SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] 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 1-13766
CROCKER REALTY TRUST, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3794787
------------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
433 Plaza Real, Suite 335, Boca Raton, FL 33432
- ------------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (407) 395-9666
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 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
------------ ------------
Class Outstanding at August 9, 1996
- ---------------------------------------- -----------------------------------
Common Stock, $.01 Par Value 27,697,457 shares
<PAGE>
CROCKER REALTY TRUST, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets of the Company as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations of the Company for the six
months and three months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows of the Company for the six
months ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security-Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROCKER REALTY TRUST, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
ASSETS June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Investment in real estate:
Rental properties, net of accumulated depreciation of
$17,080 and $11,590 at June 30, 1996 and
December 31, 1995, respectively $355,108 279,407
Office building under construction 3,858 -
Land held for investment 16,396 11,159
Other assets:
Cash and cash equivalents 9,752 5,719
Restricted cash 11,997 9,007
Rents and expense reimbursements receivable, net of
allowance for doubtful accounts of $135 and $141 at
June 30, 1996 and December 31, 1995, respectively 1,079 969
Accounts receivable from managed properties 562 219
Deferred straight-line rents receivable 3,802 3,148
Deferred acquisition, offering and merger costs 100 2,156
Deferred loan costs, net of accumulated amortization of
$1,908 and $1,312 at June 30, 1996
and December 31, 1995, respectively 4,094 3,821
Deferred leasing costs, net of accumulated amortization of
$1,411 and $1,025 at June 30, 1996 and 3,142 2,689
December 31, 1995, respectively 611 666
Prepaid expenses and other assets
Furniture, fixtures and equipment, net of accumulated
depreciation of $142 and $60 at June 30, 1996 and
December 31, 1995, respectively 649 451
Management contracts, net of accumulated amortization of
$208 and $105 at June 30, 1996 and December 31,
1995, respectively 1,221 1,324
Goodwill, net of accumulated amortization of $330 and
$165 at June 30, 1996 and December 31, 1995,
respectively 3,776 3,941
-------- -------
Total assets $416,147 324,676
======== =======
</TABLE>
-3-
<PAGE>
CROCKER REALTY TRUST, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS, CONTINUED
(in thousands, except for share data)
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Notes payable $244,267 181,873
Accounts payable and accrued expenses 2,632 2,121
Accrued interest expense 198 361
Accrued real estate taxes 3,304 254
Accrued acquisition, offering and merger costs 40 1,805
Dividend payable 4,155 -
Rents paid in advance 1,253 679
Tenant security deposits 1,402 1,369
Deferred straight-line rents payable 311 156
Other liabilities 1,894 1,919
------- -------
Total liabilities 259,456 190,537
------- -------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized and
unissued 10,000,000 shares - -
Common stock, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 26,989,587 shares at
June 30, 1996 and 23,362,492 shares at
December 31, 1995 270 234
Additional paid-in capital 156,421 132,721
Retained earnings - 1,184
------- -------
Total stockholders' equity 156,691 134,139
------- -------
Total liabilities and stockholders' equity $416,147 324,676
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
- 4 -
<PAGE>
CROCKER REALTY TRUST, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Six months ended Three months ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Rental income and tenant reimbursements $ 34,604 18,537 17,634 9,376
Management fees - building,
development and construction 828 - 436 -
Leasing commissions 334 - 136 -
---------- -------- --------- ---------
35,766 18,537 18,206 9,376
---------- -------- --------- ---------
Expenses:
Rental property operating expenses 8,845 2,964 4,251 1,645
Real estate taxes and insurance 3,559 1,619 1,958 798
Management fees 203 1,016 88 505
Amortization of deferred leasing costs 420 306 223 153
Depreciation and amortization of property
and equipment 5,634 2,712 2,971 1,400
Amortization of goodwill and
management contracts 268 - 134 -
General and administrative expenses 2,896 319 1,416 40
Costs incurred for terminated offering 486 - 96 -
---------- -------- --------- ----------
22,311 8,936 11,137 4,541
---------- -------- --------- ----------
Operating income 13,455 9,601 7,069 4,835
---------- -------- --------- ----------
Other income (expense):
Interest and other income 671 492 371 254
Interest expense (10,420) (6,991) (5,365) (3,489)
---------- --------- --------- ----------
Total other income (expense) (9,749) (6,499) (4,994) (3,235)
---------- ---------- --------- ----------
Net income $ 3,706 3,102 2,075 1,600
========== ========== ========= ==========
Net income per share of common stock $ 0.14 0.25 0.08 0.13
========== ========== ========== ===========
Weighted average number of shares outstanding 26,705,705 2,565,071 26,982,296 12,598,825
========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
-5-
<PAGE>
CROCKER REALTY TRUST, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $3,706 3,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 5,634 2,712
Amortization of loan costs 571 325
Amortization of deferred leasing costs 420 334
Amortization of organization costs 2 2
Amortization of goodwill and management 268 -
contracts
Bad debt expense 33 23
Stock bonuses 261 -
(Increase) decrease in operating assets:
Deferred straight-line rents receivable (654) (636)
Rents and other receivables (486) 235
Prepaid expenses and other assets 55 (419)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 547 (427)
Accrued interest (401) -
Accrued real estate taxes 2,979 1,161
Rents paid in advance 574 (97)
Tenant security deposits 33 320
Deferred straight-line rents payable 155 -
------ -----
Total adjustments 9,991 3,533
------ -----
Net cash provided by operating
activities 13,697 6,635
------ -----
</TABLE>
-6- (continued)
<PAGE>
CROCKER REALTY TRUST, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisition of rental properties and land $ (1,659) --
Acquisition of land held for investment (1,776) --
Office building under construction (3,293) --
Payments for building and tenant improvements (2,292) (2,140)
Payment of deferred leasing costs (830) (915)
Payments for furniture, fixtures and equipment (284) (245)
Refund of deferred acquisition costs, net 95 --
Cash received from acquisition of management -- 3
companies -------- --------
Net cash used in investing activities (10,039) (3,297)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 15,085 --
Proceeds from borrowing under line of credit 5,000 --
Capital contribution -- 3,356
Net increase in restricted cash (2,989) (1,123)
Payments under notes payable (9,843) --
Dividends paid (4,856) (2,137)
Payment of offering costs (964) (620)
Payment of financing costs (998) --
Payment of deferred merger costs (60) --
-------- --------
Net cash provided by (used in) financing
activities 375 (524)
-------- --------
Net increase in cash and cash equivalents 4,033 2,814
Cash and cash equivalents at beginning of period 5,719 132
-------- --------
Cash and cash equivalents at end of period $ 9,752 2,946
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 10,337 6,666
======== ========
</TABLE>
-7-
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1995, the Company exchanged 62,500
shares of common stock for the shares of common stock of Options Corp. held
by the Apollo Fund, 1,110 shares of common stock for the outstanding shares
of common stock of Operating Corp. held by an affiliate of the Apollo Fund,
and 31 shares of common stock for the outstanding shares of common stock of
Fontaine Operating Corp. held by an affiliate of the Apollo fund.
On June 30, 1995, the Company issued 637,500 shares of common stock for all
of the outstanding common stock of CSI and CRMSI. In connection with the
acquisition, the Company succeeded to the interests in the assets of CSI
and CRMSI with a fair value of approximately $6,105,000 and to the
liabilities of CSI and CRMSI of approximately $904,000.
During the six months ended June 30, 1996, the Company issued 24,000 shares
of common stock which are fully-vested and 31,656 shares of common stock
which vest 100% in three years to certain officers of the Company.
On January 16, 1996, the Company issued 1,687,939 shares of common stock in
connection with the Towermarc acquisition. Details of assets acquired,
liabilities assumed and common stock issued in connection with the
Towermarc acquisition is as follows (in thousands):
Rental properties $ (79,143)
Land held for investment (3,460)
Deferred acquisition costs 1,713
Mortgage notes payable 67,237
Accrued interest expense 238
Accrued real estate taxes 71
Accrued acquisition costs (975)
Common stock 17
Additional paid-in capital 12,643
--------
Net cash used in acquisition $ (1,659)
========
See accompanying notes to consolidated financial statements.
-8-
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND FORMATION TRANSACTIONS
Crocker Realty Trust, Inc. (the "Company") was incorporated under the
Maryland General Corporation Law on September 21, 1994 under the name of
Southeast Realty Corp. On June 30, 1995, the Company changed its name to
Crocker Realty Trust, Inc. The Company was formed to succeed to the
interests of Apollo Real Estate Investment Fund, L.P. (the "Apollo Fund")
and its affiliates in AP Southeast Portfolio Partners, L.P. ("AP Southeast
Partnership"), AP-GP Southeast Portfolio Partners, L.P., Southeast
Portfolio Operating Corporation, AP Fontaine III Partners, L.P., AP-GP
Fontaine III Partners, L.P., Fontaine III Operating Corporation and
Southeast Options Operating Corporation (collectively, the "Predecessor
Entities"), which collectively include a portfolio of 47 office and
office/service properties and options to acquire up to five parcels of
undeveloped land adjacent to certain of such properties.
The Company accounted for the acquisitions of the interests of the Apollo
Fund and its affiliates at historical cost in a manner similar to that in a
pooling of interests accounting due to the above entities being under the
common control of the Apollo Fund and its affiliates.
On June 30, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended (the "CRMSI Merger Agreement") among the
Company, SER Management, Inc. ("SER Management"), Crocker Realty Management
Services, Inc. ("CRMSI") and Crocker & Sons, Inc. ("CSI"), CRMSI and CSI
merged with and into SER Management, a wholly-owned subsidiary of the
Company (the "CRMSI Merger"). The outstanding shares of CRMSI and CSI were
exchanged for 637,500 shares of the Company's common stock, of which
457,531 shares were issued to the Chairman of the Board and Chief Executive
Officer of the Company and his spouse, 149,974 shares were issued to the
President and Chief Operating Officer of the Company and 29,995 shares were
issued to the Executive Vice President and Chief Financial Officer of the
Company.
As a result of the CRMSI Merger, the Company succeeded to the interests of
the property, asset and construction management business and leasing and
brokerage business of CRMSI and CSI and to their respective assets and
liabilities.
On July 1, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended, (the "CRI Merger Agreement"), among the
Company, SER Acquisition, Inc. ("SER Acquisition") and Crocker Realty
Investors, Inc. ("CRI"), CRI merged with and into SER Acquisition, a
wholly-owned subsidiary of the Company (the "CRI Merger"). Upon
consummation of the CRI Merger; (i) the outstanding shares of common stock
of CRI were exchanged for 1,020,000 shares of the Company's common stock,
(ii) the 2,340,000 CRI public warrants each entitling the holder thereof to
purchase, during the four year period ending January 21, 1998, one share of
CRI common stock at $10.00 per share (subject to adjustment), were assumed
by the Company and entitle the holders thereof to purchase shares of the
Company's common stock at the same price and on the same terms and
conditions as set forth in the CRI public warrants, and (iii) purchase
options held by certain individuals and GKN Securities Corp. (the
Underwriter of CRI's 1993 initial public offering) to purchase an aggregate
of 210,292 shares of CRI common stock at an exercise price of $7.85 per
share of CRI common stock and the warrant held by General Electric Capital
Corporation to purchase an aggregate of 160,000 shares of CRI common stock
at an exercise price of $10.00 per share
-9-
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of CRI common stock were assumed by the Company and entitle the holders
thereof to purchase shares of the Company's common stock at the same price
and on the same terms and conditions as set forth in the instruments
pursuant to which such options and warrant were issued. On December 28,
1995, the Company entered into an agreement to pay $360,000 to certain
individuals and GKN Securities Corp. for their purchase options and other
rights held by GKN Securities Corp. The amount was accrued and charged to
additional paid-in capital at December 31, 1995 and was paid in January
1996.
As a result of the CRI Merger, the Company succeeded to the interests of
CRI in a portfolio of three office properties and to all of the assets and
liabilities of CRI.
(2) BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by the Company without audit. The statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary to present fairly the Company's
financial position as of June 30, 1996 and December 31, 1995, and the
results of its operations for the six months and three months ended June
30, 1996 and 1995, and cash flows for the six months ended June 30, 1996
and 1995. These consolidated financial statements should be read in
conjunction with the 1995 financial statements and notes thereto included
in the Company's Form 10-K.
The consolidated results of operations for the six and three months ended
June 30, 1996 and 1995 are not necessarily indicative of the results to be
expected for the full year.
Certain reclassifications have been made to the prior year balances in
order to conform to the presentation used in the current period.
(3) INCOME TAXES
The Company qualifies as a real estate investment trust ("REIT") under the
provisions of the Internal Revenue Code. Under these provisions, the
Company is required to distribute at least 95% of its taxable income to its
shareholders to maintain this qualification and not be subject to federal
income taxes for the portion of taxable income distributed. To maintain
REIT qualification, the Company must also satisfy tests concerning the
nature of its assets and income and meet certain recordkeeping
requirements.
-10-
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) ACQUISITIONS AND PRIVATE PLACEMENTS
As a result of the July 1, 1995 CRI Merger and the June 30, 1995 CRMSI
Merger, the Company succeeded to the interests of CRI in a portfolio of
three office properties and to the property, asset and construction
management business and leasing and brokerage business of CRMSI and CSI and
to all of the assets and liabilities of the respective entities.
The CRMSI Merger was accounted for under the purchase method of accounting
based on the estimated fair value of the assets acquired as there was no
established market for the Company's common stock prior to the consummation
of the CRMSI Merger. The assets acquired in the CRMSI Merger are comprised
primarily of building, construction and leasing management agreements and
leasing and brokerage operations. Of the total estimated fair value of the
assets acquired, approximately $1.4 million was classified as Management
Contracts, and approximately $3.7 million was classified as Goodwill. The
Company owns 100% of the issued and outstanding non-voting preferred stock
and 9.9% of the issued and outstanding common stock of the leasing company,
CRT Leasing, Inc., a Delaware corporation, which provides leasing and
brokerage services to properties not owned by the Company. CRT Leasing,
Inc. has been consolidated into the Company's financial statements. The
non-voting preferred stock generally is entitled to dividends equal to 95%
of all distributions of CRT Leasing, Inc. The portion of the estimated fair
value allocated to Management Contracts is being amortized over a period of
5-10 years and the portion attributable to Goodwill is being amortized over
a period of 20 years.
The CRI Merger was accounted for under the purchase method of accounting
based on the estimated fair value of the assets and liabilities acquired as
there was no established market for the Company's common stock prior to the
consummation of the CRI Merger. The assets acquired were comprised
primarily of three office properties with a combined appraised value of
approximately $48.1 million encumbered by approximately $41.4 million of
variable interest rate mortgage notes payable.
On December 28, 1995, the Company sold 8,818,231 shares of Common Stock to
AEW Partners, L.P., a pension fund advisor ("AEW"), in a private placement
transaction for $64.8 million (approximately $7.35 per share).
On December 29, 1995, the Company completed the acquisition of 11 buildings
and approximately 278 acres of land within Sabal Park in Tampa, Florida,
from Sabal Corporation, a wholly-owned subsidiary of Stone and Webster
Incorporated. The assets were acquired for an aggregate cash consideration
of $42.5 million. In a concurrent transaction, the Company contracted to
sell approximately 63 acres of the land acquired from Sabal Corporation to
Security Capital Industrial Trust and sold approximately 48 of such acres
for $2.1 million on December 29, 1995 with the sale of remaining land
(consisting of two parcels) contingent upon the resolution or satisfaction
of certain conditions.
-11-
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 12, 1996, the Company sold 1,875,000 shares of the Common Stock
to Fortis Benefits Insurance Company and its affiliate, Time Insurance
Company, in a private placement transaction for $15.0 million ($8.00 per
share).
On January 16, 1996, the Company and certain of its subsidiaries completed
the acquisition of (i) nine office buildings located in Memphis, Tennessee,
and in Tampa and Jacksonville, Florida, (ii) four parcels of land in
Memphis and Tampa and (iii) management contracts for an aggregate of
approximately 700,000 square feet of space in Memphis and Tampa, each from
affiliates of Towermarc Corporation.
The following unaudited pro forma consolidated results of operations for
the six months ended June 30, 1996 and 1995 have been prepared assuming the
above transactions occurred at the beginning of each such period, after
giving effect to certain adjustments, including depreciation and
amortization. The following unaudited pro forma consolidated results of
operations is not necessarily indicative of results of operations that
would have occurred had the transactions been made as of those dates or of
results that may occur in the future (in thousands except share and per
share amounts):
June 30,
-----------------
1996 1995
---- ----
(unaudited)
Revenue $ 36,298 34,564
========== ==========
Net income $ 3,736 3,840
========== ==========
Net income per common share $ 0.14 0.14
========== ==========
Weighted average number of
common shares outstanding 26,958,145 26,925,431
========== ==========
Pro forma net income for the six months ended June 30, 1996 is lower than
the respective period in 1995 primarily due to the incurrence of $486,000
of costs for a secondary offering during the first half of 1996 which was
terminated.
The Company has made other acquisitions during the first half of 1996 which
are not included in the above pro forma consolidated results of operations
as follows:
The Company is currently developing an office building in Center Point
Office Park in Columbia, South Carolina. The total cost of the project is
expected to be approximately $7.6 million, which includes the January 4,
1996 purchase of land for approximately $1.2 million and the construction
of an approximately 81,000 square foot office building. Pursuant to a
contract entered into with the builder, the construction costs are fixed.
The building is expected to be completed in the fourthquarter of 1996 and
is approximately 50% pre-leased.
On March 27, 1996, the Company acquired eight acres of land in Greenville,
South Carolina, for approximately $1.6 million. The Company believes that
it can develop 100,000 square feet of rentable space on this land.
-12-
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) COMMITMENTS AND CONTINGENCIES
Under the terms of the original purchase agreement pursuant to which AP
Southeast Partnership acquired its 46 properties from NationsBank of North
Carolina, N.A., in November 1993, AP Southeast Partnership is obligated to
pay a Deferred Contingent Purchase Price, as defined in the AP Southeast
Partnership purchase agreement. This contingent payment, which will in no
event exceed $4.4 million, is due on April 1, 1998, if the actual four-year
cumulative cash flow of the AP Southeast Partnership properties (as
defined) exceeds the projected four-year cash flow (as defined). Based on
actual results to date and estimates of future operations, management does
not believe that any Deferred Contingent Purchase Price will be payable.
The Company is not currently involved in any material litigation, nor, to
its knowledge, is any material litigation currently threatened against it
or any of its properties, except for routine litigation arising in the
ordinary course of business, most of which is expected to be covered by
liability insurance. While the resolution of these matters cannot be
predicted with certainty, management believes that the final outcome of
such matters will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
Management believes that any costs associated with environmental risks or
compliance with applicable environmental laws or regulations to which the
Company may be subject would not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
A number of federal, state and local laws exist, such as the Americans with
Disabilities Act, which may require modifications to existing buildings to
improve, or restrict certain renovations, by requiring access to such
buildings by disabled persons. Additional legislation may impose further
requirements on owners with respect to access by disabled persons. The
costs of compliance with such laws may be substantial and may reduce
overall returns of the Company's investments. The Company believes that all
of its properties are in substantial compliance with laws currently in
effect, and will review its properties, periodically, to determine
continuing compliance with existing laws and any additional laws that are
hereafter promulgated.
(6) PROPOSED MERGER
On April 29, 1996, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Highwoods Properties, Inc ("Highwoods"). As a
result of the Merger, the outstanding shares of common stock of the Company
will be converted into the right to receive $11.02 per share in cash,
subject to certain adjustments. The Merger is conditioned upon, among other
things, approval by holders of at least two-thirds of the outstanding
Common Stock and the continued qualification of the Company as a real
estate investment trust. Holders of approximately 83% of the Common Stock
have entered into an agreement with Highwoods pursuant to which such
holders have agreed to vote in favor of the Merger.
-13-
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the course of the negotiations leading to the Merger Agreement, the
Company and Highwoods were unable to agree on a mutually acceptable price
for certain assets of the Company that were not producing current income.
These assets (the "Excluded Assets") primarily consist of undeveloped land
(which has a book value of approximately $17.2 million as of June 30, 1996)
and contracts to acquire certain new properties. In addition, Highwoods
indicated that its willingness to pay the price it was offering for the
Company depended on certain contingent liabilities (the "Excluded
Liabilities") being effectively removed from the Company prior to the
Merger. The Company determined that in order to maximize the value of the
Merger to the Stockholders of the Company, it was necessary to form a new
entity ("Newco") that would own the Excluded Assets and assume the Excluded
Liabilities at or prior to the Merger. The Company determined that the most
efficient method of distributing the fair market value of Newco to all of
its Stockholders would be to (i) organize Newco as a private company
controlled by the two principal Stockholders and operated by the Company's
current management, (ii) sell the Excluded Assets, subject to Excluded
Assets and Excluded Liabilities, to Newco for cash in an amount of
$18 million, net fair market value of Excluded Assets and Excluded
Liabilities, (the "Newco Transaction") and (iii) distribute to all of the
Stockholders the proceeds of the Newco Transaction in the form of a special
cash dividend.
(7) SUBSEQUENT EVENT
On July 1, 1996, 707,870 shares of Common Stock were issued when the
Company received $7.1 million as a result of the conversion of CRI public
warrants at $10.00 per share. After this conversion, there are 1,623,630
CRI public warrants outstanding with the right to convert each CRI public
warrant into one share of Common Stock for $10.00 per share.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the accompanying financial
statements and notes thereto.
GENERAL:
The results of operations for the six and three months ended June 30, 1995 do
not include (i) the Company's acquisition of three properties on July 1, 1995
and certain property management, leasing, brokerage and construction management
businesses from the Executive Officers and Mrs. Crocker on June 30, 1995,
resulting in the Company becoming self-managed and self-administered, (the
"Reorganization"); (ii) two significant portfolio acquisitions on December 29,
1995 (Sabal acquisition for an approximately $42.5 million contract amount) and
January 16, 1996 (Towermarc acquisition for an approximately $81.4 million
contract amount); and (iii) two private placements on December 28, 1995 (AEW for
approximately $64.8 million) and January 12, 1996 (Fortis for approximately
$15.0 million). As a result, the operating results of the Company for the six
and three months ended June 30, 1996 and 1995 are not directly comparable.
Rental income and tenant reimbursements are derived principally from base rents,
additional rents in the form of escalation billings and expense reimbursements
charged to tenants of the properties. The recognition of rental revenue is a
function of the terms of the leases entered into with the tenants and rent
concessions granted. The operating expenses of the properties include operating
costs typically incurred by office building projects of the type owned by the
Company.
RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1996 COMPARED
TO THE SIX AND THREE MONTHS ENDED JUNE 30, 1995
Net income for the six and three months ended June 30, 1996 was $3.7 million and
$2.1 million compared with net income of $3.1 million and $1.6 million in 1995.
Rental income and tenant reimbursements were $34.6 million and $17.6 million for
the six and three months ended June 30, 1996 compared to $18.5 million and $9.4
million in 1995. The increase of $16.1 million and $8.2 million is primarily
attributable to the properties acquired in the Reorganization, the Sabal
acquisition and the Towermarc acquisition, which contributed in the aggregate
$14.6 million and $7.2 million, in the respective periods, including a $610,000
net lease termination fee earned in the first quarter of 1996.
Management fee and leasing commission revenue of approximately $1.2 million and
$572,000 in the aggregate for the six and three months ended June 30, 1996
relate to third-party management contracts acquired in the Reorganization and
Towermarc acquisition.
Rental property operating expenses were $8.8 million and $4.3 million for the
six and three months ended June 30, 1996 compared to $3.0 million and $1.6
million in 1995. Of the total increase of $5.8 million and $2.7 million, $4.5
million and $2.3 million in the respective periods is attributable to the
properties acquired in the Reorganization, the Sabal acquisition and the
Towermarc acquisition. The remaining increase is due to higher occupancies at
the Predecessor Entities Properties and the change in the overall management of
the Company from third-party to primarily self-managed subsequent to June 30,
1995.
Real estate taxes and insurance costs were $3.6 million and $2.0 million for the
six and three months ended June 30, 1996, compared to $1.6 million and $798,000
in 1995. All of the total net increase is attributable to the properties
acquired in the Reorganization, the Sabal acquisition and the Towermarc
acquisition.
-15-
<PAGE>
Management fee expenses were $203,000 and $88,000 for the six and three months
ended June 30, 1996 compared to $1.0 million and $505,000 in 1995. This decrease
is due to the change in the overall management of the Company from third-party
to primarily self-managed as a result of the Reorganization subsequent to June
30, 1995. The third-party asset management fees were approximately $475,000 and
$225,000 for the six and three months ended June 30, 1995 compared to none
during 1996. Third-party property management fees were approximately $541,000
and $280,000 for the six and three months ended June 30, 1995, respectively.
Depreciation and amortization of property and equipment was $5.6 million and
$3.0 million for the six and three months ended June 30, 1996 compared to $2.7
million and $1.4 million in 1995. Of the total increase of $2.9 million and $1.6
million, approximately $2.6 million and $1.3 million is attributable to the
properties acquired in the Reorganization, the Sabal acquisition and the
Towermarc acquisition.
Amortization of goodwill and management contracts was approximately $268,000 and
$134,000 for the six and three months ended June 30, 1996 compared to none in
1995. This amortization relates to the goodwill and management contract assets
recorded by the Company in connection with the Reorganization.
General and administrative expenses were $2.9 million and $1.4 million for the
six and three months ended June 30, 1996 compared to approximately $319,000 and
$40,000 in 1995. This $2.6 million and $1.4 million increase resulted from the
Reorganization as well as becoming a public company subsequent to June 30, 1995.
Interest expense was $10.4 million and $5.4 million for the six and three months
ended June 30, 1996 compared to $7.0 million and $3.5 million in 1995. Interest
expense resulting from debt assumed in the Reorganization and Towermarc
acquisition was approximately $4.5 million and $2.3 million for the respective
periods in 1996. This was offset by a reduction of approximately $1.2 million
and $600,000 of interest expense for the respective periods in 1996 resulting
from the extinguishment of $20 million of debt on December 28, 1995.
Costs incurred for terminated offering of $486,000 and $96,000 represents costs
incurred by the Company for the six and three months ended June 30, 1996 in
connection with a planned offering of common stock which was canceled due to the
April 29, 1996 announcement that Highwoods Properties, Inc. would be acquiring
all of the outstanding common stock of the Company.
MATERIAL CHANGES IN FINANCIAL CONDITION AT JUNE 30, 1996 COMPARED TO DECEMBER
31, 1995
Rental properties, net of accumulated depreciation, increased by $75.7 million
from December 31, 1995 to June 30, 1996. In addition, land held for investment
increased by $5.2 million. These increases are primarily attributable to the
Towermarc acquisition on January 16, 1996. Office building under construction of
$3.9 million represents $1.2 million of land costs and $2.7 million in
construction to date on the Company's construction of an office building in
Columbia, South Carolina.
The Company's cash and cash equivalents at June 30, 1996 increased by $4.0
million compared to December 31, 1995. This increase resulted from $13.7 million
net cash provided by operating activities and $375,000 net cash provided by
financing activities offset by $10.0 million net cash used in investing
activities. The net cash used in investing activities resulted primarily from
$1.7 million used to acquire certain rental properties and undeveloped land,
$1.8 million for the acquisition and improvements of land held for investment,
$3.3 million for the office building under construction, and $3.1 million for
building and tenant improvements and leasing costs. The net cash provided by
financing activities resulted from the receipt of $15.0 million from the Fortis
private placement of the
-16-
<PAGE>
Company's Common Stock and $5.0 million borrowed on the Company's Line of
Credit. These receipts were offset primarily by payments to reduce debt of $9.8
million, $1.0 million for the payment of financing costs, $4.9 million in
dividends paid, $3.0 million increase in the balance of restricted cash, and the
payment of $1.0 million in offering costs related to the AEW and Fortis private
placements.
The balance in restricted cash at June 30, 1996 increased by $3.0 million
compared to December 31, 1995 primarily due to the funding of real estate tax
and insurance escrows into the restricted cash accounts referred to above.
Accounts payable and accrued expenses were $2.6 million at June 30, 1996
compared to $2.1 million at December 31, 1995. Of this $500,000 increase,
$335,000 relates to operation of the properties from the Sabal and Towermarc
acquisitions. In addition, amounts due for office building under construction,
building and tenant improvements and leasing commissions increased by a net
$192,000.
Accrued real estate taxes at June 30, 1996 increased by $3.1 million compared to
December 31, 1995. A significant portion of the Company's portfolio's real
estate taxes are due in January of each year. The amounts which were due in
January 1996 were paid in December 31, 1995. Accordingly, the balance in accrued
real estate taxes increases during the year.
The $4.2 million dividend payable was paid on July 8, 1996 for shareholders of
record on July 1, 1996.
Common Stock and additional paid-in capital at June 30, 1996 increased by
approximately $36,000 and $23.7 million, respectively, since December 31, 1995.
The increase is primarily due to a $15.0 million private placement of the
Company's Common Stock and the issuance of 1,687,939 shares of Common Stock for
the Towermarc acquisition. 8,500 shares of Common Stock were issued during the
second quarter of 1996 due to the conversion of CRI public warrants at $10.00
per share. These increases were offset by approximately $4.1 million of
dividends paid or accrued during the six month period in excess of net income
and retained earnings.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources for the six months ended June 30, 1996 were provided primarily
by operations in addition to a $15.0 million private placement of the Company's
Common Stock and $5.0 million borrowed on the Company's Line of Credit. The net
proceeds from the private placement were used principally to pay off $9.4
million of debt assumed in the Towermarc acquisition. Assets acquired in the
Towermarc acquisition were acquired primarily through the issuance of Common
Stock and the assumption of debt.
At June 30, 1996, the Company's properties were approximately 94.2% leased.
The Properties (including the Properties acquired in the Towermarc acquisition)
had an Annual Base Rent per square foot leased of $10.84 as of December 31, 1995
compared to $11.24 as of June 30, 1996. Annual Base Rent at June 30, 1996 and
December 31, 1995, is defined as the amounts contractually due (excluding
percentage rents due and recoveries from tenants for common area maintenance
charges, taxes or other items) for the month of June 1996 and December 1995,
respectively, annualized, for continuing leases in force on or before June 30,
1996 and December 31, 1995.
The Company's consolidated indebtedness at June 30, 1996 was $244.3 million at a
weighted average interest rate of 8.45%. Such indebtedness included (i) a
mortgage note (the "Mortgage Note") issued by the AP Southeast Partnership and
secured by the Properties owned by the AP Southeast Partnership, (ii) two loans
issued by General Electric Capital Corporation ("GE Capital") to Crocker Realty
Investors, Inc. ("CRI") and secured by the three Properties in Boca Raton,
Florida, (iii) various loans assumed in the Towermarc acquisition, and (iv) a
Line of Credit with the First National Bank of Boston.
-17
<PAGE>
The Mortgage Note is a conventional, monthly pay, first mortgage note in the
principal amount of $140 million. The Mortgage Note is a limited recourse
obligation of the AP Southeast Partnership that was issued to Kidder Peabody
Acceptance Corporation I pursuant to an Indenture, dated March 1, 1994 (the
"Indenture") among the AP Southeast Partnership, Bankers Trust Company of
California, N.A., and Bankers Trust Company. The Mortgage Note bears interest on
its outstanding principal balance at the rate of 7.88% per annum, subject to
increase in the event of a default in the payment of any amount due, and matures
on January 3, 2001. The Mortgage Note provides for scheduled monthly payments of
interest only which are due on the first business day of each calendar month.
The Mortgage Note is secured by a blanket, first mortgage lien on the Properties
owned by the AP Southeast Partnership, as well as (i) a first priority
assignment of all present and future leases encumbering portions of those
Properties, (ii) a security interest in any personal property owned by AP
Southeast Partnership and (iii) a collateral assignment of the right, title and
interest of AP Southeast Partnership in and rights to all management agreements
relating to those Properties. As an additional security for the Mortgage Note,
AP Southeast Partnership maintains with a servicer various "sweep accounts," a
central cash collateral account (the "Cash Collateral Account") and a
contingency reserve account (the "Contingency Reserve Account"). All rents with
respect to the Properties securing the Mortgage Note are made payable to, and
deposited directly in, the sweep accounts, which are then transferred to the
Cash Collateral Account, and all other property income and capital event
proceeds are deposited into the Cash Collateral Account promptly upon receipt
thereof. Cash of at least $7 million is maintained in the Contingency Reserve
Account.
In connection with the Reorganization, the Company assumed the two loans issued
by GE Capital. Both of the loans have floating interest rates based on the GE
Capital Composite Commercial Paper Rate, which was 5.40% at June 30, 1996. The
GE Capital Composite Commercial Paper Rate has had a decrease of 43 basis points
since December 31, 1995. The first loan (as amended on April 27, 1994), which at
June 30, 1996 had an outstanding principal balance of $11.4 million and
approximately $85,000 available to be drawn upon, bears interest at the rate of
9.40% per annum (at June 30, 1996). The second loan, which had an outstanding
principal balance of $30.5 million at June 30, 1996, bears interest at the rate
of 9.65% per annum (at June 30, 1996). Both loans require monthly payments of
interest. The outstanding principal balance of the first loan is due at maturity
on April 27, 1999. The outstanding principal balance of the second loan is
payable in an amount equal to 50% of the annual cash flow generated by the One
Boca Place Property after payment of interest on the loan and tenant
improvements and expenses on the One Boca Place Property for each calendar year
subsequent to 1995. This payment is limited to a maximum amount of $750,000 per
year. All remaining unpaid principal on the second loan is payable at maturity
on April 27, 1999.
In connection with the Towermarc acquisition in January 1996, the Company
assumed eleven separate mortgage notes. At June 30, 1996, an aggregate of $29.9
million of the debt has fixed interest rates with a weighted average rate of
9.77% and an aggregate of $27.5 million of the debt has floating interest rates,
which in the aggregate had a weighted average interest rate of 8.37% at June 30,
1996. The notes have various years of maturities ranging from 1996 to 2001, with
approximately $15.9 million due in 1996, including one loan for $14.0 million
due on October 31, 1996.
On March 20, 1996, the Company entered into an agreement with The First National
Bank of Boston for a Line of Credit, which is a full recourse $20 million
secured revolving credit facility. The Line of Credit has a term of three years
and bears interest at either the LIBOR plus 175 basis points or The First
National Bank of Boston's Base Rate plus 75 basis points, at the Company's
option. The Line of Credit is available to fund acquisitions and development
activities, as well as for the refinancing of indebtedness and for general
corporate purposes, and is subject to customary covenants and reporting
requirements. As of June 30, 1996, the Company had borrowed $5 million on this
Line of Credit, which had an interest rate of 7.25% on June 30, 1996. On July 5,
1996, the Company borrowed an additional $2 million on this Line of Credit.
- 18 -
<PAGE>
The Company expects to meets its liquidity requirements (excluding debt
principal payments) through net cash flows provided by property operations. The
Company expects to pay its debt principal payments due in 1996 by refinancing.
Management believes the cash flows from operations are adequate to fund property
operations, related leasing costs and tenant and building improvements and to
meet debt service (excluding debt principal payments) requirements.
Additionally, the Indenture requires the maintenance of a $7.0 million
contingency fund as additional security in the event that operations of the
Properties securing the Mortgage Note do not provide sufficient cash flows for
the payment of tenant lease-up costs. Escrow accounts to pay real estate taxes
and insurance have been established and will continue to be funded by the AP
Southeast Partnership from the monthly cash receipts received from its
Properties.
On July 1, 1996, 707,870 shares of Common Stock were issued when the Company
received $7.1 million as a result of the conversion of CRI public warrants at
$10.00 per share.
The Company paid a special dividend of $809,000 on March 28, 1996 related to the
Company's 1995 REIT dividend distribution requirements. On April 3, 1996, the
Company paid a dividend of $4,047,000 which was the Company's first quarterly
dividend. On July 8, 1996, the Company paid its second quarterly dividend of
$4,155,000 for shareholders of record on July 1, 1996.
FUNDS FROM OPERATIONS
Management believes that FFO is the industry standard for reporting the
operations of real estate investment trusts. In March 1995, NAREIT issued a
clarification of its definition of FFO. The clarification provides that
amortization of deferred financing costs and depreciation of non-real estate
assets are no longer to be added back to net income in arriving at FFO. The
Company adopted the changes effective the year beginning January 1, 1996. The
following table presents the Company's pro forma and historical FFO for the six
months ended June 30, 1996 under both methods of calculation for illustrative
purposes (in thousands, except share data):
Pro Forma Historical
NEW OLD NEW OLD
METHOD METHOD METHOD METHOD
------ ------ ------ ------
Net income
$ 3,736 $ 3,736 $ 3,706 $ 3,706
Add back:
Depreciation and amorti-
zation of real estate
assets 5,659 5,659 5,552 5,552
Depreciation of non-real
estate assets - 82 - 82
Amortization of deferred
leasing costs 421 421 420 420
Amortization of deferred
loan costs - 584 - 571
Amortization of goodwill
and management con-
racts - 268 - 268
Amortization ororganiza-
tion costs - 2 - 2
Cost of terminated
offering 486 486 486 486
------- ------- ------- -------
Funds From Operations $ 10,302 $ 11,238 $ 10,164 $ 11,087
======= ======== ======= =======
Weighted average number
of shares outstanding 26,958,145 26,958,145 26,705,705 26,705,705
========== ========== ========== ==========
FFO per share $ 0.38 $ 0.42 $ 0.38 $ 0.42
========== ========== ========== ==========
- 19 -
<PAGE>
While management believes that FFO is the most relevant and widely used measure
of the Company's operating performance, such amount does not represent cash flow
from operations as defined by GAAP, should not be considered as an alternative
to net income as an indicator of the Company's operating performance, and is not
indicative of cash available to fund all cash flow needs. The Company generally
considers FFO to be an appropriate measure of the performance of an equity REIT
because it is predicated on a cash flow analysis, as opposed to a measure
predicated on generally accepted accounting principles, which gives effect to
non-cash items such as depreciation. Since there is no formally agreed upon
calculation of FFO, and the NAREIT definition is a guideline, computation of FFO
may vary from one REIT to another.
-20-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY.)
(b) REPORTS ON FORM 8-K
Not applicable.
- 21 -
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
CROCKER REALTY TRUST, INC.
Registrant
Date: August 13, 1996 /s/ THOMAS F. COCHRAN
---------------------
Thomas F. Cochran
Executive Vice President and
acting principal financial officer
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILE AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,749
<SECURITIES> 0
<RECEIVABLES> 5,578
<ALLOWANCES> 135
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 393,233
<DEPRECIATION> 17,222
<TOTAL-ASSETS> 416,147
<CURRENT-LIABILITIES> 0
<BONDS> 244,267
0
0
<COMMON> 270
<OTHER-SE> 156,421
<TOTAL-LIABILITY-AND-EQUITY> 416,147
<SALES> 34,604
<TOTAL-REVENUES> 35,766
<CGS> 21,825
<TOTAL-COSTS> 21,825
<OTHER-EXPENSES> 486
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 10,420
<INCOME-PRETAX> 3,706
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,706
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
