SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ending December 31, 1997 Commission file number 0-13693
VININGS INVESTMENT PROPERTIES TRUST
AND SUBSIDIARIES
(Exact name of registrant as specified in its charter)
Massachusetts 13-6850434
- ------------------------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3111 Paces Mill Road, Suite A-200, Atlanta, GA 30339
- ------------------------------------------------ -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 984-9500
-----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 _____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Based on the average bid and asking price on March 16, 1998, the aggregate
market value of the Registrant's shares held by non-affiliates of the Registrant
was $2,291,302.
The number of shares outstanding as of March 16, 1998 was 1,080,508.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Trust's Proxy Statement relating
to its 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III
VININGS INVESTMENT PROPERTIES TRUST
AND SUBSIDIARIES
INDEX TO FORM 10-K
PART I.................................................................3
ITEM 1 - Business..................................................3
ITEM 2 - Properties................................................7
ITEM 3 - Legal Proceedings.........................................8
ITEM 4 - Submission of Matters to a Vote of Shareholders...........8
PART II................................................................9
ITEM 5 - Market for Registrant's Shares of Beneficial Interest.....9
ITEM 6 - Selected Financial Information...........................11
ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...............12
ITEM 8 - Financial Statements and Supplementary Data..............18
ITEM 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............18
PART III..............................................................19
ITEM 10 - Directors and Executive Officers of the Registrant......19
ITEM 11 - Executive Compensation..................................19
ITEM 12 - Security Ownership of Certain Beneficial Owners
and Management..................................19
ITEM 13 - Certain Relationships and Related Transactions..........19
PART IV...............................................................20
ITEM 14 - Exhibits, Financial Statements and Schedule and
Reports on Form 8-K.............................21
Signatures ...........................................................22
This Form 10-K contains 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. The Trust's actual results could differ materially from those projected
in the forward-looking statements. Certain factors that might cause such a
difference are set forth in the section entitled "Certain Factors Affecting
Future Operating Results", in the relevant paragraphs of "Management's
Discussion and Analysis of Results of Operations and Financial Condition", and
elsewhere in this report.
PART I
ITEM 1 - BUSINESS
General Development of Business
- -------------------------------
Vinings Investment Properties Trust, a Massachusetts business trust (the
"Trust") (formerly known as Mellon Participating Mortgage Trust, Commercial
Properties Series 85/10), was organized on December 7, 1984 as a twenty year
finite-life real estate investment trust ("REIT"). Its original purpose was to
invest in participating, shared appreciation, convertible and fixed rate
mortgages and joint venture financing secured by office, industrial and retail
facilities located throughout the United States. The Declaration of Trust
provided, among other things, that the Trustees would use their best efforts to
terminate the Trust within approximately ten years, provided, however, that the
Trustees would have the absolute discretion to determine in good faith such
termination date as would be in the best interests of the shareholders of the
Trust. As provided in the Declaration of Trust, the Trustees proceeded with the
orderly liquidation of assets and distribution of proceeds to the shareholders.
As of December 31, 1995 all of the assets to be liquidated had been sold except
the Hawthorne Note, as hereinafter defined, which was sold on January 3, 1996.
In connection with the liquidation, per share final distributions of $15.60 and
$1.28 (adjusted for the Share Split, as hereinafter defined) were paid on
February 2, 1996 and March 8, 1996, respectively. The remaining assets of the
Trust were Peachtree Business Center ("Peachtree") and approximately $163,000 in
cash.
On January 31, 1996, Vinings Investment Properties, Inc. (the "Purchaser")
commenced a cash tender offer (the "Tender Offer") for a minimum of a majority
and a maximum of 85% of the outstanding shares of beneficial interest without
par value (the "Shares"), of the Trust at a price of $0.47 per Share ($3.76
adjusted for the Share Split, as hereinafter defined). The Tender Offer expired
in accordance with its terms at midnight on February 28, 1996. The Purchaser
accepted an aggregate of 6,337,279 Shares (792,159 Shares adjusted for the Share
Split, as hereinafter defined) validly tendered pursuant to the Tender Offer,
representing approximately 73.3% of the outstanding Shares.
The purpose of the Tender Offer was for the Purchaser to acquire control of the
Trust and to rebuild the Trust's assets by expanding into the multifamily
property markets. In connection with the consummation of the Tender Offer, all
of the trustees and officers of the Trust resigned and were replaced with
designees of the Purchaser. In addition, prior to the Tender Offer, the Trust
was an externally advised REIT for which it paid advisory fees to an unrelated
third party (the "Advisor"). Upon consummation of the Tender Offer, the
relationship with the Advisor was terminated and the Trust became
self-administered.
On June 11, 1996, Vinings Investment Properties, L.P. (the "Operating
Partnership"), a Delaware limited partnership, was organized. The Trust is the
sole general partner and an 80.67% limited partner in the Operating Partnership
at December 31, 1997. During the fourth quarter of the fiscal year ended
December 31, 1997 ("fiscal 1997"), 242,546 limited partnership units in the
Operating Partnership ("Units") were issued, of which 224,330 Units were in
connection with the acquisition of Windrush, as defined below. The Units are
redeemable by their holders for Shares of the Trust on a one-for-one basis or
for cash, at the option of the Trust. (This structure is commonly referred to as
an umbrella partnership REIT or "UPREIT").
On July 1, 1996, the Trust effected a 1-for-8 reverse share split (the "Share
Split") of its 8,645,000 outstanding Shares pursuant to which shareholders of
the Trust received one Share for every eight Shares owned. The Trust has
purchased and continues to purchase any fractional Shares at a cost of $5.50 per
Share. As of December 31, 1997, fractional Shares totaling 113 had been
repurchased and retired leaving 1,080,512 Shares outstanding.
At December 31, 1997, approximately ninety three percent (93%) of the Trust's
total assets were invested in three real estate assets. They were (1) The
Thicket Apartments ("Thicket"), a 254-unit apartment complex located in Atlanta,
Georgia, owned through Thicket Apartments, L.P., a Delaware limited partnership,
of which the Operating Partnership is a 99% limited partner and Thicket
Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of the Trust,
is the sole general partner; (2) Windrush Apartments ("Windrush"), a 202-unit
apartment community located in Atlanta, Georgia, owned through Vinings
Communities, L.P., a Delaware limited partnership of which the Operating
Partnership is a 99% limited partner and the Trust is the sole general partner
and; and (3) Peachtree, an approximately 75,000 square foot, single-story
business park located in Atlanta, Georgia, owned by the Operating Partnership.
The Trust has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, and intends to maintain its qualification as a REIT in the
future. As a REIT, the Trust will generally not be subject to federal income
taxation on that portion of its income that qualifies as REIT taxable income to
the extent that it distributes at least 95% of its taxable income to its
shareholders and satisfies certain other requirements.
The Trust's executive offices are located at 3111 Paces Mill Road, Suite A-200,
Atlanta, Georgia 30339, (770) 984-9500.
Financial Information About Industry Segments
- ---------------------------------------------
The Trust's operations and identifiable long-term assets have been attributed to
the real estate industry for the entirety of its existence. While investments
prior to the Tender Offer were primarily mortgage loans, currently the assets of
the Trust are equity investments. Management plans to continue making equity
investments in the multifamily real estate markets.
Narrative Description of Business
- ---------------------------------
The primary objective of the Trust is to continue to expand into the multifamily
real estate markets through the acquisition of garden style apartment
communities, which are leased to middle-income residents. The middle-income
resident is a more stable and broader based market, often referred to as "the
renter by necessity." Management believes that middle market properties provide
greater potential for appreciation through increased revenues and cash flows
than the more expensive high-end apartment communities, which cater to the
"renter by choice."
Management believes that these investments will provide attractive sources of
income to the Trust, which will not only provide cash available for future
distributions, but will increase the value of the Trust's real estate portfolio
as well.
In the past, the Trust has reviewed each real estate investment in the Trust's
portfolio on a quarterly basis. Management plans to continue this review as well
as to carefully review each acquisition to insure that the Trust makes sound
investments on behalf of its shareholders. In this regard, the Trust has
established an Acquisition Committee comprised of four members of the Board of
Trustees, one of which is also an officer. The Board has also established
certain investment criteria which must be met. The Acquisition Committee must
review and approve each potential acquisition before it is presented to the
Board for final approval.
Growth and Expansion Strategy
- -----------------------------
Management intends to implement its growth and expansion strategy by targeting
properties that have been under managed and under maintained, and purchase such
properties at a price which is below replacement cost. Through strategic value
added and return oriented capital improvements and intensive property
management, the Trust believes that cash flow, and in turn value, will be
increased.
The Trust currently anticipates that these acquisitions will include certain
properties within the existing multifamily property portfolios of entities
affiliated with management of the Trust which meet certain criteria, as well as
properties acquired from unaffiliated third parties. These properties may be
acquired either for cash, through debt financing, in exchange for Shares of the
Trust or Units or any combination thereof. In addition, the Trust believes it
can raise capital through private offerings for specific acquisitions.
Competition
- -----------
The Trust competes with a number of housing alternatives for its residents
including other multifamily communities and single family homes available for
rent as well as purchase. This competition could have an affect not only on the
properties' ability to lease rental units but also on the rents charged. The
Trust also competes with other investors for potential acquisitions, some of
which may have greater resources with which to purchase projects that the Trust
may be interested in acquiring.
Advisory and Property Management Services
- -----------------------------------------
Through February 28, 1996, the Trust's day-to-day operations were managed by the
Advisor. See Note 8 to the Trust's December 31, 1997 Consolidated Financial
Statements, which provides additional information regarding the advisory
agreement. After the consummation of the Tender Offer, the Trust terminated the
services of the Advisor and became self-administered. The Trust has entered into
management agreements with Vinings Properties, Inc. for property management
services for Thicket and Windrush for a fee equal to five percent of gross
revenues. Vinings Properties, Inc. is an affiliate of certain officers and
trustees of the Trust. In addition, as a commitment to the rebuilding of the
Trust, The Vinings Group, Inc., the parent corporation of Vinings Properties,
Inc., (collectively, "Vinings") provided numerous services to the Trust during
fiscal 1997 relating to administration, acquisition, and capital and asset
advisory services at little or no cost to the Trust. The Trust does not
anticipate that these services will continue to be provided free of charge.
However, while the Trust has been in its rebuilding stages, the officers and
trustees have been committed to providing as many services as possible to
promote the Trust's growth. Peachtree is managed by a third-party property
management firm not affiliated with management.
Employees
- ---------
At December 31, 1997, Thicket and Windrush had 10 employees who performed
on-site property management services for the communities and were paid with
funds generated from Thicket and Windrush. In addition, the Trust paid a total
of $45,000 to Vinings for shareholder services performed exclusively for the
Trust by one of its employees. None of the officers of the Trust received
compensation from the Trust for their services.
Environmental Policy
- --------------------
Investments in real property create a potential for environmental liability on
the part of the Trust. Owners of real property may be held liable for all costs
and liabilities relating to hazardous substances present on or emanating from
their properties. Current management, as did the previous Advisor, assesses on
an as needed basis, measures that may need to be been taken to comply with
environmental laws and regulations. In the event that there is a potential of
environmental responsibility, the costs to comply with environmental laws and
regulations would be estimated at that time. At December 31, 1997, the Trust was
not aware of any potential environmental contamination relating to investments
in its portfolio.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
This Form 10-K contains 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. The Trust's actual results could differ materially from those set forth
in the forward-looking statements. Certain factors that might cause such a
difference include the following: the inability of the Trust to identify
properties within existing multifamily property portfolios of entities
affiliated with management which will have a strategic fit with the Trust, the
inability of the Trust to identify unaffiliated properties for acquisition, the
less than satisfactory performance of any property which might be acquired by
the Trust, the inability to access the capital markets in order to fund the
Trust's present growth and expansion strategy, the cyclical nature of the real
estate market generally and locally in Georgia and the surrounding southeastern
states, the national economic climate, the local economic climate in Georgia and
the surrounding southeastern states, and the local real estate conditions and
competition in Georgia and the surrounding southeastern states. There can be no
assurance that, as a result of the foregoing factors, the Trust's growth and
expansion strategy will be successful or that the business and operations of the
Trust will not be adversely affected thereby.
ITEM 2 - PROPERTIES
As of December 31, 1997, all of the Trust's investments were equity investments
in real estate. While the Trust still owns Peachtree, a single-story business
park, it intends to continue investing only in multifamily communities. The
Trust's real estate investments are summarized below by property:
Amount of Investment Occupancy
Investment Percentage at 12/31/97
---------- ------------ -----------
The Thicket Apartments $ 8,308,773 46% 99%
Windrush Apartments 7,555,000 42% 93%
Peachtree Business Center 2,262,908 12% 100%
============ ===========
Totals $18,126,681 100%
============ ===========
The above investment amounts are net of accumulated depreciation. The Trust
incorporates herein by reference the description of owned real property on
Schedule III and the notes thereto. This schedule is made part of the Trust's
December 31, 1997 Consolidated Financial Statements.
ITEM 3 - LEGAL PROCEEDINGS
In August 1997, the Trust, through the Operating Partnership, began contract
negotiations for the acquisition of a 2,365-unit portfolio of 16 multifamily
properties. The sellers, which were 16 individual partnerships (the "Sellers"),
were to contribute the properties to the Operating Partnership in exchange for a
combination of Units and/or cash and the assumption of existing mortgage
indebtedness (the "Portfolio Transaction"). The officers of the Trust spent
substantial amounts of time and the Trust spent substantial amounts of money in
its due diligence on the properties and in contract negotiations specifically
for this portfolio. The Trust believes that it secured a binding commitment from
the Sellers for the Portfolio Transaction. Conditional commitments for equity
financing were obtained and the Trust was prepared to close on the transaction
in early 1998. Within thirty days of closing, the general partner of the Sellers
terminated the contract for reasons the Trust believes to be pretextual, in
breach of the contract and not in the best interests of the partners of the
selling partnerships or the shareholders of the Trust.
On February 3, 1998, the Trust commenced an action against the Sellers, their
general partners and a related property management company seeking specific
enforcement of the contract and damages for the defendant's willful breach of
contract, lack of good faith negotiation and tortious interference in connection
with the breach and termination of the contract. In a related case, the Sellers
filed an action on January 29, 1998 seeking a declaratory judgement that the
contract is not valid, binding and enforceable against them. The Trust is
vigorously pursuing its claim. However, there can be no assurances that the
Trust will prevail in its action or recover any damages.
None of the Trust's properties are presently subject to any material litigation
nor, to the Trust's knowledge, is any material litigation threatened against the
Trust or any of its properties, other than the above complaint and routine
actions or claims and administrative proceedings arising in the ordinary course
of business. Some of these claims are expected to be covered by insurance and
all of which collectively are not expected to have a material adverse effect on
the business, the financial condition, or the results of operations of the
Trust.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of the Trust's shareholders during the
fourth quarter of fiscal 1997.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S SHARES OF BENEFICIAL INTEREST
Stock Quotation
- ---------------
The Trust's Shares are currently traded on the Nasdaq SmallCap Market under the
symbol "VIPIS".
Market Information
- ------------------
On July 1, 1996, the Trust effected a 1-for-8 reverse Share Split of its
8,645,000 outstanding Shares. Shareholders tendered their Shares and received
one Share for every eight Shares owned. The Trust has purchased and continues to
purchase any fractional Shares at a cost of $5.50 per share. As of December 31,
1997, fractional Shares totaling 113 had been repurchased and retired leaving
1,080,512 Shares outstanding. All Share prices and dividends have been restated
to reflect the Share Split. The high and low sales prices for each quarterly
period during fiscal 1997 and the fiscal year ended December 31, 1996 ("fiscal
1996"), which reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions, are as
follows:
--------------------- ---------------------
1997 1996
--------------------- ---------------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
March 31 4 5/8 4 3/8 22 3
June 30 4 7/8 4 3/8 6 1/2 3
September 30 4 7/8 4 6 4
December 31 5 1/4 3 3/4 5 4 3/8
Dividends
- ---------
The Trust's dividend policy up to the consummation of the Tender Offer was to
distribute all liquidating proceeds. These dividends were 100% return of capital
in fiscal 1996 (as summarized below) which historically had an effect on the
Trust's Share price. The effect of dividend distributions reduced the book value
of the Trust, and therefore, reduced the market price for the Shares, especially
with regard to the final liquidating dividends paid in the first quarter of
fiscal 1996. For fiscal 1997 the Trust did not pay or declare cash
distributions. On March 16, 1998, the closing sales price for the Trust's
Shares, as reported on the Nasdaq SmallCap Market, was $4.25.
The Trust has paid quarterly cash distributions to shareholders sufficient to
enable the Trust to qualify as a REIT. For fiscal 1996 the Trust declared cash
distributions per Share in accordance with generally accepted accounting
principles (adjusted for the Share Split) as shown below. For a discussion of
the federal income tax consequences of these distributions, refer to Note 10 of
the Trust's December 31, 1997 Consolidated Financial Statements.
------------------------------------
1996
------------------------------------
Payment Date Distributions
February 2, 1996 $15.60
March 8, 1996 1.28
---------
Total $16.88
=========
Since the consummation of the Tender Offer, management has not issued its
dividend policy for the Trust, nor has it declared any dividends. In an effort
to rebuild the Trust's assets, all operating cash flow has been reserved for
future growth and expansion. However, as assets are acquired and operating cash
flow increases, the Trust intends to pay distributions to shareholders in
amounts at least sufficient to enable the Trust to qualify as a REIT.
Holders
- -------
The Trust had 745 holders of record of its Shares as of March 16, 1998.
ITEM 6 - SELECTED FINANCIAL INFORMATION
- ---------------------------------------
The following table sets forth selected financial information for the Trust and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as the Trust's December
31, 1997, Consolidated Financial Statements which are made part of this report.
All share and per share information have been restated to reflect the Share
Split.
For the year ended December 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- -------------- -------------- -------------
Revenues $ 2,478,824 $ 1,796,917 $ 3,244,908 $ 4,159,170 $ 6,668,425
Expenses 3,146,005 2,580,195 1,779,475 2,477,923 2,163,286
-------------- ------------- -------------- -------------- -------------
Income (loss) before loss on
real estate investments (667,181) (783,278) 1,465,433 1,681,247 4,505,139
Loss on real estate investments - (26,800) (886,887) (816,307) (1,325,000)
-------------- ------------- -------------- -------------- -------------
Net income (loss) before minority interest (667,181) (810,078) 578,546 864,940 3,180,139
Minority interest (5,464) - - - -
-------------- ------------- -------------- -------------- -------------
Net income (loss) $ (661,717) $ (810,078) $ 578,546 $ 864,940 $ 3,180,139
============== ============= ============== ============== =============
Net income (loss) per share - basic
and diluted $ (0.61) $ (0.75) $ 0.54 $ 0.80 $ 2.94
============== ============= ============== ============== =============
Weighted average shares outstanding-basic 1,080,513 1,080,528 1,080,625 1,080,625 1,080,625
============== ============= ============== ============== =============
Weighted average shares outstanding-diluted 1,089,435 1,080,528 1,080,625 1,080,625 1,080,625
============== ============= ============== ============== =============
Dividends declared and paid:
Ordinary income $ - $ - $ - $ 0.08 $ 4.08
Return of capital - 16.88 12.24 24.64 -
-------------- ------------- -------------- -------------- -------------
Total dividends declared and paid $ - $ 16.88 $ 12.24 $ 24.72 $ 4.08
============== ============= ============== ============== =============
Total assets $ 18,989,558 $ 11,519,469 $ 21,878,357 $ 34,348,242 $ 60,514,634
============== ============= ============== ============== =============
Shareholders' equity $ 2,268,803 $ 2,232,548 $ 21,284,112 $ 33,932,908 $ 59,781,018
============== ============= ============== ============== =============
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Trust was organized on December 7, 1984 as a twenty year finite-life REIT
whose original purpose was to invest in participating, shared appreciation,
convertible and fixed rate mortgages and joint venture financing secured by
office, industrial and retail facilities located throughout the United States.
The Declaration of Trust provided, among other things, that the Trustees would
use their best efforts to terminate the Trust within approximately ten years.
The Trustees proceeded with the orderly liquidation of assets and the
distribution of proceeds to the shareholders. As of December 31, 1995, all of
the assets to be liquidated had been sold except the Hawthorne Note, as
hereinafter defined, which was sold on January 3, 1996. The remaining assets of
the Trust were Peachtree Business Center, a 75,000 square foot business park
located in Atlanta, Georgia ("Peachtree") and approximately $163,000 in cash.
On January 31, 1996, Vinings Investment Properties, Inc. (the "Purchaser")
commenced a cash tender offer (the "Tender Offer") for a minimum of a majority
and a maximum of 85% of the outstanding shares of beneficial interest, without
par value (the "Shares"), of the Trust. The Tender Offer expired in accordance
with its terms at midnight on February 28, 1996, and the Purchaser accepted
approximately 73.3% of the outstanding Shares. In connection with the
consummation of the Tender Offer, all of the trustees and officers of the Trust
("Prior Management") resigned and were replaced with designees of the Purchaser
("Management"). In addition, the Trust was an externally advised REIT for which
it paid advisory fees to an unrelated third party (the "Advisor"). Upon
consummation of the Tender Offer, the relationship with the Advisor was
terminated and the Trust became self-administered.
The purpose of the Tender Offer was for Management to acquire control of the
Trust and to rebuild the Trust's assets by expanding into the multifamily real
estate markets through the acquisition of garden style apartment communities
which are leased to middle-income residents. Management believes that these
investments will provide attractive sources of income to the Trust which will
not only increase net income and provide cash available for future
distributions, but will increase the value of the Trust's real estate portfolio
as well.
On June 11, 1996, Vinings Investment Properties, L.P. (the "Operating
Partnership"), a Delaware limited partnership, was organized. At December 31,
1997, the Trust is the sole general partner and an 80.67% limited partner in the
Operating Partnership. During the fourth quarter of fiscal year end December 31,
1997 ("fiscal 1997"), a total of 242,546 limited partnership units in the
Operating Partnership ("Units") were issued, of which 224,330 Units were in
connection with the acquisition of Windrush, as defined below. The Units are
redeemable for Shares of the Trust on a one-for-one basis or for cash, at the
option of the Trust. (This structure is commonly referred to as an umbrella
partnership REIT or "UPREIT").
On July 1, 1996, the Trust effected a 1-for-8 reverse share split (the "Share
Split") of its 8,645,000 outstanding Shares. Shareholders tendered their Shares
and received one Share for every eight Shares owned. The Trust has purchased and
continues to purchase any fractional Shares at a cost of $5.50 per share. As of
December 31, 1997, fractional Shares totaling 113 had been repurchased and
retired leaving 1,080,512 Shares outstanding.
Much of Management's efforts during fiscal 1997 were focused on the acquisition
of Windrush Apartments, a 202-unit apartment community located in Atlanta,
Georgia ("Windrush"), the Trust's first UPREIT transaction in exchange for
Units, as well as negotiating for a 2,365-unit portfolio transaction, the
contract for which was terminated by the Seller thirty days prior to closing
(the "Portfolio Transaction"). (See Item 3-Legal Proceedings and Note 9 to the
Trust's December 31, 1997 Consolidated Financial Statements). At December 31,
1997, the Trust's real estate assets were The Thicket Apartments, a 254-unit
apartment community located in Atlanta, Georgia ("Thicket"), Windrush and
Peachtree, which were 100%, 93% and 100% leased, respectively.
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements of the Trust and the notes thereto.
Results of Operations
- ---------------------
Because it was the original intent of the Trust to liquidate and terminate after
approximately ten years, the net income, as well as the asset value, of the
Trust decreased during the liquidating years of fiscal year ended December 31,
1995 ("fiscal") and fiscal year ended December 31, 1996 ("fiscal") and have
begun to increase in fiscal 1997 with the Tender Offer and Management's
redirection and rebuilding of the Trust. Revenues decreased from fiscal 1995 to
fiscal 1996 as a result of the liquidation of the Trust's assets and increased
from fiscal 1996 to fiscal 1997 with continued growth as the Trust pursued its
expansion strategy. Operating expenses, however, increased substantially in
fiscal 1996 due to a number of non-recurring costs associated with the Tender
Offer and the structural reorganization of the Trust and increased again in
fiscal 1997 as a result of the costs incurred in connection with the Portfolio
Transaction. In addition, the nature of the operating expenses has shifted from
administrative expenses and advisory fees to property operating expenses and
mortgage interest expense connected with the Trust's income producing assets.
All of the gains (losses) on real estate investments since fiscal 1995 were the
result of prior management's liquidation of the Trust's investments.
As a result of the liquidation of assets, change in management, and the
redirection of the Trust's business objectives, substantially all of the income
producing assets held in fiscal 1995 are no longer held by the Trust, with the
exception of Peachtree.
Comparison of Operating Results of 1997 to Operating Results of 1996
- --------------------------------------------------------------------
Total revenues increased $681,907, or 38%, from $1,796,917 to $2,478,824 due to
the fact that the Trust had begun to pursue its growth and expansion strategy.
Rental and other property revenues increased $924,263, or 60%, from $1,552,483
to $2,476,746 due primarily to the revenues generated in connection with the
Trust's ownership of Thicket for an entire year during fiscal 1997 as compared
to six months during fiscal 1996. Revenues from Peachtree remained fairly
constant. Immaterial amounts of revenue were generated for the twelve days
Windrush was owned during fiscal 1997.
Interest income decreased by $90,579, or 98%, from $92,657 to $2,078. In fiscal
1996, interest income was generated from cash investments primarily in the first
two months of the year, prior to the payment of liquidating dividends. Since
that time there have been relatively small cash balances.
Property operating and maintenance expense increased $406,496, or 69%, from
$586,430 to $992,926, primarily to the expenses generated in connection with the
Trust's ownership of Thicket for an entire year during fiscal 1997 as compared
to six months during fiscal 1996.
Depreciation increased $182,036, or 76%, from $240,357 to $422,393. Depreciation
on Thicket increased $185,165 due to the Trust's ownership of Thicket for an
entire year during fiscal 1997 as compared to six months during fiscal 1996 as
well as additional depreciation on improvements made during fiscal 1997.
Depreciation on Peachtree decreased slightly.
Interest expense increased $407,832, or 100% from $408,719 to $816,551 due to
the Trust's ownership of Thicket for an entire year during fiscal 1997 as
compared to six months during fiscal 1996.
General and administrative expense decreased $651,598 or 66%, from $987,973 to
$336,375. The majority of the decrease relates to costs associated with the
Tender Offer and structural reorganization of the Trust during 1996 that did not
recur during fiscal 1997. The following expense categories included in general
and administrative decreased from fiscal 1996 to fiscal 1997: professional fees
by $398,733, directors' and officers' insurance by $176,768, trustee expense by
$31,312, annual report and proxy costs by $27,361 and filing fees by $17,425.
There were no investment advisor's fees incurred during fiscal 1997. All of the
advisor's fees during fiscal 1996 were incurred during January and February as
the services of the Advisor were terminated at the consummation of the Tender
Offer.
The unusual item of $532,185 included in operating expenses during fiscal 1997
relates to costs incurred in connection with the Portfolio Transaction. These
expenses include due diligence costs such as environmental and engineering
reports, independent financial analysis, investor appraisal costs and legal
contract negotiations.
(See Note 9 to the Trust's December 31, 1997 Consolidated Financial Statements).
There were no gains or losses on real estate investments during fiscal 1997. The
loss on real estate investment of $26,800 in fiscal 1996 represents commissions
and fees on the sale of the Hawthorne Note, as hereinafter defined.
The Trust incurred a net loss before minority interest of $667,181 for fiscal
1997 as compared to $810,078 for fiscal 1996, representing a decrease of
$142,897, even with the unusual item described above. Had the Trust not incurred
the unusual item associated with the Portfolio Transaction, the net loss before
minority interest for fiscal 1997 would have been $134,996. The minority
interest of $5,464 represents the allocation of losses for the short period in
December 1997 during which Units in the Operating Partnership were held.
Comparison of Operating Results of 1996 to Operating Results of 1995
- --------------------------------------------------------------------
Total revenues decreased $1,447,991, or 45%, from $3,244,908 to $1,796,917 as a
result of the Trust's liquidation of investments.
Rental and other property revenues increased $952,029, or 159%, from $600,454 to
$1,552,483 as a result of the acquisition of Thicket on June 28, 1996. Revenues
from Peachtree remained fairly constant.
There was no partnership income during 1996, as compared to $1,730,508 in 1995,
due to the sale of the interest in the Mellon\Pier I Properties Limited
Partnership I (the "Pier I Interest") on December 29, 1995.
Interest income decreased by $798,842, or 90%, from $891,499 to $92,657. One of
the Trust's major sources of revenues prior to fiscal 1996 was its investment in
mortgage loan receivables. Interest earned on these investments generated the
Trust's interest income in fiscal 1995. In fiscal 1996, interest income was
generated from cash investments primarily in the first two months of the year,
prior to the payment of liquidating dividends.
Property operating and maintenance expense increased $295,882, or 102%, from
$290,548 to $586,430, also as a result of the acquisition of Thicket.
Depreciation and amortization decreased $116,903, or 32%, from $361,013 to
$244,110. There was no depreciation generated from the Pier I Interest in fiscal
1996, as compared to $277,601 in fiscal 1995. The Thicket generated depreciation
of $162,965 for the six months held in fiscal 1996. Depreciation and
amortization on Peachtree increased slightly.
The Trust incurred a mortgage note payable and established a line of credit
during 1996, both associated with the acquisition of Thicket. (See Note 6 to the
Trust's December 31, 1997 Consolidated Financial Statements). In connection with
these liabilities, the Trust incurred financing costs, which are being amortized
over the lives of the obligations, and interest expense associated with the
notes. These amounts totaled $19,502 and $408,719, respectively.
General and administrative expense increased $221,627, or 29%, from $766,346 to
$987,973. The majority of the increased expense relates to costs associated with
the Tender Offer and the structural reorganization of the Trust. In addition,
the 1996 expense includes $180,987 of non-recurring directors' and officers'
insurance obtained for the sole benefit of prior management, as well as the
Trust's continuing directors' and officers' insurance coverage.
Investment advisor's fees decreased $28,107, or 8%, from $361,568 to $333,461.
All of the advisor's fees were incurred during January and February 1996 as the
services of the Advisor were terminated at the consummation of the Tender Offer.
The loss on real estate investment of $26,800 represents commissions and fees on
the sale of the Hawthorne Note as hereinafter defined. The Hawthorne Research
and Development Complex was sold on March 30, 1995 for $5,095,000 of which
$3,500,000 was paid at closing. A note for the balance of $1,595,000 (the
"Hawthorne Note") was received by the Trust. The Trust realized a net gain on
this sale of $152,825. On January 3, 1996, the Hawthorne Note was sold for
$700,000. As of December 31, 1995, an allowance to reduce the note receivable to
fair market value of $895,000 was recognized on the Hawthorne Note.
The Trust incurred a net loss of $810,078 for 1996 as compared to net income of
$578,546 for 1995, representing a decrease of $1,388,624. This decrease was the
direct result of the Trust's liquidation of its assets and the consummation of
the subsequent Tender Offer.
Liquidity and Capital Resources
- -------------------------------
Operating activities provided net cash of $152,536 for fiscal 1997 as compared
to net cash used in operating activities of $704,965 for fiscal 1996, which was
the result of the liquidating and restructuring of the Trust during fiscal 1996.
As a result of the Tender Offer and the implementation of Management's growth
and expansion strategy, cash flows from investing and financing activities have
changed dramatically from fiscal years 1995 to 1996 to 1997. During fiscal 1995,
cash provided by investing activities was the result of the Trust's liquidation
of investments. In fiscal 1996, $673,200 was generated from the sale of
investments and approximately $8,700,000 was invested in Thicket. While Windrush
was acquired during fiscal 1997, it was not acquired with cash but through the
assumption of debt, escrow accounts and the issuance of Units. Approximately
$3,800 in cash was spent in connection with the Windrush acquisition and
approximately $135,000 was used to make improvements to Thicket and Peachtree.
Cash flows used in financing activities were comprised of (1) distributions to
shareholders, and (2) debt incurred. Distributions to shareholders have
decreased from $13,277,342 during fiscal 1995, to $9,526,133 during fiscal 1996,
with no distributions during fiscal 1997. All distributions were the result of
final liquidating dividends paid to shareholders. During fiscal 1996, the Trust
received net proceeds of $7,392,000 from a mortgage note payable, in addition to
$1,568,104 in proceeds from a secured line of credit, all of which were used in
the acquisition of Thicket. During fiscal 1997, an additional $150,000 was drawn
from the line of credit. A mortgage note in the amount of $6,464,898, was
assumed in connection with the acquisition of Windrush and is not considered a
cash transaction.
Many of the costs associated with the liquidation of Trust's assets and the
subsequent Tender Offer and organizational restructuring that were incurred
during fiscal 1996, have not continued into fiscal 1997. The cash held by the
Trust at December 31, 1997, plus the cash flow from the Trust's assets, is
expected to provide sources of liquidity to allow the Trust to meet all current
operating obligations. In addition, the remaining balance of $281,896 on the
Trust's $2,000,000 line of credit may be drawn for working capital needs or
acquisition funding. It is anticipated that the line of credit, which is due in
June 1998, will be renewed, refinanced or repaid through the issuance of new
equity. (For additional information regarding the line of credit see Note 6 to
the Trust's December 31, 1997 Consolidated Financial Statements). Management
intends to continue ongoing discussions with capital sources, both public and
private, as well as explore financing alternatives, so as to allow the Trust to
expand and grow its income producing investments. (See "Growth and Expansion
Strategy".)
Recent Accounting Pronouncements
- --------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
supersedes the authoritative literature and related interpretations for earnings
per share under Accounting Principles Board Opinion No. 15. Effective for the
quarter and year ended December 31, 1997, the Trust computes net income (loss)
per share under the provisions of SFAS No. 128. As prescribed by SFAS No. 128,
all prior period net income (loss) per share data has been restated to conform
with the provisions of SFAS No. 128. Under SFAS No. 128, basic net income (loss)
per share is computed based upon the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
to reflect the potential dilution of all instruments or securities which are
convertible into common shares of the Trust. Previously reported net income
(loss) per share under prior accounting standards was equal to basic and diluted
net income (loss) per share under SFAS no. 128.
Impact of Inflation
- -------------------
Substantially all of the residential leases at Thicket and Windrush are for
periods of one year or less which will enable the Trust to seek increased rents
upon renewal of existing leases or upon commencement of new leases. Although
there can be no assurance that rental increases may be obtained, the short term
nature of these leases generally serves to reduce the risk to the Trust of the
adverse effects of inflation.
Substantially all of the tenant leases at Peachtree have remaining terms of five
years or less and contain clauses which require the tenants to pay their
prorated share of operating expenses, including common area maintenance, real
estate taxes, and insurance. This serves to reduce the risk of increased costs
and operating expenses resulting from inflation. In addition, the Trust may seek
increased base rents upon renewal of existing leases or upon commencement of new
leases in order to offset any adverse effects of inflation. However, there can
be no assurance that rental increases may be obtained.
Other Matters
- -------------
The Trust is currently assessing the potential impact of the year 2000 on the
processing of date sensitive information. The year 2000 issue is the result of
many computer programs recognizing a date ending with "00" as the year 1900
rather than the year 2000, causing potential system failures or miscalculations
which could result in disruptions of normal business operations. However, year
2000 computer issues are not expected to have a material adverse impact on the
Trust's financial position, results of operations or cash flows in future
periods. The Trust's software systems are either currently year 2000 compliant
or will be compliant well in advance of January 1, 2000.
This Form 10-K contains 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. The Trust's actual results could differ materially from those set forth
in the forward-looking statements. Certain factors that might cause such a
difference include the following: the inability of the Trust to identify
properties within existing multifamily property portfolios of entities
affiliated with management which will have a strategic fit with the Trust, the
inability of the Trust to identify unaffiliated properties for acquisition, the
less than satisfactory performance of any property which might be acquired by
the Trust, the inability to access the capital markets in order to fund the
Trust's present growth and expansion strategy, the cyclical nature of the real
estate market generally and locally in Georgia and the surrounding southeastern
states, the national economic climate, the local economic climate in Georgia and
the surrounding southeastern states, and the local real estate conditions and
competition in Georgia and the surrounding southeastern states. There can be no
assurance that, as a result of the foregoing factors, the Trust's growth and
expansion strategy will be successful or that the business and operations of the
Trust will not be adversely affected thereby.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are listed under
Item 14(a) and filed as part of this report on the pages indicated.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this Item 9 was previously reported in a Current
Report on Form 8-K filed with the Securities and Exchange Commission on January
14, 1997.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Trustees and Executive Officers of the Registrant
required by Item 10 shall be included in the Proxy Statement to be filed
relating to the 1998 Annual Meeting of the Registrant's shareholders and is
incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information concerning the Trustees and Executive Officers of the Registrant
required by Item 11 shall be included in the Proxy Statement to be filed
relating to the 1998 Annual Meeting of the Registrant's shareholders and is
incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning Ownership of Certain Beneficial Owners and Management
required by Item 12 shall be included in the Proxy Statement to be filed
relating to the 1998 Annual Meeting of the Registrant's shareholders and is
incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning Certain Relationships and Related Transactions
required by Item 13 shall be included in the Proxy Statement to be filed
relating to the 1998 Annual Meeting of the Registrant's shareholders and is
incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND
REPORTS ON FORM 8-K
14(A) (1) AND (2) INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULE Page
----
Report of Independent Public Accountants--As of December 31, 1997
and 1996 and for the years then ended 24
Report of Independent Auditors--For the year ended December 31, 1995 25
Consolidated Balance Sheets--As of December 31, 1997 and 1996 26
Consolidated Statements of Operations--For the years ended
December 31, 1997, 1996 and 1995. 27
Consolidated Statements of Shareholders' Equity--For the years ended
December 31, 1997, 1996 and 1995 28
Consolidated Statements of Cash Flows--For the years ended
December 31, 1997, 1996 and 1995 29
Notes to Consolidated Financial Statements--For the years ended
December 31, 1997, 1996 and 1995 30
Consolidated Financial Statement Schedule 42
14(A) (3) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ---------- ------------
3.1 --- Second Amended and Restated Declaration of Trust of the Trust (incorporated by reference
to Exhibit 3.1 to the Trust's Registration Statement on Form S-11, No. 2-94776).
3.2 --- Amendment No. 1 to the Second Amended and Restated Declaration of Trust of the Trust
(incorporated by reference to Exhibit 3.3 to the Trust's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, No. 0-13693).
3.3 --- Amendment No. 2 to the Second Amended and Restated Declaration of Trust of the Trust
(incorporated by reference to Exhibit 3.4 to the Trust's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, No. 0-13693).
3.4 --- Amended and Restated Bylaws of the Trust (incorporated by reference to Exhibit 3.2 to
the Trust's Registration Statement on Form S-11, No. 2-94776).
10.1 --- Amended and Restated Agreement of Limited Partnership of Vinings Investment Properties,
L.P. (filed herewith).
10.2 --- First Amendment to the Amended and Restated Agreement of Limited Partnership of Vinings
Investment Properties, L.P. (filed herewith).
10.3 --- Second Amendment to the Amended and Restated Agreement of Limited Partnership of Vinings
Investment Properties, L.P. (filed herewith).
10.4 --- Management Contract, dated June 25, 1996, between Thicket Apartments, L.P. and Vinings
Properties, Inc. (incorporated by reference to Exhibit 10.8 to the Trust's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, No. 0-13693).
10.5 --- Management Contract, dated July 6, 1990, between PBC Acquisition, Inc. and Carter and
Associates Enterprises, Inc. (incorporated by reference to Exhibit 10.9 to the Trust's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, No. 0-13693).
10.6 --- Agreement to Contribute, dated April 1, 1997, between Vinings Investment Properties,
L.P. and Windrush Partners, Ltd. (incorporated by reference to Exhibit 10.1 to the
Trust's Current Report on Form 8-K filed December 29, 1997, No. 0-13693).
10.7 --- Amendment to Agreement to Contribute, dated August 11, 1997, between Vinings Investment
Properties, L.P. and Windrush Partners, Ltd. (incorporated by reference to Exhibit 10.2
to the Trust's Current Report on Form 8-K filed December 29, 1997, No. 0-13693).
10.8 --- Second Amendment to Agreement to Contribute, dated October 30, 1997, between Vinings
Investment Properties, L.P. and Windrush Partners, Ltd. (incorporated by reference to
Exhibit 10.3 to the Trust's Current Report on Form 8-K filed December 29, 1997, No.
0-13693).
10.9 --- Agreement of Limited Partnership of Vinings Communities, L.P. (incorporated by reference
to Exhibit 10.1 to the Trust's Current Report on Form 8-K/A filed March 3, 1998, No.
0-13693).
10.10 --- Management Contract dated December 19, 1997 between Vinings Communities, L.P. and
Vinings Properties, Inc. (filed herewith).
10.11 --- Limited Warranty Deed, dated December 19, 1997, by and between Windrush Partners, L.P.
and Vinings Communities, L.P. (incorporated by reference to Exhibit 10.2 to the Trust's
Current Report on Form 8-K/A filed March 3, 1998, No. 0-13693).
10.12 --- Assumption Agreement, dated December 19 1997, by Vinings Communities, L.P. in favor of
Reilly Mortgage Group, Inc. (incorporated by reference to Exhibit 10.3 to the Trust's
Current Report on Form 8-K/A filed March 3, 1998, No. 0-13693).
10.13 --- Commercial Credit Agreement between Hardwick Bank and Trust Company and the Trustees of
the Trust dated June 28, 1997 (filed herewith).
21.1 --- Subsidiaries of the Trust (filed herewith).
27 --- Financial Data Schedule (filed herewith).
14(B) REPORTS ON FORM 8-K
Current Report on Form 8-K, dated December 19, 1997, was filed with the
Securities and Exchange Commission on December 29, 1997, with respect
to the Trust's acquisition of Windrush.
14(C) INDEX TO EXHIBITS
See Item 14(a)(3) above.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
VININGS INVESTMENT PROPERTIES TRUST
By: /s/ Peter D. Anzo
---------------------
Peter D. Anzo
President and
Chief Executive Officer
Dated: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Peter D. Anzo Chief Executive Officer, March 30, 1998
- ------------------------- President and Trustee
Peter D. Anzo
/s/ Stephanie A. Reed Vice President, Treasurer, March 30, 1998
- ------------------------- Secretary and Trustee
Stephanie A. Reed
/s/ Martin H. Petersen Trustee March 30, 1998
- -------------------------
Martin H. Petersen
/s/ Gilbert H. Watts, Jr. Trustee March 30, 1998
- -------------------------
Gilbert H. Watts, Jr.
/s/ Phill D. Greenblatt Trustee March 30, 1998
- -------------------------
Phill D. Greenblatt
/s/ Henry Hirsch Trustee March 30, 1998
- -------------------------
Henry Hirsch
/s/ Thomas B. Bender Trustee March 30, 1998
- -------------------------
Thomas B. Bender
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vinings Investment Properties Trust:
We have audited the accompanying consolidated balance sheets of Vinings
Investment Properties Trust and subsidiaries (the "Trust") as of December 31,
1997 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vinings Investment
Properties Trust and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
- -----------------------
Atlanta, Georgia
March 6, 1998
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Vinings Investment Properties Trust:
We have audited the accompanying consolidated balance sheet (not included
herein) of Vinings Investment Properties Trust and Subsidiaries (formerly known
as Mellon Participating Mortgage Trust, Commercial Properties Series 85/10) (the
"Trust") as of December 31, 1995 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the year ended
December 31, 1995. Our audit also included the financial statement schedules
listed in the index as Item 6 and 14(a). These financial statements and
schedules are the responsibility of the Trust's management. Our responsibility
is to express an opinion of these consolidated financial statements and schedule
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Trust as of December 31, 1995 and the consolidated results of their operations
and their cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles. Also, it is our opinion, that the
related financial statement schedules above, when considered in relation to the
basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
Ernst & Young LLP
/s/ Ernst & Young LLP
- ---------------------
New York, New York
February 23, 1996
VININGS INVESTMENT PROPERTIES TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
1997 1996
-------------- --------------
ASSETS
- ------
Real estate assets:
Land $ 2,884,500 $ 1,470,500
Buildings and improvements 15,267,009 9,218,263
Furniture, fixtures & equipment 1,011,483 783,691
Less: accumulated depreciation (1,036,311) (613,918)
-------------- --------------
Net real estate assets 18,126,681 10,858,536
Cash and cash equivalents 282,851 171,736
Cash escrows 314,684 192,611
Receivables and other assets 63,402 86,002
Deferred financing costs, less accumulated amortization of
$54,459 and $19,502 at December 31, 1997 and 1996,
respectively 169,968 204,925
Deferred leasing costs, less accumulated amortization of
$39,087 and $28,470 at December 31, 1997 and 1996,
respectively 31,972 5,659
-------------- --------------
Total assets $ 18,989,558 $ 11,519,469
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Mortgage notes payable $ 13,784,566 $ 7,371,676
Line of credit 1,718,104 1,568,104
Accounts payable and accrued liabilities 708,876 347,141
-------------- --------------
Total liabilities 16,211,546 9,286,921
-------------- --------------
Minority interest in Operating Partnership 509,209 -
-------------- --------------
Contingencies (Note 12)
Shareholders' equity:
Shares of beneficial interest, without par value,
unlimited shares authorized, 1,080,512 and 1,080,528
shares issued and outstanding at December 31,
1997 and 1996, respectively 19,429,735 18,731,763
Cumulative earnings 37,217,597 37,879,314
Cumulative distributions (54,378,529) (54,378,529)
-------------- --------------
Total shareholders' equity 2,268,803 2,232,548
-------------- --------------
Total liabilities and shareholders' equity $ 18,989,558 $ 11,519,469
============== ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
VININGS INVESTMENT PROPERTIES TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
-----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUES
- --------
Rental revenues $ 2,392,072 $ 1,482,419 $ 576,216
Other property revenues 84,674 70,064 24,238
Income from partnership - - 1,730,508
Interest income 2,078 92,657 891,499
Other income - 151,777 22,447
------------ ------------ ------------
2,478,824 1,796,917 3,244,908
------------ ------------ ------------
EXPENSES
- --------
Property operating and maintenance 992,926 586,430 290,548
Depreciation and amortization 433,011 244,110 361,013
Amortization of deferred financing costs 34,957 19,502 -
Interest expense 816,551 408,719 -
General and administrative 336,375 987,973 766,346
Investment advisor's fees - 333,461 361,568
Unusual item 532,185 - -
------------ ------------ ------------
3,146,005 2,580,195 1,779,475
------------ ------------ ------------
Income (loss) before gain (loss) on real estate investments (667,181) (783,278) 1,465,433
------------ ------------ ------------
GAIN (LOSS) ON REAL ESTATE INVESTMENTS
- --------------------------------------
Gain (loss) on real estate investments - (26,800) 1,655,113
Allowance to reduce real estate investments
to fair market value - - (2,542,000)
------------ ------------ ------------
- (26,800) (886,887)
------------ ------------ ------------
Income (loss) before minority interest (667,181) (810,078) 578,546
Minority interest (5,464) - -
------------ ------------ ------------
Net income (loss) $ (661,717) $ (810,078) $ 578,546
============ ============ ============
NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED $ (0.61) $ (0.75) $ 0.54
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 1,080,513 1,080,528 1,080,625
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 1,089,435 1,080,528 1,080,625
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
VININGS INVESTMENT PROPERTIES TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For
the years ended December 31, 1995, 1996 and 1997
Shares of Total
beneficial Cummulative Cummulative shareholders'
interest earnings distributions equity
------------- ------------ -----------------------------
BALANCE AT DECEMBER 31, 1994 $ 50,200,591 $ 38,110,846 $(54,378,529) $ 33,932,908
Net income - 578,546 - 578,546
Distributions to shareholders
($12.24 per share return of capital
for federal income tax purposes) (13,227,342) - - (13,227,342)
------------- ------------ ------------- -------------
BALANCE AT DECEMBER 31, 1995 36,973,249 38,689,392 (54,378,529) 21,284,112
Net loss - (810,078) - (810,078)
Retirement of shares (536) - - (536)
Distributions to shareholders
($16.88 per share return of capital
for federal income tax purposes) (18,240,950) - (18,240,950)
------------- ------------ ------------- -------------
BALANCE AT DECEMBER 31, 1996 18,731,763 37,879,314 (54,378,529) 2,232,548
Adjustment for minority interest of
unitholders and issuance of units
in Operating Partnership 698,056 698,056
Net loss - (661,717) - (661,717)
Retirement of shares (84) - - (84)
------------- ------------ ------------- -------------
BALANCE AT DECEMBER 31, 1997 $ 19,429,735 $ 37,217,597 $(54,378,529) $ 2,268,803
============= ============ ============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
VININGS INVESTMENT PROPERTIES TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income (loss) $ (661,717) $ (810,078) $ 578,546
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 433,011 244,110 409,450
Amortization of deferred financing costs 34,957 19,502 -
Loan discount amortization - - (101,800)
Minority interest of unitholders in Operating Partnership (5,464)
Estimated allowance to reduce real
estate to fair value - - 2,542,000
(Gain) loss on real estate investments - 26,800 (1,655,113)
Changes in assets and liabilities:
Cash escrows 75,745 (192,611) -
Receivables and other assets 22,600 260,055 3,768
Capitalized leasing costs (36,931) (5,639) -
Accounts payable, accrued liabilities and due to affiliate 290,335 (247,104) 43,470
------------- ------------- -------------
Total adjustments 814,253 105,113 1,241,775
------------- ------------- -------------
Net cash provided by (used in) operating activities 152,536 (704,965) 1,820,321
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Purchase of The Thicket Apartments - (8,660,900) -
Purchase of Windrush Apartments, net of cash acquired (3,791) - -
The Thicket capital expenditures (109,333) (49,635) -
Peachtree capital expenditures (26,205) (29,862) (16,751)
Principal payments on notes receivable - - 2,000,000
Sales proceeds from real estate investments - 673,200 25,338,141
------------- ------------- -------------
Net cash provided by (used in) investing activities (139,329) (8,067,197) 27,321,390
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Net proceeds from mortgage note payable - 7,392,000 -
Net proceeds from line of credit 150,000 1,568,104 -
Deferred financing costs - (224,427) -
Principal repayments on mortgage payable (52,008) (20,324) -
Purchase of retired shares (84) (536) -
Distributions to shareholders - (18,240,950) (13,227,342)
------------- ------------- -------------
Net cash provided by (used in) financing activities 97,908 (9,526,133) (13,227,342)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 111,115 (18,298,295) 15,914,369
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 171,736 18,470,031 2,555,662
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 282,851 $ 171,736 $ 18,470,031
============= ============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
VININGS INVESTMENT PROPERTIES TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - FORMATION AND ORGANIZATION
Vinings Investment Properties Trust (the "Trust") was organized on
December 7, 1984 under the laws of the Commonwealth of Massachusetts as
a twenty-year finite-life real estate investment trust ("REIT") under
the Internal Revenue Code of 1986. The Trust was originally organized
for the purpose of making real estate investments consisting primarily
of mortgage loans and was to liquidate at the end of approximately ten
years in accordance with its Declaration of Trust, provided, however,
that the Trustees would have the absolute discretion to determine in
good faith such termination date as would be in the best interests of
the shareholders. On January 3, 1996, the final asset to be liquidated
was sold and final dividends were declared.
On January 31, 1996, Vinings Investment Properties, Inc. ("the
Purchaser") commenced a tender offer for a minimum of a majority and a
maximum of 85% of the issued and outstanding shares of beneficial
interest without par value of the Trust (the "Shares"), at a purchase
price of $0.47 per share ($3.76 per share adjusted for the Share Split,
as hereinafter defined) (the "Tender Offer"). The Tender Offer expired
in accordance with its terms on February 28, 1996, and, in connection
therewith, the Purchaser accepted an aggregate of 6,337,279 Shares
(792,159 Shares adjusted for the Share Split, as hereinafter defined),
representing approximately 73.3% of the outstanding Shares, for a total
acquisition price of $2,978,521. The remaining assets of the Trust were
Peachtree Business Center ("Peachtree") and approximately $163,000 in
cash. The purpose of the Tender Offer was for the Purchaser to acquire
control of the Trust and to rebuild the Trust's assets by expanding
into the multifamily property markets. In connection with the
consummation of the Tender Offer, all of the Trustees and officers of
the Trust resigned and were replaced with designees of the Purchaser.
Until the consummation of the Tender Offer, the Trust was an externally
advised REIT for which it paid advisory fees to an unrelated third
party (the "Advisor"). Upon consummation of the Tender Offer, the
relationship with the Advisor was terminated and the Trust became
self-administered.
On June 11, 1996, Vinings Investment Properties, L.P. (the "Operating
Partnership"), a Delaware limited partnership, was organized. As of
December 31, 1997, the Trust is the sole 1% general partner and an
80.67% limited partner in the Operating Partnership. During the fourth
quarter of 1997, 242,546 limited partnership units in the Operating
Partnership ("Units") were issued, of which 224,330 Units were in
connection with the acquisition of Windrush, as defined below. The
Units are redeemable for shares of the Trust on a one-for-one basis
or cash, at the option of the Trust. (This structure is commonly
referred to as an umbrella partnership REIT or "UPREIT").
The Trust currently owns three real estate assets. They are (1) The
Thicket Apartments ("Thicket"), a 254-unit apartment complex located in
Atlanta, Georgia, owned through Thicket Apartments, L.P., a Delaware
limited partnership, of which the Operating Partnership is a 99%
limited partner and Thicket Holdings, Inc., a Delaware corporation and
wholly-owned subsidiary of the Trust, is the sole general partner; (2)
Windrush Apartments ("Windrush"), a 202-unit apartment community
located in Atlanta, Georgia owned through Vinings Communities, L.P., a
Delaware limited partnership of which the Operating Partnership is a
99% limited partner and the Trust is the sole general partner; and (3)
Peachtree, an approximately 75,000 square foot, single-story business
park located in Atlanta, Georgia, owned by the Operating Partnership.
At December 31, 1997, Thicket, Windrush and Peachtree were 100%, 93%
and 100% leased, respectively.
On July 1, 1996, the Trust effected a 1-for-8 reverse share split (the
"Share Split") of its 8,645,000 outstanding Shares. Shareholders
tendered their Shares and received one Share for every eight Shares
owned. The Trust has purchased and continues to purchase any fractional
Shares at a cost of $5.50 per share. As of December 31, 1997,
fractional Shares totaling 113 had been repurchased and retired leaving
1,080,512 Shares outstanding. All share and per share data included in
the accompanying financial statements and notes thereto have been
restated to reflect the Share Split.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying consolidated financial statements of Vinings
Investment Properties Trust include the consolidated accounts of
Vinings Investment Properties Trust and its subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation. The minority interest of the unitholders in the
Operating Partnership on the accompanying balance sheet is calculated
based on the minority interest ownership percentage (18.33% as of
December 31, 1997) multiplied by the Operating Partnership's net
assets. The minority interest of the unitholders in the income or loss
of the Operating Partnership on the accompanying statement of
operations is calculated based on the weighted average number of Shares
and Units outstanding during the period. The term "Trust" hereinafter
refers to Vinings Investment Properties Trust and its subsidiaries,
including the Operating Partnership.
Income Taxes
------------
The Trust has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"). As a result, the Trust will
generally not be subject to federal income taxation on that portion of
its income that qualifies as REIT taxable income to the extent the REIT
distributes at least 95% of its taxable income to its shareholders and
satisfies certain other requirements. Accordingly, no provision for
federal income taxes has been included in the accompanying consolidated
financial statements.
Cash and Cash Equivalents
-------------------------
The Trust considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Cash Escrows
------------
Cash escrows consist of real estate tax, insurance, replacement reserve
and repair escrows held by mortgagees. These funds are restricted
accounts and released solely for the purpose for which they were
established.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Real Estate Assets
------------------
Real estate assets are stated at depreciated cost less reductions for
impairment, if any. In identifying potential impairment, management
considers such factors as declines in a property's operating
performance or market value, a change in use, or adverse changes in
general market conditions. In determining whether an asset is impaired,
management estimates the future cash flows expected to be generated
from the asset's use and its eventual disposition. If the sum of these
estimated future cash flows on an undiscounted basis is less than the
asset's carrying cost, the asset is written down to its fair value. In
management's opinion, there has been no impairment of the Trust's real
estate assets as of December 31, 1997.
Ordinary repairs and maintenance are expensed as incurred. Major
improvements and replacements are capitalized and depreciated over
their estimated useful lives when they extend the useful life, increase
capacity or improve efficiency of the related asset. Depreciation is
computed on a straight-line basis over the useful lives of the real
estate assets (buildings and improvements, 5-40 years; furniture,
fixtures and equipment, 5 years; and tenant improvements, generally
over the life of the related lease.)
Revenue Recognition
-------------------
All leases are classified as operating leases and rental income is
recognized when earned which materially approximates revenue
recognition on a straight-line basis.
Deferred Financing Costs and Amortization
-----------------------------------------
Deferred financing costs include fees and costs incurred to obtain
financing and are capitalized and amortized over the term of the
related debt.
Net Income (Loss) Per Share
---------------------------
Effective for the quarter and year ended December 31, 1997, the Trust
computes net income (loss) per share under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." As prescribed by SFAS No. 128, all prior period net income
(loss) per share data has been restated to conform with the provisions
of SFAS No. 128. Under SFAS No. 128, basic net income (loss) per share
is computed based upon the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is
computed to reflect the potential dilution of all instruments or
securities which are convertible into common shares of the Trust.
Previously reported net income (loss) per share under prior accounting
standards was equal to basic and diluted net income (loss) per share
under SFAS No. 128.
The following is a reconciliation of net income (loss) available to the
common shareholders and the weighted average shares used in the Trust's
basic and diluted net income (loss) per share computations:
1997 1996 1995
----------- ----------- ----------
Net income (loss) - basic $(661,717) $(810,078) $578,546
Minority interest (5,464) - -
=========== =========== ==========
Net income (loss) - diluted $(667,181) $(810,078) $578,546
=========== =========== ==========
Weighted average shares - basic 1,080,513 1,080,528 1,080,625
Dilutive Securities
Weighted average Units in Operating
Partnership 8,922 - -
Share options - - -
----------- ----------- ----------
Weighted average shares - diluted 1,089,435 1,080,528 1,080,625
=========== =========== ==========
The dilutive effect of the share options on the Trust's net income
(loss) per share calculation was excluded, as the impact of such share
options was antidilutive.
Reclassification
----------------
Certain 1996 and 1995 financial statement amounts have been
reclassified to conform with the current year presentation.
NOTE 3 - REAL ESTATE ASSETS
Windrush Apartments
-------------------
On December 19, 1997, the Trust acquired Windrush for a purchase price
of $7,555,000 consisting of the assumption of an existing mortgage loan
in the amount of $6,464,898 and other liabilities and the issuance of
224,330 limited partnership units in the Operating Partnership.
The Thicket Apartments
----------------------
On June 28, 1996, the Trust acquired Thicket for a purchase price of
$8,650,000. The acquisition was financed by a mortgage loan on the
property in the amount of $7,392,000 and borrowings from the Trust's
line of credit.
Peachtree Business Center
-------------------------
The Trust acquired Peachtree through a deed-in-lieu of foreclosure on
April 12, 1990. Peachtree was recorded at $1,700,000, its fair market
value, which was less than the book value of the Trust's mortgage
investment at the date of foreclosure. Subsequent to the acquisition,
approximately $1,062,000 of improvements have been capitalized.
NOTE 4 - REAL ESTATE INVESTMENTS
Arbutus and Pacesetter Notes
----------------------------
On August 2, 1995, the Trust sold participating mortgage loans secured
by the Arbutus and Pacesetter Shopping Centers ("Arbutus and
Pacesetter") for $3,615,000 and $2,900,000, respectively. These sales
resulted in a total loss of $1,845,035, comprised of a $1,647,000
write-down to reflect the realizable value, and selling, legal and
advisory expenses of $198,035.
Hawthorne Note
--------------
The Trust acquired the Hawthorne Research and Development Complex
("Hawthorne") in 1992 through foreclosure of its mortgage note. The
Trust's investment in the property was written down from 1992 through
1994 to $4,605,702 to reflect its anticipated net realizable value. On
March 30, 1995, the Trust sold Hawthorne for $5,095,000 of which
$3,500,000 was paid at closing. The balance of $1,595,000 (the
"Hawthorne Note") was payable pursuant to a non-recourse purchase money
note and was subordinate to first mortgage liens totaling $10,360,000.
In connection with the sale of Hawthorne, the Trust reported a gain of
$152,825. In connection with the liquidation of assets, the Trust
entered into an agreement with the first mortgage lien holder to sell
the Hawthorne Note for $700,000. At December 31, 1995, the Trust
established a valuation allowance of $895,000 to reflect its net
realizable value of $700,000. On January 3, 1996, the Trust closed on
the sale of the Hawthorne Note and recorded commissions and fees for a
loss on the sale of $26,800.
NOTE 5 - INVESTMENT IN PARTNERSHIP
The Trust held partnership interests totaling 35.5% in the Mellon/Pier
I Properties Limited Partnership I (the "Pier I Partnership"). The Pier
I Partnership was formed to acquire land and buildings which were
leased to affiliates of the Pier I Partnership's managing general
partner, Pier I, and operated as Pier I Imports retail stores.
On December 29, 1995, the Trust sold its partnership interests to Pier
I. Total sales proceeds to the Trust were $15,788,680, which after
legal and advisory fees of $189,648, resulted in a gain of $1,700,323.
NOTE 6 - NOTES PAYABLE
Mortgage Notes Payable
----------------------
At December 31, 1997, the Trust had the following mortgage notes
payable:
1) 9.04% mortgage note payable in the original principal amount of
$7,392,000, which is secured by Thicket and which matures on July
1, 2003. Principal and interest are payable in monthly installments
of $59,691.
2) 7.5% mortgage note payable which was assumed on December 19, 1997
with a principal balance of $6,464,898, which is secured by
Windrush and which matures on July 1, 2024. Principal and interest
are payable in monthly installments of $47,457.
At December 31, 1997, the total outstanding principal for both notes
was $13,784,566. Scheduled maturites of the mortgage notes payable as
of December 31, 1997 are as follows:
1998 $ 144,501
1999 156,664
2000 169,860
2001 184,179
2002 199,716
Thereafter 12,929,646
==============
Total $13,784,566
==============
Line of Credit
--------------
The Trust renewed its one year line of credit in the amount of
$2,000,000 on June 27, 1997, which bears interest at the bank's base
rate which approximates prime. At December 31, 1997, the interest rate
was 8.50%. Interest is payable monthly with the entire principal
balance due on June 28, 1998. It is anticipated that the line of credit
will be renewed at that time. The line of credit is secured by
Peachtree. At December 31, 1997, the outstanding balance of the line of
credit was $1,718,104.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Trust entered into management agreements with Vinings Properties,
Inc. to provide property management services for Thicket and Windrush
for a fee equal to five percent of gross revenues plus a fee for data
processing. Vinings Properties, Inc. is an affiliate of certain
officers and trustees of the Trust. A total of $93,235 and $44,459 in
management fees and $15,240 and $7,620 in data processing fees were
incurred by the Trust during 1997 and 1996, respectively.
In addition, as a commitment to the rebuilding of the Trust, The
Vinings Group, Inc., the parent corporation of Vinings Properties, Inc.
(collectively "Vinings"), has provided numerous services to the Trust
relating to administration, acquisition, and capital and asset advisory
services at little or no cost to the Trust. The Trust does not
anticipate that these services will continue to be provided free of
charge, and certain costs paid on the Trust's behalf have been
reimbursed to Vinings. However, while the Trust has been in its initial
growth stages, the officers and trustees have been committed to
providing as many services as possible to promote the growth of the
Trust. A total of $45,000 and $15,000 were paid during 1997 and 1996,
respectively, to Vinings for shareholder services provided for the sole
benefit of the Trust by one of Vinings' employees. The officers did not
receive compensation from the Trust for their services.
On December 19, 1997, the Trust acquired Windrush from Windrush
Partners, Ltd. (the "Partnership"), a Georgia limited partnership,
whose general partner is Hallmark Group Services Corp ("Hallmark").
Hallmark is an affiliate of the officers and certain trustees of the
Trust. In connection with the acquisition of Windrush, an advisor's fee
of $75,550 was paid by the Partnership to MFI Realty, Inc.("MFI"), a
wholly owned subsidiary of The Vinings Group, Inc.
In connection with the acquisition of Thicket on June 28, 1996, a
broker's commission of $150,000 was paid by the seller of the property
to MFI.
In addition, the Trust paid a total of $21,000 during 1997 to
Northshore Communications, Inc., a company affiliated with one of the
Trustees, for the design and production of the Trust's 1996 annual
report.
NOTE 8 - ADVISORY AGREEMENT
Prior to the consummation of the Tender Offer, the Trust had engaged
the Advisor to provide investment advisory services and act as the
administrator of Trust operations. The agreement with the Advisor,
which was terminated upon consummation of the Tender Offer, provided
for the payment of administrative, asset management and other servicing
fees to the Advisor for services rendered in administering the Trust's
operations. The Advisor earned administrative, asset management,
special services, and mortgage servicing fees aggregating $333,461 and
$290,684 for the years ended December 31, 1996 and 1995, respectively.
The Trust also amortized deferred loan acquisition fees of $70,884 for
the year ended December 31, 1995, which is recorded as investment
advisor's fees in the accompanying financial statements.
NOTE 9 - UNUSUAL ITEM
In August 1997, the Trust, through the Operating Partnership, began
contract negotiations for the acquisition of a 2,365-unit portfolio of
16 multifamily properties. The sellers, which were 16 individual
partnerships (the "Sellers"), were to contribute the properties to the
Operating Partnership in exchange for a combination of Units and/or
cash and the assumption of existing mortgage indebtedness (the
"Portfolio Transaction"). The officers of the Trust spent substantial
amounts of time and the Trust spent substantial amounts of money in its
due diligence on the properties and in contract negotiations
specifically for this portfolio. The Trust believes that it secured a
binding commitment from the Sellers for the Portfolio Transaction.
Conditional commitments for equity financing were obtained and the
Trust was prepared to close on the transaction in early 1998. Within
thirty days of closing, the general partner of the Sellers terminated
the contract for reasons the Trust believes to be pretextual, and
in breach of the contract and not in the best interests of the partners
of the selling partnerships or the shareholders of the Trust.
On February 3, 1998, the Trust commenced an action against the Sellers,
their general partners and a related property management company
seeking specific enforcement of the contract and damages for the
defendant's willful breach of contract, lack of good faith negotiation
and tortious interference in connection with the breach and termination
of the contract. In a related case, the Sellers filed an action on
January 29, 1998 seeking a declaratory judgement that the contract is
not valid, binding and enforceable against them. The Trust is
vigorously pursuing its claim. However, there can be no assurances that
the Trust will prevail in its action or recover any damages. Therefore,
because of the uncertainty of any legal action, the Trust has written
off as unrecoverable the due diligence, contract negotiation and other
acquisition costs totaling $532,185 associated with the Portfolio
Transaction that were incurred during the fourth quarter of 1997.
NOTE 10 - DISTRIBUTIONS
There were no distributions declared or distributed for the year ended
December 31, 1997. Distributions declared and distributed for the years
ended December 31, 1996 and 1995 aggregated $18,240,950 and
$13,227,342, respectively, or $16.88 and $12.24 per share.
For federal income tax purposes, all distributions received by
shareholders for the years ended December 31, 1996 and 1995 represented
a return of capital.
NOTE 11 - LEASING ACTIVITY
The following is a schedule of future minimum rents due under operating
leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1997, at Peachtree:
1998 $ 543,118
1999 540,930
2000 403,665
2001 318,864
2002 132,860
------------
Total $1,939,437
============
One tenant generated 57% of Peachtree's revenues for the fiscal year
ended December 31, 1997. The same tenant accounts for 73% of the future
minimum lease payments. While this tenant's lease does not expire until
May 31, 2002, it contains a 90-day cancellation clause which management
is renegotiating to eliminate such provision.
NOTE 12 - CONTINGENCIES
The Trust is, from time to time, subject to various claims that arise
in the ordinary course of business. These matters are generally covered
by insurance. While the resolution of these matters cannot be predicted
with certainty, management believes that the final outcome of such
matters will not have a material adverse effect on the financial
position or results of operations of the Trust.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
The Trust paid interest of $800,388 and $353,032 during 1997 and 1996,
respectively.
Significant noncash investing and financing activities were as follows:
1. In connection with the December 19, 1997 Windrush acquisition the
Trust assumed a mortgage note payable in the amount of $6,464,898
and related cash escrow accounts. In addition, 242,546 limited
partnership units in the Operating Partnership were issued during
1997 valued at $1,212,729.
2. The Hawthorne Research and Development Complex was sold on
March 30, 1995 for $5,095,000 at which time the Trust received a
note for $1,595,000.
NOTE 14 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on interest rates and other pertinent information available to
the Trust as of December 31, 1997 and 1996, the Trust estimates that
the carrying value of cash and cash equivalents, the mortgage notes
payable, the line of credit, and other liabilities approximate their
fair values when compared to instruments of similar type, terms and
maturity.
Disclosure about fair value of financial instruments is based on
pertinent information available to management as of December 31, 1997
and 1996. Although management is not aware of any factors that would
significantly affect its estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since December 31, 1997.
NOTE 15 - 1997 STOCK OPTION AND INCENTIVE PLAN
At the 1997 annual shareholders meeting held on July 1, 1997, the Trust
adopted the Vinings Investment Properties Trust 1997 Stock Option and
Incentive Plan (the "Plan") in order to provide incentives to officers,
employees, trustees, and other key persons. The Plan provides for the
grant of share options, share appreciation rights, restricted and
unrestricted share awards, performance share awards, and dividend
equivalent rights.
Under the Plan the maximum number of shares reserved and available for
issuance is 10% of the total number of outstanding shares at any time
plus 10% of the number of Units outstanding at any time that are
subject to redemption rights. At December 31, 1997 the total number of
shares reserved under the plan totaled 132,305.
On July 1, 1997, the Trust granted a total of 26,000 non-qualified
share options (the "Options") to the officers, trustees and certain key
persons. The Options are exercisable at a price of $5.00 (based on a
closing sales price of a share of the Trust on the Nasdaq SmallCap
Market on June 30, 1997 of $4.56) to vest over a one year period. No
options had been exercised as of December 31, 1997.
The Trust accounts for share options issued under the Plan in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost has been recognized since
all options have been granted with an exercise price equal to or above
the fair value of the Trust's shares on the date of grant. In
accordance with Statement of Financial Accounting Standard No. 123
(SFAS 123) "Accounting for Stock-Based Compensation," the Trust has
estimated the fair value of the Options using a binomial option pricing
model with the following weighted average assumptions: risk free
interest rate of 6.12%, expected option life of five years, expected
volatility of 30% and expected dividend yield of 3.6%. Using these
assumptions, the estimated fair value of the Options was $38,000, which
would be included in compensation expense over the life of the vesting
period. Accordingly, had the Trust accounted for the Plan under SFAS
123, the Trust's pro forma net loss and net loss per share for the year
ended December 31, 1997 would have been as follows:
Net loss:
As reported $(661,717)
===========
Pro forma $(680,717)
===========
Net loss per share:
As reported $(0.61)
===========
Pro forma $(0.63)
===========
NOTE 16 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited summarized quarterly results of operations for the years
ended December 31, 1997 and 1996 are as follows:
- ----------------------------- --------------- ---------------- -------------- ----------------
1997 FIRST SECOND THIRD FOURTH
- ----------------------------- --------------- ---------------- -------------- ----------------
Total revenues $ 596,364 $ 600,046 $635,736 $ 646,678
=============== ================ ============== ================
Net loss $ (51,820) $ (59,171) $(18,625) $ (532,101)
=============== ================ ============== ================
Net loss per share -
Basic and diluted $ (0.05) $ (0.05) $ (0.02) $ (0.49)
=============== ================ ============== ================
- ----------------------------- --------------- ---------------- -------------- ----------------
1996 FIRST SECOND THIRD FOURTH
- ----------------------------- --------------- ---------------- -------------- ----------------
Total revenues $ 393,473 $ 169,281 $613,310 $ 620,853
=============== ================ ============== ================
Net loss $(407,671) $(127,349) $(76,093) $(198,965)
=============== ================ ============== ================
Net loss per share -
basic and diluted $ (0.38) $ (0.12) $ (0.07) $ (0.18)
=============== ================ ============== ================
Dividends declared and paid $ 16.88 $ - $ - $ -
=============== ================ ============== ================
VININGS INVESTMENT PROPERTIES TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
Gross amounts at which
Initial Cost to Trust carried at close of period
--------------------- -------------------------------
Improvements
Capitalized
Buildings and Subsequent to Buildings and
Description Encumbrance Land Improvements Acquisition Land Improvements Total
- -----------------------------------------------------------------------------------------------------------------------------
Peachtree Business Center $ 1,718,104 $ 400,000 $ 1,300,000 $1,088,124 $ 400,000 $ 2,388,124 $ 2,788,124
The Thicket Apartments 7,319,668 1,070,500 7,590,400 158,968 1,070,500 7,749,368 8,819,868
Windrush Apartments 6,464,898 1,414,000 6,141,000 - 1,414,000 6,141,000 7,555,000
------------------------------------------------------------------------------------------------
Totals $15,502,670 $2,884,500 $15,031,400 $1,247,092 $2,884,500 $16,278,492 $19,162,992
================================================================================================
Life on which Date of
Accumulated Depreciation Date Original
Description Depreciation is Computed Acquired Construction
- ---------------------------------------------------------------------------------------------
Peachtree Business Center $ 450,953 5-40 Years 4/90 1984
The Thicket Apartments 162,965 5-40 Years 6/96 1989
Windrush - 5-40 Years 12/97 1983
----------------------------------------------------------------
Totals $ 1,036,311
============
The accompanying notes are an integral part of this schedule.
VININGS INVESTMENT PROPERTIES TRUST
NOTES TO SCHEDULE III
DECEMBER 31, 1997
(A) The Peachtree investment was acquired through a deed in-lieu of
foreclosure of an original mortgage note investment. In June 1996, the
Trust obtained a $2,000,000 line of credit, which is secured by
Peachtree. At December 31, 1997, $1,718,104 was outstanding on the
line.
(B) The Thicket Apartments was acquired on June 28, 1996 for a purchase
price of $8,650,000. It was financed by a mortgage loan in the original
amount of $7,392,000 and borrowings from the Trust's line of credit,
which is secured by Peachtree.
(C) Windrush Apartments was acquired on December 19, 1997, for a purchase
price of $7,555,000 consisting of the assumption of an existing
mortgage loan in the amount of $6,464,898 and other liabilities and the
issuance of 224,330 limited partnership units in the Operating
Partnership.
(D) Gross capitalized costs of real estate assets are summarized as
follows:
------------- -------------- -------------
1997 1996 1995
------------- -------------- -------------
Balance at beginning of period $11,472,454 $ 2,732,057 $7,445,666
----------- -------------- -----------
Additions during period:
Additions 7,555,000 8,660,900 -
Improvements 135,538 79,497 16,751
----------- -------------- -----------
Total additions 7,690,538 8,740,397 16,751
----------- -------------- -----------
Deductions during period:
Hawthorne - - 4,730,360
----------- ------------- -----------
Balance at close of period $19,162,992 $11,472,454 $2,732,057
=========== ============== ===========
(E) Accumulated depreciation on real estate assets is as follows:
-------------- ----------- -----------
1997 1996 1995
-------------- ----------- -----------
Balance at beginning of period $ 613,918 $374,524 $424,332
-------------- ----------- -----------
Additions during period:
Peachtree Business Center 74,263 76,429 75,480
The Thicket Apartments 348,130 162,965 -
-------------- ----------- -----------
Total additions 422,393 239,394 75,480
-------------- ----------- -----------
Deductions during period:
Retirements/sales - - (125,288)
-------------- ----------- -----------
Total deductions - - (125,288)
-------------- ----------- -----------
Balance at close of period $1,036,311 $613,918 $374,524
============== =========== ===========
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ---------- ------------
3.1 --- Second Amended and Restated Declaration of Trust of the Trust (incorporated by reference
to Exhibit 3.1 to the Trust's Registration Statement on Form S-11, No. 2-94776).
3.2 --- Amendment No. 1 to the Second Amended and Restated Declaration of Trust of the Trust
(incorporated by reference to Exhibit 3.3 to the Trust's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, No. 0-13693).
3.3 --- Amendment No. 2 to the Second Amended and Restated Declaration of Trust of the Trust
(incorporated by reference to Exhibit 3.4 to the Trust's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, No. 0-13693).
3.4 --- Amended and Restated Bylaws of the Trust (incorporated by reference to Exhibit 3.2 to
the Trust's Registration Statement on Form S-11, No. 2-94776).
10.1 --- Amended and Restated Agreement of Limited Partnership of Vinings Investment Properties,
L.P. (filed herewith).
10.2 --- First Amendment to the Amended and Restated Agreement of Limited Partnership of Vinings
Investment Properties, L.P. (filed herewith).
10.3 --- Second Amendment to the Amended and Restated Agreement of Limited Partnership of Vinings
Investment Properties, L.P. (filed herewith).
10.4 --- Management Contract, dated June 25, 1996, between Thicket Apartments, L.P. and Vinings
Properties, Inc. (incorporated by reference to Exhibit 10.8 to the Trust's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, No. 0-13693).
10.5 --- Management Contract, dated July 6, 1990, between PBC Acquisition, Inc. and Carter and
Associates Enterprises, Inc. (incorporated by reference to Exhibit 10.9 to the Trust's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, No. 0-13693).
10.6 --- Agreement to Contribute, dated April 1, 1997, between Vinings Investment Properties,
L.P. and Windrush Partners, Ltd. (incorporated by reference to Exhibit 10.1 to the
Trust's Current Report on Form 8-K filed December 29, 1997, No. 0-13693).
10.7 --- Amendment to Agreement to Contribute, dated August 11, 1997, between Vinings Investment
Properties, L.P. and Windrush Partners, Ltd. (incorporated by reference to Exhibit 10.2
to the Trust's Current Report on Form 8-K filed December 29, 1997, No. 0-13693).
10.8 --- Second Amendment to Agreement to Contribute, dated October 30, 1997, between Vinings
Investment Properties, L.P. and Windrush Partners, Ltd. (incorporated by reference to
Exhibit 10.3 to the Trust's Current Report on Form 8-K filed December 29, 1997, No.
0-13693).
10.9 --- Agreement of Limited Partnership of Vinings Communities, L.P. (incorporated by reference
to Exhibit 10.1 to the Trust's Current Report on Form 8-K/A filed March 3, 1998, No.
0-13693).
10.10 --- Management Contract dated December 19, 1997 between Vinings Communities, L.P. and
Vinings Properties, Inc. (filed herewith).
10.11 --- Limited Warranty Deed, dated December 19, 1997, by and between Windrush Partners, L.P.
and Vinings Communities, L.P. (incorporated by reference to Exhibit 10.2 to the Trust's
Current Report on Form 8-K/A filed March 3, 1998, No. 0-13693).
10.12 --- Assumption Agreement, dated December 19 1997, by Vinings Communities, L.P. in favor of
Reilly Mortgage Group, Inc. (incorporated by reference to Exhibit 10.3 to the Trust's
Current Report on Form 8-K/A filed March 3, 1998, No. 0-13693).
10.13 --- Commercial Credit Agreement between Hardwick Bank and Trust Company and the Trustees of
the Trust dated June 28, 1997 (filed herewith).
21.1 --- Subsidiaries of the Trust (filed herewith).
27 --- Financial Data Schedule (filed herewith).