<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number 0-18261
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Tower Properties Company
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Missouri 43-1529759
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STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION
911 Main Street, Kansas City, Missouri 64105
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, (816) 421-8255
including area code ---------------------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
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</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
$1 Par Value Common Stock
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(TITLE OF CLASS)
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 SUCH 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
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (Sec. 229.405 OF THIS CHAPTER) 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.
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF
THE REGISTRANT. (THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE
TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES
OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF
FILING.)
$28,552,212 at February 23, 1999
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE (APPLICABLE ONLY TO
CORPORATE REGISTRANTS).
$1 Par Value Common Stock - 183,027 Shares
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DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF
INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE
DOCUMENT ARE INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS; (2)
ANY PROXY OR INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED PURSUANT TO
RULE 424(b) OR (c) UNDER THE SECURITIES ACT OF 1933. (THE LISTED DOCUMENTS
SHOULD BE CLEARLY DESCRIBED FOR IDENTIFICATION PURPOSES.)
Portions of Annual Report to Stockholders for the year ended Dec. 31, 1998,
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are incorporated by reference in Parts I, II and IV. Portions of the Annual
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Proxy Statement are incorporated by reference into Part III.
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<PAGE> 2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
TOWER PROPERTIES COMPANY
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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<TABLE>
CROSS-REFERENCE SHEET
---------------------
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Part II
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<S> <C>
Item 6 - Selected Financial Data 1998 Annual Report to Stockholders,
Page 27.
Item 7 - Management's Discussion and 1998 Annual Report to Stockholders,
Analysis of Financial Condition Pages 21 through 26.
and Results of Operations
Item 8 - Financial Statements and 1998 Annual Report to Stockholders,
Supplementary Data Pages 4 through 19 and Pages 27 and 28.
<CAPTION>
Part III
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<S> <C>
Item 10 - Directors and Executive Proxy Statement relating to Annual
Officers of the Registrant Meeting of Stockholders to be held on
April 14, 1999, under the caption
"Election of Directors."
Item 11 - Executive Compensation Proxy Statement relating to Annual
Meeting of Stockholders to be held on
April 14, 1999, under the captions "Summary
Compensation Table" and "Compensation Plans."
Item 12 - Security Ownership of Certain Proxy Statement relating to Annual
Beneficial Owners and Meeting of Stockholders to be held on
Management April 14, 1999, under the caption
"Security Ownership of Certain
Beneficial Owners and Management."
Item 13 - Certain Relationships and Proxy Statement relating to Annual
Related Transactions Meeting of Stockholders to be held on
April 14, 1999, under the caption
"Transactions."
<CAPTION>
Part IV
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<S> <C>
Item 14(a)(1) - Financial Statements 1998 Annual Report to Stockholders,
Pages 4 through 19.
Item 14(a)(2) - Exhibits Registrant's 1998 Form 10-K (File
No. 0-18261) filed on March 31, 1999.
</TABLE>
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Part I
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Item 1. Business.
(a) General Development of Business:
In September 1989, Tower Properties Company (Tower) formed Tower
Acquisition Corp. (TAC), a wholly-owned subsidiary of Tower. TAC
was formed pursuant to the terms of a merger between Tower and
Commerce Bancshares, Inc. (Commerce), a bank holding company.
Tower spun off certain assets and liabilities to TAC with a net
book value of approximately $17,500,000. Tower then merged with
Commerce on January 29, 1990. In connection with the merger each
Tower shareholder received 7.88 shares of Commerce in exchange for
each Tower share. TAC's capital stock was distributed to Tower's
shareholders on January 29, 1990 in the form of a stock dividend.
TAC's name was changed to Tower Properties Company (the Company)
on this same date. The net assets distributed to TAC represent
the assets currently owned and managed by the Company.
A private letter ruling was obtained from the IRS that the
distribution was tax-free under Section 355 of the Internal
Revenue Code and the merger constituted a tax-free reorganization
under Section 368(a)(1)(A) of the Internal Revenue Code.
The Company is primarily engaged in owning, developing, leasing
and managing real property located in Johnson County, Kansas,
Clay, St. Louis and Jackson County, Missouri.
(b) Financial Information About Industry Segments:
Registrant considers its business to be concentrated in one
industry segment--real estate ownership, development, leasing and
management.
(c) Narrative Description of Business:
Registrant is primarily engaged in the business of owning,
developing, leasing and managing real property. Registrant owns
and manages 1,172,000 rentable square feet of office and warehouse
space located in the Kansas City and St. Louis metropolitan areas.
Substantially all the improved real estate owned by Registrant
consists of office buildings and a warehouse and a
warehouse/office facility held for lease, automobile parking
garages, apartments and land held for future sale. Registrant has
not pursued a policy of acquiring real estate on a speculative
basis, although some real estate owned by Registrant may be sold
at a future time.
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<PAGE> 5
Registrant leasing operations provided rental income constituting
approximately 77 percent of the 1998 revenues. Registrant
competes with other building owners in the renting and leasing of
office building space. Registrant employs approximately 58
persons on a full-time basis and approximately 4 persons on a
part-time basis. The remaining 24 percent of 1998 revenues
include real estate sales (19 percent), management and service
fees (2 percent) and other income (2 percent).
Registrant leases rental space and provides services to Commerce
Bancshares, Inc. The annual aggregate rental and service fees
paid to Registrant by Commerce will vary depending upon the space
occupied and services provided. For the years ended December 31,
1998, 1997 and 1996, Registrant received rent and fees of
$3,746,446, $1,180,051 and $1,043,640, respectively, from
Commerce.
The Company was also reimbursed for utilities in the amount of
$101,758, $107,711 and $107,885 in 1998, 1997 and 1996.
Item 2. Properties.
(a) The following real property is owned, in fee, by Registrant:
(1) The Commerce Tower, a 30-story office building located at
911 Main Street, Kansas City, Missouri, was opened for
occupancy in January 1965. The Commerce Tower has net
rentable space of approximately 425,000 square feet and is
presently 90 percent occupied. The building, of modern
architectural design, has six elevators serving the first 17
floors and an additional six express elevators serving the
17th through the 30th floors. Registrant considers the
Commerce Tower to be in good condition. The building is
collateral for a line of credit with Commerce Bank.
(2) The Barkley Place, a 6-story 95,000 rentable square foot
office building located in Overland Park, Kansas. The
building was completed in 1988. The Company purchased the
building on July 15, 1994. Registrant considers the
building to be in good condition. The building is 100
percent occupied. The building is subject to a mortgage
deed of trust securing a loan with a balance owing of
$3,571,011.
(3) 6601 College Boulevard, a 6-story 101,200 rentable square
foot building, located in Overland Park, Kansas. The
building was completed in 1979. The Company purchased the
building on December 15, 1995. Registrant considers the
building to be in good condition. The building is 100
percent leased under a triple net lease. The building is
subject to a mortgage deed of trust securing a loan with a
balance owing of $5,039,918.
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(4) 9221 Quivera, a 1-story 24,000 rentable square foot building
and an adjacent 70,000 square foot vacant parcel of land,
located in Overland Park, Kansas. The building was
completed in 1968. The Company purchased the building on
December 27, 1996. Registrant considers the building to be
in good condition. The building is 100 percent leased under
a triple net lease. The building is subject to a mortgage
deed of trust securing a loan with a balance owing of
$1,150,307.
(5) UMB Bank, a 6-story 59,982 square foot office building with
covered parking on five levels plus surface parking on top
of the attached garage located at 7911 Forsyth, Clayton,
Missouri. The building was completed in 1985. The Company
purchased the building on December 1, 1998. Registrant
considers the building to be in excellent condition. The
building is 100% leased.
(6) A warehouse/office facility, located at 9200 Cody, Overland
Park, Kansas. The building contains approximately 24,100
square feet of office space and 96,800 square feet of
warehouse space. The building was constructed in 1973, with
an addition in 1976 and an expansion completed in 1997. The
Company purchased the facility on June 30, 1995. Registrant
considers this facility to be in good condition. The
building is 100 percent leased under a triple net lease.
The warehouse/office facility is subject to a mortgage deed
of trust securing a loan with a balance owing of $1,811,581.
The expansion is subject to a mortgage deed of trust
security a loan with a balance of $758,780.
(7) A warehouse, located at 9909 Lakeview, Lenexa, Kansas. The
building contains approximately 115,000 square feet of
warehouse space. The building was constructed in 1987. The
Company purchased the facility on December 18, 1996.
Registrant considers this facility to be in excellent
condition. The building is presently vacant. The warehouse
is subject to a mortgage deed of trust securing a loan with
a balance owning of $2,607,144.
(8) 900-920 Walnut Street. The Company, under its Tax
Redevelopment District, demolished the 908-10 Walnut and the
916 and 920 Walnut buildings in 1998 to accommodate a new
624-garage on the Southwest corner of 9th and Walnut.
Construction has begun with plans for completion in
September, 1999.
(9) A 27-building, 350-unit apartment complex, on a 30.7-acre
tract, located at New Mark Drive and North Cherry in Kansas
City North. Construction of the first phase was completed
in mid-1971, completion of the second phase in 1978, and
completion of the third phase in 1998. The apartments are 79
percent occupied. Registrant considers the complex to be in
good condition. The original 210 unit apartments are
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<PAGE> 7
subject to a mortgage deed of trust securing a loan with a
balance owing of $2,054,022. The 140 units, Phase III, are
subject to a mortgage deed of trust securing a loan with a
balance owing of $4,877,699.
(10) A 24-building, 329-unit apartment complex, on a 30.3-acre
tract, located at 5401 Fox Ridge Drive in Mission, Kansas.
Construction of the complex was completed in 1985, with an
addition of 7 buildings in 1996. The Company purchased the
complex on December 31, 1992. Registrant considers the
24-building complex to be in good condition. The apartments
are 95 percent occupied. The apartments are subject to a
mortgage deed of trust securing a loan with a balance owing
of $9,242,684.
(11) A 7-building, 162-unit apartment complex, on an 8.7-acre
tract located at 6800 Antioch in Merriam, Kansas.
Construction of the complex was completed in 1987. The
Company purchased the complex on September 30, 1993.
Registrant considers the 7-building complex to be in good
condition. The apartments are 94 percent occupied. The
apartments are subject to a mortgage deed of trust securing
a loan with a balance owing of $3,486,498.
(12) One block of surface parking bounded generally by Sixth
Street, Baltimore Street, Seventh Street and Wyandotte
Street. This parking location contains approximately 206
parking stalls.
(13) A block of surface parking located generally at the corner
of Eighth and Wyandotte Streets in Kansas City, Missouri,
that contains approximately 200 parking stalls and a surface
parking located located at 102 E. 8th in Kansas City,
Missouri, that contains approximately 40 parking stalls.
(14) A tract of land located at the southwest corner of Ninth and
Walnut. This tract contains approximately 12,000 square
feet of land.
(15) A two-story facility located at the Northwest corner of
Ninth and Walnut, immediately adjacent to the 811 Main
building and garage. The parking facility contains
approximately 80 parking spaces.
(b) New Mark, a division of Registrant, originally owned 1,207 acres
located in Kansas City North immediately adjacent to and
contiguous with the apartment complex owned by Registrant. The
tract is owned in fee. Residential lots and land aggregating
approximately 826 acres have been sold from the tract by the
Company. An additional 116 acres have been dedicated to streets,
and 103 acres are designated as an open greenbelt area.
(c) Downtown Redevelopment Corporation, an urban redevelopment
corporation under the laws of the state of Missouri, of which
Registrant owns
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<PAGE> 8
approximately 98 percent of the outstanding capital stock, owns the
following property located in downtown Kansas City, Missouri:
(1) The 811 Main building, which consists of an L-shaped,
12-story combination office building and parking garage, was
completed in 1959. The first five floors are utilized
primarily for parking, although approximately 27,000 square
feet of ground floor and lower level space is available for
use as commercial office space and storage. The office
space extending from the 6th floor through the 12th floor
encloses a gross area of approximately 252,000 square feet.
The building became a full-service, multi-tenant building in
April, 1996, and is presently 81 percent occupied. The
condition of the property is considered good. The building
is subject to a mortgage deed of trust of trust securing a
loan with a balance owing $6,472,022.
(2) 710 Main Garage Building, a multi-deck, self-parking
garage facility, contains approximately 737 parking spaces.
The original portion was completed in 1959, with additions
made in 1962. The condition of the property is considered
good.
(3) A tract of ground approximately one-half block in width
on the east side of Main Street between 6th and 8th Streets.
The Company successfully pursued quiet title actions against
the leaseholder, and as a result, now holds clear title to
the leasehold improvements on this tract, Prom/Rodeway Inn
and 711 Main Garage. These structures are functionally
obsolete. The Company had remediated environmental problems
in the buildings and plans to demolish them except for the
280 car parking garage at 711 Main. The Company made
available an additional 30 parking spaces at the 711 Main
location in 1998. In 1997, Company demolished the north
Rodeway facility and completed a 100 car surface parking
lot.
(4) An irregular tract of ground containing approximately
35,000 square feet, which was previously leased in part to
a service station until December, 1996. The company
demolished the station in 1997 and completed the entire area
for a 112 car surface parking lot.
Item 3. Legal Proceedings.
Neither Registrant nor any of its subsidiaries are involved in any
material pending litigation other than ordinary routine proceedings
incidental to their business.
Item 4. Submission of Matters to a Vote of Security Holders.
Registrant did not submit any matters to a vote of security holders
during the fourth quarter of 1998.
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<PAGE> 9
Part II
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Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters.
Registrant's stock is traded in the "over-the-counter" market and
trading of such stock is limited. The schedule below depicts the bid
and asked prices, as provided by an investment banking firm, in each
quarter of 1998. The "over-the-counter" market quotations shown below
reflect interdealer prices without retail markup, markdown or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 1997
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Quarter Bid Asked Bid Asked
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<S> <C> <C> <C> <C>
First $140.50 $ -- $121.00 $ --
Second 148.00 -- 127.50 --
Third 153.00 -- 127.50 --
Fourth 156.00 -- 135.25 --
</TABLE>
There are no present or future restrictions on the ability of Registrant
to pay common stock dividends. No dividends were paid in 1998, 1997 and
1996. (Management has indicated it will not pay dividends in 1999.)
The table below shows the number of holders of record of each class of
equity securities of Registrant as of February 23, 1999:
<TABLE>
<CAPTION>
Number of
Title of Class Security Holders
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Common stock,
$1.00 par value 476
</TABLE>
Item 6. Selected Financial Data.
Reference is made to the caption "Selected Financial Data" on Page 27 of
Registrant's 1998 Annual Report to Stockholders for a summary of certain
financial data for the Registrant for each of its last five fiscal
years. Pursuant to General Instruction G(2) to Form 10-K and Securities
Exchange Act Rule 12b-23, the information set forth therein is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Reference is made to the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" set forth on Pages 21
through 26 of
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<PAGE> 10
Registrant's 1998 Annual Report to Stockholders which, pursuant to
General Instruction G(2) to Form 10-K and Securities Exchange Act Rule
12b-23, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Reference is made to Pages 4 through 19 and Pages 27 and 28 of
Registrant's 1998 Annual Report to Stockholders which, pursuant to
General Instruction G(2) to Form 10-K and Securities Exchange Act Rule
12b-23, is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None.
Part III
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Item 10. Directors and Executive Officers of the Registrant.
Reference is made to the caption "Election of Directors" set forth on Page
2 of Registrant's Proxy Statement relating to Annual Meeting of
Stockholders to be held April 14, 1999. Pursuant to General Instruction
G(2) to Form 10-K and Securities Exchange Act Rule 12b-23, information
therein relating to the names, ages, positions, terms of office, family
relationships and business experience of Registrant's directors is
incorporated herein by reference.
Item 11. Executive Compensation.
Reference is made to the captions "Summary Compensation Table" and
"Compensation Plans" set forth on Pages 7 through 9 of Registrant's
Proxy Statement relating to Annual Meeting of Stockholders to be held
April 14, 1999. Pursuant to General Instruction G(2) to Form 10-K and
Securities Exchange Act Rule 12b-23, information therein is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to the caption "Security Ownership of Certain
Beneficial Owners and Management" set forth on Page 4 of Registrant's
Proxy Statement relating to Annual Meeting of Stockholders to be held
April 14, 1999. Pursuant to General Instruction G(2) to Form 10-K and
Securities Exchange Act Rule 12b-23, the information therein is
incorporated herein by reference.
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<PAGE> 11
Item 13. Certain Relationships and Related Transactions.
Reference is made to the caption "Transactions" in Registrant's Proxy
Statement relating to Annual Meeting of Stockholders to be held April
14, 1999. Pursuant to General Instruction G(2) to Form 10-K and
Securities Exchange Act Rule 12b-23, the information therein is
incorporated herein by reference.
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements. The following consolidated financial
--------------------
statements of the Registrant and its subsidiaries, together
with the report of independent public accountants, contained in
the Registrant's 1998 Annual Report to Stockholders are hereby
incorporated herein:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Investment for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Schedule III
All other schedules have been omitted because the required
information is shown in the financial statements or notes
thereto, because the amounts involved are not significant or
because of the absence of the conditions under which they are
required.
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<TABLE>
(2) Exhibits.
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Item No. Description Location
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<C> <S> <C>
3(a) Articles of Incorporation of Filed on March 30, 1990, as
Tower Acquisition Corp. Exhibit 3(a) to Registrant's 1989
Form 10-K (File No. 0-18261)
3(b) Bylaws of Tower Acquisition Filed on March 30, 1990, as
Corp. Exhibit 3(b) to Registrant's 1989
Form 10-K (File No. 0-18261)
3(c) Certificate of Amendment and Filed on March 30, 1990, as
Amendment of Articles of Exhibit 3(c) to Registrant's 1989
Incorporation Form 10-K (File No. 0-18261)
4(a) Conformed composite copy of Filed on March 30, 1990, as
Note Agreement and Deed of Exhibit 4(a) to Registrant's 1989
Trust dated September 21, 1972, Form 10-K (File No. 0-18261)
with respect to $8,000,000,
8 percent, due in monthly install-
ments to October 2007
10 Hillsborough Apartment Complex Filed on January 11, 1993, as
Acquisition agreement Exhibit A to Registrant's Form 8-K
(File No. 0-18261)
Peppertree Apartment Complex Filed on October 12, 1993, as
Acquisition agreement Exhibit A to Registrant's Form 8-K
(File No. 0-18261)
Barkley Place Office Building Filed on July 26, 1994, as
Acquisition agreement Exhibit A to Registrant's Form 8-K
(File No. 0-18261)
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<PAGE> 13
6601 College Boulevard Office Filed on February 27, 1996, as
Building acquisition agreement Exhibit A to Registrant's Form 8-K
(File No. 0-18261)
UMB Bank Office Building Filed on February 16, 1999, as
Acquisition agreement Exhibit A to Registrant's Form 8k
(File No. 0-18261)
13 Tower Properties Company's Filed on March 09, 1999, as
Annual report to its security Exhibit 13 to Registrant's 1998
holders for the 1998 fiscal year. Form 10-K (File No. 0-18261)
Such report is furnished for the
information of the Commission and
is not to be deemed as filed as a
part of this report.
21 A list of Tower Properties See attached Exhibit 21
Company subsidiaries
</TABLE>
(b) Reports on Form 8-K. Registrant filed a required report on
-------------------
Form 8-K during the last quarter of 1998.
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TOWER PROPERTIES COMPANY
(Registrant)
DATE: March 31, 1999 BY: /s/JAMES M. KEMPER, JR.
----------------------------------------
James M. Kemper, Jr.
Chairman and Chief Executive Officer
DATE: March 31, 1999 BY: /s/ROBERT C. HARVEY III
----------------------------------------
Robert C. Harvey III
Chief Financial Officer,
Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated.
DATE: March 31, 1999 BY: /s/NEIL T. DOUTHAT
----------------------------------------
Neil T. Douthat
Director
DATE: March 31, 1999 BY: /s/BRIAN D. EVERIST
----------------------------------------
Brian D. Everist
Director
DATE: March 31, 1999 BY: /s/JONATHAN M. KEMPER
----------------------------------------
Jonathan M. Kemper
Director
DATE: March 31, 1999 BY: /s/THOMAS R. WILLARD
----------------------------------------
Thomas R. Willard
President and Director
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<PAGE> 15
TOWER PROPERTIES COMPANY
ANNUAL REPORT 1998
<PAGE> 16
TOWER PROPERTIES COMPANY
911 Main Street, Suite 100
Kansas City, Missouri 64105
TRANSFER AGENT:
UMB Bank, n.a.
928 Grand Avenue, Post Office Box 410064
Kansas City, Missouri 64141-0064
DESCRIPTION OF THE COMPANY'S BUSINESS
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The Company and its subsidiary organizations are primarily engaged in the
business of owning, developing, leasing and managing real property. All real
estate assets are located in Johnson County, Kansas, Clay, St. Louis and
Jackson County, Missouri. Substantially all the improved real estate owned by
the Company and its subsidiaries consists of office buildings, apartment
complexes, a warehouse and a warehouse/office facility, automobile parking
garages and land held for future sale or development. The Company has not
pursued a policy of acquiring real estate on a speculative basis for future
sale, although some real estate owned by the Company or a subsidiary may be
sold at some future time.
STOCK MARKET DATA
- -----------------
The Company's stock is traded on the "over the counter" market. Following
is a schedule of the bid and asked prices in each quarter of 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
Quarter Bid Asked Bid Asked
------- --- ----- --- -----
<S> <C> <C> <C> <C>
First $140.50 $ -- $121.00 $ --
Second 148.00 -- 127.50 --
Third 153.00 -- 127.50 --
Fourth 156.00 -- 135.25 --
</TABLE>
The Company will furnish to any person who was a stockholder on February 23,
1999, a copy of the annual report, on Form 10-K, including the financial
statement schedules required to be filed with the Securities and Exchange
Commission, upon such person's written request for the same, which request must
contain a good faith representation that, as of February 23, 1999, such person
was a beneficial owner of securities entitled to vote at such meeting. The
request should be directed to Mr. Robert C. Harvey III, Vice President, Tower
Properties Company, 911 Main Street, Suite 100, Kansas City, Missouri 64105.
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<PAGE> 17
DEAR STOCKHOLDER:
The sale of land at New Mark, which was carried at a low basis, resulted in a
large increase in net income for 1998. This land, which will be used for a
grocery store and small retail center for the New Mark complex as well as a
city park, will enhance the value of the property that Tower continues to
own. The proceeds of these land sales were reinvested in a small office
building in Clayton, Missouri. The 140 apartments at New Mark were completed
and leasing is going as planned. Twenty-four additional apartment units will
be built in 1999.
We have strengthened the real estate management division of the company to
accommodate our assumption of the management of properties owned by Commerce
Bancshares as it increases its workforce in Kansas City. We have put
together an aggressive young management group to handle our increasing
opportunities in real estate development and management. Major repairs on
our older apartment units will affect our earnings next year on an operating
basis. This will hopefully be offset by the leasing of our Lenexa warehouse
and increased management income. Interest rates have remained low and we
have continued to finance our expansion with long term funds. We look
forward to a profitable New Year.
Sincerely,
James M. Kemper, Jr.
Chairman and C.E.O.
<PAGE> 18
<TABLE>
TOWER PROPERTIES COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<CAPTION>
1998 1997
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<S> <C> <C>
ASSETS
Cash $ 84,650 $ 21,137
Short Term Investments 63,278 63,118
Related Party Investment, At Market 4,552,133 4,607,407
Accounts Receivable 1,234,849 907,012
Notes Receivable 377,272 210,865
Tenant Leasehold Improvements, Net 4,175,869 3,732,907
Construction in Progress 2,900,811 4,986,958
Prepaid Expenses and Other Assets 874,710 763,718
Rental Income Property, Net 66,184,736 51,055,746
Real Estate Held for Sale 430,717 912,081
Equipment and Furniture, Net 4,221,000 3,514,670
----------- -----------
Total Assets $85,100,025 $70,775,619
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Liabilities:
Accounts Payable and Other Liabilities $ 3,232,969 $ 1,092,359
Related Party Line of Credit 2,045,000 1,395,000
Income Taxes Payable 64,673 66,091
Deferred Income Taxes 2,867,725 1,354,387
Real Estate Bond Issue 6,400,000 --
Mortgage Notes Payable 41,072,416 41,634,615
----------- -----------
Total Liabilities 55,682,783 45,542,452
Minority Interest 178,705 159,667
Commitments and Contingencies
Preferred Stock, No Par Value
Authorized 60,000 Shares, None Issued -- --
Stockholders' Investment:
Common Stock, Par Value $1.00
Authorized 1,000,000 Shares, Issued 183,430 shares
and 178,430 shares in 1998 and 1997, respectively 183,430 178,430
Paid-In Capital 18,272,313 17,355,872
Retained Earnings 8,684,079 5,656,677
Unrealized Holding Gain for Securities 2,250,043 2,358,637
----------- -----------
29,389,865 25,549,616
Less Treasury Stock, 2,345 shares and 7,396 shares
in 1998 and 1997, respectively, at cost (151,328) (476,116)
----------- -----------
Total Stockholders' Investment 29,238,537 25,073,500
----------- -----------
Total Liabilities and Stockholders' Investment $85,100,025 $70,775,619
=========== ===========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
-4-
<PAGE> 19
<TABLE>
TOWER PROPERTIES COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Rent $15,821,300 $16,050,084 $14,587,306
Rent, Related Party 1,200,686 773,149 687,052
Management and Service Fees 79,099 68,604 73,040
Management and Services Fees, Related Party 388,340 98,834 49,356
Real Estate Sales 4,295,556 -- 580,000
Interest and Other Income 477,024 301,301 236,332
------------ ------------ ------------
Total Revenues 22,262,005 17,291,972 16,213,086
------------ ------------ ------------
COSTS & EXPENSES:
Salaries and Employee Benefits 1,819,974 1,640,586 1,426,952
Depreciation 2,840,357 2,359,602 2,049,245
Maintenance and Repairs 3,932,474 3,226,346 2,877,710
Cost of Real Estate Sold 551,990 -- 352,240
Taxes Other than Income 1,408,405 1,343,101 1,197,183
Utilities 1,350,262 1,311,968 1,241,963
Interest 3,371,426 2,607,298 2,058,593
Interest, Related Party (81,263) 275,848 476,755
Amortization of Leasehold Improvements 1,068,137 1,202,613 1,259,681
Other 1,005,960 848,566 937,749
------------ ------------ ------------
Total Costs and Expenses 17,267,722 14,815,928 13,878,071
Income Before Minority Interest and
Provision for Income Taxes 4,994,283 2,476,044 2,335,015
Minority Interest In Income of Subsidiary (19,038) (22,263) (12,504)
------------ ------------ ------------
Income Before Provision for Income Taxes 4,975,245 2,453,781 2,322,511
PROVISION (BENEFIT) FOR INCOME TAXES:
Currently Payable 342,825 1,164,748 933,288
Deferred 1,605,018 (248,709) (116,000)
------------ ------------ ------------
1,947,843 916,039 817,288
------------ ------------ ------------
NET INCOME $ 3,027,402 $ 1,537,742 $ 1,505,223
============ ============ ============
Earnings Per Share:
Basic $ 16.85 $ 9.00 $ 8.80
============ ============ ============
Diluted $ 16.84 $ 8.96 $ 8.80
============ ============ ============
Weighted Average Common Shares Outstanding:
Basic 179,667 170,925 170,958
============ ============ ============
Dilutive 179,791 171,678 170,958
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-5-
<PAGE> 20
<TABLE>
TOWER PROPERTIES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET INCOME $3,027,402 $1,537,742 $1,505,223
Unrealized holding gains (losses) on marketable
equity securities arising during the year (55,274) 1,611,887 636,107
Income tax benefit (expense) 21,557 (639,039) (222,637)
Adjustment for tax rate change (74,877) -- --
------------------------------------------------
Comprehensive income $2,918,808 $2,510,590 $1,918,693
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-6-
<PAGE> 21
<TABLE>
TOWER PROPERTIES COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
Common Stock
------------------------
Paid-In Retained
Shares Amount Capital Earnings
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 178,430 178,430 17,355,872 2,613,712
Net Income -- -- -- 1,505,223
Treasury Stock Purchases -- -- -- --
Treasury Stock Issued to Directors -- -- -- --
Unrealized Holding Gain For Securities -- -- -- --
--------- --------- ------------ ------------
Balance, December 31, 1996 178,430 178,430 17,355,872 4,118,935
Net Income -- -- -- 1,537,742
Treasury Stock Purchases -- -- -- --
Treasury Stock Issued to Directors -- -- -- --
Unrealized Holding Gain For Securities -- -- -- --
--------- --------- ------------ ------------
Balance, December 31, 1997 178,430 178,430 17,355,872 5,656,677
Net Income -- -- -- 3,027,402
Common Stock Issuance 5,000 5,000 671,250 --
Treasury Stock Purchases -- -- -- --
Treasury Stock Sold -- -- 148,150 --
Treasury Stock Issued to Directors -- -- 5,041 --
Tax benefit from exercise of stock options -- -- 92,000 --
Unrealized Holding (Loss) For Securities -- -- -- --
--------- --------- ------------ ------------
Balance, December 31, 1998 183,430 $183,430 $18,272,313 $8,684,079
========= ========= ============ ============
<CAPTION>
Treasury Stock
----------------------
Unrealized
Holding
Shares Amount Gain/(Loss) Total
-------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 7,416 (485,074) 972,319 20,635,259
Net Income -- -- -- 1,505,223
Treasury Stock Purchases 339 (29,663) -- (29,663)
Treasury Stock Issued to Directors (220) 19,939 -- 19,939
Unrealized Holding Gain For Securities -- -- 413,470 413,470
------- ---------- ----------- ------------
Balance, December 31, 1996 7,535 (494,798) 1,385,789 22,544,228
Net Income -- -- -- 1,537,742
Treasury Stock Purchases 13 (1,272) -- (1,272)
Treasury Stock Issued to Directors (152) 19,954 -- 19,954
Unrealized Holding Gain For Securities -- -- 972,848 972,848
------- ---------- ----------- ------------
Balance, December 31, 1997 7,396 (476,116) 2,358,637 25,073,500
Net Income -- -- -- 3,027,402
Common Stock Issuance -- -- -- 676,250
Treasury Stock Purchases 79 (11,757) -- (11,757)
Treasury Stock Sold (5,000) 321,850 -- 470,000
Treasury Stock Issued to Directors (130) 14,695 -- 19,736
Tax benefit from exercise of stock options -- -- -- 92,000
Unrealized Holding (Loss) For Securities -- -- (108,594) (108,594)
------- ---------- ----------- ------------
Balance, December 31, 1998 2,345 $(151,328) $2,250,043 $29,238,537
======= ========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-7-
<PAGE> 22
<TABLE>
TOWER PROPERTIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,027,402 $ 1,537,742 $ 1,505,223
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 2,840,357 2,359,602 2,049,245
Amortization of Leasehold Improvements 1,068,137 1,202,613 1,259,681
Gain on Real Estate Sales (3,743,566) -- (227,760)
Change in Balance Sheet Accounts:
Accounts Receivable (327,837) (147,412) 228,965
Notes Receivable (166,407) (133,456) (7,731)
Prepaid Expenses and Other Assets (110,992) (280,964) (136,276)
Accounts Payable and Other Liabilities 2,140,610 188,191 (15,129)
Income Taxes Payable (1,418) (19,242) (350,753)
Deferred Taxes 1,513,338 428,192 (304,592)
------------ ------------ -----------
Net Cash Provided by Operating Activities 6,239,624 5,135,266 4,000,873
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of New Mark Phase III/Hillsborough Phase II (6,544,710) -- (4,157,931)
Purchase of Warehouse -- -- (3,675,000)
Purchase of Suburban Office Building (9,424,454) -- (2,220,294)
Net Change in Construction in Progress 2,086,147 (3,394,805) 1,423,871
Proceeds from Sale of Land 4,295,556 -- 580,000
Additions to Real Estate Held for Sale, Net (70,626) (158,333) (41,521)
Net Change in Unrealized Gain for Securities (108,594) 972,848 413,470
Net Change to Related Party Investments 55,274 (1,611,887) (636,107)
Additions to Equipment & Furniture, Net (1,314,225) (843,945) (571,579)
Additions to Rental Income Property, Net (1,392,447) (3,366,959) (105,620)
Additions to Leasehold Improvements, Net (1,511,100) (807,464) (834,932)
------------ ------------ -----------
Net Cash Used in Investing Activities (13,929,179) (9,210,545) (9,825,643)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments on Mortgages (1,337,199) (940,442) (695,815)
Proceeds from Long Term Borrowings 7,175,000 15,670,000 8,300,000
Net Change in Short Term Borrowings 650,000 (10,726,859) (1,735,000)
Sale of Common Stock 676,250 -- --
Sale of Treasury Stock 470,000 -- --
Purchase of Treasury Stock (11,757) (1,272) (29,663)
Treasury Shares Issued to Directors 19,736 19,954 19,939
Tax Benefit from exercise of stock options 92,000 -- --
Net Change in Minority Interest 19,038 22,263 12,504
------------ ------------ -----------
Net Cash Provided by Financing Activities 7,753,068 4,043,644 5,871,965
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH: 63,513 (31,635) 47,195
CASH, Beginning of Period 21,137 52,772 5,577
------------ ------------ -----------
CASH, End of Period $ 84,650 $ $21,137 $ 52,772
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-8-
<PAGE> 23
TOWER PROPERTIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. BUSINESS:
Tower Properties Company (the Company) is primarily engaged in owning,
developing, leasing and managing real property located in Johnson County,
Kansas, Clay, St. Louis and Jackson County, Missouri. Substantially all of
the improved real estate owned by the Company and its subsidiaries consists
of office buildings, apartment complexes, a warehouse and a warehouse/office
facility and automobile parking lots and garages.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made
to previously reported amounts to conform to the current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company's accounting
policies conform to generally accepted accounting principles.
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation is charged to operations using straight-line and accelerated
methods over the estimated asset lives as follows:
Commercial office & warehouse buildings 18-65 years<F*>
Apartments 8-40 years
Parking facilities 15-45 years
Equipment and furniture 3-20 years
Tenant leasehold improvements 1-20 years
[FN]
<F*> Certain components of the Commerce Tower office building are
depreciated over 65 years. The original weighted average life of all
components is 38 years.
-9-
<PAGE> 24
Maintenance and repairs are charged to expense as incurred. The cost of
additions and betterments are capitalized. The cost of assets retired or
sold and the related accumulated depreciation are removed from the applicable
accounts and any gain or loss is recognized as income or expense. Fully
depreciated assets are retained in the accounts until retired or sold.
The amount of accumulated amortization on tenant leasehold improvements was
$8,305,855 and $7,237,719 at December 31, 1998 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
- -------------------------------
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 prescribes that
an impairment loss is recognized in the event that facts and circumstances
indicate that the carrying amount of an asset may not be recoverable, and an
estimate of future undiscounted cash flows is less than the carrying amount
of the asset. Impairment is recorded based on an estimate of future
discounted cash flows.
REVENUE RECOGNITION
- -------------------
Rental revenue is recognized on a straight-line basis over the term of
individual leases.
REAL ESTATE HELD FOR SALE
- -------------------------
Revenue is recorded on the sale of real estate when title passes to the
buyer. All land sales are for cash or short-term notes receivable. The
Company's real estate held for sale is recorded at cost which does not exceed
its estimated realizable value.
STATEMENTS OF CASH FLOWS
- ------------------------
Interest payments were $3,280,224, $2,924,659 and $2,549,254 for the years
ended December 31, 1998, 1997 and 1996, respectively. The Company paid
income taxes of $423,464, $1,146,128, and $1,633,704 for the years ended
December 31, 1998, 1997 and 1996, respectively.
EARNINGS PER SHARE
- ------------------
Basic earnings per share is based upon the weighted average common shares
outstanding during each year. Diluted earnings per share is based upon the
weighted average common and common equivalent shares outstanding during each
year. Stock options are the Company's only common stock equivalents.
-10-
<PAGE> 25
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). This statement establishes standards for reporting and
display of comprehensive income and its components in the financial
statements. Effective January 1, 1998, the Company adopted the provisions of
SFAS 130.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet at
its fair value. SFAS 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company will adopt SFAS 133 no later than January 1,
2000. Management is currently evaluating the impact that adoption of SFAS
133 will have on the Company's financial position and results of operations.
3. RENTAL INCOME PROPERTY:
Major classes of rental income property owned by the Company at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---- ------------ ---
December 31, 1998--
<S> <C> <C> <C>
Commercial office and warehouse buildings $55,890,737 $18,459,655 $37,431,082
Apartments 29,451,588 5,254,707 24,196,881
Parking facilities 6,819,173 2,262,400 4,556,773
----------- ----------- -----------
$92,161,498 $25,976,762 $66,184,736
=========== =========== ===========
<CAPTION>
Accumulated
Cost Depreciation Net
---- ------------ ---
December 31, 1997--
<S> <C> <C> <C>
Commercial office and warehouse buildings $45,435,264 $17,593,164 $27,842,100
Apartments 23,127,608 4,580,954 18,546,654
Parking facilities 6,819,173 2,152,181 4,666,992
----------- ----------- -----------
$75,382,045 $24,326,299 $51,055,746
=========== =========== ===========
</TABLE>
4. BENEFIT PLANS:
The Company sponsors a defined benefit pension plan covering substantially
all employees not covered in collective bargaining agreements. The plan's
assets are primarily invested in fixed income securities. The Company's
funding policy is to make annual contributions as required by applicable
regulations.
In February, 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132). This statement revises employers'
disclosures about pension benefit plans. SFAS
-11-
<PAGE> 26
132 does not change the measurement or recognition of the plans. Effective
December 31, 1998, the Company adopted the provisions of SFAS 132.
The following tables summarize the status of the Company's benefit plan:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $ 631,402 $ 607,149
Service Cost 33,130 27,207
Interest Cost 38,770 34,946
Plan Participant Contributions 0 0
Actuarial (Gain)/Loss 209,583 71,589
Benefits Paid 0 0
Other (122,349) (109,489)
--------- ---------
Benefit Obligation at End of Year $ 790,536 $ 631,402
========= =========
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year $ 549,177 $ 564,436
Actual Return on Plan Assets 61,404 48,059
Employer Contributions 63,011 46,171
Plan Participant Contributions 0 0
Benefits Paid 0 0
Other (122,349) (109,489)
--------- ---------
Fair Value of Plan Assets at End of Year $ 551,243 $ 549,177
========= =========
Funded Status (Underfunded)/Overfunded $(239,293) $ (82,225)
Unrecognized Net Actuarial (Gain)/Loss 197,429 39,048
Unrecognized Transition (Asset)/Obligation (1,844) (4,416)
Unrecognized Prior Service Cost 11,908 15,352
--------- ---------
(Accrued)/Prepaid Benefit Costs $ (31,800) $ (32,241)
========= =========
COMPONENTS OF NET PERIODIC BENEFIT COST
Service Cost $ 33,130 $ 27,207
Interest Cost 38,770 34,946
Expected Return on Plan Assets (40,751) (34,931)
Recognized Net Actuarial (Gain)/Loss 0 0
Amortization of Transition (Asset)/Obligation (2,287) (2,684)
Amortization of Prior Service Cost 3,444 3,444
Effect of Special Events 30,264 6,006
--------- ---------
Net Periodic Benefit Cost $ 62,570 $ 33,988
========= =========
</TABLE>
-12-
<PAGE> 27
ASSUMPTIONS AND METHOD DISCLOSURES
Discount Rate 5.50% 6.50%
Expected Long Term Rate of Return 7.00% 7.75%
Weighted Average Rate of Compensation Increase 4.05% 3.89%
All of the Company's union employees are covered by union-sponsored,
collectively-bargained, multi-employer pension plans. Tower contributed
$19,500, $8,781 and $8,837 in 1998, 1997 and 1996, respectively, to such
plans. The contributions were determined in accordance with the provisions
of negotiated labor contracts and are based on the number of hours worked.
The Company has a 401 (k) plan whereby the Company matches 25% of employee
contributions up to 1.5% of employee compensation. The Company may also make
discretionary contributions. The Company matched $13,766 and $12,959 and
$12,203 for the years ending December 31, 1998, 1997 and 1996, respectively.
Effective July 1, 1990, the Company adopted a Stock Purchase Plan for
non-employee directors. The Plan permits the non-employee directors to elect to
have their director fees retained by the Company in a special account. The
Company will annually add to the special accounts 25% of the amount
contributed by each participating director. Semi-annually, the funds in each
participant's account shall be used to purchase common stock of the Company
at the last known sale price and the stock shall be distributed to
participants. Shares issued to non-employee directors were 130, 152 and 220
for the years ending December 31, 1998, 1997 and 1996, respectively.
5. MORTGAGE NOTES PAYABLE:
Mortgage notes payable, secured by rental income property with a net book
value of approximately $44,878,590 and an assignment of certain leases and
related revenue, consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
8.50%, principal and interest payable
$66,388 monthly, until April, 2013 $ 6,588,904 $ 6,814,966
7.875%, principal and interest payable
$24,660 monthly, until February,
2009 2,054,772 2,183,326
7.50%, principal and interest payable
$32,224 monthly, until February,
2014 3,486,498 3,606,757
9.00%, principal and interest payable
$37,458 monthly, until December,
2012 3,571,011 3,693,083
8.00%, principal and interest payable
$16,311 monthly, until December,
2015 1,811,581 1,860,276
-13-
<PAGE> 28
7.65%, principal and interest payable
$25,448 monthly, until May,
2013 2,653,780 2,752,025
7.40%, principal and interest payable
$43,172 monthly, until April,
2016 5,039,918 5,179,584
7.70%, principal and interest payable
$22,246 monthly, until March,
2017 2,607,144 2,670,665
7.25%, principal and interest payable
$9,531 monthly, until May,
2003 1,150,307 1,178,790
8.31%, principal and interest payable
$65,721 monthly, until November,
2012 6,472,022 6,711,914
8.125%, principal and interest payable
$42,212 monthly, until November,
2017 4,877,699 4,983,229
7.45%, principal and interest payable
$6,569 monthly, until December,
2015 758,780 --
----------- -----------
$41,072,416 $41,634,615
=========== ===========
</TABLE>
Minimum mortgage note principal payments required over the next five years
and thereafter are as follows:
1999 $ 1,455,525
2000 1,577,267
2001 1,709,232
2002 2,860,687
2003 1,964,988
Thereafter 31,504,717
-----------
$41,072,416
===========
The carrying value of debt at December 31, 1998 approximates fair value.
6. INCOME TAXES:
Deferred income taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using the enacted
tax rate.
The Company's effective income tax rate differed from the statutory federal
income tax rate primarily due to the following:
-14-
<PAGE> 29
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Tax effect of:
Dividend exclusion (0.8) (1.5) (1.4)
Minority interest 0.4 0.9 0.5
State income taxes,
net of federal benefit 0.7 4.6 3.1
Other 0.4 (0.7) (1.0)
---- ---- ----
Effective Income Tax Rate 34.7% 37.3% 35.2%
==== ==== ====
</TABLE>
The tax effect of temporary differences giving rise to the Company's net
deferred income tax liability at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Amortization of leasehold improvements $ 1,488,658 $ 1,241,933
Pension 37,717 37,717
Vacation 34,827 30,810
Contested real estate taxes -- 164,488
---------- ----------
1,561,202 1,474,948
---------- ----------
Deferred tax liabilities:
Depreciation on rental income property,
equipment and furniture (2,604,445) (1,072,060)
Unrealized holding gain for securities (1,438,552) (1,460,109)
Accrued rent receivable (385,930) (297,166)
---------- ----------
(4,428,927) (2,829,335)
---------- ----------
Net deferred income tax liability $ (2,867,725) $ (1,354,387)
========== ==========
</TABLE>
7. ACQUISITIONS:
On December 1, 1998, the Company purchased the UMB Bank commercial office
building assets for $9,400,000. UMB Bank is a six-story, 59,982 square foot
commercial office building and parking garage located in Clayton, Missouri.
The following unaudited pro forma summary combines the results of operations
of the Company as if the acquisition of UMB Bank had occurred at the
beginning of each period.
<TABLE>
<CAPTION>
Unaudited Unaudited
--------- ---------
1998 1997
---- ----
<S> <C> <C>
Total revenue $23,330,341 $17,891,771
Net income 3,165,998 1,448,153
Earnings per common share $17.62 $8.47
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations had been combined
during the period and is not intended to be a projection of future results.
-15-
<PAGE> 30
8. OTHER RELATED PARTY TRANSACTIONS:
The Company received rent and fees from Commerce Bank, N.A. and Commerce
Bancshares, Inc. (Commerce) and its subsidiaries of $3,746,446, $1,180,051
and $1,043,640 in 1998, 1997, and 1996, respectively. The Company was also
reimbursed for utilities in the amount of $101,758, $107,711 and $107,885 in
1998, 1997 and 1996, respectively.
The Company owns 107,109 shares of Commerce common stock, which is shown as a
related party investment in the accompanying consolidated balance sheet. The
shares have been classified as available for sale. Accordingly, they are
valued at market and the unrealized gain has been recorded as a component of
equity, net of deferred taxes. There are common officers and directors of
the Company and Commerce.
The Company has a $20,500,000 line of credit with a variable interest rate
equal to one and one half percent (1 1/2%) in excess of the Fed Funds rate,
floating with Commerce. At December 31, 1998, $6,234,000 was available under
this line of credit, and the interest rate was 5.57%. The line requires
monthly interest payments and expires March 31, 1999. Interest expense paid
to Commerce was $116,299, $538,319, and $551,527 for the years ended December
31, 1998, 1997 and 1996, respectively. The Company pledged the shares of
Commerce common stock and real estate as collateral for the line of credit.
The weighted short term borrowing rate was 6.76% in 1998. Interest of
$207,497 and $220,958 was capitalized for the years ending December 31, 1998
and 1997, respectively.
9. STOCK BASED COMPENSATION:
In January, 1998, the Company's Chairman exercised 5,000 nonqualified stock
options granted in 1997 with an exercise price of $94.00 per share. Treasury
shares were used to satisfy the options. Also in January, 1998, an
additional 5,000 nonqualified stock options were granted to the Chairman with
an exercise price of $135.25. The options, exercisable for five years from
the date of grant were exercised in March, 1998. Additional shares were
issued to satisfy the options. There were no options issued or outstanding
for the year ended December 31, 1996. The Company accounts for the options
under APB No. 25, under which no compensation cost has been recognized.
Had compensation cost for the options been determined in accordance with SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Net Income: As reported $3,027,402 $1,537,742
Pro Forma 2,916,887 1,458,656
Basic Earnings per share: As reported $16.85 $9.00
Pro Forma $16.23 $8.53
Diluted Earnings per share: As reported $16.84 $8.96
Pro Forma $16.22 $8.50
</TABLE>
-16-
<PAGE> 31
The fair value of options granted in 1998 and 1997 are estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions for 1998 and 1997, respectively: risk free rate of 5.43% and
6.29%, expected dividend yield of zero for all options, expected life of five
years for all options, and expected volatility of 14.23% and 9.69%.
Subsequent to year end an additional 2,000 nonqualified stock options were
granted.
10. COMMITMENTS AND CONTINGENCIES:
Congress passed the Americans With Disabilities Act (the Act) of 1990 which
became effective January 26, 1992. The Act contains provisions for building
owners to provide persons with disabilities with accommodations and access
equal to, or similar to, that available to the general public. Management
cannot estimate the eventual impact of the Act on the financial condition of
the Company since certain provisions of the Act are open to interpretation.
The Company is implementing the requirements of the Act that are readily
achievable and will not constitute an undue burden on the Company.
Due to governmental regulations regarding asbestos and the uncertainty
surrounding the advantages and disadvantages of asbestos removal, Tower
Properties Company will continue to monitor the status of asbestos in its
commercial office buildings and will take appropriate action when required.
The cost to remove all asbestos from properties owned by Tower Properties
Company cannot be determined; however, these removal costs could have a
significant adverse impact on the future operations and liquidity of Tower
Properties Company.
The Company has outstanding construction commitments of $8,091,000 as of
December 31, 1998. The Company also has an extraordinary repair project at
Phase I & Phase II of the New Mark apartment complex due to sudden termite
damage with estimated expense of $1,160,000. The Company has plans to make
repairs to the 710 Main garage in the approximate amount of $792,000. Both
projects shoud be completed by the second quarter, 1999.
-17-
<PAGE> 32
11. BUSINESS SEGMENTS
In 1998 the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information".
This statement requires the Company to define and report the Company's
business based on how management currently evaluates its business.
The Company groups its operations into three business segments, commercial
office, apartments, and parking. The Company's business segments are separate
business units that offer different real estate services. The accounting
policies for each segment are the same as those described in the summary of
significant accounting policies.
Following is information for each segment for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
December 31, 1998
---------------------------------------------------------------------------------
COMMERCIAL
OFFICE APARTMENTS PARKING OTHER ELIMINATING TOTAL
------------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE FROM EXTERNAL CUSTOMERS 10,188,025 5,263,237 1,619,725 5,191,018 -- 22,262,005
LAND SALES 242,589 -- -- 4,052,967 (4,295,556) --
INTEREST EXPENSE 1,365,742 1,616,757 -- 307,664 -- 3,290,163
DEPRECIATION AND AMORTIZATION 2,405,007 1,097,707 118,773 287,007 -- 3,908,494
SEGMENT NET INCOME BEFORE TAX 1,222,911 (470,456) 687,335 3,535,455 -- 4,975,245
CAPITAL EXPENDITURES BY SEGMENT 12,709,602 7,187,161 170,649 393,760 (20,461,172) --
IDENTIFIABLE SEGMENT ASSETS 37,571,163 26,234,571 4,658,670 16,635,621 -- 85,100,025
<CAPTION>
---------------------------------------------------------------------------------
December 31, 1997
---------------------------------------------------------------------------------
COMMERCIAL
OFFICE APARTMENTS PARKING OTHER ELIMINATING TOTAL
------------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE FROM EXTERNAL CUSTOMERS 9,583,305 4,983,724 1,508,100 1,216,843 -- 17,291,972
LAND SALES -- -- -- -- -- --
INTEREST EXPENSE 997,600 1,334,954 -- 550,592 -- 2,883,146
DEPRECIATION AND AMORTIZATION 2,289,464 917,073 110,374 245,304 -- 3,562,215
SEGMENT NET INCOME BEFORE TAX 1,322,163 434,965 595,542 101,111 -- 2,453,781
CAPITAL EXPENDITURES BY SEGMENT 2,073,345 446,721 1,221,370 1,701,902 (5,443,338) --
IDENTIFIABLE SEGMENT ASSETS 27,536,685 23,731,690 4,767,312 14,739,932 -- 70,775,619
<CAPTION>
---------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------------------------------------
COMMERCIAL
OFFICE APARTMENTS PARKING OTHER ELIMINATING TOTAL
------------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE FROM EXTERNAL CUSTOMERS 9,105,664 4,621,978 1,361,271 1,124,173 -- 16,213,086
LAND SALES -- -- -- 580,000 (580,000) --
INTEREST EXPENSE 757,817 1,291,615 -- 485,916 -- 2,535,348
DEPRECIATION AND AMORTIZATION 2,225,836 863,620 99,525 119,945 -- 3,308,926
SEGMENT NET INCOME BEFORE TAX 1,238,251 434,386 520,584 129,290 -- 2,322,511
CAPITAL EXPENDITURES BY SEGMENT 3,351,248 4,517,888 262,350 3,720,117 (11,851,603) --
IDENTIFIABLE SEGMENT ASSETS 28,017,974 20,634,825 3,303,610 11,667,836 -- 63,624,245
</TABLE>
-18-
<PAGE> 33
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarters 1997 Quarters
============================================== ===============================================
First Second Third Fourth First Second Third Fourth
============================================================================== ================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue 4,602,878 4,313,375 5,906,086 7,439,666 4,237,939 4,332,798 4,306,808 4,414,427
Net income 454,403 214,758 732,560 1,625,681 337,504 509,418 403,958 286,862
============================================================================== ================================================
Basic Earnings Per Share 2.59 1.19 4.05 9.02 1.97 2.98 2.36 1.69
Diluted Earnings Per Share 2.58 1.19 4.05 9.02 1.97 2.97 2.35 1.67
============================================================================== ================================================
</TABLE>
-19-
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Tower Properties Company:
We have audited the accompanying consolidated balance sheets of Tower
Properties Company (a Missouri Corporation) and Subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of income,
comprehensive income, stockholders' investment and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated
financial statements and schedules referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tower Properties Company and
Subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying Schedule III is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as
a whole.
Kansas City, Missouri
March 2, 1999
-20-
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal assets consist of real estate holdings which are not
liquid assets. Real estate holdings include office buildings, apartment
complexes, a warehouse and a warehouse/office facility, parking facilities
and land held for future sale. The principal source of funds generated
internally is income from operations. The principal source of external funds
is long term debt and a $20,500,000 line of credit with Commerce Bank, N.A.
At December 31, 1998, the Company had $2,045,000 outstanding on the line of
credit. In 1999, the Company plans to build and complete a $7,000,000
parking garage. With cash provided from operations of $6,332,000 in 1998, the
Company does not anticipate any liquidity problems. The Company has not
experienced liquidity problems during the twelve months ended December 31,
1998. During 1996, the Company constructed an additional 68 units at the
Hillsborough apartment complex. The Company used the line of credit with
Commerce Bank, N.A. to fund the construction project. In April, 1996, a
$2,900,000 twenty-year term mortgage loan was secured for this property with
Penn Mutual. The proceeds from this loan were used to reduce the line of
credit with Commerce Bank, N.A. On October 11, 1996, the Company acquired
the 916-920 Walnut office buildings and the 102 E. 8th Street parking lot in
Kansas City, Missouri for $700,000. The Company used the line of credit with
Commerce Bank, N.A. to acquire the property. On December 18, 1996, the
Company acquired the 9909 Lakeview Avenue warehouse located in Lenexa, Kansas,
for $3,675,000. The Company used the line of credit with Commerce Bank,
N.A. to acquire this property. In February, 1997, a $2,720,000 twenty-year
term mortgage loan was secured for this property from Prudential Insurance of
America. The proceeds of this loan were used to reduce the line of credit.
On December 27, 1996, the Company acquired the 9221 Quivera commercial office
building and an adjoining 70,000 square foot vacant parcel of land, located
in Overland Park, Kansas for $1,750,000. The Company used the line of credit
with Commerce Bank, N.A. to make this purchase. In March, 1997, a $1,200,000
loan with a twenty-year amortization and a five-year balloon payment was
secured for this property with Mercantile Bank and Trust. The proceeds from
this loan was used to reduce the line of credit. During 1997 and 1998, the
Company constructed an additional 140 units at the New Mark Apartment
Complex. The Company used the line of credit with Commerce Bank, N.A. to
fund the construction. In October, 1997, a $5,000,000 twenty-year term
mortgage loan was secured for this property from Ohio National. The proceeds
of this loan were used to reduce the line of credit. Also in October, 1997,
the Company secured a $6,750,000 fifteen year mortgage loan on the 811 Main
office building. The proceeds from this loan was used to pay off the line of
credit and the remainder was invested in short term investments until it was
necessary to borrow additional funds to finance the low rise elevator
modernization and the replacement of the chiller and cooling towers in the
Commerce Tower office building. In March, 1998, the Company secured a
$775,000 seventeen year, 10 month mortgage loan on the expansion of the 9200
Cody warehouse/office facility. The proceeds from this loan was used to
reduce the line of credit. The Company closed land sales in the amount of
$1,400,000 in September, 1998 and $2,700,000 in October, 1998. The proceeds
were held by an exchange corporation
-21-
<PAGE> 36
with the intention of enacting a tax-free exchange. The Company identified the
UMB Bank commercial office building, located in Clayton, Missouri as a target
exchange property and purchased the property in December, 1998 for $9,400,000.
The $4,000,000 generated from the land sales and $5,400,000 in cash drawn on the
Company's line of credit. In the transaction, Tower also acquired the right to
issue $6,400,000 in low interest industrial revenue bonds. These proceeds were
used to reduce the line of credit. The Company is arranging permanent financing
of $7,000,000 from Business Men's Assurance at a fixed rate of 6.9%. The loan
will close during the first quarter of 1999, and the proceeds of this loan will
be used to reduce the line of credit and provide funds for major repairs at the
710 Garage, New Mark apartments and the continued construction of the Tower
Parking garage.
YEAR ENDED DECEMBER 31, 1998
COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
- ---------------------
Increased parking spaces due to the demolition of the Texaco station at 600
Main and the increase in rental rates for all surface parking, the completion
of Phase III of the New Mark apartment complex, the expansion of the 9200
Cody warehouse/office facility and the acquisition of the UMB Bank commercial
office building in Clayton, Missouri, offset by the decrease in occupancy
during the first half of 1998 in the 811 Main commercial office building, the
vacancy of the 916-920 Walnut commercial office buildings and the vacancy of
the 9909 Lakeview warehouse are responsible for the increase in rental income
of $198,753. Parking revenue increased 7% and apartment rentals increased
6%. The expansion of the 9200 Cody warehouse/office facility in October,
1997 created a 40% increase in rental income for that facility. Occupancy in
the Commerce Tower is 90%. The Barkley Place, the UMB Bank and the 811 Main
office buildings are 100% leased. The 9200 Cody warehouse/office facility,
the 6601 College Boulevard commercial office building, and the 9221 Quivera
commercial office building are 100% leased under triple net leases. The 9909
Lakeview warehouse is presently vacant. Phase I and II of the New Mark
apartment complex are 78% leased, Phase III of New Mark are 79% leased,
Hillsborough apartments are 95% leased and Peppertree apartments are 94%
leased at year end.
The increase in management and service fees and the increase in salary
expense is due to the acquisition of the management contract for the Commerce
Trust, Commerce Bank, Osco and Executive Office commercial office buildings
for Commerce Bank N.A.
The Company was granted and received $242,589 for a Kansas City Power and
Light easement on its 6601 College Boulevard commercial office building
location. In addition, the Company sold 197 acres of undeveloped land
located in the New Mark sub-division. These transactions account for the
increase in real estate sales and cost of real estate sold. Interest and
other income has increased primarily due to the construction management fees
earned on Commerce Bank property and department remodels.
-22-
<PAGE> 37
The increase in depreciation is a direct result of the modernization of the
low and high rise elevators in the Commerce Tower, the expansion of the 9200
Cody warehouse/office facility and the completion of the Phase III of the New
Mark apartment complex. Due to a lack of benefit, management has decided to
close the law library located in the Commerce Tower commercial office
building at year end and write down the law library books in the amount of
$287,422 to an estimated value of $15,000.
The increase of $706,128 in maintenance and repairs is primarily due to the
sudden termite damage at the Phase I and II of the New Mark apartment complex
and the necessary repairs made at the 710 Main parking garage. The increase
in taxes other than income is the Stanley warehouse real estate taxes
previously paid by the tenant in a triple net lease, the acquisition of the
UMB Bank commercial office building and the completion of Phase III of the
New Mark apartment complex, offset by the decrease in assessment of the
Commerce Tower commercial office building.
Utilities increased primarily due to the Stanley warehouse and Phase III of
New Mark. The increase in other interest expense is the interest payments on
the $6,750,000 mortgage loan for the 811 Main commercial office building and
garage, the $5,000,000 mortgage loan on the Phase III of the New Mark
apartment complex and the $775,000 mortgage on the expansion of the 9200 Cody
warehouse/office facility, offset by the capitalized interest during
construction of the Phase III New Mark construction project.
The decrease in amortization of leasehold improvements is comprised of 1998
tenant improvements in the Commerce Tower, Barkley Place and 811 Main
commercial office buildings and the 9200 Cody warehouse expansion as compared
to the 1997 improvements which included the write off of the UtiliCorp space
in the Commerce Tower commercial office building.
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
- ---------------------
Increased occupancy in the Barkley Place office building, the change at the
811 Main building from a single tenant with a triple net lease to a
multi-tenant, full service building effective April 1, 1996, the completion
of Phase II of the Hillsborough apartment complex, increased revenue from
parking operations, the acquisition of the 916-920 Walnut commercial office
buildings on October 11, 1996, the acquisition of the Stanley warehouse on
December 18, 1996 and the December 27, 1996 acquisition of the 9221 Quivera
office building, offset by the decrease in occupancy in the Commerce Tower
are primarily responsible for the 10% increase in rental income of
$1,548,875. Parking revenue increased 11% and apartment rentals increased
8%. The acquisition of the Stanley warehouse and the 9221 Quivera commercial
office building with combined rental income of $755,270 was responsible for
49% of the total increase. The increase in rental income at the 822 Main
building was responsible for 24% of the total increase. Occupancy in the
Commerce Tower is 86%. The Barkley Place commercial office building is 100%
leased and the 811 Main office building is 81% leased. The 9200 Cody
-23-
<PAGE> 38
warehouse/office facility, the 6601 College Boulevard commercial office
building, and the 9221 Quivera commercial office building are 100% leased
under triple net leases. The 9909 Lakeview warehouse was 100% leased until
October 31, 1997 at which time they accepted a buy out offer from Stanley
Works. The New Mark apartments are 92% leased, Hillsborough apartments are
87% leased and Peppertree apartments are 95% leased at year end. The
increase in parking revenues in 1997 is primarily due to an increase in
occupancy in both the 710 and 711 Main Garages and the demolition and
construction of a surface parking lots at the South Rodeway and Texaco
Station property.
The increase in management and service fees is primarily due to an increase
in the amount of fees billed for tenant leasehold improvements performed by
Company employees and the management fee for the Commerce Trust, Commerce
Bank, Osco and Executive Office commercial office building for Commerce Bank
N.A. effective November 10, 1997.
The sale of twenty nine acres of undeveloped land located in the New Mark
sub-division in 1996 accounts for the decrease in real estate sales and cost
of real estate sold.
Interest and other income has increased due to a combination of the increase
in apartment income collected for washer and dryer facilities, forfeited
security deposits and the construction management fees earned on tenant
remodels.
The increase in salaries and employee benefits of $221,484 is a direct result
of the increase in management personnel. The increase in depreciation is a
direct result of the acquisition of the Stanley warehouse, the 9221 Quivera
commercial office building, the completion of the Phase II of the
Hillsborough apartment complex, the expansion of the 9200 Cody
warehouse/office facility and the modernization of the low rise elevators in
the Commerce Tower commercial office building.
The increase of $346,636 in maintenance and repairs is primarily due to
changing the 811 Main building to a multi-tenant, full service building
effective April 1, 1996, repairs to the chillers at the Commerce Tower
office building, concrete repairs at the 710 Main parking facility and the
acquisition of 916-920 Walnut commercial office buildings. The changing of
the 811 Main building to a multi-tenant, full service building, the
acquisition of the 916-920 Walnut commercial office buildings, the completion
of the Phase II of the Hillsborough apartment complex, the lease buy out of
the 9909 Lakeview warehouse and the increase in the assessment of the
Commerce Tower commercial office building are responsible for the increase in
taxes other than income.
The increase in utilities is primarily due to the conversion of 811 Main to a
full service, multi-tenant building and the acquisition of the 916-920 Walnut
office building, offset by a reduction in both the Commerce Tower and Barkley
Place office buildings. The increase in other interest expense and the
reduction in related party interest expense is result of securing a mortgage
loan of $2,700,000 for the 9909 Lakeview warehouse, a $1,200,000 mortgage
loan for the 9221 Quivera commercial office building, a $6,750,000 mortgage
loan for the 811 Main commercial office building and garage and a $5,000,000
mortgage loan on the Phase III of the New Mark apartment complex. The
proceeds from these loans were used to reduce the line of credit with
Commerce Bank N.A.
-24-
<PAGE> 39
The decrease in amortization of leasehold improvements is primarily due to
the UtiliCorp tenant improvements in the Commerce Tower which were being
amortized over the life of their leases which ended in the first half of
1997. The decrease in professional fees and other expenses is primarily due
to the expenses incurred in connection with the buy out of the downtown
Texaco lease and the write off of a note receivable for rent from a former
Commerce Tower tenant in 1996.
ENVIRONMENTAL ISSUES
In accordance with Federal, State and local laws regarding asbestos, Tower
Properties Company is not required to remove, but will continue to monitor
the status of asbestos in its commercial office buildings.
The cost to remove all asbestos from properties owned by Tower Properties
Company cannot be been determined; however, these removal costs could have a
significant adverse impact on the future operations and liquidity of Tower
Properties Company.
AMERICANS WITH DISABILITIES ACT
Congress passed the Americans With Disabilities Act (the Act) of 1990 which
became effective January 26, 1992. The Act contains provisions for building
owners to provide persons with disabilities with accommodations and access
equal to, or similar to, that available to the general public. Management
cannot estimate the eventual impact of the Act on the financial condition of
the Company since certain provisions of the Act are open to interpretation.
The Company is implementing the requirements of the Act that are readily
achievable and will not constitute an undue burden on the Company. During
1998, the Company made modifications to certain properties at a cost of
approximately $111,000.
MARKET RISK DISCLOSURE
The Company is exposed to various market risks, including equity investment
prices and interest rates.
The Company has $4,552,133 of equity securities as of December 31, 1998.
These investments are not hedged and are exposed to the risk of changing
market prices. The Company classifies these securities as "available-for-sale"
for accounting purposes and marks them to market on the balance sheet at the end
of each period. Management estimates that its investments will generally be
consistent with trends and movements of the overall stock market excluding any
unusual situations. An immediate 10% change in the market price of our equity
securities would have a $277,680 effect on comprehensive income.
The Company has approximately $8,445,000 of variable rate debt as of December
31, 1998. A 100 basis point change in each debt series benchmark would
impact net income on an annual basis by approximately $52,000.
-25-
<PAGE> 40
PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet at
its fair value. SFAS 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company will adopt SFAS 133 no later than January 1,
2000. Management is currently evaluating the impact that adoption of SFAS
133 will have on the Company's financial position and results of operations.
YEAR 2000
The Company has assessed the key financial, information and operational
systems. Management does not anticipate that the Company will encounter
significant operational issued related to the year 2000. Our elevator and
heating and cooling systems have been deemed Year 2000 compliant by our
respective vendors. We have successfully completed tests on these systems
without failures. All of our office systems have been upgraded to Year 2000
compliant software. Futhermore, the financial impact of making required
systems changes has not been material to the Company's consolidated financial
position, results of operations or cash flows.
Our greatest exposure for problems is our reliance on our utility providers.
While none will guarantee service without disruption, all of the utilities
expect to be Year 2000 compliant by the U.S. Government's deadline of June
30, 1999. Most of our utilities have manual override alternatives should any
interruption occur.
-26-
<PAGE> 41
<TABLE>
TOWER PROPERTIES COMPANY
SELECTED FINANCIAL DATA
<CAPTION>
TWELVE MONTHS ENDING DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $22,262,005 $17,291,972 $16,213,086 $13,152,882 $11,697,118
Net Income 3,027,402 1,537,742 1,505,223 1,510,180 811,831
Basic Earnings Per Common Share 16.85 9.00 8.80 8.84 4.75
Diluted Earnings Per Common Share 16.84 8.96 8.80 8.84 4.75
Dividends Per Common Share -- -- -- -- --
Mortgages Notes Payable 41,072,416 41,634,615 26,905,057 19,300,872 17,820,480
Net Equity 29,238,537 25,073,500 22,544,228 20,635,259 18,618,042
Total Assets $85,100,025 $70,775,619 $63,624,245 $56,504,061 $42,497,944
</TABLE>
-27-
<PAGE> 42
<TABLE>
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
<CAPTION>
Cost Capitalized
Subsequent to
Initial Cost to Company Acquisition
------------------------------ ----------------------------
Buildings and Carrying
Description-(C) Encumbrances Land Improvements Improvements Costs
--------------- ------------ ---- ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
COMMERCIAL OFFICE BUILDINGS
Commerce Tower $ 0 $ 919,920 $18,133,895 $ 1,615,804 $ 0
811 Main 6,472,022 596,387 2,553,247 218,914 0
UMB Bank-Clayton 0 1,113,734 8,310,720 -- 0
Barkley Place 3,571,011 871,000 4,943,000 59,591 0
6601 College Boulevard 5,039,918 1,000,000 5,950,000 0 0
9200 Cody Warehouse/office 2,570,361 296,850 2,174,150 1,222,560 0
9909 Lakeview Avenue 2,607,144 652,000 2,773,000 0 0
9221 Quivera 1,150,307 290,738 1,193,130 0 0
Other Rental Properties 0 767,401 229,118 5,578 0
----------- ----------- ----------- ----------- --------
Sub-Total 21,410,763 6,508,030 46,260,260 3,122,447 0
APARTMENTS
New Mark Apartments, 210 Units 2,054,772 19,768 3,797,495 627,285 0
New Mark Apartments III, 140 Units 4,877,699 649,374 5,341,616 -- 0
Hillsborough Apartments, 329 Units 9,242,684 1,161,740 8,485,514 3,901,449 0
Peppertree Apartments, 162 Units 3,486,498 833,243 4,554,674 79,430 0
----------- ----------- ----------- ----------- --------
Sub-Total 19,661,653 2,664,125 22,179,299 4,608,164 0
PARKING FACILITIES
710 Main 0 286,361 672,655 4,974 0
811 Main 0 149,096 614,122 599,857 0
DRC Texaco & 711 Garage 0 501,513 50,538 1,030,112 0
Surface lots & 9th & Walnut Garage 0 2,129,257 81,000 748,281 0
----------- ----------- ----------- ----------- --------
Sub-Total 0 3,066,227 1,418,315 2,383,224 0
----------- ----------- ----------- ----------- --------
TOTALS $41,072,416 $12,238,382 $69,857,874 $10,113,835 $ 0
=========== =========== =========== =========== ========
<CAPTION>
Gross Amount at Which
Carried at Close
of Period
-------------------------------- -------------
Buildings and
Description-(C) Land Improvements Total
--------------- ---- ------------ -----
<S> <C> <C> <C>
COMMERCIAL OFFICE BUILDINGS
Commerce Tower $ 919,920 $19,749,699 $20,669,619
811 Main 608,355 2,760,193 3,368,548
UMB Bank-Clayton 1,113,734 8,310,720 9,424,454
Barkley Place 871,000 5,002,591 5,873,591
6601 College Boulevard 1,000,000 5,950,000 6,950,000
9200 Cody Warehouse/office 296,850 3,396,710 3,693,560
9909 Lakeview Avenue 652,000 2,773,000 3,425,000
9221 Quivera 290,738 1,193,130 1,483,868
Other Rental Properties 767,401 234,696 1,002,097
----------- ----------- -----------
Sub-Total 6,519,998 49,370,739 55,890,737
APARTMENTS
New Mark Apartments, 210 Units 19,768 4,424,780 4,444,548
New Mark Apartments III, 140 Units 649,374 5,341,616 5,990,990
Hillsborough Apartments, 329 Units 1,161,740 12,386,963 13,548,703
Peppertree Apartments, 162 Units 833,243 4,634,104 5,467,347
----------- ----------- -----------
Sub-Total 2,664,125 26,787,463 29,451,588
PARKING FACILITIES
710 Main 350,349 613,641 963,990
811 Main 149,096 1,213,979 1,363,075
DRC Texaco & 711 Garage 501,513 1,032,057 1,533,570
Surface lots & 9th & Walnut Garage 2,877,538 81,000 2,958,538
----------- ----------- -----------
Sub-Total 3,878,496 2,940,677 6,819,173
----------- ----------- -----------
TOTALS $13,062,619 $79,098,879 $92,161,498
=========== =========== ===========
<CAPTION>
Life
on Which
Depreciation
December 31, 1998 in Latest
------------------------------ ------------- Income
Accumulated Date of Date Statement
Description-(C) Depreciation Construction Acquired is Computed
--------------- ------------ ------------ -------- -----------
<S>
COMMERCIAL OFFICE BUILDINGS <C> <C> <C> <C>
Commerce Tower $14,202,127 1965 1971 18 to 65 Years
811 Main 2,407,125 1959 1972 45 Years
UMB Bank-Clayton 17,314 1985 1998 40 Years
Barkley Place 673,872 1988 1994 40 Years
6601 College Boulevard 561,423 1979 1995 40 Years
9200 Cody Warehouse/office 270,986 1973 1995 40 Years
9909 Lakeview Avenue 159,531 1987 1996 40 Years
9221 Quivera 79,792 1968 1996 40 Years
Other Rental Properties 87,485 Various Various 10 to 40 Years
-----------
Sub-Total 18,459,655
APARTMENTS
New Mark Apartments, 210 Units 2,788,988 1969/1977 1971/1977 8 to 40 Years
New Mark Apartments III, 140 Units 126,428 1998 1998 40 Years
Hillsborough Apartments, 329 Units 1,669,729 1985 1992 40 Years
Peppertree Apartments, 162 Units 669,562 1986 1993 40 Years
-----------
Sub-Total 5,254,707
PARKING FACILITIES
710 Main 575,800 1959 1972 45 Years
811 Main 1,316,961 1959/1996 1972/1996 15 to 45 Years
DRC Texaco & 711 Garage 175,875
Surface lots & 9th & Walnut Garage 193,764 Various 1989 20 Years
-----------
Sub-Total 2,262,400
-----------
TOTALS $25,976,762
===========
</TABLE>
-28-
<PAGE> 43
DIRECTORS
James M. Kemper, Jr.
Chairman, and Chief Executive Officer of Tower Properties Company
Thomas R. Willard
President, Tower Properties Company
David W. Kemper
Chairman, President and Chief Executive Officer, Commerce Bancshares, Inc., a
bank holding company, Chairman, President and Chief Executive Officer,
Commerce Bank, N.A.
Jonathan M. Kemper
Vice Chairman, Commerce Bancshares, Inc., a bank holding company,
Vice Chairman, Commerce Bank, N.A.
Brian D. Everist
President, Intercontinental Engineering Manufacturing Corporation
Neil T. Douthat
Sr. Vice President-Investments, Solomon Smith Barney, Inc.
OFFICERS
James M. Kemper, Jr.
Chairman, and Chief Executive Officer
Thomas R. Willard
President
E. Gibson Kerr
Vice President
Robert C. Harvey III
Chief Financial Officer, Vice President and Secretary
Margaret V. Allinder
Vice President, Assistant Secretary and Controller
-30-
<PAGE> 44
<TABLE>
PRINCIPAL REAL ESTATE OF
TOWER PROPERTIES COMPANY
<S> <C>
Commerce Tower Building 30-story office building, 911 Main Street
Barkley Place Office Building 6-story office building, 10561 Barkley
811 Main Building 230,000 rentable square feet office building
and 530 car parking garage
UMB Bank Building 6 story office building and parking garage,
7911 Forsyth Blvd., Clayton, Missouri
6601 College Boulevard Office Building 6-story office building, 6601 College Blvd.
9221 Quivera Office Building 1-story office building, 9221 Quivera
9200 Cody Warehouse/Office Facility 120,900 square foot warehouse/office facility
9909 Lakeview Avenue Warehouse 115,000 square foot warehouse
710 Main Parking Garage 740 car parking garage
711 Main Parking Garage 280 car parking garage
New Mark Apartment Complex 210 apartments and an additional
140 apartments completed in 1998, located at
100th and North Oak Streets
New Mark Subdivision 117 acres of residential and commercial
land in the area of 100th and North Oak
Streets
Downtown Kansas City Vacant Land 6th Street to 7th Street, Baltimore to
Wyandotte Streets and a block of land
Located on the corner of 8th and Wyandotte
Streets, land and improvements from
7th to 8th Streets on east side of Main
Street, a 112 car parking lot at 600 Main, a
100 car parking lot at 601 Main and a 40 car
parking lot at 8th and Walnut.
900-920 Walnut A new 264-car garage under construction,
To be completed in 1999.
9th and Walnut Property located at the southwest corner
Of Ninth and Walnut and a two-story
Parking facility located at the northwest
Corner of Ninth and Walnut
Hillsborough Apartment Complex 329 garden apartments located at 5401 Fox
Ridge Drive
Peppertree Apartment Complex 162 garden apartments, located at
6800 Antioch
All of the real estate is located in Johnson County, Kansas, Clay, St. Louis and Jackson County, Missouri.
</TABLE>
-31-
<PAGE> 1
EXHIBIT 21
TOWER PROPERTIES COMPANY
LISTING OF SUBSIDIARIES
Percentage
Subsidiary Ownership
---------- ---------
Downtown Redevelopment Corporation 98%
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 84,650
<SECURITIES> 4,615,411
<RECEIVABLES> 1,612,121
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,087,703
<PP&E> 92,161,498
<DEPRECIATION> 25,976,762
<TOTAL-ASSETS> 85,100,025
<CURRENT-LIABILITIES> 5,342,642
<BONDS> 47,472,416
<COMMON> 183,430
0
0
<OTHER-SE> 29,055,107
<TOTAL-LIABILITY-AND-EQUITY> 85,100,025
<SALES> 0
<TOTAL-REVENUES> 22,262,005
<CGS> 0
<TOTAL-COSTS> 13,977,559
<OTHER-EXPENSES> 19,038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,290,163
<INCOME-PRETAX> 4,975,245
<INCOME-TAX> 1,947,843
<INCOME-CONTINUING> 3,027,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,027,402
<EPS-PRIMARY> 16.85
<EPS-DILUTED> 16.84
</TABLE>
