<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
_______________________________________________________
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transition Period from
------------to------------
________________________________________________________
Commission File Number 0-20047
I.R.S. Employer Identification Number 41-1691930
Royale Investments, Inc.
3430 List Place
Minneapolis, MN 55416
Telephone: (612) 920-4078
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
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's stock as of August 9, 1997
was:
1,420,000 Shares of Common Stock
<PAGE>
ROYALE INVESTMENTS, INC.
MINNEAPOLIS, MINNESOTA
FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<PAGE>
Royale Investments, Inc.
INDEX
Page
----
Accountant's Report 1
Balance Sheets 2
Statements of Operations and Distributions in Excess
of Accumulated Earnings 3
Statements of Cash Flows 4
Notes to Financial Statements 5 - 10
<PAGE>
[LETTERHEAD]
July 18, 1997
To the Board of Directors and Shareholders
Royale Investments, Inc.
Minneapolis, Minnesota
The accompanying balance sheets of Royale Investments, Inc. as of June 30, 1997,
and 1996, and the related statements of operations, distributions in excess of
accumulated earnings, and cash flows for the six months ended June 30, 1997, and
1996, were not audited by us, and accordingly, we do not express an opinion on
them.
/s/ Hoffmann, Swintek
<PAGE>
Royale Investments, Inc.
BALANCE SHEETS
(Unaudited)
June 30,
1997 1996
---- ----
ASSETS
REAL ESTATE INVESTMENTS:
Property subject to operating leases $25,027,358 $25,027,358
Less: accumulated depreciation 2,234,662 1,680,234
----------- -----------
22,792,696 23,347,124
CASH AND CASH EQUIVALENTS 237,730 184,031
MARKETABLE SECURITIES 401,839 530,091
OTHER ASSETS 447,870 369,056
----------- -----------
$23,880,135 $24,430,302
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable $14,519,694 $14,787,795
Dividends payable 177,500 177,500
Accounts payable and other liabilities 188,529 106,581
----------- -----------
14,885,723 15,071,876
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value per share
Authorized - 50,000,000 shares
Issued - 1,420,000 shares 14,200 14,200
Additional paid-in capital 12,353,398 12,353,398
Distributions in excess of accumulated earnings (3,373,186) (3,009,172)
----------- -----------
8,994,412 9,358,426
----------- -----------
$23,880,135 $24,430,302
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements 2
<PAGE>
Royale Investments, Inc.
STATEMENTS OF OPERATIONS AND
DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME:
Rental income $ 626,935 $ 616,616 $ 1,252,364 $ 1,227,662
Interest income 5,796 7,912 12,963 17,262
----------- ----------- ----------- -----------
632,731 624,528 1,265,327 1,244,924
----------- ----------- ----------- -----------
EXPENSES:
Operations and management 82,101 101,701 161,492 189,883
Mortgage and other interest 306,836 312,280 615,015 625,871
Depreciation and amortization 141,771 141,771 283,542 283,541
Administrative and general 14,639 4,710 27,220 20,511
----------- ----------- ----------- -----------
545,347 560,462 1,087,269 1,119,806
----------- ----------- ----------- -----------
NET INCOME 87,384 64,066 178,058 125,118
DISTRIBUTIONS IN EXCESS OF
ACCUMULATED EARNINGS:
Balance - beginning (3,283,070) (2,895,738) (3,196,244) (2,779,290)
Dividends declared (177,500) (177,500) (355,000) (355,000)
----------- ----------- ----------- -----------
Balance - ending $ (3,373,186) $ (3,009,172) $ (3,373,186) $ (3,009,172)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FUNDS FROM OPERATIONS $229,155 $205,837 $461,600 $408,659
PER COMMON SHARE:
Net income $.06 $.05 $.13 $.09
Dividends declared $.13 $.13 $.25 $.25
Funds from operations $.16 $.14 $.33 $.29
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,420,000 1,420,000 1,420,000 1,420,000
</TABLE>
The accompanying notes are an integral part of these financial statements 3
<PAGE>
Royale Investments, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 178,058 $ 125,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 283,542 283,541
Amortization of marketable securities (1,460) (13,698)
Changes in operating assets and liabilities:
(Increase) in rent receivables (33,278) (33,277)
(Increase) in other assets (31,403) (25,162)
Increase (decrease) in accounts payable and
other liabilities (1,448) 8,659
--------- ---------
Net cash provided by operating activities 394,011 345,181
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable securities 878,787 588,000
Purchase of marketable securities (799,787) (524,272)
--------- ---------
Net cash provided by investing activities 79,000 63,728
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage loans (138,556) (127,848)
Dividends paid to shareholders (355,000) (355,000)
--------- ---------
Net cash (used) by financing activities (493,556) (482,848)
--------- ---------
NET (DECREASE) IN CASH (20,545) (73,939)
CASH AND CASH EQUIVALENTS:
Beginning of period 258,275 257,970
--------- ---------
End of period $ 237,730 $ 184,031
--------- ---------
--------- ---------
Supplementary data:
Income taxes paid $3,100 $3,125
Interest paid $615,887 $626,514
The accompanying notes are an integral part of these financial statements 4
<PAGE>
Royale Investments, Inc.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Royale Investments, Inc. (the company), a Minnesota corporation, was formed
in 1988, to acquire a portfolio of income-producing commercial real estate
properties. The company has qualified as a real estate investment trust
(REIT) under provisions of the Internal Revenue Code.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect certain reported amounts and disclosures in the
financial statements and accompanying notes. Actual results could differ
from these estimates.
REAL ESTATE INVESTMENTS
Real estate investments, consisting entirely of properties leased to
operators of retail food stores, are recorded at cost and include land,
land improvements, and buildings. For financial reporting purposes,
depreciation is computed by the straight-line method using a 40-year life
for buildings and a 20-year life for land improvements. For income tax
purposes, depreciation is computed by the straight-line method using lives
of 31.5-40 years for buildings and 15-20 years for land improvements.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
The company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash.
INCOME TAXES
The company has qualified, and intends to continue to qualify, as a real
estate investment trust under Sections 856 through 860 of the Internal
Revenue Code and, to the extent available, the applicable state statutes.
Under such provisions, the company is not subject to federal income tax on
amounts distributed to stockholders, providing that at least 95% of its
real estate investment trust taxable income is distributed. As the company
intends to distribute all of its income currently, no federal income tax
provision was made.
State income taxes are incurred in some of the states in which the company
owns property. This expense is included with administrative and general
expense.
5
<PAGE>
Royale Investments, Inc.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET INCOME PER COMMON SHARE
Net income per common share is based upon the weighted average number of
common and common equivalent shares outstanding during each period. Common
stock equivalents represent stock options assumed to be exercised. Common
stock equivalents were not considered if they had an anti-dilutive effect
on net income per common share.
DIRECTORS' STOCK OPTION PLAN
In April 1993, the company adopted a stock option plan for directors which
provides for the grant of an option to purchase 2,500 shares of common
stock to a director upon appointment or election, and upon each
re-election. The purchase price of the stock will be the fair market value
at the time the option is granted. The options cannot be exercised for the
first year after the option is granted and expires ten years from the date
of the grant. The company reserved 75,000 shares of common stock for
issuance pursuant to the plan.
The company accounts for stock options issued to directors in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees".
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair value of
each class of financial instruments:
Cash and cash equivalents - The carrying amount approximates fair
value because of their liquidity.
Marketable securities - The fair value is based on quoted market
prices.
Mortgage notes payable - The carrying value approximates fair value.
2. MARKETABLE SECURITIES
The company owns U.S. Treasury Bills which are accounted for as
held-to-maturity securities. The held-to-maturity securities are due in
one year or less and amortized cost approximates market value.
6
<PAGE>
Royale Investments, Inc.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
3. OTHER ASSETS
Other assets consists of the following as of June 30:
1997 1996
---- ----
Accrued rental income $217,092 $150,537
Loan costs (net of accumulated amortization:
1997 - $40,369, and 1996 - $27,714) 179,099 191,753
Other 51,679 26,766
-------- --------
$447,870 $369,056
-------- --------
-------- --------
Loan costs include application fees, lender fees, and legal costs paid to
acquire mortgage loans and are amortized over the terms of the loans.
4. LEASES
The company leases its properties to operators of seven major retail food
stores under long-term operating lease agreements. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases have initial terms
of 17 to 20 years (expiring between 2006 and 2014) and provide for minimum
and contingent rentals. In addition, the tenant is generally required to
pay all property taxes, insurance, and maintenance costs. The leases have
renewal options for 4 to 8 successive five-year periods, subject to
substantially the same terms and conditions as the initial lease. Five of
the leases are guaranteed by the lessee's parent company or franchisor.
The guaranteed leases provide for escalating minimum rent to begin in
subsequent years. Income from these scheduled rent increases is recognized
on a straight-line basis over the term of each lease. The amount earned in
excess of the amount received is included in accrued rental income.
Approximate future minimum rentals on these leases are as follows:
For the Years Ending December 31: Amount
--------------------------------- ------
1997 $ 2,441,000
1998 2,441,000
1999 2,462,000
2000 2,480,000
2001 2,488,000
Thereafter 25,127,000
-----------
$37,439,000
-----------
-----------
7
<PAGE>
Royale Investments, Inc.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
5. MORTGAGE NOTES PAYABLE
Mortgage notes payable consists of the following as of June 30:
1997 1996
---- ----
Mortgage note collateralized by land,
buildings, and assignments of rents in
Indianapolis, Indiana and Plymouth, Minnesota,
interest rate of 9.5%, monthly payments of
principal and interest of $40,890 through
May 2002, and final payment of $4,433,758
due June 2002. $ 4,683,959 $ 4,723,934
Mortgage note collateralized by land, a
building, and an assignment of rents in Peru,
Illinois, interest rate at 8%, monthly
payments of principal and interest of $21,489
through December 1998, $22,212 from January
1999 through December 2003, $22,886 from
January 2004 through December 2008,
$23,537 from January 2009 through October
2013, and a final payment of $5,585
due November 2013. 2,460,381 2,518,855
Mortgage note collateralized by land,
a building, and an assignment of rents in
Minot, North Dakota, interest rate of 8%,
monthly payments of principal and interest
of $23,111 through February 1999, $23,888
from March 1999 through February 2004,
$24,614 from March 2004 through February
2009, $25,313 from March 2009 through
December 2013, and a final payment of
$26,126 due January 2014. 2,661,118 2,722,852
Mortgage note collateralized by land,
a building, and an assignment of rents in
Glendale, Wisconsin, interest rate of 7.75%,
monthly payments of principal and interest of
$10,602 through April 2011, and a final pay-
ment of approximately $11,125 due
April 2011. 1,077,929 1,119,834
Mortgage note collateralized by land,
a building, and an assignment of rents in
Oconomowoc, Wisconsin, interest rate of
7.625%, monthly payments of principal and
interest of $12,750 through June 1999,
$13,500 from July 1999 through June 2004,
$17,700 from July 2004 through June 2009,
and $18,750 from July 2009 through
June 2014. 1,747,097 1,766,087
----------- -----------
Subtotal 12,630,484 12,851,562
----------- -----------
8
<PAGE>
Royale Investments, Inc.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
MORTGAGE NOTES PAYABLE (CONTINUED)
1997 1996
---- ----
Balance forward 12,630,484 12,851,562
Mortgage note collateralized by land,
a building, and an assignment of rents in
Delafield, Wisconsin, interest rate of 8.125%,
monthly payments of principal and interest
of $16,885 through November 2004, and a final
payment of $1,401,001 due December 2004.
In December 1999, the holder has the option
to adjust the interest rate to 1.80% over the
then current five-year U.S. Treasury yield.
Monthly payments will be adjusted
accordingly. 1,889,210 1,936,233
----------- -----------
$14,519,694 $14,787,795
----------- -----------
----------- -----------
Approximate future maturities of mortgage notes are as follows:
For the Years Ending December 31: Amount
--------------------------------- ------
1997 $ 283,000
1998 307,000
1999 355,000
2000 391,000
2001 425,000
Thereafter 12,897,250
-----------
$14,658,250
-----------
-----------
6. LINE OF CREDIT
The company has a revolving credit agreement with a bank whereby it can
borrow up to $100,000 at an annual interest rate equal to prime. Interest
is payable monthly with the principal due April 10, 1998. At June 30,
1997, the company had no outstanding balance on the note.
7. MAJOR TENANTS
All of the company's rental revenue is derived from four major tenants,
each of which contributed at least 20% of the total revenues for each of
the periods presented in the statements of income.
8. DIVIDENDS
On June 23, 1997, the board of directors declared a cash dividend of $.125
per common share payable on July 14, 1997, to stockholders of record on
June 30, 1997.
9
<PAGE>
Royale Investments, Inc.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
9. RELATED-PARTY TRANSACTIONS
Pursuant to an advisory agreement, Crown Advisors, Inc., an affiliate of
the company, acts as investment advisor to the company and assists in the
management of the day-to-day operations. Under this agreement, the company
pays the advisor an annual fee of up to 1% of "invested real estate
assets", as defined in the agreement. The advisor is also entitled to a
performance fee, also as defined in the agreement. No performance fee has
been incurred under this agreement.
In addition, the company must pay a 3% commission for each real estate
acquisition and disposition. Upon termination of the agreement, the
company must pay a fee equal to 3% of the invested real estate assets plus
25% of the increase in the value of invested real estate assets from the
date of acquisition to the date of termination.
Fees and commissions incurred were as follows for the six months ended June
30:
1997 1996
---- ----
Advisory fee $125,137 $125,137
Commissions - -
-------- --------
$125,137 $125,137
-------- --------
-------- --------
An officer and director of the company is a partner in a law firm which
received fees from the company relating to legal services totaling $2,097
for the six months ended June 30, 1997.
10. GUARANTY FEES
The company obtained a lease guaranty from the seller of the Plymouth and
Indianapolis properties, for up to the lesser of $3.5 million or the
aggregate amount of the remaining lease obligations. The guaranty will
expire in 2002. In consideration of the guaranty, the company agreed to
pay to the seller an annual fee of 1% of the value of the guaranty.
In 1996, the Indianapolis tenant sold their operation to a new tenant, with
the approval of the company. As an inducement to allow this lease
transfer, the new tenant agreed to reimburse the company one-half of this
fee. The amount receivable is included in other assets.
10
<PAGE>
ROYALE INVESTMENTS, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
During the six month periods ended June 30, 1997 and 1996, the Company
owned and leased seven properties in five states to operators of retail food
stores.
Revenues for the period ended June 30, 1997, increased slightly
over the comparable period of 1996 due to scheduled increases in rent income,
which was partially offset by decreases in interest income.
Expenses during the period were reduced 3.1% compared with the compable
period of 1996. Mortgage interest, operations and management and administrative
and general expenses decreased in 1997, and are the primary reasons for the
increase in net income.
Net income increased to $178,058 for the period of 1997, versus $125,118
for the first six months of 1996, a 42% increase and within management's
expectations.
The Company considers Funds from operations ("FFO") along with net income
and cash flows as a measure of the Company's operating performance and
liquidity. FFO is essentially net income computed in accordance with
generally accepted accounting principles, but excluding depreciation expense
and gains (or losses) from sales of property. For the first half of 1997,
FFO increased 13.0% to $461,600 from $408,659 in first half of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's properties are all leased on a triple-net basis, which places
the risk of rising property costs, such as maintenance, insurance and property
taxes, on the tenant. The leases generally provide that the tenant is also
responsible for roof and structural repairs. Hence, the Company's only demand
for funds has been for the payment of management and administrative expenses,
dividends and mortgage payments. Property acquisitions have been funded by
equity offerings and mortgage borrowing's.
The Company declared a dividend of $177,500, or $.125 per share, on June
23, 1997, payable to shareholders of record on June 30, 1997. The dividend was
paid on July 14, 1997.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 - 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits filed with Form 10-QSB
None
b) No reports filed on Form 8-K for the quarter ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on it's behalf by the
undersigned, thereunto duly authorized.
Dated: August 11, 1997
ROYALE INVESTMENTS, INC.
By: ____________________
Vernon R. Beck
Chief Executive Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 237,730
<SECURITIES> 401,839
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 639,569
<PP&E> 25,027,358
<DEPRECIATION> 2,234,662
<TOTAL-ASSETS> 23,880,135
<CURRENT-LIABILITIES> 366,029
<BONDS> 14,519,694
0
0
<COMMON> 14,200
<OTHER-SE> 8,980,212
<TOTAL-LIABILITY-AND-EQUITY> 23,880,135
<SALES> 0
<TOTAL-REVENUES> 632,731
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 238,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306,836
<INCOME-PRETAX> 178,058
<INCOME-TAX> 0
<INCOME-CONTINUING> 178,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178,058
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
