-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OxP2TevsyB2BlT/DlN4p5gejxT9gJxlD5GdE7GtI2pH7o0MSUYXcyXZQ5QiBLT0w GOVPI2vjX/VvusOStrgPcQ== 0000835712-99-000001.txt : 19990405 0000835712-99-000001.hdr.sgml : 19990405 ACCESSION NUMBER: 0000835712-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASTER MORTGAGE INVESTMENT FUND INC CENTRAL INDEX KEY: 0000835712 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 481056392 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18615 FILM NUMBER: 99586457 BUSINESS ADDRESS: STREET 1: 712 BROADWAY STREET 2: SUITE 700 CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8164749333 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K _X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998, or ___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period from ____________ to _____________ Commission File Number: 1934 Act File Number 33-22805 MASTER REALTY PROPERTIES, INC. (Exact name of registrant as specified in its charter) Delaware 48-1056392 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 410 W. 8th Street Kansas City, Missouri 64105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (816) 474-9333 Securities registered pursuant to Section 12(d) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Shares of Common Stock None Shares of Preferred Stock None 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 amendments to this Form 10-K. ___ There is no quoted market value of the Shares of Common Stock held by non-affiliates of the Registrant. The book value non-diluted for such stock on December 31, 1998 was $14,637,957. As of December 31, 1998, there were 1,187,804 Shares of Common Stock and 35,925 Shares of Preferred Stock of the Registrant outstanding. Documents Incorporated by Reference - ----------------------------------- Portions of the proxy statement for the annual shareholders meeting to be held in 1999 are incorporated by reference into Part III. PART I - ------ This report 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, including, without limitation, statements containing the words "believes," "anticipates", "expects" and words of similar import. Such forward-looking statements related to future events, the future financial performance of the Company, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Readers should specifically consider the various factors identified in this report which could cause actual results to differ. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statement contained herein to reflect future events or developments. ITEM 1. BUSINESS (a) General Development of Business Master Realty Properties, Inc. (the "Company") was incorporated in Delaware on May 12, 1988 and is a self-administered real estate investment trust ("REIT"). (b) Financial Information About Industry Segment The Company is in the business of acquiring equity interests in hotel and mixed-use apartment/commercial properties. See the Consolidated Financial Statements and notes thereto included in Item 8 of this Report on Form 10-K for certain financial information required in Item 1. (c) Narrative Description of Business At December 31,,1998, the Company owned either directly or indirectly through subsidiaries and Partnerships four hotels containing 598 rooms located in four states; (the "Hotels") three mixed-use apartment and commercial Properties containing 308 apartments and 121,663 square feet of commercial office space and a 178 car parking structure and other commercial properties containing 43,622 square feet of leasable space (collectively the "Properties"). In addition, the Company has a cash flow mortgage on a 62,436 square foot commercial office building. In order to qualify as a REIT neither the Company or any of its subsidiaries or related partnerships can operate the Hotels. As a result, all of the Hotels are leased to a third party lessee ("the Lessee"). The Company's primary strategy for growth is to acquire, develop and own high quality hotel, apartment and apartment/commercial mixed-use properties. The Company filed for protection under Chapter 11 of the Federal Bankruptcy Laws on April 17, 1992. On April 11, 1994 the Company's Plan of Reorganization became effective and the Company commenced operations outside of its Chapter 11 proceeding. Business Strategy - ----------------- The Company seeks growth in funds from operations (a common measure of equity REIT performance, defined as net income [loss] computed in accordance with generally accepted accounting principles, excluding gains or losses from debt restructuring and sales of property and distributions in excess of earnings allocated to minority interests, plus depreciation and amortization of assets unique to the real estate industry) while preserving and enhancing property values by pursuing the following strategies: (i) maximizing cash flow from operations of the Properties by seeking to maintain high occupancy levels, obtain rent and rate increases, manage tenant turnover efficiently, make strategic capital investments, maximize percentage rent under the Hotel leases and control operating expenses; (ii) acquiring additional apartment/commercial and hotel properties for Common Stock Units, or cash in situations where, in the judgment of management, the Company's business strengths have the potential to increase property performance and value; (iii) developing new apartment/commercial properties. Financing Strategy - ------------------ To the extent that the Company's Board of Trustees determines to seek additional capital for acquisitions or otherwise, the Company may raise such capital through additional equity offerings, debt financing or retention of cash flow, joint ventures or a combination of these methods. The Company has a large net operating loss for income tax purposes which will allow the Company to retain current taxable income without violating the REIT rules and regulations. Equity - ------ During 1994, the Company issued Convertible Subordinated Debentures (the "Debentures"). The Debentures are convertible on the basis of .1339 shares of the Company's Common Stock for each $1.00 of Debenture converted. In 1996, 1997 and 1998 $3,047,185, $ 2,475,393 and $134,784 respectively of Debentures have been converted into Common Stock. The Company's shareholders approved, at the 1997 Annual Meeting, a reverse stock split in the ratio of twenty-five hundred (2,500) shares to one (1) share for both the Common Stock and Preferred Stock, with an elimination of all fractional interests. Each shareholder was provided the option of having their fractional interest purchased by the Company or acquiring additional shares to eliminate the fractional interest. The price approved for this purpose was $.31 per share. The reverse stock split became effective April 30, 1998. The cost to acquire the fractional shares was $294,171. An additional $37,698 of equity was raised from holders of fractional shares. The Company's shareholders approved at the 1998 Annual Meeting a forward split of seventy-five (75) for one (1) forward split for both the common stock and preferred stock effective June 30, 1998. Property Management - ------------------- The Lessee operates all four of the Hotels. The Lessee, through its parent management company, (the "Manager") is paid a management fee equal to 4% of gross revenue of the Hotels, plus reimbursement of out-of-pocket expenses. The Lessee is generally required to perform all operational and management functions necessary to operate the Hotels. Such functions include, but are not limited to, ordering supplies, advertising and marketing, maid service, laundry and maintenance. The Company has engaged the Manager to manage all of its non-hotel properties. The Manager is experienced in the management and leasing of apartment and commercial properties. The Manager generally performs all day to day activities including rent collection, tenant relations, leasing and payment of all operating expenses. Competition - ----------- All four of the Hotels are located in developed areas where other hotel properties exist. If and when additional hotel properties are developed in these areas, the Company's hotel operations could incur material and adverse impact. In addition, other hotels changes in rates could adversely impact the Hotels. The Company's Properties are primarily located in the downtown area of Kansas City, Missouri. A number of new apartment properties are either being developed or are in various stages of potential development in downtown Kansas City. The Company is involved in several of these potential developments. The Downtown Council of Kansas City has issued a housing study for downtown Kansas City which indicates a substantial need for additional housing in the downtown Kansas City area. The Company does not believe the new properties being developed will have any impact on the Properties. Inflation - --------- Although inflation has slowed in recent years, it is still a factor in our Economy and the Company continues to seek ways to mitigate its impact. To The extent permitted by competition, the Company passes increased costs on to its customers by increasing rent and common area maintenance charges. Employees - --------- The Company has four full-time employees. Recent Development - ------------------ The Company acquired a mixed-use project containing 96 apartments and 23,137 square feet of commercial space in February, 1998. The Company has an additional 14 apartments under construction as part of the 96 apartment complex acquired in February, 1998. Environmental Issues - -------------------- Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment a hazardous substance at another property may be liable for the costs of removal or remediation of hazardous substances released into the environment at the property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. Thus, if such liability were to arise in connection with the ownership and operation of the Hotels or Properties, the Company, the Lessee or the Manager, as the case may be, may be potentially liable for such costs. Phase I Environmental Survey Assessments ("ESA's") have been obtained on all of the major Hotel and Properties of the Company from independent environmental engineering firms at the time of acquisition and or in connection with financing transactions. The Phase I ESA's were intended to identify potential sources of contamination for which the Hotels or Properties may be responsible and to assess the status of environmental regulatory compliance. No assurance can be given that the Phase I ESA's identified all significant environmental problems or that no additional environmental liabilities exist. The Phase I ESA reports have not revealed an environmental liability or compliance concerns that the Company believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such liability or compliance concerns. Nevertheless, it is possible that these reports do not reveal all environmental liabilities or compliance concerns or that there are material environmental liabilities or compliance concerns of which the Company is unaware. Moreover, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Hotels and Properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Company. The Company believes that the Hotels and Properties are in compliance, in all material respects, with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances and other environmental matters. Year 2000 Management - -------------------- In order to address the computer industry's "Year 2000" problem, the Company is in the process of upgrading the accounting software and network server. Management does not believe the costs for this upgrade will be significant. The Company is in the process of determining whether the Companies that manage the Hotels are in the process of studying the "Year 2000" issue. Upon completion, the Company will determine the extent to which it is vulnerable to third parties' failure to remediate their own "Year 2000" issues and the costs associated with resolving this issue. Tax Status - ---------- The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with its taxable year ended December 31, 1988. The Company believes that it qualifies for taxation as a REIT, in which case the Company generally will not be subject to federal income tax on income that it distributes to shareholders provided it distributes at least 95% of its REIT taxable income to its shareholders. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed income. Executive Officers of the Company - --------------------------------- The following is a biographical summary of the experience of the executive officers of the Company. John J. Bennett, 55 3850 W. 171st Street Stilwell, KS 66085 President, Chairman of the Board of Master Realty Properties, Inc. since 1988. Mr. Bennett is the President of Master Realty Corp., Master Mortgage Realty II, Inc., Master Mortgage Realty III, Inc., and Master Mortgage Realty V, Inc., Mezzanine, Inc., and Soho, Inc., and the Vice President of Master Mortgage Realty IV, Inc., River Market Venture, Inc., and Real Estate Equities, Inc., all of which are wholly owned subsidiaries of the Company. Thomas H. Trabon, 49 3441 W 131st Street Leawood, KS 66209 Executive Vice President since 1991. Mr. Trabon was a partner in Laventhol & Horwath, a National Certified Public Accounting firm from January 1, 1984 to November, 1990. Mr. Trabon is the President of River Market Venture, Inc., Master Mortgage Realty IV, Real Estate Equities, Inc., and Vice President of Master Realty Corp., Master Mortgage Realty II, Master Mortgage Realty III, Master Mortgage Realty V, Mezzanine Inc., and Soho, Inc. Byron Constance, 72 3729 S. Union Independence, MO 64055 Secretary of Master Realty Properties, Inc. since, January 26, 1991. Mr. Constance is the retired Senior Partner in Constance, Stewart & Cook, L.C. a law firm located in Independence, Missouri, and is presently counsel to the firm. He has practiced law since 1949, and serves on the Advisory Board of Directors of Hillcrest Bank, located in Kansas City, Missouri. Robert K. Brown, 54 3200 South M-291 Highway Independence, MO 64057 Treasurer since 1996. Mr. Brown has been a partner in Floyd R. Brown & Co., P.C., a certified public accounting firm in Independence, Missouri, since 1969. ITEM 2. REAL ESTATE PROPERTIES The following table sets forth certain proforma information for the year ended December 31, 1998 with respect to the Hotels For the year ended December 31, 1998 ------------------------------------------------------------- Number Average *Revenue Per Date of Room Daily Available Opened Rooms Revenue Occupancy Rate Room ------ ------- ---------- --------- ------- ----------- Ramada Inn Phoenix, AZ 1955 162 $2,642,559 61.6% $72.30 $44.69 Euless, TX 1974 144 $1,923,427 80.4% $44.71 $35.85 **Wichita, KS 1959 192 $2,045,813 50.6% $57.16 $29.19 Historic Suites of America 1989 100 $2,198,496 63.7% $93.50 $60.23 * Revenue per available room calculation is using total revenue and not room revenue only. As of April 1, 1998, the Holiday Inn - Wichita became a Ramada Inn Hotel. The following table sets forth certain information relating to the Properties as of December 31, 1998 (in the following table, occupancy is based upon economic occupancy, which measures occupancy beginning on the rent commencement date; monthly revenue per unit is total property revenue divided by the number of apartment units) Residential Portfolio Statistics for the Year Ended December 31, 1998 --------------------------------------------------------------------- Property Type/ Number of Property Property Apartment Average Sq. Name Type Year Built Units Ft. Per Unit ---------------- -------- ---------- --------- ------------ Mixed-use Property Kansas City - ------------------ River Market Mid Rise Late 1800's 165 880 Soho VI Mid Rise Late 1800's 47 729 Soho III* Mid Rise Late 1800's 96 731 Commercial Property Kansas City - ------------------- Oldham Building Mid Rise early 1900's N/A N/A 39/40 Plaza Low Rise 1970 N/A N/A Loans Commercial Property Kansas City - -------------------- Soho Office Center Mid Rise Late 1800's N/A N/A Gaslight Garage** Parking Garage 1986 N/A N/A Residential Portfolio Statistics for the Year Ended December 31, 1998 --------------------------------------------------------------------- Property Commercial Type/ Monthly Average Commercial Average Property Revenue Economic Square Rental Rate Name Per Unit Occupancy Footage per Sq. Ft. ---------------- -------- --------- ---------- ----------- Mixed-use Property Kansas City - ------------------ River Market $577 96% 85,592 $9.01 Soho VI $563 96% 12,934 $9.71 Soho III* $603 92% 23,137 $5.60 Commercial Property Kansas City - ------------------- Oldham Building N/A N/A 35,000 $10.00 39/40 Plaza N/A N/A 8,622 Loans Commercial Property Kansas City - -------------------- Soho Office Center N/A N/A 62,436 $10.05 Gaslight Garage** N/A N/A 3,367 $3.48 * Soho III was acquired February 1, 1998. ** The Gaslight Garage contains 178 parking spaces which rent on an average monthly rate of $65.00 per space. Mortgage Financing - ------------------ The following table reflects the terms and amounts of the Company's mortgage financing at December 31, 1998. Pool/Collateral 12/31/98 Salomon Brothers Outstanding Interest Maturity Realty Corp. Pool Location Principal Rate Date - ----------------- --------------------- ----------- -------- --------- River Market Kansas City, Missouri $19,417,830 7.5% 1/1/2008 Soho VI Kansas City, Missouri Ramada Inn Phoenix Phoenix, Arizona Ramada Inn Euless Euless, Texas Historic Suites Hotel Kansas City, Missouri Midland Bank - ------------ Ramada Inn Wichita Wichita, Kansas $ 7,245,312 7.0% 4/1/2004 ----------- Hilcrest Bank - -------- Soho III Kansas City, Missouri $3,556,295 9.25% 2/17/2000 277,448 Prime + 1% Oldham Building Kansas City, Missouri $ 152,834 Prime + 1% 12/1/1999 ---------- $30,649,719 ========== Hotel Leases - ------------ All of the Company's Hotels are leased to the Lessee under leases which provide for a base rent and percentage rents. The following table reflects the basis term of each lease. % Rate Period on Gross Maximum Property Initial Term Base Rent Revenues Rent - --------------------- ----------------- --------- -------- -------- Ramada Inn Phoenix 1/1/95-1/1/2000 $672,000 26% $840,000 Ramada Inn Euless 1/1/97-1/1/2002 $504,000 27% $648,000 Ramada Inn Wichita 10/1/97-10/1/2002 * * * Historic Suites Hotel 1/1/97-1/1/2002 $744,000 33% $816,000 *Annual amount not yet determined. The leases require the Company to maintain the capital improvements for the Hotels. The Company currently has established reserves for replacement for each of the Hotels equal to up to five percent (5%) of the Hotel gross revenues. The leases can be terminated by the Company upon notice to the Lessee and the payment of certain defined severance payments. The Ramada Inn Wichita lease provides for an interim rental period which will expire in June, 1999 at which time all final terms of the lease agreement will be finalized. ITEM 3. LEGAL PROCEEDINGS. The Company is presently subject to legal actions or claims for damages that arise in the ordinary course of business. In the opinion of management and counsel to the Company, the ultimate outcome of such litigation will not have a material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND OTHER RELATED MATTERS: Based on the Company's shareholder records at December 31, 1998, the Company has approximately 354 common shareholders and 87 preferred shareholders. The preferred and common shares of the Company are not traded on any established public trading market, and the Company is not aware of any quotations of the market price, if any, for the preferred or common shares of the Company. There were secondary trades in the Company's stock up to September of 1990, but no systematic reports by brokers as to the prices at which such stock was traded are available. However, the Company's stock has periodically been traded between certain Beneficial Owners and Management as reported in Item 12, Security Ownership of Certain Beneficial Owners and Management for the appropriate periods At the time of its public offering, the Company intended to apply for quotation of the common shares on NASDAQ following completion of the offering, assuming satisfaction of the requirements for a NASDAQ listing. Among the requirements for obtaining a NASDAQ listing is the requirement that the Company have at least two active market makers for the common shares. The Company did not subscribe a sufficient number of common shares during its initial offering to attract active market makers in its common stock. The Company currently meets all requirements for obtaining a NASDAQ listing with the exception of such requirement. The Trustees believe, since the substantial interest shown to date in the Debenture conversion option to common stock, that a trading market will be established in the future. There are no outstanding options to purchase any preferred or common shares of the Company. The Company's preferred shares are convertible into common shares at the option of the preferred shareholders at the ratio of one common share for each preferred share. The Company issued Convertible Subordinated Debentures in 1994. The Debentures are convertible into shares of common stock of the Company, unless the Debentures are called by the Company for redemption. The number of shares issuable upon conversion is based on the Company's book value at December 31 of 1993 of $.224/share ($.00672/share after all stock splits). The Company maintains a Dividend Reinvestment Plan (the "Plan"), pursuant to which shareholders who are participants in the Plan may reinvest dividends from the Company in additional preferred and/or common shares of the Company. Dividends may be reinvested by the Plan in shares purchased either from the Company or its shareholders. The Company is required to distribute not less than 95% of its taxable income annually to maintain its status as a REIT. The Company has a net operating loss for Federal Income Tax purposes which allows the Company to retain any net current year taxable income for reinvestment in real estate assets. ITEM 6: SELECTED FINANCIAL DATA: The following table, not covered by the report of independent certified public accountants, sets forth selected historical financial data from 1994 through 1998. This table should be read in conjunction with the detailed information and financial statements of the Company appearing elsewhere herein. The basic earnings per share amounts for 1993 through 1996 have been restated to conform with SFAS No. 128. Operating Results: - ----------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Revenues $6,579,712 $5,617,287 $6,587,642 $4,834,116 $9,518,079 Net income (Loss) 295,676 1,507,127 1,550,216 1,883,399 2,481,895 Basic Per Share: - --------------- Net income (Loss) (Without anti- dilutive effect) $.27 $2.27 $8.89 $1.44 $1.89 Dividends None None None None None Weighted average number of common shares outstanding $1,084,202 663,698 174,297 1,308,709 1,308,669 Balance Sheet: - ------------- Total assets 50,527,507 47,193,662 38,972,126 29,996,326 27,408,492 Notes payable 34,981,360 30,842,693 24,964,331 20,323,851 19,610,838 Shareholders' equity 14,637,957 13,797,456 9,814,936 5,217,535 3,334,136 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands, unless otherwise stated): Background: - ---------- The following discussion compares historical results of operation for the years ended December 31, 1996, 1997 and 1998. The discussion should be read in conjunction with the "Selected Financial Data," and the financial statements and notes thereto included elsewhere in this report. The Company - ----------- The Company is a public real estate investment trust that is primarily engaged in the acquisition, development and operation of mixed use apartment/commercial properties and the acquisition and development of hotel properties. The Company operates these properties either directly or through subsidiaries or partnerships. Results of Operations - --------------------- Year Ended December 31,1998 Compared with Year Ended December 31, 1997. Rental Properties - ----------------- Revenue from rental properties increased by $783,228 from December 31, 1997 to December 31, 1998. This increase was due to the increases in rental rates in all of the Properties, a reduction in vacancies, and the acquisition of an additional 96 apartments and 23,137 square feet of commercial space on February 1, 1998. Rental expenses increased from $1,129,222 at December 31, 1997 to $1,559,069 at December 31, 1998. This increase of $429,847 was due to normal price increases related to the Properties operating costs and the acquisition of an additional 96 apartments and 23,137 square feet of commercial space on February, 1998. Hotel Properties - ---------------- Revenues from hotel lease income increased from $2,104,346 at December 31, 1997 to $2,605,749 for December 31, 1998. This increase was due to the lease of the Company's hotel in Wichita, Kansas. Other Revenues and Expenses - --------------------------- The Company continued to receive interest income on its remaining real estate loans. The decrease in the amount received of $102,916 from December 31, 1997 to December 31, 1998 was due to the decline in mortgage notes receivable of the Company. The Company had a $210,675 decrease in general and administrative expenses for 1998. This decrease was entirely attributable to a decrease in the Company's bonus pool for employees from December 31, 1997 to December 31, 1998. Interest expense increased by $274,323 from $2,274,698 at December 31, 1997 to $2,549,021 at December 31, 1998. This increase was due to the acquisition of additional real estate properties using borrowed funds. The Company has continued to recover losses previously reserved related to the Company's former loan portfolio. The recovery for December 31, 1998 was $831,640 compared to $2,233,271 for December 31, 1997. Results of Operations - --------------------- Year Ended December 31,1997 Compared with Year Ended December 31, 1996. Rental Properties - ----------------- Revenue from rental properties increased by $622,441 from December 31, 1996 to December 31, 1997. This increase was due to the increases in rental rates in all of the Properties and a reduction in vacancies Rental expenses increased from $1,062,361 at December 31, 1996 to $1,129,222 at December 31, 1997. This increase of $66,861 was due to normal price increases related to the Properties operating costs Hotel Properties - ---------------- Revenues from hotel lease income increased from $996,706 at December 31, 1996 to $2,104,346 for December 31, 1997. This substantial increase was due to the lease of the Company's hotel in Euless, Texas and the increases related to volume growth in hotel operating revenue and the corresponding increases in percentage rent. In 1996, the Euless hotel was accounted for as an operating activity, accordingly, the statements of operation include this hotel's operating revenue and operating expenses. Other Revenues and Expenses - --------------------------- The Company continued to receive some interest income on its remaining real estate loans. The decrease in the amount received of $248,795 from December 31, 1996 to December 31, 1997 was due to the decline in mortgage notes receivable of the Company. The Company had a $871,232 decrease in general and administrative expenses for 1997. This decrease was entirely attributable to a decrease in the Company's bonus pool for employees from December 31, 1996 to December 31, 1997. Interest expense increased by $460,968 from $1,813,730 at December 31, 1996 to $2,274,698 at December 31, 1997. This increase was due to the acquisition of additional real estate properties using borrowed funds. The Company has continued to recover losses previously reserved related to the Company's former loan portfolio. The recovery for December 31, 1997 was $2,233,271 compared to $2,632,194 for December 31, 1996. Liquidity and Capital Resources - ------------------------------- The Company had positive cash flow from its operating activities and a deficit in cash flow from its investing activities which represented the payment of Company liabilities and the acquisition of additional real estate assets. The Company had an increase in cash flows from financing activities related to debt financing of the acquisition of additional real estate assets. Funds from Operations - --------------------- FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as net income (loss) (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of property, and distributions in excess of earnings allocated to Minority Interest, plus depreciation/amortization of assets unique to the real estate industry. Depreciation/amortization of assets not unique to the industry, such as amortization of deferred financing costs and non-real estate assets, is not added back. FFO does not represent cash flow from operating activities in accordance with generally accepted accounting principles (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income) and should not be considered an alternative to net income as an indication of the Company's performance or to cash flow as a measure of liquidity or ability to make distributions. The Company considers FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of real estate assets diminishes predictably over time, and because industry analysts have accepted it as a performance measure. Comparison of the Company's presentation of FFO, using the NAREIT definition, to similarly title measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. The following reflects the FFO by the Company's primary segments. Year Ended Residential/ Assets December 31, Hotel mixed use for All 1998 Leasing Properties Restructure Other Total - ------------ -------- ---------- ----------- --------- ----------- Net Income $ (144,331) $ 986,482 $230,418 ($776,893) $295,676 Add: Minority interest 8,283 - - - 8,283 Less: Partner- ship invest- ment income - - - 13,565 13,565 ---------- ---------- -------- --------- ---------- Income before minority interest (136,048) 986,482 230,418 (763,328) 317,524 Add: Deprecia- tion and amortization of real estate assets 1,213,409 196,782 23,037 125,873 1,559,101 Less: Gain on sales of assets - - (81,884) - (81,884) Less: Non-recur- ring items: Accrued inte- rest expense forgone on converted debentures - - - (105,399) (105,399) Funds from --------- ---------- -------- --------- ---------- operations $1,077,361 $1,183,264 $171,571 $(742,854) $1,689,342 ========== ========== ======== ========= ========== ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK. None ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Index to Consolidated and Combined Financial Statements on Page 21 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to directors is hereby incorporated by reference to the material appearing under the caption "Election of Directors" in the Company's definitive proxy statement for the annual meeting of shareholders to be held in 1999 (the "Proxy Statement"). Information required by this item with respect to executive officers is provided in Item 1 of this report. See "Executive Officers of the Company". Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of such securities with the Securities and Exchange Commission and the NYSE. To the best of the Company's knowledge, all required reports were timely filed during and with respect to the fiscal year ended December 31, 1998. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is hereby incorporated by reference to the material appearing under the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is hereby incorporated by reference to the material appearing under the caption "Voting Securities and Principal Holders Thereof" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is hereby incorporated by reference to the material appearing under the caption "Certain Relationships and Related Transactions" in the Proxy Statement. PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K 14(a)(1) Financial Statements Reference is made to the Index to Financial Statements and Schedule on Page 21 of this Form 10-K. 14(a)(2) Financial Statement Schedules Reference is made to the Index to Financial Statements and Schedule on Page 21 of this Form 10-K. All other schedules have been omitted because the required information of such other schedules is not present in amounts sufficient to require submission of the schedule or because the required information is included in the consolidated financial statements. (a) The following documents are filed as a part of this report. (1) Financial Statements: Report of Independent Auditors Balance sheets as of December 31, 1998 and 1997 Statements of operations for the year ended December 31, 1998, 1997 and 1996 Statements of changes in stockholders' equity for the year ended December 31, 1998, 1997 and 1996. Statements of cash flows for the year ended December 31, 1998, 1997 and 1996. Notes to financial statements. (2) Financial Statement Schedules II - Valuation and qualifying accounts and reserves III - Property, Equipment and Accumulated Depreciation IV - Mortgage loans on real estate All other schedules have been omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. (The remainder of this page intentionally left blank) (3) Exhibits: Number Description *1.1 Form of Participating Dealer Agreement *3.1 Restated Certificate of Incorporation *3.2 Amended and Restated Bylaws *4.1 Form of Preferred Share Certificate *4.2 Form of Common Share Certificate *4.3 Escrow Agreement *5.1 Opinion of Counsel regarding legality of the Shares *5.2 Opinion of Counsel regarding ERISA matters *8.1 Opinion of Counsel regarding certain tax matters *10.1 Reinvestment Plan *10.2 Executed Bonus Interest Escrow Agreement *10.3 Revised Advisory Agreement *10.4 Appointment of Transfer Agent and Registrar *10.5 Promissory Note for $10,000,000 line of credit from Master Mortgage Fund Trust VII *10.6 Revolving Line of Credit Loan Agreement, Security Agreement and Revolving Credit Note for $15,000,000 line of credit from Skopbank *10.7 Revolving Line of Credit Loan Agreement for $10,000,000 line of credit from Metro North State Bank * Previously filed (b) Reports on Form 8-K SIGNATURES Pursuant to the requirements of Section 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. Master Realty Properties, Inc. March 30, 1999 By: /s/ John J. Bennett President and Trustee 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 /s/ John J. Bennett Affiliated Trustee President, and Chief /s/ Byron Constance Independent Trustee and Secretary /s/ Robert K. Brown Independent Trustee and Treasurer /s/ Richard Polcari Independent Trustee /s/ James E. Trimmer Independent Trustee /s/ James I. Threatt Independent Trustee /s/ Roger E. Buford Affiliated Trustee /s/ Thomas H. Trabon Executive Vice President Chief Financial Officer MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998, 1997 and 1996 INDEPENDENT AUDITORS' REPORT To the Board of Trustees MASTER REALTY PROPERTIES, INC. We have audited the consolidated balance sheets of Master Realty Properties, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. In connection with our audits of the consolidated financial statements, we have also audited the attached supplementary schedules. These consolidated financial statements and the supplementary schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and supplementary schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Master Realty Properties, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related supplementary schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects the information set forth therein. MAYER HOFFMAN McCANN L.C. Kansas City, Missouri February 5, 1999 MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE STATEMENTS December 31, 1998 and 1997 1998 1997 ---- ---- A S S E T S ----------- CASH $ 699,358 $ 2,348,692 RESTRICTED CASH 1,096,360 294,866 MORTGAGE NOTES RECEIVABLE, net of allowance for loan losses 1,080,850 2,829,615 NOTE RECEIVABLE 535,871 193,460 PROPERTY HELD FOR INVESTMENT 1,001,688 1,000,000 INVESTMENT IN REAL ESTATE PARTNERSHIPS 173,456 188,938 ACCOUNTS RECEIVABLE - RELATED PARTY 987,062 1,112,143 ACCOUNTS RECEIVABLE - OTHER 37,004 43,071 INDUSTRIAL REVENUE BONDS -- 276,452 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation 43,870,414 37,638,765 OTHER ASSETS 1,045,444 1,267,660 TOTAL ASSETS $50,527,507 $47,193,662 =========== ========== See Notes to Financial Statements MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) December 31, 1998 and 1997 1998 1997 ---- ---- L I A B I L I T I E S --------------------- NOTES PAYABLE $34,981,360 $30,842,693 OTHER LIABILITIES 586,964 2,037,553 ----------- ----------- TOTAL LIABILITIES 35,568,324 32,880,246 ----------- ----------- MINORITY INTEREST IN SUBSIDIARIES 321,226 515,960 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 16) S T O C K H O L D E R S' E Q U I T Y -------------------------------------- CAPITAL CONTRIBUTED Convertible preferred stock, par value $.01, liquidation preference up to 5% of the Company's net assets, authorized 1,000,000 shares in 1998; 2,500,000 shares in 1997. 359 24,916 Common stock, par value $.01, authorized 8,500,000 shares in 1998; 45,000,000 shares in1997 11,878 291,814 Additional paid-in capital 41,760,211 40,926,229 ---------------- TOTAL CAPITAL CONTRIBUTED 41,772,448 41,242,959 RETAINED DEFICIT (27,134,491) (27,430,167) TREASURY STOCK, 67,990 shares of common stock, and 475 shares of preferred stock in 1997 -- (15,336) TOTAL STOCKHOLDERS' EQUITY 14,637,957 13,797,456 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,527,507 $47,193,662 =========== See Notes to Financial Statements MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- REVENUES Rental income $ 3,598,406 $ 2,815,178 $ 2,192,737 Hotel lease income 2,605,749 2,104,346 996,706 Hotel operating income - --- 1,828,749 Interest and fees on mortgage loans 155,882 258,798 507,593 Other income (loss) 137,791 372,286 652,653 Settlement of real estate taxes ---- - 409,204 Gain on sale of assets 81,884 66,679 - ----------- ----------- ----------- TOTAL REVENUES 6,579,712 5,617,287 6,587,642 ----------- ----------- ----------- EXPENSES Rental expenses 1,559,069 1,129,222 1,062,361 Hotel operating expenses --- - 1,509,553 General and administrative expenses 675,043 885,718 1,756,950 Legal and accounting 248,863 247,867 175,132 Payroll and employee benefits 379,306 517,080 485,759 Depreciation and amortization 1,563,108 1,139,532 780,474 Interest expense 2,549,021 2,274,698 1,813,730 Property management fees 132,983 141,549 119,734 Provision for loan losses (recoveries) (831,640) (2,233,271) (2,632,194) ----------- ----------- ----------- TOTAL EXPENSES 6,275,753 4,102,395 5,071,499 MINORITY INTEREST IN LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES (8,283) (7,765) 34,073 NET INCOME $ 295,676 $ 1,507,127 $ 1,550,216 =========== =========== ========== BASIC EARNINGS PER SHARE $ .27 $ 2.27 $ 8.89 =========== =========== =========== DILUTED EARNINGS PER SHARE $ .27 $ 1.61 $ 1.62 =========== =========== =========== See Notes to Financial Statements MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1998, 1997 and 1996 Preferred Stock Common Stock -------------------------- ---------------------------- Shares Shares Issued Amount Issued Amount ----------- ------------- ------------ ------------- Balance, December 31, 1995 2,491,622 24,916 1,308,669 13,086 Conversion of de- bentures to common stock - - 14,246,000 142,460 Acquisition of treasury stock Preferred stock - - - - Common stock - - - - Net income for the year ended December 31, 1996 - - - - ----------- ------------- ------------ ------------ Balance, December 31, 1996 2,491,622 $ 24,916 15,554,669 $ 155,546 Conversion of de- bentures to common stock - - 13,626,817 136,268 Net income for the year ended December 31, 1997 - - - - ----------- ------------- ------------ ------------ Balance, December 31, 1997 2,491,622 $ 24,916 29,181,486 $ 291,814 =========== ============= ============ ============ See Notes to Financial Statements MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Continued Years Ended December 31, 1998, 1997 and 1996 Additional Retained Total paid-in earnings Treasury stockholders' capital (deficit) stock equity ----------- ------------- ------------ ------------- Balance, December 31, 1995 35,667,043 (30,487,510) - 5,217,535 Conversion of de- bentures to common stock 2,904,725 - - 3,047,185 Acquisition of treasury stock Preferred stock 15,230 - (15,230) - Common stock 106 - (106) - Net income for the year ended December 31, 1996 - 1,550,216 - 1,550,216 ----------- ------------ ------------ ------------ Balance, December 31, 1996 38,587,104 $(28,937,294) (15,336) $ 9,814,936 Conversion of de- bentures to common stock 2,339,125 - - 2,475,393 Net income for the year ended December 31, 1997 - 1,507,127 - 1,507,127 ----------- ------------ ------------ ------------ Balance, December 31, 1997 $40,926,229 $(27,430,167) $ (15,336) $ 13,797,456 =========== ============ ============ ============ See Notes to Financial Statements MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Continued Years Ended December 31, 1998, 1997 and 1996 Preferred Stock Common Stock ------------------------- Shares Shares Issued Amount Issued Amount ________________________________________________ Conversion of debentures to common stock --- --- 521,700 5,217 Other liabilities converted to common stock --- --- 3,763,900 37,640 Aggregate effect of reverse Stock split (2,500 to 1), Forward stock split (1 to 75), Purchase and sale of Fractional shares (2,426,672) (24,267) (32,308,307) (323,083) Conversion of preferred Stock and retirement of treasury stock (29,025) (290) 29,025 290 Net income for the year Ended December 31, 1998 -- -- -- -- ________ ________ __________ ______ Balance 12/31/98 35,925 359 1,187,804 11,878 ======== ======== ========== ====== Additional Retained Total paid-in earnings Treasury stockholders' capital (deficit) stock equity ----------- ------------- ------------ ------------- Conversion of debentures to common stock 134,784 --- --- 140,001 Other liabilities converted to common stock 625,801 --- --- 663,441 Aggregate effect of reverse Stock split (2,500 to 1), Forward stock split (1 to 75), Purchase and sale of Fractional shares 88,733 --- --- (258,617) Conversion of preferred Stock and retirement of treasury stock (15,336) --- 15,336 --- Net income for the year Ended December 31, 1998 -- 295,676 -- 295,676 ________ ________ __________ ______ Balance 12/31/98 41,760,211 (27,134,491) -- 14,637,957 ======== ======== ========== ====== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 295,676 $ 1,507,127 $ 1,550,216 Adjustments to reconcile net income to net cash provided by (used in) operating activities (8,283) 7,765 (34,073) Minority interest 1,563,108 1,139,532 780,474 Depreciation and amortization (865,670) (2,233,271) (2,632,194) Provision for loan losses) (non-cash recoveries (81,885) (66,679) - Gain on disposal of assets 93,061 143,733 406,937 Interest expense added to note payable 15,482 (7,143) (2,883) Partnership investment loss (income) Changes in operating assets and liabilities Interest receivable --- - 28,861 Accounts receivable 131,148 (542,675) (566,925) Other assets, net (7,538) (237,331) 128,381 Due to advisory company and affiliates (367,707) (19,146) 2,874 Other liabilities (524,873) (429,497) 276,902 All other (89,495) (288,570) 13,264 NET CASH PROVIDED BY ----------- ----------- ----------- (USED IN) OPERATING ACTIVITIES 153,024 (1,026,155) (48,166) CASH FLOWS FROM INVESTING ACTIVITIES Funding of notes receivable (167,092) (200,000) (100,225) Collection on notes receivable 165,483 9,342 35,057 Redemption of industrial Revenue bonds 206,452 33,548 --- Proceeds from sale of assets 375,047 Acquisition of real estate partnerships (net of cash acquired) (3,576,367) (7,048,779) - Purchase of property and equipment (2,161,864) (916,066) (1,324,836) NET CASH USED IN IN- VESTING ACTIVITIES $(5,158,341) $(8,121,955) $(1,390,004) =========== =========== =========== See Notes to Financial Statements MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 ----- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net cost of reverse stock split $ (258,617) --- --- Proceeds from notes payable 4,915,456 8,940,634 21,359,279 Payment of notes payable (499,362) (444,988) (15,253,393) Decrease in debt service reserves --- - (507,724) (Decrease) increase in minority interest in subsidiaries --- (559,732) (520,988) All other --- - (470,484) NET CASH PROVIDED BY ------- ----- ------ FINANCING ACTIVITIES 4,157,477 7,935,914 4,606,690 ------- ----- ------ NET INCREASE (DECREASE) IN CASH (847,840) (1,212,196) 3,168,520 CASH, BEGINNING OF YEAR 2,643,558 3,855,754 687,234 ----------- ----------- ----------- CASH, END OF YEAR $ 1,795,718 $ 2,643,558 $ 3,855,754 =========== =========== =========== CASH $ 699,358 $ 2,348,692 $ 2,773,183 RESTRICTED CASH 1,096,360 294,866 1,082,571 ----- ------ ------ TOTAL CASH $1,795,718 $ 2,643,558 $ 3,855,754 =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES CASH PAID Interest $ 2,424,422 $ 2,285,682 $ 1,828,525 NON-CASH INVESTING AND =========== =========== =========== FINANCING ACTIVITIES Property recovered as collateral on notes receivable $2,273,633 $ - $ 9,679,821 Convertible subordinated =========== =========== =========== debentures converted to common stock $ 134,784 $ 2,475,393 $ 3,047,185 Other liabilities paid With stock $ 625,801 --- --- =========== =========== =========== Sale of property - Assumption of liabilities by buyer $ --- $ 591,270 $ - Other consideration (non-cash) $ --- 31,936 - Total reduction of -------------------- property and equipment $ --- $ 623,206 $ - =========== ========== ========== Debt refinancing $ --- $19,200,000 $ - =========== =========== ========== See Notes to Financial Statements MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (1) Summary of significant accounting policies ------------------------------------------ Nature of operations - Master Realty Properties, Inc. (MRP) (formerly Master Mortgage Investment Fund, Inc.) is a Delaware corporation organized on May 12, 1988, with the original purpose of investing in mortgage loans. However beginning in 1993, MRP became the owner of various real estate assets through acquisitions, foreclosures, deeds in lieu of foreclosure or workouts with previous borrowers. As a result, MRP and its majority-owned subsidiaries (the Company) changed its purpose to holding, leasing and operating real estate property for the production of income and appreciation in value. The market for the Company's residential and commercial real estate properties is Kansas City, Missouri. The hotels owned by the Company are located in Phoenix, Arizona; Euless, Texas; Wichita, Kansas and Kansas City, Missouri and are leased to hotel operators. Principles of consolidation - The accompanying consolidated financial statements include the accounts of the following: Real estate investment trust ---------------------------- Master Realty Properties, Inc. and Subsidiaries and its majority- owned subsidiaries: Corporations ------------ Master Realty Corporation River Market Venture, Inc. (formerly Master Mortgage Realty, Inc.) Master Mortgage Realty II, Inc. Master Mortgage Realty III, Inc. Master Mortgage Realty IV, Inc. Old Town Redevelopment Corporation Real Estate Equities, Inc. Partnerships and limited liability companies ------------ River Market Venture I, L.P. New Historic Suites Partners, L.P. (Control acquired in August 1996) Hospitality Wichita, L.C. (control acquired October 1997) Soho West III, L.P. (control acquired February, 1998) All significant intercompany balances and transactions have been eliminated in consolidation. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (1) Summary of significant accounting policies (continued) ------------------------------------------ Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on mortgage notes and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for losses on loans and valuation of foreclosed real estate, management evaluates the underlying real estate collateral and makes estimates of value based on independent appraisals, estimates of operating earnings and cash flow potential, and other factors. The valuation of real estate collateral is assessed on the assumption that the Company will be able to dispose of or realize the investments in the ordinary course of business. Adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions and other relevant factors vary significantly from those utilized in the estimates. While management uses available information to recognize losses on mortgage notes receivable and foreclosed real estate, future valuation allowances may be necessary based on changes in local economic conditions. Because of these factors, it is possible that the allowances for losses on mortgage notes receivable and the valuation of foreclosed real estate acquired may change materially in the near term. Revenue recognition - The Company does not accrue interest on delinquent loans where, in the judgment of management, collection of such interest is doubtful. Among the factors the Company considers in making the evaluation of the collectibility of interest is the status and classification of the loan, the financial condition of the borrower and anticipated future events. The Company recognizes revenue from rental real estate and hotel leases as earned in accordance with the individual lease agreements. Mortgage notes receivable - The Company's investment in mortgage notes receivable is stated individually at the lower of cost or the estimated net realizable value. Partially earning notes are loans where cash payments are being received, but not according to the contractual terms of the loans. Interest income on partially earning notes is recognized only to the extent of interest payments received. The allowance for losses on notes receivable is maintained based on the underlying collateral, the cost of money and, in the case of anticipated foreclosures, operating cash flows from the property during the anticipated holding period. As of December 31, 1998 and 1997, all of the notes classified as partially earning are considered impaired and carried at lower of cost or estimated net realizable value. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (1) Summary of significant accounting policies (continued) Investment in real estate partnerships - Investment in real estate Partnerships, with less than 50% ownership, is accounted for using the equity method of accounting for investments where the investment is initially recorded at cost and then adjusted for the Company's share of the earnings and losses. Cash - Cash consists of amounts on hand and demand deposits with financial institutions. Depreciation and amortization - Depreciation and amortization are computed by the following methods and estimated useful lives: Assets Principal Methods Lives ------ ----------------- ----- Land improvements Straight-line 27.5 years Building and building improvements Straight-line 27.5-39 years Furniture and equipment Double-declining balance 5-7 years Goodwill Straight-line 20 years Financing costs Straight-line 2-11 years Financing costs - Financing costs are amortized over the life of the mortgage note payable and presented net of accumulated amortization. Minority interest in subsidiaries - Minority interest in subsidiaries represents the minority partner's proportionate share of the equity of New Historic Suites L.P. The Company's investments in Soho West III, L.P., and Hospitality Wichita, L.C. are considered to be in-substance 100% owned by the Company. The minority interests in subsidiaries for Soho West III, L.P., and Hospitality Wichita, L.C., are valued at zero as of the balance sheet dates presented, based on the terms of the partnership agreements which give Master Realty Properties, Inc. (MRP) a preferential return, until MRP recovers its investment and preferred return. As of December 31, 1998, management believes the probability of the minority interests receiving any distributions is remote, and accordingly, no amount has been reflected for the minority interests. In the event the Company were to receive all fo the preferential returns, the minority interests would be entitled to 10% and 20%, respectively, of any distributions. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Income taxes - Since inception, the Company has conducted its operations with the intent of meeting the requirements of the Internal Revenue Code for qualification as a real estate investment trust (REIT). REIT qualification requires, among other things, that the Company distribute at least 95% of its taxable income to its shareholders. The Company had taxable losses for each of the years ended December 31, 1998, 1997 and 1996. As of December 31, 1998, the Company had approximately $14,595,000 of net operating loss carryforwards available to offset future taxable income. Convertibility of preferred stock into common stock - Preferred stock is convertible into common stock at any time at the option of the stockholder at the ratio of one common share for each preferred share. Voting rights - Stockholders are entitled to one vote for each common share and one vote for each preferred share held on all matters submitted for the approval of the stockholders. (2) Restricted cash and escrows --------------------------- December 31, 1998 1997 ------- ------- Lasalle Bank accounts - Central operating account $109,526 $ -- Debt services reserve 153,078 146,000 Capital expenditures reserve 20,157 91,035 Impound costs sub-account 13,599 57,831 Other - Cash - Real Estate Equities, Inc. 600,000 -- Certificate of deposit - Hillcrest Bank 200,000 -- ------- ------ Total restricted cash $1,096,360 $294,866 Cash in the amount of $600,000 is pledged against Notes Payable- Real Estate Equities, Inc. The certificate of deposit in the amount $200,000 is collateral on a bank note payable. The Lasalle Bank accounts are restricted pursuant to the Cash Management, Collateral and Security Agreement (Cash Collateral Agreement dated December 19, 1997, as part of the First Mortgage Note and Mezzanine Note Transactions. As a result, all cash received from the operations of the collateral pledged for the First Mortgage Note is deposited into a central operating account. A monthly sweep of this account is used to fund, in priority, certain reserves and sub-accounts created pursuant to the Cash Collateral Agreement. All remaining funds, if any, are paid to the Company. Debt service reserve - This account was created to fund the First Mortgage Note debt service to the extent necessary. Withdrawals from this account occur only when there are insufficient funds in the central operating account to fully fund the First Mortgage Note debt service. Capital expenditure reserve - This account was created to fund the payment of replacement expenditures, furniture, fixtures and equipment replacement expenditures and leasing expenditures. Funding is provided in monthly deposits from the central operating account. Withdrawals may be made from this account for approved expenditures. Impound costs sub-account - This account was established to pay impound costs. These impound costs are defined as all taxes of the First Mortgage Note borrowers and insurance (if insurance not otherwise provided for by the Company) for the pledged collateral of the First Mortgage Note. Funding is provided in monthly deposits from the central operating account. Withdrawals may be made from this account for approved costs. The Cash Collateral Agreement is secured by a pledge of the central operating account and all income derived from the investment of that account. The First Mortgage Note and Mezzanine Note are also cross- collateralized and cross-defaulted with the Cash Collateral Agreement. (3) Mortgage notes receivable December 31, --------------------------- 1998 1997 ------------ ------------ Mortgage notes receivable, partially-earning $2,299,738 $ 6,521,108 Allowance for losses (1,218,888) (3,691,493) ----------- ----------- Net mortgage notes receivable $ 1,080,850 $ 2,829,615 =========== =========== Mortgage notes receivable are collateralized by real estate, assignment of rents, certain future earnings of borrowers, other borrower assets, investor notes and borrower personal guarantees. The collateralized real estate is located at various geographical locations, with a concentration in a downtown area of Kansas City, Missouri. A substantial portion of the Company's debtors' ability to honor their contracts is dependent upon the real estate economy. Due to the uncertainty of future collections and possible foreclosures, it is not practicable to estimate the scheduled maturities of mortgage notes receivable over the next five years and thereafter. (4) Property held for investment December 31, --------------------------- 1998 1997 ------------ ------------ Non-earning, land in New Mexico $ 1,001,688 $ 1,000,000 =========== =========== The carrying amount of the land in New Mexico is based on an estimate of value established at the time the contractual right to the property was acquired in foreclosure on collateral for a note receivable. The estimate was based on prior appraisals, studies of the development possibilities for the property, and local economic conditions. The land is in a remote part of New Mexico and access to the property is limited. There is limited real estate sales activity in this region to determine the likelihood of realizing the carrying value of this investment. Because of these factors, it is possible that the estimate of the realizable value of this land may change materially. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (5) Investment in real estate partnerships -------------------------------------- Investment in real estate partnerships consists of the following: Ownership % at December 31, Ownership --------------------------- Partnership Name Interest 1998 1997 1996 - ---------------- --------- -------- -------- -------- OPP IX, Limited Partnership Limited 25.12% 24.9% 24.9% OPP X, Limited Partnership Limited 2.3% 2.3% 2.3% Historic Suites of America - KC Limited 19.8% 19.8% 19.8% Financial information, summarizing the financial position of the Partnerships as of December 31, 1998, 1997 and 1996, and the operating performances for the years then ended is as follows: 1998 1997 1996 (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- FINANCIAL POSITION Total assets $4,980,753 $ 5,120,981 $ 5,130,921 Total liabilities 2,488,492 2,521,329 2,596,944 --------- ----------- ------------ Partners' equity $2,492,261 $ 2,599,652 $ 2,533,977 =========== =========== =========== OPERATING PERFORMANCE Total revenue $ 821,774 $ 843,905 $ 852,322 Total expenses 835,083 790,418 809,319 ---------- ----------- ----------- Net income $ (13,309) $ 53,487 $ 43,003 =========== =========== =========== In February of 1998, the Company acquired a 90% general partnership Interest in Soho West III, L.P. by converting its notes receivable From the partnership to an ownership interest. In addition, the Company contributed real estate property known as Gaslight Garage, Which adjoins the real estate property owned by Soho West III, L.P. The Company's cost as a result of the conversion of the notes Receivable is $5,850,000. The net book value of the Gaslight Garage contributed is $1,014,239, resulting in an initial cost basis in the partnership totaling $6,864,239. Commencing February, 1998, the Company consolidated its 90% interest in the partnership into its financial statements. The business combination has been accounted for under the purchase method of accounting. The operations of Soho West III, L.P. are included in the consolidated statement of operations from the date of acquisition. The Company is to receive all of the distributions until recovery of its capital contributions is attained. After the Company recovers its capital contribution, the Company is to Receive 90% of any distributions. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (5) Investment in real estate partnerships (continued) In October, 1997, the Company acquired an 80% managing ownership interest In Hospitality Wichita, L.C., a limited liability company, for a Contribution of $608,044. The Company is to receive all of the distributions until recovery of its capital contribution is attained, plus a 15% return. After distributions of these amounts and repayment of any additional capital contributions and 15% returns to all memebers, the Company is to receive 80% of any distributions. In February 1997, the Company acquired the remaining 10.88% limited partnership interest in River Market Venture I, L.P. (RMV) for $250,000 to achieve 100% ownership of the partnership. Previously, the Company paid $150,000 in December 1996 for a 9.12% interest in RMV and acquired its initial 80% general partnership interest in March 1995. On December 19, 1997, substantially all of RMV's assets were transferred to Master Realty Corporation. The business combination was accounted for under the purchase method of accounting without pro forma presentation of the financial information due to materiality considerations. In December 1996, the Company acquired the remaining 25% partnership interest in Euless, Texas 1192 General Partnership (Euless) for $1,433,873 to achieve 100% ownership of the partnership. The partnership was terminated simultaneously. The Company initially acquired a 75% general partnership interest in Euless in September 1993. In August of 1996, the Company acquired an 89.6% general partnership interest in New Historic Suites Partners, L.P. by converting its notes receivable from the partnership to an ownership interest. The Company's cost as a result of this conversion is $3,039,255. The partnership owns a hotel in Kansas City, Missouri. Commencing August 1996, the Company consolidated its 89.6% interest in the general partnership into its financial statements. The business combination has been accounted for under the purchase method of accounting. The operations of New Historic Suites Partners, L.P. are included in the consolidated statement of operations from the date of acquisition. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (5) Investment in real estate partnerships (continued) The pro forma unaudited results of operations for the years ended December 31, 1998, 1997 and 1996, assuming the purchase of Soho West III, L.P., New Historic Suites Partners, L.P. and Hospitality Wichita, L.C. had been consummated as of January 1, 1996 are as follows: (Unaudited) Years ended December 31, ----------------------------------------- 1998 1997 1996 ---- ---- ---- Revenues Revenues as reported $6,579,712 $5,617,287 $ 6,587,642 Pro-forma effect of acquisitions - New Historic Suites Partners, L.P. --- - 267,619 Hospitality Wichita, L.C. --- 450,000 600,000 Soho West III, L.P. $ 66,621 773,747 769,381 ------- -------- --------- Pro-forma revenues after acquisitions $ 6,646,333 $ 6,841,034 $ 8,224,642 =========== =========== =========== - -------------------------------------- (Unaudited) Years ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net income Net income as reported $ 295,676 $ 1,507,127 $ 1,550,216 Pro-forma effect of acquisitions - New Historic Suites Partners, L.P. --- - 267,619 Hospitality Wichita, L.C. --- (238,571) (277,985) Soho West III, L.P. 35,332 327,132 356,486 ------ ------- ------- Pro-forma net income after acquisitions $ 331,008 $ 1,595,688 $ 1,896,336 =========== =========== =========== Pro-forma earnings per common share Basic $ .31 $ 2.40 $ 10.88 =========== =========== =========== Diluted $ .31 $ 1.70 $ 1.90 =========== =========== =========== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (6) Accounts receivable - related party ----------------------------------- Amounts due from Embassy Hotel Management, Inc. are in connection with the leases and funds advanced for operations of the following hotel properties: December 31, --------------------------- 1998 1997 ------------ ------------ Ramada Inn- Phoenix, Arizona $ 345,347 $ 353,085 Ramada Inn - Euless, Texas 397,392 525,755 Historic Suites - Kansas City, Missouri 24,399 114,479 Ramada Inn - Wichita, Kansas 219,924 118,824 ----------- ----------- Total $ 987,062 $ 1,112,143 =========== =========== (7) Industrial revenue bonds As disclosed in Note (17) the Company is contingently liable as a guarantor on Industrial Revenue Bonds (Soho Office Center Project) Series 1996 between the Land Clearance for Redevelopment Authority of Kansas City (the Issuer) and Soho Office Center, L.P. (the Borrower). The Company owned the bonds, which totalled $2,655,000 as part of a note receivable, and distributed $2,345,000 in 1996, and $33,548 in 1997 in satisfaction of certain notes payable obligations. The Company redeemed the balance of these bonds during the year ended December 31, 1998. (8) Property and equipment December 31, 1998 1997 Cost Land and land improvements $ 7,051,999 $ 6,880,699 Building and building improvements 37,271,763 30,750,746 Furniture and equipment 3,385,308 2,840,758 Assets not yet in service 145,723 --- ---------- ----------- Total cost 47,854,793 40,472,203 Accumulated depreciation (3,984,379) (2,833,438) ----------- ----------- Net property, plant and equipment $43,870,414 $37,638,765 =========== =========== Expenditures for maintenance, repairs and improvements which do not materially extend the useful life of the asset are expensed. The aggregate depreciation charged to operations for the years ended December 31, 1998, 1997 and 1996 was $1,333,354, $969,802, and $703,638, respectively. Included in property and equipment is a hotel property in Wichita, Kansas With a net book value of $7,822,586 and $7,257,691 as of December 31, 1998 and 1997 respectively. The Company acquired the property in October, 1997 and switched from a Holiday Inn to a Ramada Inn during April, 1998. In connection with this change, the property experienced a significant drop in its occupancy rate and the room rates. Correspondingly, the operating income and cash flow performance for this property decreased in 1998. Management has implemented a plan designed to correct these declines In operating performance, but the long-term results of this plan are Not yet known. Because of these factors, it is possible that the estimate of the realizable value of this investment may change in the near term, and that change could be material. (9) Notes payable December 31, 1998 1997 ------------ ------------ Salomon Brothers mortgage note $19,417,830 $19,675,000 Salomon Brothers Mezzanine note 1,190,000 930,000 Midland Bank mortgage note 7,245,312 7,249,997 Convertible subordinated debentures 1,468,623 1,646,534 Hillcrest Bank note #1 3,556,295 --- Hillcrest Bank note #2 277,448 --- Hillcrest Bank note #3 152,834 --- Unsecured alternative treatment note 827,895 994,430 Real Estate Equities, Inc. note 600,000 --- Unsecured non-interest bearing note payable 113,049 174,406 Real estate tax notes 92,614 147,890 Hotel van loan 39,460 24,436 Total notes payable $34,981,360 $30,842,693 =========== =========== Salomon Brothers mortgage note - Mortgage note payable (First Mortgage Note) of December 19, 1997 with monthly principal and interest payments of $145,397 based on an interest rate of 7.5% and a 25-year amortization period. The initial payment of accrued interest only through January 31, 1997 is due on February 1, 1998. The outstanding principal and interest are due at maturity on January 1, 2008. The nonrecourse First Mortgage Note is collateralized by commercial, residential and hotel properties in Kansas City, Missouri, a hotel in Phoenix, Arizona and a hotel in Euless, Texas. This note is also cross-collateralized and cross-defaulted with the Mezzanine Note and the Cash Collateral Agreement. Salomon Brothers Mezzanine note - Mortgage note payable (Mezzanine Note) of December 19, 1997 with interest payable monthly based upon the one-month London Interbank Offered Rate (LIBOR) plus 4.95%. The interest rate at December 31, 1997 was 10.92% with the initial payment due February 1, 1998. Monthly principal payments begin in January 1999 based upon a monthly calculation using the outstanding principal balance, the interest rate from the preceding month and a 48-month amortization period less the months elapsed since January 1, 1999. The outstanding principal and interest are due at maturity on January 1, 2003. The Mezzanine Note is secured by the pledge of the Company's general partner interest in New Historic Suites Partners, L.P. and a full payment guaranty by the Company. The Mezzanine Loan Agreement requires that the monthly aggregated Adjusted Property Net Cash Flow for the properties securing the First Mortgage Note to at least equal the monthly calculation of the Debt Service Coverage Threshold. The Debt Service Coverage Threshold is defined as 1.05 times the sum of the annual debt service on the First Mortgage Loan plus the debt service payable on the Mezzanine Loan at an assumed principal and interest constant of 27%. This note is cross-collateralized and cross-defaulted with the First Mortgage Note and the Cash Collateral Agreement. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (9) Notes payable (continued) ------------- Midland Bank mortgage note - Mortgage note payable of October 1, 1997 with interest payable monthly at an initial rate of 7% until May 5, 1999. The rate then increases to 8% through March 31, 2001 and to 8.5% from April 1, 2001 until maturity. Interest only is payable monthly through October 5, 2000. The interest payments are based on the Deemed Balance (as defined) determined annually beginning on April 1, 1999. The initial Deemed Balance is the face amount of the note. The deemed balance as of December 31, 1998 and 1997 was $6,745,312 and $7,249,997, respectively. From November 5, 1998 through October 5, 2000, monthly payments of principal and interest are based on a 30-year amortization of the outstanding principal balance. Beginning on November 5, 2000, the monthly principal and interest payments are based on a 25-year amortization of the outstanding principal balance. The outstanding principal and interest are due at maturity on April 1, 2004 The note is collateralized by a hotel in Wichita, KS and the Disbursement Account (required reserve account to fund property improvements). Convertible subordinated debentures - Convertible Subordinated Debentures issued January 1994. The securities were issued in the initial aggregate principal amount of $9,127,752, and bear interest at the rate of 6% per annum. Interest accrues semiannually on January 1 and July 1 of each year. The outstanding balance as of December 31, 1998 consists of principal of $1,094,381 and accrued interest of $374,242, for a total of $1,468,623. The securities mature December 2003. At any time prior to maturity, the securities are convertible into shares of common stock of the Company, unless the securities are called for redemption. The number of shares issuable upon conversion is based on the Company's book value of $.224/share before reverse and forward stock split as of the December 31, 1993 financial statements. Related accrued interest expense is not subject to conversion to common stock and the liability is eliminated upon conversion of the debenture principal. Accrued interest eliminated upon conversion of debentures during the years ended December 31, 1998, 1997 and 1996 amounted to $105,399, $285,624 and $439,486, respectively. The securities are subordinate and junior in right of payment to all senior indebtedness of the Company (which includes all collateralized debt of the Company). Senior Indebtedness is to be paid in full before holders of the Subordinated Debentures are to be paid any principal or interest. Hillcrest Bank note #1 - Mortgage note payable of February 17, 1998 with monthly principal and interest payments of $32,975 based on an interest rate of 9.25%. The outstanding principal and interest are due at maturity on February 17, 2000, although the Company has the option to extend the maturity until February 17, 2001. The note is collateralized by an apartment/retail/parking garage facility located in Kansas City, Missouri. The note is also collateralized by a certificate of deposit in the amount of $200,000, and a full payment guaranty by the Company. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (9) Notes payable (continued) Hillcrest Bank note #2 - Line of credit, with maximum aggregate principal Amount of $850,000, with interest at the Wall Street Prime Interest Rate Plus 1%. Monthly payments of interest are required until maturity on February 17, 2000, at which time any unpaid accrued interest and principal Are due. The Company has the option to extend the maturity until February 17, 2000. The note is cross-collateralized with the Hillcrest Bank note #1. Hillcrest Bank note #3 - Line of credit, with maximum aggregate principal Amount of $250,000, with interest at the Wall Street Prime Interest Rate Plus 1%. Monthly payments of interest are required until maturity on December 1, 1999, at which time any unpaid accrued interest and principal Are due. The note is collateralized by a commercial property located in the River Market area Kansas City, Missouri, a vacant lot, assignment of Rents, furniture and fixtures, and a full payment guaranty by the Company. Unsecured alternative treatment note - 9% unsecured note payable to previous participants in the alternative treatment plan, with interest only payable quarterly until maturity in August 2000. Real Estate Equities, Inc. notes - Demand notes payable to related parties, With interest at 9%. The notes are collateralized by restricted cash Totaling $600,000. Unsecured non-interest bearing note payable - Note due September 2000, payable in an installment of $75,000 on January 31, 1996 and 60 monthly payments of $7,333 with the remaining unpaid principal due at maturity. Interest has been imputed at a rate of 9%. Real estate tax notes - Unsecured notes payable consisting of agreements with the taxing authorities for delinquent real estate taxes on foreclosed properties with interest imputed at 9% and monthly payments of $4,046 until maturity on August 15, 2002. Hotel van loan - 9.25% and 8.75% notes payable, collateralized by vehicles, payable in aggregate monthly installments of $1,445 through May 2001, and $646 through September 2001. Maturities for notes payable are as follows: Year ---- 1999 $ 815,636 2000 5,269,995 2001 695,906 2002 737,378 2003 2,421,155 Thereafter 24,441,290 Unscheduled maturities 600,000 ----------- Total long-term obligations $34,981,360 =========== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (10) Other liabilities ----------------- Other liabilities consists of the following: December 31, --------------------------- 1998 1997 Accounts payable $ 227,557 $ 169,550 Accrued bonus pool 215,126 1,324,113 Due to affiliates --- 367,707 Other liabilities 144,281 176,183 ----------- -------- Totals $ 586,964 $ 2,037,553 =========== ========== At December 31, 1998 and 1997, other liabilities includes the accrued bonus pool liability. The Company's bonus pool became effective June 15, 1994 to provide additional compensation to Company employees. Bonus pool expense charged to operations for the years ended December 31, 1998, 1997, and 1996 was $16,744, $425,340, and $1,403,608, respectively. (11) Treasury stock -------------- During the year ended December 31, 1996, the Company acquired 67,990 shares of preferred stock and 475 shares of common stock. These shares were obtained under a provision in the Company's Plan of Reorganization which allowed holders of convertible debentures over 65 years old to convert their debentures into alternative treatment debt. Since no value was assigned to the treasury stock, management has used $.224 per share as the cost of the treasury stock acquired. The treasury stock was retired during the year ended December 31, 1998. (12) Capital Stock The Company completed both a twenty-five hundred (2,500) to one (1) reverse Stock split effective April 30, 1998 and a seventy five (75) for one (1) Forward stock split effective June 30, 1998. Both of these stock splits Were approved by the stockholders of the Company. As part of the reverse stock split all fractional interests in the Company stock were redeemed. The cost to acquire the fractional shares was $294,171. An additional $35,554 of equity was raised from holders of fractional shares. As a result of the forward stock split, the number of authorized shares Of common stock was changed to 8,500,000 shares, and the number of Authorized shares of preferred stock was changed to 1,000,000 shares. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (13) Earnings per share ------------------ Basic earnings per share was computed by dividing income available to Common stockholders by the weighted average number of common shares Outstanding for the periods. Diluted earnings per share reflects the Potential dilution that could occur if convertible preferred shares And convertible subordinated debentures were converted into common Stock. The following shows the amounts used in computing earnings per share and the effects on income and the weighted average number of shares of dilutive potential common stock. All per share and weighted average share amounts for 1997 and 1996 have been retroactively restated to reflect the impact of the stock splits occuring during 1998, as described in Note (12). Weighted Average Common Income Shares Earnings Numerator Denominator Per Share 1998 Basic earnings per share - ------------------------ Income available to common stockholders $ 295,676 1,084,202 $ 0.27 ========= Dilutive effect of potential common stock: Convertible debentures 68,551 153,016 Less Convertible debentures Since their inclusion would Be antidilutive (22,723) (50,722) ---------- --------- Net convertible debentures 45,828 102,294 ---------- --------- Convertible preferred shares --- 55,358 ---------- --------- Diluted earnings per share Income available to common shareholders after assumed conversions of dilutive securities $ 341,504 1,241,854 $ 0.27 ========= ========= ======== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (13) Earnings per share (Continued) ------------------ Weighted Average Common Income Shares Earnings Numerator Denominator Per Share ----------- ----------- --------- 1997 (restated) Basic earnings per share - ------------------------ Income available to common stockholders $ 1,507,127 663,698 $ 2.27 ========= Dilutive effect of potential common stock: Convertible debentures 122,718 273,924 Convertible preferred shares - 74,734 ---------- -------- Diluted earnings per share Income available to common shareholders after assumed conversions of dilutive securities $ 1,629,845 1,012,356 $ 1.61 ========= ========= ========= 1996 (restated) Basic earnings per share Income available to common stockholders $ 1,550,216 174,297 $ 8.89 ========= Dilutive effect of potential common stock: Convertible debentures 438,151 978,016 Convertible preferred shares - 74,749 --------- ------- Diluted earnings per share - -------------------------- Income available to common shareholders after assumed conversions of dilutive securities $ 1,988,367 1,227,062 $ 1.62 ========= MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (14) Pension plan - ------------ The Company has a defined contribution pension plan covering all of its employees. All contributions to the plan are made by the Company, no contributions are required from the employees. Employees vest in the plan over a five year period. Total pension expense for the years ended December 31, 1998, 1997 and 1996 was $58,000, $63,147, and $43,180. (15) Related parties --------------- The Company had party transactions with the following related parties - Embassy Properties, Inc. - Embassy Properties, Inc. (EPI) provides property management services to the Company. EPI is considered a related party due to the 90% ownership of EPI by the immediate family of the Company's president. Embassy Hotel Management Company, Inc. - Embassy Hotel Management Company, Inc. (EHM) is a subsidiary of Embassy Properties, Inc. The Company has leased their hotels to this management company and receives hotel lease revenues rather than the corresponding hotel revenues and expenses directly connected with the individual hotel properties. Due to affiliates - Integrated Financial Services (IFS) served as the sponsor and advisory company to the Company from inception through June 1994, at which time the contract with IFS was terminated. Pursuant to the prior agreements, the Company pays an assignee of IFS for amounts due IFS and one of its affiliates for various services previously performed for the Company and expenses previously incurred on the Company's behalf. Interest accrues monthly with semi-annual payments. Principal payments of $9,575 plus accrued interest are payable on a semi-annual basis. The obligation was paid off during the year ended December 31, 1998. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (15) Related parties (continued) --------------- Years ended December 31, ------------------------------- 1998 1997 1996 Embassy Properties, Inc. (EPI) - ------------------------------ Payment of loan servicing fees to EPI $ 19,712 $ 33,404 $ 51,481 Payment of property management fees to EPI 132,983 141,549 119,734 Payment of asset management fees to EPI 24,000 32,687 - Payment of real estate lease commissions to EPI 24,216 32,005 2,183 Payment to EPI for loan closing services --- 19,700 - Payment for painting services 58,260 --- --- Payment of development fee 6,034 --- --- Payment of payroll processing fee 3,000 --- --- Embassy Hotel Management Company, Inc. (EHM) - ------------------------ Hotel lease revenue earned from leases with EHM $2,605,749 $2,104,346 $996,706 ========== ======== ======== Due to affiliates - ----------------- Due to affiliates, beginning of year $ 367,707 386,853 $383,979 Interest expense 10,974 31,316 89,530 Payments on obligation (378,681) (50,462) (86,656) ---------- -------- -------- Due to affiliates, end of year $ --- $ 367,707 $386,853 ========== ======== ======== December 31, --------------------- Embassy Hotel Management 1998 1997 Company, Inc. (EHM Accounts receivable for hotel lease revenue and advances made to hotels $ 987,062 $1,112,143 =========== ======== OTHER RELATED PARTY TRANSACTIONS Certain officers and trustees of the Company own limited partnership interests in certain borrowers of the Company. During the years ended December 31, 1998 and 1997, the Company incurred $100,000 and $70,000, respectively for consulting and investment banking services related to the Salomon Brothers financing to an entity in which an officer of the Company is a minority owner. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (15) Related parties (continued) --------------- During the year ended December 31, 1996, the Company and its subsidiaries incurred fees and expenses, totaling $106,000 to parties affiliated with the Company's trustees. During the years ended December 31, 1998 and 1997, certain trustees and officers of the Company converted debentures to common stock in accordance with the conversion features on the bonds. (16) Business segment information ---------------------------- Description of the types of activities for reportable segments - The Company has three reportable segments: hotel leasing, residential/mixed use properties, and assets held for restructure. The hotel leasing segment realizes rent income on Hotel properties leased to operators. The residential/mixed use properties segment realizes income from residential and commercial real estate properties. The assets held for restructure are assets recovered as collateral on notes receivable for which the Company has no long-term objective of owning and operating. Revenue from segments below the quantitative thresholds are reported as all other. Those activities are predominantly non-recurring gains and losses. The assets in all other are predominantly administrative assets, intangible assets, and assets held for long-term capital appreciation. Measurement of segment profit or loss and segment assets - The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company does not have intersegment sales and transfers. Factors management used to identify the enterprise's reportable segments - The Company's reportable segments are strategic business units that are in distinct markets consistent with the Company's long-range strategic business plan. They are managed separately because each business requires different management practices. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (16) Business segment information (continued) ---------------------------- The following table illustrates information concerning segment profit or loss and segment assets: Residential/ Assets Hotel mixed use for Year Ended December 31, 1998 Leasing Properties Restructure - ---------------------------- ----------- ----------- ----------- Revenues from external customers $ 2,605,749 $ 3,348,194 $ 332,097 Interest revenue 9,838 13,812 114,244 Total revenues $ 2,615,587 $ 3,362,006 $ 446,341 =========== =========== =========== Percentage of segment revenues to total 40% 51% 7% Interest expense $ 1,500,975 $ 741,073 $ 13,101 Depreciation and amortization 1,213,409 196,782 23,037 Segment profit (loss) (144,331) 986,482 230,418 Percentage of segment profit (loss) to total (49%) 334% 78% Other significant noncash items: Property recovered as collateral On note receivable $ - $ 2,273,633 $ --- Convertible subordinated debentures converted to common stock - - - December 31, 1998 - ----------------- Segment assets $27,650,820 $17,469,568 $ 2,594,229 Percentage of segment assets to total 55% 35% 5% Expenditures for segment assets 1,635,853 6,386,541 --- MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (16) Business segment information (continued) All Year Ended December 31, 1998 Other Total Revenues from external customers $ 96,844 $ 6,382,884 Interest revenue 58,934 196,828 ----------- ----------- Total revenues $ 155,778 $ 6,579,712 =========== =========== Percentage of segment revenues to total 2% 100% Interest expense $ 293,872 $ 2,549,021 Depreciation and amortization 129,880 1,563,108 Segment profit (loss) (776,893) 295,676 Percentage of segment profit (loss) to total (263%) 100% Other significant noncash items: Property recovered as collateral On note receivable $ - $ 2,273,633 Convertible subordinated debentures converted to common stock 134,784 134,784 December 31, 1998 - ----------------- Segment assets $ 2,812,890 $50,527,507 Percentage of segment assets to total 5% 100% Expenditures for segment assets 8,022,394 In addition to the above measures for business segments, the Company monitors Funds from Operations (FFO) as defined by National Association of Real Estate Investment Trusts (NAREIT). Real Estate Investment Trusts use FFO as a standard measure of operating performance. FFO is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The calculation of FFO for the Company for each operating segment is as follows: MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (16) Business segment information (continued) ---------------------------- Residential/ Assets Hotel mixed use for Year Ended December 31, 1998 Leasing Properties Restructure - ---------------------------- ----------- ----------- ----------- Segment profit (loss) $ (144,331) $ 986,482 $ 230,418 Add: Minority interest 8,283 - - Less: Partnership investment income - - - ----------- ----------- ----------- Income before minority interest (136,048) 986,482 230,418 Add: Depreciation and amorti- zation of real estate assets 1,213,409 196,782 23,037 Less: Gain on sales of assets - - (81,884) Less: Non-recurring items: Accrued interest expense foregone on converted debentures - - - ----------- ----------- ----------- Funds from operations $ 1,077,361 $ 1,183,264 $ 171,571 =========== =========== =========== All Year Ended December 31, 1997 Other Total Segment profit (loss) $ (776,893) $ 295,676 Add: Minority interest - 8,283 Less: Partnership investment income 13,565 13,565 Income before minority interest (763,328) 317,524 Add: Depreciation and amorti- zation of real estate assets 125,873 1,559,101 Less: Gain on sales of assets - (81,884) Less: Non-recurring items: Accrued interest expense foregone on converted debentures (105,399) (105,399) ------------ ------------ Funds from operations $ (742,854) $ 1,689,342 =========== =========== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (16) Business segment information (continued) ---------------------------- Residential/ Assets Hotel mixed use for Year Ended December 31, 1997 Leasing Properties Restructure - ---------------------------- ----------- ----------- ----------- Segment profit (loss) $ 743,499 $ 904,901 $ 220,208 Add: Minority interest 7,765 - - Less: Partnership investment income - - - ----------- ----------- ----------- Income before minority interest 751,264 904,901 220,208 Add: Depreciation and amorti- zation of real estate assets 745,990 181,493 24,483 Less: Gain on sales of assets - - (66,679) Less: Non-recurring items: Accrued interest expense foregone on converted debentures - - - ----------- ----------- ----------- Funds from operations $ 1,497,254 $ 1,086,394 $ 178,012 =========== =========== =========== All Year Ended December 31, 1997 Other Total - ---------------------------- ----------- ----------- Segment profit (loss) $ (361,481) $ 1,507,127 Add: Minority interest - 7,765 Less: Partnership investment income (7,143) (7,143) ----------- ----------- Income before minority interest (368,624) 1,507,749 Add: Depreciation and amorti- zation of real estate assets 14,823 966,789 Less: Gain on sales of assets - (66,679) Less: Non-recurring items: Accrued interest expense foregone on converted debentures (285,624) (285,624) ----------- ----------- Funds from operations $ (639,425) $ 2,122,235 =========== =========== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (16) Business segment information (continued) ---------------------------- Segment information for December 31, 1996 - The Company has not restated 1996 business segment information to conform to the current reporting. During the years ended 1996, the Company was undergoing a fundamental reorganization of its business activities. The Company's original purpose was investing in mortgage loans. However, beginning in 1993, the Company became the owner of various real estate assets through acquisitions, foreclosures, and loan workouts with previous borrowers. As a result, throughout 1994, 1995 and 1996, the Company was changing its purpose to holding, leasing and operating real estate property for the production of income and appreciation in value. As a result, it is not cost justified to restate segment information, because the revised information would lack any comparability to current information due to the dramatic difference in business purpose. For 1996, the Company's operations have been classified into three business segments: mortgage loan investing, rental real estate and hotel activities. Mortgage loan investing involves investing in mortgage loans primarily collateralized by income-producing real estate or real estate under development. Rental real estate includes the operation and management of commercial and residential properties. Hotel activities consist of hotel operating and lease revenue and operating expenses. Identifiable assets are those assets that are used in the business segment's operation. The identifiable assets of the mortgage loan investing segment consist of mortgage loans receivable net of allowance for losses, foreclosed property held for sale and interest receivable. The identifiable assets of the rental real estate operation segment include property and equipment net of accumulated depreciation. The identifiable assets of the hotel activities include all assets of the hotels plus related goodwill. Summarized financial information by business segment for the year ended December 31, 1996 is as follows: 1996 REVENUES Mortgage loan investing $ 1,569,450 Rental real estate 2,192,737 Hotel activities 2,825,455 CONSOLIDATED TOTAL $ 6,587,642 =========== EXPENSES Mortgage loan investing $ 1,157,552 Rental real estate 1,700,658 Hotel activities 2,179,216 CONSOLIDATED TOTAL $ 5,037,426 =========== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (16) Business segment information (continued) ---------------------------- 1996 NET INCOME (LOSS) Mortgage loan investing $ 411,898 Rental real estate activities 492,079 Hotel activities 646,239 ------ CONSOLIDATED TOTAL $ 1,550,216 =========== IDENTIFIABLE ASSETS Mortgage loan investing $ 1,550,024 Rental real estate activities 17,840,295 Hotel activities 13,152,177 CONSOLIDATED TOTAL $32,542,496 =========== DEPRECIATION AND AMORTIZATION Mortgage loan investing $ - Rental real estate operations 335,223 Hotel activities 445,251 ------ CONSOLIDATED TOTAL $ 780,474 =========== CAPITAL EXPENDITURES Mortgage loan investing $ - Rental real estate operations 2,796,117 Hotel activities 7,523,064 ------ CONSOLIDATED TOTAL $10,319,181 =========== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (17) Commitments and contingencies ----------------------------- Contingency: The Company has a non-recourse second mortgage note for $525,536 in a collection action presently pending in bankruptcy court. There are two competing bankruptcy plans currently being considered by the bankruptcy court. The first plan was submitted by a limited partner of the debtor which would pay the Company's claim for $525,536, subject to a pending adversary proceeding in which the limited partner has requested equitable subordination of the Company's claim. The second plan was submitted by the Partnership as the general partner, and debtor in possession. The plan would relinquish the general partner role to Real Estate Equities, Inc., (a wholly owned subsidiary of Master Realty Properties, Inc.). This plan would admit Real Estate Equities, Inc. as a 17.5% limited partner in consideration for the notes receivable balance, and an additional 42.5% limited partner interest in return for $1,275,000 cash. The Company believes that the full value of its investment of $525,536 is recoverable under either plan, provided that the pending adversary proceeding seeking equitable subordination of the Company's claim is satisfactorily resolved in favor of the Company. Guaranty: - -------- The Company is contingently liable as a guarantor on Industrial Revenue Bonds (IRB's) (Soho Office Center Project) Series 1996 between the Land Clearance for Redevelopment Authority of Kansas City (the Issuer) and Soho Office Center, L.P. (the borrower) in the amount of $2,655,000. The Series 1996 bonds were reissued to pay amounts due to the Company on Series 1984 Bonds. The Company entered into the Guarantor Agreement to effectuate the transaction whereby these funds would be available to the Company. The Company has pledged collateral to secure the guaranty. The collateral consists of the Company's Deed of Trust and Security Agreement executed by the borrower in favor of the Company on the Series 1984 Bonds, and assignment on a ratable basis of General Partnership Interest of River Market Venture, Inc. (a wholly owned subsidiary of the Company) in River Market Venture I, L.P. In 1996, the Company assigned the IRB's, which were originally part of a note receivable, to the participants in the Company's Alternative Treatment Plan who elected to receive them as reductions of their Alternative Treatment. The Company's guarantee and collateral remain in place for these bonds. Minimum rents: - ------------- The Company receives income on commercial and residential properties under noncancelable operating lease agreements expiring through 2001 in connection with its rental operations. Future minimum rental payments under these leases as of December 31, 1998 are as follows: Years Ended December 31, ------------------------ 1999 $1,961,879 2000 556,338 2001 198,696 2002 143,276 2003 43,468 Thereafter 196,770 ------ Total $ 3,100,427 =========== (18) Fair value of financial instruments ----------------------------------- Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," (SFAS No. 107) requires disclosure of estimated fair values for financial instruments held by the Company. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and restricted cash - The carrying amounts reported in the statements of condition for cash and cash equivalents and interest bearing deposits approximate those assets' fair values. Mortgage notes receivable - Fair values for loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. The carrying amount has been evaluated for impairment and is stated at estimated net realizable value which is equivalent to fair value. Notes payable - The fair value of the Company's convertible subordinated debentures was determined by using the most recent trades occurring between individual debenture holders. The value used in those trades was 30% of the face amount of the debentures. Based on those trades, the fair value of the convertible subordinated debentures is estimated at 30% of the principal amount of the debentures, plus accrued interest payable on those obligations. The fair value of the Company's remaining long-term debt was estimated based on estimates of the current market rates for debt with similar remaining maturities and collateral. MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (18) Fair value of financial instruments (continued) ----------------------------------- The estimated fair values of the financial instruments are as follows: December 31, 1998 December 31, 1997 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Financial assets Cash and restricted cash $ 1,795,718 $ 1,795,718 $ 2,643,558 $ 2,643,558 Mortgage notes receivable (after reduction for allowance for loan losses) 1,080,850 1,080,850 2,829,615 2,829,615 Notes receivable 535,871 535,871 193,460 193,460 Financial liabilities Convertible subordi- nated debentures 1,468,623 702,556 1,646,534 715,673 Notes payable - other 33,512,737 33,393,832 29,196,159 28,956,755 MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Write Off Beginning Charged to of Un- Balance at Balance at Expense Collectible End of Period (Recovery) Accounts Period ------------ ------------ ------------ ------------ DESCRIPTION - ----------- Year ended December 31, 1998: Deducted from asset accounts: Allowance for losses - mortgage notes receivable $ 3,691,493 $( 831,640) $(1,640,965 $ 1,218,888 =========== =========== =========== =========== Year ended December 31, 1997: Deducted from asset accounts: Allowance for losses - mortgage notes receivable $ 4,974,901 $(1,283,408) $ -- $ 3,691,493 Year ended December 31, 1996: Deducted from asset accounts: Allowance for losses - mortgage notes receivable $10,780,742 $(3,854,698) $(1,951,143) $ 4,974,901 Allowance for losses - interest receivable 613,742 (408,028) ( 205,714) - ----------- ----------- ------------ ----------- TOTAL $11,394,484 $(4,262,726) $(2,156,857) $ 4,974,901 =========== =========== =========== =========== See Accompanying Independent Auditors' Report MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III - PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION Carrying Cost Additions at 12/31/97 Initial Cost since ------------ ------------ Acquisition Buildings Buildings ------------ & Land Encum- & Land Improvements Improvements Description brances Improvements Carrying Cost Total (4) - ----------- ------------ ------------ ------------ ------------ Commercial: - ---------- Rivermarket - Kansas City, MO (1) $ 7,490,894 $ 848,788 $ 8,339,682 Soho VI - Kansas City, MO (1) 1,494,345 79,092 1,573,437 Soho III/ Gaslight Garage - Kansas City, MO 6,864,239 231,583 7,095,822 39/40 Plaza - Kansas City, MO 725,000 95,274 820,274 Hotels: - ------ Ramada - Phoenix, AZ (1) 3,952,594 2,988,029 6,940,623 Ramada - Euless, TX (1,3) 5,772,619 1,215,453 6,988,072 Ramada - Wichita, KS (2) 7,323,687 674,391 7,998,078 Historic Suites - Kansas City, MO (1) 7,500,000 324,112 7,824,112 (1) Encumbered by mortgage note payable with a balance at December 31, 1998 of $19,417,830. (2) Encumbered by mortgage note payable with a balance at December 31, 1998 of $7,245,312. (3) Encumbered by note payable with a balance at December 31, 1998 of $18,699. (4) Encumbered by a mortgage note payable with an aggregate balance at December 31, 1998 of $3,833,743. (5) The aggregate carrying cost for Federal income tax purposes at December 31, 1998 is $47,854,793. See Accompanying Independent Auditors' Report MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III - PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION (Continued) Carrying Cost Additions at 12/31/97 Initial Cost since ------------ ------------ Acquisition Buildings Buildings ------------ & Land Encum- & Land Improvements Improvements Description brances Improvements Carrying Cost Total (4) - ----------- ------------ ------------ ------------ ------------ Unimproved land: - --------------- Gabriel - Kansas City, MO 65,003 69,700 134,703 All other property and equipment 20,860 119,130 139,990 ----------- ---------- ----------- Totals $41,209,241 $ 6,645,552 $47,854,793 =========== =========== =========== (1) Encumbered by mortgage note payable with a balance at December 31, 1998 of $19,417,830. (2) Encumbered by mortgage note payable with a balance at December 31, 1998 of $7,245,312. (3) Encumbered by note payable with a balance at December 31, 1998 of $18,699. (5) Encumbered by a mortgage note payable with an aggregate balance at December 31, 1998 of $3,833,743. (5) The aggregate carrying cost for Federal income tax purposes at December 31, 1998 is $47,854,793. See Accompanying Independent Auditors' Report MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III - PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION (Continued) Estimated Accumulated Date of Date Depreciable Description Depreciation Construction Acquired Life - ----------- ------------ ------------ ------------ ------------ Commercial: - ---------- Rivermarket - Kansas City, MO $ 495,880 1870 - 1890 6-95 7 & 39 years Soho VI - Kansas City, MO 46,984 1900 12-96 7 & 39 years Soho III/ Gaslight Garage - 2-98/ Kansas City, MO 157,881 1986 8-93 5 & 39 years 39/40 Plaza - Kansas City, MO 53,348 1970 1-94 5 & 39 years Hotels: - ------ Ramada - Phoenix, AZ 770,547 1956 6-94 7 & 39 years Ramada - Euless, TX 1,615,391 1971 3-94 5 - 39 years Ramada - Wichita, KS 305,787 1954, 1973 1985 10-97 5 - 39 years Historic Suites - Kansas City, MO 526,950 1890 9-96 7 & 39 years Unimproved land: - --------------- Gabriel - Kansas City, MO - 1890 Various 5 & 39 years All other property and equipment 11,611 ----------- Totals $ 3,984,379 =========== (1) Encumbered by mortgage note payable with a balance at December 31, 1998 of $19,417,830. (2) Encumbered by mortgage note payable with a balance at December 31, 1998 of $7,245,312. (3) Encumbered by note payable with a balance at December 31, 1998 of $18,699. (6) Encumbered by a mortgage note payable with an aggregate balance at December 31, 1998 of $3,833,743. (5) The aggregate carrying cost for Federal income tax purposes at December 31, 1998 is $47,854,793. See Accompanying Independent Auditors' Report MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE Interest rate at Final Periodic Interest December Maturity Payment Location Rate 31, 1998 Date Terms - ------------------- --------- --------- -------- ----------------- PARTIALLY-EARNING 2ND AND 3RD MORTGAGE LOANS - ------------------ COMMERCIAL BUILDINGS Kansas City, MO 10.00% 10.00% 10/01/94 Quarterly pay- ments equal to property's net cash flow; Unpaid principal and interest at maturity RESIDENTIAL Mission, KS 9.5% 9.5% 06/01/01 Monthly payments equal to property's available cash flow after prin- cipal & interest payments on 1st mortgage See Accompanying Independent Auditors' Report MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued) Principal Amount Carrying of Loans Amount of Subject to Face Mortgages Delinquent Prior Amount of at December Principal Location Liens Mortgages 31, 1997 or Interest - ------------------- ---------- ---------- ---------- ---------- PARTIALLY-EARNING 2ND & 3RD MORTGAGE LOANS - ------------------ COMMERCIAL BUILDINGS Kansas City, MO $ - $3,300,000 $1,774,738 $1,774,738 RESIDENTIAL Mission, KS 6,768,000 300,000 525,000 525,000 TOTAL MORTGAGE NOTES RECEIVABLE, PARTIALLY- EARNING $6,768,000 $3,600,000 $2,299,738 $2,299,738 ========== ========== ========== ========== See Accompanying Independent Auditors' Report MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued) Years Ended December 31, 1998, 1997 and 1996 Year Ended December 31 --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Balance at beginning of year $ 6,521,108 $ 5,519,500 $15,962,800 Additions during year Advances on existing loans 67,338 295,258 101,856 Other recoveries - 709,151 - ----------- ----------- ----------- Total additions 6,588,446 6,523,909 16,064,656 ----------- ----------- ----------- Deductions during year Collection of principal 3,815,739 2,801 35,057 Write off principal against the allowance 226,489 - 10,510,099 Reclassification to notes Receivable 246,480 --- --- ----------- ----------- ----------- Total deductions 4,288,708 2,801 10,545,156 ----------- ----------- ----------- BALANCE AT END OF YEAR $ 2,299,738 $ 6,521,108 $ 5,519,500 =========== =========== =========== See Accompanying Independent Auditors' Report -----END PRIVACY-ENHANCED MESSAGE-----