U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1996
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, 1996: 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.
1996 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-4
Item 3 Legal Proceedings I-7
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 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. Effective September 7, 1993, the Company's shareholders approved a
resolution to complete a 1 for 2 reverse stock split. Consequently, the
resulting outstanding shares, which number 5,010,050, have an effective original
issue price of $20 per share. As of November 1, 1996, PaineWebber and its
affiliates held 111,601 shares of the Company's common stock. 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. In September 1993 and November 1994,
the Company's shareholders approved certain amendments to the Company's Articles
of Incorporation and Bylaws 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 which had existed at that time.
As discussed further in Item 7, however, 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 did not complete the final phase of its restructuring
plans. In view of the then 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
other 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 which it had received
to date, all of which were indications of interest from third parties to buy the
Company's real estate assets. 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 instructed Lehman to work with the various third
parties that expressed an interest in such a transaction to obtain transaction
terms most favorable to the Company and its shareholders. As discussed further
in Item 7, subsequent to year end, in October 1996 the Company completed the
sale of its real estate assets to Glimcher Realty Trust ("GRT"). As also
discussed further in Item 7, the Company expects to complete a plan of
liquidation prior to December 31, 1996 and to distribute all of the Company's
net cash assets to the shareholders prior to such date.
As of August 31, 1996, 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
<PAGE>
Property Name Date of
and Location (1) Type of Property Investment Size
- ---------------- ---------------- ---------- ----
(continued:
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
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 8/7/90 279,261 Sq. Ft.
Columbia, SC
Cross Creek Plaza Shopping Center 12/19/90 237,765 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 3/5/91 210,150 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
<PAGE>
Property Name Date of
and Location (1) Type of Property Investment Size
- ---------------- ---------------- ---------- ----
(continued)
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 6/23/93 156,543 Sq. Ft.
Marion, SC
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the mortgage debt which encumbered these real estate
investments.
The 22 retail shopping centers listed above are located in nine central and
eastern states and aggregate approximately 4.4 million square feet of gross
leasable area. All of the properties are or were anchored by Wal-Mart stores.
The typical property profile for the Company's portfolio was 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. 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 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. 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.
Wal-Mart remains one of the leading and fastest growing discount mass
merchandisers in the United States. 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 had an initial term of
20 years. However, as discussed further in Item 7, over the past several years
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, at certain of the Company's properties management had
been unable to satisfy Wal-Mart's space and location preferences and Wal-Mart
had either moved or expressed its intent to move from such properties. Wal-Mart
would remain obligated to pay rent and its share of operating expenses through
the remaining terms of the leases even upon vacating the properties. 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 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 expected that there
would be additional Wal-Mart relocation vacancies at certain of its properties
as a result of this trend toward supercenter construction, which was one of the
factors which influenced the Board of Directors to pursue a sale of the entire
portfolio of properties during fiscal 1995.
The Company has been 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, none of whom are
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.
Item 2. Properties
As of August 31, 1996, the Company owned 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 1996, along with an
average for the year, are presented below for each property:
Percent Leased At
-------------------------------------------------------
Fiscal
1996
11/30/95 2/28/96 5/31/96 8/31/96 Average
-------- ------- ------- ------- -------
Village Plaza 100% 99% 100% 100% 100%
Logan Place 100% 96% 96% 97% 97%
Piedmont Plaza 99% 99% 99% 99% 99%
Artesian Square 100% 100% 98% 99% 99%
Sycamore Square 89% 88% 89% 89% 89%
Audubon Village 94% 91% 91% 92% 92%
Crossroads Centre 98% 98% 98% 98% 98%
East Pointe Plaza 99% 99% 99% 99% 99%
Cross Creek Plaza 96% 97% 96% 96% 96%
Cypress Bay Plaza 97% 97% 97% 97% 97%
Walterboro Plaza 95% 97% 97% 96% 96%
Lexington Parkway Plaza 96% 96% 96% 96% 96%
Roane County Plaza 100% 100% 100% 100% 100%
Franklin Square 100% 100% 100% 100% 100%
Barren River Plaza 100% 99% 99% 99% 99%
Cumberland Crossing 98% 98% 100% 99% 99%
Applewood Village 100% 99% 99% 99% 99%
Aviation Plaza 99% 100% 100% 100% 100%
Crossing Meadows 100% 100% 100% 100% 100%
Southside Plaza 100% 100% 100% 100% 100%
College Plaza 100% 100% 100% 100% 100%
Marion Towne Center 96% 96% 96% 96% 96%
The Village Plaza shopping center, located in Augusta, Georgia, was the
Company's largest property, representing 10% of the Company's total assets as of
August 31, 1996 and 11% of the Company's total revenues for the year ended
August 31, 1996. The Village Plaza property was encumbered by a mortgage loan
with a principal balance of $18,900,000 as of August 31, 1996. The loan bore
interest at 8% (after the effect a loan buydown fee paid at inception) and
required monthly payments of interest-only through November 1996. Thereafter,
monthly payments of principal and interest totalling $138,682 were to be due
through maturity on November 1, 1999. At maturity, a balloon payment of
$18,401,949 would have been due. For calendar year 1996, the Company owed real
estate taxes with respect to Village Plaza at a rate of $27.22 per $1,000 of
assessed value. Fiscal 1996 real estate tax expense for the Village Plaza
property amounted to $108,098.
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 9/30/96 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, 1996, 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:
Annual Lease
Square Feet Base Expiration Renewal
Tenant Merchandise Occupied Rent Date Options
------ ----------- -------- ---- ---- -------
Wal-Mart Discount 149,211 $ 396,764 10/28/08 5 successive
Department 5-year options
Store
Sam's Club Member 106,728 $ 547,358 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
<PAGE>
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
--------- -------- ------ ------ ---------
1997 2 4,600 $ 68,016 3%
1998 8 63,460 $ 539,171 21%
1999 2 6,800 $ 70,166 3%
2000 2 1,600 $ 33,227 1%
2001 - - - -
2002 1 23,000 $ 184,000 7%
2003 - - - -
2004 - - - -
2005 - - - -
2006 - - - -
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 1992 Fiscal 1993 Fiscal 1994 Fiscal 1995 Fiscal 1996
-------------------- --------------------- --------------------- -------------------- ---------------------
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*
- ------ ------ ------ ------ ------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
98% $5.61 100% $ 5.90 100% $ 5.95 100% $ 5.98 $100% $6.00
</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 were not owned
by the Company and, therefore, were 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:
<TABLE>
Fiscal 1994 Fiscal 1995 Fiscal 1996
------------------------ ----------------------- --------------------
Effective Effective Effective
Rent Rent Rent
per per per
Average % Square Average % Square Average % Square
Leased Foot * Leased Foot* Leased Foot*
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Logan Place 95% $ 3.99 98% $ 4.01 97% $ 4.23
Piedmont Plaza 100% $ 5.50 100% $ 5.76 99% $ 5.89
Artesian Square 100% $ 5.17 100% $ 5.23 99% $ 5.20
Sycamore Square 86% $ 4.52 89% $ 4.54 89% $ 4.83
Audubon Village 93% $ 5.25 94% $ 5.33 96% $ 5.34
Crossroads Centre 99% $ 4.66 100% $ 4.70 98% $ 4.71
East Pointe Plaza 76% $ 5.90 82% $ 5.86 99% $ 5.00
Cross Creek Plaza 96% $ 5.94 98% $ 5.92 96% $ 6.04
Cypress Bay Plaza 97% $ 5.38 98% $ 5.66 97% $ 5.71
Walterboro Plaza 97% $ 5.17 95% $ 5.22 96% $ 5.22
Lexington Parkway Plaza 98% $ 4.99 92% $ 4.98 96% $ 5.14
<PAGE>
Fiscal 1994 Fiscal 1995 Fiscal 1996
------------------------ ----------------------- --------------------
Effective Effective Effective
Rent Rent Rent
per per per
Average % Square Average % Square Average % Square
Leased Foot * Leased Foot* Leased Foot*
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Roane County Plaza 99% $ 4.76 100% $ 4.80 100% $ 4.90
Franklin Square 100% $ 5.18 100% $ 5.27 100% $ 5.41
Barren River Plaza 100% $ 5.15 100% $ 5.26 99% $ 5.31
Cumberland Crossing 100% $ 5.22 100% $ 5.32 99% $ 5.27
Applewood Village 100% $ 5.09 100% $ 5.15 99% $ 5.09
Aviation Plaza 100% $ 5.28 99% $ 5.31 100% $ 5.31
Crossing Meadows 100% $ 5.49 100% $ 5.61 100% $ 5.64
Southside Plaza 100% $ 5.91 100% $ 5.88 100% $ 5.98
College Plaza 100% $ 6.26 100% $ 6.30 100% $ 6.29
Marion Towne Center 100% $ 5.70 100% $ 5.64 96% $ 5.60
</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 certain expansions of
the Wal-Mart anchor stores at five of the properties because such expansions
were not owned by the Company and, therefore, were not covered under the
terms of the respective lease agreements.
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 alleged,
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 were suing on behalf of
all persons who invested in the Company, also alleged 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
alleged that the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought 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 sought
treble damages under RICO.
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. On July 17, 1996, PaineWebber and
the class plaintiffs submitted a definitive settlement agreement which has been
preliminarily approved by the court and provides for the complete resolution of
the class action litigation, including releases in favor of the Company and the
General Partner of the Advisor, and the allocation of the $125 million
settlement fund among investors in the various partnerships and REITs at issue
in the case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships
and REITs. The details of the settlement are described in a notice mailed
directly to class members at the direction of the court. A final hearing on the
fairness of the proposed settlement is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests and REIT stocks,
including those offered by the Company. The complaint alleges, among other
things, that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs
by selling or promoting investments that were unsuitable for the plaintiffs and
by overstating the benefits, understating the risks and failing to state
material facts concerning the investments. The complaint seeks compensatory
damages of $15 million plus punitive damages. In September 1996, the court
dismissed many of the plaintiffs' claims as barred by applicable securities
arbitration regulations. The eventual outcome of this litigation and the
potential impact, if any, on the Company's shareholders cannot be determined at
the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests and REIT stocks,
including those offered by the Company. The complaint is substantially similar
to the complaint in the Abbate action described above, and seeks compensatory
damages of $3.4 million plus punitive damages.
In July 1996, approximately 15 plaintiffs filed an action entitled Barstad
v. PaineWebber Inc. in Maricopa County, Arizona Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests and REIT stocks,
including those offered by the Company. The complaint is substantially similar
to the complaint in the Abbate action described above, and seeks compensatory
damages of $752,000 plus punitive damages. Mediation hearings on the Abbate,
Bandrowski, and Barstad actions are scheduled to be held in December 1996.
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 the litigation
described above. However, PaineWebber and its affiliates have formally 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.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of fiscal 1996, the Company's Board of Directors
presented a proxy to the shareholders which recommended approval of the sale of
substantially all of the Company's real estate assets to Glimcher Realty Trust
("GRT") and the complete and voluntary liquidation and dissolution of the
Company pursuant to the Plan of Liquidation and Dissolution. The proxy proposal
was voted on at a Special Meeting of Shareholders which was held on October 16,
1996. The proposal required an affirmative vote of more than two-thirds of all
the votes entitled to be cast on the transaction. The proposal was approved at
the Special Meeting on October 16, 1996 by the required affirmative votes of the
shareholders.
The following table sets forth a summary of the votes cast with respect to the
proposal:
Votes Votes Abstentions/ Total
For Against Non-Votes Votes
----- ------- ---------- -----
Approval of the Transaction
and the Plan of Liquidation
and Dissolution of the
Company 3,807,939 90,714 83,379 3,982,032
<PAGE>
PART II
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
During the initial public offering period, which commenced on October 23,
1989 and closed in the second quarter of fiscal 1991, the Company issued
10,020,100 shares of common stock at a selling price of $10 per share. Effective
September 7, 1993, the Company's shareholders approved a resolution to complete
a 1 for 2 reverse stock split. Consequently, the resulting outstanding shares,
which number 5,010,050, have an effective original issue price of $20 per share.
As of August 31, 1996, there were 5,885 record holders of the Company's Shares.
There has been 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 1996 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, 1996, 1995, 1994, 1993 and 1992
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 25,513 $ 25,009 $ 24,590 $ 22,606 $ 18,582
Loss before
extraordinary gain $ (3,677) $ (6,364) $ (6,070) $(1,732) $ (1,990)
Extraordinary gain from
forgiveness of debt $ 1,139 $ - $ - $ - $ -
Net loss $ (2,538) $ (6,364) $ (6,070) $ (1,732) $ (1,990)
Per share amounts:
Loss before
extraordinary gain $ (0.74) $ (1.27) $ (1.21) $ (0.35) $ (0.40)
Extraordinary gain
on forgiveness
of debt $ 0.23 $ - $ - $ - $ -
Net loss $ (0.51) $ (1.27) $ (1.21) $ (0.35) $ (0.40)
Cash dividends
declared $ - $ - $ 0.80 $ 1.60 $ 1.60
Mortgage notes
payable, net $155,483 $156,508 $157,599 $156,547 $ 135,978
Total assets $198,164 $202,544 $208,910 $219,086 $ 207,619
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 per share amounts are based upon the weighted average number of
shares outstanding on a daily basis during each of the years ended August 31,
1996, 1995, 1994, 1993 and 1992, of 5,010,050, as adjusted for the 1 for 2
reverse stock split effective September 7, 1993.
<PAGE>
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 invested in
centers containing Wal-Mart Stores, Inc. ("Wal-Mart") as the principal anchor
tenant. 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. Effective
September 7, 1993, the Company's shareholders approved a resolution to complete
a 1 for 2 reverse stock split. Consequently, the resulting outstanding shares,
which number 5,010,050, have an effective original issue price of $20 per share.
As of November 1, 1996, PaineWebber and its affiliates held 111,601 shares of
the Company's common stock. The Company 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 was 98% leased as of August 31, 1996. The Company was
originally organized as a finite-life, non-traded REIT. In September 1993 and
November 1994, the Company's shareholders approved certain amendments to the
Company's Articles of Incorporation and Bylaws 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 which had existed at
that time. However, due to a deterioration in the public equity markets for REIT
stocks during the latter part of calendar 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. Due to changes in interest rate levels and other market factors
which continued to adversely affect the market for new public REIT equity
offerings during the first half of calendar 1995, the Company did not complete
the final phase of its restructuring plans. In view of the then 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 other 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 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 which it had received
to date, all of which were indications of interest from third parties to buy the
Company's real estate assets. 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 instructed Lehman to work with the various third
parties that expressed an interest in such a transaction to obtain transaction
terms most favorable to the Company and its shareholders.
In March 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 $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. 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 required approval by vote of at least two-thirds of the outstanding
shares of common stock. A proxy statement describing the sale transaction and a
proposed subsequent liquidation plan for the Company was mailed to shareholders
in August 1996 and received the requisite vote of the outstanding shares at a
special meeting of the shareholders held on October 16, 1996. The Company
received votes totalling 79% of the shares outstanding, and shareholders
representing 76% of the shares outstanding voted to approve the sale transaction
and plan of liquidation. Upon receiving the required shareholder approval, the
Company finalized the closing of the sale transaction, which occurred on October
17, 1996.
The Company received net proceeds of $36,371,000 on October 17, 1996 from
the final closing of the sale transaction. The net proceeds reflected the
aggregate sales price of $197,000,000, less selling costs paid at closing of
$489,000, capital improvement and repair allowances of $572,000, mortgage debt
outstanding of $158,857,000 and other closing prorations and purchase price
adjustments of $711,000. During the escrow period in which the Company sought to
obtain the required shareholder approval, the Company's operating properties
were managed by GRT. Under the terms of the management agreement, GRT received a
base fee of 3% of the gross operating revenues of the properties. In addition,
GRT earned 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. A portion of the
incentive management fee was paid to GRT out of the net closing proceeds. In
addition, the Company transferred to GRT at the time of the closing certain cash
balances, together with outstanding receivables and payables, related to the net
cash flow generated subsequent to May 14, 1996. The total incentive management
fee through the date of the sale transaction aggregated approximately $3.1
million. The Company received interest earnings from GRT beginning June 20, 1996
through the escrow period on a net equity amount 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 (5.39% per annum). The interest credit totalled $657,000
through the date of the sale transaction and is included in the net proceeds of
$36,371,000 referred to above. The incentive management fee and the interest
credit described above were treated as purchase price adjustments in connection
with the sale and will be recorded in the Company's financial statements as of
the sale closing date. In addition to the net proceeds received upon the closing
of the sale transaction, the Company retained an interest in tenant receivables
with a carrying value of approximately $878,000 as of October 17, 1996 (net of
an allowance for possible uncollectible amounts of $162,000). Such receivables
are primarily comprised of expense reimbursements for real estate taxes,
insurance and common area maintenance associated with the Company's period of
ownership of the properties. The majority of these receivables are expected to
be collected over the next several months with the major portion expected to be
received in early calendar year 1997 after the preparation of the annual tenant
reconciliations of common area charges is completed. However, subsequent to
year-end the Advisor agreed to buy the outstanding receivables from the Company
at their net carrying value so that the Company can complete its liquidation
during calendar 1996 without the need to establish a liquidating trust for any
remaining non-cash assets.
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.
The Company did not achieve its capital appreciation objective. While the
$197 million selling price of the Company's real estate assets significantly
exceeded the book value of the assets, net of accumulated depreciation and the
reserve for impairment loss discussed further below, the amount is below the
aggregate price at which the 22 properties were purchased by the Company between
August 1989 and June 1993 of approximately $224 million (including $6.7 million
of capitalized acquisition fees and expenses). At the present time, real estate
values for retail shopping centers in many markets are being adversely impacted
by the effects of overbuilding and corporate restructurings and consolidations
among retailers which have resulted in an oversupply of space. In addition, the
adverse conditions in the capital markets for public REIT stocks referred to
above have resulted in a drop off in acquisition demand from large institutional
buyers of retail properties. Furthermore, certain strategic changes in
Wal-Mart's corporate growth plans appear to have resulted in potential buyers
attributing a higher leasing risk to the Company's portfolio of properties. Over
the past several years, 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, at
certain of the Company's properties management had been unable to satisfy
Wal-Mart's space and location preferences and Wal-Mart had either moved or
expressed its intent to move from such properties. As previously reported,
during the first quarter of fiscal 1996 Wal-Mart announced plans to build a
200,000 square foot Supercenter on land secured by the Company adjacent to
Audubon Village, subject to various regulatory approvals. During the second
quarter of fiscal 1996, the Planning Board in Henderson, Kentucky rejected
Wal-Mart's proposal to construct the Supercenter adjacent to the Company's site.
The Company and Wal-Mart had been discussing potential options in light of this
development. As discussed further in the 1995 Annual Report, it was anticipated
that Wal-Mart would vacate its store at Applewood Village in Fremont, Ohio.
During the second quarter of fiscal 1996, Wal-Mart vacated, as expected, to
relocate to a newly constructed Supercenter several miles away. During the first
quarter of fiscal 1996, the Company learned that Wal-Mart is also expected to
relocate from Piedmont Plaza in Greenwood, South Carolina to a new Supercenter
currently under construction in that market. Wal-Mart remains obligated to pay
rent and its share of operating expenses through the remaining terms of the
leases even upon vacating the properties. 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 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 expected that there would be additional Wal-Mart
relocation vacancies at certain of its properties as a result of this trend
toward supercenter construction, which was one of the factors which influenced
the Board of Directors to pursue a sale of the entire portfolio of properties
during fiscal 1995.
In addition to the general retail market conditions and Wal-Mart relocation
risk discussed above, the decision by the Board to pursue a sale of the
Company's real estate assets was partly based on the refinancing risk to which
the Company has been and would remain subject in the event that it continued to
hold the operating properties for long-term investment purposes. The first
mortgage loans secured by the College Plaza and Franklin Square properties are
held by the same lender and were scheduled to mature during fiscal 1996. The
College Plaza loan with a principal balance of $6,862,000, had an original
maturity date of April 23, 1996. The Franklin Square loan, with a principal
balance of $6,600,000, had an original maturity date of June 21, 1996. During
the quarter ended May 31, 1996, the Company reached an agreement with the lender
of the College Plaza and Franklin Square notes on terms for a short-term
extension of the two notes. The maturity date of both notes was extended to
March 31, 1997. Subsequent to the original maturity dates, the interest rate for
both mortgage notes was changed to a variable rate equal to either prime plus
0.75% or LIBOR plus 2.75%, as selected by the Company. Formal closing of the
College Plaza and Franklin Square extension agreements occurred in May 1996 and
August 1996, respectively. The next significant loan maturities were scheduled
to occur during fiscal 1998, when approximately $30 million of debt would have
needed to be repaid or refinanced. The obligation to repay the lenders with
respect to the outstanding mortgage loans at the time of the sale transaction in
October 1996 was equal to the outstanding mortgage principal balances prior to
unamortized loan buydown fees. In conjunction with the sale transaction, the
amount of the remaining unamortized loan buydown fees, of approximately $3.5
million, will be written off as a loss on the early extinguishment of debt in
the period in which the sale occurred.
As previously reported, in September 1993, in order to take advantage of a
negotiated prepayment right which was due to expire, PaineWebber Properties
Incorporated (PWPI), the general partner of the Advisor, purchased the mortgage
note secured by Applewood Village from the original lender at par for
$5,175,000. The Applewood Village mortgage loan was refinanced in June 1995 for
$4,000,000 leaving a balance of $1,175,000 which PWPI agreed to hold as an
unsecured note payable. During fiscal 1996, PWPI agreed to release the Company
from its remaining obligation under this promissory note. Effective June 1,
1996, the outstanding balance of this note payable to affiliate, of $1,136,000,
was forgiven, together with the related accrued interest payable of $3,000. The
extraordinary gain from forgiveness of debt resulting from this transaction is
recognized in the Company's statement of operations for fiscal 1996.
As a result of the Company's plan to complete the sale of all of its
operating investment properties, the accompanying financial statements as of
August 31, 1996 and 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 impairment
losses for financial reporting purposes of $1,030,000 and $3,850,000 in fiscal
1996 and 1995, respectively, in connection with this accounting treatment. The
resulting writedowns apply only to the properties for which losses were expected
based on their estimated fair values. The gains on properties for which fair
value less costs to sell exceeded the adjusted cost basis will be recognized in
the first quarter of fiscal 1997; the period in which the sale transaction was
completed. The Company also incurred portfolio sale expenses of $1,834,000 in
fiscal 1996. Portfolio sale related expenses consisted primarily of legal fees
associated with negotiating the sale agreement and preparing, distributing and
soliciting the shareholder proxy. Such costs were expensed as incurred because
of the impairment issues discussed further above and the uncertainty regarding
the ability to complete the sale transaction which existed until the subsequent
shareholder vote.
As reported on the Company's Statements of Cash Flows, net cash provided by
operating activities decreased by approximately $639,000 in fiscal 1996 as
compared to the prior year. The decline in net cash provided by operating
activities was primarily due to expenses incurred in fiscal 1996 related to the
subsequent sale of the operating investment properties. Net cash provided by
investing activities totalled $468,000 during fiscal 1996, as compared to
$114,000 for fiscal 1995. The increase in net cash provided by investing
activities was mainly due to the transfer of cash reserved for capital
improvements to cash and cash equivalents during fiscal 1996 as a result of the
subsequent sale of the operating investment properties. The Company had net cash
used in financing activities of $2,039,000 in fiscal 1996, as compared to
$2,928,000 for fiscal 1995. Net cash used in financing activities was higher in
fiscal 1995 due to a number of mortgage loan refinancing transactions completed
during the year. The Company generally is 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 1996 and, therefore, was not required
to pay a cash dividend in order to retain its REIT status.
The accompanying balance sheet as of August 31, 1996 reflects cash and cash
equivalents totalling $9,208,000. A portion of such cash balance, in the amount
of $1,471,000, relates to net cash flow of the operating properties subsequent
to May 14, 1996 which was due to GRT as part of the incentive management fee
calculation described above and was transferred to GRT on October 17, 1996 in
conjunction with the sale closing. The Company's balance sheet at August 31,
1996 also included escrowed cash of $1,379,000. The majority of this amount,
which primarily represented cash designated for real estate taxes and insurance
premiums, was either transferred to GRT at the time of the sale or applied by
certain lenders against the respective mortgage debt liabilities. The remaining
net cash balance of approximately $7,737,000, along with the net proceeds of
$36,371,000 received at closing, $86,000 of escrowed cash refunded to the
Company subsequent to the closing and a recovery of prepaid insurance in the
amount of $167,000 received subsequent to the closing, were available to be used
to pay for the expenses associated with winding up the Company's business and
for liquidation distributions to the shareholders. In addition, as discussed
further above, the Company retains outstanding tenant receivables in the net
amount of $878,000 which the Advisor has agreed to purchase at carrying value.
The Company also expects to receive certain state tax refunds of approximately
$109,000 and interest income of approximately $441,000. From the available cash
and receivables, the Company expects to pay expenses totalling $1,354,000
subsequent to August 31, 1996. Such costs are comprised of operating expenses
through the date of the sale transaction of approximately $98,000, expenses
related to the sale transaction of approximately $930,000 and estimated
liquidation expenses of $326,000. After these estimated expenses, the Company
expects to have net assets totalling approximately $44.4 million available for
distribution to the shareholders. From these net assets, the Company expects to
make a final liquidating distribution to the shareholders of approximately $8.80
per share in December 1996 which will be followed by the formal liquidation of
the Company by December 31, 1996.
Results of Operations
1996 Compared to 1995
The Company reported a net loss of $2,538,000 for the year ended August
31, 1996, as compared to a net loss of $6,364,000 for the prior year. The
decrease in net loss occurred primarily due to the effects of certain
non-recurring items: a decrease in loss on impairment of assets held for sale
and a $1,139,000 extraordinary gain recognized in fiscal 1996 from the
forgiveness of the unsecured debt owed to an affiliate, as discussed further
above. The decrease in loss on impairment of assets held for sale resulted from
the fiscal 1995 $3,850,000 writedown of the Company's assets to the lower of
cost or fair value less estimated selling costs stemming from its decision to
market its portfolio of assets for sale. The fiscal 1995 impairment loss was
partially offset by the additional loss of $1,030,000 recognized in the current
year, as discussed further above. Partially offsetting the effect on net loss of
these non-recurring items were the expenses of $1,834,000 recognized in fiscal
1996 relating to the sale of the Company's assets, as discussed further above.
Also contributing to the decrease in net loss for fiscal 1996 were
increases in revenues combined with decreases in the interest, general and
administrative, financial and investor servicing and REIT management fee expense
categories. Total revenues increased by $504,000 due to increases in interest
income and rental income and expense reimbursements. Interest income increased
by $176,000 due to the higher average invested cash reserve balances which
resulted from the suspension of the Company's dividend payments to shareholders.
Rental income increased by $175,000 primarily due to an increase in occupancy at
Lexington Parkway Plaza and higher percentage rent earned at Village Plaza
during the current year. The remainder of the increase in revenues is
attributable to higher recorded expense reimbursements in the current year which
corresponds to the increase in property expenses and real estate taxes discussed
below. Interest expense decreased by $475,000 due to the reduction in effective
interest rates associated with certain loans which were refinanced in fiscal
1995. General and administrative expenses decreased by $755,000 partly due to
costs incurred in the prior year related to an independent valuation of the
Company's operating properties which was commissioned in fiscal 1995 as part of
management's refinancing and portfolio management efforts. In addition, a
decline in other required professional services and certain non-recurring
expenses incurred in fiscal 1995 related to a transfer of property management
responsibilities also contributed to the decline in general and administrative
expenses. REIT management fees and financial and investor servicing expenses
declined by $236,000 due to the Advisor's decision to waive collection of such
amounts, effective March 1, 1995, as an accommodation to the Company in order to
maximize earnings and cash flow while the strategic plans regarding the
Company's future operations were evaluated and implemented.
Increases in property expenses, real estate taxes, and bad debts partially
offset the overall decrease in net loss for the current year. Property expenses
increased by $167,000 mainly due to an increase in snow removal costs at several
properties from the record breaking snowfall levels during the winter of 1996.
Real estate taxes increased by $124,000 mainly as a result of higher tax expense
recognized for the Piedmont Plaza and East Pointe Plaza properties. At Piedmont
Plaza, the taxing authority began billing the Company for taxes on the anchor
tenant stores in 1996 as compared to prior years when these amounts had been
billed directly to the anchor tenants. Such amounts are recoverable from the
tenants through the expense reimbursement revenues referred to above. At East
Pointe Plaza, the prior year tax expense had been reduced to correct the
overaccrual of taxes in fiscal 1994 as a result of a successful appeal of the
property's tax assessment. Bad debt expense increased mainly due to the write
off of a note which was deemed to be uncollectible due from a tenant of the
Aviation Plaza property that filed for bankruptcy protection during fiscal 1996.
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 fiscal 1994. 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 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 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 consisted 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.
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 fiscal 1995 and increases in the prime lending rate,
upon which the variable rate College Plaza loan was 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 were
incurred in fiscal 1995 and 1994. 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 was mainly due to a 1% increase in base rental
income and a $179,000 increase in interest income. The increase in base rental
income was 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 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.
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 fiscal 1993. The
increase in net loss was due, in large part, to the expenses incurred in
pursuing certain shareholder approvals and restructuring plans. As noted above,
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. 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,
included 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.
Inflation
The Company commenced operations on August 9, 1989 and completed its seventh
full year of operations in fiscal 1996. 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 as a result of the October 1996 sale of the Company's real estate
assets and the Company's plan of liquidation, which it expects to complete by
December 31, 1996.
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, none of whom are
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 43 5/15/91
Lawrence S. Bacow (1) Director 45 8/20/93
Joseph W. Robertson, Jr. (1) Director 49 10/20/89
J. William Sharman, Jr. (1) Director 56 10/20/89
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/20/89
James A. Snyder Senior Vice President 51 7/6/92
John B. Watts III Senior Vice President 43 5/31/91
Timothy J. Medlock Vice President and Treasurer 35 10/20/89
Rock M. D'Errico Vice President 40 11/01/89
Dorothy F. Haughey Secretary 70 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 and have not been
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"), the 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
---- ------ ---
Bruce J. Rubin President and Chief Executive Officer 37
Walter V. Arnold Senior Vice President and Chief
Financial Officer 49
James A. Snyder Senior Vice President 51
David F. Brooks First Vice President and
Assistant Treasurer 54
Timothy J. Medlock Vice President and Treasurer 35
Thomas W. Boland Vice President 34
(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 Vice Chairman and Chief
Financial Officer of Capital Senior Living Corp., a company that develops and
operates senior housing facilities. Mr. Cohen was President and Chief
Executive Officer of PWPI until August 1996. 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 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. 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 joined the Company as a director in August 1993. He 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. 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 the LaSalle Street Fund
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.
John B. Watts III is a Senior Vice President of the Company and, until
August 1996, he was a Senior Vice President of PWPI 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.
Bruce J. Rubin was named President and Chief Executive Officer of PWPI in
August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in
November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr.
Rubin was employed by Kidder, Peabody and served as President for KP Realty
Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior
Vice President and Director of Direct Investments at Smith Barney Shearson.
Prior thereto, Mr. Rubin was a First Vice President and a real estate workout
specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman
Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie
Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford
Law School.
<PAGE>
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.
James A. Snyder is a Senior Vice President of the Company and a Senior Vice
President 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.
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, 1996, all filing
requirements applicable to its officers, directors and ten-percent beneficial
holders were complied with.
Item 11. Executive Compensation
The three Independent 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.
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.
<PAGE>
(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, 1996:
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 due 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 earns 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 suspended. Accordingly,
the Advisor has not earned any Advisory Incentive Fees since December 1,
1993. Effective March 1, 1995, the Advisor agreed to waive its management
fees indefinitely in order to maximize the Company's earnings and cash flow
while the strategic plans regarding the Company's future operations were
evaluated and implemented. Accordingly, the Advisor did not receive an
asset management fee for the year ended August 31, 1996.
(ii) For its services in finding and recommending investments, and for
analyzing, structuring and negotiating the purchase of properties by the
Company, PWPI received 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 rendered substantial services, and for
which no fees were paid to a third party, were to be paid to the Advisor as
compensation for such services. No such fees will be due to the Advisor
through the Company's expected liquidation date.
(iv) Upon disposition of the Company's investments, the Advisor could have
earned sales commissions and disposition fees. These fees and commissions
are subordinated to the repayment to shareholders of their Capital
Contributions plus certain minimum returns on their Invested Capital. In no
event were the disposition fees to 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 will be due to the Advisor through the Company's
expected liquidation date.
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 would not be reimbursed for providing these
services to the Company. As with the management fees discussed above, the
Advisor agreed to waive these servicing fees indefinitely in order to maximize
the Company's earnings and cash flow while the strategic plans regarding the
Company's future operations were evaluated and implemented. Accordingly, for the
year ended August 31, 1996 no payments were made by the Company to this
affiliate 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, 1996, Mitchell Hutchins earned fees of $23,000 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.
<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 1996. A Current Report on Form 8-K dated October 16, 1996 was
filed subsequent to the fiscal year end to report the sale of the
Company's 22 shopping centers and the shareholder-approved plan of
liquidation.
(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: November 27, 1996
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: November 27, 1996
------------------------ -----------------
Lawrence S. Bacow
Director
By: /s/ Joseph W. Robertson, Jr. Date: November 27, 1996
----------------------------- -----------------
Joseph W. Robertson, Jr.
Director
By: /s/ J. William Sharman, Jr. Date: November 27, 1996
---------------------------- -----------------
J. William Sharman, Jr.
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
RETAIL PROPERTY INVESTORS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ----------------------- ------------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated October 6, 1989, as pursuant to Rule 424(c)
supplemented. and incorporated herein
by reference.
(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 Exchange Act of 1934 and
all such contracts filed as incorporated herein by
exhibits of previously filed reference.
Forms 8-K and Forms 10-K are
hereby incorporated herein by
reference.
(13) Annual Report to Stockholders No Annual Report for
the year ended August
31, 1996 has been sent
to the shareholders.
An Annual Report will
be sent to the
shareholders subsequent
to this filing.
(27) Financial Data Schedule Filed as the last page
of EDGAR submission
following the Financial
Statements and Financial
Statement Schedule required
by Item 14.
</TABLE>
<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, 1996 and 1995 F-3
Statements of operations for the years ended August 31,
1996, 1995 and 1994 F-4
Statements of changes in shareholders' equity for the years ended
August 31, 1996, 1995 and 1994 F-5
Statements of cash flows for the years ended August 31,
1996, 1995 and 1994 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, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended August 31, 1996, 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.
As discussed further in Note 8 to the financial statements, the Company
completed the sale of all of its operating investment properties on October 17,
1996 and adopted a plan of liquidation.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
November 22, 1996
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
BALANCE SHEETS
August 31, 1996 and 1995
(In thousands, except per share amounts)
ASSETS
1996 1995
---- ----
Operating investment properties
held for sale, net (Note 4) $ 185,541 $ 192,311
Cash and cash equivalents 9,208 5,943
Escrowed cash 1,379 1,067
Accounts receivable, net of
allowance for doubtful accounts of
$162 ($80 in 1995) 640 170
Other assets 1 77
Prepaid expenses 336 308
Capital improvement reserve - 1,201
Deferred expenses, net of accumulated
amortization of $856 ($446 in 1995) 1,059 1,467
---------- ----------
$ 198,164 $ 202,544
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable - affiliates $ 4 $ 4
Accounts payable and accrued expenses 1,909 1,316
Mortgage interest payable 371 358
Note payable - affiliate - 1,168
Security deposits and other liabilities 513 768
Mortgage notes payable, net 155,483 156,508
------------ -----------
Total liabilities 158,280 160,122
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 (47,347) (44,809)
---------- ----------
Total shareholders' equity 39,884 42,422
---------- ----------
$ 198,164 $ 202,544
========== ==========
See accompanying notes to financial statements.
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
STATEMENTS OF OPERATIONS
For the years ended August 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 25,010 $ 24,682 $24,442
Interest income 503 327 148
--------- -------- -------
25,513 25,009 24,590
Expenses:
Interest expense and related fees 14,808 15,283 15,459
Depreciation and amortization 6,411 6,495 6,334
Property expenses 2,515 2,348 2,207
Real estate taxes 1,453 1,329 1,370
Portfolio sale expenses 1,834 - -
Loss on impairment of assets
held for sale 1,030 3,850 -
General and administrative 947 1,702 968
Bad debt expense 169 21 241
Cash management fees 23 8 8
Financial and investor
servicing expenses - 111 260
REIT management fees - 125 237
Non-deferrable offering expenses - - 1,561
Investment analysis expense - 101 2,015
--------- ---------- ---------
29,190 31,373 30,660
--------- ---------- ---------
Loss before extraordinary gain (3,677) (6,364) (6,070)
Extraordinary gain from
forgiveness of debt 1,139 - -
--------- --------- ---------
Net loss $ (2,538) $ (6,364) $ (6,070)
========= ========= ========
Per share amounts (Note 2.I):
Loss before extraordinary gain $ (0.74) $ (1.27) $ (1.21)
Extraordinary gain from
forgiveness of debt 0.23 - -
-------- -------- --------
Net loss $ (0.51) $ (1.27) $ (1.21)
======== ======== =========
Cash dividends declared $ - $ - $ 0.80
======== ======== ========
See accompanying notes to financial statements.
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended August 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
Common Stock Additional
$.01 Par Value Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
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
Net loss - - - (2,538) (2,538)
---------- ------ ------- -------- -------
Shareholders' equity
at August 31, 1996 5,010,050 $ 50 $87,181 $(47,347) $39,884
========= ====== ======= ======== =======
See accompanying notes to financial statements.
<PAGE>
RETAIL PROPERTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,538) $ (6,364) $ (6,070)
Adjustments to reconcile net
loss to net cash provided by operating activities:
Depreciation and amortization 6,411 6,495 6,334
Amortization of loan buydown fees 982 1,566 1,572
Amortization of deferred financing costs 392 265 29
Loss on impairment of assets held for sale 1,030 3,850 -
Extraordinary gain from forgiveness of debt (1,139) - -
Changes in assets and liabilities:
Accounts receivable (521) 22 543
Other assets 76 (8) 422
Prepaid expenses (28) (48) 66
Deferred expenses (183) (224) 238
Accounts payable - affiliates - (63) (578)
Accounts payable and accrued expenses 593 (27) 202
Mortgage interest payable 16 191 (60)
Security deposits and other liabilities (255) (180) (714)
-------- -------- --------
Total adjustments 7,374 11,839 8,054
-------- -------- --------
Net cash provided by operating activities 4,836 5,475 1,984
-------- -------- --------
Cash flows from investing activities:
Additions to operating investment properties (421) (178) (767)
Use of (additions to) escrowed cash (312) 311 65
Withdrawals from (additions to) capital
improvement reserve 1,201 (19) (939)
Master lease payments received - - 326
---------- --------- -------
Net cash provided by (used in)
investing activities 468 114 (1,315)
---------- --------- -------
Cash flows from financing activities:
Dividends paid to shareholders - - (4,008)
Proceeds from issuance of mortgage notes payable - 45,825 100
Payment of debt issuance costs - (1,439) -
Proceeds from issuance of unsecured note payable - 1,175 -
Repayment of principal on mortgage notes payable (2,007) (48,482) (620)
Repayment of principal on unsecured note payable (32) (7) -
---------- --------- ---------
Net cash used in financing activities (2,039) (2,928) (4,528)
--------- ------- ---------
Net increase (decrease) in cash and cash equivalents 3,265 2,661 (3,859)
Cash and cash equivalents, beginning of year 5,943 3,282 7,141
--------- --------- ---------
Cash and cash equivalents, end of year $ 9,208 $ 5,943 $ 3,282
========= ========= =========
Supplemental Disclosure:
Cash paid during the year for interest $ 13,421 $ 13,261 $ 13,917
======= ======== ========
See accompanying notes to financial statements.
</TABLE>
<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"). Effective September 7, 1993, the Company's
shareholders approved a resolution to complete a 1 for 2 reverse stock
split. Consequently, the resulting outstanding shares, which number
5,010,050, have an effective original issue price of $20 per share. As of
November 1, 1996, PaineWebber and its affiliates held 111,601 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. In
September 1993 and November 1994, the Company's shareholders approved
certain amendments to the Company's Articles of Incorporation and Bylaws 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 which had existed at that time. However, due to a
deterioration in the public equity markets for REIT stocks during the latter
part of calendar 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. 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 fiscal 1994. 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 that year.
Due to changes in interest rate levels and other market factors which
continued to adversely affect the market for new public REIT equity
offerings during the first half of calendar 1995, the Company did not
complete the final phase of its restructuring plans. In view of the then
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 other 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
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 which it had received to date, all of
which were indications of interest from third parties to buy the Company's
real estate assets. 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 instructed Lehman to work with the
various third parties that expressed an interest in such a transaction to
obtain transaction terms most favorable to the Company and its shareholders.
In March 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 $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. 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 required approval by
vote of at least two-thirds of the outstanding shares of common stock. A
proxy statement describing the sale transaction and a proposed subsequent
liquidation plan for the Company was mailed to shareholders in August 1996
and received the requisite vote of the outstanding shares at a special
meeting of the shareholders held on October 16, 1996. Upon receiving the
required shareholder approval, the Company finalized the closing of the sale
transaction, which occurred on October 17, 1996. See Note 8 for a further
discussion of the net proceeds realized from the sale of the Company's real
estate assets, the expected liquidation distribution to the shareholders and
the timing of the Company's plan of liquidation. The Company's financial
statements as of August 31, 1996 and 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 losses of $1,030,000 and $3,850,000 in fiscal 1996 and
1995, respectively, in connection with this accounting treatment. Since the
sale transaction and associated liquidation plan were contingent upon the
receipt of the shareholder vote, which did not occur until after August 31,
1996, the accompanying financial statements continue to reflect the going
concern basis of accounting. The Company will adopt the liquidation basis of
accounting effective as of October 16, 1996.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of August 31, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended August
31, 1996. Actual results could differ from the estimates and assumptions
used.
The Company's significant accounting policies are summarized as
follows:
A. INCOME TAXES
The Company has elected 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
1996 and 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
discussed further in Notes 1 and 4, all of the Company's operating
investment properties were held for sale as of August 31, 1996 and
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 at August 31, 1996 and 1995. In
March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets To be
Disposed Of." In accordance with SFAS 121, an impairment loss with
respect to an operating investment property is recognized when the sum
of the expected future net cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset. An
impairment loss is measured as the amount by which the carrying amount
of the assets exceeds its fair value, where fair value is defined as
the amount at which the asset could be bought or sold in a current
transaction between willing parties, that is other than a forced or
liquidation sale. Due to the subsequent sale of the Company's real
estate assets in October 1996, FAS No. 121, which is effective for
financial statements for years beginning after December 15, 1995, will
not have a material effect on the Company's financial statements.
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 various lender escrows and real estate tax
and insurance premium escrows. The lender escrows were 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 at both August 31, 1996 and
1995. The lender escrows were refunded to the Company subsequent to the
closing of the sale of the Company's real estate assets in October
1996. The Company maintained separate real estate tax and insurance
premium escrows for each property. The balance of these escrows was
approximately $1,304,000 and $992,000 at August 31, 1996 and 1995,
respectively. Such funds were generally used to pay the Company's pro
rated share of real estate tax expenses upon the sale of the Company's
real estate assets in October 1996.
E. CAPITAL IMPROVEMENT RESERVE
The Company had elected to fund a capital improvement reserve to cover
the potential cost of future capital improvement expenditures. The
balance of the capital improvement reserve at August 31, 1995 was
approximately $1,201,000. The Company funded $.06 per square foot of
leasable space owned (approximately 4.4 million square feet) to the
reserve through August 31, 1995. The capital improvement reserve was
not restricted by any third parties. Due to the pending sale of the
Company's investment properties, the balance of the capital improvement
reserve was reclassified to cash and cash equivalents as of August 31,
1996.
F. DEFERRED EXPENSES
Deferred expenses as of August 31, 1996 and 1995 include costs incurred
in connection with the mortgage notes payable, leasing commissions and
computer software. Capitalized loan costs have been 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 have been amortized using the
straight-line method over the term of the related lease, generally 3 to
5 years. Software costs have been 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, 1996 and 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. The unamortized balance of capitalized
loan costs will be written off as a loss on the early extinguishment of
debt effective as of October 17, 1996 due to the subsequent sale of the
Company's real estate assets.
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, 1996 and 1995,
the difference between the revenue recorded on the straight-line method
and the payments made in accordance with the lease agreements totalled
$356,000 and $305,000, respectively. 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, 1996 and 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
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, 1996, of 5,010,050.
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 due to
the short-term maturities of such instruments.
Escrowed cash: The carrying amount reported on the balance sheet for
escrowed cash approximates its fair value due to the short-term
maturities of such instruments.
Mortgage notes payable: Due to the subsequent sale of the Company's
real estate assets in October 1996 and the related settlement of the
Company's outstanding mortgage loan liabilities, the fair value of the
Company's mortgage indebtedness was deemed to equal its face value as
of August 31, 1996.
The carrying amounts and fair values of the Company's financial
instruments at August 31, 1996 are as follows (amounts in thousands):
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 9,208 $ 9,208
Escrowed cash $ 1,379 $ 1,379
Mortgage notes payable, net $ 155,483 $ 159,144
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 due 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 earns 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 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 indefinitely in order to maximize the Company's earnings and cash flow
while the strategic plans regarding the Company's future operations were
evaluated and implemented. Accordingly no management fees were paid during
the year ended August 31, 1996. The Advisor received total management fees
of $125,000 and $237,000 for the period September 1, 1994 through February
28, 1995 and the year ended August 31, 1994, respectively.
(ii) For its services in finding and recommending investments, and for
analyzing, structuring and negotiating the purchase of properties by the
Company, PWPI received 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 rendered substantial services, and for
which no fees were paid to a third party, were to be paid to the Advisor as
compensation for such services. No such fees will be due to the Advisor
through the Company's expected liquidation date.
(iv) Upon disposition of the Company's investments, the Advisor could have
earned sales commissions and disposition fees. These fees and commissions
are subordinated to the repayment to shareholders of their Capital
Contributions plus certain minimum returns on their Invested Capital. In no
event were the disposition fees to 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 will be due to the Advisor through the Company's
expected liquidation date.
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
agreed to waive these servicing fees indefinitely in order to maximize the
Company's earnings and cash flow while the strategic plans regarding the
Company's future operations were evaluated and implemented. Accordingly, no
servicing fees were paid during the year ended August 31, 1996. For the
period September 1, 1994 through February 28, 1995 and the year ended August
31, 1994, the Company paid $111,000 and $260,000, 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, 1996, 1995 and 1994, Mitchell Hutchins earned fees of
$23,000, $8,000 and $8,000, respectively, for managing the Company's cash
assets. Accounts payable - affiliates at both August 31, 1996 and 1995
consists of $4,000 payable to Mitchell Hutchins.
The Company had engaged the services of a consulting firm for certain
professional services related to its mortgage loan refinancing and
acquisition due diligence activities prior to August 31, 1995. The
consulting firm was a partnership in which Mr. Robert J. Pansegrau was one
of two 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 $186,000 and $282,000 for the
years ended August 31, 1995 and 1994, respectively. The consulting firm also
received reimbursement for out-of-pocket expenses of $79,000 and $167,000
for the years ended August 31, 1995 and 1994, 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 had a 15-year term and
carried an interest rate tied to PWPI's cost of funds, not to exceed 8% per
annum. The note was to be fully amortizing over its term and required
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. On June 1, 1996, PWPI forgave the entire balance on this
unsecured loan of $1,136,000 plus accrued interest of $3,000. The Company
recorded this transaction as an extraordinary gain from forgiveness of debt
in the fiscal 1996 statement of operations. Interest expense incurred by the
Company under the terms of this note agreement totalled $53,000 and $12,000
in fiscal 1996 and 1995, respectively.
4. Operating Investment Properties
Through August 31, 1996, the Company had acquired 22 Wal-Mart anchored
shopping centers. The ownership of the Company's operating properties
described below was 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 was 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 and sale proceeds generated through
the disposition of the operating properties in October 1996 were allocated
to the Company. Furthermore, as a limited partner in the partnerships, PWPI
had 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 had 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, 1996,
are as follows (in thousands):
<TABLE>
<CAPTION>
Costs
Name Acquisition Capitalized Master Adjusted
Location Date Purchase Fees and Subsequent to Lease Cost at
Size Acquired Price Expenses (1) Acquisition Payments (2) 8/31/96
- ---- -------- ----- ------------ ----------- ------------ -------
<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 42 - 10,202
Knoxville, TN
242,430
square feet
East Pointe Plaza 8/07/90 13,936 269 737 306 14,636
Columbia, SC
279,261
square feet
Walterboro Plaza - 12/19/90 6,645 284 18 136 6,811
Phases I and II
Walterboro, SC
132,130
square feet
Cypress Bay Plaza 12/19/90 12,235 215 88 522 12,016
Morehead City, NC
258,245
square feet
Cross Creek Plaza 12/19/90 13,565 302 20 525 13,362
Beaufort, SC
237,801
square feet
Lexington Parkway
Plaza 3/05/91 10,290 251 115 208 10,448
Lexington, NC
210,190
square feet
<PAGE>
Costs
Name Acquisition Capitalized Master Adjusted
Location Date Purchase Fees and Subsequent to Lease Cost at
Size Acquired Price Expenses (1) Acquisition Payments (2) 8/31/96
- ---- -------- ----- ------------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Roane County
Plaza 3/05/91 7,000 197 - 43 7,154
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 Plaza 8/09/91 11,788 412 49 57 12,192
Glasgow, KY
234,795
square feet
Cumberland
Crossing 8/09/91 7,458 370 39 116 7,751
LaFollette, TN
144,734
square feet
Applewood Village 10/25/91 6,965 389 - - 7,354
Fremont, OH
140,039
square feet
Aviation Plaza 8/31/92 8,349 337 - - 8,686
Oshkosh, WI
174,715
square feet
Crossing
Meadows Plaza 8/31/92 12,100 356 6 - 12,462
Onalaska, WI
233,984
square feet
Southside Plaza 10/21/92 9,200 356 7 - 9,563
Sanford, NC
172,293
square feet
<PAGE>
Costs
Name Acquisition Capitalized Master Adjusted
Location Date Purchase Fees and Subsequent to Lease Cost at
Size Acquired Price Expenses (1) Acquisition Payments (2) 8/31/96
- ---- -------- ----- ------------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
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 27 - 8,558
Center
Marion, SC
156,558
square feet
$216,972 $6,737 $ 3,106 $ 3,420 $ 223,395
======== ====== ======= ======= =========
</TABLE>
(1) 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 were recorded as other assets pending the
closing of a transaction and were reclassified after acquisition to
the cost basis of the related property. Expenses incurred to review
potential investments which were subsequently not acquired by the
Company were charged to investment analysis expense once the Company
stopped pursuing the acquisition.
(2) 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 provided 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
guaranteed that the aggregate cash flow from all non-anchor tenants
would 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 was less than the
guaranteed amount, the Guarantors were obligated to make cash
payments to the Company equal to any such deficit. All amounts
earned under the master lease agreements were 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
fiscal 1995, the Company entered into settlement agreements related
to the outstanding master lease obligations on the Southside Plaza,
College Plaza, Aviation Plaza and Crossing Meadows properties. 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. As of August 31, 1996, Applewood
Village was the only property remaining under a master lease and was
not generating any master lease payments based on the property's
leasing level. The Applewood Village master lease was terminated
subsequent to year-end in connection with the October 1996 sale of
the Company's real estate assets.
As discussed in Note 1, as a result of the decision by the Board of
Directors to pursue a sale of the Company's portfolio of properties, the
accompanying statements of operations for fiscal 1996 and 1995 include
losses of $1,030,000 and $3,850,000, respectively, 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, 1996
and 1995. Such losses apply only to the properties for which losses were
expected based on the estimated fair values. The gains on properties for
which the estimated fair value less costs to sell exceeded the adjusted cost
basis will be recognized in the period in which the sale transaction was
completed. The Company also incurred portfolio sale expenses of $1,834,000
in fiscal 1996. Portfolio sale related expenses consisted primarily of legal
fees associated with negotiating the sale agreement and preparing,
distributing and soliciting the shareholder proxy. Such costs were expensed
as incurred because of the impairment issues discussed further above and the
uncertainty regarding the ability to complete the sale transaction which
existed until the subsequent shareholder vote. The Company continued to
recognize depreciation on its assets held for sale through the date of
disposal. Operating investment properties held for sale on the accompanying
balance sheets as of August 31, 1996 and 1995 is comprised of the following
amounts (in thousands):
<PAGE>
1996 1995
---- ----
Land $ 37,845 $ 37,845
Buildings and improvements 175,874 175,453
Furniture and equipment 9,676 9,676
--------- ---------
223,395 222,974
Less: accumulated depreciation (33,666) (27,409)
--------- ---------
189,729 195,565
Deferred rent receivable 356 305
Deferred leasing commissions, net 336 291
--------- ---------
190,421 196,161
Less: Allowance for possibl
impairment loss (4,880) (3,850)
--------- ---------
$ 185,541 $ 192,311
========= ========
5. Mortgage Notes Payable
Mortgage notes payable, reduced by unamortized loan buydown fees (see
below), at August 31, 1996 and 1995 consisted of the following (in
thousands):
1996 1995
---- ----
Mortgage notes payable to a $ 49,005 $ 49,005
financial institution which (2,034) (2,504)
were secured by Village Plaza, -------- --------
Piedmont Plaza, Artesian Square, 46,971 46,501
Logan Place, Sycamore Square and
Crossroads Centre. These mortgage
notes required monthly payments of
interest only at 8% for the first
seven years and then principal and
interest at 8% until maturity,
which ranged from November 1, 1999
to July 1, 2000. These notes
contained certain cross default
and cross collateral provisions.
See discussion of effective
interest rates and loan buydown
fees below.
<PAGE>
(continued) 1996 1995
---- ----
Mortgage notes payable to a 24,426 24,678
financial institution which were (875) (1,022)
secured by East Pointe Plaza, ------ --------
Cumberland Crossing and Barren 23,551 23,656
River Plaza. The mortgage note on
East Pointe Plaza, in the original
principal amount of $11,150,
called for monthly interest only
payments at 8% per annum through
June 1996. The balance of these
mortgage notes required monthly
payments of principal and interest
at 8% through June 1996. Effective
June 10, 1996, all three notes
required monthly payments of
principal and interest at 8.75%
per annum through maturity on June
10, 2001. These notes contained
certain cross default and cross
collateral provisions. See
discussion of effective interest
rates and loan buydown fees below.
Mortgage note payable to a bank 13,439 13,498
secured by Franklin Square and - (83)
College Plaza. The Franklin note ------ -------
required monthly interest only 13,439 13,415
payments at 8% per annum until
maturity, which was originally
scheduled for June 21, 1996.
Interest on the College Plaza note
accrued at prime plus 0.75% per
annum. Monthly payments equal to
the greater of $58 or accrued
interest for such month were
payable until maturity, which was
originally scheduled for April 23,
1996. The Company obtained a loan
modification on both these loans,
effective as of their respective
maturity dates, extending the due
dates to March 31, 1997. Both
loans required monthly interest
payments based on a variable
interest rate equal to either
prime plus 0.75% or LIBOR plus
2.75%, as selected by the Company.
The College Plaza loan also
required monthly principal
payments of $7.5.
Mortgage note payable to a 22,840 23,680
financial institution secured by
Cross Creek Plaza, Cypress Bay
Plaza and Walterboro Plaza (Phases
I and II). The loan bore interest
at a variable rate equal to 30-day
LIBOR plus 3.50% per annum for the
first twelve months, 30-day LIBOR
plus 3.75% for the next twelve
months (9.25% as of August 31,
1996), 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) were due
until maturity on December 10,
1997.
<PAGE>
(continued):
1996 1995
---- ----
Mortgage notes payable to a 17,110 17,487
financial institution secured by
Audubon Village, Lexington Parkway
Plaza and Roane County Plaza. The
notes secured by the Lexington and
Roane properties bore interest at
a fixed rate of 9.125% per annum
and required monthly payments of
principal and interest aggregating
$119 through maturity on March 1,
2015. The note secured by Audubon
Village bore interest at 8.75% per
annum and required monthly
payments of principal and interest
of $43 through maturity on June 1,
2000.
Mortgage notes payable to a 16,139 16,321
financial institution which were (621) (815)
secured by Aviation Plaza and ------- ------
Crossing Meadows. Monthly payment 15,518 15,506
terms for the loan secured by
Aviation Plaza, in the principal
amount of $6,800, called 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
required monthly payments,
including interest at 8% per
annum, of $71 until maturity. Both
notes were scheduled to mature on
June 1, 1999. See discussion of
effective interest rates and loan
buydown fees below.
Mortgage note payable to a 6,583 6,686
financial institution which was (131) (219
secured by Southside Plaza. The ------ ------
note required monthly payments, 6,452 6,467
including interest 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 5,757 5,817
financial institution which was
secured by Marion Towne Center.
The note, which was issued on June
23, 1993, called for monthly
payments, including interest at 8%
per annum, of $44 until maturity
on July 1, 2002. The lender had
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 was not called at such
time, the interest rate on the
loan was subject to adjustment.
During fiscal 1996, the lender
adjusted the interest rate to
7.375%, thereby reducing the
monthly principal and interest
payments to $41 effective with the
August 1, 1996 payment.
<PAGE>
(continued):
1996 1995
---- ----
Mortgage note payable to a 3,845 3,979
financial institution secured by
Applewood Village. The note bore
interest at 9% per annum and
required monthly principal and
interest payments of $41 until
maturity on June 10, 2010. ------- --------
Total mortgage notes payable, net $155,483 $156,508
======== ========
Summary of outstanding mortgage notes payable
Total outstanding mortgage principal
balances as of August 31, 1996 and
August 31, 1995 $159,144 $161,151
Aggregate unamortized loan buydown fees (3,661) (4,643)
-------- --------
Total mortgage notes payable, net $155,483 $156,508
======== ========
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
have been amortized, using the effective interest method, over the terms of
the respective loans. The effective interest rates on these outstanding
loans ranged from 7.38% to 9.80% per annum as of August 31, 1996. As
discussed further in Note 1, the Company completed the sale of the operating
investment properties which serve as collateral for the above mortgage loans
subsequent to year end, on October 17, 1996. The obligation to repay the
lenders with respect to such loans at the time of the sale transaction was
equal to the outstanding mortgage principal balances prior to unamortized
loan buydown fees. In conjunction with the sale transaction, the amount of
the remaining unamortized buydown fees will be written off as a loss on the
early extinguishment of debt in the period in which the sale occurred.
During fiscal 1996 and 1995, the Company was not in technical
compliance with provisions in certain of the above mortgage loan agreements
which required formal lender approval of all property expansions and lease
modifications. Under the terms of the loan agreements, failure to comply
with such terms could have constituted events of default. Management had
been working with the lenders to obtain the necessary approvals and,
subsequent to year end, all instances of non-compliance were cured prior to
the final closing of the sale transaction referred to above.
As of August 31, 1996, aggregate scheduled maturities of mortgage notes
payable for the next five years and thereafter were as follows (in
thousands):
Year ended August 31:
---------------------
1997 $ 15,590
1998 29,895
1999 17,286
2000 52,945
2001 24,037
Thereafter 19,391
----------
$ 159,144
==========
<PAGE>
6. Rental income
The Company has earned rental income from leasing shopping center
space. All of the Company's leasing agreements were operating leases
expiring in one to twenty years. Base rental income of $22,271,000
$22,183,000 and $21,958,000 was earned for the years ended August 31, 1996,
1995 and 1994, respectively. The following is a schedule of minimum future
lease payments from noncancellable operating leases as of August 31, 1996
(in thousands):
Year ended August 31:
---------------------
1997 $ 21,463
1998 19,805
1999 18,461
2000 16,535
2001 15,068
Thereafter 117,293
----------
$ 208,625
==========
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 $247,000, $160,000 and $92,000 were
earned for the years ended August 31, 1996, 1995 and 1994, respectively.
Virtually all tenant leases also required lessees to pay all or a portion of
real estate taxes and certain property operating costs.
Rental income of approximately $7,990,000, $7,913,000 and $7,913,000 was
received from leases with Wal-Mart and its affiliates for the years ended
August 31, 1996, 1995 and 1994 respectively. Such amounts comprised 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. 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
alleged, 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 alleged 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 alleged
that the defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought 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 sought treble damages under RICO.
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.
On July 17, 1996, PaineWebber and the class plaintiffs submitted a
definitive settlement agreement which has been preliminarily approved by
the court and provides for the complete resolution of the class action
litigation, including releases in favor of the Company and the General
Partner of the Advisor, and the allocation of the $125 million settlement
fund among investors in the various partnerships and REITs at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the
partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A
final hearing on the fairness of the proposed settlement is scheduled to
continue in November 1996.
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.
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
In March 1996, the Company announced the execution of a definitive
agreement for the sale of its real estate 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 $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 pending the receipt of the
approval of the transaction by the Company's shareholders, which was
received on October 16, 1996. On October 17, 1996, the sale transaction
closed out of escrow and the Company received net proceeds of $36,371,000.
The net proceeds reflected the aggregate sales price of $197,000,000, less
selling costs paid at closing of $489,000, capital improvement and repair
allowances of $572,000, mortgage debt outstanding of $158,857,000 and other
closing prorations and purchase price adjustments of $711,000. During the
escrow period in which the Company sought to obtain the required shareholder
approval, the Company's operating properties were managed by GRT. Under the
terms of the management agreement, GRT received a base fee of 3% of the
gross operating revenues of the properties. In addition, GRT earned 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. A portion of the incentive
management fee was paid to GRT out of the net closing proceeds. In addition,
the Company transferred to GRT at the time of the closing certain cash
balances, together with outstanding receivables and payables, related to the
net cash flow generated subsequent to May 14, 1996. The total incentive
management fee through the date of the sale transaction aggregated
approximately $3.1 million. The Company received interest earnings from GRT
beginning June 20, 1996 through the escrow period on a net equity amount 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 (5.39% per annum). The
interest credit totalled $657,000 through the date of the sale transaction
and is included in the net proceeds of $36,371,000 referred to above. The
incentive management fee and the interest credit described above were
treated as purchase price adjustments in connection with the sale and will
be recorded in the Company's financial statements as of the sale closing
date. In addition to the net proceeds received upon the closing of the sale
transaction, the Company retained an interest in tenant receivables with a
carrying value of approximately $878,000 as of October 17, 1996 (net of an
allowance for possible uncollectible amounts of $162,000). Such receivables
are primarily comprised of expense reimbursements for real estate taxes,
insurance and common area maintenance associated with the Company's period
of ownership of the properties. The majority of these receivables are
expected to be collected over the next several months with the major portion
expected to be received in early calendar year 1997 after the preparation of
the annual tenant reconciliations of common area charges is completed.
However, subsequent to year-end the Advisor agreed to buy the outstanding
receivables from the Company at their net carrying value so that the Company
can complete its liquidation during calendar 1996 without the need to
establish a liquidating trust for any remaining non-cash assets.
The accompanying balance sheet as of August 31, 1996 reflects cash and
cash equivalents totalling $9,208,000. A portion of such cash balance, in
the amount of $1,471,000, relates to net cash flow of the operating
properties subsequent to May 14, 1996 which was due to GRT as part of the
incentive management fee calculation described above and was transferred to
GRT on October 17, 1996 in conjunction with the sale closing. The Company's
balance sheet at August 31, 1996 also included escrowed cash of $1,379,000.
The majority of this amount, which primarily represented cash designated
for real estate taxes and insurance premiums, was either transferred to GRT
at the time of the sale or applied by certain lenders against the
respective mortgage debt liabilities. The remaining net cash balance of
approximately $7,737,000, along with the net proceeds of $36,371,000
received at closing, $86,000 of escrowed cash refunded to the Company
subsequent to the closing and a recovery of prepaid insurance in the amount
of $167,000 received subsequent to the closing, were available to be used
to pay for the expenses associated with winding up the Company's business
and for liquidation distributions to the shareholders. In addition, as
discussed further above, the Company retains outstanding tenant receivables
in the net amount of $878,000 which the Advisor has agreed to purchase at
carrying value. The Company also expects to receive certain state tax
refunds of approximately $109,000 and interest income of approximately
$441,000. From the available cash and receivables, the Company expects to
pay expenses totalling $1,354,000 subsequent to August 31, 1996. Such costs
are comprised of operating expenses through the date of the sale
transaction of approximately $98,000, expenses related to the sale
transaction of approximately $930,000 and estimated liquidation expenses of
$326,000. After these estimated expenses, the Company expects to have net
assets totalling approximately $44.4 million available for distribution to
the shareholders. From these net assets, the Company expects to make a
final liquidating distribution to the shareholders of approximately $8.80
per share in December 1996 which will be followed by the formal liquidation
of the Company by December 31, 1996.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1996
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, Total, less in Latest
Improvements (Removed) Improvements Allowance for Income
& Personal Subsequent to & Personal Impair- Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property ment (C) Depreciation Construction Acquired is 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 $4,359 1988 8/16/89 12 - 40 yrs.
Augusta, GA
Shopping Center 10,125 1,532 12,231 (78) 1,532 12,153 13,685 2,639 1990 1/19/90 12 - 40 yrs.
Greenwood, SC
Shopping Center 3,715 448 4,659 (313) 448 4,442 4,890 964 1988 1/18/90 12 - 40 yrs.
Russellville, KY (96)
-------
4,794
Shopping Center 5,340 730 6,464 596 730 7,060 7,790 1,504 1989 1/30/90 12 - 40 yrs.
Martinsville, IN
Shopping Center 3,595 616 4,527 (789) 616 4,419 5,035 1,048 1990 4/26/90 12 - 40 yrs.
Ashland City, TN (681)
-------
4,354
Shopping Center 4,506 704 5,860 (226) 704 5,891 6,595 1,190 1989 5/22/90 12 - 40 yrs.
Henderson, KY (257)
-------
6,338
Shopping Center 7,330 1,813 8,347 (76) 1,813 8,389 10,202 1,713 1990 6/15/90 12 - 40 yrs.
Knoxville, TN (118)
-------
10,084
Shopping Center 11,150 4,244 9,965 (57) 4,244 10,392 14,636 2,216 1990 8/7/90 12 - 40 yrs.
Columbia, SC (484)
-------
14,152
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation (continued)
RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1996
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, Total, less in Latest
Improvements (Removed) Improvements Allowance for Income
& Personal Subsequent to & Personal Impair- Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property ment (C) Depreciation Construction Acquired is Computed
- ----------- ----------- ---- -------- ----------- ---- -------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center 9,785 3,292 10,578 (508) 3,292 10,070 13,362 1,846 1990 12/19/90 12 - 40 yrs.
Beaufort, SC
Shopping Center 9,002 1,104 11,346 (434) 1,104 10,912 12,016 2,055 1989 12/19/90 12 - 40 yrs.
Morehead City, NC
Shopping Center 4,893 929 6,001 (357) 929 5,882 6,811 981 1989 12/19/90 12 - 40 yrs.
Walterboro, SC (238)
-------
6,573
Shopping Center 7,729 2,438 8,103 (230) 2,438 8,010 10,448 1,569 1990 3/5/91 12 - 40 yrs.
Lexington, NC (137)
-------
10,311
Shopping Center 5,252 1,280 5,918 (44) 1,280 5,874 7,154 1,125 1989 3/5/91 12 - 40 yrs.
Rockwood, TN
Shopping Center 6,600 2,361 6,888 20 2,361 6,908 9,269 1,277 1987 6/21/91 12 - 40 yrs.
Spartanburg, SC
Shopping Center 8,279 929 11,275 (152) 929 11,263 12,192 1,879 1990 8/9/91 12 - 40 yrs.
Glasgow, KY (140)
-------
12,052
Shopping Center 5,249 737 7,093 (169) 737 7,014 7,751 1,199 1990 8/9/91 12 - 40 yrs.
LaFollette, TN (90)
-------
7,661
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation (continued)
RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1996
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, Total, less in Latest
Improvements (Removed) Improvements Allowance for Income
& Personal Subsequent to & Personal Impair- Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property ment (C) Depreciation Construction Acquired is Computed
- ----------- ----------- ---- -------- ----------- ---- -------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center 3,979 728 6,626 (1,989) 728 6,626 7,354 1,023 1990 10/25/91 12 -40 yrs.
Fremont, OH (1,989)
------
5,365
Shopping Center 6,795 1,806 6,880 - 1,806 6,880 8,686 905 1990 8/31/92 12 -40 yrs.
Osh Kosh, WI
Shopping Center 9,526 2,570 9,886 6 2,570 9,892 12,462 1,261 1991 8/31/92 12 -40 yrs.
Onalaska, WI
Shopping Center 6,686 1,274 8,282 (274) 1,274 8,289 9,563 1,049 1991 10/21/92 3 - 40 yrs.
Sanford, NC (281)
------
9,282
Shopping Center 6,898 1,626 8,735 (2) 1,626 8,733 10,359 980 1992 4/29/93 12 - 40 yrs.
Bluefield, VA
Shopping Center 5,817 377 8,153 (341) 377 8,181 8,558 884 1992 6/23/93 12 - 40 yrs.
Marion, SC (369)
------
8,189
-------- ------ -------- ------- ------- -------- -------- -------
$161,151 $37,845 $185,879 $(5,209) $37,845 $185,550 $218,515 $33,666
======== ======= ======== ======= ======= ======== ======== =======
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation (continued)
RETAIL PROPERTY INVESTORS, INC.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1996
(In thousands)
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 were 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 impairment losses of $1,030 and
$3,850 recognized in fiscal 1996 and 1995, respectively, 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, 1996 for Federal income tax
purposes is approximately $226,815,000.
(D) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of year $219,124 $222,814 $222,373
Acquisitions and improvements 421 178 767
Disposal of fully depreciated tenant
improvements - (18) -
Reduction of basis due to master
lease payments received - - (326)
Provision for loss on impairment of
assets held for sale (1,030) (3,850) -
--------- -------- --------
Balance at end of year $ 218,515 $219,124 $222,814
========= ======== ========
(E) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 27,409 $ 21,080 $ 14,863
Depreciation expense 6,257 6,347 6,217
Disposal of fully depreciated tenant
improvements - (18) -
---------- -------- --------
Balance at end of year $ 33,666 $ 27,409 $ 21,080
========== ========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended August 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<CASH> 9,208
<SECURITIES> 0
<RECEIVABLES> 802
<ALLOWANCES> 162
<INVENTORY> 0
<CURRENT-ASSETS> 11,564
<PP&E> 219,207
<DEPRECIATION> 33,666
<TOTAL-ASSETS> 198,164
<CURRENT-LIABILITIES> 2,797
<BONDS> 155,483
0
0
<COMMON> 39,884
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 198,164
<SALES> 0
<TOTAL-REVENUES> 25,513
<CGS> 0
<TOTAL-COSTS> 13,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,030
<INTEREST-EXPENSE> 14,808
<INCOME-PRETAX> (3,677)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,677)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,139
<CHANGES> 0
<NET-INCOME> (2,538)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
