SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarter period ended: September 30, 2003
------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
----------- -----------
Commission file number 000-13754
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MAXUS REALTY TRUST, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
Missouri 43-1339136
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
104 Armour, North Kansas City, Missouri 64116
---------------------------------------------
(Address of principal executive offices)
(816)303-4500
-------------
(Trust's telephone number, including area code)
State the number of shares outstanding of the Trust's sole class of common
equity, $1.00 par value common stock, as of November 1, 2003: 1,238,737.
1
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 9
ITEM 3. CONTROLS AND PROCEDURES 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXUS REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
(Unaudited)
ASSETS:
Investment property
Land $ 2,174,000 2,174,000
Buildings and improvements 30,833,000 30,698,000
Personal property 1,977,000 1,795,000
------------ ------------
34,984,000 34,667,000
Less accumulated depreciation (5,267,000) (4,269,000)
------------ ------------
Total investment property, net 29,717,000 30,398,000
Cash 3,340,000 85,000
Escrows and reserves 870,000 885,000
Accounts receivable 376,000 388,000
Prepaid expenses and other assets 240,000 224,000
Deferred expenses, less accumulated amortization 469,000 525,000
------------ ------------
Total 35,012,000 32,505,000
Assets of property held for sale - discontinued operations --- 4,978,000
------------ ------------
Total assets $ 35,012,000 37,483,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 23,295,000 23,510,000
Accounts payable, prepaid rent, and accrued expenses 675,000 530,000
Real estate taxes payable 390,000 222,000
Refundable tenant deposits 132,000 160,000
------------ ------------
Total 24,492,000 24,422,000
Liabilities of property held for sale - discontinued operations 9,000 1,556,000
------------ ------------
Total liabilities 24,501,000 25,978,000
============ ============
Shareholders' equity:
Common stock, $1 par value: authorized 5,000,000 shares
1,239,000 and 1,230,000 shares issued and outstanding
at September 30, 2003 and December 31, 2002, respectively 1,239,000 1,230,000
Additional paid-in-capital 17,279,000 17,194,000
Distributions in excess of accumulated earnings (8,007,000) (6,919,000)
------------ ------------
Total shareholders' equity 10,511,000 11,505,000
------------ ------------
$ 35,012,000 37,483,000
============ ============
See accompanying notes to consolidated financial statements.
3
MAXUS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
Income
Revenues:
Rental $ 1,309,000 1,370,000 4,095,000 4,134,000
Other 160,000 142,000 413,000 372,000
----------- ----------- ----------- -----------
Total revenues 1,469,000 1,512,000 4,508,000 4,506,000
----------- ----------- ----------- -----------
Expenses:
Depreciation and amortization 352,000 356,000 1,055,000 1,050,000
Repairs and maintenance, including common
area maintenance 191,000 181,000 509,000 578,000
Real estate taxes 109,000 100,000 326,000 306,000
General and administrative 68,000 75,000 221,000 222,000
Utilities 103,000 87,000 280,000 257,000
Property management fees - related parties 71,000 64,000 210,000 213,000
Other operating expenses 309,000 247,000 881,000 699,000
----------- ----------- ----------- -----------
Total operating expenses 1,203,000 1,110,000 3,482,000 3,325,000
----------- ----------- ----------- -----------
Net operating income 266,000 402,000 1,026,000 1,181,000
----------- ----------- ----------- -----------
Interest
Interest income (14,000) (2,000) (17,000) (8,000)
Interest expense 399,000 405,000 1,197,000 1,205,000
----------- ----------- ----------- -----------
Loss from continuing operations (119,000) (1,000) (154,000) (16,000)
Income (loss) from discontinued operations
including loss on disposal of $26,000 in 2003 (7,000) 58,000 (9,000) 188,000
----------- ----------- ----------- -----------
Net income (loss) $ (126,000) 57,000 (163,000) 172,000
=========== =========== =========== ===========
Per share data (basic and diluted):
Loss from continuing operations $ (.09) --- (.12) (.01)
Income (loss) from discontinued operations (.01) .05 (.01) .15
----------- ----------- ----------- -----------
Total $ (.10) .05 (.13) .14
=========== =========== =========== ===========
Distributions paid in current year $ .25 .25 .75 .75
=========== =========== =========== ===========
Weighted average shares outstanding 1,236,000 1,224,000 1,233,000 1,222,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
MAXUS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
Sept.30, Sept.30,
2003 2002
Cash flows from operating activities:
Net income (loss) $ (163,000) 172,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities of continuing operations:
(Income) loss from discontinued operations: 9,000 (188,000)
Depreciation and amortization 1,055,000 1,050,000
Changes in accounts affecting operations:
Accounts receivable 12,000 (19,000)
Prepaid expenses and other assets (16,000) 59,000
Escrows and reserves 15,000 (427,000)
Accounts payable and other liabilities 285,000 168,000
----------- -----------
Net cash provided by operating activities of continuing operations 1,197,000 815,000
Net cash provided by operating activities of discontinued operations 20,000 455,000
----------- -----------
Net cash provided by operating activities 1,217,000 1,270,000
Cash flows from investing activities:
Capital expenditures (318,000) (466,000)
----------- -----------
Net cash used in investing activities of continuing operations (318,000) (466,000)
Net cash provided by (used in) investing activities
of discontinued operations 4,787,000 (85,000)
----------- -----------
Net cash provided by (used in) investing activities 4,469,000 (551,000)
Cash flows from financing activities:
Principal payments on mortgage notes payable (215,000) (204,000)
Issuance of common stock 94,000 86,000
Distributions paid to shareholders (925,000) (916,000)
----------- -----------
Net cash used in financing activities of continuing operations (1,046,000) (1,034,000)
Net cash provided by (used in) financing activities
of discontinued operations (1,385,000) 235,000
----------- -----------
Net cash used in financing activities (2,431,000) (799,000)
Net increase (decrease) in cash 3,255,000 (80,000)
Cash, beginning of period 85,000 200,000
----------- -----------
Cash, end of period $ 3,340,000 120,000
=========== ===========
Supplemental disclosure of cash flow information -
cash paid during the Nine-month period for interest (includes Atrium) $ 1,220,000 1,251,000
=========== ===========
See accompanying notes to consolidated financial statements
5
MAXUS REALTY TRUST, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
(UNAUDITED)
(1) Summary of Significant Accounting Policies
Refer to the financial statements of Maxus Realty Trust, Inc. (the "Trust" or
"Registrant") for the year ended December 31, 2002, which are contained in the
Trust's Annual Report on Form 10-KSB, for a description of the accounting
policies, which have been continued without change. Also, refer to the footnotes
to those statements for additional details of the Trust's financial condition.
The details in those notes have not changed except as a result of normal
transactions in the interim. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at September 30,
2003 and for all periods presented have been made. The results for the
nine-month period ended September 30, 2003 are not necessarily indicative of the
results which may be expected for the entire year. The historical financial
statements as of December 31, 2002 and for the three and nine month periods
ended September 30, 2002 have been reclassified to present discontinued
operations.
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
(2) Segment Reporting
The Trust has two reportable operating segments--apartments and commercial
buildings. The Trust's management evaluates the performance of each segment
based on profit or loss from operations before allocation of general and
administrative expenses, unusual and extraordinary items, and interest. The
accounting policies of the segments are the same as those of the Trust.
Operations at the Atrium at Alpha Business Center (the "Atrium") are presented
separately in Note 3 below. The Atrium was classified as held for sale beginning
May 14, 2003 and was previously included in the commercial segment. The Atrium
was sold May 29, 2003.
Following is information for each segment for the three months ended September
30, 2003 and 2002:
Total
excluding
Commercial Corporate discontinued
September 30, 2003 Apartments buildings* and other operations
- ------------------ ---------- ---------- --------- ----------
Total revenues $ 1,235,000 234,000 --- 1,469,000
Income (loss) from continuing operations (100,000) 36,000 (55,000) (119,000)
Capital expenditures 139,000 --- --- 139,000
Depreciation and amortization 291,000 61,000 --- 352,000
Interest expense 306,000 93,000 --- 399,000
September 30, 2002
- ------------------
Total revenues $ 1,266,000 246,000 --- 1,512,000
Income (loss) from continuing operations 20,000 54,000 (75,000) (1,000)
Capital expenditures 177,000 --- --- 177,000
Depreciation and amortization 294,000 62,000 --- 356,000
Interest expense 312,000 93,000 --- 405,000
* Commercial buildings excludes discontinued operations at the Atrium.
6
(2) Segment Reporting - Continued
Following is information for each segment for the nine months ended September
30, 2003 and 2002:
Total
excluding
Commercial Corporate discontinued
September 30, 2003 Apartments buildings* and other operations
- ------------------ ---------- ---------- --------- ----------
Total revenues $ 3,788,000 720,000 --- 4,508,000
Income (loss) from continuing operations (68,000) 122,000 (208,000) (154,000)
Capital expenditures 318,000 --- --- 318,000
Depreciation and amortization 873,000 182,000 --- 1,055,000
Interest expense 921,000 276,000 --- 1,197,000
Assets 26,561,000 5,123,000 3,328,000 35,012,000
September 30, 2002
- ------------------
Total revenues $ 3,789,000 717,000 --- 4,506,000
Income (loss) from continuing operations 81,000 125,000 (222,000) (16,000)
Capital expenditures 466,000 --- --- 466,000
Depreciation and amortization 870,000 180,000 --- 1,050,000
Interest expense 927,000 278,000 --- 1,205,000
Assets 27,497,000 5,381,000 96,000 32,974,000
* Commercial buildings excludes discontinued operations at the Atrium.
(3) Property Disposition
The Trust follows the provisions of Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed of, ("SFAS 121") and establishes a single accounting model, based on
the framework established in SFAS 121, for long-lived assets to be disposed of
by sale. The Trust has reclassified its Consolidated Balance Sheet as of
December 31, 2002 and its Consolidated Statements of Operations for the three
and nine months ended September 30, 2002 and Consolidated Statement of Cash
Flows for the nine months ended September 30, 2002 in compliance with SFAS 144
to reflect discontinued operations of the Atrium, which was classified as held
for sale on May 14, 2003 and was sold on May 29, 2003. This reclassification has
no impact on the Trust's net income or net income per share. This property was
previously included in the commercial segment.
On May 29, 2003, the Trust sold the Atrium to an unrelated third party. The sale
resulted in a net book loss of $26,000 and provided approximately $3,500,000 in
net sale proceeds, after the payoff of the related line of credit secured by the
Atrium. The table below presents the pro forma results of operations of the
Trust as if the sale of investment property had occurred at January 1, 2002
(unaudited):
Three Months Ended: Nine Months Ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
Total revenue $ 1,469,000 1,512,000 4,508,000 4,506,000
Depreciation and amortization 352,000 356,000 1,055,000 1,050,000
Repairs and maintenance, including
common area maintenance 191,000 181,000 509,000 578,000
Real estate taxes 109,000 100,000 326,000 306,000
General and administrative 68,000 75,000 221,000 222,000
7
Utilities 103,000 87,000 280,000 257,000
Property management fees - related parties 71,000 64,000 210,000 213,000
Other 309,000 247,000 881,000 699,000
---------- ---------- ---------- ----------
Total expenses 1,203,000 1,110,000 3,482,000 3,325,000
---------- ---------- ---------- ----------
Net operating income 266,000 402,000 1,026,000 1,181,000
---------- ---------- ---------- ----------
Interest
Interest income (14,000) (2,000) (17,000) (8,000)
Interest expense 399,000 405,000 1,197,000 1,205,000
---------- ---------- ---------- ----------
Net loss $ (119,000) (1,000) (154,000) (16,000)
========== ========== ========== ==========
Net loss per share (basic and diluted) $ (.09) --- (.12) (.01)
========== ========== ========== ==========
This pro forma information does not purport to be indicative of the results that
actually would have been obtained if the transactions had actually occurred at
the beginning of 2002, and is not intended to be a projection of future results.
Condensed financial information for the rental property classified as held for
sale is below.
DISCONTINUED OPERATIONS
(ATRIUM)
BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2003 2002
ASSETS:
Investment property
Land $ --- 823,000
Buildings and improvements --- 8,597,000
---------- ----------
--- 9,420,000
Less accumulated depreciation --- (4,538,000)
---------- ----------
Total investment property --- 4,882,000
Cash --- 38,000
Accounts receivable --- 32,000
Prepaid expenses and other assets --- 1,000
Deferred expenses, less accumulated amortization --- 25,000
---------- ----------
Total assets $ --- 4,978,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ --- 1,385,000
Accounts payable, prepaid rent, and accrued expenses 9,000 171,000
---------- ----------
Total liabilities 9,000 1,556,000
---------- ----------
Shareholders' equity - accumulated earnings (9,000) 3,422,000
---------- ----------
Total liabilities and shareholder's equity: $ --- 4,978,000
========== ==========
8
DISCONTINUED OPERATIONS
ATRIUM
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended: Nine Months Ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
Total revenue $ --- 311,000 478,000 971,000
Depreciation and amortization --- 81,000 117,000 234,000
Repairs and maintenance, including
common area maintenance 7,000 56,000 121,000 184,000
Real estate taxes --- 56,000 92,000 167,000
Property management fees --- (4,000) 18,000 25,000
Utilities --- 30,000 56,000 87,000
Other --- 17,000 33,000 41,000
---------- ---------- ---------- ----------
Total expenses 7,000 236,000 437,000 738,000
---------- ---------- ---------- ---------
Net operating income (7,000) 75,000 41,000 233,000
---------- ---------- ---------- ---------
Interest expense --- 17,000 24,000 45,000
---------- ---------- ---------- ----------
Net income (loss) before loss on sale (7,000) 58,000 17,000 188,000
---------- ---------- ---------- ----------
Loss on sale --- --- (26,000) ---
---------- ---------- ---------- ----------
Net income (loss) $ (7,000) 58,000 (9,000) 188,000
========== ========== ========== ==========
Net income (loss) per share $ (.01) 0.05 (.01) 0.15
========== ========== ========== ==========
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This section includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements, other than statements of historical facts, included in
this section and located elsewhere in this Form 10-QSB regarding the prospects
of our industry and our prospects, plans, financial position and business
strategy may constitute forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "intend," "estimate," "anticipate," "plan,"
"foresee," "believe" or "continue" or the negatives of these terms or variations
of them or similar terminology. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we can give no
assurance that these expectations will prove to have been correct. All such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those contemplated by the
relevant forward-looking statement. Important factors that could cause actual
results to differ materially from our expectations include, among others: (i)
the ability to retain key tenants, (ii) general economic, business, market and
social conditions, (iii) trends in the real estate investment market, (iv)
projected leasing and sales, (v) competition, (vi) inflation and (vii) future
prospects for the Trust. Readers are urged to consider these factors carefully
in evaluating the forward-looking statements. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements. The
forward-looking statements included herein are made only as of the date of this
Form 10-QSB, and we do not undertake any obligation to release publicly any
revisions to such forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
9
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect amounts reported in the accompanying Consolidated
Financial Statements. The most significant assumptions and estimates relate to
revenue recognition, depreciable lives of investment property, capital
expenditures, properties held for sale, and the valuation of investment
property. Application of these assumptions requires the exercise of judgment as
to future uncertainties and, as a result, actual results could differ from these
estimates.
Revenue Recognition
Lease agreements are accounted for as operating leases, and rentals from such
leases are reported as revenues ratably over the terms of the leases. The
recognition of scheduled rent increases on a straight-line basis results in
recognition of a receivable. Such receivable was $386,000 at September 30, 2003.
The Trust believes this receivable will be collectable over the life of the
lease. If the lease was terminated, the receivable could become uncollectable,
since the receivable represents future cash earnings, the Trust believes the
risk is immaterial.
Investment Property Useful Lives
The Trust is required to make subjective assessments as to the useful lives of
its properties for the purposes of determining the amount of depreciation to
reflect on an annual basis with respect to those properties. These assessments
have a direct impact on the Trust's net income.
Buildings and improvements are depreciated over their estimated useful lives of
27.5 to 35 years on a straight-line basis. Tenant improvements are depreciated
over the term of the lease on a straight-line basis. Personal property is
depreciated over its estimated useful life ranging from 5 to 7 years using the
straight-line method.
Capital Expenditures
For reporting purposes, the Trust capitalizes all carpet, flooring, blinds,
appliance and HVAC replacements. The Trust expenses all other expenditures that
total less than $10,000. Expenditures over $10,000 and expenditures related to
contracts over $10,000 are evaluated individually for capitalization. Repairs
and maintenance are charged to expense as incurred. Additions and betterments
are capitalized.
Classification of Properties
The Trust is required to make subjective assessments as to whether a property
should be classified as "Held for Sale" under the provisions of SFAS 144. SFAS
144 contains certain criteria that must be met in order for a property to be
classified as held for sale, including: management commits to a plan to sell the
asset; the asset is available for immediate sale in its present condition; an
active program to locate a buyer has been initiated; the sale of the asset is
probable and transfer of the asset is expected to qualify for recognition as a
sale within one year; the asset is being actively marketed for sale at a price
that is reasonable in relation to its current fair value; and actions required
to complete the plan indicate that it is unlikely that significant changes to
the plan will be made or that the plan will be withdrawn.
Management believes that a property should not be classified as "Held for Sale"
until a contract for the sale of a property has been executed, all inspection
periods have passed and any earnest deposit becomes non-refundable and the only
pending item to complete the sale is the passage of time. Until this point,
management believes that there may be actions required to complete the plan that
may result in changes to or termination of the plan, and therefore the property
should not be classified as "Held for Sale" under SFAS 144.
The classification of a property as held for sale can have a significant impact,
in certain situations in determining whether a property's carrying value is
impaired under SFAS 144.
10
Impairment of Investment Property Values
The Trust is required to make subjective assessments as to whether there are
impairments in the value of its investment properties. Management's estimates of
impairment in the value of investment properties have a direct impact on the
Trust's net income.
The Trust follows the provisions of SFAS No. 144. The Trust assesses the
carrying value of its long-lived asset whenever events or changes in
circumstances indicate that the carrying amount of the underlying asset may not
be recoverable. Certain factors that may occur and indicate that an impairment
may exist include, but are not limited to: significant underperformance relative
to projected future operating results; significant changes in the manner of the
use of the asset; and significant adverse industry or market economic trends. If
an indicator of possible impairment exists, a property is evaluated for
impairment by a comparison of the carrying amount of a property to the estimated
undiscounted future cash flows expected to be generated by the property. If the
carrying amount of a property exceeds its estimated future cash flows on an
undiscounted basis, an impairment charge is recognized by the amount by which
the carrying amount of the property exceeds the fair value of the property.
Management estimates fair value of its properties based on projected discounted
cash flows using a discount rate determined by management to be commensurate
with the risk inherent in the Trust.
DESCRIPTION OF BUSINESS
The Trust invests in income-producing real properties, primarily apartments and
commercial buildings. As of September 30, 2003 the Trust's portfolio is
comprised of:
SQUARE
FEET/
PROPERTY # UNITS TYPE LOCATION PURCHASE DATE
ACI Worldwide, Inc. (formerly 70,000 Single Tenant Omaha, NE January, 1986
Applied Communications, Inc.) Office
("ACI")
Forest Park Apartments 110 Apartments Kansas City, MO August, 2000
("Forest Park")
(f.k.a. North Winn)
King's Court Apartments 82 Apartments Olathe, KS August, 2001
("King's Court")
Chalet Apartments - I and II 234 Apartments Topeka, KS September, 2001
("Chalet")
The Landings Apartments 154 Apartments Little Rock, AR September, 2001
(the "Landings")
Barrington Hills Apartments 232 Apartments Little Rock, AR November, 2001
("Barrington Hills")
ACI, Forest Park, the Landings, Chalet and Barrington Hills are owned by the
following limited liability companies that are directly owned by the Registrant:
ACI Financing, L.L.C., North Winn Acquisition, L.L.C., Landings Acquisition,
L.L.C., Chalet I Acquisition, L.L.C., Chalet II Acquisition, L.L.C. and
Barrington Hills Acquisition, L.L.C.
Maxus Properties, Inc., an affiliate of the Registrant, provides property
management services for each of the Trust's real properties.
11
LIQUIDITY AND CAPITAL RESOURCES
Cash and escrows and reserves as of September 30, 2003 were $4,210,000, an
increase of $3,240,000 from the balance of $970,000 at December 31, 2002.
Escrows and reserves includes $870,000 at September 30, 2003 and $885,000 at
December 31, 2002, held in escrow and reserves by various lenders, which are not
readily available for current disbursement. The primary reason for the increase
in cash was the sale of the Atrium, which generated approximately $3,500,000 in
net cash proceeds after the payoff of the related line of credit. Net cash
provided by operating activities of continuing operations for the nine-month
period ended September 30, 2003 was $1,197,000 compared to $815,000 for the
nine-month period ended September 30, 2002. The increase was primarily due to
funding of escrow balances of $427,000 in 2002. Net cash used in investing
activities of continuing operations was $318,000 and $466,000 for the periods
ended September 30, 2003 and 2002, respectively, and consisted solely of capital
expenditures. Capital expenditures in 2003 consisted primarily of $161,000 for
replacements of carpet, flooring, HVAC, appliances and blinds, along with
various other property replacements, upgrades and tenant improvements of
$157,000 with $43,000 at North Winn, $45,000 at King's Court, and $59,000 at The
Landings representing the largest expenditures. Net cash used in financing
activities of continuing operations was $1,046,000 in 2003 and $1,034,000 in
2002, including distributions paid totaling $925,000 in 2003 and $916,000 in
2002.
Net cash provided by operations of discontinued operations was $20,000 in 2003
and $455,000 in 2002. Net cash provided by investing activities of discontinued
operations was $4,787,000 in 2003 and net cash used was $85,000 in 2002. The
cash provided by investing activities in 2003 relates primarily to cash provided
by the sale proceeds of the Atrium (net of costs of the sale) offset by capital
expenditures of $74,000 at the Atrium. Net cash used in financing activities of
discontinued operations was $1,385,000, which was used to pay off the line of
credit secured by the Atrium after its sale in May 2003. In 2002, $235,000 was
provided by financing operations of discontinued operations, which represents an
increase in the line of credit in 2002.
Contractual Obligations and Commercial Commitments
Balance at Interest Due
September 30, 2003 Rate
ACI 4,178,000 8.63% August 1, 2010
Forest Park 1,902,000 4.91% September 1, 2007
King's Court 2,209,000 5.69% November 1, 2026
Chalet I 4,000,000 6.59% October 1, 2008
Chalet II 1,510,000 6.535% October 1, 2008
The Landings 3,738,000 7.66% September 1, 2007
Barrington Hills 5,758,000 6.035% July 1, 2029
----------
Total $ 23,295,000
==========
Reference is also made to Note 2 of Notes to Financial Statements incorporated
by reference in the Trust's Annual Report on Form 10-KSB for a description of
mortgage indebtedness secured by the Trust's real property investments.
Management believes the Trust's current cash position and the properties'
ability to provide operating cash flows should enable the Trust to fund
anticipated operating and capital expenditures in 2003. Tenant improvement costs
at the Atrium were $74,000 in 2003. Projected capital improvement expenditures
of approximately $215,000 were planned at Barrington Hills in 2003, primarily
for painting the complex, with the majority of the expenditures expected to be
reimbursed from reserves held by lender. Management has determined that the
painting will not be contracted in 2003, therefore projected capital improvement
expenditures at Barrington are now less than $30,000. There were also $59,000 of
landscaping capital improvements at the Landings. Except for the items mentioned
12
management does not anticipate any material capital improvement operating
expenditures at any one property in 2003. However, the Trust will continue to
evaluate opportunities for the acquisition of investment properties and may
incur material capital expenditures in connection with these acquisition
opportunities. The Trust's ability to acquire investment properties and to incur
material capital expenditures if desirable opportunities arise will be dependent
on the Trust's ability to obtain suitable financing on reasonable terms to fund
the acquisitions.
Management does not believe the risk of changes in operations that would
adversely impact cash flow from operating activities is a material risk. As
leases expire, they are expected to be replaced or renewed in the normal course
of business over a reasonable period of time.
The Board of Trustees voted to approve the listing of the Atrium and the ACI
building, and subsequently a listing agreement was entered into for each
property. The Atrium was sold May 29, 2003 to an unrelated third party. The sale
price was $5,117,500 and net proceeds, after the payoff of the Atrium's
$1,385,000 line of credit and payment of related closing costs, were
approximately $3,500,000. The current market may not support the listing price
for the ACI building, and no guarantee can be made as to whether or not the sale
of the ACI building will occur in the near future.
Insurance
Industry wide, insurance rates continue to rise. In 2002, the Trust experienced
rate increases upon the renewal of insurance policies on its properties of
approximately 30% or $44,000 on an annualized basis due to a continuing
tightening of risk underwriting. Insurance rates in 2003 increased 33% or
$59,000 on an annualized basis. Management believes the Trust will be able to
absorb future increases in insurance rates and eventually expects to pass these
expenses on to tenants through increased rents.
RESULTS OF OPERATIONS
The results of operations for the Trust's properties for the three and nine
months ended September 30, 2003 and 2002 are detailed in the schedule below.
Funds from Operations
The white paper on Funds from Operations approved by the board of governors of
NAREIT defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from sales of property, plus
property related depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect Funds from Operations
on the same basis. In 1999, NAREIT clarified the definition of Funds from
Operations to include non-recurring events, except for those that are defined as
"extraordinary items" under GAAP and gains and losses from sales of depreciable
operating property. In 2002, NAREIT clarified that Funds from Operations related
to assets held for sale, sold or otherwise transferred and included in results
of discontinued operations should continue to be included in consolidated Funds
from Operations.
The Trust computes Funds from Operations in accordance with the guidelines
established by the white paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs, and,
accordingly, may not be comparable to such other REITs. Funds from Operations do
not represent amounts available for management's discretionary use because of
needed capital replacement or expansion, debt service obligations, distributions
or other commitments and uncertainties. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Trust's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Trust's liquidity, nor is it indicative of funds available to fund the Trust's
cash needs including its ability to make distributions. The Trust believes Funds
from Operations is helpful to investors as a measure of the performance of the
Trust because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors with an understanding
of the ability of the Trust to incur and service debt and make capital
expenditures. In the table below, revenue, expenses, net income and property
related depreciation and amortization were determined in accordance with GAAP.
The addition of property related depreciation and amortization to and the
exclusion of the loss on sale from net income results in Funds from Operations,
which is not determined in accordance with GAAP.
13
Funds From Operations
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
Net income (loss) (126,000) 57,000 (163,000) 172,000
Property related depreciation
and amortization (1) 341,000 427,000 1,139,000 1,201,000
Loss on sale --- --- 26,000 ---
--------- --------- --------- ---------
Funds from operations $ 215,000 484,000 1,002,000 1,373,000
========= ========= ========= =========
(1) Depreciation and amortization of the Atrium is included in this amount.
Comparison of Consolidated Results From Continuing Operations
For the three and nine month periods ended September 30, 2003 the Trust's
consolidated revenues from continuing operations were $1,469,000 and $4,508,000,
respectively. Revenues decreased $43,000 (2.8%) and increased $2,000 for the
three and nine-month periods ended September 30, 2003 as compared to the same
periods ended September 30, 2002, respectively. Increases in income at The
Landings and Barrington Hills were offset by a decrease in revenue at Chalet,
causing revenue for the nine- month period to be consistent with the same time
period in 2002.
For the three and nine month periods ended September 30, 2003 the Trust's
consolidated operating expenses from continuing operations were $1,203,000 and
$3,482,000, respectively. Expenses increased $93,000 (8.4%) and $157,000 (4.7%)
for the three and nine-month periods ended September 30, 2003 as compared to the
same periods ended September 30, 2002. The increase in consolidated operating
expenses for the nine-month period is attributable to a $182,000 increase in
other operating expenses offset by a $69,000 decrease in repairs and maintenance
expense. The increase in other operating expenses was due primarily to increases
in insurance rates of $61,000, along with increased office and payroll expense
of $25,000 and increased leasing expenses of $28,000 (primarily at Chalet).
The net loss from continuing operations for the three and nine month periods
ended September 30, 2003 was ($119,000) or ($.09) per share and ($154,000) or
($.12) per share, respectively. The net loss for the three and nine month
periods ended September 30, 2002 was ($1,000) and ($16,000) or ($.01) per share,
respectively.
Cash and escrows and reserves as of September 30, 2003 were $4,210,000, an
increase of $3,240,000 from the balance of $970,000 at December 31, 2002.
Escrows and reserves includes $870,000 at September 30, 2003 and $885,000 at
December 31, 2002, held in escrow and reserves by various lenders, which are not
readily available for current disbursement. The primary reason for the increase
in cash was the sale of the Atrium, which generated approximately $3,500,000 in
net cash proceeds after the payoff of the related line of credit. Net cash
provided by operating activities of continuing operations for the nine-month
period ended September 30, 2003 was $1,197,000 compared to $815,000 for the
nine-month period ended September 30, 2002. The increase was primarily due to
funding of escrow balances of $427,000 in 2002. Net cash used in investing
activities of continuing operations was $318,000 and $466,000 for the periods
ended September 30, 2003 and 2002, respectively, and consisted solely of capital
expenditures. Capital expenditures in 2003 consisted primarily of $161,000 for
replacements of carpet, flooring, HVAC, appliances and blinds, along with
various other property replacements, upgrades and tenant improvements of
$157,000 with $43,000 at North Winn, $45,000 at King's Court, and $59,000 at The
Landings representing the largest expenditures. Net cash used in financing
activities of continuing operations was $1,045,000 in 2003 and $1,034,000 in
2002, including distributions paid totaling $925,000 in 2003 and $916,000 in
2002.
Net cash provided by operations of discontinued operations was $20,000 in 2003
and $455,000 in 2002. Net cash provided by investing activities of discontinued
operations was $4,787,000 in 2003 and net cash used was $85,000 in 2002. The
cash provided by investing activities in 2003 relates primarily to cash provided
by the sale proceeds of the Atrium (net of costs of the sale) offset by capital
expenditures of $74,000 at the Atrium. Net cash used in financing activities of
discontinued operations was $1,385,000, which was used to pay off the line of
credit secured by the Atrium after its sale in May 2003. In 2002, $235,000 was
provided by financing operations of discontinued operations, which represents an
increase in the line of credit in 2002.
14
Comparison of Results from Continuing Operations by Segment
For the three and nine month periods ended September 30, 2003, revenues for the
Trust's Commercial Building Segment (excluding the Atrium) decreased $12,000
(4.9%) and increased $3,000 (.4%) respectively as compared to the same time
periods last year. This increase in the revenue for the nine-month period is
primarily due to an increase in CAM reimbursement of $6,000 over prior year.
For both the three and nine month periods ended September 30, 2003, expenses for
the Commercial Buildings Segment (excluding the Atrium) increased $6,000.
For the three and nine month periods ended September 30, 2003, revenues for the
Apartments Segment decreased $31,000 (2.4%) and $1,000, respectively from the
periods ended September 30, 2002.
For the three and nine month periods ended September 30, 2003, expenses for the
Apartments Segment increased $89,000 (7.1%) and $148,000 (4.0%), respectively,
primarily as a result of increased other operating expenses of $171,000, of
which $61,000 represents an increase in insurance expense.
Comparison of Results of Discontinued Operations
For the three and nine month periods ended September 30, 2003, revenue decreased
$311,000 and $493,000 respectively as compared to the same periods last year.
This decrease is primarily due to 2003 representing five months of operations as
compared to nine in 2002, combined with a decrease in 2003 CAM reimbursement
compared to 2002.
For the three and nine month periods ended September 30, 2003, expenses
decreased $229,000 and $301,000 respectively as compared to the same periods
last year. This decrease is due primarily to 2003 representing only five months
of operations, compared to nine in 2002.
Net cash provided by operations of discontinued operations was $20,000 in 2003
and $455,000 in 2002. Net cash provided by investing activities of discontinued
operations was $4,787,000 in 2003 and net cash used was $85,000 in 2002. The
cash provided by investing activities in 2003 relates primarily to cash provided
by the sale proceeds of the Atrium (net of costs of the sale) offset by capital
expenditures of $74,000 at the Atrium. Net cash used in financing activities of
discontinued operations was $1,385,000, which was used to pay off the line of
credit secured by the Atrium after its sale in May 2003. In 2002, $235,000 was
provided by financing operations of discontinued operations, which represents an
increase in the line of credit in 2002.
Occupancy
The occupancy levels at September 30 were as follows:
OCCUPANCY LEVELS AT SEPTEMBER 30,
2003 2002
The Atrium N/A 76%
ACI 100% 100%
Forest Park 88% 95%
King's Court 96% 93%
Chalet 93% 99%
The Landings 92% 95%
Barrington Hills 91% 94%
The Atrium was sold May 29, 2003.
The ACI building has a single tenant occupying 100% of the building. The lease
expires in August 2008. Recently, the parent company of the single tenant
restated its consolidated financial statements. In connection with the
restatement of its financial statements, the Securities and Exchange Commission
has issued a formal order of private investigation and class action lawsuits
have been publicly announced against the parent company and certain of its
15
former and present officers and directors. The lawsuits allege violations of
securities laws on the grounds that certain of the parent company's Exchange Act
reports and press releases contained untrue statements of material facts, or
omitted to state facts necessary to make the statements therein not misleading.
Derivative action lawsuits have also been filed on behalf of the parent company
against certain named officers and directors of the parent company. The parent
company has publicly reported that if it were to lose any of these lawsuits or
if they were not settled on favorable terms, the judgment or settlement may have
a material adverse effect on the parent company's consolidated financial
position, results of operations and cash flows. The Trust is monitoring this
litigation closely, but is unable at this time to determine what impact, if any,
the investigation and these lawsuits will have on the tenant's ability to meet
its payment obligations under its lease with the Trust. The balance of the
receivable due from ACI to the Trust was $386,000 at September 30, 2003,
comprised of recognition of scheduled rent increases on a straight-line basis.
At Forest Park, occupancy of 88% on September 30, 2003 reflects the decline in
market conditions in the north Kansas City market with heavy concessions and
rent reductions. Average occupancy in this sub market is 90%. King's Court has
maintained above market occupancy during the summer leasing season by offering
discounted rents on select units and a lowered deposit. Occupancy was 96% on
September 30, 2003. The management anticipates a decrease in the occupancy
during the next few months due to the number of units on notice and the lack of
traffic to fill vacancies in the Olathe market. The Olathe, Kansas area market
occupancy rates were averaging 88% according to the Apartment Guide with most
properties lowering rents and increasing concessions for new move-ins to fill
vacant units before winter. Chalet Apartments in Topeka, Kansas ended the month
of September with an occupancy of 93%, which is slightly better than the current
market. The concessions are still strong in Topeka and rental rates have dropped
overall. The major source of move outs continues to be home purchases. The
Landings in Little Rock experienced a stable third quarter, with an average
occupancy of 92%. The concessions in this market are minimal compared to other
areas of the country. Barrington Hills, also in Little Rock, Arkansas remained
steady at the lower 90's in occupancy to end the third quarter. This reflects
the Little Rock market at this time. The occupancy in the area has dropped,
however heavy concessions are not yet being used.
MARKET RISK
The Trust has considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Trust had
no holdings of derivative financial or commodity instruments at September 30,
2003.
The Trust does not believe that it has any material exposure to interest rate
risk. The debt on the ACI building is at a fixed rated of 8.63% and matures in
2010; the debt on King's Court is at a fixed rate of 5.69% and matures in 2026;
the debt on the Landings is at a fixed rate of 7.66% and matures in 2007; the
debt on Chalet is at fixed rates of 6.59% and 6.535% and matures in 2008; and
the debt on Barrington Hills is at a fixed rate of 6.035%, is repriced in 2009
and matures in 2029. The debt on Forest Park is variable. The current interest
rate on Forest Park is 4.91%. The debt on Forest Park matures in 2007. A 100
basis point increase in the variable rate debt on an annual basis would impact
net income by approximately $19,000.
INFLATION
The effects of inflation did not have a material impact upon the Trust's
operations in the period ended September 30, 2003, or in fiscal 2002.
OFF-BALANCE SHEET ARRANGEMENTS
The Partnership does not have any "off-balance sheet arrangements" as defined in
Item 303 (c) of Regulations S-B promulgated under the Securities Exchange Act of
1934, as amended.
16
ITEM 3: CONTROLS AND PROCEDURES
An evaluation of the Trust's disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")) as
of September 30, 2003, was carried out under the supervision and with the
participation of the Trust's Chief Executive Officer, Chief Financial Officer
and several other members of the Trust's senior management. The Trust's Chief
Executive Officer and Chief Financial Officer concluded that the Trust's
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Trust in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to the Trust's management (including the Chief Executive Officer
and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within time periods specified in the SEC's rules and
forms. There have been no changes in the Trust's internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred
during the quarter ended September 30, 2003, that have materially affected, or
are reasonably likely to materially affect, the Trust's internal control over
financial reporting.
The Trust intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material financial and non-financial information concerning the
Trust's business. While the Trust believes the present design of its disclosure
controls and procedures is effective to achieve its goal, future events
affecting its business may cause the Trust to modify its disclosure controls and
procedures.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On November 10, 2003, the Board of Trustees of the Trust declared a
cash dividend of $0.25 per share payable to the holders of record on
November 30, 2003 of the Trust's $1.00 par value, common stock. The
Board anticipates that the dividend will be paid on December 22,
2003. The Trust's Board of Trustees intends, subject to continued
performance and availability of sufficient funds, to declare a $.25
per share cash dividend each quarter, at least in the near future.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibits Index on Page 20
(b) Reports on Form 8-K
On August 12, 2003, the Registrant filed an amendment to Item 7
of its Form 8-K filed on June 2, 2003 to include the required
financial statements and pro forma information relating to the
sale of the Atrium at Alpha Business Center, an office building
located in Bloomington, MN.
18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
there unto duly authorized.
MAXUS REALTY TRUST, INC.
Date: November 10, 2003 By: /s/ Danley K. Sheldon
---------------------
Danley K. Sheldon
President and Chief Executive Officer
Trustee
Date: November 10, 2003 By: /s/ John W. Alvey
---------------------
John W. Alvey
Vice President
Chief Financial and Accounting Officer
19
EXHIBIT INDEX
Exhibit
Number Description
3.1 Articles of Incorporation dated June 12, 1984, as amended, are
incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000, as filed pursuant to Rule 13a-13 under the Securities
Exchange Act of 1934 (File No. 000-13754).
3.2 Bylaws of the Registrant, as amended, are incorporated by
reference to Exhibit 3.2, to the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2003,
as filed pursuant to Rule 13a-13 under the Securities
Exchange Act of 1934 (File No. 0000-13754).
31.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
20