UNITED STATES
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: June 30, 2004
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___ 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
-------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of the Trust's sole class of common
equity, $1.00 par value common stock, as of August 10, 2004: 1,289,129.
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 11
ITEM 3. CONTROLS AND PROCEDURES 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 22
EXHIBIT INDEX 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXUS REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
(Unaudited) ------
-----------
ASSETS:
Investment property
Land $ 2,335,000 2,174,000
Buildings and improvements 32,684,000 30,891,000
Personal property 2,207,000 1,981,000
----------- -----------
37,226,000 35,046,000
Less accumulated depreciation (6,307,000) (5,601,000)
----------- -----------
Total investment property, net 30,919,000 29,445,000
Cash 2,971,000 863,000
Escrows and reserves 1,058,000 830,000
Accounts receivable 490,000 388,000
Prepaid expenses and other assets 208,000 158,000
Deferred expenses, less accumulated amortization 502,000 423,000
----------- -----------
Total assets $ 36,148,000 32,107,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 24,848,000 21,012,000
Accounts payable, prepaid rent, and accrued expenses 673,000 574,000
Real estate taxes payable 289,000 197,000
Refundable tenant deposits 152,000 130,000
----------- -----------
Total liabilities 25,962,000 21,913,000
=========== ===========
Minority interest 137,000 ---
Shareholders' equity:
Common stock, $1 par value: authorized 5,000,000 shares,
1,289,000 and 1,242,000 shares issued and outstanding
at June 30, 2004 and December 31, 2003, respectively 1,289,000 1,242,000
Additional paid-in-capital 17,830,000 17,309,000
Distributions in excess of accumulated earnings (9,070,000) (8,357,000)
----------- -----------
Total shareholders' equity 10,049,000 10,194,000
----------- -----------
$ 36,148,000 32,107,000
=========== ===========
See accompanying notes to consolidated financial statements.
3
MAXUS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30 June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Income
Revenues:
Rental 1,429,000 1,373,000 2,790,000 2,786,000
Other 186,000 143,000 356,000 253,000
----------- ----------- ----------- -----------
Total revenues 1,615,000 1,516,000 3,146,000 3,039,000
----------- ----------- ----------- -----------
Expenses:
Depreciation and amortization 383,000 351,000 742,000 703,000
Repairs and maintenance, including common
area maintenance 192,000 182,000 357,000 318,000
Real estate taxes 113,000 112,000 220,000 217,000
General and administrative 87,000 45,000 187,000 153,000
Utilities 95,000 87,000 200,000 177,000
Property management fees - related parties 76,000 70,000 147,000 139,000
Other operating expenses 340,000 306,000 634,000 572,000
----------- ----------- ----------- -----------
Total operating expenses 1,286,000 1,153,000 2,487,000 2,279,000
----------- ----------- ----------- -----------
Net operating income 329,000 363,000 659,000 760,000
----------- ----------- ----------- -----------
Interest income (4,000) (1,000) (7,000) (3,000)
Interest expense 394,000 399,000 756,000 798,000
----------- ----------- ----------- -----------
Loss before minority interest and
discontinued operations (61,000) (35,000) (90,000) (35,000)
Minority interest --- --- --- ---
Loss from continuing operations (61,000) (35,000) (90,000) (35,000)
Loss from discontinued operations,
including loss on disposal of $26,000 in 2003 --- (35,000) --- (2,000)
----------- ----------- ----------- -----------
Net loss $ (61,000) (70,000) (90,000) (37,000)
=========== =========== =========== ===========
Per share data (basic and diluted):
Loss from continuing operations $ (.05) (.03) (.07) (.03)
Loss from discontinued operations --- (.03) --- ---
----------- ----------- ----------- -----------
Total $ (.05) (.06) (.07) (.03)
=========== =========== =========== ===========
Distributions paid in current year $ .25 .25 .50 .50
=========== =========== =========== ===========
Weighted average shares outstanding 1,251,000 1,233,000 1,246,000 1,232,000
=========== =========== =========== ==========
See accompanying notes to consolidated financial statements.
4
MAXUS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, June 30,
2004 2003
Cash flows from operating activities:
Net loss $ (90,000) (37,000)
Adjustments to reconcile net loss to net
cash provided by operating activities of continuing operations:
Loss from discontinued operations: --- 2,000
Depreciation and amortization 742,000 703,000
Changes in accounts affecting operations:
Accounts receivable (102,000) (24,000)
Prepaid expenses and other assets (44,000) (16,000)
Escrows and reserves (219,000) ---
Accounts payable and other liabilities 144,000 121,000
----------- -----------
Net cash provided by operating activities of continuing operations 431,000 749,000
Net cash provided by operating activities of discontinued operations --- 20,000
----------- -----------
Net cash provided by operating activities 431,000 769,000
Cash flows from investing activities:
Acquisition of Terrace Apartments (193,000) ---
Capital expenditures (161,000) (179,000)
----------- -----------
Net cash used in investing activities of continuing operations (354,000) (179,000)
Net cash provided by investing activities
of discontinued operations --- 4,787,000
----------- -----------
Net cash (used in) provided by investing activities (354,000) 4,608,000
Cash flows from financing activities:
Principal payments on mortgage notes payable (164,000) (144,000)
Proceeds from mortgage notes payable 2,250,000 ---
Issuance of common stock 568,000 61,000
Distributions paid to shareholders (623,000) (615,000)
----------- -----------
Net cash provided by (used in) financing activities
of continuing operations 2,031,000 (698,000)
Net cash used in financing activities
of discontinued operations --- (1,385,000)
----------- -----------
Net cash provided by (used in) financing activities 2,031,000 (2,083,000)
Net increase in cash 2,108,000 3,294,000
Cash, beginning of period 863,000 85,000
----------- -----------
Cash, end of period $ 2,971,000 3,379,000
=========== ===========
Supplemental disclosure of cash flow information -
cash paid during the six-month period for interest (2003 includes Atrium) $ 750,000 820,000
=========== ===========
Items assumed in connection with acquition of investment properties
Investment property and other assets $ 2,048,000 ---
Mortgage notes payable and other liabilities $ 1,739,000 ---
See accompanying notes to consolidated financial statements
5
MAXUS REALTY TRUST, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
(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, 2003, 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 June 30, 2004
and for all periods presented have been made. The results for the six-month
period ended June 30, 2004 are not necessarily indicative of the results which
may be expected for the entire year. The historical financial statements as of
December 31, 2003 and for the three and six month periods ended June 30, 2003
have been reclassified to present discontinued operations, as further described
in Note 4.
(2) Organization
The Trust is now structured as what is commonly referred to as an umbrella
partnership REIT, or UPREIT, structure. To effect the UPREIT restructuring, the
Trust formed Maxus Operating Limited Partnership, a Delaware limited partnership
("MOLP"), to which the Trust contributed all of its assets, in exchange for a
99.999% partnership interest in MOLP and the assumption by MOLP of all of the
Trust's liabilities. The Trust now conducts and intends to continue to conduct
all of its activities through MOLP. MOLP is the sole member of limited liability
companies that own all of the Trust's properties. Maxus Realty GP, Inc., a
Delaware corporation that is wholly owned by the Trust, is the sole general
partner of MOLP and has a 0.001% interest in MOLP. As the sole general partner
of MOLP, Maxus Realty GP, Inc. generally has the exclusive power under the
partnership agreement to manage and conduct the business of MOLP, subject to
certain limited approval and voting rights of the limited partners.
Pursuant to MOLP's limited partnership agreement, MOLP may issue limited
partnership operating units (and corresponding limited partnership interests) in
return for cash or other property that is contributed to MOLP. Holders of MOLP
limited partnership operating units may redeem the units (and corresponding
limited partnership interests) in return for the issuance of the Trust's common
stock or cash, at the Trust's election, after a one (1) year holding period. At
June 30, 2004, the Trust owned approximately 99.09% of the limited partnership
interests in MOLP and minority holders of MOLP owned 11,455 limited partnership
operating units, or approximately .91% of MOLP. The 11,455 limited partnership
operating units were issued in connection with the acquisition of the Terrace
Apartments in April 2004.
(3) 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 June 30,
2004 and 2003:
6
Total
excluding
Commercial Corporate discontinued
June 30, 2004 Apartments buildings* and other operations
- ------------- ---------- ---------- --------- ----------
Total revenues $ 1,381,000 234,000 --- 1,615,000
Income (loss) from continuing operations (18,000) 42,000 (85,000) (61,000)
Capital expenditures 90,000 --- --- 90,000
Depreciation and amortization 323,000 60,000 --- 383,000
Interest expense 303,000 91,000 --- 394,000
June 30, 2003
- -------------
Total revenues $ 1,263,000 253,000 --- 1,516,000
Income (loss) from continuing operations (44,000) 55,000 (46,000) (35,000)
Capital expenditures 113,000 --- --- 113,000
Depreciation and amortization 291,000 60,000 --- 351,000
Interest expense 308,000 91,000 --- 399,000
* Commercial buildings excludes discontinued operations at the Atrium.
Following is information for each segment for the six months ended June 30, 2004
and 2003:
Total
excluding
Commercial Corporate discontinued
June 30, 2004 Apartments buildings* and other operations
- ------------- ---------- ---------- --------- ----------
Total revenues $ 2,678,000 468,000 --- 3,146,000
Income (loss) from continuing operations 12,000 80,000 (182,000) (90,000)
Capital expenditures 161,000 --- --- 161,000
Depreciation and amortization 621,000 121,000 --- 742,000
Interest expense 574,000 182,000 --- 756,000
Assets 28,152,000 4,929,000 3,067,000 36,148,000
June 30, 2003
- -------------
Total revenues $ 2,553,000 486,000 --- 3,039,000
Income (loss) from continuing operations 32,000 86,000 (153,000) (35,000)
Capital expenditures 179,000 --- --- 179,000
Depreciation and amortization 582,000 121,000 --- 703,000
Interest expense 615,000 183,000 --- 798,000
Assets 26,799,000 5,106,000 3,410,000 35,315,000
* Commercial buildings excludes discontinued operations at the Atrium.
(4) Property Acquisition and Disposition
Sale of the Atrium
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 establishes a single accounting
model for long-lived assets to be disposed of by sale. The Trust has
reclassified its Consolidated Balance Sheet as of December 31, 2003, and its
Consolidated Statements of Operations and Consolidated Statement of Cash Flows
for the three and six months ended June 30, 2003 in compliance with SFAS 144 to
reflect discontinued operations of the Atrium, which
7
was classified as held for sale on May 14, 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 buildings 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.
Operating information for Atrium for the three and six-month periods ended June
30, 2003 is set forth below:
Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
Total revenue $ 188,000 478,000
----------- -----------
Depreciation and amortization 39,000 117,000
Repairs and maintenance, including
common area maintenance 57,000 114,000
Real estate taxes 36,000 92,000
Property management fees 8,000 18,000
Utilities 33,000 56,000
Other 15,000 33,000
----------- -----------
Total expenses 188,000 430,000
----------- -----------
Net operating income --- 48,000
----------- -----------
Interest expense 9,000 24,000
----------- -----------
Net income (loss) before loss on sale $ (9,000) 24,000
----------- -----------
Loss on sale (26,000) (26,000)
Net loss $ (35,000) (2,000)
=========== ===========
Net loss per share $ 0.03 ---
=========== ===========
Acquisition of the Terrace Apartments
On April 30, 2004, the Trust, through one of the Trust's subsidiaries, acquired
The Terrace Apartments, an eighty-four unit apartment complex located in Olathe,
Kansas, for a purchase price of approximately $2,020,000. In connection with the
acquisition and as part of the purchase price, the Trust assumed a mortgage loan
of approximately $1,650,000, other liabilities of approximately $89,000, and
other assets of approximately $28,000.
In connection with the merger, the Trust issued 5,455 MOLP limited partnership
operating units valued at approximately $65,460 and made cash payments totaling
approximately $172,000.
David L. Johnson, the Trust's Chairman, Chief Executive Officer and President
and beneficial owner of more than 10% of the Trust's issued and outstanding
common stock, is the principal owner and President of DLJ Enterprises, Inc., the
general partner of Terrace Acquisition, L.P., and is the primary equity owner of
a limited partner of a partnership that owned approximately 18% of Terrace
Acquisition, L.P. DLJ Enterprises, Inc. received a brokerage commission of
$72,000 in connection with the closing of the transaction in the form of 6,000
MOLP limited partnership operating units.
The tables below present the proforma results of operations of the Trust as if
the acquisition (and disposition) had occurred at January 1, 2003
(unaudited).
8
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Total revenue 1,652,000 1,626,000 3,292,000 3,252,000
Depreciation and amortization 395,000 387,000 791,000 776,000
Repairs and maintenance, including
common area maintenance 202,000 197,000 389,000 352,000
Real estate taxes 115,000 119,000 230,000 232,000
General and administrative 87,000 45,000 187,000 153,000
Utilities 99,000 94,000 213,000 196,000
Property management fees - related parties 78,000 75,000 155,000 150,000
Other 352,000 339,000 678,000 632,000
---------- ---------- ---------- ----------
Total operating expenses 1,328,000 1,256,000 2,643,000 2,491,000
---------- ---------- ---------- ----------
Net operating income 324,000 370,000 649,000 761,000
---------- ---------- ---------- ----------
Interest income (3,000) (1,000) (7,000) (3,000)
Interest expense 403,000 428,000 794,000 854,000
---------- ---------- ---------- ----------
Loss before minority interest and
discontinued operations (76,000) (57,000) (138,000) (90,000)
Minority interest (1,000) (1,000) (1,000) (1,000)
Loss from continuing operations (75,000) (56,000) (137,000) (89,000)
Loss from discontinued operations,
including loss on disposal of $26,000 in 2003 --- (35,000) --- (2,000)
---------- ---------- ---------- ----------
Net loss $ (75,000) (91,000) (137,000) (91,000)
========== ========== ========== ==========
Net loss per share $ (.06) (.07) (.11) (.07)
========== ========== ========== ==========
This proforma 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 2003, and is not intended to be a projection of future results.
(5) Subsequent Events
Sale of the ACI Building
On April 28, 2004, ACI Financing, L.L.C., a subsidiary of the Trust ("ACI
Financing"), entered into a contract to sell the ACI Building, an office
building located in Omaha, Nebraska (the "ACI Building"), to an unrelated third
party, DBSI Housing Inc., an Idaho corporation ("DBSI"). The sale price is Eight
Million Two Hundred Two Thousand Five Hundred Dollars ($8,202,500) before the
brokerage commission and other standard closing costs.
ACI Financing's lender, Principal Commercial Funding, LLC, a Delaware limited
liability company, has refused to approve DBSI's assumption of the existing loan
secured by the ACI Building. As a result, on August, 2, 2004, ACI Financing and
DBSI entered into an amendment to the contract pursuant to which:
o the parties acknowledged that the lender would not approve DBSI's
assumption of the existing loan;
o the parties agreed that DBSI would indemnify ACI Financing from all
costs, expenses, penalties, interests, attorneys' fees, defense costs,
Make Whole Premiums (as described below), principal, default interest
and every other charge made by the lender against ACI Financing
resulting directly or indirectly from the transfer of the ACI Building
to DBSI without the consent of the lender or otherwise complying with
the terms of the lender loan documents in connection with the transfer
of the ACI Building to DBSI;
9
o ACI Financing agreed to be responsible for and pay to the lender the
lesser of (i) $100,000 or (ii) ten percent (10%) of any Make Whole
Premium successfully charged by the lender resulting from ACI
Financing's sale of the ACI Building to DBSI;
o DBSI agreed to execute, at the closing, wrap around loan documents,
including (i) a promissory note payable to ACI Financing, (ii) a deed
of trust, assignment of rents and security agreement in favor of ACI
Financing, (iii) an indemnity agreement and (iv) a management
agreement; and
o DBSI agreed to deposit an additional $50,000 as an earnest money
deposit with the escrow agent (in addition to $50,000 previously
deposited).
As amended, the contract provides that DBSI will pay the purchase price by
executing a promissory note in favor of ACI Financing in the amount of the
outstanding principal amount and accrued interest of ACI Financing's loan from
the lender and paying the balance at the closing.
The amendment to the contract also provides that the closing shall occur on or
before August 15, 2004; provided, however, that DBSI may extend the closing date
an additional 15 days upon written notice to ACI Financing and depositing an
additional $50,000 of earnest money with the escrow agent prior to the close of
business on August 15, 2004.
ACI Financing's current loan documents with its lender includes a due on sale
clause that allows the lender to declare the entire principal amount and accrued
interest due immediately upon an event of default. Under the loan documents ACI
Financing's transfer of the ACI Building to DBSI requires approval of the
lender, which the lender has refused to provide. As a result, upon consummation
of the sale of the ACI Building to DBSI without lender approval, ACI Financing's
lender may declare the entire principal amount and outstanding interest
immediately due and payable, which as of June 30, 2004 was approximately
$4,150,000. In addition, ACI Financing's loan agreement with the lender provides
that in an event of a default and acceleration of the loan, ACI Financing must
pay the lender a "Make Whole Premium," which is defined to mean the greater of
(i) one percent (1%) of the outstanding principal amount of the loan or (ii) a
premium calculated by determining the present value of the payments to be made
in accordance with the promissory note discounted at the yield on the applicable
US Treasury Issue for the number of months remaining from the date of
acceleration to the maturity date, which is approximately 72 months. The
Registrant also executed a limited guarantee for the benefit of the lender
guaranteeing certain obligations of ACI Financing under its loan documents with
the lender.
There can be no assurance that this transaction will ultimately be consummated
with DBSI. In the event the transaction is ultimately consummated, there can be
no assurance that the lender will not (i) declare the full amount of the loan
immediately due and payable, (ii) request payment of the Make Whole Premium,
(iii) foreclose upon the property and (iv) file a lawsuit to enforce its rights
against ACI Financing and the Registrant. There also can be no assurance that
DBSI will have sufficient assets to support its indemnification obligations to
ACI Financing.
Purchase of Mississippi Apartments
On June 15, 2004, the Registrant entered into a Purchase and Sale Agreement (the
"Purchase Agreement") between LB 100 Arbor Gate Circle LLC and LB 100 Waverly
Drive LLC ("Sellers") and the Registrant pursuant to which the Registrant has
agreed to purchase two apartment complexes, one of which is located in the City
of Picayune, Mississippi, known as 100 Arbor Gate Circle (the "Picayune
Property") and the other of which is located in the City of Bay Saint Louis,
Mississippi, known as 100 Waverly Drive (the "Bay Saint Louis Property"),
subject to the terms and conditions provided in the Purchase Agreement, for a
purchase price of $9.4 million, subject to standard closing prorations. The
Properties are being sold on an "as is," "where is," and "with all defects"
basis, without representation, warranty or covenant on the part of the Sellers.
The acquisition of the Properties was subject to Registrant's due diligence,
which ended on July 15, 2004. The acquisition of the Properties is not
contingent upon the ability of the Registrant to obtain financing for the
acquisition. Management anticipates funding the acquisition of the Properties
from cash on hand and a mortgage loan on the Properties. The Registrant has paid
$235,000 of the Purchase Price to an escrow agent as a deposit.
10
The closing of the sale is tentatively scheduled for no later than September 9,
2004; provided, that Sellers may extend the closing date for an additional sixty
(60) days if Sellers are unable to convey insurable title on the closing date.
The closing is subject to other standard closing conditions, including, without
limitation, conveyance to buyer of insurable title in and to the Properties and
delivery of a title policy.
At the closing, the Registrant will pay a broker's fee of $141,000, $70,500 of
which will be paid to an unrelated third party and $70,500 of which will be paid
to Maxus Properties, Inc. ("Maxus Properties"), the Registrant's management
company. The Registrant's chief executive officer and current trustee David L.
Johnson and current trustee Christopher J. Garlich are principal owners of Maxus
Properties, and Mr. Johnson is Chairman of Maxus Properties.
The Registrant anticipates assigning its rights under the Purchase Agreement to
two wholly owned subsidiaries of its operating limited partnership Maxus
Operating Limited Partnership (the "Intended Assignees") prior to the closing.
The Purchase Agreement requires the Intended Assignees to assume all
representations, warranties and indemnities of the Registrant under the Purchase
Agreement. The Registrant anticipates that the Intended Assignees will make
these assumptions and otherwise shall constitute permitted assignees under the
Purchase Agreement.
There can be no assurance that this transaction will ultimately be consummated.
The Sellers are each unrelated third parties.
The Picayune Property is a 120-unit apartment complex located in Picayune,
Mississippi; the Bay Saint Louis Property is a 128-unit apartment complex in Bay
Saint Louis, Mississippi.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY NOTE REGARDING 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.
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.
11
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 $373,000 at June 30, 2004.
The Trust believes this receivable will be collectable over the life of the
lease. If the lease was terminated, the receivable could become uncollectable.
However, because the receivable represents future cash earnings, the Trust
believes the risk of uncollectability is immaterial.
Investment Property Useful Lives
The Trust is required to make subjective assessments as to the useful lives of
its properties for the purpose 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 40 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 15 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.
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 impairmentexists, 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
12
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 undiscounted cash flows using a discount rate
determined by management to be commensurate with the risk inherent in the Trust.
DESCRIPTION OF BUSINESS
OVERVIEW
The Trust operates rental real estate in two key segments, apartments and
commercial. The Trust currently operates five apartment communities and one
commercial building. Cash is primarily generated in each segment by renting
space to tenants, or securing loans with the Trust's assets. Cash is used
primarily to pay operating expenses (repairs and maintenance, payroll,
utilities, taxes, and insurance), make capital expenditures for property
improvements, repay outstanding loans or to pay cash distributions to
shareholders. The key performance indicators for revenues are occupancy rates
and rental rates. Revenues are also impacted by concessions (discounts) offered
as rental incentives. The key performance indicator for operating expenses in
the apartment sector is total operating expense per apartment unit. A
significant change in the turnover rate of rental units can also cause a
significant change in operating expenses. The commercial contract provides for
the tenant to pay operating expenses, excluding a portion of the real estate
taxes and insurance. Management also evaluates total taxes, utilities and
insurance rates for each property.
General economic trends that management evaluates include construction of
apartment units (supply), unemployment rates, job growth, and interest rates
(demand). The apartment segment is sensitive to extremely low interest rates,
which tend to increase home ownership and decrease apartment occupancy rates.
The apartment segment is also sensitive to increased unemployment rates, which
tend to cause possible renters to double up in a unit or share a non-rental
dwelling with relatives or acquaintances. New construction in an area with low
occupancy rates can cause a further decline in occupancy or rental rates. The
lease with the commercial tenant, which occupies 100% of the commercial
property, is not as sensitive to general economic conditions, but is sensitive
to the success of the tenant in their business.
Economic trends appear to indicate that interest rates have bottomed out and
have begun to rise. It also appears that unemployment rates are beginning to
decline, with job growth beginning to rise. If this is correct and if the trend
continues, the Trust should be able to begin reducing concessions, raising
rental rates and increasing occupancy, which should improve revenues. Variable
operating expenses would also tend to increase, but fixed expense coverage would
improve.
The Trust invests in income-producing real properties, primarily apartments and
commercial buildings. As of June 30, 2004 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 (1) 82 Apartments Olathe, KS August, 2001
("King's Court")
Terrace Apartments (1)
("Terrace") 84 Apartments Olathe, KS April, 2004
13
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")
(1) King's Court and Terrace Apartment ("Kings Court/Terrace") are operated as
one entity.
UPREIT Structure
The Trust is now structured as what is commonly referred to as an umbrella
partnership REIT, or UPREIT, structure. To effect the UPREIT restructuring, the
Trust formed Maxus Operating Limited Partnership, a Delaware limited partnership
("MOLP"), to which the Trust contributed all of its assets, in exchange for a
99.999% partnership interest in MOLP and the assumption by MOLP of all of the
Trust's liabilities. The Trust now conducts and intends to continue to conduct
all of its activities through MOLP. Maxus Realty GP, Inc., a Delaware
corporation that is wholly owned by the Trust, is the sole general partner of
MOLP and has a 0.001% interest in MOLP. As the sole general partner of MOLP,
Maxus Realty GP, Inc. generally has the exclusive power under the partnership
agreement to manage and conduct the business of MOLP, subject to certain limited
approval and voting rights of the limited partners.
Pursuant to MOLP's limited partnership agreement, MOLP may issue limited
partnership operating units (and corresponding limited partnership interests) in
return for cash or other property that is contributed to MOLP. Holders of MOLP
limited partnership operating units may redeem the units (and corresponding
limited partnership interests) in return for the issuance of the Trust's common
stock or cash, at the Trust's election, after a one (1) year holding period. The
Trust anticipates that the UPREIT structure will enable it to make additional
acquisitions of properties from tax-motivated sellers. As an UPREIT, the Trust
believes that MOLP will be able to issue limited partnership operating units to
tax-motivated sellers who contribute properties to MOLP, thereby enabling those
sellers to realize certain tax benefits that would be unavailable to them if the
Trust purchased those properties directly for cash or common stock.
Acquisition of The Terrace Apartments
On April 30, 2004, the Trust, through one of the Trust's subsidiaries, acquired
The Terrace Apartments in the transaction described below. The Terrace
Apartments are located in Olathe, Kansas and contain eighty-four apartment
units.
On December 22, 2003, Terrace Acquisition, L.P. (the "Partnership") entered into
an Agreement and Plan of Merger with Kings Court/Terrace Acquisition, L.L.C., a
Missouri limited liability company ("Kings Court LLC"). Kings Court LLC is
wholly owned by MOLP, which in turn is owned by the Trust. Under the terms of
the merger agreement, Kings Court LLC was the surviving entity which effectively
resulted in Kings Court LLC succeeding to the ownership of The Terrace
Apartments, the Partnership's sole asset.
In consideration for the merger, the Trust:
o Issued 5,455 MOLP limited partnership operating units valued at
approximately $65,460 to certain of the Partnership's limited partners
electing to receive units and qualifying as accredited investors under
the Securities Act of 1933, as amended, and
o Made cash payments totaling approximately $172,000 to the
Partnership's limited partners from the Trust's available cash
reserves.
o Assumed a mortgage loan of approximately $1,650,000 and the
Partnership's other liabilities valued for purposes of the merger at
approximately $89,000.
14
The consideration paid was based on a 2003 third party appraisal of The Terrace
Apartments. David L. Johnson, Chairman, Chief Executive Officer and President of
the Trust and beneficial owner of more than 10% of the Trust's issued and
outstanding common stock, is the principal owner and President of DLJ
Enterprises, Inc., the general partner of the Partnership, and is the primary
equity owner of a limited partner of a partnership that owned approximately 18%
of Terrace Acquisition, L.P. DLJ Enterprises, Inc. received a brokerage
commission of $72,000 in connection with the closing of the transaction in the
form of 6,000 MOLP limited partnership operating units.
ACI, Forest Park, King's Court/Terrace, Chalet, the Landings and Barrington
Hills are each owned by single member limited liability companies that are
directly owned by MOLP.
Maxus Properties provides property management services for each of the Trust's
real properties.
LIQUIDITY AND CAPITAL RESOURCES
Cash as of June 30, 2004 was $2,971,000, an increase of $2,108,000 from the
balance of $863,000 at December 31, 2003. Escrows and reserves held by various
lenders were $1,058,000 and $830,000 at June 30, 2004 and December 31, 2003,
respectively, and are not readily available for current disbursement. Net cash
provided by operating activities of continuing operations decreased $338,000 to
$431,000 for the six-month period ended June 30, 2004 primarily attributable to
$219,000 of escrows and reserves being funded in 2004 compared to $0 in 2003.
Net cash used in investing activities of continuing operations was $354,000,
comprised of $193,000 for the net cash outlay for the merger of Terrace
Apartments and $161,000 for capital expenditures. The largest capital
expenditures included $87,000 for capital replacements at all properties
combined, along with approximately $18,000 on roofs at Kings Court. Net cash
provided by financing activities of continuing operations was $2,031,000. Cash
of $2,250,000 (net of $100,000 of financing costs) was provided by the financing
of Kings Court, which previously was not financed. Distributions were paid
totaling $623,000 and cash was provided by issuance of common stock for
$568,000.
Management believes the Trust's current cash position and the properties'
ability to generate operating and financing cash flows should enable the Trust
to fund anticipated operating and capital expenditures in 2004. Projected
capital expenditures of approximately $170,000, are currently planned for the
remainder of 2004, primarily for roofs, HVAC and plumbing and painting projects,
with the majority of the expenditures expected to be reimbursed from reserves
held by lenders. Capital replacements of approximately $158,000 are also
expected to be reimbursed from reserves held by lenders. Except for the items
mentioned, management does not anticipate any material capital expenditures at
any one property in 2004. 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.
Management does not believe the risk of changes in operations adversely
impacting 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.
On April 28, 2004 a subsidiary of the Trust entered into a contract for the sale
of the ACI Building. This contract is described in more detail in note 4 to the
Unaudited Consolidated Financial Statements above.
Contractual Obligations and Commercial Commitments
Balance at Interest Due
June 30, 2004 Rate
ACI 4,150,000 8.63% August 1, 2010
Forest Park 1,877,000 4.91% September 1, 2007
Kings Court/Terrace 2,346,000 3.34% May 1, 2034
Terrace 1,645,000 6.87% February 1, 2009
15
Chalet I 3,956,000 6.59% October 1, 2008
Chalet II 1,493,000 6.535% October 1, 2008
The Landings 3,695,000 7.66% September 1, 2007
Barrington Hills 5,686,000 6.035% July 1, 2029
-----------
Total $ 24,848,000
===========
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 On April
30, 2004, the Trust assumed the mortgage on Terrace, and also secured additional
financing secured by Kings Court, which was not previously financed, and
Terrace.
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.
RESULTS OF OPERATIONS
The results of operations for the Trust's properties for the three and six
months ended June 30, 2004 and 2003 are detailed 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
elimination of the loss on sale from, net income results in Funds from
Operations, which is not determined in accordance with GAAP.
16
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
Net income (loss) (61,000) (70,000) (90,000) (37,000)
Property related depreciation
and amortization (1) 365,000 379,000 707,000 798,000
Loss on sale --- 26,000 --- 26,000
-------- -------- -------- --------
Funds from operations $ 304,000 335,000 $ 617,000 787,000
======== ======== ======== ========
(1) For the three and six months ended June 30, 2003, depreciation and
amortization of the Atrium of $39,000, and $117,000, respectively is included in
this amount.
Occupancy
The occupancy levels at June 30 were as follows:
OCCUPANCY LEVELS AT JUNE 30,
2004 2003
ACI 100% 100%
Forest Park 86% 97%
King's Court/Terrace (1) 93% 96%
Chalet 97% 93%
The Landings 97% 94%
Barrington Hills 97% 94%
(1) King's Court/Terrace occupancy for 2003 reflects only King's Court. Terrace
was acquired in April 2004.
The ACI building has a single tenant, which has occupied the building throughout
2004. The lease expires in August 2008.
In 2002 the parent company of the single tenant restated its consolidated
financial statements. In connection with the restatement of its financial
statements, two class action lawsuits have been publicly announced against the
parent company and certain of its former and present officers and directors. The
lawsuits, which have now been consolidated, 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, 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 $373,000 at June 30, 2004, comprised of recognition of scheduled rent
increases on a straight-line basis.
Forest Park ended the second quarter of 2004 at 86% occupancy. The Northern
Kansas City, Missouri market conditions continue to show heavy concessions and
average occupancy of 90%. King's Court/Terrace occupancy was 93% at June 30,
2004. Olathe, Kansas area markets continue to have average occupancy rates of
mid-to-high 80% range and concessions are common in the market, due to excess
supply and low interest rates. Occupancy rates in the Topeka, Kansas market
averaged approximately 90% for 2003, however, concessions in the market are
extensive. Chalet, which is located in Topeka, ended the quarter at 97%
occupied, with concessions being reduced. The Landings and Barrington Hills are
both located in Little Rock, Arkansas, where the market occupancy rates are
currently in the mid 90% range. The Landings and Barrington Hills had occupancy
of 97% on June 30, 2004. Concessions in the Little Rock area have not been as
significant as in some other parts of the country.
17
Comparison of Consolidated Results From Continuing Operations
For the three and six month periods ended June 30, 2004, the Trust's
consolidated revenues from continuing operations were $1,615,000 and $3,146,000,
respectively. Revenues increased $99,000 (6.5%) and $107,000 (3.5%) for the
three and six-month periods ended June 30, 2004 as compared to the same periods
ended June 30, 2003. The increase in consolidated revenue for the six-month
period is primarily attributable to a $125,000 increase in income from the
Apartment Segment, offset by a decrease in CAM reimbursements at ACI. The
increase in income in the Apartment Segment is primarily due to the acquisition
of Terrace Apartments. The combined income from Kings Court/Terrace increased by
approximately $67,000 when compared to the same period in 2003. Revenue also
increased by $35,000 at Chalet, due to increased occupancy and decreased
concessions. Revenue increased at Barrington by $25,000 primarily due to an
increase in other income.
For the three and six month periods ended June 30, 2004, the Trust's
consolidated operating expenses from continuing operations were $1,286,000 and
$2,487,000, respectively. Expenses increased $133,000 (11.5%) and $208,000
(9.1%) for the three and six-month periods ended June 30, 2004 as compared to
the same periods ended June 30, 2003. The increase in consolidated operating
expenses for the six-month period is primarily attributable to a $62,000
increase in other operating expense, a $39,000 increase in repairs and
maintenance expense, a $39,000 increase in depreciation and a $34,000 increase
in general and administrative expenses. The increase in other operating expenses
was due primarily to increased payroll and collection costs at Kings
Court/Terrace ($41,000) and Forest Park ($13,000). The increase in repair and
maintenance expenses occurred primarily at the Landings ($25,000) and King's
Court/Terrace ($20,000) and was comprised of various items significant only as a
whole. The increase in depreciation expense is primarily due to the merger of
the Terrace Apartments. General and administrative expense increased compared to
the prior year primarily due to increased professional fees in conjunction with
the formation of the UPREIT structure and costs related to the Terrace merger.
The combined operating expenses at Kings Court/Terrace for the six-month period
ended June 30, 2004 increased by approximately $121,000 when compared to the
same period in 2003.
The net loss from continuing operations for the three and six month periods
ended June 30, 2004 was ($61,000) or ($.05) per share and ($90,000) or ($.07)
per share, respectively. The net loss from continuing operations for the three
and six month periods ended June 30, 2003 was ($35,000) or ($.03) per share and
($35,000) or ($.03) per share, respectively.
Comparison of Results from Continuing Operations by Segment
For the three and six month periods ended June 30, 2004, revenues for the
Trust's Commercial Building Segment (excluding the Atrium) decreased $19,000
(7.5%) and $18,000 (3.7%), respectively, as compared to the same time periods
last year. This increase is primarily due to a decrease in CAM reimbursement of
$18,000 from prior year. CAM reimbursements of $18,000 were received in the
quarter ended June 30, 2003, and a similar amount is expected to be received in
the quarter ended September 30, 2004.
For the three and six month periods ended June 30, 2004, expenses for the
Commercial Buildings Segment (excluding the Atrium) decreased $6,000 and
$12,000, respectively, as compared to 2003 results for the same periods.
For the three and six month periods ended June 30, 2004, revenues for the
Apartments Segment increased $118,000 (9.3%) and $125,000 (4.9%), respectively,
from the periods ended June 30, 2003, due to increased revenue at Kings
Court/Terrace, Chalet and the Landings.
For the three and six month periods ended June 30, 2004, expenses for the
Apartments Segment increased $92,000 (7.0%) and $145,000 (5.8%), respectively,
primarily due to the merger of the Terrace Apartments.
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
18
commodity instruments at June 30, 2004.
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 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 Terrace is at a fixed rate of 6.87% and
matures in 2009. The debt on Forest Park and King's Court/Terrace is at a
variable rate and matures in 2007 and 2034, respectively. The current interest
rate on Forest Park is 4.91% and King's Court/Terrace is 3.34%. A 100 basis
point increase in the variable rate debt on an annual basis would impact net
income by approximately $42,000.
INFLATION
The effects of inflation did not have a material impact upon the Trust's
operations in the period ended June 30, 2004, or in fiscal 2003.
ITEM 3: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Trust's Chief Executive Officer and Chief Financial Officer,
after evaluating the design and effectiveness of the Trust's
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered
by this report (the "Evaluation Date"), have concluded that as of
the Evaluation Date, the Trust's disclosure controls and
procedures were adequately designed and operating effectively to
ensure that material information relating to the Trust would be
made known to them by others within the Trust, particularly
during the period in which this Form 10-QSB Quarterly Report was
being prepared.
(b) Changes in internal controls
There has been no change in the Trust's internal control over
financial reporting during its most recent fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, its internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ralph and Sandra Schmude v. Maxus Properties, Inc., et al, Case No. 04
CV 104814, Clay County, Missouri.
On January 29, 2004, Ralph and Sandra Schmude filed suit against
several defendants, including the Registrant. The count relating to
the Registrant is for common law conspiracy with other defendants.
However, the plaintiffs seek an order that all defendants, including
the Registrant, are jointly and severally liable for all of the other
counts and damages in the petition. Plaintiffs seek (i) compensatory
damages in the amount of $1.5 million for lost earnings, past and
future, and emotional distress, (ii) punitive damages of $3 million,
(iii) costs, disbursements and prejudgment interest and (iv) such
further legal and equitable relief as the court may deem appropriate.
Discovery has recently commenced. The Registrant anticipates its costs
of defending this suit will be negligible. The Registrant believes the
plaintiffs' claims against the Registrant are meritless.
19
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(a) On April 30, 2004, the Trust issued MOLP limited partnership
units in connection with The Terrace Apartments as described in
more detail under the captions "Acquisition of The Terrace
Apartments" and "UPREIT" Structure". In June 2004 the Trust
completed a private placement pursuant to which it sold 41,668
shares of the Trust's $1.00 par value common stock at $12.00 per
share, raising an aggregate of $500,016. The shares were sold to
David Watson, an individual unaffiliated with the Trust,
Christopher J. Garlich, a trustee of the Trust, and David L.
Johnson, Chairman, Chief Executive Officer and President of the
Trust. No commissions were paid in connection with the private
placement. The Trust relied on the SEC's Rule 506 exemption
(Regulation D) from registration for both offerings, offering the
MOLP units and the Trust's common stock solely to accredited
investors (as defined in Rule 502).
(b) None
(c) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 2004, the Trust held its Annual Meeting of Shareholders.
At the meeting the shareholders elected seven trustees to hold office
until the next Annual Meeting of Shareholders and until their
successors are elected and qualify.
The following individuals were the nominees of management voted upon
and elected as trustees by the shareholders of the Trust at the
meeting: Monte McDowell, Danley K. Sheldon, Jose Evans, Kevan Acord,
David L. Johnson, Chris Garlich and W. Robert Kohorst. There were
958,025 votes "for" Mr. McDowell and 10,975 votes "withheld." There
were 958,025 votes "for" Mr. Sheldon and 10,975 votes "withheld."
There were 958,225 votes "for" Mr. Evans and 10,775 votes "withheld."
There were 958,225 votes "for" Mr. Acord and 10,775 votes "withheld."
There were 948,775 votes "for" Mr. Johnson and 20,225 votes
"withheld." There were 958,225 votes "for" Mr. Garlich and 10,975
votes "withheld." There were 958,225 votes "for" Mr.
Kohorst and 10,775 votes "withheld."
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibits Index on Page 23
(b) Reports on Form 8-K
On May 4, 2004, Trust filed a Form 8-K under Item 5 reporting
that one of its subsidiaries had entered into a contract to sell
the ACI Building, and that one of its subsidiaries had acquired
The Terrace Apartments. (File Number 000-13754.)
On June 9, 2004, the Trust filed a Form 8-K under Item 5
reporting that the Trust received a notice from the Nasdaq Stock
Market ("Nasdaq") that it was not in compliance with the minimum
$10,000,000 stockholders' equity requirement for continued
listing on the Nasdaq National
20
Market as of March 31, 2004; and that the Trust responded to
Nasdaq on June 7, 2004 noting that management believes it has
been in compliance with the minimum requirement since May 1,
2004. (File Number 000-13754.)
On July 1, 2004, the Trust filed a Form 8-K under Item 5
reporting that the Trust received a letter from Nasdaq stating
that its staff believed the Trust had provided a definitive plan
to achieve and sustain compliance with the $10,000,000
stockholders' equity requirement. (File Number 000-13754.)
On July 29, 2004, the Trust filed a Form 8-K under Item 5
reporting that on June 15, 2004 the Trust entered into a purchase
agreement to purchase two apartment complexes located in
Mississippi. (File Number 000-13754.)
21
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: August 13, 2004 By: /s/ David L. Johnson
--------------------
David L. Johnson
Chairman of the Board,
President and Chief Executive Officer
Trustee
Date: August 13, 2004 By: /s/ John W. Alvey
-----------------
John W. Alvey
Vice President
Chief Financial and Accounting Officer
22
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).
10.1 Agreement for Purchase and Sale dated April 28, 2004 between ACI Financing,
L.L.C. and DBSI Housing Inc. is incorporated by reference to Exhibit 10.1
to the Registrant's Current Report on Form 8-K filed May 4, 2004 (File No.
000-13754).
10.2 Amendment No. 1 to Agreement for Purchase and Sale dated May 24, 2004
between ACI Financing, L.L.C. and DBSI Housing, Inc.
10.3 Amendment No. 2 to Agreement for Purchase and Sale dated August 2, 2004
between ACI Financing, L.L.C. and DBSI Housing, Inc.
10.4 Purchase and Sale Agreement dated June 15, 2004 between LB 100 Arbor Gate
Circle LLC and LB 100 Waverly Drive LLC and the Registrant
10.5 Amendment No. 1 to Purchase and Sale Agreement dated July 13, 2004 between
LB 100 Arbor Gate Circle LLC and LB 100 Waverly Drive LLC and the
Registrant
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.
23