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, 2005
-------------
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
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 June 30, 2005: 1,299,000
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 10
ITEM 3. CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS 19
SIGNATURES 20
EXHIBIT INDEX 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXUS REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
Assets 2005 2004
(Unaudited)
Investment property
Land $ 1,355,000 1,355,000
Buildings and improvements 35,674,000 35,641,000
Personal property 2,740,000 2,606,000
----------- -----------
39,769,000 39,602,000
Less accumulated depreciation (4,937,000) (4,083,000)
----------- -----------
Total investment property, net 34,832,000 35,519,000
Cash 3,268,000 3,860,000
Escrows and reserves 1,107,000 1,125,000
Note receivable 4,112,000 4,133,000
Accounts receivable 54,000 3,000
Prepaid expenses and other assets 399,000 242,000
Intangible assets (net) 9,000 94,000
Deferred expenses, less accumulated amortization 383,000 423,000
----------- -----------
Total assets of continuing operations 44,164,000 45,399,000
Assets of discontinued operations - property held for sale 5,000 4,000
----------- -----------
Total assets $ 44,169,000 45,403,000
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Mortgage notes payable $ 27,595,000 27,824,000
Note payable 4,112,000 4,133,000
Accounts payable, deferred rent and accrued expenses (note 5) 650,000 623,000
Real estate taxes payable 396,000 394,000
Refundable tenant deposits 185,000 177,000
Other accrued liabilities 934,000 1,047,000
----------- -----------
Total liabilities 33,872,000 34,198,000
----------- -----------
Minority interest 149,000 152,000
Shareholders' equity:
Common stock, $1 par value; Authorized 5,000,000 shares, issued and
outstanding 1,299,000 and 1,294,000 shares
at June 30, 2005 and December 31, 2004, respectively 1,299,000 1,294,000
Preferred Stock, $0.01 par value; Authorized 5,000,000 shares,
no shares issued and outstanding at June 30, 2005 (note 2) --- ---
Additional paid-in capital 17,953,000 17,899,000
Distributions in excess of accumulated earnings (9,104,000) (8,140,000)
----------- -----------
Total shareholders' equity 10,148,000 11,053,000
----------- -----------
$ 44,169,000 45,403,000
=========== ===========
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
2005 2004 2005 2004
---- ---- ---- ----
Income
Revenues:
Rental 1,588,000 1,195,000 3,150,000 2,322,000
Other 218,000 184,000 431,000 354,000
----------- ----------- ----------- -----------
Total revenues 1,806,000 1,379,000 3,581,000 2,676,000
----------- ----------- ----------- -----------
Expenses:
Depreciation and amortization 475,000 323,000 978,000 621,000
Repairs and maintenance 252,000 191,000 472,000 356,000
Turn costs and leasing 117,000 77,000 215,000 139,000
Utilities 125,000 87,000 259,000 175,000
Real estate taxes 133,000 85,000 257,000 165,000
Insurance 83,000 76,000 173,000 134,000
Property management fees - related parties 90,000 68,000 177,000 130,000
Other operating expenses 241,000 189,000 470,000 372,000
General and administrative 121,000 88,000 231,000 188,000
----------- ----------- ----------- -----------
Total operating expenses 1,637,000 1,184,000 3,232,000 2,280,000
----------- ----------- ----------- -----------
Net operating income 169,000 195,000 349,000 396,000
----------- ----------- ----------- -----------
Interest income (163,000) (4,000) (308,000) (7,000)
Interest expense 549,000 303,000 1,083,000 574,000
----------- ----------- ----------- -----------
Loss before minority interest and
discontinued operations (217,000) (104,000) (426,000) (171,000)
Income (loss) from discontinued operations (64,000) 42,000 112,000 80,000
Minority interest 3,000 1,000 3,000 1,000
----------- ----------- ----------- -----------
Net loss $ (278,000) (61,000) (311,000) (90,000)
=========== =========== =========== ===========
Per share data (basic and diluted):
Loss from continuing operations $ (.17) (.08) (.33) (.14)
Income (loss) from discontinued operations (.05) .03 .09 .06
----------- ----------- ----------- -----------
Total $ (.22) (.05) (.24) (.08)
=========== =========== =========== ===========
Distributions paid in current year $ .25 .25 .50 .50
=========== =========== =========== ===========
Weighted average shares outstanding 1,297,000 1,251,000 1,296,000 1,246,000
=========== =========== =========== ===========
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,
2005 2004
---- -----
Cash flows from operating activities:
Net loss $ (311,000) (90,000)
Adjustments to reconcile net loss to net
cash provided by operating activities of continuing operations:
Income from discontinued operations (112,000) (80,000)
Minority interest (3,000) (1,000)
Depreciation and amortization 978,000 619,000
Changes in accounts affecting operations:
Accounts receivable (51,000) (115,000)
Prepaid expenses and other assets (136,000) (43,000)
Escrows and reserves 18,000 (177,000)
Accounts payable and other liabilities 36,000 150,000
----------- -----------
Net cash provided by operating activities of continuing operations 419,000 263,000
Net cash provided by discontinued operations --- 172,000
----------- -----------
Net cash provided by operating activities 419,000 435,000
Cash flows from investing activities:
Acquisition of Terrace Apartments --- (193,000)
Purchase of available for sale securities (21,000) ---
Capital expenditures (167,000) (163,000)
----------- -----------
Net cash used in investing activities (188,000) (356,000)
Cash flows from financing activities:
Principal payments on mortgage notes payable (250,000) (146,000)
Proceeds from notes issued 21,000 2,250,000
Issuance of common stock 59,000 568,000
Distributions paid to shareholders (653,000) (623,000)
----------- -----------
Net cash used in financing activities
of continuing operations (823,000) 2,049,000
Net cash used in financing activities
of discontinued operations --- (18,000)
----------- -----------
Net cash used in (provided by) financing activities (823,000) 2,031,000
----------- -----------
Net decrease (increase) in cash (592,000) 2,110,000
Cash, beginning of period 3,860,000 861,000
----------- -----------
Cash, end of period $ 3,268,000 2,971,000
=========== ===========
Supplemental disclosure of cash flow information -
cash paid during the six-month period for interest (includes interest
paid for discontinued operations in 2004) $ 1,083,000 750,000
----------- -----------
Items assumed in connection with acquisition of investment properties
Investment property and other assets --- 2,047,000
Mortgage notes payable and other liabilities --- 1,650,000
See accompanying notes to consolidated financial statements.
5
MAXUS REALTY TRUST, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
(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, 2004, 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, 2005
and for all periods presented have been made. The results for the six-month
period ended June 30, 2005 are not necessarily indicative of the results which
may be expected for the entire year. The historical financial statements as of
December 31, 2004 and for the three and six month periods ended June 30, 2004
have been reclassified to present discontinued operations, as further described
in Note 5.
Prior period amounts have been reclassified to conform to the current year
presentation.
(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, 2005, 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.
On May 10, 2005, the shareholders approved an amendment to Article Three of the
Trust's Articles of Incorporation that authorized 5,000,000 shares of preferred
stock commonly referred to as "blank check" preferred stock. The term "blank
check" refers to preferred stock, the creation and issuance of which is
authorized in advance by the shareholders and the terms, rights and features of
which are determined by the Trust's Board of Trustee's upon issuance. The
authorization of such preferred stock would permit the Board of Trustees to
authorize and issue preferred stock from time to time in one or more series.
(3) Segment Reporting
The Trust aggregates the financial information of all its properties into one
reportable segment because the properties all have similar economic
characteristics and provide similar services to similar types and classes of
customers.
(4) Property Acquisitions
6
In accordance with SFAS No. 141, the Trust has determined the fair value of
acquired in-place leases, which consist of the following:
June 30, 2005 December 31, 2004
------------- -----------------
In-place leases, net of accumulated amortization of
$287,000 and $202,000 respectively $ 9,000 94,000
----------- -----------
Total intangible assets, net $ 9,000 94,000
=========== ===========
In place leases, net at June 30, 2005 and December 31, 2004 relate solely to
three apartment complexes purchased in 2004.
Amortization expense for 2005 is expected to be $94,000, of which $85,000 was
recognized in the period ended June 30, 2005.
Acquisition of Apartments
On September 1, 2004, the Trust, through two of the Trust's wholly owned
subsidiaries of its operating limited partnership, MOLP, acquired The Waverly
Apartments ("Waverly"), a 128-unit apartment complex located in Bay Saint Louis,
Mississippi, and Arbor Gate Apartments ("Arbor Gate"), a 120-unit apartment
complex located in Picayune, Mississippi, for a purchase price of approximately
$9,400,000 from an unrelated third party. The purchase price was allocated
$3,948,000 to Arbor Gate and $5,452,000 to Waverly. In connection with the
purchase of Arbor Gate, the Trust paid cash of approximately $1,028,000 and
acquired financing of $3,080,000 with monthly payments of approximately $24,000.
In connection with the acquisition of Waverly, the Trust paid cash of
approximately $1,380,000 and acquired financing of $4,250,000, with monthly
payments of approximately $35,000. The cash paid includes cash used to fund tax
and insurance escrows required by the Lender. Each mortgage loan bears interest
at a variable rate of 2.25% over the one month Reference Bill (R) Index Rate,
with a maximum rate cap of 6.25% and is due and payable on September 1, 2011.
The rate at June 30, 2005 was 5.12% for Arbor Gate and 5.11% for Waverly.
The table below presents the proforma results of operations of the Trust as if
the acquisitions (and disposition of ACI as described in note 5) had occurred at
January 1, 2004 (unaudited).
Three Months Ended Six Months Ended
June 30, June 30
2004 2004
----------- -----------
Total revenue 1,787,000 3,549,000
Net income (loss) $ 744,000 2,468,000
=========== ===========
Per share data (basic and diluted):
Net income (loss) $ .59 1.98
=========== ===========
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 2004, and is not intended to be a projection of future results.
(5) Property Disposition
Sale of ACI
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"). The Trust has reclassified its Consolidated Statements of Operations and
Consolidated Statement of Cash Flows for the three and six months ended June 30,
2004 in compliance with SFAS 144 to reflect discontinued operations of ACI,
which was classified as held for sale on August 25, 2004. 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. The Trust no longer
has separate reportable
7
segments. On August 25, 2004, the Trust sold ACI to an unrelated third party.
The sales price was $8,202,500. After deducting costs of the sale and the net
book value of the assets sold, the sale resulted in a net book gain of
approximately $2,116,000 and provided approximately $3,791,000 net sale
proceeds. Accounting rules required the Trust to defer approximately $1,100,000
in sales proceeds, which represents the make whole payment that would be
required if the lender accelerated the obligation at the time of the sale. The
net book gain on sale has been reduced by this amount. The make whole payment is
included in other accrued liabilities and is further described in Note 6.
Operating information for ACI for the three and six month periods ended June 30,
2005 and 2004 is set forth below:
Three Months Ended: Six Months Ended:
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Total revenue $ --- 234,000 --- 468,000
Depreciation and amortization --- 60,000 --- 121,000
Real estate taxes --- 29,000 --- 57,000
Property management fees --- 8,000 --- 17,000
Other --- 4,000 --- 11,000
----------- ----------- ----------- -----------
Total operating expenses --- 101,000 --- 206,000
----------- ----------- ----------- -----------
Net operating income --- 133,000 --- 262,000
----------- ----------- ----------- -----------
Interest expense --- 91,000 --- 182,000
----------- ----------- ----------- -----------
Net income before gain (loss) on sale $ --- 42,000 --- 80,000
----------- ----------- ----------- -----------
Adjustment of make whole premium 64,000 --- (112,000) ---
----------- ----------- ----------- -----------
Income from discontinued operations (64,000) 42,000 112,000 80,000
=========== =========== =========== ===========
Income from discontinued operations
before minority interest per share $ (.05) .03 .09 .06
=========== =========== =========== ===========
(6) Contingencies
On August 25, 2004, ACI Financing, L.L.C., a subsidiary of the Trust ("ACI
Financing"), sold the ACI Building, an office building located in Omaha,
Nebraska (the "ACI Building"), to an unrelated third party, FOR 1031 Omaha LLC,
an Idaho limited liability company ("FOR 1031").
As a result of the sale in 2004, the Trust recorded a gain of approximately
$2,116,000 after deducting the costs of the sale and the net book value of the
assets sold. Accounting rules required the Trust to defer approximately
$1,100,000 in sales proceeds. The net book gain was reduced by this amount. This
amount represents the Make Whole Premium that would be presently be required if
the Lender accelerated the obligation at the time of the sale. The difference
obtained by subtracting the current amount of the loan from the present value,
calculated in accordance with the Trust's policies, is the current value of the
Make Whole Premium. The period-to-period change in the value of the Make Whole
Premium is recorded in discontinued operations for the period in which the
change occurs. Increases in the calculated amount of the Make Whole Premium are
represented as decreases in income from discontinued operations and decreases in
the calculated amount of the Make Whole Premium are represented as increases in
income from discontinued operations. If the Lender does not accelerate this
obligation and it is paid pursuant its regular schedule, the amount deferred
will be amortized to income over the remaining term of the obligation in
accordance with the Trust's policies. The balance of the Make Whole Premium at
June 30, 2005 is $935,000 and is presented in other accrued liabilities.
Interest income and interest expense of $130,000 and $263,000 is reflected in
the financial statements for the three and six month periods ending June 30,
2005, representing the aggregate interest and default interest on the loan paid
by FOR 1031 to ACI Financing.
Under an executed real estate contract, a $97,000 earnest money deposit for the
purchase of Carrington Apartments during 2004 was made by the Trust. The Trust
was unable to obtain lender approval for assumption of the current loan in
connection with the purchase and, as a result, the transaction did not close. As
a result, the seller believes the Trust should forfeit the deposit. The seller
did reimburse the Trust $7,000 for fees associated with the loan assumption
process. The Trust believes that it fulfilled its obligations under the contract
and that the remaining deposit should be returned to the Trust. As a result, the
$90,000 deposit has been placed with the court for
8
resolution. A motion for summary judgment has been filed by the Trust contending
that as a matter of law, they are entitled to a full return of the escrow. The
opposing party also filed a motion for summary judgment. Both motions are before
the court awaiting a judicial resolution. Management believes the Trust will
ultimately prevail and receive the funds; however, it is possible that the
escrow could be forfeited. If the Trust forfeits the deposit, it will record a
loss of $90,000 in the period in which the deposit is forfeited.
(7) Investments
The Trust applies SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115") for its investments in equity securities. Upon
acquisition, the Trust classifies its equity securities as available for sale.
This classification is evaluated at each reporting date. Unrealized holding
gains and losses for available for sale securities are excluded from earnings
and reported as other comprehensive income. Dividend and interest income is
included in earnings. At the end of each reporting period the investments are
evaluated for impairment. If the fair value is below the amortized cost, the
investment is impaired. If the investment is impaired, the Trust determines if
the impairment is other than temporary, and if it is the investment is written
down to fair value as its new cost basis and the decline in value is included in
earnings. If the impairment is temporary the decline in value is included in
other comprehensive income.
During the quarter ended March 31, 2005, the Trust invested $21,000 in equity
securities of real estate investment trusts. The amortized cost basis is
equivalent to the cost basis. Such securities are included in the caption
prepaid and other assets and are classified as available for sale following the
provisions of SFAS 115. The aggregate fair value on June 30, 2005 of these
equity securities was approximately $21,000. No net unrealized holding gain or
loss was recognized or included in other comprehensive income.
(8) Subsequent Event
Acquisition of Bicycle Club Apartments
On July 1, 2005, the Trust, through one of its subsidiaries, completed the
acquisition of the Bicycle Club Apartments for a purchase price of $12,750,000.
Secured Investment Resources Fund, L.P. III, a Missouri limited partnership
("SIR III") entered into a Merger Agreement with Bicycle Club, L.L.C., a wholly
owned subsidiary of MOLP ("Bicycle Club") on March 18, 2005. Under the terms of
the Merger Agreement, Bicycle Club is the surviving entity, which effectively
results in Bicycle Club succeeding to the ownership of the Bicycle Club
Apartments, which is SIR III's primary asset. The Bicycle Club Apartments which
are located in Kansas City, Missouri and consists of 312 units of multi-family
rental real estate.
David L. Johnson, a significant shareholder, President, Chief Executive Officer
and Trustee of the Trust, is the principal beneficial owner and President of
Nichols Resources, Ltd., the general partner of SIR III. Mr. Johnson, together
with his wife, jointly own approximately 85% of Bond Purchase, L.L.C., a 7.81%
limited partner in SIR III. Mr. Johnson is also an affiliate of Paco
Development, L.L.C. that is a 2.43% limited partner in SIR III.
Monte McDowell, Bob Kohorst, Chris Garlich, and David L. Johnson are trustees of
the Trust and are the beneficial owners of 20.3%, 8.0%, 6.5%, and 10.2%
respectively of SIR III. John W. Alvey, Vice President and Chief Financial and
Accounting Officer of the Trust is an executive officer and a minority
beneficial owner of the general partner of SIR III.
In consideration for the merger, the Trust:
(i) is paying the SIR III limited partners approximately $4,280,000,
which will be paid in cash. This amount will be reduced by those
limited partners of SIR III that qualify as accredited investors under
the Securities Act of 1933 (as amended) and elect to receive MOLP
limited partnership operating units. As of August 4, 2005, 13 limited
partners of SIR III have elected to receive operating units in MOLP
instead of cash, pending receipt of the required representations from
each of those limited partners. Therefore, the total merger
consideration to be paid to the SIR III limited partners will be
approximately $3,602,000 in cash and 1,174 MOLP units. The Trust
anticipates meeting this obligation by using approximately
9
$2,602,000 of MOLP's cash and approximately $1,000,000 of SIR III's
cash and other deposits, which was acquired in connection with the
merger. Holders of MOLP limited partnership operating units may redeem
the units (and corresponding limited partnership interests) in return
for the issuance of our common stock or cash, at our election, after a
one year holding period.
(ii) assumed a $8,350,000 mortgage loan secured by the Bicycle Club
Apartments (the "Mortgage Loan"). The Mortgage Loan, which matures on
March 1, 2008, bears interest at a fixed rate of 6.91% and requires
monthly payments of $48,082.09. The Mortgage Loan contemplates a
prepayment premium, which would apply in the event Bicycle Club
prepays the Mortgage Loan (the "Prepayment Premium"). The lender may
accelerate the Mortgage Loan (and charge a Prepayment Premium) if
Bicycle Club defaults under the terms of the mortgage loan documents,
which defaults are customary defaults in real estate mortgage loan
transactions.
Contract To Purchase Apartments In Temple Texas
On June 14, 2005 (the "Effective Date"), the Trust entered into a Purchase and
Sale Agreement and Joint Escrow Instructions (the "Purchase Agreement") with FF
Park Lane Associates, L.P., a Texas limited partnership ("Seller") pursuant to
which the Trust agreed to purchase a 168 multi-family unit apartment complex
that is located at 3007 Antelope Trail, Temple, Texas, known as Westgate Park
Apartments II (the "Property"), subject to the terms and conditions provided in
the Purchase Agreement, for a purchase price of approximately $4.75 million (the
"Purchase Price"), subject to standard prorations (the "Transaction").
On July 1, 2005, the Trust's Board of Trustees approved the Transaction. In
accordance with the terms of the Purchase Agreement, the Trust has paid a total
of $100,000 of the Purchase Price to an escrow agent as a deposit (the
"Deposit").
The Purchase Price is comprised of (i) the $100,000 Deposit, (ii) the Trust's
assumption of a mortgage loan of Lehman Brothers Bank, FSB (the "Lender") in the
amount of $3,800,000 (the "Existing Mortgage") and (iii) the balance of
approximately $850,000 payable in cash on the closing date. The acquisition of
the Property is not contingent upon the ability of the Trust to obtain financing
for the acquisition, except that the closing is subject to the condition that
the Trust assume the Existing Mortgage (in the amount of $3,800,000), which
assumption is subject to the Lender's approval. If the Lender denies the Trust's
assumption of the Existing Mortgage, or fails to approve the Trust's assumption
of the Existing Mortgage within four months and two weeks of the Effective Date,
the Purchase Agreement will terminate and the Trust will be entitled to receive
the $100,000 Deposit. Management anticipates funding the acquisition of the
Property from cash on hand and the assumption of the Existing Mortgage secured
by the Property.
The closing is scheduled to occur 21 days after the Lender's approval of Trust's
assumption of the Existing Mortgage or any other date that Seller and Trust
agree. The closing is also subject to other standard closing conditions,
including, without limitation, conveyance to the Trust of a special warranty
deed conveying the Property to the Trust free and clear of all liens and
encumbrances except permitted encumbrances. Trust will pay all costs fees and
expenses in connection with its assumption of the Existing Mortgage.
The Trust anticipates assigning its rights under the Purchase Agreement to a
wholly-owned subsidiary of MOLP prior to the closing.
There can be no assurance that this transaction will ultimately be consummated.
Seller is an unrelated third party.
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. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may,"
10
"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 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.
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.
In connection with the sale of the ACI Building on August 25, 2004, a deferred
liability was recorded in the amount of approximately $1,100,000, representing
the Make Whole Premium described in Note 6. The Make Whole Premium is the
greater of (i) 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 65 months. The
difference obtained by subtracting the current amount of the loan from the
present value, calculated in this manner represents the current value of the
make whole premium. The period-to-period change in the value of the Make Whole
Premium is recorded in discontinued operations for the period in which the
change occurs. Increases in the calculated amount of the Make Whole Premium are
represented as decreases in income from discontinued operations and decreases in
the calculated amount of the Make Whole Premium are represented as increases in
income from discontinued operations. Due to the method of calculation of the
value of the Make Whole Premium using the yield on the applicable U.S. Treasury
note, the amount of the Make Whole Premium can fluctuate significantly from
period to period. The calculation method is dictated by the ACI loan documents
and management believes alternate calculations using different assumptions are
inappropriate.
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. Land improvements are depreciated
over their useful lives of 15-20 years 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
11
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 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
undiscounted cash flows using a discount rate determined by management to be
commensurate with the risk inherent in the Trust.
Real Estate Acquisitions
Upon acquisitions of real estate properties, management makes subjective
estimates of the fair value of acquired tangible assets (consisting of land,
land improvements, building, improvements, and furniture, fixtures and
equipment) and identified intangible assets and liabilities (consisting of above
and below market leases, in-place leases, tenant relationships and assumed
financing that is determined to be above or below market terms) in accordance
with Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. Management utilizes methods similar to those used by independent
appraisers in making these estimates. Based on these estimates, management
allocates purchase price to the applicable assets and liabilities. These
estimates have a direct impact on our net income.
DESCRIPTION OF BUSINESS
OVERVIEW
The Trust previously operated rental real estate in two key segments, apartments
and commercial. The Trust currently operates eight apartment communities,
including the Bicycle Club Apartments that were acquired July 1, 2005. The last
commercial building was sold in August 2004. Cash is primarily generated by
renting apartment units
12
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 principal
and interest on 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 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.
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 industry is sensitive to extremely low interest rates,
which tend to increase home ownership and decrease apartment occupancy rates.
The apartment industry 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.
Economic trends appear to indicate that interest rates are increasing. It also
appears that unemployment rates are declining, with job growth rising. If these
trends are correct and if the trends continue, the Trust believes it should be
able to begin reducing concessions, raising rental rates and increasing
occupancy, which should improve revenues. In such case, the Trust also believes
variable operating expenses will also tend to increase, but fixed expense
coverage would improve.
The Trust primarily invests in income-producing real properties (apartments). As
of June 30, 2005 the Trust's portfolio is comprised of:
PROPERTY # UNITS TYPE LOCATION PURCHASE
DATE
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
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")
Arbor Gate Apartments 120 Apartments Picayune, MS September, 2004
("Arbor Gate")
Waverly Apartments 128 Apartments Bay Saint Louis, MS September, 2004
("Waverly")
(1) King's Court and Terrace Apartment ("Kings Court/Terrace") are operated as
one entity.
UPREIT Structure
The Trust is 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
13
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 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. As of June
30, 2005, minority holders of MOLP own 11,455 limited partnership operating
units, or approximately .91% of the partnership interest in MOLP.
Each of the apartment complexes are owned by single member limited liability
companies that are directly owned by MOLP. Maxus Properties, Inc. provides
property management services for each of the Trust's real properties.
LIQUIDITY AND CAPITAL RESOURCES
Cash as of June 30, 2005 was $3,268,000, a decrease of $592,000 from the balance
of $3,860,000 at December 31, 2004. Escrows and reserves held by various lenders
were $1,007,000 and $1,025,000 at June 30, 2005 and December 31, 2004,
respectively, and are not readily available for current disbursement. An
additional escrow amount of $97,000 at each period end represents a deposit made
for the purchase of Carrington Apartments as described in Note 6 of Notes to
Unaudited Consolidated Financial Statements herein.
Net cash provided by operating activities decreased $16,000 to $419,000 for the
period ended June 30, 2005 primarily attributable to a decrease of $172,000 of
cash provided by discontinued operations, partially offset by an increase in
cash provided by continuing operations.
Net cash used in investing activities of continuing operations was $188,000
comprised primarily of capital expenditures. The largest capital expenditures
included $68,000 for capital replacements at all properties combined. The Trust
expended an additional $21,000 for purchases of equity securities of other real
estate investment trusts during the first quarter of 2005.
Net cash provided by financing activities of continuing operations was $823,000.
Total distributions in the first six months were $653,000 and cash was provided
by the issuance of common stock for $59,000 in connection with the Trust's
optional stock dividend plan.
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 2005. Projected
capital expenditures of approximately $283,000 are currently planned for the
remainder of 2005, primarily for painting, staircase repair, asphalt and
concrete repairs, roofs, and HVAC projects, with the majority of the
expenditures expected to be reimbursed from reserves held by lenders. Capital
replacements of approximately $156,000 are 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 2005.
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. In connection with the merger
between a subsidiary of the Trust and Secured Investment Resources Fund, L.P.,
III, as more fully described in Note 8 of Notes to Unaudited Consolidated
Financial Statements herein, the Trust anticipates paying approximately
$3,602,000 in cash to pay a portion of the merger consideration. Closing of the
transaction occurred July 1, 2005.
On August 25, 2004, ACI Financing, L.L.C., a subsidiary of the Trust ("ACI
Financing"), sold the ACI Building.
14
Net cash proceeds were approximately $3,791,000. This transaction is described
in more detail in Notes 5 and 6. On September 1, 2004, subsidiaries of the Trust
purchased Arbor Gate and Waverly for a purchase price of $9,400,000 using
approximately $2,156,000 of the sale proceeds from ACI in a 1031 exchange. The
remainder of cash for the purchase was provided by available working capital of
the Trust. Management intends to evaluate uses for the remaining net sale
proceeds from ACI, including investing in additional income-producing real
estate properties, working capital purposes and dividends to shareholders.
At this time, management does not believe the risk of changes in operations
adversely impacting cash flow from operating activities in the foreseeable
future is a material risk to the Trust's operations. As leases expire, they are
expected to be replaced or renewed in the normal course of business over a
reasonable period of time.
Contractual Obligations and Commercial Commitments
Balance at Interest Due
June 30, 2005 Rate
ACI 4,112,000 12.63% August 1, 2010
Forest Park 1,846,000 4.91% (variable) September 1, 2007
Kings Court/Terrace 2,308,000 5.15% (variable) May 1, 2009
Terrace 1,611,000 6.87% February 1, 2009
Chalet I 3,896,000 6.59% October 1, 2008
Chalet II 1,469,000 6.535% October 1, 2008
The Landings 3,636,000 7.66% September 1, 2007
Barrington Hills 5,586,000 6.035% July 1, 2029
Arbor Gate 3,044,000 5.12% (variable) September 1, 2011
Waverly 4,200,000 5.11% (variable) September 1, 2011
------------
Total $ 31,708,000
===========
Reference is also made to Note 3 of Notes to Consolidated 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.
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, 2005 and 2004 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
15
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 net income
results in Funds from Operations, which is not determined in accordance with
GAAP.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
Net income (loss) (278,000) (61,000) (311,000) (90,000)
Property related depreciation
and amortization (1) 475,000 383,000 978,000 742,000
----------- ----------- ----------- -----------
Funds from operations $ 197,000 322,000 667,000 652,000
=========== =========== =========== ===========
(1) Depreciation and amortization of discontinued operations of $60,000 for the
three months ended, and $121,000 for the six months ended, is included in the
2004 amount.
Occupancy
The occupancy levels at June 30 were as follows:
OCCUPANCY LEVELS AT JUNE 30,
2005 2004
---- ----
Arbor Gate 99% n/a
Barrington Hills 92% 97%
Chalet 98% 97%
Forest Park 88% 86%
King's Court/Terrace 90% 93%
The Landings 96% 97%
Waverly 95% n/a
ACI Building n/a 100%
Forest Park was 88% occupied at June 30, 2005. The Northern Kansas City,
Missouri market conditions continue to show concessions of one-month free rent
and average occupancy in the high 80% to low 90% range. There are no new
competitors in the market. King's Court/Terrace occupancy was 90% at June 30,
2005. Overall occupancy in the Olathe, Kansas market has remained stable, with
most competitors' average occupancy in the high 80% to low 90% range.
Concessions continue to be common throughout the market with rent concessions
and reduced deposits
16
commonly offered. Occupancy rates in the Topeka, Kansas market is averaging in
the mid 80% range. Competitors in the market continue to offer concessions.
Chalet, which is located in Topeka, ended the quarter at 98% occupied.
Concessions were minimal in the first quarter. The Landings and Barrington Hills
are both located in Little Rock, Arkansas, where the market occupancy rates are
currently in the low to mid 90% range. The Landings and Barrington Hills had
occupancy of 96% and 92%, respectively on June 30, 2005. Concessions in the
Little Rock area continue to be minimal. Arbor Gate and Waverly ended the
quarter at 99% and 95% occupied, respectively. Arbor Gate is located in
Picayune, Mississippi. Waverly is located in Bay Saint Louis, Mississippi. The
average range of occupancy for competitors in the Mississippi market is in the
upper 80% to low 90% range.
Comparison of Consolidated Results From Continuing Operations
For the three and six-month periods ended June 30, 2005, the Trust's
consolidated revenues from continuing operations were $1,806,000 and $3,581,000,
respectively. Revenues increased $427,000 (31%) and $905,000 (34%) for the three
and six-month periods ended June 30, 2005 as compared to the same periods ended
June 30, 2004. The increase is due primarily to the acquisition of Terrace,
Arbor Gate and Waverly Apartments. The combined income for the three and
six-months ended June 30, 2005 from Kings Court/Terrace increased by
approximately $27,000 and $119,000 when compared to the same period in 2004.
Arbor Gate provided $193,000 and $372,000 and Waverly provided $225,000 and
438,000 of additional revenue for the three and six-months ended June 30, 2005.
For the three and six-month periods ended June 30, 2005, the Trust's
consolidated operating expenses from continuing operations were $1,637,000 and
$3,232,000, respectively. Expenses increased $453,000 (38%) and $952,000 (42%)
for the three and six-month periods ended June 30, 2005 as compared to the same
periods ended June 30, 2004. This increase is due primarily to the properties
acquired in 2004. The combined operating expenses at Kings Court/Terrace for the
three and six-month periods ended June 30, 2005 increased by approximately
$47,000 and $151,000 when compared to the same period in 2004. The acquisition
of Arbor Gate and Waverly increased operating expenses by $146,000, and
$319,000, respectively for the three and six-month periods ended June 30, 2005.
Interest expense increased $509,000 for the six-month period ended June 30,
2005, primarily due to $263,000 of interest expense recorded on the ACI wrap
loan. There is a corresponding increase of $263,000 in interest income on the
wrap loan that offsets this expense. See Note 6 of the Notes to Unaudited
Consolidated Financial Statements for a discussion of the interest income and
expense on this loan. The interest expense recorded on the ACI loan in 2004 is
included in discontinued operations in 2004. The properties acquired in 2004
incurred interest expense of $254,000 that was not incurred for the six-month
period ended June 30, 2004.
The net loss from continuing operations for the six month period ended June 30,
2005 was ($426,000) or ($.33) per share. The net loss from continuing operations
for the six month period ended June 30, 2004 was ($90,000) or ($.13) per share.
Comparison of Results of Discontinued Operations
For the six-month period ended June 30, 2005, revenues for the Trust's
discontinued operations decreased $468,000 (100%) and operating expenses
decreased $206,000 (100%) as compared to the same time period in 2004. This
decrease is primarily due to the inclusion of the ACI results for six months in
2004 compared to none in 2005. The activity under the caption adjustment of make
whole premium in Note 5 is the only discontinued operations activity and is
discussed in detail in Note 6.
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 June 30, 2005.
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 lender is currently charging, and DBSI is paying, a default interest
rate of 12.63% as described in Note 6); 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
17
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, King's Court/Terrace, Arbor Gate and Waverly is at variable rates and
matures in 2007, 2009, 2011 and 2011, respectively. The current interest rate on
Forest Park is 4.91%, King's Court/Terrace is 5.15%; Arbor Gate and Waverly are
currently 5.12% and 5.11% respectively and are capped at 6.25%. A 100 basis
point increase in the variable rate debt on an annual basis would impact net
income by approximately $114,000.
INFLATION
The effects of inflation did not have a material impact upon the Trust's
operations in fiscal 2004.
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 C. and Sandra L. Schmude, et al. v. Maxus Properties, Inc., et
al.
On January 29, 2004, Ralph C. and Sandra L. Schmude filed a lawsuit
against a number of entities, including the Registrant, in the Circuit
Court of Clay County, Missouri, Case No. CV104-814 CC ("Clay County
Litigation"). The only claim brought against the Registrant was a
claim that the Registrant allegedly conspired with the other
defendants to mismanage an apartment complex in the Kansas City area
in order for the Registrant, or one of the other defendants, to buy
the apartment complex at a discounted price. The Registrant has
answered Plaintiffs' Petition, denying all claims and asserting
several affirmative defenses.
The Registrant intends to vigorously defend this case because it
believes the claim against it is frivolous. To that end, on April 6,
2005, the Registrant filed a motion for summary judgment, which is
currently pending before the court. In that motion the Registrant
argues that, as a matter of law based on the cumulative facts, the
Plaintiffs have failed to state an actionable civil conspiracy claim.
Maxus Realty Trust, Inc. v. Ralph C. and Sandra L. Schmude
On October 5, 2004, the Registrant filed a lawsuit against Ralph C.
and Sandra L. Schmude in the Circuit Court of Clinton County,
Missouri, Case No. CV0904-182CC. The Registrant brought this suit
because the frivolous civil conspiracy claim alleged in the Clay
County Litigation resulted in the Registrant losing a business
opportunity because of the pending litigation against the Registrant.
The Registrant seeks the recovery of damages it has suffered in
connection with losing this business opportunity, which are unknown at
this time.
18
ITEM 2. UNREGISTERED SALES OF EQUITY SECRUTIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Notes 5 and 6 of the Notes to Unaudited Consolidated Financial
Statements with respect to the sale of the ACI Building
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 30, 2005, the Trust held a special meeting of shareholders. At
the meeting the shareholders approved the issuance of MOLP limited
partnership operating units to certain limited partners of Secured
Investment Resources Fund, L.P. III ("SIR III") in connection with the
merger of SIR III into a subsidiary of MOLP.
There were 683,305 shares voting in favor of the proposal, 16,607
shares voting against such proposal, and 7,975 shares abstaining.
ITEM 5. OTHER INFORMATION
On June 21, 2005 the Trust paid a cash dividend of $.25 per share
payable to the holders of record on May 31, 2005 of the Trust's $1.00
par value common stock.
ITEM 6. EXHIBITS
See Exhibits Index on Page 21
19
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 12, 2005 By: /s/ David L. Johnson
--------------------
David L. Johnson
Chairman of the Board,
President and Chief Executive Officer
Trustee
Date: August 12, 2005 By: /s/ John W. Alvey
--------------------
John W. Alvey
Vice President
Chief Financial and Accounting Officer
20
EXHIBIT INDEX
Exhibit
Number Description
3.1 Articles of Incorporation of the Registrant, as amended, are incorporated
by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2005, 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 March 31, 2005, as filed pursuant to Rule 13a-13 under the
Securities Exchange Act of 1934 (File No. 0000-13754).
10.1 Purchase and Sale Agreement and Joint Escrow Instructions dated June 14,
2005 between FF Park Lane Associates, L.P. 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.
21