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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended March 31, 2005 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 0-18261
TOWER PROPERTIES COMPANY
------------------------
(Exact name of registrant as specified in its charter)
Missouri (43-1529759)
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(State of incorporation) (IRS Employer Identification No.)
Suite 100, 911 Main Street, Kansas City, Missouri 64105
- --------------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
(816) 421-8255
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(Registrant's telephone number, including area code)
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 the
filing requirements for the past 90 days.
Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X].
185,013 shares of common stock, $1.00 par value per share, outstanding at
April 30, 2005
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
TOWER PROPERTIES COMPANY
BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(UNAUDITED)
2005 2004
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ASSETS
Investment in Commercial Properties:
Rental Property, Net $ 77,240,222 $ 79,828,578
Tenant Leasehold Improvements, Net 3,364,839 7,185,281
Equipment and Furniture, Net 4,538,469 5,032,808
Construction in Progress 7,878 795,459
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Commercial Properties, Net 85,151,408 92,842,126
Real Estate Held for Sale 12,429,224 11,613,583
Cash and Cash Equivalents (Related Party) 1,394,825 29,794
Investment Securities At Fair Value (Related Party) 6,918,290 7,201,051
Receivables (Including Related Party) 2,438,278 2,516,768
Income Taxes Recoverable 568,925 576,425
Prepaid Expenses and Other Assets 976,726 1,111,817
------------- ------------
TOTAL ASSETS $ 109,877,676 $115,891,564
============= ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Liabilities:
Mortgage Notes $ 51,715,793 $ 57,749,654
Construction Loans (Related Party) -- 2,400,000
Real Estate Bond Issue 6,400,000 6,400,000
Line of Credit (Related Party) -- 5,533,000
Accounts Payable and Other Liabilities 2,722,062 2,237,543
Deferred Income Taxes 8,717,082 5,800,631
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Total Liabilities 69,554,937 80,120,828
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock, No Par Value
Authorized 60,000 Shares, None Issued -- --
Common Stock, Par Value $1.00
Authorized 1,000,000 Shares, Issued
185,430 Shares 185,430 185,430
Paid-In Capital 18,925,812 18,925,812
Retained Earnings 17,585,636 12,861,149
Accumulated Other Comprehensive Income 3,693,399 3,865,883
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40,390,277 35,838,274
Less Treasury Stock, At Cost (417 shares) (67,538) (67,538)
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Total Stockholders' Investment 40,322,739 35,770,736
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TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 109,877,676 $115,891,564
============= ============
The accompanying notes are an integral part of these financial statements.
2
TOWER PROPERTIES COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(UNAUDITED)
2005 2004
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REVENUES
Non-Related Party Revenues:
Rent $ 5,212,630 $ 4,608,017
Management and Service Fee 10,625 538
Gain (Loss) on Sale of Real Estate 77,322 (20,751)
Interest and Other Income 351,373 27,333
----------- -----------
Total Non-Related Party Revenues 5,651,950 4,615,137
Related Party Revenues:
Rent 251,249 449,341
Management and Service Fee 250,787 237,509
Gain on Sale of Real Estate 7,542,307 --
Interest and Other Income 35,854 33,829
----------- -----------
Total Related Party Revenues 8,080,197 720,679
----------- -----------
Total Revenues 13,732,147 5,335,816
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OPERATING EXPENSES
Operating Expenses 1,068,074 1,107,630
Maintenance and Repairs 1,116,736 1,389,593
Depreciation and Amortization 1,460,611 1,447,625
Taxes Other than Income 504,001 482,872
General, Administrative and Other 744,726 703,256
----------- -----------
Total Operating Expenses 4,894,148 5,130,976
INTEREST EXPENSE (Including Related Party) 1,092,933 1,074,421
----------- -----------
Income (Loss) Before Provision for Income Taxes 7,745,066 (869,581)
PROVISION (BENEFIT) FOR INCOME TAXES
Current Payable -- (339,135)
Deferred 3,020,579 --
----------- -----------
Total Provision (Benefit) for Income Taxes 3,020,579 (339,135)
NET INCOME (LOSS) $ 4,724,487 $ (530,446)
=========== ===========
Earnings (Loss) Per Share:
Basic $ 25.54 $ (3.00)
=========== ===========
Diluted $ 25.54 $ (3.00)
=========== ===========
Weighted Average Common Shares Outstanding:
Basic 185,013 177,012
=========== ===========
Diluted 185,013 177,012
=========== ===========
The accompanying notes are an integral part of these statements.
3
TOWER PROPERTIES COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(UNAUDITED)
2005 2004
------------- ------------
NET INCOME (LOSS) $ 4,724,487 $ (530,446)
Unrealized holding losses on marketable
equity securities, net of deferred tax benefit of
($110,277) and ($69,840), respectively (172,484) (109,236)
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COMPREHENSIVE INCOME (LOSS) $ 4,552,003 $ (639,682)
============= ============
The accompanying notes are an integral part of these financial statements.
4
TOWER PROPERTIES COMPANY
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(UNAUDITED)
2005 2004
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 4,724,487 $ (530,446)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation 987,167 1,078,181
Amortization 473,444 369,444
(Gain) Loss on Sale of Real Estate (7,619,629) 20,751
Change in Assets and Liabilities, Net:
Receivables 78,490 138,730
Prepaid Expenses and Other Assets 64,203 (154,123)
Accounts Payable and Other Liabilities 484,519 181,278
Income Taxes Payable -- (425,549)
Deferred Income Taxes 3,026,728 --
Income Taxes Recoverable 7,500 --
Tax Benefit from Stock Options Exercise -- 84,240
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Net Cash Provided by Operating Activities 2,226,909 762,506
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Disposition of Assets 19,073,239 --
Additions to Equipment & Furniture (720,767) (129,690)
Additions to Rental Property (4,896,671) (153,297)
Additions to Tenant Leasehold Improvements (152,328) (533,783)
Additions to Real Estate Held for Sale (198,490) --
------------- ------------
Net Cash Provided by (Used In) Investing Activities 13,104,984 (816,771)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments on Mortgage Notes (6,033,861) (3,346,715)
Principal Payments on Construction Loans (2,400,000) --
Proceeds from Long Term Borrowings -- 5,000,000
Net Change in Line of Credit (5,533,000) (3,110,000)
Proceeds from Exercise of Stock Options -- 1,328,000
Deferred Loan Costs -- (79,856)
------------- ------------
Net Cash Used in Financing Activities (13,966,861) (208,571)
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NET INCREASE (DECREASE) IN CASH 1,365,031 (262,835)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,794 321,517
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,394,825 $ 58,682
============= ============
The accompanying notes are an integral part of these financial statements.
5
TOWER PROPERTIES COMPANY
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
1. The financial statements included herein have been prepared by Tower
Properties Company (the Company), and in the opinion of management, present a
fair statement of the results for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") have been condensed or omitted, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K as of and for the year ended December 31, 2004
to provide a description of the accounting policies which have been continued
without change, and for additional information about the Company's financial
condition.
The Company is primarily engaged in owning, developing, leasing and
managing real property located in Johnson County, Kansas, and Clay, St. Louis
and Jackson Counties in Missouri. Substantially all of the improved real estate
owned by the Company consists of office buildings, apartment complexes, a
warehouse, a warehouse/office facility, automobile parking lots and garages, and
land held for future sale or development. The Company has not pursued a policy
of acquiring real estate on a speculative basis for future sale, although some
real estate owned by the Company may be sold at some future time.
2. Interest paid during the three months of 2005 and 2004, amounted to
$1,123,659 and $1,071,050, respectively. Of those amounts, interest paid to
related party was $75,011 and $161,418 for the first three months of 2005 and
2004, respectively. There were no income taxes paid during the first three
months of 2005 and $7,500 was paid for the first three months of 2004.
3. No interest was capitalized during the first three months of 2005.
Interest of $1,728 was capitalized during the first three months of 2004.
4. Under SFAS No. 115, the investment in Commerce Bancshares, Inc. common
stock is classified as "available for sale", and is recorded at fair value. The
unrealized gain at March 31, 2005 of $6,054,753 net of tax effects of
$2,361,354, or $3,693,399 is reflected as a separate component of equity. There
was a decrease in the net unrealized holding gain for the three months ended
March 31, 2005 of $172,484, net of deferred taxes.
5. SALES AND ACQUISITION OF PROPERTIES:
On February 1, 2005, the Company sold the 9221 Quivira Building in Overland
Park, Kansas, which was classified on the December 31, 2004 balance sheet as
real estate held for sale. The sales price was $1,110,000 which resulted in a
net gain of $77,000.
6
On February 28, 2005, the Company sold the 811 Main Building and Garage in
Kansas City, Missouri, which was classified on the December 31, 2004 balance
sheet as real estate held for sale, to Commerce Bank, N.A. The sales price was
$10,750,000. On March 24, 2005, the Company sold the 9th and Walnut Garage in
Kansas City, Missouri, which was classified on the December 31, 2004 balance
sheet as real estate held for sale, to Commerce Bank, N.A. The sales price was
$7,250,000. The sales of the 811 Main Building and Garage and the 9th and Walnut
Garage to Commerce Bank, N.A., a related party, had a total combined sales price
of $18,000,000 and resulted in a total combined net gain of $7,542,000.
On March 2, 2005, the Company purchased two 2-story office buildings, known as
One and Two Liberty Plaza, totaling approximately 54,000 sq. ft. and surrounding
surface parking lots in Liberty, Missouri for cash of approximately $5,500,000
and entered into a net operating lease with a tenant that expires in 2015.
The following unaudited pro forma summary combines the results of operations of
the Company as if the sales of 9221 Quivira Building, 811 Main Building and
Garage and 9th and Walnut Garage, and the purchase of One and Two Liberty Plaza
(discussed in footnote No. 5 above) had occurred at the beginning of 2004.
Unaudited Unaudited
2005 2004
--------- ---------
Total Revenue 5,752,207 4,626,524
Net Income (Loss) 270,885 (525,916)
Basic Earnings (Loss) Per Share 1.46 (2.97)
This pro forma information does not purport to be indicative of the results that
actually would have been obtained if the operations had been combined during the
period and is not intended to be a projection of future results.
6. REAL ESTATE HELD FOR SALE
The Company's real estate held for sale is recorded at cost which does not
exceed its estimated realizable value. Revenue is recorded on the sale of real
estate when title passes to the buyer and the earnings process is complete.
Included in Real Estate Held for Sale at March 31, 2005 is the commercial office
building at 911 Main, Kansas City, Missouri ("Commerce Tower") which met the
criteria to be recorded as Real Estate Held for Sale in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Included
in Real Estate Held for Sale at December 31, 2004 were the 9221 Quivira office
building, the 811 Main building and parking garage, and the 9th and Walnut
parking garage, all of which met the criteria to be recorded as Real Estate Held
for Sale in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" and all were sold in the first quarter of 2005.
7
7. COMMITMENTS AND CONTINGENCIES
Congress passed the Americans With Disabilities Act (the Act) of 1990
which became effective January 26, 1992. The Act contains provisions for
building owners to provide persons with disabilities with accommodations and
access equal to, or similar to, that available to the general public. Management
cannot estimate the eventual impact of the Act on the financial condition or
results of operations of the Company since certain provisions of the Act are
open to interpretation. The Company is implementing the requirements of the Act
that are readily achievable and will not constitute an undue burden on the
Company.
Due to governmental regulations regarding asbestos and the uncertainty
surrounding the advantages and disadvantages of asbestos removal, the Company
will continue to monitor the status of asbestos in its commercial office
buildings and will take appropriate action when required. The cost to remove all
asbestos from properties owned by the Company cannot be determined; however,
these removal costs could have a significant adverse impact on the future
operations and liquidity of the Company.
8. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based upon the weighted average common
shares outstanding during each period. Diluted earnings (loss) per share is
based upon the weighted average common and dilutive common equivalent shares
outstanding during each period. The Company did not have any dilutive securities
outstanding for the three months ended March 31, 2005 and 2004. The weighted
average common shares outstanding were 185,013 and 177,012 for the quarters
ended March 31, 2005 and 2004, respectively.
8
9. BUSINESS SEGMENTS:
The Company groups its operations into four business segments: commercial
office, apartments, parking and industrial. The Company's business segments are
separate business units that offer different real estate services. The
accounting policies for each segment are the same as those described in the
summary of significant accounting policies. Beginning in the third quarter of
the year ended December 31, 2004, the Company reflected an additional business
segment, the industrial operations. Previously, the industrial operations were
included as part of Corporate, Other and Eliminations. The 2004 amounts below
were reclassified to reflect the industrial operations separately.
Following is information for each segment for the three months ended March 31,
2005 and 2004:
--------------------------------------------------------------------------------
March 31, 2005
--------------------------------------------------------------------------------
COMMERCIAL CORP., OTHER
OFFICE APARTMENTS PARKING INDUSTRIAL & ELIMINATIONS TOTAL
----------- ---------- --------- ---------- -------------- -----------
REVENUE FROM EXTERNAL CUSTOMERS $ 3,203,893 1,984,618 196,387 256,197 10,855 5,651,950
REVENUE FROM RELATED PARTY/MAJOR CUSTOMER 7,116,677 - 676,879 - 286,641 8,080,197
INTEREST EXPENSE 412,847 490,804 41,933 79,588 67,761 1,092,933
DEPRECIATION AND AMORTIZATION 718,886 605,708 16,246 106,530 13,241 1,460,611
SEGMENT INCOME (LOSS) BEFORE TAX 7,379,693 (301,176) 639,989 39,415 (12,855) 7,745,066
CAPITAL EXPENDITURES BY SEGMENT 5,885,888 69,438 1,814 - 11,116 5,968,256
IDENTIFIABLE SEGMENT ASSETS 49,756,768 39,545,333 3,904,698 7,026,133 9,644,744 109,877,676
--------------------------------------------------------------------------------
March 31, 2004
--------------------------------------------------------------------------------
COMMERCIAL CORP., OTHER
OFFICE APARTMENTS PARKING INDUSTRIAL & ELIMINATIONS TOTAL
----------- ---------- ---------- ---------- -------------- -----------
REVENUE FROM EXTERNAL CUSTOMERS $ 2,668,614 1,576,941 222,811 148,109 (1,338) 4,615,137
REVENUE FROM RELATED PARTY/MAJOR CUSTOMER 346,491 - 102,850 - 271,338 720,679
INTEREST EXPENSE 477,808 441,199 41,837 83,747 29,830 1,074,421
DEPRECIATION AND AMORTIZATION 612,186 658,587 72,819 85,652 18,381 1,447,625
SEGMENT INCOME (LOSS) BEFORE TAX 67,596 (893,221) (585) (223,481) 180,110 (869,581)
CAPITAL EXPENDITURES BY SEGMENT 528,828 150,145 72,290 64,173 1,334 816,770
IDENTIFIABLE SEGMENT ASSETS 46,677,739 41,627,412 12,274,570 6,807,629 8,493,733 115,881,083
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal assets consist of real estate holdings which are not
liquid assets. Real estate holdings include office buildings, apartment
complexes, a warehouse and a warehouse/office facility, parking facilities and
land held for future sale. The principal source of funds generated internally is
income from operations. The principal source of external funds is long-term debt
and an $18,500,000 line of credit with Commerce Bank, N.A. ("Line of Credit").
The Line of Credit is collateralized by 143,533 shares of Commerce Bancshares,
Inc. common stock, certain real estate owned in Downtown Kansas City, MO. and a
negative pledge of rents from the Commerce Tower Building. The Line of Credit
has been utilized by issuing a $6,656,000 letter of credit to back a low rate
Industrial Revenue Bond and a $65,000 letter of credit required by the Company's
mortgage on the Hillsborough apartment complex. At March 31, 2005, the Company
had no outstanding borrowings on the Line of Credit. The Company had $11,779,000
available under the Line of Credit at March 31, 2005. This Line of Credit has
been extended at market rates and terms and management believes the Company
could obtain similar financing arrangements if the Company's relationship with
Commerce Bank, N.A. did not exist. The Company does not utilize off-balance
sheet financing or leasing transactions.
CASH PROVIDED BY OPERATING ACTIVITIES for the three months ended March 31, 2005
was $2,227,000, compared to $763,000 for the three months ended March 31, 2004.
The $1,464,000 increase in cash provided by operating activities is mainly due
to improved cash flow from operations (defined as net income plus depreciation
and amortization) at the Commerce Tower Building ($399,000), 9909 Lakeview
Warehouse ($181,000), Oakbrook Apartments ($132,000), New Mark Phases I-IV
Apartments ($94,000) and the UMB Building in St. Louis ($56,000). Included in
the increase from the Commerce Tower Building is a $315,000 lease buyout from a
tenant in January 2005.
INVESTING ACTIVITIES PROVIDED $13,105,000 of cash in the three months ended
March 31, 2005 as $19,073,000 of proceeds after commissions and closing costs
were received upon the sales of: a) 9221 Quivira office building on February 1,
2005 for $1,092,000, b) 811 Main Building and Garage on February 28,2005 for
$10,739,000, and c) 9th and Walnut Garage on March 24, 2005 for $7,242,000,
which were partially offset by capital expenditures of $5,968,000. The major
capital expenditure was the purchase of two 2-story office buildings in Liberty,
MO on March 2, 2005 for $5,500,000.
FINANCING ACTIVITIES utilized $13,967,000 in the three months ended March 31,
2005. Activity in 2005 included $5,348,162 of mortgages notes pay offs upon the
sales of properties which combined with $685,699 of normal monthly payments on
other mortgage notes total $6,033,861 of principal payments on Mortgage Notes.
On February 1, 2005, upon the sale of the 9221 Quivira office building, the
Company paid off a mortgage note that had an outstanding balance of $853,084. On
February 28, 2005, upon the sale of the 811 Main Building and Garage, the
10
Company paid off a mortgage note that had an outstanding balance of $4,495,078
and paid a 4.5% prepayment penalty of $202,000.
Activity in 2005 also includes $2,400,000 of principal payments on Construction
Loans. On March 24, 2005, upon the sale of the 9th and Walnut Garage, the
Company paid off the $2,400,000 construction loan with Commerce Bank, N.A.
The Line of Credit, which had a balance of $5,533,000 at December 31, 2004, had
no outstanding balance at March 31, 2005. The decrease is due to the $5,623,000
of net cash received in connection with the sales of 9221 Quivira office
building, 811 Main Building and Garage, and the 9th and Walnut Garage and the
purchase of One and Two Liberty Plaza in Liberty, Missouri. The sales proceeds
of $19,073,000 were used to pay off mortgage and construction loans of
$7,748,000 and to pay a pre-payment penalty of $202,000, leaving net cash
received from the three sales of $11,123,000. Of that amount, $5,500,000 was
utilized to purchase One and Two Liberty Plaza in Liberty, Missouri, with the
remaining $5,623,000 utilized primarily to pay-down the Line of Credit.
Management believes that the Company's current combination of liquidity, capital
resources and borrowing capabilities will be adequate for its existing
operations during fiscal 2005. The Company did not experience liquidity problems
during the quarter ended March 31, 2005. The Company does not anticipate any
deficiencies in meeting its liquidity needs. The availability under the
$18,500,000 Line of Credit along with cash provided from operations will give
the Company adequate resources to meet the Company's cash requirements during
2005. If necessary, the Company has adequate resources to collateralize
additional financing. The Company had cash on hand of $1,395,000 at March 31,
2005.
The Company's revenues are primarily based on lease contracts, none of which are
deemed to be materially at risk.
CONTRACTUAL CASH OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
There have been no material changes to the Registrant's contractual cash
obligations and other commercial commitments from amounts disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2004, except for the
$7,748,000 of loan payoffs, discussed above, associated with the sales of 9221
Quivira office building, 811 Main Building and Garage and the 9th and Walnut
Garage, which are no longer contractual cash obligations at March 31, 2005.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company derives its revenue primarily from two sources: 1) rent from leases
of real property, and 2) management and service fees from real property leased
and managed. Rental revenue is recognized on a straight-line basis over the term
of individual non-cancellable operating leases. The recognition of scheduled
rent increases on a straight-line basis results in
11
the recognition of receivables from tenants. Such receivables were $1,730,301
and $1,386,813 at March 31, 2005 and 2004, respectively. Lease agreements
generally do not provide for contingent rents. If amounts are received from
tenants upon early termination of leases, the amounts are recorded when received
as a reduction of lease receivables to the extent there is an associated
straight-line rent receivable, with the remainder recorded as income. Management
and service fees are recognized as a percentage of revenues on managed
properties as earned over the terms of the related management agreements.
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The Company assesses the carrying value of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of the underlying asset may not be recoverable. Certain factors that may
occur and indicate that an impairment exists include, but are not limited to:
significant underperformance relative to expected projected future operating
results; significant changes in the manner of the use of the assets; and
significant adverse industry or market economic trends. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeded its estimated future cash
flows, an impairment charge would be recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet as held for sale
and reported at the lower of the carrying amount or fair value less costs to
sell, and would no longer be depreciated.
Cost Capitalization
The Company evaluates major expenditures for capitalization. Those which improve
or extend the useful life of the property are capitalized. Depreciation is based
upon the expected useful lives, generally forty years for buildings, fifteen
years for land improvements, seven years for furniture and fixtures, five years
for equipment and three years for software. Maintenance and repairs are charged
to expense as incurred.
RELATED PARTY TRANSACTIONS:
The Company has a variety of related party transactions with Commerce
Bancshares, Inc. and its subsidiaries (Commerce). The Company had the following
transactions with Commerce:
- Rentals - The Company leases space to Commerce Bank and its
affiliates. Total rental income derived from these leases for the
three months ended March 31, 2005 and March 31, 2004 was $251,249
and $449,341, respectively. The rental income of $251,249 for the
three months ended March 31, 2005 is a net amount and includes a
$102,182 write-off of a straight-line rent receivable associated
with a lease with Commerce Bank as a tenant of 811 Main which was
recorded when the 811 Main Building and Garage was sold on February
28, 2005. Such leases contain lease rates and other provisions
similar to those of leases with unrelated parties.
12
- Management and Service fees - The Company manages certain properties
owned by Commerce under property management agreements. In addition,
the Company has been overseeing the construction of an office
building in Wichita, Kansas owned by Commerce. Total fees earned
under these property and construction management agreements were
$216,824 and $220,180 for the three months ended March 31, 2005 and
March 31, 2004, respectively. The Company earns lease commissions on
property owned by or rented by Commerce under a listing agreement.
Total fees earned under these lease commission arrangements were
$33,843 and $17,209 for the three months ended March 31, 2005 and
March 31, 2004, respectively. The Company may also earn income from
consulting fee services. Total fees earned for consulting services
were $120 for each of the three month periods ended March 31, 2005
and March 31, 2004, respectively. The Company provides similar
services to unrelated parties and fee rates under these arrangements
are similar to those earned from other unrelated parties.
- Gain on Sale of Real Estate - On February 28, 2005, the Company sold
the 811 Main Building and Garage in Kansas City, Missouri, which was
classified on the December 31, 2004 balance sheet as real estate
held for sale, to Commerce Bank, N.A. The sales price was
$10,750,000. On March 24, 2005, the Company sold the 9th and Walnut
Garage in Kansas City, Missouri, which was classified on the
December 31, 2004 balance sheet as real estate held for sale, to
Commerce Bank, N.A. The sales price was $7,250,000. The sales of the
811 Main Building and Garage and the 9th and Walnut Garage to
Commerce Bank, N.A., a related party, had a total combined sales
price of $18,000,000 and resulted in a combined net gain of
$7,542,000. The sales were made at market rates and management
believes the Company could have obtained similar contract terms if
the Company's relationship with Commerce Bank, N.A. did not exist.
- Interest and other income - The Company owned 143,533 shares of
Commerce Bancshares, Inc. common stock at March 31, 2005. The
Company received dividend income from ownership of Commerce
Bancshares common stock of $34,448 for the three months ended March
31, 2005. The Company owned 136,699 shares at March 31, 2004 and
received dividend income of $31,441 for the three months ended March
31, 2004. In addition, excess funds are deposited in Commerce Bank,
N.A. Interest income earned on such deposits aggregated $1,406 and
$2,388 for the three months ended March 31, 2005 and March 31, 2004,
respectively. The dividends paid to the Company are the same as the
dividends paid to all shareholders of Commerce Bank. Interest income
earned is similar to that earned by other customers of Commerce
Bank.
- Interest expense - The Company has an $18,500,000 line of credit
with Commerce Bank, N.A. that has a variable interest rate equal to
one and one half percent (1 1/2%) in excess of the Fed Funds rate.
At March 31, 2005, $11,779,000 was available under this line of
credit, and the interest rate at March 31, 2005 would calculate to
be 4.46%. The Line of Credit requires monthly interest payments and
matures June 1, 2005. The Company intends to renew this line of
credit with Commerce upon expiration. Interest expense for this
loan, including letter of credit fees, was $52,669 and $69,499 for
the three months ended March 31, 2005 and 2004, respectively. The
Company pledged its shares of Commerce common stock, certain real
estate and a negative pledge and assignment of rents on the Commerce
Tower Building as collateral for the line of credit. The weighted
average short term borrowing rate on the line of credit was 3.99%
for the three months
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ended March 31, 2005. The Line of Credit has been extended at market
rates and interest expense paid is similar to that paid by other
customers of Commerce Bank.
- The Company had a $2,400,000 construction loan with Commerce Bank,
N.A. for the 9th and Walnut Garage with variable interest rate equal
to the London Interbank Offered Rate (LIBOR) plus 1.75%. On March
24, 2005 the Company paid the loan in full. The loan required
monthly interest payments and would have matured on May 1, 2006.
Interest expense for this loan was $23,532 and $17,331 for the three
months ended March 31, 2005 and March 31, 2004, respectively. The
Company also had a $10,250,000 construction loan with Commerce Bank,
N.A. for the development of the Oakbrook apartments with a variable
interest rate equal to the LIBOR plus 1.75%. On May 14, 2004 the
Company paid the loan in full. The loan required monthly interest
payments and would have matured February 18, 2006. Interest expense
for this loan for the three months ended March 31, 2004 was $74,019.
Interest expense paid on these construction loans is similar to that
paid by other customers of Commerce Bank.
- Included in receivables at March 31, 2005 and 2004 are amounts due
from Commerce of $247,033 and $548,610, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005
COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2004
Results for the three months ended March 31, 2005 reflect net income of
$4,724,000, while the comparable three months of 2004 had a net loss of
($530,000). Pre-tax income in 2005 is $7,745,000, which is $8,615,000 greater
than the pre-tax loss in 2004 of ($870,000). The increase in pre-tax results is
derived from a $8,396,000 increase in Total Revenues and a decrease in expenses
(excluding the Provision for Income Taxes) of $219,000.
The $8,396,000 increase in Total Revenues is the result of several factors,
including an increase of $326,000 in Interest and Other Income (mostly
Non-Related Party), an increase of $7,640,000 in Gain on Sale of Real Estate
(Non-Related Party and Related Party), an increase in Total Rent income
(Non-Related Party increase greater than Related Party decrease) of $407,000 and
an increase in Management and Service Fee Income (Non-Related Party and Related
Party) of $23,000.
Interest and Other Income increased by $326,000 mostly due to the fact that 2005
included $315,000 of revenue from a lease buyout in January 2005 from a tenant
in the Commerce Tower.
The Gain on Sale of Real Estate increased by $7,640,000 mainly due to the
$7,619,000 of gains recorded in 2005. On February 1, 2005, the Company sold the
9221 Quivira Building in Overland Park, Kansas for a net gain of $77,000. On
February 28, 2005, the Company sold the 811 Main Building and Garage in Kansas
City, Missouri to Commerce Bank, N.A., a related party, and on March 24, 2005,
the Company also sold the 9th and Walnut Garage in Kansas City, Missouri to
Commerce Bank, N.A. which resulted in a total combined net gain of $7,542,000.
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All three properties sold in 2005 were classified on the December 31, 2004
balance sheet as Real Estate Held for Sale.
The increase of $407,000 in Total Rent income includes the following:
a) Income from the Commerce Tower is up by $189,000 as average
occupancy in 2005 is 78% compared to 67% in 2004.
b) Income from the 9909 Lakeview Warehouse in 2005 is $107,000. The
building was vacant in 2004 until June.
c) Income from the UMB office building in St. Louis is up by $69,000 as
average occupancy in 2005 is 100% compared to 76% in 2004.
d) Income from the Barkley office building is up by $59,000 as average
occupancy in 2005 is 100% compared to 91% in 2004.
e) Income at the apartment complexes is $401,000 greater in 2005 than
2004 mostly because the Oakbrook apartments at New Mark, which were
not completed until late 2003, have rental income in 2005 that
exceeds 2004 by $279,000 and income from the New Mark Phases I-IV
apartments is up by $94,000 as occupancy in 2005 is 94% compared to
75% in 2004.
f) Income from the One and Two Liberty Plaza office buildings of
$39,000 in 2005 represents the rent recorded since the property was
purchased on March 2, 2005.
g) Income from the 811 Main Building and Garage is $401,000 less in
2005 than 2004 because the property was sold on February 28, 2005.
Only 2 months rent is recorded in 2005 and associated with the sale
the Company in 2005 wrote off as a reduction in rent $102,000 of a
straight-line rent receivable. The straight-line rent receivable
represented the amount by which accumulated income, which had been
recorded equally over the life of the lease, exceeded the actual
amount owed by the tenant in the early years of the lease.
Following are comments about the expense decrease of $219,000 (excluding the
Provision for Income Taxes).
Maintenance and Repairs expense has decreased by $292,000. The largest factors
associated with the decrease include: a) repairs at the 811 Main Building and
Garage are $124,000 less in 2005 than 2004 mainly due to the fact that the
property was sold on February 28, 2005 and therefore the expense in 2005 is for
only two months, b) 2004 includes roof and skylight repairs in preparation for a
new tenant of $93,000 at the 9909 Lakeview Warehouse, c) snow removal costs in
2004 exceeded 2005 by $44,000 and d) "make ready" repairs associated with
increased leasing of the New Mark Phase I & II apartments in 2004, explains why
repairs in 2004 exceeded 2005 by $70,000.
Depreciation and Amortization expense increased by $13,000 as 2005 includes the
write-off of $54,000 of amortization that represents the unamortized portion of
loan costs associated with three loans paid off in 2005 while 2004 had a
comparable write-off of $42,000 associated with the loan refinanced for the
Peppertree apartments.
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General Administrative and Other expenses increased by $61,000 as 2005 includes
$202,000 for a prepayment penalty (calculated at 4.5% of the loan balance) due
when the loan for the 811 Main Building and Garage was paid in full while 2004
includes $136,000 for a prepayment penalty (calculated at 5% of the loan
balance) when the loan for the Peppertree apartments was refinanced.
The Provision for Income Taxes of $3,021,000 in 2005 is recorded as a deferred
income tax because the amount will not be due currently. The gain recognition
for tax purposes on the February 28, 2005 sale of the 811 Main Building and
Garage is expected to be deferred through a Section 1031 tax-free exchange. The
subsequent March 2, 2005 purchase of One and Two Liberty Plaza office buildings
was one step in the tax-free exchange process. The Company plans to make an
additional future acquisition to complete the full 1031 tax-free exchange.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The Company is exposed to various market risks, including equity investment
prices and interest rates.
The Company has a significant amount of fixed rate debt and believes that the
fair value risk is best quantified by considering prepayment penalties
associated with the debt. Most prepayment penalties are based upon the
difference between the debt's fixed rate and the Treasury note rate that most
closely corresponds with the remaining life of the mortgage. The estimated
aggregate prepayment penalty on such debt was $7,028,000 at March 31, 2005.
The Company had $6,400,000 of variable rate debt as of March 31, 2005. A 100
basis point change in each debt series benchmark would impact net income on an
annual basis by approximately $39,000. This debt is not hedged.
The Company owned 143,533 shares of common stock of Commerce Bancshares, Inc.
with a fair value of $6,918,290 as of March 31, 2005. This investment is not
hedged and is exposed to the risk of changing market prices. The Company
classifies these securities as "available-for-sale" for accounting purposes and
marks them to market on the balance sheet at the end of each period. Management
estimates that its investments will generally be consistent with trends and
movements of the overall stock market excluding any unusual situations. An
immediate 10% change in the market price of the securities would have a $422,000
effect on comprehensive income.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, the Company has evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of March 31, 2005 (the "Evaluation Date"). Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial
16
Officer have concluded that, as of the Evaluation Date, these controls and
procedures are effective. There have been no significant changes in the
Company's internal control over financial reporting during the Company's quarter
ended March 31, 2005, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 3 - Bylaws of the Registrant as amended on April 26, 2005 by
the Board of Directors.
Exhibit 10(a) - Real Estate Purchase Contract dated February 28,
2005 with Ferrellgas L.P. providing for the purchase of two office
buildings commonly known as One and Two Liberty Plaza, Liberty,
Missouri.
Exhibit 10(b) - Net Lease dated March 2, 2005 with Ferrellgas L.P.
("Tenant") leasing to Tenant the two office buildings commonly known
as One and Two Liberty Plaza, Liberty, Missouri.
Exhibit 31.1 - Certification of the Chief Executive Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934
Exhibit 31.2 - Certification of the Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934
Exhibit 32.1 - Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350
Exhibit 32.2 - Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWER PROPERTIES COMPANY
/s/ Thomas R. Willard
- -------------------------------------
Thomas R. Willard
President and Chief Executive Officer
/s/ Stanley J. Weber
- -------------------------------------
Stanley J. Weber
Chief Financial Officer
Date: May 16, 2005
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