President, The Huntington National
Bank - SAMUEL S. PEARLMAN - Principal, Berick,
Pearlman & Mills Co., L.P.A. (attorneys) - MARK S.
MISENCIK - Vice President of the Trust - CHRISTINE
TURK - Secretary of the Trust - TIMOTHY M. BAIRD -
Controller of the Trust
CORPORATE HEADQUARTERS, 1385 Eaton Center,
Cleveland, Ohio 44114, 216.771.7663 - INVESTMENT
ADVISOR, Mid-America ReaFund Advisors, Inc., 1385
Eaton Center, Cleveland, Ohio 44114,216.771.7663 -
TRANSFER AGENTS AND REGISTRARS OF SHARES, The
Huntington National Bank, Columbus, Ohio; Chemical
Mellon Shareholder Services, New York, New York;
Telecommunications Devices for the Deaf can be
reached at 800.231.5469 - STOCK LISTING - New York CORPORATE DATA
Stock Exchange, Symbol: RRF - INDEPENDENT PUBLIC
ACCOUNTANT - Arthur Andersen LLP - GENERAL COUNSEL
- Berick, Pearlman & Mills Co., L.P.A. Cleveland,
Ohio - SHAREHOLDERS WHO WOULD LIKE TO RECEIVE,
WITHOUT CHARGE, THE TRUST'S ANNUAL REPORT ON FORM
10-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION SHOULD WRITE TO: Realty ReFund Trust,
1385 Eaton Center, Cleveland, Ohio 44114, Attn.:
Timothy M. Baird
</TABLE>
[INSIDE BACK COVER]
<PAGE> 21
REALTY REFUND TRUST
[REALTY REFUND TRUST LOGO]
1385 Eaton Center
Cleveland, Ohio 44114
[OUTSIDE BACK COVER]
<PAGE> 1
EXHIBIT 24
Powers of Attorney.
<PAGE> 2
POWER OF ATTORNEY
-----------------
The undersigned Trustee of Realty ReFund Trust, an Ohio unincorporated
association in the form of a business trust ("Trust"), which Trust anticipates
filing with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Exchange Act of 1934, as amended, an Annual Report
on Form 10-K for its year ended January 31, 1997, hereby constitutes and
appoints JAMES H. BERICK and ALAN M. KRAUSE, and each of them, with full power
of substitution and resubstitution, as attorneys or attorney to sign for the
undersigned and in my name, place and stead, as Trustee of said Trust, said
Annual Report and any and all amendments and exhibits thereto, and any and all
applications and documents to be filed with the Securities and Exchange
Commission pertaining to such Annual Report, with full power and authority to do
and perform any and all acts and things whatsoever requisite, necessary or
advisable to be done in the premises, as fully and for all intents and purposes
as the undersigned could do if personally present, hereby approving the acts of
said attorneys, and any of them and any such substitute.
IN WITNESS WHEREOF, I have hereunto set my hand this 14th day of February,
1997.
/s/ Samuel S. Pearlman
------------------------------
Samuel S. Pearlman
<PAGE> 3
POWER OF ATTORNEY
-----------------
The undersigned Trustee of Realty ReFund Trust, an Ohio unincorporated
association in the form of a business trust ("Trust"), which Trust anticipates
filing with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Exchange Act of 1934, as amended, an Annual Report
on Form 10-K for its year ended January 31, 1997, hereby constitutes and
appoints JAMES H. BERICK, ALAN M. KRAUSE and SAMUEL S. PEARLMAN, and each of
them, with full power of substitution and resubstitution, as attorneys or
attorney to sign for the under signed and in my name, place and stead, as
Trustee of said Trust, said Annual Report and any and all amendments and
exhibits thereto, and any and all applications and documents to be filed with
the Securities and Exchange Commission pertaining to such Annual Report, with
full power and authority to do and perform any and all acts and things
whatsoever requisite, necessary or advisable to be done in the premises, as
fully and for all intents and purposes as the undersigned could do if personally
present, hereby approving the acts of said attorneys, and any of them and any
such substitute.
IN WITNESS WHEREOF, I have hereunto set my hand this 14th day of February,
1997.
/s/ Frank L. Kennard
--------------------------------
Frank L. Kennard
<PAGE> 4
POWER OF ATTORNEY
The undersigned Trustee of Realty ReFund Trust, an Ohio unincorporated
association in the form of a business trust ("Trust"), which Trust anticipates
filing with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Exchange Act of 1934, as amended, an Annual Report
on Form 10-K for its year ended January 31, 1997, hereby constitutes and
appoints JAMES H. BERICK, ALAN M. KRAUSE and SAMUEL S. PEARLMAN, and each of
them, with full power of substitution and resubstitution, as attorneys or
attorney to sign for the under signed and in my name, place and stead, as
Trustee of said Trust, said Annual Report and any and all amendments and
exhibits thereto, and any and all applications and documents to be filed with
the Securities and Exchange Commission pertaining to such Annual Report, with
full power and authority to do and perform any and all acts and things
whatsoever requisite, necessary or advisable to be done in the premises, as
fully and for all intents and purposes as the undersigned could do if personally
present, hereby approving the acts of said attorneys, and any of them and any
such substitute.
IN WITNESS WHEREOF, I have hereunto set my hand this 14th day of February,
1997.
/s/ Alvin M. Kendis
-----------------------------
Alvin M. Kendis
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AS OF JANUARY 31, 1997 AND 1996. STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED JANUARY 31, 1997, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000082473
<NAME> REALTY REFUND TRUST
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 531,997
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,599,122
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,414,123
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,300,000
<COMMON> 3,251,220
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,416,123
<SALES> 0
<TOTAL-REVENUES> 3,915,506
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,739,290
<LOSS-PROVISION> 111,498
<INTEREST-EXPENSE> 953,083
<INCOME-PRETAX> (888,365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (888,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (888,365)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> (.87)
<FN>
<F1>THE REGISTRANT UTILIZES AN UNCLASSIFIED BALANCE SHEET. THEREFORE, THE
CAPTIONS "TOTAL CURRENT ASSETS" AND "TOTAL CURRENT LIABILITIES" ARE NOT
APPLICABLE.
</FN>
</TABLE>
