U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-2
(As Amended)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-18247
RETAIL PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Virginia 04-3060233
(State of organization) (I.R.S.Employer
Identification No.)
1285 Avenue of the Americas, New York, New York 10019
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (212) 713-4264
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X .
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____
Shares of common stock outstanding as of August 31, 1995: 5,010,050.
The aggregate sales price of the shares sold was $100,201,000. This does
not reflect market value. There is no current market for these shares.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Original Offering Prospectus of registrant Part IV
dated October 6, 1989, as supplemented
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
1995 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-5
Item 3 Legal Proceedings I-8
Item 4 Submission of Matters to a Vote of Security Holders I-8
Part II
Item 5 Market for the Registrant's Shares and
Related Stockholder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-8
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure II-8
Part III
Item 10 Directors and Executive Officers of the Registrant III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-4
Item 13 Certain Relationships and Related Transactions III-4
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-27
<PAGE>
PART I
Item 1. Business
Retail Property Investors, Inc. (the "Company"), formerly PaineWebber Retail
Property Investments, Inc., is a corporation organized on August 9, 1989 in the
Commonwealth of Virginia for the purpose of investing in a portfolio of retail
shopping centers located throughout the midwestern, southern and southeastern
United States. The Company has elected and intends to continue to qualify to be
taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code
of 1986, as amended, for each taxable year of operations. As a REIT, the Company
is allowed a tax deduction for the amount of dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. On October 23, 1989, the Company
commenced an initial public offering of up to 10,000,000 shares of its Common
Stock (the "Shares"), priced at $10 per Share, pursuant to a Registration
Statement filed on Form S-11 under the Securities Act of 1933 (Registration
Statement No. 33-29755). The initial offering closed during the second quarter
of fiscal 1991, after 10,020,100 shares had been sold (including the sale of
20,100 shares to an affiliate, PaineWebber Group, Inc.), representing gross
proceeds of $100,201,000. The Company was originally organized as a finite-life,
non-traded REIT that had a stated investment policy of investing exclusively in
shopping centers in which Wal-Mart Stores Inc. ("Wal-Mart") was or would be an
anchor tenant. The Company invested the net proceeds of the initial public
offering in 22 Wal-Mart anchored shopping centers, as discussed in more detail
below. During fiscal 1993, the Company's Board of Directors proposed three
amendments to the Company's Articles of Incorporation and two resolutions, all
of which were approved at a Special Meeting of Shareholders which was held on
September 7, 1993. The amendments to the Articles of Incorporation changed the
Company from a "finite-life" corporation to an "infinite-life" corporation,
increased the number of authorized shares of the Company's Common Stock from
12,500,000 to 25,000,000 and changed the Company's name. The resolutions
approved a 1 for 2 Reverse Stock Split of the Company's outstanding shares of
Common Stock and affirmed the Company's investment authority under the Articles
of Incorporation and Bylaws to invest in property other than shopping centers
anchored by Wal-Mart stores.
The amendments to the Company's Articles of Incorporation and the
resolutions which were approved in September 1993 were proposed as part of a
plan to reposition the Company in response to changes in the market for publicly
held REITs at that time. As reported by the National Association of Real Estate
Investment Trusts, Inc., capital formation by REITs in 1993 was the greatest in
the industry's 33-year history. The increased activity represented a potentially
attractive source of capital for the Company to refinance its outstanding
mortgage indebtedness and to take advantage of future growth opportunities in
the improving real estate market which existed at that time. During 1993, the
Board of Directors determined that in order to best position the Company to
access the public capital markets, it would be in the Company's best interests
to convert from an externally advised REIT to a self-administered REIT. The
Company also investigated the possibility of acquiring a third-party property
management and leasing company which would enable property management activities
to be conducted internally. In conjunction with these initiatives, the Board of
Directors presented several proposals for consideration at the Annual Meeting of
Shareholders which was held on November 4, 1994. Approval of these proposals,
which involved further amendments to the Company's Articles of Incorporation and
Bylaws, was required in order to enable the Company to proceed with an equity
offering of its common stock, to pursue listing of the Company's common stock on
a national securities exchange and to permit a conversion to
self-administration. All of the proposals were approved at the Annual Meeting by
the required affirmative vote of the shareholders.
As discussed further in Item 7, due to changes in interest rate levels and
other market factors which adversely affected the market for new public REIT
equity offerings during the latter half of calendar 1994 and the first half of
calendar 1995, the Company has not completed the final phase of its
restructuring plans. In view of the existing capital market conditions, the
Company's Board of Directors engaged the investment banking firm of Lehman
Brothers Inc. ("Lehman") in June of 1995 to act as its financial adviser and to
provide financial and strategic advisory services to the Board of Directors
regarding options available to the Company. The strategic options considered
included, among other things, a recapitalization of the Company, sales of the
Company's assets and the exploration of merger opportunities. In November 1995,
Lehman presented a summary to the Board of the proposals received to date. All
of the proposals were indications of interest from third parties to buy the
Company's real estate assets. At such time, the Board concluded that it would be
in the shareholders' best interests to immediately initiate the process of
soliciting firm offers to purchase the Company's portfolio of operating
investment properties. The Directors have instructed Lehman to work with the
various third parties that have expressed an interest in such a transaction to
obtain transaction terms most favorable to the Company and its shareholders. At
the conclusion of this process, which will include all required buyer's due
diligence, the Directors expect to submit and recommend for approval by the
shareholders what, in their judgment, is the most favorable proposal. Pursuant
to the Company's Articles of Incorporation, the sale of all, or substantially
all, of the Company's real estate assets would require shareholder approval.
Because the sale of the Company's real estate assets remains contingent upon,
among other things, satisfactory completion of buyers' due diligence,
negotiation of a definitive sales agreement and the required shareholder
approval of such a transaction, there are no assurances that a portfolio sale
transaction will be completed.
As of August 31, 1995, the Company owned 22 retail shopping centers located
in nine central and eastern states aggregating approximately 4.4 million square
feet of gross leasable area. All of the properties acquired to date are anchored
by Wal-Mart stores. The typical property profile for the Company portfolio is a
community shopping center of roughly 180,000 square feet (they range in size
from 93,304 to 490,970 square feet) anchored by Wal-Mart and a major grocery
chain store. The Wal-Mart anchors range in size from 41,000 to 149,000 square
feet. The properties generally include designated expansion areas or available
land parcels for expansion. At many of the centers, in addition to the Wal-Mart
and grocery anchors, there are also national credit tenants such as Sears, JC
Penney, Goody's and Lowe's, among others. All centers contain a moderate amount
of shop space which is leased to both credit and non-credit tenants. Of the
gross leasable space at the Company's properties, 49% is leased to Wal-Mart and
its affiliates and 40% is leased to other national and regional credit tenants.
The Company's properties are generally located on major state and federal
highways, with many at intersections of primary thoroughfares. The majority of
the properties are located in county seat markets with a few located in smaller
metropolitan areas or at the fringe of larger metropolitan areas.
Shopping center leases typically provide for a minimum base rental per
square foot which the tenant is obligated to pay in all cases ("Minimum Base
Rent"), plus additional rentals equal to a negotiated percentage of gross
receipts or gross sales above a stated sales volume ("Percentage Rentals").
Small tenants typically pay from 3% to 6% in Percentage Rentals. Anchor tenants
or other significant tenants often pay lower Percentage Rentals, and sometimes
no Percentage Rentals. The typical Wal-Mart department store lease provides that
no Percentage Rentals will be paid during the first seven years. Thereafter,
Percentage Rentals will equal only .5% to .75% of gross receipts in excess of
the gross receipts during the seventh year of the lease, up to a maximum of
$1.00 per square foot. The Company has not realized a significant amount of
income from Percentage Rentals to date. In addition to rentals, tenants are
ordinarily required to pay their pro rata share of real estate taxes, certain
insurance premiums, and other common area maintenance costs. However, the
Wal-Mart leases generally contain a limit on Wal-Mart's share of such costs.
Certain other costs are usually not paid by the tenants. For example, the
landlord is usually responsible for maintaining roofs, exterior walls,
foundations and parking areas to some extent.
As of August 31, 1995, the Company owned the investment properties referred
to below:
Property Name Date of
and Location (1) Type of Property Investment Size
- --------------- ---------------- ----------- --------------
Village Plaza Shopping Center 8/16/89 490,970 Sq. Ft.
Augusta, GA
Logan Place Shopping Center 1/18/90 114,748 Sq. Ft.
Russellville, KY
Piedmont Plaza Shopping Center 1/19/90 249,052 Sq. Ft.
Greenwood, SC
Artesian Square Shopping Center 1/30/90 177,428 Sq. Ft.
Martinsville, IN
<PAGE>
Property Name Date of
and Location (1) Type of Property Investment Size
- --------------- ---------------- ----------- --------------
(continued)
Sycamore Square Shopping Center 4/26/90 93,304 Sq. Ft.
Ashland City, TN
Audubon Village Shopping Center 5/22/90 124,592 Sq. Ft.
Henderson, KY
Crossroads Centre Shopping Center 6/15/90 242,430 Sq. Ft.
Knoxville, TN
East Pointe Plaza Shopping Center 8/7/90 238,722 Sq. Ft.
Columbia, SC
Cross Creek Plaza Shopping Center 12/19/90 237,801 Sq. Ft.
Beaufort, SC
Cypress Bay Plaza Shopping Center 12/19/90 258,245 Sq. Ft.
Morehead City, NC
Walterboro Plaza Shopping Center 12/19/90 132,130 Sq. Ft.
Walterboro, SC
Lexington Parkway Shopping Center 3/5/91 210,190 Sq. Ft.
Plaza
Lexington, NC
Roane County Plaza Shopping Center 3/5/91 160,198 Sq. Ft.
Rockwood, TN
Franklin Square Shopping Center 6/21/91 237,062 Sq. Ft.
Spartanburg, SC
Barren River Plaza Shopping Center 8/9/91 234,795 Sq. Ft.
Glasgow, KY
Cumberland Crossing Shopping Center 8/9/91 144,734 Sq. Ft.
LaFollette, TN
Applewood Village Shopping Center 10/25/91 140,039 Sq. Ft.
Fremont, OH
Aviation Plaza Shopping Center 8/31/92 174,715 Sq. Ft.
Osh Kosh, WI
Crossing Meadows Shopping Center 8/31/92 233,984 Sq. Ft.
Onalaska, WI
Southside Plaza Shopping Center 10/21/92 172,293 Sq. Ft.
Sanford, NC
College Plaza Shopping Center 4/29/93 178,431 Sq. Ft.
Bluefield, VA
Marion Towne Center Shopping Center 6/23/93 156,558 Sq. Ft.
Marion, SC
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the mortgage debt encumbering these real estate investments.
<PAGE>
Wal-Mart remains one of the leading and fastest growing discount mass
merchandisers in the United States. As a principal anchor tenant, Wal-Mart
frequently participates with the developer during the site planning stage and
may influence the developer's decisions regarding site development,
architectural design and other aspects of retail center development. An anchor
tenant usually commits to a long-term lease with an initial term of 10 to 20
years or more with a succession of renewal options. All of the Company's
Wal-Mart leases have an initial term of 20 years. Anchor tenants frequently pay
lower rents than non-anchor tenants; however, commitments of anchor tenants who
are creditworthy and have proven track records may enable a developer to obtain
financing and reduce the speculative risk of the development. The presence of a
stable anchor tenant also lends economic stability to the shopping center
because of its long-term lease. It has been demonstrated that the presence of a
strong anchor tenant will attract more customers, which in turn may support the
business of other tenants. As discussed further in Item 7, Wal-Mart has begun
building "supercenters", which contain up to 200,000 square feet and include a
grocery store component in addition to a Wal-Mart discount store. This practice
reflects a broad trend among retailers to maximize selling areas and reduce
costs by constructing supercenters or by emphasizing larger properties and
closing smaller, marginal stores. In response to these changes, which occurred
during the Company's initial acquisition phase, management became particularly
selective in its purchase of existing centers in an effort to address Wal-Mart's
changing needs by generally purchasing centers with larger Wal-Mart stores which
also had future expansion capabilities. Despite such efforts to alter the
Company's acquisition criteria to accommodate Wal-Mart's strategic growth plans,
there are no assurances that the Company will be able to satisfy Wal-Mart's
space and location preferences in any markets in which Wal-Mart determines that
expansion of its existing facilities is desirable. In the event Wal-Mart were to
vacate any of the Company's properties, it would remain obligated to pay rent
and its share of operating expenses through the remaining terms of the leases.
However, unless a suitable replacement anchor tenant could be located, such a
relocation of a Wal-Mart store would have a long-term negative impact on
renewals by other tenants and on the long-term performance of the affected
shopping center. Certain tenants of the Company's properties have co-tenancy
clauses in their lease agreements which stipulate that if the Wal-Mart anchor
space is vacant these tenants are entitled to pay a reduced amount of rent and,
in some cases, retain the right to terminate their lease agreements. Management
expects that there will be Wal-Mart relocation vacancies at certain of its
properties as a result of this trend toward supercenter construction. Wal-Mart's
business, as with most retail sales, is seasonal to an extent, with the highest
volume of sales occurring between the months of November and January and the
lowest volume of sales occurring between the months of February and April. The
Wal-Mart discount stores compete with other department, discount department,
grocery, drug variety and specialty stores, many of which are national or
regional chains. The Company competes for retail tenants with other properties
of similar type in the markets in which its shopping centers are located,
generally on the basis of location, rental rates, tenant improvement allowances,
and tenant mix.
The Company is engaged solely in the business of real estate investment.
Therefore, a presentation of information about industry segments is not
applicable.
There currently are four directors of the Company, three of whom are not
affiliated with the Advisor. The Directors are subject to removal by the vote of
the holders of a majority of the outstanding Shares. The Directors are
responsible for the general policies of the Company, but they are not required
to conduct personally the business of the Company. Subject to the supervision of
the Company's Board of Directors, the business of the Company has been managed
to date by PaineWebber Realty Advisors, L.P. (the "Advisor"), a limited
partnership composed of PaineWebber Properties Incorporated ("PWPI"), a Delaware
corporation, and Properties Associates, L.P., a Virginia limited partnership.
Both partners of the Advisor are affiliates of PaineWebber Incorporated ("PWI").
PWI is a subsidiary of PaineWebber Group Inc. ("PaineWebber").
The terms of transactions between the Company and the Advisor and its
affiliates are set forth in Items 11 and 13 below to which reference is hereby
made for a description of such terms and transactions.
<PAGE>
Item 2. Properties
The Company owns directly, or through a partnership interest, the operating
properties referred to under Item 1 above to which reference is made for the
description, name and location of such properties.
Occupancy figures for each fiscal quarter during 1995, along with an
average for the year, are presented below for each property:
Percent Leased At
------------------ Fiscal 1995
11/30/94 2/28/95 5/31/95 8/31/95 Average
-------- ------- ------- ------- -------
Village Plaza 100% 100% 100% 100% 100%
Logan Place 97% 97% 98% 98% 98%
Piedmont Plaza 100% 100% 100% 100% 100%
Artesian Square 100% 100% 100% 100% 100%
Sycamore Square 93% 87% 87% 89% 89%
Audubon Village 93% 94% 94% 94% 94%
Crossroads Centre 100% 100% 99% 100% 100%
East Pointe Plaza 82% 82% 82% 82% 82%
Cross Creek Plaza 98% 98% 98% 98% 98%
Cypress Bay Plaza 98% 98% 98% 98% 98%
Walterboro Plaza 95% 95% 95% 95% 95%
Lexington Parkway Plaza 96% 96% 88% 88% 92%
Roane County Plaza 100% 100% 100% 100% 100%
Franklin Square 100% 100% 100% 100% 100%
Barren River Plaza 100% 100% 100% 100% 100%
Cumberland Crossing 100% 100% 100% 100% 100%
Applewood Village 100% 100% 100% 100% 100%
Aviation Plaza 99% 99% 99% 99% 99%
Crossing Meadows 100% 100% 100% 100% 100%
Southside Plaza 100% 100% 100% 100% 100%
College Plaza 100% 100% 100% 100% 100%
Marion Towne Center 100% 100% 100% 100% 100%
The Village Plaza shopping center, located in Augusta, Georgia, is the
Company's largest property, representing 11% of the Company's total assets as
of August 31, 1995 and 11% of the Company's total revenues for the year ended
August 31, 1995. The Village Plaza property is encumbered by a mortgage loan
with a principal balance of $18,900,000 as of August 31, 1995. The loan
bears interest at 8% (after the effect a loan buydown fee paid at inception)
and requires monthly payments of interest-only through November 1996.
Thereafter, monthly payments of principal and interest totalling $138,682 are
due through maturity on November 1, 1999. At maturity, a balloon payment of
$18,401,949 would be due. For calendar year 1995, the Company owed real
estate taxes with respect to Village Plaza at a rate of $27.22 per $1,000 of
assessed value. Such taxes amounted to $101,339.
<PAGE>
Certain information concerning the Federal income tax basis of the
Village Plaza property and the methods of depreciation used for Federal
income tax purposes is summarized below (in thousands):
Federal income
tax basis Method of
Property component as of 9/30/95 depreciation used
- ------------------ ------------- -----------------
Land $ 6,307 N/A
Land improvements 3,556 20 year straight-line
Building 14,321 40 year straight-line
Personal property 971 12 year straight-line
Tenant improvements 40 12 year straight-line
-------
$25,195
=======
As of August 31, 1995, three tenants leased greater than 10% of the
leasable square footage at Village Plaza. Certain information regarding
these tenants and their leases is summarized below:
Square Annual Lease
Feet Base Expiration Renewal
Tenant Merchandise Occupied Rent Date Options
------ ----------- -------- ---- --------- -------
Wal-Mart Discount 149,211 $ 380,937 10/28/08 5 successive
Department 5-year options
Store
Sam's Club Member 106,728 $ 531,505 7/11/08 5 successive
Warehouse 5-year options
(Wal-Mart
affiliate)
Home Quarters Home 95,971 $ 434,874 1/31/09 4 successive
Improvements 5-year options
Scheduled lease expirations at Village Plaza over the next ten years are
summarized as follows:
Square Annual
footage base rent
Year Number of of Percent
ended of leases expiring expiring of total
August 31 expiring leases leases base rent
--------- -------- -------- -------- ---------
1996 3 5,600 $ 69,700 3%
1997 1 1,600 $ 21,600 1%
1998 5 15,500 $ 175,699 7%
1999 3 48,960 $ 355,236 14%
2000 4 8,400 $ 96,000 4%
2001 - - - -
2002 1 23,000 $ 184,000 7%
2003 - - - -
2004 - - - -
2005 - - - -
<PAGE>
The average leased percentage and effective rent per square foot for
Village Plaza for each of the past five fiscal years is summarized as follows:
<TABLE>
<CAPTION>
Fiscal 1991 Fiscal 1992 Fiscal 1993 Fiscal 1994 Fiscal 1995
- ---------------- ------------------ ----------------- ----------------- ----------------
Effective Effective Effective Effective Effective
Rent Rent Rent Rent Rent
per per per per per
Average % Square Average % Square Average % Square Average % Square Average % Square
Leased Foot * Leased Foot * Leased Foot * Leased Foot* Leased Foot*
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
94% $5.99 98% $5.61 100% $5.90 100% $5.95 100% $5.98
</TABLE>
* Effective rent per square foot is calculated as total annualized base and
percentage rent divided by average occupied square feet. The amount of
occupied square feet used for this calculation excludes two expansions of
the Wal-Mart anchor store at Village Plaza because the expansions are not
owned by the Company and, therefore, are not covered under the terms of
the lease agreement.
The average leased percentage and effective rent per square foot for each
property (other than Village Plaza) for each of the past three fiscal years
is summarized as follows:
The average leased percentage and effective rent per square foot for each
property (other than Village Plaza) for each of the past three fiscal years is
summarized as follows:
Fiscal 1993 Fiscal 1994 Fiscal 1995
------------------- ---------------- --------------
Effective Effective Effective
Rent Rent Rent
per per per
Average Square Average Square Average Square
% Leased Foot * % Leased Foot* % Leased Foot*
------ ------ ------ ----- ------ ------
Logan Place 92% $ 4.10 95% $ 3.99 98% $ 4.01
Piedmont Plaza 99% $ 5.50 100% $ 5.50 100% $ 5.76
Artesian Square 98% $ 4.84 100% $ 5.17 100% $ 5.23
Sycamore Square 79% $ 4.79 86% $ 4.52 89% $ 4.54
Audubon Village 96% $ 5.52 93% $ 5.25 94% $ 5.33
Crossroads Centre 98% $ 4.85 99% $ 4.66 100% $ 4.70
East Pointe Plaza 73% $ 6.00 76% $ 5.90 82% $ 5.86
Cross Creek Plaza 96% $ 5.82 96% $ 5.94 98% $ 5.92
Cypress Bay Plaza 93% $ 5.21 97% $ 5.38 98% $ 5.66
Walterboro Plaza 98% $ 5.16 97% $ 5.17 95% $ 5.22
Lexington Parkway Plaza 99% $ 4.86 98% $ 4.99 92% $ 4.98
Roane County Plaza 99% $ 4.75 99% $ 4.76 100% $ 4.80
Franklin Square 100% $ 5.07 100% $ 5.18 100% $ 5.27
Barren River Plaza 99% $ 5.24 100% $ 5.15 100% $ 5.26
Cumberland Crossing 97% $ 5.17 100% $ 5.22 100% $ 5.32
Applewood Village 99% $ 4.99 100% $ 5.09 100% $ 5.15
Aviation Plaza 100% $ 5.26 100% $ 5.28 99% $ 5.31
Crossing Meadows 98% $ 5.36 100% $ 5.49 100% $ 5.61
Southside Plaza 100% $ 5.99 100% $ 5.91 100% $ 5.88
College Plaza 100% $ 6.24 100% $ 6.26 100% $ 6.30
Marion Towne Center 100% $ 5.68 100% $ 5.70 100% $ 5.64
* Effective rent per square foot is calculated as total annualized base and
percentage rent divided by average occupied square feet. The amount of
occupied square feet used for this calculation excludes certain expansions of
the Wal-Mart anchor stores at five of the properties because such expansions
are not owned by the Company and, therefore, are not covered under the terms
of the respective lease agreements.
<PAGE>
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership interests and common stock, including
the securities offered by the Company. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group, Inc. (together, "PaineWebber"),
among others, by allegedly dissatisfied investors. In March 1995, after the
actions were consolidated under the title In re PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including PaineWebber Properties Incorporated,
which is the General Partner of the Advisor. The Company is not a defendant in
the New York Limited Partnership Actions. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges,
among other things, that, in connection with the sale of common stock of the
Company, the defendants (1) failed to provide adequate disclosure of the risks
involved; (2) made false and misleading representations about the safety of the
investments and the Company's anticipated performance; and (3) marketed the
Company to investors for whom such investments were not suitable. The
plaintiffs, who are not shareholders of the Company but are suing on behalf of
all persons who invested in the Company, also allege that following the sale of
the common stock of the Company the defendants misrepresented financial
information about the Company's value and performance. The amended complaint
alleges that the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek
unspecified damages, including reimbursement for all sums invested by them in
the Company, as well as disgorgement of all fees and other income derived by
PaineWebber from the Company. In addition, the plaintiffs also seek treble
damages under RICO.
The defendant's time to move against or answer the complaint has not yet
expired, but the Company is informed that PWPI intends to vigorously contest the
allegations of this litigation. The Advisory Agreement and the Company's
Articles of Incorporation require the Company to indemnify the Advisor and other
PaineWebber affiliates for costs and liabilities of litigation in certain
limited circumstances. Management has had discussions with representatives of
PaineWebber, and, based on such discussions, the Company does not believe that
PaineWebber intends to invoke the indemnity. However, if PaineWebber were to
demand the indemnity and such obligation were deemed applicable and enforceable
in connection with the New York Limited Partnership Actions, the indemnity could
have a material adverse effect on the Company's financial statements, taken as a
whole.
In addition, two of the Company's shareholders initiated proceedings in
Virginia state court during fiscal 1995 to compel the Company to deliver the
names and addresses of shareholders. One shareholder has withdrawn his suit and
settled out of court in a confidential settlement with PaineWebber Incorporated.
In the second suit, the circuit court found in favor of the plaintiff and
ordered the Company to provide the names and addresses of shareholders. As of
the date of this report, the circuit court has stayed the order pending the
Company's application for review by the Supreme Court of Virginia. Management
believes that this action will be resolved without material adverse effect on
the Company's financial statements, taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
During the initial public offering period, which commenced October 23,
1989 and closed in the second quarter of fiscal 1991, the selling price of the
shares of common stock was $10 per Share (prior to the effect of the 1 for 2
reverse stock split which was effected in fiscal 1994). As of August 31, 1995,
there were 5,986 record holders of the Company's Shares. At the present time,
there is no established public market for the resale of the Shares.
The Company is required to make distributions to shareholders in an amount
equal to at least 95% of its taxable income in order to continue to qualify as a
REIT. The Company incurred a taxable loss in fiscal 1995 and therefore, was not
required to pay a cash dividend in order to retain its REIT status.
Item 6. Selected Financial Data
RETAIL PROPERTY INVESTORS, INC.
(In thousands, except per share data)
Years ended August 31, 1995, 1994, 1993, 1992 and 1991
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues $ 25,009 $ 24,590 $ 22,606 $ 18,582 $ 14,485
Net income (loss) before
cumulative effect
of change in
accounting method $ (6,364) $ (6,070) $ (1,732) $ (1,990) $ 78
Cumulative effect on
prior periods (to
August 31, 1990)
of change in
accounting method $ -- $ -- $ -- $ -- $ 338
Net income (loss) $ (6,364) $ (6,070) $ (1,732) $ (1,990) $ 416
Per share amounts (1):
Net income (loss)
before cumulative
effect of change in
accounting method $ (1.27)$ (1.21) $ (0.35)$ (0.40) $ 0.02
Cumulative effect on
prior periods (to
August 31, 1990)
of change in
accounting method $ -- $ -- $ -- $ -- $ 0.06
Net income (loss) $ (1.27) $ (1.21) $ (0.35) $ (0.40) $ 0.08
Cash dividends
declared $ -- $ 0.80 $ 1.60 $ 1.60 $ 1.52
Mortgage notes
payable, net $ 156,508 $ 157,599 $ 156,547 $135,978 $ 113,528
Total assets $ 202,544 $ 208,910 $ 219,086 $207,619 $ 199,568
(1) The above per share amounts have been adjusted to give effect to a 1 for 2
reverse stock split of the common stock effective as of September 7, 1993.
See the accompanying financial statements of the Company for further
details regarding the reverse stock split.
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above earnings and cash dividends declared per share of common stock are
based upon the weighted average number of shares outstanding on a daily basis
during the years ended August 31, 1995, 1994, 1993, 1992 and 1991, as adjusted
for the 1 for 2 reverse stock split effective September 7, 1993 (5,010,050,
5,010,050, 5,010,050, 5,010,050 and 4,927,517, respectively). The actual per
share computation for each shareholder for periods prior to fiscal 1992 will
vary according to when the shareholder's shares were issued.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company was formed for the purpose of investing in a portfolio of retail
shopping centers anchored primarily by discount retailers and has invested in
centers containing Wal-Mart Stores, Inc. ("Wal-Mart") as the principal anchor
tenant. The Company raised $100,201,000 in an initial public offering between
October 1989 and December 1990 and completed the investment of the initial net
offering proceeds in fiscal 1993 with the acquisition of the last of its 22
shopping centers. These centers, which were financed with approximately 75%
leverage, contain approximately 4.4 million square feet of leasable space and
include other national and regional credit tenants. Of the total gross leasable
square footage at the Company's properties, 49% is leased to Wal-Mart and its
affiliates and 40% is leased to other national and regional credit tenants. The
overall portfolio occupancy level was 99% as of August 31, 1995. The Company was
originally organized as a finite-life, non-traded REIT. During fiscal 1993,
management of the Company began to pursue a plan to reposition the Company in
response to changes in the market for publicly held REITs at that time. As
reported by the National Association of Real Estate Investment Trusts, Inc.,
capital formation by REITs in 1993 was the greatest in the industry's 33-year
history. The increased activity represented a potentially attractive source of
capital for the Company to refinance its outstanding mortgage indebtedness and
to take advantage of future growth opportunities in the improving real estate
market which existed at that time. In order to position the Company to access
the public capital markets, certain changes to the Company's Articles of
Incorporation and Bylaws were required. Such changes, which were approved by the
required affirmative vote of the shareholders, involved, among other things, the
conversion of the Company from a "finite-life" corporation to an "infinite-life"
corporation, an increase in the number of authorized shares of the Company's
common stock from 12,500,000 to 25,000,000, the completion of a 1 for 2 Reverse
Stock Split of the Company's outstanding shares of common stock and the
conversion from an externally advised REIT to a self-administered REIT.
Due to changes in interest rate levels and other market factors which
adversely affected the market for new public REIT equity offerings during the
latter half of calendar 1994 and the first half of calendar 1995, the Company
has not completed the final phase of its restructuring plans, which included the
conversion to self-administration, the completion of a second equity offering of
its common stock and the listing of the Company's common stock on a national
securities exchange. In view of the existing capital market conditions and the
resulting possibility that such restructuring plans might not be feasible in the
near term, the Company's Board of Directors engaged the investment banking firm
of Lehman Brothers Inc. ("Lehman") in June of 1995 to act as its financial
adviser and to provide financial and strategic advisory services to the Board of
Directors regarding options available to the Company. The strategic options
considered included, among other things, a recapitalization of the Company,
sales of the Company's assets and the exploration of merger opportunities.
Lehman's services have included the solicitation and identification of potential
transactions for the Company, the evaluation of these transactions, and the
provision of advice to the Board regarding them. In November 1995, Lehman
presented a summary to the Board of the proposals received to date. All of the
proposals were indications of interest from third parties to buy the Company's
real estate assets. At such time, the Board concluded that it would be in the
shareholders' best interests to immediately initiate the process of soliciting
firm offers to purchase the Company's portfolio of operating investment
properties. The Directors have instructed Lehman to work with the various third
parties that have expressed an interest in such a transaction to obtain
transaction terms most favorable to the Company and its shareholders. At the
conclusion of this process, which will include all required buyer's due
diligence, the Directors expect to submit and recommend for approval by the
shareholders what, in their judgment, is the most favorable proposal. Pursuant
to the Company's Articles of Incorporation, the sale of all, or substantially
all, of the Company's real estate assets would require shareholder approval.
Because the sale of the Company's real estate assets remains contingent upon,
among other things, satisfactory completion of buyer's due diligence,
negotiation of a definitive sales agreement and the required shareholder
approval, there are no assurances that such a transaction will be completed.
The Company's original investment objectives were to (1) provide quarterly
cash distributions, a substantial portion of which was expected to have deferred
federal income tax liability; (ii) achieve long-term capital appreciation
through potential appreciation in the values of the Company's properties; and
(iii) preserve and protect the shareholders' capital. The Company, for the most
part, has not achieved these original objectives. From its inception in 1989
through the end of fiscal 1993, the Company was in the process of investing the
net proceeds of its initial public offering. Delays in the placement of such
proceeds in real estate assets resulted from a number of unforeseen changes in
the real estate and mortgage financing markets. Because the acquisition period
was longer than originally anticipated and because there was a significant
decline in short-term reinvestment rates during the acquisition period, the
Company had lower than anticipated earnings during this period. In addition to
the extended acquisition period, the Company's earnings were affected by changes
in its acquisition criteria. As Wal-Mart accelerated its in-house development
activity and increased the size of its prototype store, the Company attempted to
keep pace with these developments by modifying its acquisition criteria. As a
result, acquisition costs exceeded the original budgets for legal and investment
analysis expenses. The consequences of these conditions are that the Company
supported a portion of its quarterly dividend payments to shareholders during
this period by returning capital from cash reserves. The use of cash reserves in
this manner, along with the need for funds to pay for the initial costs of
pursuing the desired restructuring and recapitalization transactions, led to the
Directors' decision to suspend dividend payments in the second quarter of fiscal
1994. Through the date of the dividend suspension in fiscal 1994, shareholders
had received total dividend payments of approximately $30.8 million, of which
approximately $9.7 million was from cash reserves. Based on the preliminary
results of Lehman's solicitation of potential transactions, it does not appear
that the Company will realize any appreciation in the aggregate value of the
operating investment properties if, as expected, it completes a portfolio sale
transaction in the near term. The unadjusted cost basis of the Company's
portfolio of operating properties totalled $222,974,000 (including capitalized
acquisition fees and expenses of $6.7 million) as of August 31, 1995. Real
estate values for retail shopping centers in many markets have begun to be
affected by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. In addition, the conditions in the
capital markets for public REIT stocks discussed further above have resulted in
a drop off in acquisition demand from large institutional buyers of retail
properties. Lastly, certain strategic changes in Wal-Mart's corporate growth
plans, which are discussed in more detail below, appear to have resulted in
potential buyers attributing a higher leasing risk to the Company's portfolio of
properties. In light of such conditions, the Board of Directors believes that a
bulk sale of the portfolio of properties may result in higher net proceeds than
if the properties were sold on an individual basis, and therefore may represent
the best available course of action for the Company's shareholders.
Based on the Board's decision to solicit offers to purchase the Company's
portfolio of properties in the near term, the payment of regular quarterly
dividends will not be reinstated at this time. A distribution of net sales
proceeds and accumulated cash reserves, after payment of all liquidation-related
expenses, would be made subsequent to the completion of a sale transaction. As a
result of the Company's plans to pursue a course of action which is expected to
result in the sale of all of the operating investment properties during fiscal
1996, the Company's financial statements as of August 31, 1995 reflect the
reclassification of the operating investment properties and certain related
assets to operating investment properties held for sale and the writedown of the
individual properties to the lower of adjusted cost or net realizable value. The
Company recorded an impairment loss for financial reporting purposes of
$3,850,000 in fiscal 1995 in connection with this accounting treatment. The
resulting writedown applies only to the properties for which losses are expected
based on the estimated fair values. The expected gains on properties for which
fair value less costs to sell exceeds the adjusted cost basis will be recognized
in the period in which a sale transaction is completed.
Over the past several years, Wal-Mart has significantly changed its
prototype store concept, requiring larger stores with additional expansion space
to accommodate increasing per store sales volume. Additionally, Wal-Mart has
begun building "supercenters", which contain up to 200,000 square feet and
include a grocery store component in addition to a Wal-Mart discount store. This
practice reflects a broad trend among retailers to maximize selling areas and
reduce costs by constructing supercenters or by emphasizing larger properties
and closing smaller, marginal stores. In response to these changes, which
occurred during the Company's initial acquisition phase, management became
particularly selective in its purchase of existing centers in an effort to
address Wal-Mart's changing needs by generally purchasing centers with larger
Wal-Mart stores which also had future expansion capabilities. Despite such
efforts to alter the Company's acquisition criteria to accommodate Wal-Mart's
strategic growth plans, there are no assurances that the Company will be able to
satisfy Wal-Mart's space and location preferences in any markets in which
Wal-Mart determines that expansion of its existing facilities is desirable. In
the event Wal-Mart were to vacate any of the Company's properties, it would
remain obligated to pay rent and its share of operating expenses through the
remaining terms of the leases, which have scheduled expiration dates between the
years 2007 and 2012. However, unless a suitable replacement anchor tenant could
be located, such a relocation of a Wal-Mart store would have a long-term
negative impact on renewals by other tenants and on the long-term performance of
the affected shopping center. Certain tenants of the Company's properties have
co-tenancy clauses in their lease agreements which stipulate that if the
Wal-Mart anchor space is vacant these tenants are entitled to pay a reduced
amount of rent and, in some cases, retain the right to terminate their lease
agreements. To date, Wal-Mart has completed or begun expansions of its existing
stores at 6 of the Company's 22 properties. At both the Village Plaza and
Franklin Square properties, two separate expansions of the original Wal-Mart
space have been completed to date. Such Wal-Mart expansions have been
constructed and financed by Wal-Mart and, as a result, do not generate any
additional rental income for the Company. However, benefits to the Company
include increased shopper traffic as described above which generally strengthens
the performance of other tenants in the center, cost savings which result from
sharing fixed operational expenses over a larger tenant base, and a
reinforcement of Wal-Mart's long-term commitment to the respective center. As
previously reported, the Company had been working with Wal-Mart on plans to
redevelop and expand its store at Applewood Village. However, Wal-Mart has
exercised an option on an alternative site and it appears likely that Wal-Mart
will relocate in this market. In addition, it was previously reported that a
Wal-Mart expansion at Cross Creek Plaza was expected to start shortly. During
the third quarter of fiscal 1995, the Company was informed that Wal-Mart is not
proceeding with the expansion at this time in order to re-evaluate its prototype
store requirements in this market area, and does not anticipate any expansion
until 1997. Subsequent to year end, Wal-Mart announced plans to build a 200,000
square foot supercenter on land secured by the Company adjacent to Audubon
Village. The construction of this supercenter will be financed by Wal-Mart,
which will purchase the option to buy the land from the Company. The fact that
this new supercenter will be located adjacent to the Company's property should
mitigate the impact on property operations of this Wal-Mart relocation. The
construction and operation of the Wal-Mart supercenter is expected to solidify
the Audubon Village property's location as the retail hub in the market area and
enhance leasing activities for the remaining shop space. Although Wal-Mart will
close its store in Audubon Village when it opens its new supercenter, it will
remain obligated to pay rent and its pro-rata share of the shopping center's
expenses. Furthermore, the increased level of shopper traffic that is expected
to be generated by the new Wal-Mart supercenter may provide an opportunity to
re-lease the vacated Wal-Mart store at Audubon Village to another single anchor
tenant or multiple tenants under more favorable lease terms than the present
Wal-Mart lease would provide. However, there are no assurances that such leasing
results will be achieved. Management expects that there will be additional
Wal-Mart relocations which could affect certain of the Company's properties over
the course of the next several years as a result of this trend toward
supercenter construction. Management has been and will continue, over the
Company's remaining holding period, to be proactive in securing additional land,
relocating tenants and working with Wal-Mart to accommodate its expansion plans
in order to attempt to minimize the Company's Wal-Mart relocation risk.
At the present time, the leasing status of the Company's non-Wal-Mart space
remains strong. All but three of the properties maintained overall occupancy
levels of 94% or better as of year end. The remaining vacancy at East Pointe
Plaza, which was 82% leased as of August 31, 1995, consists primarily of the
40,000 square foot anchor space vacated in fiscal 1993 by a national chain that
declared bankruptcy. A lease has been executed for 16,400 square feet of this
space with a strong regional clothing retailer. Lease negotiations are ongoing
with a pet supply superstore for the remaining 23,600 square feet. The Company
expects to spend approximately $380,000 to re-configure this space to
accommodate these two tenants. If both of these tenants take occupancy at East
Pointe, the center would be 98% occupied. The same regional clothing retailer
moving into East Pointe has also executed a lease at Lexington Parkway Plaza for
the vacant 17,050 square foot space at that property, which was 92% leased as of
August 31, 1995. Subsequent to year end, the Company spent approximately $87,000
on tenant improvements to prepare the space for this tenant, which will open for
business in December 1995. Once this tenant takes occupancy, the property will
be 100% leased. The only other property with any significant vacancy is Sycamore
Square, which was 89% leased as of year end. This shopping center, which is
located in Ashland, Tennessee, is the smallest of the Company's properties, with
93,000 square feet of leasable space. As previously reported, the Company had
been considering the acquisition of an adjacent parcel of land at Aviation Plaza
to construct a 50,000 square foot anchor space for a national credit tenant plus
15,000 square feet of additional shop space. During the second quarter of fiscal
1995, negotiations regarding this potential development reached an impasse, and
the Company did not extend its option to purchase the required parcel of land.
However, an unrelated entity is proceeding with a development of a JC Penney
store on this site, which should have a favorable impact on traffic at Aviation
Plaza. At College Plaza, the Company reviewed a possible land acquisition and
development plan for an expansion which would consist of a new 30,000 square
foot junior department store plus 15,000 square feet of additional shop space.
For the present time, management has postponed pursuit of these expansion plans.
In addition to the general retail market conditions and Wal-Mart
relocation risk discussed above, the decision by the Directors to pursue a sale
of the Company's real estate assets at the present time is also partly based on
the refinancing risk to which the Company has been and would remain subject in
the event that it continues to hold the operating properties for long-term
investment purposes. As noted above, the Company financed approximately 75% of
the original purchase prices of its 22 Wal-Mart anchored shopping centers with
loans having terms of between 4 and 10 years. The first phase of these maturity
dates occurred between December 1994 and September 1995. During fiscal 1995 the
Company completed the refinancings of all of the mortgage loans maturing in
fiscal 1995 and the first half of fiscal 1996. At such time, the Company was
still pursuing its restructuring plans. Accordingly, the Company sought to
obtain the flexible prepayment terms and/or shorter term loans which would
accommodate such plans. In total, mortgage loans representing 28% of the
originally issued debt secured by seven of the Company's operating investment
properties have been refinanced. The mortgage loans that were repaid had
outstanding principal balances which totalled $47,290,000 and effective interest
rates ranging from 9.34% to 10.02% per annum. The new mortgage loans, together
with an unsecured note in the amount of $1,175,000 which was taken back by an
affiliate, had initial principal balances aggregating $47,000,000 and all
require monthly principal and interest payments throughout their terms, which
range from 3 to 20 years. One mortgage loan in the initial principal amount of
$24,200,000, which is secured by three operating investment properties, carries
a variable interest rate equal to the 30-day LIBOR rate plus 3.5% per annum for
the first twelve months, 30-day LIBOR plus 3.75% for the next twelve months and
30-day LIBOR plus 4.25% for the final twelve months. The 30-day LIBOR rate was
equal to 6.06% per annum as of August 31, 1995. The rest of the new mortgage
loans bear interest at fixed rates ranging from 8.75% to 9.125% per annum. The
Company paid approximately $1,439,000 toward the closing of these new loans to
cover third-party financing fees and transaction costs. The Company also paid
$290,000 toward the reduction of the principal balances of the loans. The
Applewood Village loan, which had been held by an affiliate, PaineWebber
Properties Incorporated ("PWPI"), since September 1993, had a principal balance
of $5,175,000. On June 14, 1995, the Company secured a new mortgage loan in the
amount of $4,000,000 which repaid a portion of the PWPI loan. PWPI agreed to
take back an unsecured loan for the difference, in the amount of $1,175,000. The
unsecured loan has a 15-year term and carries an interest rate tied to PWPI's
cost of funds, not to exceed 8% per annum. The lower principal balance on the
new mortgage loan reflects the uncertainty associated with the relocation of the
Wal-Mart anchor store at the Applewood property, as discussed further above.
<PAGE>
Certain of the Company's outstanding mortgage loans include substantial
prepayment penalties. In the event that the Company proceeds with a portfolio
sale transaction in the near term, such penalties would be payable to the
lenders unless the prospective buyer agrees to assume the outstanding loan, if
permitted under the terms of the loan agreement, or unless the Company can
negotiate any reduction in the contractual amounts owed. The evaluation of any
firm purchase offers received will include an assessment of the impact of the
terms of such offers on any debt prepayment penalties which would be borne by
the Company. The remaining fiscal 1996 loan maturities, totalling $13,498,000,
are scheduled for the spring of 1996 and will occur prior to the expected
completion date of a portfolio sale transaction. Accordingly, management is
evaluating the refinancing options available to the Company in addition to
initiating discussions with the current lenders regarding possible extensions of
the scheduled maturity dates. The goal for any contemplated refinancings, in
light of the Company's potential portfolio sale plans, would be to minimize
transaction costs while obtaining attractive and assumable terms. Management
believes that with the current favorable interest rate environment and the
strong supply of capital which continues to be available for real estate
lending, completing the required refinancing or extension transactions for these
maturing obligations should be achievable. In addition, the Company has
accumulated significant liquidity as a result of the suspension of dividend
payments which could be used in the event that market conditions change and
additional equity is required to be contributed to complete such transactions.
The next significant loan maturities are not scheduled until fiscal 1998.
As reported on the Company's Statements of Cash Flows, net cash provided by
operating activities increased by approximately $3,473,000 in fiscal 1995 as
compared to the prior year. As discussed in more detail below, in fiscal 1994
the Company incurred significant expenses in pursuing its restructuring plans
which were charged to operations as a result of the delays in the plans for a
secondary equity offering. Net cash provided by investing activities totalled
$132,000 during fiscal 1995, as compared to net cash used for investing
activities of $1,315,000 for fiscal 1994. This increase in net cash flows from
investing activities primarily reflects a decrease in funds spent on tenant
improvements in fiscal 1995 and the initial funding of the capital improvement
reserve in fiscal 1994. The Company had net cash used for financing activities
of $2,928,000 in fiscal 1995, as compared to $4,528,000 for fiscal 1994. This
change is a direct result of the suspension of dividends which took place in the
second quarter of fiscal 1994. This elimination of dividend payments for all of
fiscal 1995 was partially offset by the use of funds to pay down principal on
the Company's mortgage loans and pay transactions costs as part of the
refinancing transactions discussed further above.
As of August 31, 1995, the Company had available cash and cash equivalents
of approximately $5,943,000. Such amounts will be used for leasing costs,
financing expenses and the Company's working capital requirements. In addition,
as of August 31, 1995 the Company had a capital improvement reserve of
approximately $1.2 million which is available, in part, to pay for the costs of
required capital improvements to the operating properties. The source of future
liquidity and dividends to the shareholders is expected to be through cash
generated from the operations of the income-producing properties, interest
income on working capital reserves and proceeds from the sale or refinancing of
the investment properties. Such sources of liquidity are expected to be
sufficient to meet the Company's needs on both a short-term and long-term basis.
The Company generally will be obligated to distribute annually at least 95% of
its taxable income to its shareholders in order to continue to qualify as a REIT
under the Internal Revenue Code. The Company incurred a loss for both book and
tax purposes in fiscal 1995 and, therefore, was not required to pay a cash
dividend in order to retain its REIT status. Due to the non-cash depreciation
and amortization charges which will continue to be recognized for both book and
tax purposes, losses are expected to be reported in 1996 as well.
Results of Operations
1995 Compared to 1994
The Company reported a net loss of $6,364,000 for the year ended August
31, 1995, as compared to a net loss of $6,070,000 for the prior year. The
increase in net loss occurred despite a decrease in non-recurring charges
recorded in fiscal 1995 as compared to the prior year. Due to changing
conditions in the debt and equity markets which impacted the Company's
restructuring plans, the Company took significant charges against earnings in
fiscal 1994 to reflect certain costs incurred in connection with the
restructuring plans which were either no longer expected to have future economic
benefit or were no longer deferrable because the prospects for a second equity
offering were uncertain as of the end of fiscal 1994. Acquisition due diligence
costs totalling approximately $2,015,000 and non-deferrable offering expenses of
$1,561,000 were charged to earnings in fiscal 1994. In addition, interest
expense and related fees in fiscal 1994 included $760,000 paid to one of the
Company's mortgage lenders to extend a debt prepayment agreement, which was
entered into as part of the Company's restructuring plans, but which was allowed
to lapse due to increases in market interest rates. Such non-recurring charges,
which totalled $4.3 million, were approximately $400,000 greater than the
non-recurring charges reflected in the fiscal 1995 net loss, which consist
primarily of the writedown of the Company's assets to the lower of adjusted cost
or fair value less costs to sell at August 31, 1995, in the amount of $3.9
million, as discussed further above.
<PAGE>
The unfavorable change in the Company's net operating results for fiscal
1995 was primarily the result of increases in interest expense, depreciation and
amortization and general and administrative expenses during fiscal 1995.
Interest expense, net of the prior year prepayment extension fees referred to
above, increased by $584,000 mainly due to the write-off of unamortized loan
buydown fees totalling $336,000 at the time of the Lexington Parkway, Roane
County and Applewood Village mortgage loan refinancings. Interest expense also
increased due to additional amortization of deferred loan costs associated with
the loans refinanced in the current year and increases in the prime lending
rate, upon which the variable rate College Plaza loan is based. Non-cash
depreciation and amortization charges increased by $161,000 due to property
expansion and tenant improvement costs, as well as the related leasing
commissions, which have been incurred over the past two years. General and
administrative expenses increased by $734,000 in fiscal 1995 partly as a result
of certain costs, totalling approximately $289,000, which were incurred in
connection with an independent valuation of the Company's operating properties
which was commissioned in fiscal 1995 as part of management's ongoing
refinancing and portfolio management efforts. In addition, fiscal 1995 general
and administrative expenses include certain professional fees and other costs,
of approximately $258,000, which were incurred during the first quarter in
connection with the Company's planned conversion to self-administration and
self-management.
An increase in revenues of $419,000 and decreases in bad debt expense, REIT
management fees and financial and investor servicing expenses for the year ended
August 31, 1995 served to partially offset the unfavorable changes referred to
above. The increase in revenues is mainly due to a 1% increase in base rental
income and a $179,000 increase in interest income. The increase in base rental
income is attributable to base rent increases on lease renewals as well as the
signing of several new leases during fiscal 1995. The increase in interest
income was achieved due to the higher average invested cash reserve balances
which have resulted from the suspension of the Company's dividend payments to
shareholders. REIT management fees and financial and investor servicing fees
declined by a total of $261,000 due to the Advisor's decision to waive
collection of such amounts effective March 1, 1995. The Advisor agreed to forego
payments for its services for a period of at least one year as an accommodation
to the Company in order to maximize earnings and cash flow while the strategic
plans regarding the Company's future operations are evaluated and implemented.
1994 Compared to 1993
The Company reported a net loss of approximately $6,070,000 for fiscal
1994, as compared to a net loss of approximately $1,732,000 for the prior year.
The increase in net loss was due, in large part, to the expenses incurred in
pursuing certain shareholder approvals and restructuring plans. Due to the
changing conditions in the debt and equity markets which impacted the Company's
restructuring plans, the Company took significant charges against earnings in
fiscal 1994 to reflect certain costs incurred in connection with the
restructuring plans which were either no longer expected to have future economic
benefit or were no longer deferrable because the prospects for a second equity
offering were uncertain as of the end of fiscal 1994. Acquisition due diligence
costs totalling approximately $2,015,000 related to certain properties that were
reviewed for potential acquisition as part of the planned public offering, but
were withdrawn by the sellers due to delays in the timing of the offering, were
written off to investment analysis expense during fiscal 1994. All expenses
incurred in connection with the planned equity offering, as well as a possible
securitized debt offering, were written off to non-deferrable offering expenses.
The non-deferrable offering expenses, which totalled approximately $1,562,000,
include legal, regulatory and rating agency expenses, in addition to costs
incurred in determining the appropriate terms for the proposed equity offering
and preparing required filings for regulatory purposes. Additionally, extension
fees of $760,000 related to the debt prepayment agreement which lapsed during
fiscal 1994, were included in the balance of interest expense and related fees
in fiscal 1994.
Net operating income from the Company's shopping centers, before
depreciation expense and amortization of loan buydown fees increased from
approximately $6,640,000 for fiscal 1993 to approximately $7,526,000 for fiscal
1994. The increase in net operating income from the properties resulted mainly
from the additional contribution of operating income from the three shopping
centers purchased during fiscal 1993. In addition, leasing gains at several of
the properties accounted for a portion of the increase in rental income and
expense reimbursements during fiscal 1994. As of August 31, 1994, the portfolio
was 99% leased on average. Non-cash depreciation and amortization charges
increased by approximately $764,000 in fiscal 1994, mainly due to acquisitions,
property expansions and tenant improvements.
1993 Compared to 1992
The Company reported a net loss of approximately $1,732,000 for fiscal
1993 as compared to a net loss of approximately $1,990,000 in fiscal 1992. As of
August 31, 1993, the Company had acquired 22 retail shopping centers. The
Company had 19 shopping centers in its portfolio at the end of fiscal 1992.
Accordingly, the results of operations for the twelve months ended August 31,
1993 are not directly comparable to fiscal 1992 as a result of new acquisitions
in 1993 and the reflection of partial year operations for acquisitions in the
prior year.
<PAGE>
Net operating income from the Company's shopping centers, before
depreciation expense and amortization of loan buydown fees increased from
approximately $4,355,000 for fiscal 1992 to approximately $6,640,000 for fiscal
1993. The increase in net operating income from the properties resulted
primarily from the incremental contribution of operating income from the six
shopping centers purchased during the 24 months ended August 31, 1993. In
addition, base rental revenues increased at 10 of the 16 properties that the
Company owned for all of fiscal 1992 and 1993. Offsetting the increase in
property operating income was a decline in interest income of approximately
$1,019,000 which reflected both the investment of offering proceeds in real
estate assets and a decline in interest rates earned on reserves and uninvested
proceeds. General and administrative expenses decreased in fiscal 1993 as a
result of lower professional fees associated with the management of the
Company's assets. Professional fees declined in fiscal 1993 in part due to a
reduction in required legal fees associated with administering certain loan and
acquisition escrow reserves and due to the expiration, or impending expiration,
of a number of the Company's master lease agreements.
Inflation
The Company commenced operations on August 9, 1989 and completed its sixth
full year of operations in fiscal 1995. The effects of inflation and changes in
prices on the Company's operating results to date have not been significant.
Inflation in future periods is likely to have a minimal effect on the Company's
net cash flow. Virtually all of the tenants in the Company's retail properties
have leases which require the tenants to bear certain costs of maintenance,
insurance, and property taxes. As a result, inflationary increases in such
expenses would be passed through to the tenants, thereby limiting the Company's
exposure to property operating expenses attributable to vacant space. In
addition, the majority of the tenant leases provide for the payment of
additional rentals calculated as a percentage of tenant revenues over stated
base amounts. Tenant revenues would be expected to rise during periods of
inflation. Such increases in tenant reimbursements and percentage rentals would
be expected to offset, for the most part, increases in property and Company
operating expenses.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
There currently are four directors of the Company, three of whom are not
affiliated with the Advisor. The directors are subject to removal by the vote of
the holders of a majority of the outstanding shares. The directors are
responsible for the general policies of the Company, but they are not required
to conduct personally the business of the Company.
(a) and (b) The names and ages of the directors and executive officers
of the Company are as follows:
Date Elected
Name Office Age to Office
- ------------------------- ------------------------- --- ----------
Lawrence A. Cohen President, Chief Executive
Officer and Director 42 5/15/91
Lawrence S. Bacow (1) Director 44 8/20/93
Joseph W. Robertson, Jr. (1) Director 48 10/20/89
J. William Sharman, Jr. (1) Director 55 10/20/89
Walter V. Arnold Senior Vice President and
Chief Financial Officer 48 10/20/89
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 42 5/31/91
Timothy J. Medlock Vice President and Treasurer 34 10/20/89
Rock M. D'Errico Vice President 39 11/01/89
Dorothy F. Haughey Secretary 69 10/20/89
(1) Member of the Audit Committee. The Board of Directors of the Company has
established an Audit Committee that consists of the Independent Directors.
Independent Directors are those Directors who are not affiliated, directly
or indirectly, with an affiliate of the Company. The Audit Committee was
established to make recommendations concerning the engagement of independent
public accountants, review with the independent public accountants the plans
and results of the audit engagement, approve professional services provided
by the independent public accountants, review the independence of the
independent public accountants, consider the range of audit fees and review
the adequacy of the Company's internal accounting controls.
(c) PaineWebber Properties Incorporated ("PWPI"), a general partner of the
Advisor, assists the directors and officers of the Company in the management and
control of the Company's affairs. The principal executive officers of PWPI are
as follows:
Name Office Age
- ----------------- ------------------------------------- ---
Lawrence A. Cohen President and Chief Executive Officer 42
Walter V. Arnold Senior Vice President and Chief
Financial Officer 48
James A. Snyder Senior Vice President 50
John B. Watts III Senior Vice President 42
David F. Brooks First Vice President and
Assistant Treasurer 53
Timothy J. Medlock Vice President and Treasurer 34
Thomas W. Boland Vice President 33
(d) There is no family relationship among any of the foregoing directors or
officers. All of the foregoing directors and officers of the Company have been
elected to serve until the Company's next annual meeting.
(e) The business experience of each of the directors and officers of the
Company, as well as the principal executive officers of PWPI, is as follows:
Lawrence A. Cohen has served as President, Chief Executive Officer and
Director of the Company since 1991. Mr. Cohen is also President and Chief
Executive Officer of PWPI. Mr. Cohen joined PWPI in January 1989 as its
Executive Vice President and Director of Marketing and Sales. He is a member
of the Board of Directors and the Investment Committee of PWPI. Mr. Cohen is
also a member of the board of directors of PaineWebber Independent Living
Mortgage Fund, Inc. ("PWIL I") and PaineWebber Independent Living Mortgage
Inc. II ("PWIL II"). PWIL I and PWIL II are REITs that were formed to invest
in mortgage loans secured by rental housing projects for independent senior
citizens. From 1984 to 1988, Mr. Cohen was First Vice President of VMS Realty
Partners where he was responsible for origination and structuring of real
estate investment programs and for managing national broker-dealer
relationships. Mr. Cohen received his L.L.M (in Taxation) from New York
University School of Law and his J.D. degree from St. John's University School
of Law. Mr. Cohen received his B.B.A degree in Accounting from George
Washington University. He is a member of the New York Bar and is a Certified
Public Accountant.
Lawrence S. Bacow is a professor at the Massachusetts Institute of
Technology ("M.I.T.") where he is on the faculty of the M.I.T. Center for Real
Estate and the M.I.T. Department of Urban Studies and Planning. He joined the
Company as a director in August 1993. Professor Bacow joined the M.I.T.
faculty in 1977 and served as a director of the Center for Real Estate from
1990 until 1992. While on leave from M.I.T. from 1985 to 1987, Professor
Bacow served as Chief Operating Officer of Spaulding Investment Company, a New
England-based real estate firm. From 1990 to 1992, he was a principal of
Artel Associates, Inc., a provider of real estate advisory services to
investment entities. Professor Bacow is a director of Northland Investment
Corporation and Grubb & Ellis. He received his B.S. in economics from M.I.T.,
his J.D. from Harvard Law School, and his Ph. D. from Harvard's Kennedy School
of Government.
Joseph W. Robertson, Jr. has served as a director of the Company since
1989. Mr. Robertson is Executive Vice President and Chief Financial Officer
of Weingarten Realty Investors, a REIT that owns, develops and operates
shopping centers and other commercial real estate. In 1971, Mr. Robertson
joined Weingarten Realty, Inc., the predecessor of Weingarten Realty
Investors, and served as Executive Vice President and Chief Financial Officer
from 1980 to 1985 when Weingarten Realty Investors was formed. Mr. Robertson
serves as a trustee of Weingarten Realty Investors and as a director of
Weingarten Properties, Inc.
J. William Sharman, Jr. is a director of the Company and has held such
position since he was elected to the Board of Directors as of October 20,
1989. Mr. Sharman is also a director of PWIL 1 and PWIL II. Mr. Sharman is
the Chairman of the Board and President of Lancaster Hotel Management, L.C., a
hotel management company, and Bayou Equities, Inc. , a hotel development
company. Mr. Sharman served for ten years as Chairman of the Board and
President of The Lancaster Group, Inc., a real estate development firm based
in Houston, Texas, which is the predecessor of Lancaster Hotel Management,
L.C., and Bayou Equities, Inc. Mr. Sharman is Vice Chairman of Small Luxury
Hotels, Ltd. of the United Kingdom, an international hotel marketing and
reservations firm. He has a Bachelor of Science degree in Civil Engineering
from the University of Notre Dame. In April 1991, Mr. Sharman filed personal
bankruptcy and was discharged in October 1991 without exceptions or
objections. Mr. Sharman's bankruptcy resulted from the refusal of an RTC
successor-lender to renegotiate repayment terms of a commercial mortgage
personally guaranteed by Mr. Sharman on a hotel owned by a partnership in
which Mr. Sharman was a limited partner.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Company and Senior Vice President and Chief Financial Officer of PWPI which
he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of
Rotan Mosle, Inc. where he had been First Vice President and Controller since
1978, and where he continued until joining PWPI. He began his career in 1974
with Arthur Young & Company in Houston. Mr. Arnold is a Certified Public
Accountant licensed in the state of Texas.
<PAGE>
James A. Snyder is a Senior Vice President of the Company and a Senior Vice
President and Member of the Investment Committee of PWPI. Mr. Snyder re-joined
PWPI in July 1992 having served previously as an officer of PWPI from July 1980
to August 1987. From January 1991 to July 1992, Mr. Snyder was with the
Resolution Trust Corporation, where he served as the Vice President of Asset
Sales prior to re-joining PWPI. From February 1989 to October 1990, he was
President of Kan Am Investors, Inc., a real estate investment company. During
the period August 1987 to February 1989, Mr. Snyder was Executive Vice President
and Chief Financial Officer of Southeast Regional Management Inc., a real estate
development company.
John B. Watts III is a Senior Vice President of the Managing General
Partner and a Senior Vice President of the Adviser which he joined in June 1988.
Mr. Watts has had over 16 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of
PWPI. Mr. Brooks joined PWPI in March 1980. From 1972 to 1980, Mr. Brooks
was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from
March 1974 to February 1980, the Assistant Treasurer of Capital for Real
Estate, which provided real estate investment, asset management and consulting
services.
Timothy J. Medlock is Vice President and Treasurer of the Company and a Vice
President and Treasurer of PWPI which he joined in 1986. From June 1988 to
August 1989, Mr. Medlock served as the Controller of PWPI. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Rock M. D'Errico is Vice President of the Company and a Vice President of
PWPI which he joined in 1986. Previously he was associated with First Winthrop
Corporation and John Hancock Mutual Life Insurance Company as a Real Estate
Asset Manager.
Thomas W. Boland is a Vice President and Manager of Financial Reporting of
PWPI which he joined in 1988. From 1984 to 1987 Mr. Boland was associated
with Arthur Young & Company. Mr. Boland is a Certified Public Accountant
licensed in the state of Massachusetts. He holds a B.S. in Accounting from
Merrimack College and an M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Company, Assistant Secretary of
PaineWebber and Secretary of PWI and PWPI. Ms. Haughey joined PaineWebber in
1962.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Company, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that, during the year ended August 31, 1995, all filing
requirements applicable to its officers, directors and ten-percent beneficial
holders were complied with.
Item 11. Executive Compensation
The three unaffiliated directors each receive an annual fee of $12,000, plus
$1,000 for each meeting attended, and reimbursement for expenses incurred in
attending meetings and as a result of other work performed for the Company. The
affiliated director does not receive any compensation from the Company.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of the date hereof, no person of record owns or is known by the
Registrant to own beneficially more than five percent of the outstanding shares
of common stock of the Company.
(b) The following table sets forth the ownership of shares owned directly or
indirectly by the Directors and principal officers of the Company as of August
31, 1995:
Number of Shares
Beneficially Percent
Title of Class Name of Beneficial Owner Owned of Class
- -------------- ------------------------ --------------- ----------
Shares of Lawrence A. Cohen 350 Shares Less than 1%
Common Stock
All Directors and Officers 350 Shares Less than 1%
of the Company, as a group
(c) There exists no arrangement, known to the Company, the operation of
which may at a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
The Company has entered into an advisory agreement with PaineWebber Realty
Advisors, L.P. (the "Advisor") to perform various services in connection with
the sale of the Shares, the management of the Company and the acquisition,
management and disposition of the Company's investments. The Advisor is a
limited partnership composed of PaineWebber Properties Incorporated ("PWPI") as
the general partner and Properties Associates, L.P. ("PA") as the limited
partner. Both partners of the Advisor are affiliates of PaineWebber Incorporated
("PWI"), which is a wholly owned subsidiary of PaineWebber Group, Inc.
("PaineWebber"). The advisory agreement is renewable on an annual basis at the
discretion of the Company's Board of Directors. The type of compensation to be
paid by the Company to the Advisor and its affiliates under the terms of the
Advisory Agreement is as follows:
(i) Under the Advisory Agreement, the Advisor has specific management
responsibilities to perform day-to-day operations of the Company and
to act as the investment advisor and consultant for the Company in
connection with general policy and investment decisions. The Advisor
will receive an annual Asset Management Fee and an Advisory Incentive
Fee of 0.25% and 0.25%, respectively, of the Capital Contributions of
the Company. The Advisory Incentive Fee is subordinated to the
shareholders' receipt of distributions of net cash sufficient to
provide a return equal to 8% per annum on their Invested Capital, as
defined. During the quarter ended February 28, 1994, the payment of
regular quarterly distributions was temporarily suspended.
Accordingly, the Advisor has not earned any Advisory Incentive Fees
since December 1, 1993. Effective March 1, 1995, the Advisor agreed
to indefinitely waive its management fees in order to maximize the
Company's earnings and cash flow while certain strategic plans
regarding the Company's future operations are evaluated and
implemented. The Advisor earned asset management fees of $125,000
for the year ended August 31, 1995 which reflects management fees
paid from September 1, 1994 through February 28, 1995.
(ii) For its services in finding and recommending investments, and for
analyzing, structuring and negotiating the purchase of properties by the
Company, PWPI will receive non-recurring Acquisition Fees equal to 3% of
the Capital Contributions. PWPI received acquisition fees in connection
with the Company's real estate investments in the amount of $3,006,000.
(iii)Fees equal to 1/2 of 1% of any financing and 1% of any refinancing
obtained by the Company for which the Advisor renders substantial
services, and for which no fees are paid to a third party, will be paid
to the Advisor as compensation for such services. No such fees had been
earned as of August 31, 1995.
(iv) Upon disposition of the Company's investments, the Advisor may earn
sales commissions and disposition fees. These fees and commissions will
be subordinated to the repayment to shareholders of their Capital
Contributions plus certain minimum returns on their Invested Capital. In
no event will the disposition fees exceed an amount equal to 15% of
Disposition Proceeds remaining after the shareholders have received an
amount equal to their Capital Contributions plus a return on Invested
Capital of 6% per annum, cumulative and noncompounded. No disposition
fees or sales commissions have been earned as of August 31, 1995.
An affiliate of the Advisor performs certain accounting, tax preparation,
securities law compliance and investor communications and relations services for
Company. Total costs incurred by this affiliate in providing these services are
allocated among several entities, including the Company. Effective March 1,
1995, the Advisor agreed that it will not be reimbursed for providing these
services to the Company. As with the management fees discussed above, the
Advisor has agreed to waive these servicing fees in order to maximize the
Company's earnings and cash flow while certain strategic plans regarding the
Company's future operations are evaluated and implemented. For the year ended
August 31, 1995, the Company paid $111,000 to this affiliate, representing
reimbursements from September 1, 1994 through February 28, 1995 for providing
the above services to the Company.
Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins")
provides cash management services with respect to the Company's cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc.,
an independently operated subsidiary of PaineWebber. For the year ended August
31, 1995, Mitchell Hutchins earned fees of $8,000 for managing the Company's
cash assets. Fees charged by Mitchell Hutchins are based on a percentage of
invested cash reserves which varies based on the total amount of invested cash
which Mitchell Hutchins manages on behalf of PWPI.
The Company has engaged the services of a consulting firm for certain
professional services related to its mortgage loan refinancing and acquisition
due diligence activities. The consulting firm is a partnership in which Mr.
Robert J. Pansegrau is one of two current partners. Mr. Pansegrau is formerly a
Senior Vice President of the Company who resigned effective March 31, 1993. The
consulting firm received fee compensation from the Company totalling
approximately $186,000 for the year ended August 31, 1995. The consulting firm
also received reimbursement for out-of-pocket expenses of approximately $79,000
for the year ended August 31, 1995.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedule:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedule at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of this Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of
fiscal 1995.
(c) Exhibits:
See (a)(3) above.
(d) Financial Statement Schedule:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedule at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RETAIL PROPERTY INVESTORS, INC.
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
President, Chief Executive Officer
and Director
By /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
(additionally functioning
as chief accounting officer)
Dated: December 11, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacity and on the dates indicated.
By: /s/ Lawrence S. Bacow Date: December 11, 1995
--------------------- -----------------
Lawrence S. Bacow
Director
By: /s/ Joseph W. Robertson, Jr. Date: December 11, 1995
--------------------------- -----------------
Joseph W. Robertson, Jr.
Director
By: /s/ J. William Sharman, Jr. Date: December 11, 1995
-------------------------- -----------------
J. William Sharman, Jr.
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
RETAIL PROPERTY INVESTORS, INC.
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ----------------------------- ------------------------
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated October 10, 1989, as pursuant to Rule 424(c)
supplemented, with particular and incorporated
reference to the Restated herein by reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or
statements and amendments thereto 15(d) of the Securities
of the registrant together with all Act of 1934 and
such contracts filed as exhibits of incorported herein
previously filed Forms 8-K and by reference.
Forms 10-K are hereby incorporated
herein by reference.
(13) Annual Report to Limited Partners No Annual Report for the
year ended August 31, 1995
has been sent to the
Limited Partners. An Annual
Report will be sent to the
Limited Partners
subsequent to this filing.
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2)
RETAIL PROPERTY INVESTORS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference
RETAIL PROPERTY INVESTORS, INC.:
Report of Independent Accountants F-2
Balance sheets at August 31, 1995 and 1994 F-3
Statements of operations for the years ended August 31,
1995, 1994 and 1993 F-4
Statements of changes in shareholders' equity for the years
ended August 31, 1995, 1994 and 1993 F-5
Statements of cash flows for the years ended August 31, 1995,
1994 and 1993 F-6
Notes to financial statements F-7
Schedule III - Real Estate and Accumulated Depreciation F-24
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Retail Property Investors, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) on page F-1 present fairly, in all material respects, the
financial position of Retail Property Investors, Inc. (the "Company") at August
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended August 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 11, 1995,
except as to Note 8
which is as of
July 17, 1996
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
BALANCE SHEETS
August 31, 1995 and 1994
(In thousands, except per share amounts)
ASSETS
1995 1994
---- ----
Operating investment properties:
Operating investment properties
held for sale, net (Note 4) $ 192,311 $ -
Land - 37,845
Buildings and improvements - 175,293
Furniture and equipment - 9,676
---------- -----------
192,311 222,814
Less: accumulated depreciation - (21,080)
---------- -----------
192,311 201,734
Cash and cash equivalents 5,943 3,282
Escrowed cash 1,067 1,378
Accounts receivable, net of
allowance for doubtful accounts of
$80 ($91 in 1994) 170 497
Other assets 77 69
Prepaid expenses 308 260
Capital improvement reserve 1,201 1,182
Deferred expenses,
net of accumulated amortization of $446
($296 in 1994) 1,467 508
---------- -----------
$ 202,544 $ 208,910
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable - affiliates $ 4 $ 67
Accounts payable and accrued expenses 1,316 1,343
Mortgage interest payable 358 167
Note payable - affiliate 1,168 -
Security deposits and other liabilities 768 948
Mortgage notes payable, net 156,508 157,599
----------- -----------
Total liabilities 160,122 160,124
Contingencies (Note 7)
Shareholders' equity (Note 2.I):
Common stock, $.01 par value, 50,000,000
shares authorized, 5,010,050 shares
issued and outstanding 50 50
Additional paid-in capital, net of
offering costs 87,181 87,181
Accumulated deficit (44,809) (38,445)
------------ ----------
Total shareholders' equity 42,422 48,786
------------ ----------
$ 202,544 $ 208,910
============ ==========
See accompanying notes to financial statements.
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
STATEMENTS OF OPERATIONS
For the years ended August 31, 1995, 1994 and 1993
(In thousands, except per share amounts)
1995 1994 1993
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 24,682 $ 24,442 $ 22,175
Interest income 327 148 431
-------- -------- --------
25,009 24,590 22,606
Expenses:
Interest expense and related fees 15,283 15,459 13,620
Depreciation and amortization 6,495 6,334 5,571
Property expenses 2,348 2,207 1,996
Real estate taxes 1,329 1,370 1,296
General and administrative 1,702 968 900
Financial and investor servicing expenses 111 260 262
REIT management fees 125 237 501
Bad debt expense 21 241 72
Cash management fees 8 8 40
Non-deferrable offering expenses - 1,561 -
Investment analysis expense 101 2,015 80
Loss on impairment of assets held
for sale 3,850 - -
-------- -------- --------
31,373 30,660 24,338
-------- -------- --------
Net loss $ (6,364) $ (6,070) $ (1,732)
========= ======== =========
Per share amounts (Note 2.I):
Net loss $(1.27) $(1.21) $(0.35)
====== ====== ======
Cash dividends declared $ - $ 0.80 $ 1.60
====== ======= ======
See accompanying notes to financial statements.
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
STATEMENTSOF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended August 31,
1995, 1994 and 1993
(In thousands, except per share amounts)
Common Stock
$.01 Par Value Additional
-------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Shareholders' equity
at August 31, 1992 10,020,100 $ 100 $87,131 $(18,619) $68,612
Adjustment to
give effect
to a 1 for 2 reverse
stock split effective
as of September 7,
1993 (Note 2.I) (5,010,050) (50) 50 - -
Cash dividends
declared - - - (8,016) (8,016)
Net loss - - - ( 1,732) ( 1,732)
---------- ----- ------- --------- -------
Shareholders' equity
at August 31, 1993 5,010,050 50 87,181 (28,367) 58,864
Cash dividends
declared - - - (4,008) (4,008)
Net loss - - - (6,070) (6,070)
--------- ----- ------- -------- --------
Shareholders' equity
at August 31, 1994 5,010,050 50 87,181 (38,445) 48,786
Net loss - - - (6,364) (6,364)
--------- ------- ------- -------- --------
Shareholders' equity
at August 31, 1995 5,010,050 $ 50 $87,181 $(44,809) $42,422
========= ===== ======= ======== =======
See accompanying notes to financial statements.
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net loss $ (6,364) $ (6,070) $ (1,732)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 6,495 6,334 5,571
Amortization of loan buydown fees 1,566 1,572 1,420
Amortization of deferred financing costs 265 29 29
Loss on impairment of assets held for sale 3,850 - -
Changes in assets and liabilities:
Accounts receivable 22 543 (245)
Other assets (8) 422 527
Prepaid expenses (48) 66 (55)
Deferred expenses (224) 238 -
Accounts payable - affiliate (63) (578) 128
Accounts payable and accrued expenses (27) 202 (50)
Mortgage interest payable 191 (60) (53)
Security deposits and other liabilities (180) (714) 621
--------- --------- ---------
Total adjustments 11,839 8,054 7,893
--------- --------- ---------
Net cash provided by
operating activities 5,475 1,984 6,161
--------- --------- ---------
Cash flows from investing activities:
Additions to operating investment
properties (178) (767) (29,772)
Use of (additions to) escrowed cash 311 65 (897)
Additions to capital improvement reserve (19) (939) (243)
Restricted cash used to fund commitments - - 6,747
Master lease payments received - 326 708
-------- --------- ---------
Net cash provided by (used for)
investing activities 114 (1,315) (23,457)
-------- --------- ---------
Cash flows from financing activities:
Dividends paid to shareholders - (4,008) (8,016)
Proceeds from issuance of mortgage
notes payable 45,825 100 21,383
Payment of debt issuance costs (1,439) - (653)
Proceeds from issuance of unsecured
note payable 1,175 - -
Payment of loan buydown fees - - (452)
Repayment of principal on mortgage
notes payable (48,482) (620) (444)
Repayment of principal on unsecured
note payable (7) - -
--------- --------- ---------
Net cash (used for) provided by
financing activities (2,928) (4,528) 11,818
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 2,661 (3,859) (5,478)
Cash and cash equivalents,
beginning of year 3,282 7,141 12,619
--------- --------- ---------
Cash and cash equivalents, end of year $ 5,943 $ 3,282 $ 7,141
========= ========= =========
Supplemental Disclosure:
Cash paid during the year for interest $ 13,261 $ 13,917 $ 12,224
========= ========= =========
See accompanying notes to financial statements.
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
Notes to Financial Statements
1. Organization and Recent Business Developments
Retail Property Investors, Inc. (the "Company"), formerly PaineWebber
Retail Property Investments, Inc., is a corporation organized on August 9,
1989 in the Commonwealth of Virginia for the purpose of investing in a
portfolio of retail shopping centers located throughout the midwestern,
southern and southeastern United States. The Company commenced an initial
public offering of up to 10,000,000 shares of its common stock (the
"Shares"), priced at $10 per Share, on October 23, 1989 pursuant to a
Registration Statement filed on Form S-11 under the Securities Act of 1933
(Registration Statement No. 33-29755). The initial offering closed on
December 24, 1990, after 10,020,100 shares had been sold. The Company
received capital contributions of $100,201,000, of which $201,000 was
received from the sale of 20,100 shares to an affiliate, PaineWebber Group,
Inc. ("PaineWebber"). As of October 15, 1995, PaineWebber held 38,000 shares
of the Company's common stock. The Company was originally organized as a
finite-life, non-traded real estate investment trust that had a stated
investment policy of investing exclusively in shopping centers in which
Wal-Mart Stores, Inc. ("Wal-Mart") was or would be an anchor tenant. During
fiscal 1993, the Company's Board of Directors proposed three amendments to
the Company's Articles of Incorporation and two resolutions, all of which
were approved at a Special Meeting of Shareholders which was held on
September 7, 1993. The amendments to the Articles of Incorporation changed
the Company from a "finite-life" corporation to an "infinite-life"
corporation, increased the number of authorized shares of the Company's
Common Stock from 12,500,000 to 25,000,000 and changed the Company's name.
The resolutions approved a 1 for 2 Reverse Stock Split of the Company's
outstanding shares of Common Stock and affirmed the Company's investment
authority under the Articles of Incorporation and Bylaws to invest in
property other than shopping centers anchored by Wal-Mart stores.
1994 Developments
-----------------
The amendments to the Company's Articles of Incorporation and the
resolutions which were approved in September 1993 were proposed as part of a
plan to reposition the Company to take advantage of the liquidity and
potentially attractive source of capital available in the market for
publicly held REITs at that time. During 1993, the Board of Directors
determined that in order to best position the Company to access the public
capital markets, it would be in the Company's best interests to convert from
an externally advised REIT to a self-administered REIT. The Company also
investigated the possibility of acquiring a third-party property management
and leasing company which would enable property management activities to be
conducted internally. In conjunction with these initiatives, the Board of
Directors presented several proposals for consideration at the Annual
Meeting of Shareholders which was held November 4, 1994. Approval of these
proposals, which involved further amendments to the Company's Articles of
Incorporation and Bylaws, was required in order to enable the Company to
proceed with an equity offering of its common stock, to pursue listing of
the Company's common stock on a national securities exchange and to permit a
conversion to self-administration. All of the proposals were approved at the
Annual Meeting by the required affirmative vote of the shareholders.
However, due to a deterioration in the public equity markets for REIT stocks
during the latter part of 1994, management delayed its plans to proceed with
a public offering and subsequent listing of the Company's common stock on a
national securities exchange pending an improvement in the market
conditions. As a result of the delays in the timing of the planned public
offering which had been contemplated in fiscal 1994, the Company took
significant charges against earnings in fiscal 1994 to reflect certain costs
incurred in connection with the Company's restructuring plans which were
either no longer expected to have future economic benefit or were no longer
deferrable because the prospects for a second equity offering were
uncertain. Acquisition due diligence costs totalling approximately
$2,015,000 related to certain properties that had been reviewed for
potential acquisition as part of the planned public offering were written
off to investment analysis expense during fiscal 1994 (see Note 4). All
expenses incurred in connection with the planned equity offering, as well as
a possible securitized debt offering, in the aggregate amount of
approximately $1,561,000, were written off to non-deferrable offering
expenses. In addition, extension fees of $760,000 related to a debt
prepayment agreement which lapsed during fiscal 1994 were written off to
interest expense during the year.
<PAGE>
1995 Developments
-----------------
Due to changes in interest rate levels and other market factors which
adversely affected the market for new public REIT equity offerings during
the latter half of calendar 1994 and the first half of calendar 1995, the
Company has not completed the final phase of its restructuring plans. In
view of the existing capital market conditions, the Company's Board of
Directors engaged the investment banking firm of Lehman Brothers Inc.
("Lehman") in June of 1995 to act as its financial adviser and to provide
financial and strategic advisory services to the Board of Directors
regarding options available to the Company. The strategic options considered
included, among other things, a recapitalization of the Company, sales of
the Company's assets and the exploration of merger opportunities. Lehman's
services have included the solicitation and identification of potential
transactions for the Company, the evaluation of these transactions, and the
provision of advice to the Board regarding them. In November 1995, Lehman
presented a summary to the Board of the proposals received to date. All of
the proposals were indications of interest from third parties to buy the
Company's real estate assets. At such time, the Board concluded that it
would be in the shareholders' best interests to immediately initiate the
process of soliciting firm offers to purchase the Company's portfolio of
operating investment properties. The Directors have instructed Lehman to
work with the various third parties that have expressed an interest in such
a transaction to obtain transaction terms most favorable to the Company and
its shareholders. At the conclusion of this process, which will include all
required buyer's due diligence, the Directors expect to submit and recommend
for approval by the shareholders what, in their judgment, is the most
favorable proposal. Pursuant to the Company's Articles of Incorporation, the
sale of all, or substantially all, of the Company's real estate assets would
require shareholder approval. Because the sale of the Company's real estate
assets remains contingent upon, among other things, satisfactory completion
of buyer's due diligence, negotiation of a definitive sales agreement and
the required shareholder approval, there are no assurances that such a
transaction will be completed. Nonetheless, since the Directors have
committed to pursue this course of action, the Company's financial
statements as of August 31, 1995 reflect the reclassification of operating
investment properties and certain related assets as operating investment
properties held for sale and the writedown of the individual operating
properties to the lower of adjusted cost or net realizable value. The
Company recorded a loss for financial reporting purposes of $3,850,000 in
fiscal 1995 in connection with this accounting treatment. See Notes 2 and 4
for a further discussion.
2. Summary of Significant Accounting Policies
A. INCOME TAXES
The Company has elected and intends to continue to qualify to be taxed
as a Real Estate Investment Trust ("REIT") under the Internal Revenue
Code of 1986, as amended, for each taxable year of operations. As a
REIT, the Company is allowed a tax deduction for the amount of
dividends paid to its shareholders, thereby effectively subjecting the
distributed net income of the Company to taxation at the shareholder
level only, provided it distributes at least 95% of its real estate
investment trust taxable income and meets certain other requirements
for qualifying as a REIT. The Company incurred a loss for both book and
tax purposes in fiscal 1995 and, therefore, was not required to pay a
cash dividend in order to retain its REIT status.
B. OPERATING INVESTMENT PROPERTIES
Operating investment properties are carried at the lower of cost,
reduced by guaranteed master lease payments (see Note 4) and
accumulated depreciation, or net realizable value. The net realizable
value of a property held for long-term investment purposes is measured
by the recoverability of the Company's investment through expected
future cash flows on an undiscounted basis, which may exceed the
property's current market value. The net realizable value of a property
held for sale approximates its current market value, less disposal
costs, plus depreciation through the expected date of sale. As of
August 31, 1994, the operating investment properties were held for
long-term investment purposes and were recorded at adjusted cost on the
accompanying balance sheet. As discussed further in Notes 1 and 4, all
of the Company's operating investment properties were held for sale as
of August 31, 1995. Accordingly, the Company has reclassified the
operating properties and certain related assets to operating investment
properties held for sale and has recorded each property at the lower of
adjusted cost or net realizable value as of August 31, 1995.
Depreciation expense has been computed using the straight-line method
over an estimated useful life of forty years for the buildings and
improvements, twenty years for land improvements and twelve years for
personal property. Certain costs and fees (including the acquisition
fees paid to an affiliate, as described in Note 3) related to the
acquisition of the properties have been capitalized and are included in
the cost of the operating investment properties. Major additions and
betterments are capitalized, while minor repairs and maintenance are
charged to expense.
C. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts held in banks and money market accounts and
overnight, investment-grade commercial paper investments administered
by Mitchell Hutchins Institutional
Investors, Inc. (see Note 3).
D. ESCROWED CASH
Escrowed cash consists of master lease escrows, various lender escrows
and real estate tax and insurance premium escrows. The master lease
escrows represented funds the Company received directly as collateral,
or obtained by drawing on letters of credit which were used as
collateral, under certain master lease agreements (see Note 4). The
balance of these escrows was approximately $428,000 at August 31, 1994.
Corresponding amounts, representing unearned master lease payments for
fiscal 1994, are included in the balance of security deposits and other
liabilities on the accompanying balance sheet as of August 31, 1994.
During fiscal 1995, the remaining cash collateral held by the Company
was returned to the sellers as a result of the expiration or
termination of their respective master lease agreements.
The lender escrows are amounts held by various mortgage lenders to be
released upon the completion of certain construction projects and other
events relating to the individual property refinancings or
acquisitions. The balance of the lender escrows amounted to
approximately $75,000 and $172,000 at August 31, 1995 and 1994,
respectively.
The Company maintains separate real estate tax and insurance premium
escrows for each property. The balance of these escrows was
approximately $992,000 and $778,000 at August 31, 1995 and 1994,
respectively. Real estate tax and insurance premium escrows for Cross
Creek Plaza, Cypress Bay Plaza, Marion Towne Center, Southside Plaza
and Walterboro Plaza are controlled by the respective mortgage lenders.
The remainder of the funds segregated for the payment of real estate
taxes and insurance premiums are not restricted by third parties.
E. CAPITAL IMPROVEMENT RESERVE
The Company has elected to fund a capital improvement reserve to cover
the cost of future capital improvement expenditures. The balance of the
capital improvement reserve at August 31, 1995 and 1994 was
approximately $1,201,000 and $1,182,000, respectively. The Company is
currently funding $.06 per square foot of leasable space owned
(approximately 4.4 million square feet as of August 31, 1995), on an
annual basis, to the reserve. The amount funded may be adjusted by the
Company, from time to time, when considered appropriate given the
amount of capital improvements anticipated. The reserve also includes
funds that were retained by the Company at the acquisition of certain
properties to pay for items deemed to be the responsibility of the
sellers. As of August 31, 1995 and 1994, these funds included in the
capital improvement reserve totalled $50,000 and $62,000, respectively.
The capital improvement reserve is not restricted by any third parties.
F. ORGANIZATION COSTS AND DEFERRED EXPENSES
Organization costs consisted of legal fees incurred in connection with
the organization of the Company. Organization costs were amortized
using the straight-line method over a 60-month period and were fully
amortized as of August 31, 1994. Deferred expenses as of August 31,
1995 and 1994 include costs incurred in connection with the mortgage
notes payable, leasing commissions and computer software. Capitalized
loan costs are amortized using the straight-line method over the term
of the related loans, which range from 3 to 20 years (see Note 5). The
amortization of capitalized loan costs is included in interest expense
on the accompanying statements of operations. Leasing commissions are
amortized using the straight-line method over the term of the related
lease, generally 3 to 5 years. Software costs are being amortized using
the straight-line method over a 60-month period. As discussed further
in Note 4, due to the Company's plans to pursue a sale of its operating
investment properties, deferred leasing commissions as of August 31,
1995 were reclassified as part of the balance of operating investment
properties held for sale for purposes of measuring the expected losses
to be incurred upon disposal.
G. OFFERING COSTS
Offering costs consist primarily of selling commissions and other costs
such as printing and mailing costs, legal fees, filing fees and other
marketing costs associated with the initial offering of Shares. Selling
commissions incurred in connection with the Company's initial public
offering were equal to approximately 8% of the gross proceeds raised.
Commissions totalling $7,984,000 were paid to PaineWebber Incorporated
in connection with the sale of Shares from the initial public offering.
All of the offering costs associated with the initial public offering
are shown as a reduction of additional paid-in capital on the
accompanying balance sheets.
H. REVENUE RECOGNITION
Rental revenue is recognized on a straight-line basis over the life of
the related lease agreements. The revenue recognition method takes into
consideration scheduled rent increases. As of August 31, 1995 and 1994,
the difference between the revenue recorded on the straight-line method
and the payments made in accordance with the lease agreements totalled
$305,000 and $255,000, respectively. The amount of such deferred rent
receivable is included in the balance of interest and other receivables
as of August 31, 1994. As discussed further in Note 4, due to the
Company's plans to pursue a sale of its operating investment
properties, deferred rent receivable as of August 31, 1995 was
reclassified as part of the balance of operating investment properties
held for sale for purposes of measuring the expected losses to be
incurred upon disposal. The Company uses the allowance method to
account for bad debt expense on its tenant receivables.
I. COMMON STOCK AND EARNINGS PER SHARE OF COMMON STOCK
Effective September 7, 1993, the shareholders voted to increase the
number of authorized shares of common stock from 12,500,000 to
25,000,000 and approved a 1 for 2 reverse stock split to shareholders
of record on such date. The stated par value per share of common stock
was not changed from $.01. A total of $50,100 was reclassified from the
stated value of common stock to additional paid-in capital in
connection with the reverse stock split. Effective November 4, 1994,
the shareholders voted to increase the number of authorized shares of
common stock from 25,000,000 to 50,000,000.
The earnings and cash dividends declared per share of common stock on
the accompanying statements of operations are based upon the weighted
average number of shares outstanding on a daily basis during each of
the three years in the period ended August 31, 1995, of 5,010,050, as
adjusted for the 1 for 2 reverse stock split.
J. FAIR VALUE DISCLOSURES
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported on the balance
sheet for cash and cash equivalents approximates its fair value.
Escrowed cash: The carrying amount reported on the balance sheet for
escrowed cash approximates its fair value.
Capital improvement reserve: The carrying amount reported on the
balance sheet for capital improvement reserve approximates its fair
value.
Note payable - affiliate: The fair value of the long-term note payable
to an affiliate was estimated using discounted cash flow analyses based
on the Company's current incremental borrowing rate for long-term
indebtedness.
Mortgage notes payable: The fair value of the Company's long-term
mortgage indebtedness was estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial
instruments at August 31, 1995 are as follows (amounts in thousands):
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 5,943 $ 5,943
Escrowed cash 1,067 1,067
Capital improvement reserve 1,201 1,201
Note payable - affiliate 1,168 914
Mortgage notes payable, net 156,508 165,206
<PAGE>
3. The Advisory Agreement and Related Party Transactions
The Company has entered into an advisory agreement with PaineWebber
Realty Advisors, L.P. (the "Advisor") to perform various services in
connection with the sale of the Shares, the management of the Company and
the acquisition, management and disposition of the Company's investments.
The Advisor is a limited partnership composed of PaineWebber Properties
Incorporated ("PWPI") as the general partner and Properties Associates, L.P.
("PA") as the limited partner. Both partners of the Advisor are affiliates
of PaineWebber Incorporated ("PWI"), which is a wholly owned subsidiary of
PaineWebber Group Inc. ("PaineWebber"). The advisory agreement is renewable
on an annual basis at the discretion of the Company's Board of Directors.
The type of compensation to be paid by the Company to the Advisor and its
affiliates under the terms of the Advisory Agreement is as follows:
(i) Under the Advisory Agreement, the Advisor has specific management
responsibilities to perform day-to-day operations of the Company and
to act as the investment advisor and consultant for the Company in
connection with general policy and investment decisions. The
Advisor will receive an annual Asset Management Fee and an Advisory
Incentive Fee of 0.25% and 0.25%, respectively, of the Capital
Contributions of the Company. The Advisory Incentive Fee is
subordinated to the shareholders' receipt of distributions of net
cash sufficient to provide a return equal to 8% per annum on their
Invested Capital, as defined. During the quarter ended February 28,
1994, the payment of regular quarterly distributions was temporarily
suspended. Accordingly, the Advisor has not earned any Advisory
Incentive Fees since December 1, 1993. Furthermore, during the
quarter ended May 31, 1994 the Advisor agreed to waive its rights to
the collection of previously deferred Advisory Incentive Fees in the
aggregate amount of $76,000. This amount is reflected as a
reduction of management fee expense for the year ended August 31,
1994. Effective March 1, 1995, the Advisor agreed to waive its
management fees for a period of at least one year in order to
maximize the Company's earnings and cash flow while certain
strategic plans regarding the Company's future operations are
evaluated and implemented. The Advisor earned total management fees
of $125,000, $237,000 and $501,000 for the period September 1, 1994
through February 28, 1995 and the years ended August 31, 1994 and
1993, respectively. Accounts payable - affiliates at August 31,
1994 included management fees payable to the Advisor totalling
$62,000.
(ii) For its services in finding and recommending investments, and for
analyzing, structuring and negotiating the purchase of properties by
the Company, PWPI was to receive non-recurring Acquisition Fees equal
to 3% of the Capital Contributions. PWPI received acquisition fees in
connection with the Company's real estate investments in the amount of
$3,006,000.
(iii)Fees equal to 1/2 of 1% of any financing and 1% of any refinancing
obtained by the Company for which the Advisor renders substantial
services, and for which no fees are paid to a third party, will be paid
to the Advisor as compensation for such services. No such fees had been
earned as of August 31, 1995.
(iv) Upon disposition of the Company's investments, the Advisor may earn
sales commissions and disposition fees. These fees and commissions will
be subordinated to the repayment to shareholders of their Capital
Contributions plus certain minimum returns on their Invested Capital.
In no event will the disposition fees exceed an amount equal to 15% of
Disposition Proceeds remaining after the shareholders have received an
amount equal to their Capital Contributions plus a return on Invested
Capital of 6% per annum, cumulative and noncompounded. No disposition
fees or sales commissions have been earned as of August 31, 1995.
Financial and investor servicing expenses represent reimbursements to an
affiliate of the Advisor for providing certain financial, accounting and
investor communication services to the Company. Effective March 1, 1995, the
Advisor agreed that it will not be reimbursed for providing these services
to the Company. As with the management fees described above, the Advisor has
agreed to waive these servicing fees for a period of at least one year in
order to maximize the Company's earnings and cash flow while certain
strategic plans regarding the Company's future operations are evaluated and
implemented. For the period September 1, 1994 through February 28, 1995 and
the years ended August 31, 1994 and 1993, the Company paid $111,000,
$260,000 and $262,000, respectively, to this affiliate for providing such
services to the Company.
Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins")
provides cash management services with respect to the Company's cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. For the years
ended August 31, 1995, 1994 and 1993, Mitchell Hutchins earned fees of
$8,000, $8,000 and $40,000, respectively, for managing the Company's cash
assets. Accounts payable - affiliates at August 31, 1995 and 1994 includes
$4,000 and $5,000, respectively, payable to Mitchell Hutchins.
The Company has engaged the services of a consulting firm for certain
professional services related to its mortgage loan refinancing and
acquisition due diligence activities. The consulting firm is a partnership
in which Mr. Robert J. Pansegrau is one of two current partners. Mr.
Pansegrau is formerly a Senior Vice President of the Company who resigned
effective March 31, 1993. The consulting firm received fee compensation
from the Company totalling approximately $186,000, $282,000 and $215,000
for the years ended August 31, 1995, 1994 and 1993, respectively. The
consulting firm also received reimbursement for out-of-pocket expenses of
approximately $79,000, $167,000 and $83,000 for the years ended August 31,
1995, 1994 and 1993, respectively.
In June 1995, the Company secured a new mortgage loan in the amount of
$4,000,000 to repay a portion of the first mortgage loan held by PWPI which
was secured by the Applewood Village operating property in the amount of
$5,175,000 (see Note 5). PWPI agreed to make an unsecured loan for the
difference, in the amount of $1,175,000, which has a 15-year term and
carries an interest rate tied to PWPI's cost of funds, not to exceed 8% per
annum. The note is fully amortizing over its term and requires monthly
payments of principal and interest through maturity in June 2010. The
balance of this note payable to affiliate as of August 31, 1995 was
$1,168,000. Interest expense incurred by the Company in fiscal 1995 under
the terms of this note agreement totalled $12,000.
4. Operating Investment Properties
Through August 31, 1995, the Company had acquired 22 Wal-Mart anchored
shopping centers. The ownership of the Company's operating properties
described below is legally held by four limited partnerships in which the
Company is the sole general partner. These partnerships were created in
order to, among other things, facilitate the communication of income tax
information to the Company's shareholders. The limited partner of the
partnerships is PaineWebber Properties Incorporated ("PWPI"), which is the
general partner of the Advisor (see Note 3). The economic interest of PWPI
in the partnerships is generally limited to a share of the Company's
Disposition Proceeds, as defined, to which the Advisor was originally
entitled through the Disposition Fee, as defined in the Company's original
offering prospectus. Per the terms of the limited partnership agreements,
all distributions of operating cash flow generated to date have been
allocated to the Company. Furthermore, as a limited partner in the
partnerships, PWPI has no control over the operations of the partnerships or
of the operating properties, other than in its capacity as a partner of the
Advisor. The legal ownership of the Company's operating investment
properties by the partnerships has virtually no impact on the Company's
financial position or results of operations. Accordingly, the partnerships
are consolidated with the Company for financial reporting purposes. The
name, location and size of the acquired properties, along with information
related to the respective purchase prices and adjusted cost basis as of
August 31, 1995, are as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Costs
Name Acquisition Capitalized Master Adjusted
Location Date Purchase Fees and Subsequent to Lease Cost at
Size Acquired Price (1) Expenses (2) Acquisition Payments (3) 8/31/95
- ---------- -------- -------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Village Plaza 8/16/89 $23,975 $394 $ 826 $618 $ 24,577
Augusta, GA
490,970
square feet
Logan Place 1/18/90 4,917 189 16 232 4,890
Russellville, KY
114,748
square feet
Piedmont Plaza 1/19/90 13,500 263 29 107 13,685
Greenwood, SC
249,052
square feet
Artesian Square 1/30/90 6,990 203 989 392 7,790
Martinsville, IN
177,428
square feet
Sycamore Square 4/26/90 4,970 172 23 130 5,035
Ashland City, TN
93,304
square feet
Audubon Village 5/22/90 6,350 215 30 - 6,595
Henderson, KY
124,592
square feet
Crossroads Centre 6/15/90 9,914 246 35 - 10,195
Knoxville, TN
242,430
square feet
East Pointe Plaza 8/07/90 13,936 269 437 306 14,336
Columbia, SC
238,722
square feet
Walterboro Plaza- 12/19/90 6,645 284 14 136 6,807
Phases I and II
Walterboro, SC
132,130
square feet
<PAGE>
Name Acquisition Capitalized Master Adjusted
Location Date Purchase Fees and Subsequent to Lease Cost at
Size Acquired Price (1) Expenses (2) Acquisition Payments (3) 8/31/95
- ---------- -------- -------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
(continued)
Cypress Bay 12/19/90 12,235 215 88 522 12,016
Plaza
Morehead City, NC
258,245
square feet
Cross Creek 12/19/90 13,565 302 15 525 13,357
Plaza
Beaufort, SC
237,801
square feet
Lexington Parkway 3/05/91 10,290 251 70 208 10,403
Plaza
Lexington, NC
210,190
square feet
Roane County 3/05/91 7,000 197 - 43 7,154
Plaza
Rockwood, TN
160,198
square feet
Franklin Square 6/21/91 9,018 232 45 26 9,269
Spartanburg, SC
237,062
square feet
Barren River 8/09/91 11,788 412 49 57 12,192
Plaza
Glasgow, KY
234,795
square feet
Cumberland 8/09/91 7,458 370 31 116 7,743
Crossing
LaFollette, TN
144,734
square feet
Applewood 10/25/91 6,965 389 - 25 7,329
Village
Fremont, OH
140,039
square feet
<PAGE>
Name Acquisition Capitalized Master Adjusted
Location Date Purchase Fees and Subsequent to Lease Cost at
Size Acquired Price (1) Expenses (2) Acquisition Payments (3) 8/31/95
- ---------- -------- -------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
(continued)
Aviation Plaza 8/31/92 8,349 337 - - 8,686
Oshkosh, WI
174,715
square feet
Crossing 8/31/92 12,100 356 6 - 12,462
Meadows Plaza
Onalaska, WI
233,984
square feet
Southside Plaza 10/21/92 9,200 356 7 - 9,563
Sanford, NC
172,293
square feet
College Plaza 4/29/93 9,900 461 - 2 10,359
Bluefield, VA
178,431
square feet
Marion Towne 6/23/93 7,907 624 - - 8,531
Center
Marion, SC
156,558
square feet
-------- ------ ------ ------ --------
$216,972 $6,737 $2,710 $3,445 $222,974
======== ====== ====== ====== ========
</TABLE>
(1) At the closing of certain property acquisitions, a portion of the
purchase price amounts were retained by the Company to pay for
certain items deemed to be the responsibility of the sellers. These
amounts are included in security deposits and other liabilities on
the accompanying balance sheet and totalled approximately $62,000 at
August 31, 1994. All such amounts had been released as of August 31,
1995.
(2) Acquisition fees and expenses include the 3% fee payable to PWPI (see
Note 3) and other capitalized costs incurred in connection with the
acquisition of the properties (e.g. legal fees, appraisal fees, other
closing costs, etc.). Certain expenses incurred to investigate
potential investments are recorded as other assets pending the closing
of a transaction and are reclassified after acquisition to the cost
basis of the related property. Expenses incurred to review potential
investments which are subsequently not acquired by the Company are
charged to investment analysis expense once the Company stops pursuing
the acquisition.
(3) The Company originally entered into master lease agreements with the
sellers and certain of their affiliates (the "Guarantors") of each of
the operating properties acquired. The master lease agreements
generally provide that, for a period of up to 36 to 60 months
(depending on the credit status of the tenant in occupancy) from the
date of the acquisition of the operating property, the Guarantors will
guarantee that the aggregate cash flow from all non-anchor tenants will
not be less than the aggregate pro-forma net cash flow from non-anchor
tenants projected at the time of the purchase. In the event that the
actual aggregate net cash flow is less than the guaranteed amount, the
Guarantors are obligated to make cash payments to the Company equal to
any such deficit. All amounts earned under the master lease agreements
are treated as purchase price adjustments and recorded as reductions to
the carrying values of the related operating property for financial
reporting purposes. Certain of the Guarantors secured their guarantees
with cash collateral held by the Company or with letters of credit.
During the quarter ended February 28, 1995, the Company entered into a
settlement agreement related to the outstanding master lease
obligations on the Southside Plaza and Collage Plaza properties, which
were both with the only remaining lessee for which the Company held
cash collateral. During the quarter ended May 31, 1995, the Company
entered into a similar settlement agreement related to the Aviation
Plaza and Crossing Meadows master lease obligations. As part of these
settlement agreements, the Company agreed to the early termination of
the respective master leases and to the release of the related cash
collateral or letters of credit in return for the agreement of the
related management agent to certain changes to the property management
contracts. The master leases which were terminated as part of these
settlements related to properties which currently do not generate any
master lease payments based on their present leasing status. Applewood
Village is the only property remaining under a master lease and
currently is not generating any master lease payments based on the
present leasing level. The Applewood Village master lease is scheduled
to expire in November 1996.
As discussed in Note 1, as a result of the decision by the Board of
Directors to solicit offers to purchase the Company's portfolio of
properties in the near term, the accompanying statement of operations for
fiscal 1995 includes a loss of $3,850,000 to reflect the writedown of the
individual operating investment properties and certain related assets to the
lower of adjusted cost or net realizable value as of August 31, 1995. Such
loss applies only to the properties for which losses are expected based on
the estimated fair values. The expected gains on properties for which the
estimated fair value less costs to sell exceeds the adjusted cost basis will
be recognized in the period in which a sale transaction is completed. The
Company will continue to recognize depreciation on its assets held for sale
through the date of disposal. Operating investment properties held for sale
on the accompanying balance sheet as of August 31, 1995 is comprised of the
following amounts (in thousands):
Land $ 37,845
Buildings and improvements 175,453
Furniture and equipment 9,676
----------
222,974
Less: accumulated depreciation (27,409)
---------
195,565
Deferred rent receivable 305
Deferred leasing commissions, net 291
---------
196,161
Less: Allowance for possible
impairment loss (3,850)
---------
$ 192,311
=========
<PAGE>
5. Mortgage Notes Payable
Mortgage notes payable, reduced by unamortized loan buydown fees (see
below), at August 31, 1995 and 1994 consists of the following (in
thousands):
1995 1994
---- ----
Mortgage notes payable to a financial
institution which are secured by $ 49,005 $ 76,495
Village Plaza, Piedmont Plaza, (2,504) (3,104)
Artesian Square, Logan Place, --------- -------
Sycamore Square and Crossroads 46,501 73,391
Centre as of August 31, 1995. In
addition, notes secured by Cross
Creek Plaza, Cypress Bay Plaza and
Walterboro Plaza in the aggregate
principal amount of $22,710, which
were due to mature in December 1994,
were refinanced in December 1994, and
the mortgage note secured by Audubon
Village in the amount of $4,780,
which was due to mature on September
1, 1995, was refinanced in June
1995. Maturity dates for the six
remaining loans range from November
1, 1999 to July 1, 2000. The balance
of these mortgage notes require
monthly payments of interest only at
8% for the first seven years and then
principal and interest at 8% until
maturity. These notes contain
certain cross default and cross
collateral provisions. See
discussion of effective interest
rates and loan buydown fees below.
Mortgage notes payable to a financial
institution which are secured by 24,678 24,917
East Pointe Plaza, Cumberland Crossing (1,022) (1,160)
and Barren River Plaza. The mortgage -------- --------
note on East Pointe Plaza, in the principal 23,656 23,757
amount of $11,150, calls for monthly
interest only payments at 8% per annum
through June 1996. The balance of
these mortgage notes require monthly
payments of principal and interest at
8% through June 1996. After June 1996,
monthly payments of principal and
interest, at a rate to be determined
by the lender, are due on all three
notes until maturity on June 10, 2001.
These notes contain certain cross
default and cross collateral
provisions. See discussion of
effective interest rates and loan
buydown fees below.
Mortgage note payable to a financial 6,600 26,400
institution secured by Franklin Square (83) (670)
as of August 31 ,1995. In addition, ------ ------
the note secured by Applewood Village 6,517 25,730
in the amount of $5,175, which was
payable to PWPI and due to mature on
November 1, 1995, was refinanced in
June 1995; the note secured by
Walterboro Phase II in the amount of
$1,650, due to mature on July 1, 1995,
was refinanced in December 1994; and
the notes secured by Lexington Parkway
Plaza and Roane County Plaza in the
aggregate principal amount of $12,975,
which were payable to PWPI and due to
mature in April 1996, were refinanced
in February 1995.
<PAGE>
(continued) 1995 1994
---- ----
The remaining note requires monthly
interest only payments at 8% per annum
until maturity on June 21, 1996. See
discussion of effective interest rates
and loan buydown fees below.
Mortgage note payable to a financial 23,680 -
institution secured by Cross Creek
Plaza, Cypress Bay Plaza and
Walterboro Plaza (Phases I and II).
The loan bears interest at a variable
rate equal to 30-day LIBOR plus 3.50%
per annum for the first twelve months
(9.56% as of August 31, 1995), 30-day
LIBOR plus 3.75% for the next twelve
months and 30-day LIBOR plus 4.25% for
the final twelve months. Monthly
payments of interest and principal
(based on a 15-year amortization
schedule) are due until maturity on
December 10, 1997. The Company
purchased an interest rate cap which
covers the first twelve months of the
loan period. The interest rate cap
limits the Company's exposure to the
variable interest rate in the event
that 30-day LIBOR rates increase above
8% per annum, which would limit the
interest rate on the loan to a maximum
of 11.5% through December 1995.
Mortgage notes payable to a financial 17,487 -
institution secured by Audubon
Village, Lexington Parkway Plaza and
Roane County Plaza. The notes secured
by the Lexington and Roane properties
bear interest at a fixed rate of
9.125% per annum and require monthly
payments of principal and interest
aggregating $119 through maturity on
March 1, 2015. The note secured by
Audubon Village bears interest at
8.75% per annum and requires monthly
payments of principal and interest of
$43 through maturity on June 1, 2000.
Mortgage notes payable to a financial 16,321 16,405
institution which are secured by
Aviation Plaza and Crossing Meadows. (815) (991)
-------- --------
Monthly payment terms for the loan 15,506 15,414
secured by Aviation Plaza, in the
principal amount of $6,800,000, call
for interest only payments at 8% per
annum through August 1, 1995 and
principal and interest payments at 8%
thereafter until maturity. The loan
secured by Crossing Meadows requires
monthly payments, including interest
at 8% per annum, of $71 until
maturity. Both notes are scheduled to
mature on June 1, 1999. See discussion
of effective interest rates and loan
buydown fees below.
<PAGE>
(continued):
1995 1994
---- ----
Mortgage note payable to a financial 6,686 6,779
institution which is secured by (219) (283)
Southside Plaza. The note requires ------ -------
monthly payments, including interest 6,467 6,496
at 6.83% per annum, of $46 until
maturity on November 5, 1997. See
discussion of effective interest rates
and loan buydown fees below.
Mortgage note payable to a bank which 6,898 6,939
is secured by College Plaza. Interest
on the note accrues at prime plus .75%
per annum (9.5% as of August 31,
1995). Monthly payments equal to the
greater of $58 or accrued interest for
such month are payable until maturity
on April 23, 1996.
Mortgage note payable to a financial 5,817 5,872
institution which is secured by Marion
Towne Center. The note, which was
issued on June 23, 1993, calls for
monthly payments, including interest
at 8% per annum, of $44 until maturity
on July 1, 2002. The lender has the
option, upon 120 days' written notice,
to call the loan due at the end of
each of the third year and the sixth
year of the loan. If the loan is not
called at such time, the lender may
adjust the interest rate.
Mortgage note payable to a financial 3,979 -
institution secured by Applewood
Village. The note bears interest at 9%
per annum and requires monthly
principal and interest payments of $41
until maturity on June 10, 2010.
-------- --------
Total mortgage notes payable, net $156,508 $157,599
======== ========
Summary of outstanding mortgage notes payable
Total outstanding mortgage principal
balances as of August 31, 1995 and
August 31, 1994 $161,151 $163,807
Aggregate unamortized loan buydown fees (4,643) (6,208)
-------- --------
Total mortgage notes payable, net $156,508 $157,599
======== ========
At the time of the closing of certain of the mortgage notes listed
above, the Company paid fees to the lenders in return for the lenders'
agreement to reduce the stated interest rate on the loans to 8% per annum
(6.83% in the case of Southside Plaza) over the terms of the loans. The fees
have been recorded as reductions of the outstanding principal amounts and
are being amortized, using the effective interest method, over the terms of
the respective loans. The effective interest rates on these outstanding
loans ranged from 8.47% to 9.76% per annum as of August 31, 1995.
As discussed further in Note 1, the Company is currently in the process
of soliciting offers for the purchase of the operating investment properties
which serve as collateral for the above mortgage loans. The obligation to
repay the lenders with respect to such loans at the time of any potential
sale transaction would be equal to the outstanding mortgage principal
balance prior to unamortized loan buydown fees. In conjunction with a sale
transaction, the amount of any remaining unamortized buydown fees would be
written off as a loss on the early extinguishment of debt. In addition,
certain of the Company's outstanding mortgage loans include substantial
prepayment penalties. In the event that the Company proceeds with a
portfolio sale transaction in the near term, such penalties would be payable
to the lenders unless the prospective buyer agrees to assume the outstanding
loan, if permitted under the terms of the loan agreement, or unless the
Company can negotiate any reduction in the contractual amounts owed. Any
prepayment penalties paid by the Company would be recorded as a loss on the
early extinguishment of debt.
The Company is not in technical compliance with provisions in certain of
the above mortgage loan agreements which require formal lender approval of
all property expansions and lease modifications. Under the terms of the loan
agreements, failure to comply with such terms may constitute events of
default. Management has been working with the lenders to obtain the
necessary approvals and believes that all instances of non-compliance will
be cured during fiscal 1996. The instances of non-compliance relate to six
loans with three different lenders. Such loans had aggregate principal
balances of approximately $58,322,000 as of August 31, 1995. The summary of
scheduled debt maturities presented below shows the adjusted maturities
which reflect the changes which would occur if the lenders on these six
loans were to declare defaults and accelerate the loan obligations as a
result of these circumstances. The lenders have not indicated that they have
any intentions of declaring defaults on the related mortgage loans in
connection with these administrative matters and management would not expect
them to do so as long as diligent efforts continue to be made to resolve the
outstanding issues.
Aggregate maturities of mortgage notes payable for the next five years
and thereafter are as follows (in thousands):
Amount as
adjusted to
reflect loans
in technical default
Year ended August 31: as due immediately
--------------------- ------------------
1996 $ 66,784
1997 1,851
1998 21,424
1999 17,128
2000 22,085
Thereafter 31,879
--------
$161,151
========
6. Rental income
The Company derives rental income from leasing shopping center space.
All of the Company's leasing agreements are operating leases expiring in one
to twenty years. Base rental income of $22,183,000, $21,958,000 and
$19,982,000 was earned for the years ended August 31, 1995, 1994 and 1993,
respectively. The following is a schedule of minimum future lease payments
from noncancellable operating leases as of August 31, 1995 (in thousands):
Year ended August 31:
---------------------
1996 $ 21,397
1997 19,617
1998 17,876
1999 16,921
2000 15,546
Thereafter 129,929
--------
$221,286
========
Total minimum future lease payments do not include percentage rentals due
under certain leases, which are based upon lessees' sales volumes.
Percentage rentals of approximately $160,000, $92,000 and $48,000 were
earned for the years ended August 31, 1995, 1994 and 1993, respectively.
Virtually all tenant leases also require lessees to pay all or a portion of
real estate taxes and certain property operating costs.
Rental income of approximately $7,913,000, $7,913,000 and $7,237,000 was
received from leases with Wal-Mart and its affiliates for the years ended
August 31, 1995, 1994 and 1993 respectively. Such amounts comprise 36% of
total base rental income for each of those years. No other tenant has
accounted for more than 10% of the Company's rental income during any period
since inception.
7. Contingencies
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District
Court for the Southern District of New York concerning PaineWebber
Incorporated's sale and sponsorship of various limited partnership
interests and common stock, including the securities offered by the
Company. The lawsuits were brought against PaineWebber Incorporated and
Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims against
a variety of other defendants, including PaineWebber Properties
Incorporated, which is the General Partner of the Advisor. The Company is
not a defendant in the New York Limited Partnership Actions. On May 30,
1995, the court certified class action treatment of the claims asserted in
the litigation.
The amended complaint in the New York Limited Partnership Actions
alleges, among other things, that, in connection with the sale of common
stock of the Company, the defendants (1) failed to provide adequate
disclosure of the risks involved; (2) made false and misleading
representations about the safety of the investments and the Company's
anticipated performance; and (3) marketed the Company to investors for whom
such investments were not suitable. The plaintiffs, who are not
shareholders of the Company but are suing on behalf of all persons who
invested in the Company, also allege that following the sale of the common
stock of the Company the defendants misrepresented financial information
about the Company's value and performance. The amended complaint alleges
that the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
seek unspecified damages, including reimbursement for all sums invested by
them in the Company, as well as disgorgement of all fees and other income
derived by PaineWebber from the Company. In addition, the plaintiffs also
seek treble damages under RICO.
The defendant's time to move against or answer the complaint has not yet
expired, but the Company is informed that PWPI intends to vigorously
contest the allegations of this litigation. The Advisory Agreement and the
Company's Articles of Incorporation require the Company to indemnify the
Advisor and other PaineWebber affiliates for costs and liabilities of
litigation in certain limited circumstances. Management has had discussions
with representatives of PaineWebber, and, based on such discussions, the
Company does not believe that PaineWebber intends to invoke the indemnity.
However, if PaineWebber were to demand the indemnity and such obligation
were deemed applicable and enforceable in connection with the New York
Limited Partnership Actions, the indemnity could have a material adverse
effect on the Company's financial statements, taken as a whole. The
ultimate outcome of this matter cannot be determined at the present time.
Accordingly, no provision for any liability that may result from such
indemnification has been made in the accompanying financial statements.
The Company is a party to certain other legal actions in the normal
course of business. Management believes these actions will be resolved
without material adverse effect on the Company's financial statements,
taken as a whole.
8. Subsequent Events
As reported in the Special Update to Shareholders dated March 15, 1996,
the Company announced the execution of a definitive agreement for the sale
of its assets to Glimcher Realty Trust ("GRT"). Under the original terms of
the agreement, GRT was to have purchased the properties of the Company
subject to certain indebtedness and leases for an aggregate purchase price
of approximately $203 million plus prepayment penalties on debt to be
prepaid and assumption fees on debt to be assumed, subject to certain
adjustments. As of May 14, 1996, the terms of the purchase contract were
amended to reduce the aggregate purchase price to $197 million plus
prepayment penalties and assumption fees. The sale transaction closed into
escrow on June 27, 1996 with GRT depositing the net proceeds required to
close the transaction in the form of bank letters of credit. Consummation of
the sale remains subject to approval by the shareholders of the Company and
may also be terminated by the Company in accordance with the fiduciary
obligations of its Board of Directors. During the escrow period in which the
Company will seek to obtain the required shareholder approval, the Company's
operating properties will be managed by GRT pursuant to a management
agreement which is cancellable in the event that the sale is not completed.
Under the terms of the management agreement, GRT will receive a base fee of
3% of the gross operating revenues of the properties. In addition, in the
event that the sale is successfully consummated, GRT would earn an incentive
management fee equal to the net cash flow of the properties attributable to
the period commencing on May 14, 1996 and ending on the date of the final
closing of the sale transaction. If the sale is completed, the Company will
be entitled to interest earnings during the escrow period on net proceeds of
approximately $37,401,000 at a rate equivalent to the published market rate
on 6-month U.S. Treasury Bills as of June 20, 1996. The sale agreement with
GRT calls for GRT to receive certain compensatory payments in the event that
the sale is not consummated for certain specified reasons. A proxy statement
regarding the sale transaction is currently being prepared, and it is
expected that the Board will distribute it to the Company's shareholders for
approval during the fourth quarter of fiscal 1996. A Special Meeting of the
shareholders is expected to be held in October 1996 to vote on the
transaction and the complete liquidation and dissolution of the Company.
Pursuant to the Company's Articles of Incorporation and Virginia law, the
sale of all, or substantially all, of the Company's real estate assets
requires shareholder approval. Approval by two-thirds of the Company's
outstanding shares would be required in order to proceed with the sale
transaction. In the event that the sale transaction is approved and
completed, the Company is expected to be liquidated within a reasonable time
frame following the closing of the transaction.
As discussed in Note 7, an affiliate of the Advisor to the Company was
named as a defendant in a class action lawsuit against PaineWebber
Incorporated ("PaineWebber") and a number of its affiliates relating to
PaineWebber's sale of 70 direct investment offerings, including the
offering of shares of the Company's common stock. In January 1996,
PaineWebber signed a memorandum of understanding with the plaintiffs in
this class action outlining the terms under which the parties have agreed
to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under
the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance
with a definitive settlement agreement and a plan of allocation which the
parties expect to submit to the court for its consideration and approval
within the next several months. Until a definitive settlement and plan of
allocation is approved by the court, there can be no assurance what, if
any, payment or non-monetary benefits will be made available to
shareholders in Retail Property Investors, Inc. Under certain limited
circumstances, pursuant to the Advisory Agreement and other contractual
obligations, PaineWebber affiliates could be entitled to indemnification
for expenses and liabilities in connection with this litigation. However,
by written agreement dated April 1, 1996 PaineWebber and its affiliates
have waived all such rights with regard to this litigation and any other
similar litigation that has been or may be threatened, asserted or filed by
or on behalf of purchasers of the Company's common stock. Thus, the Advisor
believes that these matters will have no material effect on the Company's
financial statements, taken as a whole.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1995
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Close of period Depreciation
--------------- Costs ------------------------------- in Latest
Buildings Capitalized Buildings, Income
Improvements (Removed) Improvements Total, Less Statement
& Personal Subsequent to & Personal Allowance for Accumulated Date of Date is
Description Encumbrances(A) Land Property Acquisition (B) Land Property Impairment (C)Depreciation Construction Acquired Computed
- ----------- -------------- ---- -------- -------------- ---- -------- ------------- ------------ ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center $ 18,900 $ 6,307 $ 18,062 $ 208 $ 6,307 $ 18,270 $ 24,577 $3,741 1988 8/16/89 12 -
Augusta, GA 40 yrs.
Shopping Center 10,125 1,532 12,231 (78) 1,532 12,153 13,685 2,234 1990 1/19/90 12 -
Greenwood, SC 40 yrs.
Shopping Center 3,715 448 4,659 (245) 448 4,442 4,890 817 1988 1/18/90 12 -
Russellville, KY (28) 40 yrs.
-------
4,862
Shopping Center 5,340 730 6,464 596 730 7,060 7,790 1,263 1989 1/30/90 12 -
Martinsville, IN 40 yrs.
Shopping Center 3,595 616 4,527 (576) 616 4,419 5,035 887 1990 4/26/90 12 -
Ashland City, TN (468) 40 yrs.
-------
4,567
Shopping Center 4,506 704 5,860 (226) 704 5,891 6,595 1,000 1989 5/22/90 12 -
Henderson, KY (257) 40 yrs.
-------
6,338
Shopping Center 7,330 1,813 8,347 (83) 1,813 8,382 10,195 1,441 1990 6/15/90 12 -
Knoxville, TN (118) 40 yrs.
--------
10,077
Shopping Center 11,150 4,244 9,965 (250) 4,244 10,092 14,336 1,815 1990 8/7/90 12 -
Columbia, SC (377) 40 yrs.
--------
13,959
Shopping Center 9,785 3,292 10,578 (513) 3,292 10,065 13,357 1,513 1990 12/19/90 12 -
Beaufort, SC 40 yrs.
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
(continued) RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1995
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Close of period Depreciation
--------------- Costs ------------------------------- in Latest
Buildings Capitalized Buildings, Income
Improvements (Removed) Improvements Total, Less Statement
& Personal Subsequent to & Personal Allowance for Accumulated Date of Date is
Description Encumbrances(A) Land Property Acquisition (B) Land Property Impairment (C)Depreciation Construction Acquired Computed
- ----------- -------------- ---- -------- -------------- ---- -------- ------------- ------------ ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(continued)
Shopping Center 9,002 1,104 11,346 (434) 1,104 10,912 12,016 1,724 1989 12/19/90 12 -
Morehead City, NC 40 yrs.
Shopping Center 4,893 929 6,001 (361) 929 5,878 6,807 793 1989 12/19/90 12 -
Walterboro, SC (238) 40 yrs.
-------
6,569
Shopping Center 7,729 2,438 8,103 (275) 2,438 7,965 10,403 1,269 1990 3/5/91 12 -
Lexington, NC (137) 40 yrs.
--------
10,266
Shopping Center 5,252 1,280 5,918 (44) 1,280 5,874 7,154 918 1989 3/5/91 12 -
Rockwood, TN 40 yrs.
Shopping Center 6,600 2,361 6,888 20 2,361 6,908 9,269 1,032 1987 6/21/91 12 -
Spartanburg, SC 40 yrs.
Shopping Center 8,279 929 11,275 (152) 929 11,263 12,192 1,517 1990 8/9/91 12 -
Glasgow, KY (140) 40 yrs.
--------
12,052
Shopping Center 5,249 737 7,093 (177) 737 7,006 7,743 969 1990 8/9/91 12 -
LaFollette, TN (90) 40 yrs.
-------
7,653
Shopping Center 3,979 728 6,626 (1,372) 728 6,601 7,329 814 1990 10/25/91 12 -
Fremont, OH (1,347) 40 yrs.
--------
5,982
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
(continued) RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1995
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Close of period Depreciation
--------------- Costs ------------------------------- in Latest
Buildings Capitalized Buildings, Income
Improvements (Removed) Improvements Total, Less Statement
& Personal Subsequent to & Personal Allowance for Accumulated Date of Date is
Description Encumbrances(A) Land Property Acquisition (B) Land Property Impairment (C)Depreciation Construction Acquired Computed
- ----------- -------------- ---- -------- -------------- ---- -------- ------------- ------------ ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(continued)
Shopping Center 6,795 1,806 6,880 - 1,806 6,880 8,686 661 1990 8/31/92 12 -
Osh Kosh, WI 40 yrs.
Shopping Center 9,526 2,570 9,886 6 2,570 9,892 12,462 924 1991 8/31/92 12 -
Onalaska, WI 40 yrs.
Shopping Center 6,686 1,274 8,282 (274) 1,274 8,289 9,563 765 1991 10/21/92 3 -
Sanford, NC (281) 40 yrs.
-------
9,282
Shopping Center 6,898 1,626 8,735 (2) 1,626 8,733 10,359 693 1992 4/29/93 12 -
Bluefield, VA 40 yrs.
Shopping Center 5,817 377 8,153 (368) 377 8,154 8,531 619 1992 6/23/93 12 -
Marion, SC -------- ------- ------- ------ ------ ------ ---- 40 yrs.
(369)
--------
8,162
--------
$161,151 $37,845 $185,879 $(4,600) $37,845 $185,129 $219,124 $27,409
======== ======= ======== ======= ======= ======== ======== =======
Notes
(A) See Note 5 of Notes to Financial Statements for a description of the
debt encumbering the properties.
(B) Included in Costs Capitalized (Removed) Subsequent to Acquisition are
certain master lease payments earned that are recorded as reductions in the
cost basis of the properties for financial reporting purposes. See Note 4
to the financial statements for a further description of these payments.
Also included in Costs Capitalized (Removed) Subsequent to Acquisition is
the provision for impairment loss described in Note C below.
(C) The gross amount reflected above includes an impairment loss of $3,850
recognized in fiscal 1995 to writedown the operating investment properties to
the lower of adjusted cost or net realizable value. See Notes 1, 2 and 4 for
a further discussion. The aggregate cost of real estate owned at August 31,
1995 for Federal income tax purposes is approximately $219,529.
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
(continued) RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1995
(In thousands)
(D) Reconciliation of real estate owned:
1995 1994 1993
---- ---- ----
Balance at beginning of year $222,814 $222,373 $193,310
Acquisitions and improvements 178 767 29,772
Disposal of fully depreciated tenant improvements (18) - -
Reduction of basis due to master
lease payments received - (326) (708)
Provision for loss on impairment of
assets held for sale (3,850) - -
-------- --------- --------
Balance at end of year $219,124 $222,814 $222,374
======== ======== ========
(E) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 21,080 $ 14,863 $ 9,334
Depreciation expense 6,347 6,217 5,529
Disposal of fully depreciated tenant improvements (18) - -
--------- --------- ---------
Balance at end of year $ 27,409 $ 21,080 $ 14,863
========= ======== =========
</TABLE>
<PAGE>
SIGNATURE
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.
RETAIL PROPERTY INVESTORS, INC.
By /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
(additionally functioning
as chief accounting officer)
Dated: July 17, 1996
