SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999, or
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period from ______________ to _____________
Commission File Number: 1934 Act File Number 33-22805
MASTER REALTY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
48-1056392
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
410 W. 8th Street
Kansas City, Missouri
64105
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (816) 474-9333
Securities registered pursuant to Section 12(d) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Title
of each class
Name of each exchange on which registered
Shares of Common Stock None
Shares of Preferred Stock 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
------ ------
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
amendments to this Form 10-K.___
There is no quoted market value of the Shares of Common Stock held by
non-affiliates of the Registrant. The book value non-diluted for such stock
on December 31, 1999 was $14,241,733.
As of December 31, 1999, there were 1,215,809 Shares of Common Stock and
28,425 Shares of Preferred Stock of the Registrant outstanding.
Documents Incorporated by Reference
Portions of the proxy statement for the annual shareholders meeting to be held
in 2000 are incorporated by reference into Part III.
PART I
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including, without limitation, statements containing the words
"believes," "anticipates", "expects" and words of similar import. Such
forward-looking statements related to future events, the future financial
performance of the Company, and involve known and unknown risks, uncertainties
and other actors which may cause the actual results, performance or
achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward looking statements. Readers should specifically consider the
various factors identified in this report which could cause actual results to
differ. The Company disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the forward-looking
statement contained herein to reflect future events or developments.
ITEM 1. BUSINESS
a) General Development of Business
Master Realty Properties, Inc. (the "Company") was incorporated in Delaware
on May 12, 1988 and is a self-administered real estate investment trust
("REIT").
b) Financial Information About Industry Segment
The Company is in the business of owning equity interests in mixed-use
apartment/commercial properties and hotels. See the Consolidated Financial
Statements and notes thereto included in Item 8 of this Report on Form 10-K
for certain financial information required in Item 1.
c) Narrative Description of Business
At December 31, 1999, the Company owned, either directly or indirectly through
subsidiaries and Partnerships, three mixed-use apartment and commercial
properties containing 322 apartments and 121,663 square feet of commercial
office space, and a 178 car parking structure and other commercial properties
containing 43,622 square feet of leaseable space (collectively the
"Properties"), and three hotels containing 406 rooms located in three states;
(the "Hotels"). In addition, the Company has a cash flow mortgage on a
62,436 square foot commercial office building. This building will be acquired
in 2000 as part of a debt restructuring approved by the current owners.
In order to qualify as a REIT, neither the Company nor any of its subsidiaries
or related partnerships can operate the Hotels. As a result, all of the
Hotels are leased to a third party lessee ("the Lessee").
The Company's primary strategy for growth is to acquire, develop and own high
quality apartment and mixed-use apartment/commercial properties.
The Company filed for protection under Chapter 11 of the Federal Bankruptcy
Laws on April 17, 1992. On April 11, 1994 the Company's Plan of
Reorganization became effective and the Company commenced operations outside
of its Chapter 11 proceeding.
Business Strategy
The Company seeks growth in funds from operations (a common measure of equity
REIT performance, defined as net income [loss] computed in accordance with
generally accepted accounting principles, excluding gains or losses from debt
restructuring and sales of property and distributions in excess of earnings
allocated to minority interests, plus depreciation and amortization of assets
unique to the real estate industry) while preserving and enhancing property
values by pursuing the following strategies: (i) maximizing cash flow from
operations of the Properties by seeking to maintain high occupancy levels,
obtain rent and rate increases, manage tenant turnover efficiently, make
strategic capital investments and control operating expenses; (ii) acquiring
additional apartment/commercial and hotel properties for Common Stock Units,
or cash in situations where, in the judgment of management, the Company's
business strengths have the potential to increase property performance and
value; (iii) developing new apartment/commercial properties and (iv)
preserving the Company's income tax net operating loss.
Financing Strategy
To the extent that the Company's Board of Trustees determines to seek
additional capital for acquisitions or otherwise, the Company may raise such
capital through additional equity offerings, debt financing or retention of
cash flow, joint ventures or a combination of these methods. The Company has
a large net operating loss for income tax purposes which will allow the
Company to retain current taxable income without violating the REIT rules
and regulations.
Equity
During 1994, the Company issued Convertible Subordinated Debentures (the
"Debentures"). The Debentures are convertible on the basis of .1339 shares of
the Company's Common Stock for each $1.00 of Debenture converted. In 1997,
1998 and 1999, $2,475,393, $134,784 and $111,528 respectively of Debentures
have been converted into Common Stock.
The Company's shareholders approved, at the 1997 Annual Meeting, a reverse
stock split in the ratio of twenty five hundred (2,500) shares to one (1)
share for both the Common Stock and Preferred Stock, with an elimination of
all fractional interests. Each shareholder was provided the option of having
their fractional interest purchased by the Company or acquiring additional
shares to eliminate the fractional interest. The price approved for this
purpose was $.31 per share. The reverse stock split became effective April
30, 1998. The cost to acquire the fractional shares was $294,171. An
additional $37,698 of equity was raised from holders of fractional shares.
The Company's shareholders approved at the 1998 Annual Meeting, a forward
stock split of seventy five (75) for one (1) for both the common stock and
preferred stock effective June 30, 1998.
During 1999 the Board of Trustees adopted a stockholder rights plan. Under
this plan each shareholder was given the right to purchase additional
shares of stock at a price below market value. The number of shares
allowed to be purchased by each shareholder and the purchase price is
defined in the plan. The rights become exercisable if a triggering
event, as defined in the plan occurs and certain stockholders are precluded
from participating. These rights will expire if not utilized by
October 31, 2009. The dilutive effect of this plan cannot be determined
due to significant variables at this time.
Property Management
The Company has engaged the Manager to manage all of its non-hotel properties.
The Manager is an experienced property management company employing
approximately 200 people. The management services include, among other
things, rent billing and collection, leasing, maintenance, construction
supervision, compliance with regulatory statutes and rules, loan servicing,
human resource administration and property disposition.
The Company has entered into lease agreements for its hotel properties.
The Lessee is a wholly-owned subsidiary of the Manager. It is paid a
management fee equal to 4 percent of gross revenue of the Hotels, plus
reimbursement of out-of-pocket expenses. The Lessee is generally required
to perform all operational and management functions necessary to operate
the Hotels.
Competition
The Company's Properties are primarily located in the downtown area of Kansas
City, Missouri. A number of new apartment properties are either being
Developed or are in various stages of potential development in this area.
The Company is involved in several of these potential developments.
The Downtown Council of Kansas City has issued a housing study which
indicates a substantial need for additional housing in downtown Kansas
City. The Company does not believe the new properties
being developed will have any impact on the Properties.
All three of the Hotels are located in developed areas where other hotel
properties exist. If and when additional hotel properties are developed in
these areas, the Company's hotel operations could incur material and adverse
impact. In addition, other hotels changes in rates charged to customers
could adversely impact the Hotels.
Inflation
Although inflation has slowed in recent years, it is still a factor in our
economy and the Company continues to seek ways to mitigate its impact. To
the extent permitted by competition, the Company passes increased costs on to
its customers by increasing rent and common area maintenance charges.
Employees
The Company has four full-time employees.
Recent Developments
The Company acquired the Soho III project, a mixed-use project containing 96
apartments and 23,137 square feet of commercial space, in February, 1998.
The Company completed in July, 1999, an additional 14 apartments as part of
the Soho III project.
The Company completed the renovation of the Soho IV project, a 49 apartment
unit building in December, 1999. The Company is a general partner in this
project.
Environmental Issues
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore,
a person that arranges for the disposal or transports for disposal or treatment
a hazardous substance at another property may be liable for the costs of
removal or remediation of hazardous substances released into the environment
at the property. The costs of remediation or removal of such substances may
be substantial, and the presence of such substances, or the failure to
promptly remediate such substances, may adversely affect the owner's ability
to sell such real estate or to borrow using such real estate as collateral.
Thus, if such liability were to arise in connection with the ownership and
operation of the Hotels or Properties, the Company, the Lessee or the Manager,
as the case may be, may be potentially liable for such costs.
Phase I Environmental Survey Assessments ("ESA's") have been obtained on all
of the major Hotel and Properties of the Company from independent
environmental engineering firms at the time of acquisition and or in
connection with financing transactions. The Phase I ESA's were intended to
identify potential sources of contamination for which the Hotels or Properties
may be responsible and to assess the status of environmental regulatory
compliance. No assurance can be given that the Phase I ESA's identified all
significant environmental problems or that no additional environmental
liabilities exist.
The Phase I ESA reports have not revealed an environmental liability or
compliance concerns that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any such liability or compliance concerns. Nevertheless, it
is possible that these reports do not reveal all environmental liabilities or
compliance concerns or that there are material environmental liabilities or
compliance concerns of which the Company is unaware. Moreover, no assurances
can be given that (i) future laws, ordinances or regulations will not impose
any material environmental liability or (ii) the current environmental
condition of the Hotels and Properties (such as the presence of leaking
underground storage tanks) or by third parties unrelated to the Company.
The Company believes that the Hotels and Properties are in compliance, in all
material respects, with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances and other environmental
matters.
Year 2000 Management
In order to address the computer industry's "Year 2000" problem, the Company
upgraded its accounting software and network server. Management incurred
limited costs for this upgrade. The Company determined that the company that
managed the Hotels were in compliance for "Year 2000" issues.
Tax Status
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code, commencing with its taxable year
ended December 31, 1988. The Company believes that it qualifies for taxation
as a REIT, in which case the Company generally will not be subject to federal
income tax on income that it distributes to shareholders provided it
distributes at least 95 percent of its REIT taxable income to its
shareholders. Even if the Company qualifies for taxation as a REIT,
the Company may be subject to certain state and local taxes on its
income and property and to Federal income and excise taxes on its
undistributed income.
Executive Officers of the Company
The following is a biographical summary of the experience of the executive
officers of the Company.
John J. Bennett, 56
3850 W. 171st Street
Stilwell, KS 66085
President, Chairman of the Board of Master Realty Properties, Inc. since 1988.
Mr. Bennett is the President of Master Realty Corp., Master Mortgage Realty
II, Inc., Master Mortgage Realty III, Inc., and Master Mortgage Realty V,
Inc., Mezzanine, Inc., and Soho, Inc., and the Vice President of Master
Mortgage Realty IV, Inc., River Market Venture, Inc., and Real Estate
Equities, Inc., all of which are wholly-owned subsidiaries of the Company.
Thomas H. Trabon, 50
3441 W 131st Street
Leawood, KS 66209
Executive Vice President since 1991.
Mr. Trabon was a partner in Laventhol & Horwath, a National Certified Public
Accounting firm from January 1, 1984 to November, 1990. Mr. Trabon is the
President of River Market Venture, Inc., Master Mortgage Realty IV, Real
Estate Equities, Inc., and Vice President of Master Realty Corp., Master
Mortgage Realty II, Master Mortgage Realty III, Master Mortgage Realty V,
Mezzanine Inc., and Soho, Inc.
Byron Constance, 74
3729 S. Union
Independence, MO 64055
Secretary of Master Realty Properties, Inc. since, January 26, 1991.
Mr. Constance was a Senior Partner in Constance, Stewart & Cook, L.C.,
Independence, Missouri from 1949 to 1995. He is presently of counsel to the
firm, Stewart, Cook, Constance, Stewart and Minton, L.C. He is also the
President of I-470 Development, Inc.
Robert K. Brown, 54
3200 South M-291 Highway
Independence, MO 64057
Treasurer since 1996.
Mr. Brown has been a partner in Floyd R. Brown & Co., P.C., a certified public
accounting firm in Independence, Missouri, since 1969.
ITEM 2. REAL ESTATE PROPERTIES
The following table sets forth certain information relating to the Properties
as of December 31, 1999 (in the following table, occupancy is based upon
economic occupancy, which measures occupancy beginning on the rent
commencement date; monthly revenue per unit is total property revenue divided
by the number of apartment units)
Residential Portfolio Statistics for the Year Ended December 31, 1999
Property Type /Property Name Property Type Year Built Year Renovated
Mixed-use Property Kansas City
River Market Mid Rise Late 1800's 1991
Soho VI Mid Rise Late 1800's 1991
Soho III Mid Rise Late 1800's 1987
Commercial Property Kansas City
Oldham Building Mid Rise Early 1900's 2000
39/40 Plaza Low Rise 1970 1999
Loans Commercial Property Kansas City
Soho Office Center Mid Rise Late 1800's 1985
Gaslight Garage* Parking Garage 1986 N/A
Number of Average Sq. Ft. Average Average
Apartment Units Per Unit Monthly Revenue Economic
Per Unit Occupancy
Mixed-use Property Kansas City
River Market 165 880 598 96
Soho VI 47 729 597 95
Soho III 110 731 681 96
Commercial Property Kansas City
Oldham Building N/A N/A N/A N/A
39/40 Plaza N/A N/A N/A N/A
Loans Commercial Property Kansas City
Soho Office Center N/A N/A N/A 97
Gaslight Garage* N/A N/A N/A N/A
Commercial Commercial Average
Square Rental Rate
Footage Per Sq. Ft.
Mixed-use Property Kansas City
River Market 85,592 9.29
Soho VI 12,934 8.24
Soho III 23,137 8.39
Commercial Property Kansas City
Oldham Building 35,000 N/A
39/40 Plaza 8,622 23.99
Loans Commercial Property Kansas City
Soho Office Center 62,436 12.24
Gaslight Garage* 3,367 N/A
*The Gaslight Garage contains 178 parking spaces which rent on an average
monthly rate of $65.00 per space.
The following table sets forth certain proforma information for the year ended
December 31, 1999 with respect to the Hotels
For the year ended December 31, 1999
Date Opened Number of Rooms Room Revenue Occupancy
Ramada Inn
Phoenix, AZ 1955 162 2,436,321.66 50.2
Euless, TX 1974 144 1,172,123.72 47.2
Historic Suites
Of America 1989 100 2,235,619.81 68.7
Average Daily Rate *Revenue per available room
Ramada Inn
Phoenix, AZ 79.19 47.32
Euless, TX 46.26 21.85
Historic Suites
Of America 89.20 61.25
Revenue per available room calculation is using total revenue and not room
revenue only
The Company disposed of the Ramada Inn in Wichita, Kansas in September, 1999.
Mortgage Financing
The following table reflects the terms and amounts of the Company's primary
mortgage financing at December 31, 1999 with respect to the properties.
Mortgage Pool/Collateral 12/31/99
Salomon Brothers Outstanding Interest Maturity
Master Realty Corp. Pool Location Princpal Rate Date
River Market Kansas City, Missouri $19,119,204 7.5 1/1/2008
Soho VI Kansas City, Missouri
Ramada Inn Phoenix Phoenix, Arizona
Ramada Inn Euless Euless, Texas
Historic Suites Hotel Kansas City, Missouri
ITLA
Soho III Kansas City, Missouri $4,900,000 LIBOR + 3.75 6/1/2009
Hillcrest Bank
Oldham Building Kansas City, Missouri $558,872 Prime + 1per 10/1/00
The Company has acquired three buildings which will be transferred to newly
formed unrelated Limited Partnerships who will develop these properties. The
Company has short term mortgage acquisition debt with Hillcrest Bank on all
three of these buildings.
Hotel Leases
All of the Company's Hotels are leased to the Lessee under leases which
Provide for a base rent. The Company, beginning in 1999, eliminated all
percentage rent with respect to the Hotels.
The following table reflects the basic terms of each lease during 1999.
These lease terms have been amended for the year beginning January 1, 2000.
1999
Property Initial Term Base Rent
Ramada Inn Phoenix 1/1/95-1/1/2000 $672,000
Ramada Inn Euless 1/1/97-1/1/2002 $504,000
Historic Suites Hotel 1/1/97-1/1/2002 $744,000
The leases require the Company to maintain the capital improvements for the
Hotels. The Company currently has established reserves for replacement for
Each of the Hotels equal to five percent of the Hotel gross revenues.
The leases can be terminated by the Company upon notice to the Lessee and the
payment of certain defined severance payments.
ITEM 3. LEGAL PROCEEDINGS.
The Company is presently subject to legal actions or claims for damages that
arise in the ordinary course of business. In the opinion of management and
counsel to the Company, the ultimate outcome of such litigation will not have
a materially adverse effect on the Company's financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND OTHER RELATED MATTERS:
Based on the Company's shareholder records at December 31, 1999, the Company
has approximately 297 common shareholders and 57 preferred shareholders.
The preferred and common shares of the Company are not traded on any
established public trading market, and the Company is not aware of any
quotations of the market price, if any, for the preferred or common shares of
the Company. There were secondary trades in the Company's stock up to
September of 1990, but no systematic reports by brokers as to the prices at
which such stock was traded are available. However, the Company's stock has
periodically been traded between certain Beneficial Owners and Management as
reported in Item 12, Security Ownership of Certain Beneficial Owners and
Management for the appropriate periods.
At the time of its public offering, the Company intended to apply for
quotation of the common shares on NASDAQ following completion of the offering,
assuming satisfaction of the requirements for a NASDAQ listing. Among the
requirements for obtaining a NASDAQ listing is the requirement that the
Company have at least two active market makers for the common shares.
The Company did not subscribe a sufficient number of common shares during
its initial offering to attract active market makers in its common stock.
The Company currently meets all requirements for obtaining a NASDAQ listing
with the exception of such requirement. The Trustees believe, since the
substantial interest shown to date in the Debenture conversion option to
common stock, that a trading market will be established in the future.
There are no outstanding options to purchase any preferred or common shares
of the Company. The Company's preferred shares are convertible into common
shares at the option of the preferred shareholders at the ratio of one common
share for each preferred share.
The Company issued Convertible Subordinated Debentures in 1994. The
Debentures are convertible into shares of common stock of the Company, unless
the Debentures are called by the Company for redemption. The number of shares
issuable upon conversion is based on the Company's book value at December 31
of 1993 of $.224/share ($7.47/share after all stock splits).
The Company maintains a Dividend Reinvestment Plan (the "Plan"), pursuant to
which shareholders who are participants in the Plan may reinvest dividends
from the Company in additional preferred and/or common shares of the Company.
Dividends may be reinvested by the Plan in shares purchased either from the
Company or its shareholders.
The Company is required to distribute not less than 95 percent of its taxable
Income annually to maintain its status as a REIT. The Company has a net
Operating loss for Federal Income Tax purposes which allows the Company to
retain any net current year taxable income for reinvestment in real estate
assets.
ITEM 6: SELECTED FINANCIAL DATA:
The following table, not covered by the report of independent certified
public accountants, sets forth selected historical financial data from 1995
through 1999. This table should be read in conjunction with the detailed
information and financial statements of the Company appearing elsewhere
herein. The basic earnings per share amounts for 1995 and 1996 have been
restated to conform with SFAS No. 128.
Operating Results:
1999 1998 1997 1996 1995
Revenues $7,049,198 $6,579,712 $5,617,287 $6,587,642 $4,834,116
Net income (Loss) (402,560) 295,676 1,507,127 1,550,216 1,883,399
Basic Per Share:
Net income (Loss)
(Without anti-dilutive effect)
($.33) $.27 $2.27 $8.89 $1.44
Dividends None None None None None
Weighted average
number of common
shares outstanding 1,206,925 1,084,202 663,698 174,297 1,308,709
Balance Sheet:
Total assets 46,023,990 50,527,507 47,193,662 38,972,126 29,996,326
Notes payable 30,285,413 34,981,360 30,842,693 24,964,331 20,323,851
Shareholders'
Equity 14,345,233 14,637,957 13,797,456 9,814,936 5,217,535
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (dollars in thousands, unless otherwise stated):
Background:
The following discussion compares historical results of operation for the
years ended December 31, 1997, 1998, and 1999. The discussion should be
read in conjunction with the "Selected Financial Data," and the financial
statements and notes thereto included elsewhere in this report.
The Company
The Company is a public real estate investment trust that is primarily engaged
in the acquisition, development and operation of mixed use
apartment/commercial properties and the acquisition and development of hotel
properties. The Company operates these properties either directly or through
subsidiaries or partnerships.
Results of Operations
Year Ended December 31,1999 Compared with Year Ended December 31, 1998.
Rental Properties
Revenue from rental properties increased by $154,306 from $3,598,406 at
December 31, 1998 to $3,752,712 at December 31, 1999. This increase was due
to the increases in rental rates in all of the Properties, a reduction in
vacancies, and the acquisition of an additional 96 apartments and 23,137
square feet of commercial space on February 1, 1998.
Rental expenses decreased from $1,559,069 at December 31, 1998 to $1,472,517
at December 31, 1999. This decrease of $86,552 was due to the implementation
of expense controls on the Company's rental properties.
Funds from operations from rental properties was $1,308,334 at December 31,
1999 compared to $1,086,394 at December 31, 1998.
Hotel Properties
Revenues from hotel lease income decreased by $601,411 from $2,605,749 at
December 31, 1998 to $2,004,338 for December 31, 1999. This decrease was due
to the elimination of percentage rent and the substantial reduction in lease
payments for the Company's hotel in Wichita, Kansas. The Company disposed of
the Wichita hotel in September, 1999. The Company acquired this hotel as
part of a workout between the lender and its former borrower. The Company
implemented new management and funded capital improvements to reposition
the hotel. However, a significant decline in room demand in Wichita due to
the relocation of two companies' international headquarters devastated the
Wichita hotel market. The Company had no choice but to negotiate a transfer
of the hotel back to the lender. The disposition of the property resulted
in a loss on the asset transfer of $5,654,395 and an extraordinary gain on
the debt discharge of $4,789,488.
Funds from operations from Hotels was $1,371,628 at December 31, 1999 compared
to $1,077,361 at December 31, 1998.
Other Revenues and Expenses
The Company continued to receive interest income on its remaining real estate
loans. The decrease in the amount received of $94,260 from December 31, 1998
to December 31, 1999 was due to the decline in mortgage notes receivable of
the Company.
The Company had a $37,210 decrease in general and administrative expenses for
1999This decrease was attributable to a decrease in the Company's bonus
pool for employees from December 31, 1998 to December 31, 1999 and expense
controls implemented by the Company's Management.
Interest expense decreased by $260,925 from $2,549,021 at December 31, 1998 to
$2,288,096 at December 31, 1999. This decrease was due to the disposition of
the Wichita hotel in September, 1999.
The Company has continued to recover losses previously reserved related to the
Company's former loan portfolio. The recovery for December 31, 1999 was
$18,298 compared to $831,640 for December 31, 1998.
Results of Operations
Year Ended December 31,1998 Compared with Year Ended December 31, 1997.
Rental Properties
Revenue from rental properties increased by $783,228 from December 31, 1997
To December 31, 1998. This increase was due to the increases in rental rates
In all of the Properties, a reduction in vacancies, and the acquisition of an
additional 96 apartments and 23,137 square feet of commercial space on
February 1, 1998.
Rental expenses increased from $1,129,222 at December 31, 1997 to $1,559,069
at December 31, 1998. This increase of $429,847 was due to normal price
increases related to the Properties operating costs and the acquisition of an
additional 96 apartments and 23, 137 square feet of commercial space in
February, 1998.
Hotel Properties
Revenues from hotel lease income increased from $2,104,346 at December 31,
1997 to $2,605,749 for December 31, 1998. This increase was due to the lease
of the Company's hotel in Wichita, Kansas.
Other Revenues and Expenses
The Company continued to receive interest income on its remaining real estate
loans. The decrease in the amount received of $102,916 from December 31, 1997
to December 31, 1998 was due to the decline in mortgage notes receivable of
the Company.
The Company had a $396,087 decrease in general and administrative expenses for
1998. This decrease was entirely attributable to a decrease in the Company's
bonus pool for employees from December 31, 1997 to December 31, 1998.
Interest expense increased by $274,323 from $2,274,698 at December 31, 1997
to $2,549,021 at December 31, 1998. This increase was due to the acquisition
of additional real estate properties using borrowed funds.
The Company has continued to recover losses previously reserved related to the
Company's former loan portfolio. The recovery for December 31, 1998 was
$831,640 compared to $2,233,271 for December 31, 1997.
Liquidity and Capital Resources
The Company had positive cash flow from its operating activities and a deficit
in cash flow from its investment activities which represented the payment of
Company liabilities and the acquisition of additional real estate assets, and
the disposition of a hotel property.
The Company had an increase in cash flows from financing activities related to
the debt financing of the acquisition of additional real estate assets.
Funds from Operations
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as net income (loss) (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring and
sales of property, and distributions in excess of earnings allocated to
Minority Interest, plus depreciation/amortization of assets unique to the real
estate industry. Depreciation/amortization of assets not unique to the
industry, such as amortization of deferred financing costs and non-real estate
assets, is not added back. FFO does not represent cash flow from operating
activities in accordance with generally accepted accounting principles (which,
unlike FFO, generally reflects all cash effects of transactions and other
events in the determination of net income) and should not be considered an
alternative to net income as an indication of the Company's performance or to
cash flow as a measure of liquidity or ability to make distributions. The
Company considers FFO a meaningful, additional measure of operating
performance because it primarily excludes the assumption that the value of
real estate assets diminishes predictably over time, and because industry
analysts have accepted it as a performance measure. Comparison of the
Company's presentation of FFO, using the NAREIT definition, to similarly title
measures for other REITs may not necessarily be meaningful due to possible
differences in the application of the NAREIT definition used by such REITs.
The following reflects the FFO by the Company's primary segments.
Year Ended December 31, 1999
Hotel Leasing Residential/mixed Assets for
use Properties Restructure
Net Income ($499,120) $1,065,617 $61,405
Add: Minority interest 7,796 - -
Less: Partnership
investment income - - -
--------- --------- ---------
Income before
minority interest (491,324) 1,065,617 61,405
Add: Depreciation
and amortization of
real estate assets 998,045 242,717 23,853
Add: Loss transfer
of Wichita hotel 5,654,395
Less: Extraordinary
(gain) loss (4,789,488) - -
Funds from
Operations 1,371,628 1,308,334 85,258
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK.
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated and Combined Financial Statements following Page 21 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors is hereby
incorporated by reference to the material appearing under the caption
"Election of Directors" in the Company's definitive proxy statement for the
annual meeting of shareholders to be held in 1999 (the "Proxy Statement").
Information required by this item with respect to executive officers is
provided in Item 1 of this report. See "Executive Officers of the Company".
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership of such securities with the Securities and
Exchange Commission and the NYSE. To the best of the Company's knowledge, all
required reports were timely filed during and with respect to the fiscal year
ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference to
the material appearing under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is hereby incorporated by reference to
the material appearing under the caption "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is hereby incorporated by reference to
the material appearing under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
Reference is made to the Financial Statements and Schedule which follow Page
21 of this Form 10-K.
14(a)(2) Financial Statement Schedules
Reference is made to the Financial Statements and Schedule which follow Page
21 of this Form 10-K.
All other schedules have been omitted because the required information of such
other schedules is not present in amounts sufficient to require submission of
the schedule or because the required information is included in the
consolidated financial statements.
(a) The following documents are filed as a part of this report.
(1) Financial Statements:
Report of Independent Auditors
Balance sheets as of December 31, 1999 and 1998
Statements of operations for the year ended December 31, 1999, 1998 and 1997
Statements of changes in stockholders' equity for the year ended December 31,
1999, 1998 and 1997.
Statements of cash flows for the year ended December 31, 1999, 1998 and 1997.
Notes to financial statements.
(2) Financial Statement Schedules
II Valuation and qualifying accounts and reserves
III Property, Equipment and Accumulated Depreciation
IV - Mortgage loans on real estate
All other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or the notes
thereto.
(The remainder of this page intentionally left blank)
(3) Exhibits:
Number Description
*1.1 Form of Participating Dealer Agreement
*3.1 Restated Certificate of Incorporation
*3.2 Amended and Restated Bylaws
*4.1 Form of Preferred Share Certificate
*4.2 Form of Common Share Certificate
*4.3 Escrow Agreement
*5.1 Opinion of Counsel regarding legality of the Shares
*5.2 Opinion of Counsel regarding ERISA matters
*8.1 Opinion of Counsel regarding certain tax matters
*10.1 Reinvestment Plan
*10.2 Executed Bonus Interest Escrow Agreement
*10.3 Revised Advisory Agreement
*10.4 Appointment of Transfer Agent and Registrar
*10.5 Promissory Note for $10,000,000 line of credit
from Master Mortgage Fund Trust VII
*10.6 Revolving Line of Credit Loan Agreement, Security
Agreement and Revolving Credit Note for $15,000,000
line of credit from Skopbank
*10.7 Revolving Line of Credit Loan Agreement for $10,000,000
line of credit from Metro North State Bank
* Previously filed
(b) Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Master Realty Properties, Inc.
March 15, 2000
By: /s/ John J. Bennett
John J. Bennett, President and Trustee
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacity and on the dates indicated.
Signature Title Date
/s/ John J. Bennett Affiliated Trustee, March 15, 2000
John J. Bennett President, and
Chairman of the Board
/s/ Byron Constance Independent Trustee March 15, 2000
Byron Constance and Secretary
/s/ Robert K. Brown Independent Trustee March 15, 2000
Robert K. Brown and Treasurer
/s/ Richard Polcari Independent Trustee March 15, 2000
Richard Polcari
/s/ James E. Trimmer Independent Trustee March 15, 2000
James E. Trimmer
/s/ James I. Threatt Independent Trustee March 15, 2000
James I. Threatt
/s/ Roger E. Buford Affiliated Trustee March 15, 2000
Roger E. Buford
/s/ Thomas H. Trabon Executive Vice President March 15, 2000
Thomas H. Trabon Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Master Realty Properties, Inc.
Financial Statements
Pages
Report of Independent Accountants
18
Consolidated Balance Sheets as of December 31, 1998 and 1996
19-20
Consolidated Statement of Operations for the years ended
December 31, 1998, 1996 and 1995.
21
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998, 1996 and 1995.
22
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1996 and 1995.
23-24
Notes to Consolidated Financial Statements
25-49
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
50
Schedule III - Property, Equipment and Accumulated Depreciation
51
Schedule IV - Mortgage Loans on Real Estate
52-53
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees
MASTER REALTY PROPERTIES, INC.
We have audited the consolidated balance sheets of Master Realty
Properties, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended
December 31, 1999, 1998 and 1997. In connection with our audits of
the consolidated financial statements, we have also audited the
attached supplementary schedules. These consolidated financial
statements and the supplementary schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and supplementary schedules 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Master
Realty Properties, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the results of its operations and its cash flows for the years ended December
31, 1999, 1998 and 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related supplementary schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects the information set
forth therein.
MAYER HOFFMAN McCANN L.C.
Kansas City, Missouri
January 28, 2000
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
ASSETS
CASH $390,089 $699,358
RESTRICTED CASH 261,495 1,096,360
MORTGAGE NOTES RECEIVABLE,
net of allowance for loan losses 722,775 1,080,850
NOTES RECEIVABLE 235,225 535,871
PROPERTY HELD FOR INVESTMENT 1,007,651 1,001,688
INVESTMENT IN REAL ESTATE ENTITIES 692,137 173,456
ACCOUNTS RECEIVABLE - RELATED PARTY 760,490 987,062
ACCOUNTS RECEIVABLE - OTHER 1,041,709 37,004
PROPERTY AND EQUIPMENT, at cost
less accumulated depreciation 39,777,094 43,870,414
OTHER ASSETS 1,135,325 1,045,444
---------- ---------
TOTAL ASSETS $46,023,990 $50,527,507
=========== ===========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1999 and 1998
1999 1998
LIABILITIES
NOTES PAYABLE) $30,285,413 $34,981,360
OTHER LIABILITIES 1,082,471 586,964
----------- -----------
TOTAL LIABILITIES 31,367,884 35,568,324
----------- -----------
MINORITY INTEREST IN SUBSIDIARIES 310,873 321,226
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 18
STOCKHOLDER'S EQUITY
CAPITAL CONTRIBUTED
Convertible preferred stock,
par value $.01, liquidation
preference up to 5 percent of the
Company's net assets,
authorized 1,000,000 shares
in 1999 and 1998 284 359
Common stock, par value
$.01, authorized 8,500,000
shares in 1999 and 1998 12,158 11,878
Additional paid-in capital 41,869,842 41,760,211
---------- ----------
TOTAL CAPITAL CONTRIBUTED 41,882,284 41,772,448
---------- ----------
RETAINED DEFICIT (27,537,051) (27,134,491)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 14,345,233 14,637,957
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $46,023,990 $50,527,507
=========== ===========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
REVENUES
Rental income $3,752,712 $3,598,406 $2,815,178
Hotel lease income 2,004,338 2,605,749 2,104,346
Interest and fees on mortgage loans 61,622 155,882 258,798
Gain on sale of historic tax credits 918,167 - -
Other income 312,359 137,791 372,286
Gain on sale of assets - 81,884 66,679
-------- -------- ---------
TOTAL REVENUES 7,049,198 6,579,712 5,617,287
-------- -------- ---------
EXPENSES
Rental expenses 1,472,517 1,559,069 1,129,222
General and administrative expenses 452,421 489,631 885,718
Legal and accounting 270,446 248,863 247,867
Payroll and employee benefits 604,178 564,718 517,080
Depreciation and amortization 1,377,231 1,563,108 1,139,532
Interest expense 2,288,096 2,549,021 2,274,698
Property management fees 132,464 132,983 141,549
Provision for loan losses (recoveries) (18,298) (831,640) (2,233,271)
--------- -------- -----------
TOTAL EXPENSES 6,579,055 6,275,753 4,102,395
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES (7,796) (8,283) (7,765)
WRITE-DOWN OF WICHITA HOTEL
ASSETS TO ESTIMATED FAIR VALUE (5,654,395) - -
----------- --------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (5,192,048) 295,676 1,507,127
EXTRAORDINARY GAIN - Nonrecourse
debt restructuring - Wichita Hotel 4,789,488 - -
--------- --------- ---------
NET INCOME (LOSS) $(402,560) $295,676 $1,507,127
========= ========= ==========
BASIC EARNINGS (LOSS) PER SHARE
Before extraordinary item $(4.30) $0.27 $2.27
Extraordinary item 3.97 - -
--------- --------- ----------
Total $(0.33) $0.27 $2.27
========= ========= ==========
DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary item $(4.30) $0.27 $1.61
Extraordinary item 3.97 - -
--------- --------- ---------
Total $(0.33) $0.27 $1.61
========= ========= =========
MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
Preferred Stock Common Stock
---------------------------
Shares Shares
Issued Amount Issued Amount
----------- ------------- ------------ -------------
Balance, December
31, 1996 2,491,622 24,916 15,554,669 155,546
Conversion of debentures
to common stock - - 13,626,817 136,268
Net income for
the year ended
December 31,
1997 - - - -
Balance, December
31, 1997 2,491,622 $ 24,916 29,181,486 $ 291,814
Conversion of debentures
to common stock - - 521,700 5,217
Other liabilities converted
To common stock -- -- 3,763,900 37,640
Aggregate effect of reverse
Stock split (2,500 to 1),
Forward stock split (1 to 75)
Purchase and sale of
Fractional shares (2,426,672) (24,267) (32,308,307) (323,083)
Conversion of preferred
Stock and retirement
Of treasury stock (29,025) (290) 29,025 290
Net income for
the year ended
December 31, 1998 - - - -
Balance, December
31, 1998 35,925 $ 359 1,187,804 $ 11,878
=========== ============= ============ ============
Adjustment to reverse
Stock split and purchase
Of fractional shares 900 9 4,649 46
Conversion of preferred
Stock to common stock (8,400) (84) 8,400 84
Aggregate effect of conversion
Of debentures to common
Stock - - 14,956 150
Net loss for the year
Ended December 31, 1999 - - - -
-------- ------- --------- ---------
Balance, December 31,
1999 $28,425 284 1,215,809 12,158
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Continued
Years Ended December 31, 1999, 1998 and 1997
Additional Retained Total
paid-in earnings Treasury stockholders'
capital (deficit) stock equity
Balance, December
31, 1996 38,587,104 (28,937,294) (15,336) 9,814,936
Conversion of debentures
to common stock 2,339,125 - - 2,475,393
Net income for
the year ended
December 31,
1997 - 1,507,127 - 1,507,127
---------- ---------- ---------- ---------
Balance, December
31, 1997 40,926,229 (27,430,167) (15,336) 13,797,456
Conversion of debentures
to common stock 134,784 - - 140,001
Other liabilities converted
To common stock 625,801 - - 663,441
Aggregate effect of reverse
Stock split (2,500 to 1),
Forward stock split (1 to 75)
Purchase and sale of
Fractional shares 88,733 - - (258,617)
Conversion of preferred
Stock and retirement
Of treasury stock (15,336) - 15,336 -
Net income for
the year ended
December 31, 1998 - 295,676 - 295,676
----------- ----------- ------------ -------------
Balance, December
31, 1998 41,760,211 (27,134,491) - 14,637,957
=========== ============= ============ ============
Adjustment to reverse
Stock split and purchase
Of fractional shares (1,897) - - (1,842)
Conversion of preferred
Stock to common stock - - - -
Aggregate effect of conversion
Of debentures to common
Stock 111,528 - - 111,678
Net loss for the year
Ended December 31, 1999 - (402,560) - (402,560)
--------- --------- --------- ---------
Balance, December 31,
1999 41,869,842 (27,537,051) - 14,345,233
=========== ============ ========= ==========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(402,560) $295,676 $1,507,127
Adjustments to reconcile net income (loss)
to net cash provided by (used in)operating activities
Minority interest 7,796 8,283 7,765
Depreciation and amortization 1,377,231 1,563,108 1,139,532
Provision for loan losses (non-cash recoveries) (11,279) (865,670)(2,233,271)
Extraordinary loss (4,789,488) - -
(Gain) loss on disposal of assets 5,654,395 (81,885) (66,679)
Interest expense added to note payable 26,511 93,061 143,733
Partnership investment loss (income) (308,604) 15,482 (7,143)
Changes in operating assets and liabilities
Accounts receivable (1,283,957) 131,148 (542,675)
Other assets, net (267,365) (7,538) (237,331)
Due to advisory company and affiliates - (367,707) (19,146)
Other liabilities 445,507 (524,743) (429,497)
All other (18,149) (106,061) (288,570)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 430,038 153,024 (1,026,155)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Funding of notes receivable - (167,092) (200,000)
Collection on mortgage notes receivable 525,000 - -
Collection on notes receivable 45,000 165,483 9,342
Redemption of industrial revenue bonds - 206,452 33,548
Proceeds from sale of assets 84,474 375,047 -
Proceeds from sale of real estate
Partnership Interests 191,173 - -
Purchase of real estate (5,963) - -
Acquisition of real estate partnerships
(net of cash acquired) (301,250)(3,576,367)(7,048,779)
Purchase of property and equipment (4,745,296)(2,161,864) (916,066)
---------------------- ----------
NET CASH USED IN INVESTING ACTIVITIES (4,206,862)(5,158,341)(8,121,955)
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES
Net cost of reverse stock split $ - $258,617) -
Proceeds from notes payable 8,116,038 4,915,456 8,940,634
Payment of notes payable (5,481,506) (499,362) (444,988)
(Decrease) increase in minority
interest in subsidiaries - - (559,732)
All other (1,842) - -
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,632,690 4,157,477 7,935,914
---------- ---------- ----------
NET DECREASE IN CASH (1,144,134) (847,840) (1,212,196)
CASH, BEGINNING OF YEAR 1,795,718 2,643,558 3,855,754
--------- ---------- ----------
CASH, END OF YEAR 651,584 1,795,718 2,643,558
========= ========== ==========
CASH 390,089 699,358 2,348,692
RESTRICTED CASH 261,495 1,096,360 294,866
--------- ---------- -----------
TOTAL CASH 651,584 1,795,718 2,643,558
========= ========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
CASH PAID
Interest 2,312,147 2,424,422 2,285,682
========= ========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Carrying value of hotel assets applied
to nonrecourse
mortgage note payable 2,455,824 - -
========= ========== ==========
Carrying amount of nonrecourse mortgage note
payable satisfied by transfer of assets 7,245,312 - -
========= ========== ==========
Property recovered as collateral on
Notes receivable - 2,273,633 -
========= ========== ==========
Convertible subordinated
debentures converted
to common stock 111,678 134,784 2,475,393
======== ========== ==========
Other liabilities paid with stock - 625,801 -
======== ========== ==========
Sale of property -
Assumption of liabilities by buyer - - 591,270
Other consideration (non-cash) - - 31,936
-------- --------- ---------
Total reduction of property and equipment - - 623,206
======== ========= ==========
Debt refinancing - - 19,200,000
======== ========= ==========
Note receivable converted to
investment in real estate
partnership 100,000 - -
======== ========= ===========
1. Summary of significant accounting policies
Nature of operations - Master Realty Properties, Inc. (MRP) is a Delaware
corporation organized on May 12, 1988, with the original purpose of investing
in mortgage loans. However beginning in 1993, MRP became the owner of various
real estate assets through acquisitions, foreclosures, deeds in lieu of
foreclosure or workouts with previous borrowers. As a result, MRP and its
majority-owned subsidiaries (the Company) changed its purpose to holding,
leasing and operating real estate property for the production of income and
appreciation in value. The market for the Company's residential and
commercial real estate properties is Kansas City, Missouri. The hotels
owned by the Company are located in Phoenix, Arizona; Euless, Texas and
Kansas City, Missouri and are leased to hotel operators. In addition,
during September 1999 the Company disposed of its holding of a hotel
located in Wichita, Kansas.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the following:
Real estate investment trust
Master Realty Properties, Inc. and its majority-owned subsidiaries:
Corporations
Master Realty Corporation
River Market Venture, Inc. (formerly Master Mortgage Realty, Inc.)
Master Mortgage Realty II, Inc.
Master Mortgage Realty III, Inc.
Master Mortgage Realty IV, Inc.
Old Town Redevelopment Corporation
Real Estate Equities, Inc.
Soho, Inc.
Partnerships and limited liability companies
River Market Venture I, L.P.
New Historic Suites Partners, L.P.
Hospitality Wichita, L.C. (operations terminated during September 1999)
Soho West III L.P. (control acquired February 1998)
All significant intercompany balances and transactions have been eliminated
in consolidation.
1) Summary of significant accounting policies (continued)
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 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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on mortgage notes
receivable and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for losses on loans and valuation of
foreclosed real estate, management evaluates the underlying real estate
collateral and makes estimates of value based on independent appraisals,
estimates of operating earnings and cash flow potential, and other factors.
The valuation of real estate collateral is assessed on the assumption that
the Company will be able to dispose of or realize the investments in the
ordinary course of business. Adjustments may be necessary in the event
that effective interest rates, rent-up periods, future economic conditions
and other relevant factors vary significantly from those utilized in the
estimates. While management uses available information to recognize losses
on mortgage notes receivable and foreclosed real estate, future valuation
allowances may be necessary based on changes in local economic conditions.
Because of these factors, it is possible that the allowances for losses on
mortgage notes receivable and the valuation of foreclosed real estate
acquired may change materially in the near term.
Revenue recognition - The Company does not accrue interest on delinquent
loans where, in the judgment of management, collection of such interest is
doubtful. Among the factors the Company considers in making the evaluation
of the collectibility of interest is the status and classification of the
loan, the financial condition of the borrower and anticipated future events.
The Company recognizes revenue from rental real estate and hotel leases as
earned in accordance with the individual lease agreements.
Notes receivable - The Company's investment in mortgage notes receivable
and notes receivable is stated individually at the lower of cost or the
estimated net realizable value. Partially earning notes are loans where
cash payments are being received, but not according to the contractual
terms of the loans. Interest income on partially earning notes is
recognized only to the extent of interest payments received.
The allowance for losses on notes receivable is maintained based on the
underlying collateral, the cost of money and, in the case of anticipated
foreclosures, operating cash flows from the property during the anticipated
holding period.
1) Summary of significant accounting policies (continued)
As of December 31, 1999 and 1998, all of the mortgage notes receivable
classified as partially earning are considered impaired and carried at
lower of cost or estimated net realizable value.
Investment in real estate partnerships - Investment in real estate
partnerships, with less than 50 percent ownership, is accounted for using the
equity method of accounting for investments where the investment is
initially recorded at cost and then adjusted for the Company's share of
the earnings and losses.
Cash - Cash consists of amounts on hand and demand deposits with financial
institutions.
Depreciation and amortization - Depreciation and amortization are computed
by the following methods and estimated useful lives:
Assets Principal Methods Lives
Land improvements Straight-line 27.5 years
Building and building
Improvements Straight-line 27.5 - 39 years
Furniture and equipment Double-declining balance 5-7 years
Goodwill Straight-line 20 years
Financing costs Straight-line 2-11 years
Financing costs - Financing costs are amortized over the life of the
mortgage note payable and presented net of accumulated amortization.
Minority interest in subsidiaries - Minority interest in subsidiaries
represents the minority partner's proportionate share of the equity of
New Historic Suites L.P.
The Company's investments in Soho West III L.P. is treated as 100 percent
owned by the Company. As part of the Company's acquisition of the Partnership,
the Company is to give the former owners 10 percent of cash flows after the
Company has received $3,000,000 of the cash flows from the Partnership.
This agreement does not presently impact the carrying value of the Company's
Investment in the Partnership.
Tax credits - The Company accounts for Missouri Historic Tax Credits on the
flow-through method. Under this method, the Company recognizes the credits
when the underlying property is approved for occupancy, and the credits are
realized either through a reduction of income tax expense or a sale of the
credits.
1) Summary of significant accounting policies (continued)
Income taxes - Since inception, the Company has conducted its operations
with the intent of meeting the requirements of the Internal Revenue Code
for qualification as a real estate investment trust (REIT). REIT
qualification requires, among other things, that the Company distribute
at least 95 percent of its taxable income to its shareholders. For the
purpose of Federal income tax, the Company has net operating loss
carryforwards expiring in the following manner:
Available for Years
Ending Not Later Than
Years Ending December 31,
2005 $485,895
2006 1,560,178
2007 2,867,152
2008 3,280,421
2009 4,751,993
2010 1,283,061
2011 9,562,660
2018 1,765,155
2019 550,000
---------
Total 26,106,515
==========
Convertibility of preferred stock into common stock - Preferred stock
is convertible into common stock at any time at the option of the
stockholder at the ratio of one common share for each preferred share.
Voting rights - Stockholders are entitled to one vote for each common
share and one vote for each preferred share held on all matters submitted
for the approval of the stockholders.
Reclassification - Certain items in the 1998 financial statements have
been reclassified to conform with the 1999 presentation.
2. Restricted cash and escrows
December 31,
1999 1998
Lasalle Bank accounts -
Central operating account - $109,526
Debt service reserve 160,492 153,078
Capital expenditures reserve 77,611 20,157
Impound costs sub-account 23,392 13,599
Other -
Cash - Real Estate Equities, Inc. - 600,000
Certificate of deposit - Hillcrest Bank - 200,000
------- ---------
Total restricted cash 261,495 1,096,360
======= =========
2. Restricted cash and escrows (continued)
The Lasalle Bank accounts are restricted pursuant to the Cash Management,
Collateral and Security Agreement (Cash Collateral Agreement) dated December
19, 1997, as part of the First Mortgage Note and Mezzanine Note Transactions.
As a result, all cash received from the operations of the collateral pledged
for the First Mortgage Note is deposited into a central operating account.
A monthly sweep of this account is used to fund, in priority, certain
reserves and sub-accounts created pursuant to the Cash Collateral Agreement.
All remaining funds, if any, are paid to the Company.
Cash in the amount of $600,000 was pledged against Notes Payable - Real
Estate Equities, Inc. The certificate of deposit in the amount $200,000
was collateral on a bank note payable.
Debt service reserve - This account was created to fund the First Mortgage
Note debt service to the extent necessary. Withdrawals from this account
occur only when there are insufficient funds in the central operating account
to fully fund the First Mortgage Note debt service.
Capital expenditure reserve - This account was created to fund the payment
of replacement expenditures, furniture, fixtures and equipment replacement
expenditures and leasing expenditures. Funding is provided in monthly
deposits from the central operating account. Withdrawals may be made from
this account for approved expenditures.
Impound costs sub-account - This account was established to pay impound
costs. These impound costs are defined as all taxes of the First Mortgage
Note borrowers and insurance (if insurance not otherwise provided for by
the Company) for the pledged collateral of the First Mortgage Note.
Funding is provided in monthly deposits from the central operating
account. Withdrawals may be made from this account for approved costs.
The Cash Collateral Agreement is secured by a pledge of the central
operating account and all income derived from the investment of that
account. The First Mortgage Note and Mezzanine Note are also cross-
collateralized and cross-defaulted with the Cash Collateral Agreement.
3. Mortgage notes receivable
December 31,
1999 1998
Mortgage notes receivable, partially-earning $1,774,738 $2,299,738
Allowance for losses (1,051,963) (1,218,888)
----------- -----------
Net mortgage notes receivable 722,775 1,080,850
=========== ===========
3. Mortgage notes receivable (continued)
As of December 31, 1999, mortgage notes receivable consists of one mortgage
note collateralized by an Office Building located in the Historic Garment
District of Downtown Kansas City, Missouri. The Company has initiated
procedures to buy out the Partnership holding the collateral and convert
its note to equity. The buyout is subject to approval of the Land Clearance
for Redevelopment Authority of Kansas City who holds a lien on the property
in favor of Soho Office Center Project Series 1996 Bonds in the original
amount of $2,655,000. The Company has applied for approval, and expects to
receive such approval during 2000. Due to the probable conversion of the
note to an equity interest in the underlying collateral, no estimate has been
made of the scheduled maturities of the mortgage note receivable over the
next five years and thereafter.
The Company received payment in full on the other mortgage note receivable
during 1999 in the amount of $525,000. The note was collateralized by
a second mortgage on an apartment complex located in Mission, Kansas.
4. Notes receivable
December 31,
1999 1998
Unsecured notes receivable 235,225 535,871
Allowance for losses - -
------- -------
Net notes receivable 235,225 535,871
======= =======
During the year ended December 31, 1999, the Company wrote off a note
receivable in the amount of $147,300 which was made in the original
acquisition of Hospitality Wichita and became worthless in connection
with the asset forfeiture disclosed in Note 19 to Financial Statements.
(5) Property held for investment
December 31,
1999 1998
Non-earning, land in New Mexico $901,688 $901,688
Vacant residential building lots in Missouri 105,963 100,000
------- -------
Total 1,007,651 1,001,688
========= =========
The carrying amount of the land in New Mexico is based on an estimate of
value established at the time the contractual right to the property was
acquired in foreclosure on collateral for a note receivable. The estimate
was based on prior appraisals, studies of the development possibilities for
the property, and local economic conditions. The land is in a remote part
of New Mexico and access to the property is limited. There is limited real
estate sales activity in this region to determine the likelihood of realizing
the carrying value of this investment. Because of these factors, it is
possible that the estimate of the realizable value of this land may change
materially.
The building lots consist of eight lots on the west side of downtown Kansas
City and one lot in Independence, Missouri.
6. Investment in real estate entities
Investment in real estate partnerships and limited liability companies
accounted for on the equity method consists of the following:
Ownership Percentage
Ownership at December 31,
Name Interest 1999 1998 1997
OPP IX, Limited Partnership Limited - 25.12 24.9
OPP X, Limited Partnership Limited - 2.3 2.3
Historic Suites of America - KC Limited 19.8 19.8 19.8
Wellington, L.L.C. Member 20.0 - -
B & F Properties, L.P. General 0.0099 - -
MRP Historic Development Company General 33.3 - -
During November 1999, the Company sold its investments in OPP IX and OPP X
Limited Partnerships to the Company's President for an amount approximating
the Company's carrying value for the investments. The aggregate sales
proceeds was $191,173. No gain or loss was incurred on the sale.
During May 1999, the Company acquired a 20 percent ownership interest in
,Wellington L.L.C., a limited liability company, for a capital contribution
of $401,250. Wellington L.L.C. holds a 99.0 percent limited partnership
interest in Foxridge L.P. (Foxridge). Foxridge currently owns an apartment
complex known as the "Wellington Club Apartments" located in Johnson County,
Kansas.
6. Investment in real estate entities (continued)
During November 1999, the Company entered into a Limited Partnership
agreement with B & F Properties, L.P. The Company received an allocation
of Missouri Historic Tax Credits from the Partnership which it sold for a
gain of $918,167. Subsequent to year end the Company contributed the cash
to the partnership in the form of a capital contribution. This capital
contribution will give the Company a General Partner interest of 0.0099
percent. The Company will receive 0.0099 percent of available cash flow
in Years 1 through 5, and 89.999 percent thereafter. The limited partners
have an option after the first five years to have B & F Properties, L.P.
redeem their partnership interests in accordance with the buy out formula
specified in the partnership agreement.
During 1999, the Company acquired a 33.33 percent General Partnership
interest in MRP Historic Development Company for a capital contribution
of $100. The partnership was formed for the purpose of owning, developing,
managing, leasing, and operating real estate property. The initial property
and project for the partnership is the development and management of the
property owned by B & F Properties L.P. known as Soho IV Apartments.
The Company has recorded its pro-rata 33.33 percent portion of development
Fees accrued on this project and owed to the Partnership. The Company's
Equity in earnings of the Partnership for the year ended December 31, 1999
Has been recorded as other income in the amount of $289,280.
Financial information, summarizing the financial position of the Partnerships
as of December 31, 1999, 1998 and 1997 and the operating performances for
the years then ended is as follows:
1999 1998 1997
FINANCIAL POSITION
Total assets $8,839,419 $4,980,753 $5,120,981
Total liabilities 7,478,912 2,488,492 2,521,329
--------- --------- ---------
Equity 1,360,507 2,492,261 2,599,652
========= ========= =========
OPERATING PERFORMANCE
Total revenue 42,109 821,774 843,905
Total expenses 78,471 835,083 790,418
--------- -------- -------
Net income (loss) (36,362) (13,309) 53,487
========= ======== ========
(6) Investment in real estate entities (continued)
In February of 1998, the Company acquired a 100 percent general partnership
Interest in Soho West III L.P. by converting its notes receivable from the
Partnership to an ownership interest. In addition, the Company contributed
real estate property known as Gaslight Garage, which adjoins the real estate
property owned by Soho West III L.P. The Company's cost as a result of the
conversion of the notes receivable is $5,850,000. The net book value of the
Gaslight Garage contributed is $1,014,239, resulting in an initial cost basis
In the partnership totaling $6,864,239. Commencing February 1998, the
Company consolidated its interest in the partnership into its financial
statements. The business combination has been accounted for under the
purchase method of accounting. The operations of Soho West III L.P. are
included in the consolidated statement of operations from the date of
acquisition.
In October 1997, the Company acquired a 80 percent managing ownership
interest in Hospitality Wichita, L.C., a limited liability company, for
a capital contribution of $608,044. The activity in this real estate
partnership was terminated during September 1999.
In February 1997, the Company acquired the remaining 10.88 percent limited
partnership interest in River Market Venture I, L.P. (RMV) for $250,000
to achieve 100 percent ownership of the partnership. Previously, the Company
paid $150,000 in December 1996 for a 9.12 percent interest in RMV and acquired
its initial 80 percent general partnership interest in March 1995. On
December 19, 1997, substantially all of RMV's assets were transferred to
Master Realty Corporation. The business combination was accounted for under
the purchase method of accounting without pro forma presentation of the
financial information due to materiality considerations.
The pro forma unaudited results of operations for the years ended December 31,
1998 and 1997, assuming the purchase of Soho West III L.P., New Historic
Suites Partners, L.P. and Hospitality Wichita, L.C. had been consummated as
of January 1, 1997 are as follows:
(Unaudited)
Years Ended December 31,
1998 1997
Revenues
Revenues as reported $6,579,712 $5,617,287
Pro-forma effect of acquisitions -
New Historic Suites Partners, L.P. - -
Hospitality Wichita, L.C. - 450,000
Soho West III L.P. 66,621 773,747
---------- ----------
Pro-forma revenues after acquisitions $6,646,333 $6,841,034
========== ==========
(6) Investment in real estate entities (continued)
Net income
Net income as reported $ 295,676 $1,507,127
Pro-forma effect of acquisitions -
New Historic Suites Partners, L.P. - -
Hospitality Wichita, L.C. - (238,571)
Soho West III L.P. 35,332 327,132
---------- -----------
Pro-forma net income after acquisitions 331,008 1,595,688
========== ===========
Pro-forma earnings per common share
Basic .31 2.40
========== ===========
Diluted .31 1.70
========== ===========
(7) Accounts receivable - related party
Amounts due from Embassy Hotel Management, Inc. are in connection with the
leases and funds advanced for operations of the following hotel properties:
December 31,
1999 1998
Ramada Inn- Phoenix, Arizona $280,417 $345,347
Ramada Inn - Euless, Texas 392,453 397,392
Historic Suites - Kansas City, Missouri 87,620 24,399
Ramada Inn - Wichita, Kansas - 219,924
-------- -------
Total $760,490 $987,062
======== ========
During 1999, the Company wrote-off the Accounts Receivable - Related Party
for Ramada Inn - Wichita, Kansas in connection with the forfeiture of hotel
assets as described in Note 19 to Financial Statements.
(8) Accounts receivable - other
December 31,
1999 1998
Due from sale of tax credits $918,167 $ -
Other receivables 123,542 $ 37,004
--------- ---------
Total accounts receivable - other 1,041,709 37,004
========= =========
The receivable due from the sale of tax credits is in connection with the
Company's investment in B & F Properties, L.P. The credits are not subject
to recapture. Under the terms of the partnership agreement, the Company
received an allocation of Missouri Historic Rehabilitation Credits from
the partnership which it sold for a gain of $918,167. The Partnership
agreement requires the Company to reinvest the proceeds from the sale in
the Partnership in the form of a General Partner Capital Contribution.
(9) Property and equipment
December 31,
1999 1998
Cost
Land and land improvements $6,326,999 $7,051,999
Building and building improvements 31,950,335 37,271,763
Furniture and equipment 2,805,469 3,385,308
Assets not yet in service 3,411,986 145,723
--------- ---------
Total cost 44,494,789 47,854,793
Accumulated depreciation (4,717,695) (3,984,379)
---------- ---------
Net property and equipment 39,777,394 43,870,414
========== =========
The assets not yet in service consist of three buildings in the Garment and
Crossroads Districts of Kansas City Missouri, and one building in the
Rivermarket Area of Downtown Kansas City Missouri. The three buildings in
the Garment and Crossroads Districts are to be developed into loft apartments.
The building in the Rivermarket area is being developed as a mixed use building.
The Company is seeking Missouri Historic tax credits to help fund the cost of
these projects.
Expenditures for maintenance, repairs and improvements which do not materially
extend the useful life of the asset are expensed. The aggregate depreciation
charged to operations for the years ended December 31, 1999, 1998 and 1997 was
$1,199,747 and $1,333,354, $969,802, respectively.
During September 1999, the Company forfeited and disposed of property and
equipment for a hotel property in Wichita, Kansas with a net book value
(before write-down to estimated fair value) of $7,554,395. The forfeiture
and related earnings impact are described in Note 19 to Financial Statements.
(10) Notes payable
December 31,
1999 1998
Salomon Brothers mortgage note $19,119,204 $19,417,830
Salomon Brothers Mezzanine note 939,802 1,190,000
ITLA mortgage note 4,900,000 -
Midland Bank mortgage note - 7,245,312
Convertible subordinated debentures 1,383,446 1,468,623
Hillcrest Bank note #1 - 3,556,295
Hillcrest Bank note #2 - 277,448
Hillcrest Bank note #3 558,872 152,834
Hillcrest Bank note #4 480,000 -
Hillcrest Bank note #5 480,000 -
Hillcrest Bank note #6 450,000 -
Hillcrest Bank note #7 800,000 -
Unsecured alternative treatment note 1,017,444 827,895
Real Estate Equities, Inc. notes - 600,000
Unsecured non-interest bearing note payable 61,906 113,049
Real estate tax notes 67,521 92,614
Hotel van loans 27,218 39,460
--------- ----------
Total notes payable 30,285,413 34,981,360
========== ==========
Salomon Brothers mortgage note - Mortgage note payable (First Mortgage Note)
of December 19, 1997 with monthly principal and interest payments of $145,397
based on an interest rate of 7.5 percent and a 25-year amortization period.
The initial payment of accrued interest only through January 31, 1997 is due
on February 1, 1998. The outstanding principal and interest are due at
maturity on January 1, 2008. The nonrecourse First Mortgage Note is
collateralized by commercial, residential and hotel properties in Kansas
City, Missouri, a hotel in Phoenix, Arizona and a hotel in Euless, Texas.
This note is also cross-collateralized and cross-defaulted with the Mezzanine
Note and the Cash Collateral Agreement.
(10) Notes payable (continued)
Salomon Brothers Mezzanine note - Mortgage note payable (Mezzanine Note) of
December 19, 1997 with interest payable monthly based upon the one-month
London Interbank Offered Rate (LIBOR) plus 4.95 percent. Monthly principal
payments begin in January 1999 based upon a monthly calculation using the
outstanding principal balance, the interest rate from the preceding month
and a 48-month amortization period less the months elapsed since January
1, 1999. The outstanding principal and interest are due at maturity on
January 1, 2003. The Mezzanine Note is secured by the pledge of the
Company's general partner interest in New Historic Suites Partners, L.P.
and a full payment guaranty by the Company. The Mezzanine Loan Agreement
requires that the monthly aggregated Adjusted Property Net Cash Flow for
the properties securing the First Mortgage Note to at least equal the
monthly calculation of the Debt Service Coverage Threshold. The Debt
Service Coverage Threshold is defined as 1.05 times the sum of the annual
debt service on the First Mortgage Loan plus the debt service payable on
the Mezzanine Loan at an assumed principal and interest constant of 27
percent. This note is cross-collateralized and cross-defaulted with the
First Mortgage Note and the Cash Collateral Agreement.
ITLA mortgage note - Mortgage note payable of May 14, 1999 with monthly
interest only payments based on an interest rate of 8.75 percent for the
first twelve months and then monthly principal and interest payments with
interest determined quarterly based on LIBOR plus 3.75 percent and principal
payments based on a 25 year amortization period. This note matures June 1,
2009. This nonrecourse note is collateralized by an apartment/retail/parking
garage facility located in Kansas City, Missouri.
Midland Bank mortgage note - Mortgage note payable of October 1, 1997 with
interest payable monthly at an initial rate of 7 percent until May 5, 1999.
The rate then increased to 8 percent through March 31, 2001 and to 8.5
percent from April 1, 2001 until maturity. Interest only was payable monthly
through October 5, 2000. The interest payments were based on the Deemed
Balance (as defined) determined annually beginning on April 1, 1999. The
initial Deemed Balance was the face amount of the note. The deemed balance
as of December 31, 1998 was $6,745,312. From November 5, 1998 through October
5, 2000, monthly payments of principal and interest were based on a 30-year
amortization of the outstanding principal balance. Beginning on November 5,
2000, the monthly principal and interest payments were to be based on a
25-year amortization of the outstanding principal balance. The outstanding
principal and interest are due at maturity on April 1, 2004. The note was
collateralized by a hotel in Wichita, Kansas and the Disbursement Account
(required reserve account to fund property improvements). During September
1999, the Company forfeited assets in settlement of this note as described in
Note 19 to Financial Statements.
(10) Notes payable (continued)
Convertible subordinated debentures - Convertible Subordinated Debentures
issued January 1994. The securities were issued in the initial aggregate
principal amount of $9,127,752, and bear interest at the rate of 6 percent
per annum. Interest accrues semiannually on January 1 and July 1 of each
year. The outstanding balance as of December 31, 1999 and 1998 consists of
principal of $982,704 and $1,094,381 and accrued interest of $400,752 and
$374,242, respectively. Although the securities mature December 2003, the
securities are subordinate and junior in right of payment to all senior
indebtedness of the Company (which includes all collateralized debt of the
Company). Senior indebtedness is to be paid in full before holders of the
securities are to be paid any principal or interest. As a result, management
does not anticipate that the securities will be paid at the date of maturity.
At any time prior to maturity, the securities are convertible into shares of
common stock of the Company, unless the securities are called for redemption.
The number of shares issuable upon conversion is based on the Company's book
value of $7.4667/share (after reverse and forward stock split) as of the
December 31, 1993 financial statements. Related accrued interest expense is
not subject to conversion to common stock and the liability is eliminated
upon conversion of the debenture principal. Accrued interest eliminated
upon conversion of debentures during the years ended December 31, 1999,
1998 and 1997 amounted to $31,828, $105,399, $285,624, respectively.
Hillcrest Bank note #1 - Mortgage note payable of February 17, 1998 with
monthly principal and interest payments of $32,975 based on an interest rate
of 9.25 percent. The note was collateralized by an apartment/retail/parking
garage facility located in Kansas City, Missouri. The note was also
collateralized by a certificate of deposit in the amount of $200,000, and
a full payment guaranty by the Company. The note was repaid in full during
1999.
Hillcrest Bank note #2 - Line of credit, with maximum aggregate principal
amount of $850,000, with interest at the Wall Street Prime Interest Rate
plus 1 percent. Monthly payments of interest are required until maturity.
The note was cross-collateralized with the Hillcrest Bank note #1. The
note was repaid in full during 1999.
Hillcrest Bank note #3 - Line of credit, with maximum aggregate principal
amount of $1,240,000, with interest at the Wall Street Prime Interest Rate
plus 1 percent. Monthly payments of interest are required until maturity on
October 1, 2000, at which time any unpaid accrued interest and principal are
due. The note is collateralized by a commercial property located in
Rivermarket area Kansas City, Missouri, a vacant lot, assignment of rents,
furniture and fixtures, and a full payment guaranty by the Company.
Hillcrest Bank note #4 - Line of credit, with maximum aggregate principal
amount of $480,000 with interest at the Wall Street Prime Interest Rate plus
1 percent. Monthly payments on interest only are required until maturity at
April 1, 2000. This recourse note is collateralized by a building located in
downtown Kansas City, Missouri.
(10) Notes payable (continued)
Hillcrest Bank note #5 - Line of credit, with maximum aggregate principal
amount of $480,000 with interest at the Wall Street Prime Interest Rate plus
1 percent. Monthly payments on interest only are required until maturity at
May 1, 2000. This recourse note is collateralized by a building located in
downtown Kansas City, Missouri.
Hillcrest Bank note #6 - Line of credit, with maximum aggregate principal
amount of $450,000 with interest at the Wall Street Prime Interest Rate plus
1 percent. Monthly payments on interest only are required until maturity at
May 1, 2000. This recourse note is collateralized by an earnout agreement
related to the ITLA mortgage note due at the earlier of the payout of the
earnout or May 2000. Subsequent to December 31, 1999, the Company paid
down $290,000 on this obligation and the terms changed to a 3 year
amortization period through December 2002.
Hillcrest Bank note #7 - Line of credit, with maximum aggregate principal
amount of $800,000 with interest at the Wall Street Prime Interest Rate
plus 1 percent. Monthly payments on interest only are required until
maturity at September 1, 2000. This recourse note is collateralized by a
building located in downtown Kansas City, Missouri.
Unsecured alternative treatment note - 9 percent unsecured note payable to
previous participants in the alternative treatment plan, with interest only
payable quarterly until maturity in August 2000.
Real Estate Equities, Inc. notes - Demand notes payable to related parties,
with interest at 9 percent. The notes were collateralized by restricted cash
totaling $600,000. The notes were repaid in full during 1999.
Unsecured non-interest bearing note payable - Note due September 2000,
payable in an installment of $75,000 on January 31, 1996 and 60 monthly
payments of $7,333 with the remaining unpaid principal due at maturity.
Interest has been imputed at a rate of 9 percent.
Real estate tax notes - Unsecured notes payable consisting of agreements
with the taxing authorities for delinquent real estate taxes on foreclosed
properties with interest imputed at 9 percent and monthly payments of $4,046
until maturity on August 15, 2002.
Hotel van loans - 9.25 percent and 8.75 percent notes payable,
collateralized by vehicles, payable in aggregate monthly installments
of $1,445 through May 2001, and $646 through September 2001.
(10) Notes payable (continued)
Maturities for notes payable are as follows:
Year
2000 $4,508,417
2001 729,967
2002 780,587
2003 1,829,878
2004 481,669
Thereafter 21,954,895
----------
Total long-term obligations 30,285,413
==========
(11) Other liabilities
Other liabilities consists of the following:
December 31,
1999 1998
Accounts payable $556,477 $227,557
Accrued bonus pool 68,744 215,126
Other liabilities 457,250 144,281
------- -------
Totals $1,082,471 $586,964
At December 31, 1999 and 1998, other liabilities includes the accrued bonus
pool liability. The Company's bonus pool became effective June 15, 1994 to
provide additional compensation to Company employees. Bonus pool expense
charged to operations for the years ended December 31, 1999, 1998, and 1997
was $ - , $16,744 and $425,340, respectively.
(12) Treasury stock
During the year ended December 31, 1996, the Company acquired 67,990 shares
of common stock and 475 shares of preferred stock. These shares were
obtained under a provision in the Company's Plan of Reorganization which
allowed holders of convertible debentures over 65 years old to convert
their debentures into alternative treatment debt. Since no value was
assigned to the treasury stock, management has used $.224 per share (before
reverse and forward stock split) as the cost of the treasury stock acquired.
The treasury stock was retired during the year ended December 31, 1998.
(13) Capital stock
The Company completed both a twenty five hundred (2,500) to one (1) reverse
stock split effective April 30, 1998 and a seventy five (75) for one (1)
forward stock split effective June 30, 1998. Both of these stock splits were
approved by the stockholders of the Company. As part of the reverse stock
split all fractional interests in the Company stock were redeemed. The cost
to acquire the fractional shares was $294,171. An additional $35,554 of
equity was raised from holders of fractional shares.
As a result of the forward stock split, the number of authorized shares of
common stock was changed to 8,500,000 shares, and the number of authorized
shares of preferred stock was changed to 1,000,000 shares.
(14) Earnings per share
Basic earnings per share was computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the periods. Diluted earnings per share reflects the potential dilution that
could occur if convertible preferred shares and convertible subordinated
debentures were converted into common stock.
The following shows the amounts used in computing earnings per share and the
effects on income and the weighted average number of shares of dilutive
potential common stock. All per share and weighted average share amounts for
1997 have been retroactively restated to reflect the impact of the stock
splits occurring during 1998, as described in Note 13.
(14) Earnings per share (continued)
Weighted
Average
Common
Income Shares Earnings
Numerator Denominator Per Share
1999
Basic earnings per share
- ------------------------
Income (loss) available
to common stockholders $(402,560) $1,206,925 $ (0.33)
---------- ---------- =========
Dilutive effect of potential
common stock:
Convertible debentures 59,521 132,858
Convertible preferred shares - 36,063
Less convertible debentures and
preferred shares not included
since their inclusion would
be antidilutive (59,521) (168,921)
---------- -----------
Net effect - -
---------- -----------
Diluted earnings per share
Income (loss) available to common
shareholders after assumed
conversions of dilutive securities (402,560) $1,206,925 $ (0.33)
========== ========== =========
1998
Basic earnings per share
Income (loss) available to common
Stockholders $295,676 $1,084,202 $ 0.27
--------- ---------- --------
Dilutive effect of potential
common stock:
Convertible debentures 68,551 153,016
Less convertible debentures
not included since their inclusion
would be antidilutive (22,723) (50,722)
--------- -----------
Net convertible debentures 45,828 102,294
--------- -----------
Convertible preferred shares - 55,358
--------- -----------
Diluted earnings per share
Income available to
common shareholders
after assumed conversions
of dilutive securities $341,504 $1,241,854 $ 0.27
========= ========== ========
1997 (restated)
Basic earnings per share
Income available to
common stockholders $1,507,127 $ 663,698 $ 2.27
========
Dilutive effect of potential
common stock:
Convertible debentures 122,718 273,924
Convertible preferred shares - 74,734
--------- --------
Diluted earnings per share
Income available to
common shareholders after
assumed conversions of
dilutive securities $1,629,845 1,012,356 1.61
========== ========= =====
(15)Pension plan
The Company has a defined contribution pension plan covering all of its
employees. All contributions to the plan are made by the Company, no
contributions are required from the employees. Employees vest in the plan
over a five year period. Total pension expense for the years ended December
31, 1999, 1998 and 1997 was $53,350, $58,000, and $63,147.
(16) Related parties
The Company had party transactions with the following related parties -
Embassy Properties, Inc. - Embassy Properties, Inc. (EPI) provides property
management services to the Company. EPI is considered a related party due
to the 90 percent ownership of EPI by the immediate family of the Company's
president.
Embassy Hotel Management Company, Inc. - Embassy Hotel Management Company,
Inc. (EHM) is a subsidiary of Embassy Properties, Inc. The Company has
leased their hotels to this management company and receives hotel lease
revenues rather than the corresponding hotel revenues and expenses directly
connected with the individual hotel properties.
Due to affiliates - Integrated Financial Services (IFS) served as the sponsor
and advisory company to the Company from inception through June 1994, at
which time the contract with IFS was terminated. Pursuant to the prior
agreements, the Company pays an assignee of IFS for amounts due IFS and one
of its affiliates for various services previously performed for the Company
and expenses previously incurred on the Company's behalf. Interest accrues
monthly with semi-annual payments. Principal payments of $9,575 plus accrued
interest are payable on a semi-annual basis. The obligation was paid off
during the year ended December 31, 1998.
(16) Related parties (continued)
Years Ended December 31,
1999 1998 1997
Embassy Properties, Inc. (EPI)
Payment of loan servicing fees to EPI $15,429 $19,712 $33,404
Payment of property management fees to EPI 188,193 132,983 141,549
Payment of asset management fees to EPI 24,000 24,000 32,687
Payment of real estate lease commissions
to EPI 65,001 24,216 32,005
Payment to EPI for loan closing services - - 19,700
Payment for painting services 57,027 58,260 -
Payment of development fee - 6,034 -
Payment of payroll processing fee 1,500 3,000 -
------- ------- ------
Total payments 351,150 268,205 259,345
======== ======== =======
Embassy Hotel Management Company, Inc.
(EHM)
Hotel lease revenue earned from leases
with EHM 2,001,000 2,605,749 2,104,346
========= ========= =========
Forgiveness of accounts receivable for
hotel lease revenue and advances made
in connection with Ramada Inn - Wichita. 505,824 - -
========= ========= =========
Due to affiliates
Due to affiliates, beginning of year - 367,707 386,853
Interest expense - 10,974 31,316
Payments on obligation - (378,681) (50,462)
--------- --------- ---------
Due to affiliates, end of year $ - $ - $367,707
========= ========= =========
December 31,
1999 1998
Embassy Hotel Management Company, Inc. (EHM)
Accounts receivable for hotel
lease revenue and advances made to hotels $760,490 $987,062
======= =======
(16) Related parties (continued)
OTHER RELATED PARTY TRANSACTIONS
As disclosed in Note 6 to Financial Statements, the Company has a 20 percent
ownership interest in Wellington L.L.C. (a limited liability company). The
remaining ownership interests of Wellington L.L.C. are held by the Company's
President and certain board members. Wellington L.L.C. holds a 99 percent
limited partnership interest in Foxridge L.P., and the General Partner in
Foxridge L.P. is an entity controlled by the Company's President. The
Company along with the other members of Wellington L.L.C. have guaranteed
bank debt carried by Wellington L.L.C. as more fully disclosed in Note 18 to
Financial Statements.
As disclosed in Note 5 to Financial Statements, the Company entered into a
Limited Partnership agreement with B & F Properties, L.P. The Company is
also a 33 percent general partnership interest in MRP Historic Development
Company which served as the developer of the Burd & Fletcher historic
preservation apartment project. In connection with this project, B & F
Properties, L.P. is to pay development fees of approximately $867,841 to MRP
Historic Development Company.
The Company's President advanced $200,000 during 1999 to the Company under
the unsecured alternative treatment note payable. Terms on this note payable
are disclosed in Note 10 to Financial Statements.
As disclosed in Note 6 to Financial Statements, the Company sold certain
investments in limited partnerships to the Company's president.
An officer of the Company has a controlling ownership interest in Recon
Development Company. The Company paid Recon Development $133,736 during
1999 for tenant improvements on various properties owned by the Company.
Certain officers and trustees of the Company own limited partnership
interests in certain borrowers of the Company.
During the year ended December 31, 1997, the Company incurred $100,000 for
consulting and investment banking services related to the Salomon Brothers
financing to an entity in which an officer of the Company is a minority
owner.
During the years ended December 31, 1998 and 1997, certain trustees and
officers of the Company converted debentures to common stock in accordance
with the conversion features on the bonds.
(17) Business segment information
Description of the types of activities for reportable segments - The Company
has three reportable segments: hotel leasing, residential/mixed use
properties, and assets held for restructure. The hotel leasing segment
realizes rent income on Hotel properties leased to operators. The
residential/mixed use properties segment realizes income from residential
and commercial real estate properties. The assets held for restructure are
assets recovered as collateral on notes receivable for which the Company has
no long-term objective of owning and operating.
Revenue from segments below the quantitative thresholds are reported as all
other. Those activities are predominantly non-recurring gains and losses.
The assets in all other are predominantly administrative assets, intangible
assets, and assets held for long-term capital appreciation.
Measurement of segment profit or loss and segment assets - The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Company does not have intersegment
sales and transfers.
Factors management used to identify the enterprise's reportable segments
- - The Company's reportable segments are strategic business units that are
in distinct markets consistent with the Company's long-range strategic
business plan. They are managed separately because each business requires
different management practices.
(17) Business segment information (continued)
The following table illustrates information concerning segment profit or
loss and segment assets:
Residental/ Assets
Hotel Mixed Use for
Leasing Properties Restructure
Year Ended December 31, 1999
Revenues from external customers $2,004,338 $3,551,121 $205,382
Interest revenue 912 - 38,943
---------- ---------- --------
Total revenues 2,005,250 3,551,121 244,325
========== ========== ========
Percentage of segment revenues
to total 28 50 4
Interest expense 1,143,717 828,781 13,550
Depreciation and amortization 998,045 242,717 23,853
Segment profit (loss) (499,120) 1,065,617 61,405
Percentage of segment profit
(loss) to total (124) 265 15
Other significant noncash items:
Carrying value of hotel
Assets applied
to nonrecourse mortgage
note payable 2,455,824 - -
Carrying amount
of nonrecourse
mortgage note payable
satisfied by transfer of assets 7,245,312 - -
Note receivable converted to
investment in real
estate partnership - - -
Convertible subordinated
debentures converted
to common stock - - -
December 31, 1999
Segment assets 18,889,945 20,921,481 2,788,258
Percentage of segment assets
to total 41 45 6
Expenditures for segment assets 290,062 4,362,830 93,367
Year Ended December 31, 1998
Revenues from external customers 2,605,749 3,348,194 332,097
Interest revenue 9,838 13,812 114,244
---------- --------- -------
Total revenues $2,615,587 $3,362,006 $446,341
========== ========= =======
Percentage of segment revenues
to total 40 51 7
Interest expense 1,500,975 741,073 13,101
Depreciation and amortization 1,213,409 196,782 23,037
Segment profit (loss) (144,331) 986,482 230,418
Percentage of segment profit
(loss) to total (49) 334 78
Other significant noncash items:
Property recovered as collateral
on note receivable - 2,273,633 -
Convertible subordinated
debentures
converted to common stock - - -
December 31, 1998
Segment assets 27,650,820 17,469,568 2,594,229
Percentage of segment assets
to total 55 35 5
Expenditures for segment assets 1,635,853 6,386,541 -
All
Other Total
Year Ended December 31, 1999
Revenues from external customers 1,226,735 6,987,576
Interest revenue 21,767 61,622
--------- ---------
Total revenues 1,248,502 7,049,198
Percentage of segment revenues to total 18 100
Interest expense 302,048 2,288,096
Depreciation and amortization 112,616 1,377,231
Segment profit (loss) (1,030,462) (402,560)
Percentage of segment profit (loss) to total (256) 100
Other significant noncash items:
Carrying value of hotel assets applied
to nonrecourse mortgage note payable - 2,455,824
Carrying amount of nonrecourse
mortgage note payable satisfied by
transfer of assets - 7,245,312
Note receivable converted to
investment in real estate partnership 100,000 100,000
Convertible subordinated debentures
converted to common stock 111,678 111,678
December 31, 1999
Segment assets 3,424,306 46,023,990
Percentage of segment assets to total 8 100
Expenditures for segment assets 301,250 5,052,509
Year Ended December 31, 1998
Revenues from external customers 96,844 6,382,884
Interest revenue 58,934 196,828
-------- ---------
Total revenues 155,778 6,579,712
======== =========
Percentage of segment revenues to total 2 100
Interest expense 293,872 2,549,021
Depreciation and amortization 129,880 1,563,108
Segment profit (loss) (776,893) 295,676
Percentage of segment profit (loss) to total (263) 100
Other significant noncash items:
Property recovered as collateral on note
Receivable - 2,273,633
Convertible subordinated debentures
converted to common stock 134,784 134,784
December 31, 1998
Segment assets 2,812,890 50,527,507
Percentage of segment assets to total 5 100
Expenditures for segment assets - 8,022,394
(17) Business segment information (continued)
Residental/ Assets
Hotel Mixed Use for
Leasing Properties Restructure
Year Ended December 31, 1997
Revenues from external customers $2,104,346 $2,460,768 $421,089
Interest revenue 9,548 89,452 152,130
---------- ---------- --------
Total revenues 2,113,894 2,550,220 573,219
========== ========== ========
Percentage of segment revenues
to total 38 45 10
Interest expense 528,293 579,609 8,582
Depreciation and amortization 842,102 234,495 24,483
Segment profit (loss) 743,499 904,901 220,208
Percentage of segment profit
(loss) to total 49 60 15
Other significant noncash items:
Sale of Property - - 623,206
Convertible subordinated
debentures converted
to common stock - - -
December 31, 1997
Segment assets 27,383,323 11,485,810 3,978,830
Percentage of segment assets
to total 58 24 8
Expenditures for segment assets 7,886,274 306,533 42,159
All
Other Total
Year Ended December 31, 1997
Revenues from external customers $372,286 $5,358,489
Interest revenue 7,668 258,798
---------- --------
Total revenues 379,954 5,617,287
========== ========
Percentage of segment revenues
to total 7 100
Interest expense 1,158,214 2,274,698
Depreciation and amortization 38,452 1,139,532
Segment profit (loss) (361,481) 1,507,127
Percentage of segment profit
(loss) to total (24) 100
Other significant noncash items:
Sale of Property - 623,206
Convertible subordinated
debentures converted
to common stock 2,475,393 2,475,393
December 31, 1997
Segment assets 4,345,669 47,193,662
Percentage of segment assets
to total 10 100
Expenditures for segment assets 4,787 8,239,753
In addition to the above measures for business segments, the Company monitors
Funds from Operations (FFO) as defined by National Association of Real Estate
Investment Trusts (NAREIT). Real Estate Investment Trusts use FFO as a
standard measure of operating performance. FFO is defined by NAREIT as net
income (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales
of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. The calculation of FFO for
the Company for each operating segment is as follows:
Year Ended December 31, 1999
Residental/ Assets
Hotel Mixed Use for
Leasing Properties Restructure
Segment profit (loss) $(499,120) $1,065,617 $61,405
Add: Minority interest 7,796 - -
Less: Unconsolidated partnership
investment (income) loss - - -
--------- ---------- --------
Income (loss) before
minority interest (491,324) 1,065,617 61,405
Add: Depreciation and
amortization of
real estate assets 998,045 242,717 23,853
Add: Loss on transfer of
Wichita hotel assets 5,654,395 - -
Less: Extraordinary gain (4,789,488) - -
----------- -------- --------
Funds from operations $1,371,628 $1,308,334 $85,258
========== ========== =======
All
Year Ended December 31, 1999 Other Total
Segment profit (loss) $(1,030,462) $(402,560)
Add: Minority interest - 7,796
Less: Unconsolidated partnership
investment (income) loss (308,604) (308,604)
----------- ---------
Income (loss) before
minority interest (1,339,066) (703,368)
Add: Depreciation and
amortization of
real estate assets 112,616 1,377,231
Add: Loss on transfer of
Wichita hotel assets - 5,654,395
Less: Extraordinary gain - (4,789,488)
--------- -----------
Funds from operations $(1,226,450) $1,538,770
(17)Business segment information (continued)
Year Ended December 31, 1998
Residental/ Assets
Hotel Mixed Use for
Leasing Properties Restructure
Segment profit (loss) (144,331) $986,482 $230,418
Add: Minority interest 8,283 - -
Less: Unconsolidated partnership
investment (income) loss
--------- --------- ---------
Income before minority interest (136,048) 986,482 230,418
Add: Depreciation and amortization
of real estate assets 1,213,409 196,782 23,037
Less: Gain on sales of assets - - (81,884)
Less: Non-recurring items:
Accrued interest expense
forgone on converted
debentures - - -
---------- ---------- --------
Funds from operations $1,077,361 $1,183,264 $171,571
All
Year Ended December 31, 1998 Other Total
Segment profit (loss) $ (776,893) $295,676
Add: Minority interest - 8,283
Less: Unconsolidated Partnership
investment (income) loss 13,565 13,565
--------- -------
Income before minority interest (763,328) 317,524
Add: Depreciation and amortization
of real estate assets 125,873 1,559,101
Less: Gain on sales of assets - (81,884)
Less: Non-recurring items:
Accrued interest expense
forgone on converted
debentures (105,399) (105,399)
Funds from operations (742,854) (1,689,342)
Year Ended December 31, 1998
Residental/ Assets
Hotel Mixed Use for
Leasing Properties Restructure
Segment profit (loss) 743,499 $904,901 $220,208
Add: Minority interest 7,765 - -
Less: Partnership
investment income - - -
--------- --------- ---------
Income before minority interest 751,264 904,901 220,208
Add: Depreciation and amortization
of real estate assets 745,990 181,493 24,483
Less: Gain on sales of assets - - (66,679)
Less: Non-recurring items:
Accrued interest expense
forgone on converted
debentures - - -
---------- ---------- --------
Funds from operations $1,497,254 $1,086,394 $178,012
========= ========= =======
All
Year Ended December 31, 1998 Other Total
Segment profit (loss) $ (361,481) $1,507,127
Add: Minority interest - 7,765
Less: Partnership
investment income (7,143) (7,143)
--------- ----------
Income before minority interest (368,624) 1,507,749
Add: Depreciation and amortization
of real estate assets 14,823 966,789
Less: Gain on sales of assets - (66,679)
Less: Non-recurring items:
Accrued interest expense
forgone on converted
debentures (285,624) (285,624)
Funds from operations (639,425) 2,122,235
(18) Commitments and contingencies
Guaranty:
As disclosed in Note 6 to Financial Statements, the Company holds a 20
percent ownership interest in Wellington L.L.C. The Company along with the
other members of Wellington L.L.C. are contingently liable as full recourse
guarantors on a $1,200,000 loan to Wellington L.L.C. from Hillcrest Bank
dated August 1999. The note is collateralized by a partnership interest in
Foxridge Limited Partnership.
In connection with its Investment in B & F Properties, L.P. (the
Partnership), the Company has Guaranteed the Partnership's performance under
the Partnership Agreement of the General Partner Obligations as defined in
the Partnership agreement. This guarantee includes, but is not limited to,
provisions ensuring that the Investment Limited Partner will receive Federal
Historic Tax Credits equal to $1,075,613. If those credits are not received
in this amount, the Investment Limited Partner's capital contribution will
be reduced by 86 percent of the shortfall. The Company's guarantee includes
any reimbursement of the Investment Limited Partner's capital account
required under this Partnership agreement.
The Company is contingently liable as a guarantor on Industrial Revenue
Bonds (IRB's) (Soho Office Center Project) Series 1996 between the Land
Clearance for Redevelopment Authority of Kansas City (the Issuer) and
Soho Office Center, L.P. (the borrower) in the amount of $2,655,000. The
Series 1996 bonds were reissued to pay amounts due to the Company on Series
1984 Bonds. The Company entered into the Guarantor Agreement to effectuate
the transaction whereby these funds would be available to the Company.
The Company has pledged collateral to secure the guaranty. The collateral
consists of the Company's Deed of Trust and Security Agreement executed by
the borrower in favor of the Company on the Series 1984 Bonds, and assignment
on a ratable basis of General Partnership Interest of River Market Venture,
Inc. (a wholly owned subsidiary of the Company) in River Market Venture I,
L.P.
In 1996, the Company assigned the IRB's, which were originally part of a
note receivable, to the participants in the Company's Alternative Treatment
Plan who elected to receive them as reductions of their Alternative
Treatment. The Company's guarantee and collateral remain in place for
these bonds.
(18) Commitments and contingencies (continued)
Stockholder rights plan: During 1999 the Board of Trustees adopted a
stockholder rights plan. Under this plan each shareholder was given the
right to purchase additional shares of stock at a price below market value.
The number of shares allowed to be purchased by each shareholder and the
purchase price is defined in this agreement. The rights become exercisable
if a triggering event, as defined in the agreement, occurs. Certain
stockholders, as defined in the agreement, are precluded from participating
in this plan. The rights under the plan will expire if not utilized by
October 31, 2009. The dilutive effect of this plan cannot be determined
due to significant variables at this time.
Minimum rents:
The Company receives income on commercial and residential properties under
noncancelable operating lease agreements in connection with its rental
operations. Future minimum rental payments under these leases as of
December 31, 1998 are as follows:
Years Ended December 31,
2000 $2,167,143
2001 1,098,960
2002 983,010
2003 561,761
2004 463,656
Thereafter 882,382
---------
Total $6,156,912
(19) Extraordinary item
During September 1999, the Company entered into an agreement with its lender
to transfer hotel property in Wichita, Kansas in full settlement of the
nonrecourse debt collateralized by the property. The Company acquired the
troubled property in October 1997 with the intent of improving the operating
performance of the property. Certain adverse market conditions, including a
switch from a Holiday Inn to a Ramada Inn during 1998 contributed to a
continued decline in the operating performance of the property. The
carrying amount of the collateral exceeded its fair value by an estimated
$5,654,395, and, accordingly, a loss on the asset transfer was included
in net operating income for 1999. The carrying amount of the loan payable
at the date of foreclosure exceeded the fair value of the collateral by an
estimated $4,789,488, and, accordingly, an extraordinary gain, was recognized
in 1999.
(20)Subsequent event
Subsequent to December 31, 1999 the Board of Trustees of the Company voted to
recommend to the Shareholders of the Company that they vote in favor of
authorizing the Trustees to terminate the Company's election to qualify
as a real estate investment trust under the Internal Revenue Code of 1986
if it is later deemed to be in the best interest of the shareholders. The
matter will be submitted to the Shareholders at the annual meeting in April
2000. The Board of Trustees further resolved that management, together with
tax and legal counsel, investigate and analyze various strategies designed
to protect the net operating loss of the Corporation for the benefit of the
Shareholders.
(21) Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," (SFAS No. 107) requires disclosure of
estimated fair values for financial instruments held by the Company.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts do not represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
Cash and restricted cash - The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents and interest
bearing deposits approximate those assets' estimated fair values.
Mortgage notes receivable - Fair values for loans are estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers for the same remaining maturities.
The carrying amount has been evaluated for impairment and is stated at
estimated net realizable value which is equivalent to estimated fair value.
Notes receivable - The carrying amounts reported in the consolidated
balance sheets for notes receivable approximate those assets' estimated
fair value.
Notes payable - The fair value of the Company's convertible subordinated
debentures was determined by using the most recent trades occurring between
individual debenture holders. The value used in those trades was 35 percent
and 30 percent of the face amount of the debenture principal as of December
31, 1999 and 1998, respectively. The accrued interest payable on the
debentures is not convertible and therefore the fair value is estimated at
zero.
The estimated fair value of the Company's remaining long-term debt was
based on estimates of the current market rates for debt with similar
remaining maturities and collateral.
(21) Fair value of financial instruments (continued)
The estimated fair values of the financial instruments are as follows:
December 31, 1999December 31, 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and restricted cash $651,584 $651,584 $1,795,718 $1,795,718
Mortgage notes receivable
(after reduction for
allowance for loan
losses) 722,775 722,775 1,080,850 1,080,850
Notes receivable 235,225 235,225 535,871 535,871
Financial liabilities
Convertible subordinated
debentures - principal 982,704 343,946 1,094,381 382,314
Convertible subordinated
debentures - accrued
interest 400,752 - 374,242 -
Notes payable - other 28,901,957 26,658,144 33,512,737 33,393,832
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Write Off Of
Beginning Charged To Un- Balance At
Balance at Expense Collectible End Of
Period (Recovery) Accounts Period
DESCRIPTION
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for losses -
mortgage notes receivable $1,218,888 $(18,298) $(148,627) $1,051,963
================================================
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for losses -
mortgage notes receivable 3,691,493 (831,640) (1,640,965) 1,218,888
================================================
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for losses -
mortgage notes receivable 4,974,901 (1,283,408) - 3,691,493
=================================================
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
SCHEDULE III - PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION
Description
Additions
Initial Cost since
Buildings & acquisition
Land Improvements
Encumbrances Improvements Carrying Cost
Commercial:
Rivermarket -
Kansas City, MO (1) $7,490,894 $1,429,691
Soho VI -
Kansas City, MO (1) 1,494,345 170,057
Soho III
Gaslight Garage -
Kansas City, MO (3) 6,864,239 1,163,814
39/40 Plaza -
Kansas City, MO 725,000 180,486
Campbell Paint -
Kansas City, MO (5) 600,000 174,271
EBT Building -
Kansas City, MO (6) 575,000 283,108
Rothenberg & Schloss -
Kansas City, MO (7) 1,000,000 77,844
Hotels:
Ramada - Phoenix, AZ (1) 3,952,594 3,164,051
Ramada -
Euless, TX (1),(2) 5,772,619 1,283,756
Historic Suites -
Kansas City, MO (1) 7,500,000 347,887
Unimproved
land:
Gabriel -
Kansas City, MO 65,003 69,700
All other property
and equipment 20,860 89,570
-------- ---------
Totals $36,060,554 $8,434,235
Carrying Cost
At 12/31/99
Buildings &
Land Estimated
Improvements Accumulated Date of
Total (3) Depreciation Construction
Commercial:
Rivermarket -
Kansas City, MO $8,920,585 $679,615 1870-1890
Soho VI -
Kansas City, MO 1,664,402 75,094 1900
Soho III
Gaslight Garage -
Kansas City, MO 8,028,053 357,752 1986
39/40 Plaza -
Kansas City, MO 905,486 70,346 1970
Campbell Paint -
Kansas City, MO 774,271 - 1915
EBT Building -
Kansas City, MO 858,108 - 1915
Rothenberg & Schloss -
Kansas City, MO 1,077,844 - 1912
Hotels:
Ramada - Phoenix, AZ 7,116,645 978,948 1956
Ramada -
Euless, TX 7,056,375 1,810,659 1971
Historic Suites -
Kansas City, MO 7,847,887 729,161 1890
Unimproved
land:
Gabriel -
Kansas City, MO 134,703 -
All other property
and equipment 110,430 16,120
---------- ---------- -----
Totals 44,494,789 4,717,695
Date Depreciable
Acquired Life
Commercial:
Rivermarket -
Kansas City, MO 6-95 7&39 years
Soho VI -
Kansas City, MO 12-96 7&39 years
Soho III
Gaslight Garage -
Kansas City, MO 2-98/8-93 5&39 years
39/40 Plaza -
Kansas City, MO 1-94 5&39 years
Campbell Paint -
Kansas City, MO 4-99 7&39 years
EBT Building -
Kansas City, MO 5-99 7&39 years
Rothenberg & Schloss -
Kansas City, MO 9-99 7&39 years
Hotels:
Ramada - Phoenix, AZ 6-94 7&39 years
Ramada -
Euless, TX 3-94 5&39 years
Historic Suites -
Kansas City, MO 9-96 7&39 years
Unimproved
land:
Gabriel -
Kansas City, MO 9-96 N/A
All other property
and equipment Various 5&39 years
1) Encumbered by mortgage note payable with a balance at December 31, 1999
of $19,119,204
(2)Encumbered by note payable with a balance at December 31, 1999 of $12,482
(3)Encumbered by mortgage note payable with an aggregate balance at December
31, 1999 of $4,900,000
4) The aggregate carrying cost for Federal income tax purposes at December
31, 1999 is $44,600,752
5.Encumbered by mortgage note payable with a balance at December 31,
1999 of $480,000
6. Encumbered by mortgage note payable with a balance at December 31, 1999 of
$480,000
7. Encumbered by mortgage note payable with a balance at December 31, 1999 of
$800,000
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
Interest Rate at
Interest December Final Maturity Periodic
Rate 31, 1999 Date Payment Terms
Location
Partially-Earning
Second and Third
Mortgage Loans
Commercial Buildings
Kansas City, MO 10 percent 10 percent 10/1/94 Quarterly payments
Equal to property's
Net cash flow;
Unpaid principal &
Interest at maturity
Principal amount
Carrying amount of loans subject
of mortgages at to delinquent
Face Amount December 31, principal
Of mortgages 1999 or interest
Location
Partially-Earning
Second and Third
Mortgage Loans
Commercial Buildings
Kansas City, MO $3,300,000 $1,774,738 $1,774,738
========== ========== ==========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (continued)
Years Ended December 31, 1999, 1998 and 1997
Year Ended December 31,
1999 1998 1997
Balance at beginning of year $2,299,738 $6,521,108 $5,519,500
Additions during year
Advances on existing loans - 67,338 295,258
Other recoveries - - 709,151
---------- --------- -----------
Total additions - 67,338 1,004,409
---------- --------- -----------
Deductions during year
Collection of principal 525,000 3,815,739 2,801
Write off principal against
the allowance - 226,489 -
Reclassification to
notes receivable - 246,480 -
--------- ---------- ---------
Total deductions 525,000 4,288,708 2,801
--------- ---------- ----------
BALANCE AT END OF YEAR $1,774,738 $2,299,738 $6,521,108
========= ========== ==========
