-----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, AYxIsN3RTBle/NWQb/g3XMTpmORETyWj9m1oGR6JOC6V+v7PWhjAneSA8xecx5X7 NTSSrQnXKZyTCz2ydjT4CQ== 0000835712-99-000017.txt : 19991122 0000835712-99-000017.hdr.sgml : 19991122 ACCESSION NUMBER: 0000835712-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991119 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-Q SEC ACT: SEC FILE NUMBER: 000-18615 FILM NUMBER: 99761474 BUSINESS ADDRESS: STREET 1: 712 BROADWAY STREET 2: SUITE 700 CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8164749333 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to __________________. Commission File Number 33-22805 MASTER REALTY PROPERTIES, INC. (Exact name of registrant as specified in its charter) Delaware 48-1056392 (State of jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 410 W. 8th Street Kansas City, Missouri 64105 (Address of principal offices) (Zip Code) Registrant's telephone number, including area code:(816) 474-9333 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 for the preceding 12 months (or 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 As of June 30, 1999, the Registrant had 35,925 shares of preferred stock and 1,202,760 shares of common stock outstanding. The aggregate book value of all shares of the Registrant, based on the June 30, 1999 unaudited financial statements was $14,158,807. MASTER REALTY PROPERTIES, INC. JUNE 30, 1999 FORM 10Q INDEX Part I: Financial Statements Financial Statements* A. Balance Sheets as of June 30, 1999 and December 31, 1998 B. Statement of Operations for the three months Ended June 30, 1999 and 1998 C. Statement of Operations for the six months Ended June 30, 1999 and 1998 D. Statement of Changes in Shareholders' Equity for the six months ended June 30, 1999 and 1998 E. Statement of Cash Flows for the six months ended June 30, 1999 and 1998 Notes to Unaudited Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Signatures * All financial statements, except the balance sheet as of December 31, are unaudited MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1999 and December 31, 1998 June 30, December 31, 1999 1998 A S S E T S CASH $ 657,728 $ 699,358 RESTRICTED CASH 1,595,896 1,096,360 MORTGAGE NOTES RECEIVABLE, net of allowance for loan losses 1,080,850 1,080,850 NOTE RECEIVABLE 548,236 535,871 PROPERTY HELD FOR INVESTMENT 1,001,688 1,001,688 INVESTMENT IN REAL ESTATE PARTNERSHIPS 175,669 173,456 ACCOUNTS RECEIVABLE 1,030,352 1,024,066 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation 46,189,076 43,870,414 OTHER ASSETS 1,231,201 1,045,444 ----------- ----------- TOTAL ASSETS $53,510,696 $50,527,507 =========== =========== MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) June 30, 1999 and December 31, 1998 June 30, December 31, 1999 1998 L I A B I L I T I E S NOTES PAYABLE $38,060,484 $34,981,360 OTHER LIABILITIES 966,298 586,964 ------------ ------------- TOTAL LIABILITIES $ 39,026,782 $ 35,568,324 ============ ============= MINORITY INTEREST IN SUBSIDIARIES 325,107 321,226 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. 359 359 Common stock, par value $.01, authorized 45,000,000 shares 12,028 11,878 Additional paid-in capital 41,870,253 41,760,211 ----------- ----------- TOTAL CAPITAL CONTRIBUTED 41,882,640 41,772,448 RETAINED DEFICIT (27,723,833) (27,134,491) TOTAL STOCKHOLDERS' EQUITY 14,158,807 14,637,957 ------------ ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $53,510,696 $ 50,527,507 MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, 1999, and 1998 1999 1998 REVENUES Rental income $ 942,420 $ 890,792 Hotel Income 496,000 696,000 Interest and fees on mortgage loans 14,625 78,814 Other income (loss) 31,341 12,377 Gain on sale of assets 0 0 ------------ ---------- TOTAL REVENUES $ 1,484,386 $1,677,983 ============ ========== EXPENSES Loan Servicing Fees $ 3,913 $ 9,676 Rental expenses 415,384 521,037 General and administrative expenses 128,385 149,862 Legal and accounting 70,708 33,081 Payroll and employee benefits 168,951 137,300 Depreciation and amortization 352,980 358,203 Interest expense 693,897 694,325 Provision for loan losses (recoveries) 0 (61,899) ----------- ----------- TOTAL EXPENSES $ 1,834,218 $1,841,585 ----------- ----------- MINORITY INTEREST IN LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES 6,596 6,985 ----------- ---------- NET INCOME $ (356,428) $ (170,587) =========== ========== BASIC EARNINGS PER SHARE $(0.2916) $(.1396) DILUTED EARNINGS PER SHARE $(.1245) MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended June 30, 1999, and 1998 1999 1998 REVENUES Rental income $1,854,290 $1,733,907 Hotel Income 1,021,694 1,392,000 Interest and fees on mortgage loans 39,659 106,329 Other income (loss) 56,855 22,664 Gain on sale of assets 0 81,884 ------------ ---------- TOTAL REVENUES $ 2,972,498 $3,336,784 ============ ========== EXPENSES Loan Servicing Fees $ 7,828 $ 17,621 Rental expenses 812,370 887,784 General and administrative expenses 218,920 251,638 Legal and accounting 140,453 158,795 Payroll and employee benefits 321,241 276,726 Depreciation and amortization 691,126 739,670 Interest expense 1,364,499 1,265,316 Provision for loan losses (recoveries) 0 (16,058) ----------- ----------- TOTAL EXPENSES $ 3,556,437 $2,881,492 ----------- ----------- MINORITY INTEREST IN LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES 5,403 6,985 ----------- ---------- NET INCOME $ (589,342) $ 448,307 =========== ========== BASIC EARNINGS PER SHARE $(0.4822) $.3668 DILUTED EARNINGS PER SHARE $.3273 MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Six Months Ended June 30, 1999 and 1998 PREFERRED PREFERRED COMMON COMMON STOCK STOCK STOCK STOCK SHARES AMOUNT SHARES AMOUNT Balances, December 31, 1997 2,491,622 24,916 29,181,486 291,814 Debenture Conversion to Stock 959,067 9,591 Unsecured Director's Fees converted to stock 282,738 2,827 Pension Plan Stock Conversion 863,095 8,631 Stock Bonus 2,147,362 21,474 Reverse Stock Split (2,445,272) (24,452) (32,257,973)(322,579) Net income for the period ---------- ------- ---------- ------- Balances, June 30, 1998 46,350 464 1,175,775 11,758 ========== ======= ========== ======= CAPITAL IN TOTAL EXCESS OF PAR UNDISTRIBUTED TREASURY SHAREHOLDER'S VALUE EARNINGS (DEF) STOCK EQUITY Balances, December 31, 1998 40,926,229 (27,430,167) (15,336) 13,797,456 Debenture Conversion to Stock 305,322 314,913 Unsecured Director's Fees converted to stock 16,173 19,000 Pension Plan Stock Conversion 49,369 58,000 Stock Bonus 459,535 481,009 Net income for the period 90,704 (256,327) ---------- ------- ---------- ------- Balances, June 30, 1998 41,847,332 (28,019,510) (15,336) 13,824,708 ========== ======= ========== ======= PREFERRED PREFERRED COMMON COMMON STOCK STOCK STOCK STOCK SHARES AMOUNT SHARES AMOUNT Balances, December 31, 1998 35,925 359 1,187,804 11,878 Debenture Conversion to Stock 14,956 150 Net income for the period ---------- ------- ---------- ------- Balances, June 30, 1999 35,925 359 1,202,760 12,028 ========== ======= ========== ======= CAPITAL IN TOTAL EXCESS OF PAR UNDISTRIBUTED TREASURY SHAREHOLDER'S VALUE EARNINGS (DEF) STOCK EQUITY Balances, December 31, 1998 41,760,211 (27,134,491) 14,637,957 Adjustment to reverse stock split (962) (962) Debenture Conversion to Stock 111,004 111,154 Net income for the period (589,342) (589,342) ---------- ------- ---------- ------- Balances, June 30, 1999 41,870,253 (27,723,833) -- 14,158,807 ========== ======= ========== ======= MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1999 and 1998 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (589,342) $ 448,310 Adjustments to reconcile net income to net cash provided by (used in) operating activities Minority interest 3,881 (187,328) Accounts receivable (6,286) 150,778 Prepaid Expenses Other assets, net (185,757) (75,257) Increase (decrease) in operating liabilities Other liabilities 28,442 (530,663) Prepetition liabilities 0 (13,022) Interest payable 350,892 146,003 ------------ ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (398,170) (61,179) ------------ ---------- CASH FLOWS FROM INVESTING ACTIVITIES Decrease mortgage notes receivable 1,723,282 Decrease in real estate partnerships (2,213) 7,567 Decrease in industrial revenue bonds 184,709 Decrease in notes receivables (12,365) 0 Increase in fixed assets (2,318,662) (5,897,734) ------------ ---------- NET CASH USED IN INVESTING ACTIVITIES $ (2,333,240) $(3,982,176) CASH FLOW FROM FINANCING ACTIVITIES Costs of reverse stock split (1,486) (250,871) Increase in notes payable $ 3,190,802 $ 3,313,891 ------------ ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 3,189,316 $ 3,063,020 ------------ ---------- NET INCREASE (DECREASE) IN CASH 457,906 (980,335) CASH, BEGINNING OF PERIOD 1,795,718 2,643,558 CASH, END OF PERIOD $ 2,253,624 $1,663,223 =========== ========== 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. (1) Restricted cash and escrows The Company entered into a Cash Management, Collateral and Security Agreement (Cash Collateral Agreement), on 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, after December 19, 1997, 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. The following reserves were established under this agreement. June 30, 1999 December 31, 1998 Debt service reserve $156,641 $153,078 Capital expenditure reserve 48,577 20,157 Impound costs sub-account 31,722 13,599 -------- -------- Total restricted cash and escrows $236,940 $186,834 ======== ======== 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. (2) Mortgage notes receivable June 30, 1999 December 31, 1998 Mortgage notes receivable, partially-earning $2,299,738 $2,299,738 Allowance for losses (1,218,888) (1,218,888) ---------- --------- Net mortgage notes receivable $1,080,850 $1,080,850 ========== ========== 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. Effective February 1, 1998, the Company converted its partially- earning mortgage note receivable with a net carrying value of $1,748,633 into a partnership investment (see Note 13). 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. The Company is completing negotiations to acquire the underlying property of its largest remaining mortgage note. (3) Property held for investment June 30, 1999 December 31, 1998 Non-earning, land in New Mexico $1,001,688 $1,001,688 ========== ========== 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. (4) Investment in real estate partnerships Investment in real estate partnerships consists of the following: Ownership Ownership at Interest 6/30/99 & 6/30/98 OPP IX, Limited Partnership Limited 25.12 24.9 OPP X, Limited Partnership Limited 2.3 2.3 Historic Suites of America - KC Limited 19.8 19.8 (5) 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: June 30, 1999 December 31, 1998 Ramada Inn - Phoenix, Arizona $ 240,416 $ 345,347 Ramada Inn - Euless, Texas 329,809 397,392 Historic Suites - Kansas City, Missouri 76,620 24,399 Ramada Inn - Wichita, Kansas 348,824 219,924 -------- -------- Total $ 995,669 $ 987,062 ========== ========== (6) Industrial revenue bonds As disclosed in Note 12 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 totaled $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 sold all of its remaining bonds in April 1998 at their face value. (7) Property and equipment June 30, 1999 December 31, 1998 Cost Land and land improvements $ 7,051,999 $ 7,051,999 Building and building improvements 39,037,513 37,271,763 Furniture and equipment 3,507,853 3,385,308 Assets not yet in service 1,223,549 145,723 ----------- ----------- Total Cost $50,820,914 $47,854,793 Accumulated depreciation (4,631,838) (3,984,379) ----------- ----------- Net property, plant and equipment $46,189,076 $43,870,414 =========== =========== 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 period ended June 30, 1999 and 1998 was $302,266 and $320,119, respectively. (8) Notes payable June 30, 1999 December 31, 1998 Salomon Brothers mortgage note $19,269,325 $19,417,830 Salomon Brothers Mezzanine note 1,066,490 1,190,000 Midland Bank mortgage note 7,245,312 7,245,312 Convertible Subordinated Debentures 1,339,646 1,468,623 ITLA mortgage note 4,450,000 0 Hillcrest Bank #1 0 3,556,295 Hillcrest Bank #2 0 277,448 Hillcrest Bank #3 229,337 152,834 Hillcrest Bank #4 1,275,317 0 Hillcrest Bank #5 480,000 0 Hillcrest Bank #6 480,000 0 Unsecured alternative treatment note 1,015,716 827,895 Real Estate Equities, Inc. notes 1,000,000 600,000 Unsecured non-interest bearing note payable 96,861 113,049 Real Estate tax notes 80,012 92,614 Hotel van loan 32,468 39,460 ----------- ---------- Total notes payable $38,060,484 $34,981,360 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 was paid 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 percent. The interest rate at December 31, 1997 was 10.92 percent 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 percent. This note is cross-collateralized and cross-defaulted with the First Mortgage Note and the Cash Collateral Agreement. Midland Bank mortgage note - Mortgage note payable of October 1, 1997 with interest payable monthly at an initial rate of 7 percent until June 1, 1999. The rate then increases to 8 percent through March 31, 2001 and to 8.5 percent from April 1, 2001 until maturity. Interest only is payable monthly through October 5, 1998. 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. From June 5, 1999 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). The Company is delinquent on its payments under this note and are involved in restructuring its ownership in this hotel. The restructuring included a deed transfer of this hotel. The Bank had not called the note in default as of June 30, 1999. ITLA mortgage note - mortgage note payable (first mortgage note) with monthly interest only payments based on a 8.75 percent for the first twelve months and then monthly principal and interest payments with interest determined quarterly based on LIBOR plus 3.75 percent and principal payments based on a 25 year amortization period. This note matures April 1, 2009. 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 percent. The outstanding principal and interest are due at maturity on February 17, 2000, although the Company had the option to extend the maturity until February 17, 2001. The note was collateralized by an apartment/retail /parking garage facility located in Kansas City, Missouri. The note is also guaranteed by the Company. This note was paid in full in May, 1999. 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 percent. 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 had the option to extend the maturity until February 17, 2001. The note was cross-collateralized with the Hillcrest Bank note #1. This note was paid in full in May, 1999. 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 percent. 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 River Market area Kansas City, Missouri, a vacant lot, assignment of rents, furniture and fixtures, and a full payment guaranty by the Company. Hillcrest Bank note #4 - Construction loan with maximum principal amount of $4,096,500 with interest at 9 percent. This note is collateralized by commercial property in the Garment District of Kansas City, Missouri and Independence, Missouri. The Company has guaranteed this note. This note converts to a permanent loan upon completion of the construction project with interest at prime plus one percent and principal amortization based on a 25 year term. This note matures on March 1, 2006. Hillcrest Bank note #5 - Line of credit, with maximum aggregate principal amount of $480,000 with interest at Wall Street prime interest plus one percent. Monthly payments on interest only are required until maturity at April 1, 2000. This note is collateralized by a building located in downtown Kansas City, Missouri. Hillcrest Bank note #6 - Line of credit, with maximum aggregate principal amount of $480,000 with interest at Wall Street prime interest plus one percent. Monthly payments on interest only are required until maturity at May 1, 2000. This note is collateralized by a building located in downtown Kansas City, Missouri. 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 percent per annum. Interest accrues semiannually on January 1 and July 1 of each year. 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 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 periods ended June 30, 1999 and 1998 amounted to $31,828 and $48,275, 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. Unsecured note - 9 percent unsecured note payable to previous participants in the alternative treatment plan, with interest only payable quarterly until maturity in August, 2000. 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 percent. Real estate tax note - Unsecured note payable consisting of an agreement with the taxing authorities for delinquent real estate taxes on a foreclosed property with interest imputed at 9 percent and monthly payments of $3,220.30 until maturity on August 15, 2002. On March 31, 1998 the Company sold a property which was the subject of an unsecured real estate tax note. This note was paid off as part of the closing of this sale. Hotel van loan - 9.25 percent note payable, collateralized by a vehicle, payable in monthly installments of $646 until maturity in September 2001. (9) Other liabilities Other liabilities consist of the following: June 30, 1999 December 31, 1998 Interest payable $ 352,353 $ - Accounts payable 247,491 227,557 Accrued bonus pool 68,744 212,126 Other liabilities 297,710 144,281 ---------- ---------- $ 966,298 $ 586,964 ========== ========== At June 30, 1999 and December 31, 1998, 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 (10) Common and Preferred Stock and Paid in Capital. The Company completed both a twenty five hundred (2,500) to (1) reverse stock split effective April 30, 1998 and a seventy five (75) for (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 eliminated. The net cost to the Company of this transaction was $256,327. (11) 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. The following table illustrates information concerning segment profit or loss and segment assets: Residential/ Assets Hotel Mixed Use For All Period ended 6-30-99 Leasing Properties Restructure Other Total Revenues from external customers $1,021,694 $1,778,503 $101,657 $ 17,502 $2,919,356 Interest revenue 222 3,791 24,190 10,196 38,399 --------- --------- -------- -------- --------- Total revenues 1,021,916 1,782,294 125,847 27,698 2,957,755 Percentage of segment revenues to total 35 60 4 1 100 Interest expense 820,235 407,195 6,719 137,073 1,371,222 Depreciation and amortization 530,229 114,421 11,563 56,707 712,920 Segment profit (loss) (348,602) 571,209 35,542 (847,491) (589,342) Percentage of segment profit (loss) to total 59 (96) (6) 143 100 Other significant non- cash items: Convertible sub- ordinated debentures converted to common stock - - - 110,192 June 30, 1999 Segment assets 27,573,787 19,330,877 2,541,257 4,064,775 53,510,696 Percentage of segment assets to total 52 36 5 7 100 Expenditures for segment assets 50,432 564,618 --- 1,863,739 2,478,789 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: Residential/ Assets Hotel Mixed Use For All Period ended 3-31-99 Leasing Properties Restructure Other Total Net income $(348,602) $ 571,209 $ 35,542 $(847,491) $(589,342) Add minority interest (5,403) - - - (5,403) Add partnership investment income (3,011) (3,011) --------- --------- -------- -------- --------- Income before minority interest $(354,005) $ 571,209 $35,542 $(850,502) $(597,756) Add: Depreciation and amortization of real estate assets 520,400 92,736 8,190 2,097 623,417 Less: Accrued Interest foregone on converted debentures - - - (31,828) (31,828) --------- --------- -------- -------- --------- Funds from operations $166,395 $663,945 $ 43,732 $(880,239)$ (6,167) ========= ======== ======== ========= ========== (12) Commitments and contingencies 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. The Company is completing negotiations to acquire the Soho Office Center project. 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 380,903 2000 150,984 2001 50,610 2002 40,204 Thereafter 37,225 ---------- Total $ 659,926 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. 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 period ended June 30, 1999 and 1998. The discussion should be read in conjunction with 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: Period Ended June 30,1999 Compared with Period Ended June 30, 1998 Rental Properties: Revenue from rental properties increased by $120,383 for the six months ended June 30, 1998 to June 30, 1999. This increase was due to the increases in rental rates in all of the Properties, reduction in vacancies, and the acquisition of a mixed-use property in February, 1998. Rental expenses decreased from $887,784 at June 30, 1998 to $812,370 at June 30, 1999. This decrease of $75,414 was due to the acquisition of a mixed- use property in February, 1998. Hotel Properties: Revenues from hotel lease income decreased from $1,392,000 at June 30, 1998 to $1,021,694 for June 30, 1999. This substantial decrease was due to financial problems in the hotel property acquired in October, 1997 and a modification it to its percentage rent calculation with respect to its other three hotels which eliminated any percentage rent in the June 30, 1999 period. The Company is negotiating a settlement with the Lender on the financially troubled hotel and does note expect to recover any of the potential rental income loss associated with this hotel. Other Revenues and Expenses: The Company continued to receive interest income on its remaining real estate loans and cash deposits. The amount received was $39,659 and $106,329 for June 30, 1999 and June 30, 1998, respectively. The Company disposed of a rental property on March 31, 1998 at a gain of $81,884. The Company had a $32,718 decrease in general and administrative expenses for the six months ended June 30, 1999 compared to June 30, 1998. Interest expense increased by $99,183 from $1,265,316 at June 30, 1998 to $1,364,499 at June 30, 1999. This increase was due to the additional interest expense attributable to the acquisition of a mix-use property in February, 1998 and interest expenses related to certain development projects. The Company recovered losses previously reserved related to the Company's former loan portfolio in the amount of $716,058 for June 30, 1998. The Company had no recoveries in 1999. Liquidity and Capital Resources: The Company had a deficit in cash flow from both the operating and 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 the 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 of the Company for the periods ended June 30, 1999 and 1998. June 30, 1999 June 30, 1998 Net income (loss) $(589,342) $ 448,307 Add partnership interest 6,450 Add minority interest (5,403) 6,985 Less Partnership Investment income (3,011) --------- --------- Income before minority interest $(597,756) $ 461,742 Add depreciation and amortization of real estate assets 623,417 663,334 Less Non-Recurring Items: Accrued interest expense Foregone on converted Debentures (31,828) Gain on sale of assets -- (81,884) --------- ----------- Funds from operations $ (6,167) $ 1,043,192 ======== ========== SIGNATURES Pursuant to the requirements to 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. Dated: August 15, 1999 MASTER REALTY PROPERTIES, INC. By: /S/ John J. Bennett, Chairman (Principal Executive Officer) By: /S/ Thomas H. Trabon, Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----