SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report: March 20, 1998
LEXFORD RESIDENTIAL TRUST
(successor by merger to Lexford, Inc.)
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Maryland 1-13951 31-4427382
- --------------------------------------------------------------------------------
(State of Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
The Huntington Center
24th Floor
41 South High Street, Suite 2410 , Columbus, Ohio 43215
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (614) 242-3850
Lexford, Inc.
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
2
ITEM 5. OTHER EVENTS
On March 18, 1998 at 6:01 p.m. Eastern Standard Time, Lexford, Inc., an Ohio
corporation, merged with and into Lexford Residential Trust, a Maryland real
estate investment trust. Prior to the merger, Lexford Residential Trust had only
nominal assets and was a wholly owned subsidiary of Lexford, Inc. Through the
merger, Lexford Residential Trust succeeded to all of the assets and business of
Lexford, Inc. subject to all of the liabilities of Lexford, Inc. and became the
successor by merger of Lexford, Inc. Pursuant to the terms of the merger, each
share of Lexford, Inc. common stock which was issued and outstanding at the
effective time of the merger was converted into the right to receive two duly
authorized, validly issued, fully paid and nonassessable common shares of
beneficial interest, par value $.01 per share, in Lexford Residential Trust.
Common shares of beneficial interest, par value $.01 per share, in Lexford
Residential Trust began trading on the New York Stock Exchange on March 19, 1998
under the symbol "LFT".
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS
(27) Financial Data Schedule.
27.1. Financial Data Schedule (submitted electronically for
SEC information only).
(99) Additional Exhibits.
99.1 The financial statements of the Registrant (known as
Lexford, Inc. on the date thereof) and the related notes,
together with the report of Ernst & Young LLP, dated March 18,
1998.
2
<PAGE>
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on behalf of the
undersigned hereunto duly authorized.
LEXFORD RESIDENTIAL TRUST
Date: March 20, 1998 By: /s/ Mark D. Thompson
---------------------
Mark D. Thompson
Executive Vice President and
Chief Financial Officer
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
4
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEET AND THE STATEMENT
OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,569
<SECURITIES> 0
<RECEIVABLES> 5,840
<ALLOWANCES> 941
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 161,369
<DEPRECIATION> 9,152
<TOTAL-ASSETS> 241,598
<CURRENT-LIABILITIES> 0
<BONDS> 149,999
0
0
<COMMON> 29,122
<OTHER-SE> 45,724
<TOTAL-LIABILITY-AND-EQUITY> 241,598
<SALES> 0
<TOTAL-REVENUES> 70,367
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 50,365
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,427
<INCOME-PRETAX> 5,575
<INCOME-TAX> 2,189
<INCOME-CONTINUING> 3,386
<DISCONTINUED> 0
<EXTRAORDINARY> (180)
<CHANGES> 0
<NET-INCOME> 3,206
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
<FN>
THE REGISTRANT HAS A NON-CLASSIFIED BALANCE SHEET
</FN>
</TABLE>
5
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.................F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 ....................................F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 ....................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ..............................F-6 - F-7
Notes to Consolidated Financial Statements.........................F-8 - F-33
Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts.....................F-34
Schedule III - Real Estate and Accumulated Depreciation......F-35 - F-41
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable, or the information required is
included in the Consolidated Financial Statements or notes thereto and
therefore have been omitted.
F-1
<PAGE>
6
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Lexford, Inc.
We have audited the accompanying consolidated balance sheets of Lexford, Inc.
(formerly Cardinal Realty Services, Inc.) and subsidiaries as of December 31,
1997 and 1996 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedules listed in
the accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and 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 consolidated financial position of
Lexford, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
February 16, 1998, except for Note 14,
as to which the date is March 18, 1998
F-2
<PAGE>
7
<TABLE>
<CAPTION>
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---------------- -----------------
<S> <C> <C>
ASSETS
Rental Properties (Notes 2 and 5):
Land...........................................................................$ 23,124,313 $ 23,652,841
Buildings, Improvements and Fixtures........................................... 138,244,903 137,917,083
---------------- -----------------
161,369,216 161,569,924
Accumulated Depreciation....................................................... (9,151,786) (4,478,379)
---------------- -----------------
152,217,430 157,091,545
Investments in and Advances to Unconsolidated Partnerships, net of an allowance
of $2.6 and $1.6 million at December 31, 1997 and 1996, Respectively
(Notes 3 and 12)............................................................... 57,111,374 54,610,421
Cash............................................................................. 2,568,890 3,593,121
Accounts Receivable, Affiliates ($1,990,967 and $4,089,328, net
of an allowance of $941,521 and $2,034,290, at December 31,
1997 and 1996, Respectively), Residents and Other (Note 12).................... 4,898,993 5,044,603
Furniture, Fixtures and Other, Net (Note 1)...................................... 1,719,521 1,167,579
Funds Held in Escrow (Note 1).................................................... 11,887,936 14,011,013
Intangible Assets (Note 1)....................................................... 9,200,531 8,694,925
Prepaids and Other .............................................................. 1,992,921 1,154,572
---------------- -----------------
$ 241,597,596 $ 245,367,779
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and Corporate Debt
Non Recourse Mortgages (Note 5)................................................$ 142,636,874 $ 148,056,017
Corporate Debt (Note 4)........................................................ 7,361,682 15,263,268
---------------- -----------------
149,998,556 163,319,285
---------------- -----------------
Accounts Payable................................................................. 1,287,753 1,560,749
Accrued Interest, Real Estate and Other Taxes.................................... 3,719,625 4,023,310
Other Accrued Expenses........................................................... 8,241,526 8,531,031
Other Liabilities................................................................ 3,503,640 5,424,226
---------------- -----------------
Total Liabilities.............................................................. 166,751,100 182,858,601
---------------- -----------------
Commitments and Contingencies (Notes 7, 8, 10)
Shareholders' Equity (Notes 1 and 7):
Preferred Stock, 1,500,000 Shares Authorized, Unissued......................... -- --
Common Stock, 27,000,000 Shares Authorized with No Par Value at
Stated Value, 8,493,648 and 7,817,534 Shares Issued and
Outstanding, at December 31, 1997 and 1996, Respectively..................... 29,122,547 29,122,547
Additional Paid-in Capital..................................................... 25,100,166 15,968,426
Retained Earnings.............................................................. 20,623,783 17,418,205
---------------- -----------------
74,846,496 62,509,178
---------------- -----------------
$ 241,597,596 $ 245,367,779
================ =================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-3
<PAGE>
8
<TABLE>
<CAPTION>
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------------ ----------------- ---------------
<S> <C> <C> <C>
Revenues:
Rental Revenues (Note 2)...................................................$ 41,851,081 $ 41,276,684
Fee Based, primarily from Affiliates (Note 12)............................. 15,847,032 14,164,312 $ 15,906,553
Interest, Principally from Unconsolidated Partnerships (Note 12)........... 10,680,767 8,897,233 4,361,497
Income from Disposal of Assets-Net......................................... 1,988,611 962,761 3,408,379
------------------ ----------------- ---------------
70,367,491 65,300,990 23,676,429
------------------ ----------------- ---------------
Expenses:
Property Operating and Maintenance......................................... 14,883,691 16,980,888
Real Estate Taxes and Insurance............................................ 4,060,311 4,148,545
Property Management........................................................ 12,339,727 9,366,777 8,667,358
Administration............................................................. 5,446,969 5,030,967 4,399,349
Performance Equity Plan (Note 7)........................................... 6,280,500 0 0
Nonrecurring Costs (Note 9)................................................ 827,407 242,899 1,537,073
Interest - Non Recourse Mortgages (Note 5)................................. 13,769,562 14,131,780 0
Interest - Corporate Debt (Note 4)......................................... 657,349 1,098,333 1,522,087
Depreciation and Amortization (Note 2)..................................... 6,526,863 5,514,571 537,849
------------------ ----------------- ---------------
64,792,379 56,514,760 16,663,716
------------------ ----------------- ---------------
Income Before Income Taxes and Extraordinary Item............................. 5,575,112 8,786,230 7,012,713
Provision for Income Taxes (Note 8):
Credited to Additional Paid-in Capital..................................... 1,809,000 3,166,000 2,356,000
Current.................................................................... 380,000 250,000 364,000
------------------ ----------------- ---------------
Income Before Extraordinary Item.............................................. 3,386,112 5,370,230 4,292,713
Extraordinary (Loss) / Gain, Net of Income Tax Benefit/(Provision)
of $115,000 in 1997, $1,015,000 in 1996
and ($510,000) in 1995, Respectively (Note 6)................................. (180,534) (1,614,356) 804,022
------------------ ----------------- ---------------
Net Income....................................................................$ 3,205,578 $3,755,874 $5,096,735
================== ================= ===============
Basic Earnings Per Share:
Income before Extraordinary Item...........................................$ 0.42 $ 0.71 $ 0.59
Extraordinary Item......................................................... (0.02) (0.21) 0.11
------------------ ----------------- ---------------
Net Income.................................................................$ 0.40 $ 0.50 $ 0.70
================== ================= ===============
Diluted Earnings Per Share:
Income before Extraordinary Item...........................................$ 0.41 $ 0.69 $ 0.56
Extraordinary Item......................................................... (0.02) (0.21) 0.11
------------------ ----------------- ---------------
Net Income.................................................................$ 0.39 $ 0.48 $ 0.67
================== ================= ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-4
<PAGE>
9
<TABLE>
<CAPTION>
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock
---------------------------- Additional Retained
Shares Amount Paid-in Capital Earnings Total
------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995................................. 6,817,254 $ 29,122,547 $ 5,560,000 $ 8,565,596 $ 43,248,143
Shares issued in 1995, principally in connection
with the claims resolution process (Note 1) ......... 366,708
Exercise of options under Non-Qualified Stock
Option Plan (Note 7)................................. 30,606 35,216 35,216
Less: Treasury Shares Issued to Rental Properties and
subsidiaries (Note 1).......................... (8,248)
Credit from utilization of pre-confirmation tax
benefits (Note 8).................................... 2,866,000 2,866,000
Net Income for the year ended December 31, 1995...... 5,096,735 5,096,735
------------- -------------- --------------- -------------- --------------
Balance, December 31, 1995............................... 7,206,320 29,122,547 8,461,216 13,662,331 51,246,094
Shares issued in 1996, in connection with the claims
resolution process (Note 1) ......................... 13,340
Shares issued in connection with Lexford Acquisition
(Note 1)............................................. 1,400,000 14,000,000 14,000,000
Contingent........................................ (900,000) (9,000,000) (9,000,000)
Exercise of options under Non-Qualified Stock
Option Plan (Note 7)................................. 68,616 61,671 61,671
Restricted stock compensation awards and Director
Restricted Stock Plan................................ 32,334 325,869 325,869
Less: Treasury Shares primarily from the redemption
in 1996 of stock held by Unconsolidated
Partnerships .................................. (3,076) (31,330) (31,330)
Credit from utilization of pre-confirmation tax
benefits (Note 8).................................... 2,151,000 2,151,000
Net Income for the year ended December 31, 1996...... 3,755,874 3,755,874
------------- -------------- --------------- -------------- --------------
Balance, December 31, 1996............................... 7,817,534 29,122,547 15,968,426 17,418,205 62,509,178
Shares issued in 1997, in connection with the claims
resolution process (Note 1).......................... 22,264
Exercise of options under Non-Qualified Stock
Option Plan (Note 7)................................. 18,264 37,778 37,778
Stock Compensation and Director Restricted Stock
Plan, Net of 267,334 Shares subject to Vesting
Restrictions (Note 7)................................ 635,586 7,399,962 7,399,962
Credit from utilization of pre-confirmation tax
benefits (Note 8).................................... 1,694,000 1,694,000
Net Income for the year ended December 31, 1997...... 3,205,578 3,205,578
------------- -------------- --------------- -------------- --------------
Balance, December 31, 1997............................... 8,493,648 $ 29,122,547 $ 25,100,166 $ 20,623,783 $ 74,846,496
============= ============== =============== ============== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-5
<PAGE>
10
<TABLE>
<CAPTION>
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- -------------- --------------
<S> <C> <C> <C>
Cash flows provided by/(used in) Operating activities:
Management and Investment Management activities:
Cash received from Fee Based activities..............................................$ 20,046,613 $ 22,414,166 $ 22,173,861
Interest and Other Revenues received from Unconsolidated Partnerships................ 12,797,325 9,074,008 4,965,246
Cash receipts -- other............................................................... 1,913,305 2,170,253 3,261,207
Cash paid to Vendors, Suppliers and Employees........................................ (22,337,316) (21,784,246) (21,784,640)
Interest paid on Corporate Debt...................................................... (593,913) (1,147,593) (1,554,454)
Income Taxes paid - City and State................................................... (285,382) (239,145) (234,436)
Taxes paid, other than Income Taxes.................................................. (108,231) (76,575) (553,140)
Payments related to nonrecurring items............................................... (342,361) (2,221,248) (705,075)
------------- -------------- --------------
11,090,040 8,189,620 5,568,569
------------- -------------- --------------
Rental Property activities:
Cash received from Rental activities................................................. 41,586,891 41,297,937 0
Cash paid on Rental activities....................................................... (17,757,630) (19,855,056) 0
Real Estate Taxes.................................................................... (3,254,401) (3,406,946) 0
Interest paid on Mortgages........................................................... (13,579,541) (13,517,318) 0
------------- -------------- --------------
6,995,319 4,518,617 0
------------- -------------- --------------
Net Cash provided by Operating activities............................................... 18,085,359 12,708,237 5,568,569
------------- -------------- --------------
Cash Flow provided by/(used in) Investing activities:
Management and Investment Management Activities:
Proceeds from Sale of Assets and Other............................................. 2,869,955 1,016,334 3,787,441
Capital Expenditures............................................................... (1,191,992) (422,853) (397,519)
Advances to Unconsolidated Partnerships - net...................................... (992,427) (2,556,807) (8,565,119)
Acquisition of Real Estate......................................................... 0 0 (1,864,736)
Investments in Unconsolidated Partnerships......................................... (4,696,916) 0 0
Investment in Management Contracts................................................. (1,700,000) 0 0
Rental Property activities:
Net cash flow provided by Rental activities during period
Held for Sale (net of Interest paid of $13,692,045 in 1995)..................... 0 0 3,037,826
Capitalized Refinancing Costs...................................................... 0 (1,687,492) 0
Funding of Escrows................................................................. 290,805 (41,279) 0
Capital Expenditures............................................................... (2,385,951) (681,639) 0
------------- -------------- --------------
Net Cash used in Investing activities................................................... (7,806,526) (4,373,736) (4,002,107)
------------- -------------- --------------
Cash Flows provided by/(used in) Financing activities:
Management and Investment Management activities:
Proceeds from the exercise of Stock Options........................................ 37,778 61,671 35,216
Redemption of Stock held by Unconsolidated Partnerships............................ 0 (31,330) 0
Proceeds from Corporate Debt and Other............................................. 0 0 21,000,505
Principal payments on Corporate Debt and Other..................................... (8,035,774) (7,052,484) (21,859,553)
Rental Property activities:
Proceeds from Mortgage Debt........................................................ 7,428,500 47,442,961 0
Payments on Mortgages - principal amortization..................................... (2,124,904) (2,139,137) (2,150,733)
Payments on Mortgages - lump sum................................................... (8,608,664) (45,775,047) (479,554)
------------- -------------- --------------
Net Cash used in Financing activities:.................................................. (11,303,064) (7,493,366) (3,454,119)
------------- -------------- --------------
Increase/(Decrease) in Cash............................................................. (1,024,231) 841,135 (1,887,657)
Cash at Beginning of Year............................................................... 3,593,121 2,751,986 4,639,643
------------- -------------- --------------
Cash at End of Year.....................................................................$ 2,568,890 $ 3,593,121 $ 2,751,986
============= ============== ==============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-6
<PAGE>
11
<TABLE>
<CAPTION>
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---------------- -------------- ----------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided By Operating Activities:
Net Income.................................................................$ 3,205,578 $ 3,755,874 $ 5,096,735
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation .......................................................... 5,426,309 5,111,068 496,392
Amortization........................................................... 1,100,554 403,503 41,457
Provision for Losses on Accounts Receivable............................ 389,361 503,421 1,138,869
Income from Disposal of Assets -- Net.................................. (1,988,611) (962,761) (3,408,379)
(Gain) / Loss on Debt Restructuring.................................... 295,534 2,629,356 (1,314,022)
Provision for Income Taxes credited to Additional Paid-in Capital...... 1,694,000 2,151,000 2,866,000
Stock Compensation credited to Additional Paid-in Capital.............. 7,399,962 325,869 0
Changes in Operating Assets and Liabilities:
Investments in and Advances to Unconsolidated Partnerships........... 1,949,767 (94,014) (390,570)
Accounts Receivable and Other........................................ (339,386) (4,339,533) (17,039)
Funds Held in Escrow................................................. 1,832,273 (4,857,423) 595,256
Accounts Payable and Other Liabilities............................... (2,879,982) 8,081,877 463,870
---------------- -------------- ----------------
Net Cash Provided by Operating Activities....................................$ 18,085,359 $ 12,708,237 $ 5,568,569
================ ============== ================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1995, the Company acquired four Rental Properties primarily financed with
$4,770,000 of first mortgages on the properties.
In June 1995, the Company purchased from a mortgage lender the non-recourse
mortgages on one Unconsolidated Partnership and four Rental Properties. The
mortgages totaled $8.8 million and were acquired for $7.8 million. The Company
financed the acquisition with a $7.8 million note payable to the mortgage
lender. The note was repaid in June 1996.
In 1996, the Company granted deeds in lieu of foreclosure to the mortgagee for
three Rental Properties. The properties had an aggregate carrying value of $3.9
million. In 1995 the Company granted deeds in lieu of foreclosure to the
mortgagees for certain Rental Properties. The properties had an aggregate
carrying value of $3.5 million. No significant gain or loss was recognized on
these transactions because the assets and the non-recourse mortgages on each of
these Rental Properties had been recorded in equal amounts.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc. through
a merger with a wholly owned subsidiary of the Company. The Company issued
1,400,000 shares of its Common Stock (valued at $14,000,000) in consideration of
the acquisition; however 900,000 of the shares issued (valued at $9,000,000) are
subject to forfeiture, in whole or in part, if the Company's combined property
management operations fail to achieve certain profitability criteria on or
before the end of the Company's 1999 fiscal year.
In October 1997 the Company sold two Rental Properties. The buyer assumed the
mortgages with a carrying value of $2.3 million.
In 1997 and 1996, all interest incurred was expensed. In 1995 the interest
incurred on the Rental Properties was capitalized as the properties were Held
for Sale, while interest on corporate debt was expensed (SEE NOTE 2).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
12
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The principal business of Lexford, Inc., formerly Cardinal Realty
Services, Inc., and its subsidiaries (the "Company") is the
ownership and management of multi-family apartment properties. The
Company changed its name in October 1997 to emphasize its new
executive and property management personnel and to eliminate the
negative stigma associated with the "Cardinal" name due to its
bankruptcy filing in 1989. The Company is also involved in the
acquisition and redevelopment of multifamily apartment properties.
The Company holds an ownership interest in apartment communities
either as (i) the sole owner of various limited partnerships or
subsidiaries which own apartment communities (the "Rental
Properties" or "Wholly Owned Properties"), or (ii) the general
partner in various limited partnerships which own apartment
communities (the "Unconsolidated Partnerships" or "Syndicated
Partnerships"). The Rental Properties and the apartment communities
owned by the Unconsolidated Partnerships are collectively referred
to as the "Properties". The Company's general partner interests in
the Unconsolidated Partnerships ranges from 1.0% to 10.0%, but
typically 9.0% to 10.0%. The limited partnership interests in the
Unconsolidated Partnerships are substantially all owned by unrelated
third party investors. The Company also has receivables, typically
in the form of second mortgages, from the Unconsolidated
Partnerships that generate a majority of the interest income
recognized by the Company.
The majority of the Properties are located in the midwest and
southeast United States, with the heaviest concentrations in
Florida, Ohio, Georgia, Indiana, Michigan and Kentucky. The typical
Property is comprised of multiple single story buildings with
studio, one and two bedroom apartments. Substantially all of the
Properties have non-recourse first mortgage indebtedness which is
owed to financial institutions. The Company is not dependent for its
revenues on any particular Property and the loss of any Property
would not be material to the Company's financial position.
Geographic distribution of the Properties also minimizes the
Company's exposure to local economic conditions.
The Company has historically engaged in and derived revenues from,
two distinct businesses: the real estate investment business in
which it owns and operates multi-family residential real estate
("Investment Management" or "Real Estate Investment Business") and
the real estate services business ("Management Services" or "Real
Estate Services Business") in which it provides fee-based management
and other services to multi-family apartment communities, including
services to properties in which the Company does not have an
ownership interest ("Third Party Owners") and their residents.
F-8
<PAGE>
13
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Investment Management
The objective of the Company's Investment Management division is to
maximize the value of its real estate holdings and its returns on
real estate investments. The Company performs these functions both
with respect to the Rental Properties as well as the Unconsolidated
Partnerships. The Company strives to obtain and maintain the best
available financing for the Properties and to maximize the
Properties' operating performance. The Company evaluates the
performance of all real estate holdings to identify investment
requirements, under-performing Properties or those that can be sold
at an attractive price relative to their performance.
The Company's Investment Management division, acting in the
Company's capacity as general partner of the Unconsolidated
Partnerships, provides asset management services to the
Unconsolidated Partnerships. In addition, the Company's Investment
Management division performs the following services for the accounts
of the co-owners (limited partners) of the Unconsolidated
Partnerships: informational and financial reporting services
(including tax return preparation and provision of tax return
information to the limited partners) and capital and financial
planning (including determination of reserves, funding of capital
requirements and administration of capital distributions to
partners).
Management Services
The Company's Management Services division is charged with the
conduct of the Company's property management business. The Company's
property management business involves all traditional elements of
third party property management including: day-to-day management and
maintenance of multi-family residential apartment properties,
attracting and retaining qualified residents, collecting rents and
other receivables from residents, providing cash management services
for rental revenues, security deposits, taxes and insurance and
deferred maintenance escrows, and compiling and furnishing
information to property owners.
Effective August 1, 1996, the Company acquired Lexford Properties,
Inc. ("Lexford Properties") by merger of a wholly owned subsidiary
of the Company with and into Lexford Properties. On that date,
Lexford Properties became a wholly owned subsidiary of the Company.
Lexford Properties has been engaged in the business of third party
property management services to Third Party Owners since commencing
business operations in June 1988. Lexford Properties has succeeded
to the operation of the Company's Management Services Division.
F-9
<PAGE>
14
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Lexford Properties also operates an adjunct business which the
Company refers to as "Preferred Resource" (formerly referred to as
Ancillary Services or Preferred Vendor). The Preferred Resource
business currently provides assistance to most of the Properties
managed by Lexford Properties, in the acquisition of needed parts
and supplies and the management of a coordinated buying group
enjoying substantial volume discounts. In consideration of these
services for the benefit of the Unconsolidated Partnerships, the
Company generates income by retaining some portion of discounts
earned. In addition, Preferred Resource provides services to
residents such as renter's insurance.
Fresh Start Accounting
The Company adopted a method of accounting referred to as fresh
start ("Fresh Start") reporting as of September 11, 1992 ("The
Effective Date") as a result of the Company's judicial plan of
reorganization (the "Plan of Reorganization"). The Company prepared
financial statements on the basis that a new reporting entity was
created with assets and liabilities recorded at their estimated fair
values as of the Effective Date. At the Effective Date, to the
extent the non-recourse debt on certain Rental Property assets
exceeded the estimated fair value of the Rental Property, the
Company reduced the contractual amount of the related non-recourse
first mortgage debt by the amounts of the deficiency (the "Mortgage
Deficiencies"). The contractual mortgage balance, net of any
applicable Mortgage Deficiency, is referred to as the "Carrying
Value" of the mortgage. In addition, the Plan of Reorganization
provided for the issuance of the Company's common stock in
satisfaction of claims. In accordance with the Plan of
Reorganization, a total of 6,645,246 shares were issued to satisfy
claimants in the bankruptcy case. During 1997, 22,264 shares were
released to claimants upon final resolution of all claims.
F-10
<PAGE>
15
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Lexford Properties Acquisition
Effective August 1, 1996 the Company acquired Lexford Properties by
way of a merger (the "Lexford Merger") of a wholly owned subsidiary
of the Company with and into Lexford Properties. The acquisition was
accounted for as a purchase. The terms of the Lexford Merger
provided that the Company would succeed to the ownership of all of
the issued and outstanding stock of Lexford Properties and the
shareholders of Lexford Properties would receive 1,400,000 shares of
restricted, newly issued Common Stock. For purposes of the Lexford
Merger, the Common Stock was valued at $10 per share. $9.0 million,
or 900,000 shares, of the purchase price is subject to forfeiture in
whole or in part in the event Lexford Properties does not achieve
certain profitability criteria by December 31, 1999. These shares
are held in escrow pending release or forfeiture. If and when
Lexford Properties attains some or all of the profitability criteria
the corresponding number of shares (up to all 900,000 shares)
subject to forfeiture will be released without contingency and the
Company will record the additional purchase price. The Lexford
Properties shareholders received 500,000 shares of Common Stock free
of contingencies. The 900,000 shares subject to forfeiture are not
reflected in the Shareholders' Equity section of the Company's
Consolidated Balance Sheets nor in the Consolidated Statements of
Shareholders' Equity presented herein (SEE NOTE 14).
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FASB
Statement No. 107, Disclosure About Fair Value of Financial
Instruments. The fair value of Cash and Funds Held in Escrow is
equal to their respective carrying amounts. For Investments in and
Advances to Unconsolidated Partnerships, the Company used the Fresh
Start accounting methodology used at the Effective Date to estimate
the value at December 31, 1997 and 1996, which value approximated
$140.3 million and $133.4 million, respectively. Such methodology is
generally based on estimates of the fair market value of the
apartment communities owned by the Unconsolidated Partnerships, less
related indebtedness senior to the Company's investments and
advances. The Investments in and Advances to Unconsolidated
Partnerships consist substantially of second mortgage loans
receivable, whose ultimate repayment is subject to a number of
variables, including the performance and value of the underlying
real estate property and the ultimate timing of repayments of the
receivables. Considerable judgment is required in the interpretation
of market data to develop estimates of fair value, accordingly, the
estimates are not necessarily indicative of the amounts that could
be realized or would be paid in a current market exchange. The
effect of using different market assumptions and/or estimation
methodologies may be material to the estimated fair value amounts
(SEE NOTE 3).
F-11
<PAGE>
16
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
The carrying value of the amounts comprising the Company's corporate
debt as described in Note 4 approximate their fair value based upon
the Company's current borrowing rates for similar types of borrowing
arrangements. The carrying amount of accrued interest approximates
its fair value.
As further described in Note 5, at December 31, 1997 mortgages on
the Company's Rental Properties in the amount of $142.6 million had
contractual balances totaling $150.3 million (resulting in an
aggregate Mortgage Deficiency of $7.7 million). Interest rates on
the mortgages ranged from 7.0% to 10.0% with rates being fixed on
approximately $142.1 million of the contractual balances (SEE NOTE
5). The Carrying Value of the amounts comprising the mortgages on
Rental Properties as described in Note 5, approximate their fair
value based upon the Company's borrowing rates for similar types of
mortgage debt.
Basis of Presentation
The consolidated financial statements include the accounts of
Lexford, Inc. and its wholly owned subsidiaries, and all entities
which the Company has majority interest or control. All significant
intercompany balances and transactions (except for Fee Based
Revenues and related expenses generated from Rental Properties in
1995) have been eliminated in consolidation. Total Revenues from
Rental Properties (during the period such properties were held for
sale) amounted to $3.6 million for the year ended December 31, 1995.
Any gross profit on such revenues has been eliminated in
consolidation (SEE NOTE 2).
Reclassification
Certain amounts in the 1995 and 1996 Consolidated Financial
Statements have been reclassified to conform to the 1997
presentation.
Rental Properties (previously Held for Sale)
During 1995 and prior years, the Company classified the Rental
Properties as Held for Sale. However, based upon mortgage debt that
had been restructured with favorable amortization terms, combined
with improved net operating income and cash flow performance,
management decided to retain the Rental Properties for investment.
Therefore, commencing January 1, 1996, the Company changed the
classification of the Rental Properties and discontinued the Held
for Sale accounting treatment. The Rental Properties are carried at
lower of cost or fair value and depreciated over their estimated
remaining useful lives, typically approximately 30 years, using the
straight-line method for financial reporting purposes and tax
purposes. The Company capitalizes interior replacement costs and
major building exterior improvements, and depreciates the assets
over their estimated useful lives ranging from five to 20 years (SEE
NOTE 2). The Company evaluates its Rental Properties periodically
for indicators of impairment, including recurring operating losses
and other significant adverse changes in the business climate that
affect the recovery of the recorded asset value. If Rental Property
is considered impaired, a loss is provided to reduce the net
carrying value of the asset to its estimated fair value. Management
is not aware of any indicator that would result in any significant
impairment loss.
F-12
<PAGE>
17
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Investments in and Advances to Unconsolidated Partnerships
Investments in and Advances to Unconsolidated Partnerships represent
the Company's general partners' interest and advances to
non-controlled partnerships which own multi-family apartment
communities. The carrying value represents the allocation of the
estimated fair value of the underlying real estate assets as of the
Effective Date or, if later, date of purchase or investment and, as
described in Note 3, the contractual amounts of the receivables are
significantly more than the recorded amounts. These receivables
generally include long-term second mortgages and other receivables.
In addition, subsequent to the Effective Date, the Company has made
advances to the Unconsolidated Partnerships. These advances
primarily relate to operating needs and supplemental funding for
refinancing transactions, and bear interest at prime plus one
percent. Interest is accrued on the recorded values of the second
mortgages and certain of the other receivables based upon
contractual interest rates, and allowances are provided for
estimated uncollectible interest based upon the underlying
Properties' net cash flows. In certain instances, cash flow received
in excess of accrued second mortgage interest on the recorded values
of the second mortgages is recorded as income. The Company is also
entitled to receive incentive management fees and supplemental
second mortgage interest based upon certain levels of cash flows of
certain of the underlying Properties. Also, in the event the
underlying Properties are sold or refinanced, the Company is
generally entitled to a participation interest in the net proceeds,
as a general partner and/or a second mortgage holder. The
realization of the Investments in and Advances to Unconsolidated
Partnerships is dependent on the future operating performance of the
Unconsolidated Partnerships.
Prior to November 1, 1997, the Company accounted for its investments
by the cost method. Effective November 1, 1997, based on the
Company's board of directors decision to seek to acquire ownership
of third party equity interests in substantially all of the
Unconsolidated Partnerships, the Company began accounting for its
investments on the equity method. The Company's share of net income
or loss of the Unconsolidated Partnerships is classified with Fee
Based Revenues in the Consolidated Statement of Income (SEE NOTES 3
AND 14).
In December 1997, the Company purchased a non-controlling interest
in certain limited partnerships that have an ownership interest
and/or other investments in 15 properties, comprising approximately
3,400 units. The purchase price of $3.3 million is included in
Investments in and Advances to Unconsolidated Partnerships at
December 31, 1997. The Company is accounting for these investments
under the equity method.
Furniture, Fixtures and Other, Net
Furniture and fixtures, net of accumulated depreciation of $2.5
million and $1.8 million at December 31, 1997 and 1996,
respectively, are recorded at cost and are depreciated over their
estimated useful lives ranging from three to 10 years, using the
straight-line method for financial reporting purposes and various
accelerated or straight-line methods for income tax purposes.
F-13
<PAGE>
18
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Funds Held in Escrow
The amounts at December 31, 1997 and 1996 include funds of $6.7
million and $7.0 million, respectively, escrowed by Rental
Properties for improvements and deferred maintenance, real estate
taxes, insurance and resident security deposits. In addition, the
Company is holding $2.0 million and $3.0 million, at December 31,
1997 and 1996, respectively, as funds held primarily for payment of
insurance premiums which are collected from the Properties. At
December 31, 1997 and 1996 the Company's Funds Held in Escrow also
includes $3.2 million and $4.0 million, respectively, of funds
received from the settlement of litigation brought against the
Company's former insurance carrier to prosecute policy claims for
termite infestation losses at certain of the Properties. These funds
are being used to pay additional litigation costs associated with
the Company's prosecution of claims against its former excess
coverage insurance carrier. The Company's Other Liabilities includes
$1.9 million and $3.4 million at December 31, 1997 and 1996,
respectively, representing the settlement proceeds from the
litigation allocable to certain Unconsolidated Partnerships.
Revenue Recognition
Rental revenue is recognized as income in the period earned.
Intangible Assets
Intangible Assets at December 31, 1997 and 1996 is primarily
comprised of goodwill and management contracts, net of accumulated
amortization of approximately $816,700 and $129,600, respectively.
In 1997, the Company acquired management contracts on a group of
affiliated properties for $1.7 million. The goodwill and management
contracts related to the Lexford Properties Acquisition is being
amortized on the straight line basis over 25 years and 10 years,
respectively. In the third quarter of 1997, the Company recorded a
charge of approximately $364,000 as an amortization adjustment to
the value assigned to the third party management contracts acquired
with the Lexford Properties Acquisition. The adjustment was based
upon the significant decline in the number of third party management
contracts. The management contracts purchased in 1997 are being
amortized on the straight line basis over seven years.
Intangible Assets also includes deferred financing costs at December
31, 1997 and 1996 of $2.5 million and $2.7 million, respectively.
The costs relate to mortgage refinancings on the Rental Properties
and are amortized over the terms of the respective loans.
F-14
<PAGE>
19
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share. Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform with the
Statement 128 requirements. Also see Note 14 - Subsequent Events
regarding two for one stock exchange.
The following table shows the amounts used in computing basic and
diluted earnings per share as well as weighted average numbers of
shares outstanding and the effect on income of restricted common
stock and stock options with dilutive potential.
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
Numerator for Basic and Diluted Earnings Per Share:
Income before Extraordinary Items $ 3,386,112 $ 5,370,230 $ 4,292,713
Extraordinary Item (180,534) (1,614,356) 804,022
--------------- --------------- ----------------
Net Income 3,205,578 3,755,874 5,096,735
=============== =============== ================
Denominator:
Denominator for Basic Earnings Per Share -
Weighted Average Shares 8,071,970 7,537,298 7,256,100
Effect of Dilutive Securities:
Stock Options 171,862 192,166 260,956
Time Vesting Restricted Stock Awards 70,084 95,210 69,000
--------------- --------------- ----------------
Dilutive Potential Common Shares 241,946 287,376 329,956
--------------- --------------- ----------------
Denominator for Diluted Earnings Per Share -
Adjusted Weighted Average Shares 8,313,916 7,824,674 7,586,056
=============== =============== ================
Basic Earnings Per Share:
Income Before Extraordinary Item $ 0.42 $ 0.71 $ 0.59
Extraordinary Item (0.02) (0.21) 0.11
--------------- --------------- ----------------
Net Income $ 0.40 $ 0.50 $ 0.70
=============== =============== ================
Diluted Earnings Per Share:
Income Before Extraordinary Item $ 0.41 $ 0.69 $ 0.56
Extraordinary Item (0.02) (0.21) 0.11
--------------- --------------- ----------------
Net Income $ 0.39 $ 0.48 $ 0.67
=============== =============== ================
</TABLE>
F-15
<PAGE>
20
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
In August, 1996, the Company issued 1,400,000 shares of Common Stock
in connection with the Lexford merger, 900,000 shares of which
remain subject to forfeiture in whole or in part. The 900,000 shares
subject to forfeiture are contingent upon achieving certain
profitability criteria. The 900,000 contingent shares are excluded
from the weighted average shares outstanding because profitability
criteria have not been met (SEE "LEXFORD PROPERTIES ACQUISITION").
The weighted average shares outstanding excludes 267,334 shares of
Common Stock awarded to certain officers which vesting is contingent
upon the Company achieving certain performance criteria that were
not met as of December 31, 1997. In addition, weighted average stock
options for 8,000 shares were excluded from weighted average shares
outstanding since the exercise price exceeded the average stock
price. For additional disclosures regarding outstanding employee
stock options, SEE NOTE 7.
In February 1997, the Company retired approximately 420,600 shares
that were previously held as treasury shares.
NOTE 2: RENTAL PROPERTIES
During 1995 and prior years, the Company had attempted to market and
sell the Rental Properties and classified the Rental Properties as
Held for Sale. While the Rental Properties were held for sale, the
results of operations from the Rental Properties were credited to
the carrying value of the real estate and no revenues, operating
expenses or depreciation were included in the Consolidated
Statements of Income. Cash flows from the Rental Properties prior to
1996 were classified as Cash Flow Provided by Investing Activities.
Commencing January 1, 1996, based upon management's decision to
retain the Rental Properties for investment, the operations,
including a provision for depreciation, of the Rental Properties
have been fully consolidated in the Company's Consolidated
Statements of Income. Further, the cash flows of the Rental
Properties have been reclassified as Cash Flows Provided by
Operating Activities.
F-16
<PAGE>
21
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 2: RENTAL PROPERTIES (cont'd)
Condensed combined balance sheets, with intercompany payables and
receivables eliminated, of the Company's 111 and 113 Rental
Properties as of December 31, 1997 and 1996, respectively, are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
ASSETS
Net Rental Properties $ 152,217,430 $ 157,091,545
Cash 2,619,761 3,322,494
Accounts Receivable 817,948 324,772
Funds Held in Escrow 6,689,337 6,980,142
Intangible Assets 2,492,029 2,721,365
Prepaids and Other 310,292 832,132
------------------ -----------------
$ 165,146,797 $ 171,272,450
================== =================
LIABILITIES AND EQUITY
Non Recourse Mortgages Payable:
Contractual $ 150,284,725 $ 157,381,603
Mortgage Deficiency (7,647,851) (9,325,586)
------------------ -----------------
142,636,874 148,056,017
Accounts Payable 561,203 1,160,426
Accrued Interest and Real Estate Taxes 2,825,450 2,961,795
Other Accrued Expenses 1,175,438 1,337,083
Other Liabilities 959,987 683,202
------------------ -----------------
148,158,952 154,198,523
Equity 16,987,845 17,073,927
------------------ -----------------
$ 165,146,797 $ 171,272,450
================== =================
</TABLE>
Condensed consolidated statement of income of the 116 Rental
Properties while Held for Sale, including intercompany expenses, for
the year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995
------------------
<S> <C>
Rental Revenues $ 40,000,678
Operating Expenses (18,691,062)
------------------
Net Operating Income 21,309,616
Improvements and Replacement Expense (2,213,586)
Improvements and Replacement Expense funded from Escrows (1,746,156)
Interest Expense (contractual interest of approximately $14,562,000) (13,549,258)
Other Expenses (1,464,630)
Reorganization Expenses (96,227)
------------------
Income, less expenses, excluding depreciation $ 2,239,759
==================
</TABLE>
F-17
<PAGE>
22
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 3: INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS
The Investments in and Advances to Unconsolidated Partnerships net
of allowances of $2.6 million and $1.6 million, respectively, are
comprised of the following major components:
1997 1996
--------------- --------------
Second Mortgage Notes $35,778,288 $36,450,176
Advances, since the Effective Date 14,770,765 14,271,906
Investments in Unconsolidated Partnerships 3,395,474 0
Other, including accrued interest 3,166,847 3,888,339
--------------- --------------
$57,111,374 $54,610,421
=============== ==============
The majority of the second mortgage notes bear interest at 6%.
Interest income is accrued based upon the Fresh Start value of the
second mortgage notes, as described in Note 1. The advances
currently bear interest at prime plus 1%. At December 31, 1997 and
1996, the contractual obligations of the Unconsolidated Partnerships
on account of second mortgages, advances and other payables,
including related interest, aggregated $232.5 million and $238.7
million, respectively. Amounts due under second mortgages are
collateralized substantially by all the real estate assets of the
Unconsolidated Partnerships and are subordinate to the first
mortgage debt. There can be no assurance that the Company will
collect the full carrying value of, or any additional contractual
balances owing under, these receivables.
F-18
<PAGE>
23
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 3: INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS(cont'd)
Following is a summary of financial position and results of
operations of the 394 Unconsolidated Partnerships at December 31,
1997 and 406 Unconsolidated Partnerships at December 31, 1996 and
1995. The presentation does not include data for 15 additional
Unconsolidated Partnerships in which the Company made initial
investments in December 1997 (SEE NOTE 1 - "INVESTMENTS IN AND
ADVANCES TO UNCONSOLIDATED PARTNERSHIPS")
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Real Estate Assets, Net $ 394,138,048 $ 413,430,542 $ 427,165,373
Cash, Funds Held in Escrow and
Resident Receivables 32,117,034 35,821,876 33,579,786
Other Assets 12,721,170 14,650,648 11,610,306
------------------- ------------------- -------------------
Total Assets $ 438,976,252 $ 463,903,066 $ 472,355,465
=================== =================== ===================
Non Recourse Mortgage Debt 437,235,691 456,926,896 457,388,544
Other Liabilities 21,613,975 25,175,139 20,499,327
Amounts Due to the Company 232,511,337 238,676,999 237,098,604
------------------- ------------------- -------------------
$ 691,361,003 $ 720,779,034 $ 714,986,475
------------------- ------------------- -------------------
Net Deficit $ (252,384,751) $ (256,875,968) $ (242,631,010)
=================== =================== ===================
Rental and Other Revenues $ 123,922,337 $ 122,712,181 $ 117,213,041
=================== =================== ===================
Net Loss $ (5,019,247) $ (13,732,614) $ (12,482,318)
=================== =================== ===================
Company's Share of Loss (Equity Method)
November 1 through December 31, 1997 $ (80,644)
===================
</TABLE>
Prior to November 1, 1997 and during 1996 and 1995 the Company's
share of loss relating to its investment in Unconsolidated
Partnerships was not recorded because the Company accounted for the
investment under the cost method (SEE NOTE 1).
F-19
<PAGE>
24
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 4: CORPORATE DEBT
Corporate debt consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C>
Amended and Restated Revolving Credit Facility
principal payable March 30, 2000;
interest payable monthly in arrears
at Prime minus 1% (7.5% for 1997) $ 2,572,092 $ 0
Reducing Balance Revolving Credit
Agreement - amended in 1997 0 9,110,816
Acquisition Term Debt - principal and interest in monthly
installments of $139,435 through March 31, 2001; interest
at a fixed rate of 7.25% 4,733,283 6,007,232
Other notes payable 56,307 145,220
---------------------- ----------------------
$ 7,361,682 $ 15,263,268
====================== ======================
</TABLE>
On September 30, 1997 the Company entered into an Amended and
Restated Loan and Security Agreement with the Provident Bank
("Bank"). The new revolving credit facility ("Facility"), is for $35
million and represents an increase to and replacement of the former
Provident revolving credit facilities and commitments ("Former
Lines"), consisting of a $3 million working capital revolving credit
facility ("Working Capital Line"), and a $22 million reducing
balance revolving line ("Reducing Line") and a committed $10 million
acquisition line ("Acquisition Line"). The scheduled term of the
Facility expires March 30, 2000, although the Company may elect from
time to time to reduce the Facility and convert all or any portion
of the principal amount outstanding under the Facility into a five
year term loan. Revolving loans under the Facility bear interest
equal to the Bank's prime rate of interest, currently 8.5%, minus
1%. The Facility and Acquisition Term Debt continues to be secured
by all of the Company's assets, subject to the interest of the first
mortgage holder on non recourse mortgage debt of the Rental
Properties. At December 31, 1997 the Company had unrestricted credit
availability of approximately $31.7 million. This amount is net of
$767,400 restricted for unfunded stand-by letters of credit for
1997.
The Company's loan agreements contain restrictive covenants,
including but not limited to, the maintenance of certain net worth,
financial ratios, certain restrictions on incurrence of additional
debt and certain restrictions on acquisitions.
F-20
<PAGE>
25
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 4: CORPORATE DEBT (cont'd)
The Company's annual long-term debt maturities following December
31, 1997 are:
1998 $ 1,419,915
1999 1,503,254
2000 4,162,150
2001 276,363
-------------------
$ 7,361,682
===================
NOTE 5: NON RECOURSE MORTGAGES
In connection with Fresh Start reporting as further described in
Note 1, mortgages on Rental Properties were restated to their
estimated fair value as of the Effective Date. The contractual
principal balances of the mortgages on Rental Properties exceed the
carrying values by $7.7 million and $9.3 million at December 31,
1997 and 1996, respectively. The mortgages are non recourse, are
collateralized by the Rental Properties (generally on a single
Rental Property by Rental Property basis, although a portfolio of
mortgages on 26 Rental Properties are cross-collateralized and
cross-defaulted) and are payable over periods through 2007. At
December 31, 1997 contractual interest rates ranged from 7.0% to
10.0% with fixed rates on approximately $142.1 million of the
outstanding contractual mortgage balances. Interest expense is
recorded using the effective interest method based upon the carrying
value of the mortgage debt. The weighted average effective interest
rate was 8.63% at December 31, 1997. The weighted average
contractual interest rate and term to maturity on the mortgages on
Rental Properties, was 8.61% and 6.2 years at December 31, 1997. The
annual debt service requirement was $15.2 million at December 31,
1997. In addition, ten Rental Properties have second mortgage debt
totaling $1.5 million at December 31, 1997, that requires the
application of all excess cash flow from operations to be applied to
the outstanding principal on such debt. The range of interest rates
and related carrying amounts of mortgages payable at December 31,
1997 is as follows:
Contractual Contractual Carrying
Rate Balance Value
- ---------------------------- ----------------------- -----------------------
Less than 8.0% $ 15,979,531 $ 14,351,759
8.01% - 9.0% 120,960,409 116,421,071
More than 9.01% 13,344,785 11,864,044
----------------------- -----------------------
$ 150,284,725 $ 142,636,874
======================= =======================
F-21
<PAGE>
26
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 5: NON RECOURSE MORTGAGES (cont'd)
Minimum estimated repayment requirements of mortgages for the next
five years based upon the contractual principal balances are as
follows:
Contractual
Amounts
-------------------
1998 $ 10,009,959
1999 4,738,553
2000 7,408,432
2001 22,365,496
2002 9,072,499
Thereafter 96,689,786
-------------------
$ 150,284,725
===================
NOTE 6: EXTRAORDINARY ITEM - REFINANCED MORTGAGE DEBT
During 1997, the Company refinanced mortgages on six Rental
Properties. Mortgage indebtedness on these Rental Properties, with a
contractual value of approximately $7.4 million and a Carrying Value
of approximately $7.1 million, was refinanced with mortgages bearing
a fixed rate of interest ranging from 7.45% to 9.03%, with 25 year
amortization and ten year maturities. Annual debt service on the
affected Rental Properties decreased approximately $18,000. An
extraordinary non-cash loss of approximately $180,000, net of tax
benefits, resulted from the mortgage debt refinancings of the Rental
Properties. The loss arose from the mortgages repaid from refinance
proceeds at the contractual balance which exceeded the Carrying
Value of the mortgages (SEE NOTE 1).
The refinancing of mortgages on the Unconsolidated Partnerships
generated loan fee revenue of approximately $130,000 in 1997 as
compared to $752,000 and $886,000 in 1996 and 1995, respectively.
The fees were based upon a graduated percentage of the new loan
amounts and are classified with Fee Based Revenue in the
Consolidated Statements of Income.
In 1996 and 1995, the Company completed modification or refinancing
transactions on Rental Properties and Unconsolidated Partnerships
which resulted in an extraordinary non-cash loss of $1.6 million,
net of tax benefits in 1996 and an extraordinary gain on discharge
of indebtedness net of closing costs reserves and taxes of
approximately $804,000 in 1995. The loss arose from those mortgages
repaid from refinance proceeds at the contractual balance which
exceeded the Carrying Value of the mortgage (SEE NOTE 1).
F-22
<PAGE>
27
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7: STOCK BASED COMPENSATION
The company provides stock based compensation to employees and
non-employee directors including stock options, stock awards and
stock in lieu of cash payments under various plans and contractual
arrangements.
Performance Equity Plan
In October 1997, the shareholders of the Company approved the
Company's 1997 Performance Equity Plan (the "Performance Plan"). The
Performance Plan authorizes the grant of restricted stock awards to
certain officers and non-employee directors. The Performance Plan
has a three year term (1997 through 1999), with increasing
performance goals associated with each year of the term. A total of
636,000 shares of restricted Common Stock are available for grants.
On October 7, 1997 the Compensation Committee of the Company's Board
of Directors authorized restricted stock grants for the full 636,000
shares. Vesting under the Performance Plan occurs only upon
attainment of specified performance goals. The performance goals are
stated as percentage increases over base line amounts established,
and as defined, in the Performance Plan approved by shareholders.
Any awards that remain non-vested after the third year will be
forfeited.
In 1997, 424,000 shares awarded under the Performance Plan vested
upon achievement of the performance goals. The vesting of these
shares resulted in a non-cash charge in the fourth quarter of 1997
of approximately $6.3 million.
Incentive Equity Plan and Other Stock Compensation
The Company also has an Incentive Equity Plan (the "Incentive
Plan"), that was established in 1992 and amended with shareholder
approval in 1995, that authorizes the Company's issuance of stock in
connection with stock options and restricted stock awards. The
Incentive Plan, which benefits officers, key employees and
non-employee directors, authorized approximately 1,182,000 shares
for officers and key employees and approximately 280,400 shares for
non-employee directors. At December 31, 1997, 287,036 shares remain
available for officers and key employees and approximately 64,400
shares remain available for grants of stock options to non-employee
directors. The shares of stock available for future options and
awards may be granted at the discretion of the Company's Board of
Directors or its Compensation Committee. Approximately 496,800 of
the 895,200 shares or options previously issued under the Equity
Plan are held by officers and key employees currently employed by
the Company and all of the non-employee director shares or options
issued are held by individuals currently serving as directors.
In 1997, the Company granted to officers and key employees stock
options for the purchase of 72,550 shares, 15,000 shares of
restricted stock, and 18,000 shares of stock with vesting contingent
on certain Company performance criteria. In addition, stock options
for the purchase of 32,000 shares, and 4,000 shares of restricted
stock were granted to non-employee directors in 1997. In addition,
certain officers and key employees received 8,620 shares of stock in
lieu of cash compensation in 1997 and 150,800 shares were issued
under employment agreements.
F-23
<PAGE>
28
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7: STOCK BASED COMPENSATION (cont'd)
In 1996, the Company granted stock options for 152,000 shares,
including 32,000 to non employee directors, restricted stock awards
for 99,000 shares and deferred stock awards for 76,000 shares. The
restricted stock awards included up to 35,000 shares as a Company
match of shares if purchased by officers by April, 1997, and 64,000
shares which vest ratably over time. The deferred stock awards vest
upon achievement of specified performance criteria.
The shares authorized under the Incentive Plan in 1992 were provided
for in the Plan of Reorganization, prior to the Effective Date.
Therefore these shares were deemed awarded prior to the Effective
Date with no compensation expense recorded for periods subsequent to
the Effective Date. Awards of shares provided for in the amendment
to the Incentive Plan in 1995, depending on the nature of the award,
may be reflected as compensation over the vesting period.
Compensation expense resulting from transactions under this plan and
other stock compensation arrangements was $842,600 and $207,500 for
1997 and 1996, respectively, in addition to the non cash charge
recorded for the Performance Plan. There was no stock compensation
expense in 1995. The weighted average per share value at grant date
of the restricted and deferred stock awards was $14.68 and $9.29 for
1997 and 1996, respectively.
In 1996, the shareholders of the Company approved the director
restricted stock plan (the "Director Plan") that provides for
compensation earned by the directors to be paid, at the option of
the Directors, in whole or in part, in shares of stock in lieu of
cash fees. The Director Plan authorized 100,000 shares, of which
approximately 66,800 shares remain available at December 31, 1997.
In 1997 and 1996 the Company recorded compensation expense of
$276,800 and $118,400, respectively, related to the Director Plan.
Stock Option Valuation
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations in accounting for its employee and
director stock options, because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting
for Stock Based Compensation," ("FASB 123") requires use of option
valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be
determined as if the Company has accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value
method of that Statement. The fair value for these options was
estimated at the date of the grant using Black-Scholes option
pricing model.
The following assumptions were utilized in the pricing model: a
weighted average risk free interest rate of 5.6% in 1997 and 6.5% in
1996 and 1995; dividend yield of one percent; volatility factors of
the expected market price of the Company's common stock of 0.248 in
1997 and 0.236 in 1996 and 1995; and a weighted average expected
life of 6.3 years in 1997, seven years in 1996 and eight years in
1995.
F-24
<PAGE>
29
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7: STOCK BASED COMPENSATION (cont'd)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restriction and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized over the options vesting period. The
Company's pro forma information follows:
1997 1996 1995
------------- -------------- -------------
Pro forma net income $ 3,026,754 $ 3,629,797 $ 5,090,716
============= ============== =============
Pro forma basic earnings per share $ 0.37 $ 0.48 $ 0.70
============= ============== =============
Pro forma diluted earnings per share $ 0.36 $ 0.46 $ 0.67
============= ============== =============
The following table summarizes the Company's stock option activity,
and related information for the years ended December 31, 1997, 1996
and 1995 (in thousands except for exercise prices):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Ave. Ave. Ave.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 352 $5.45 270 $2.05 270 $1.17
------------------- ---------- ----------- --------- ------------
Options granted 104 $12.27 152 $9.44 35 $8.63
Options exercised (18) $2.07 (68) $0.90 (31) $1.14
Options forfeited (4) $9.59 (2) $1.31 (4) $1.31
------------------- ---------- ----------- --------- ------------
Options outstanding at end of year 434 $7.20 352 $5.46 270 $2.05
=================== ========== =========== ========= ============
Options exercisable at end of year 234 $4.17 176 $2.60 192 $1.11
=================== ========== =========== ========= ============
Weighted Ave. Fair Value of Options $4.15 $3.19 $3.42
Granted during the Year =========== =========== ============
</TABLE>
F-25
<PAGE>
30
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7: STOCK BASED COMPENSATION (cont'd)
Options awarded have an exercise price equal to or greater than the
market price of the Common Stock at the time of the award, and are
subject to vesting schedules as determined by the Company's Board of
Directors or its Compensation Committee. The options granted expire,
if not exercised, ten years from the date on which the option was
granted. Exercise prices for options outstanding as of December 31,
1997 ranged from $0.71 to $15.50 per share with a weighted average
remaining term of 7.3 years. At December 31, 1997, there were
options outstanding to purchase approximately 152,000 shares at an
exercise price less than $5 and approximately 282,000 shares at an
exercise price in excess of $5.
NOTE 8: INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income
tax return. For financial reporting purposes, the Company follows
FASB Statement No. 109 ("FASB 109"). In accordance with FASB 109,
income taxes have been provided at statutory rates in effect during
the period. Tax benefits associated with net operating loss carry
forwards and other temporary differences that existed at the time
Fresh Start reporting was adopted are reflected as an increase to
Additional Paid-in Capital in the period in which they were
realized.
The provision for income taxes in the Consolidated Statements of
Income (including amounts applicable to extraordinary items) is as
follows:
Years Ended
--------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
Current:
Federal $ 0 $ 0 $ 50,000
State 380,000 250,000 314,000
Amounts not payable in cash 1,694,000 2,151,000 2,866,000
--------------- ---------------- ---------------
$ 2,074,000 $ 2,401,000 $ 3,230,000
=============== ================ ===============
The Company's actual income tax payments for the years 1997, 1996
and 1995 were significantly less than the total provision for income
taxes because of available net operating loss carry forwards and
other tax benefits. The amounts included in the provision for taxes
for which no amounts were payable in cash are set forth in the table
above.
F-26
<PAGE>
31
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 8: INCOME TAXES (cont'd)
The effective income tax rates varied from the federal statutory
rates as follows:
1997 1996 1995
------------ ------------ -----------
Federal Tax provision at statutory rates $ 1,787,000 $ 2,094,000 $ 2,832,000
State Income Taxes, Net of Federal Income
Tax Benefit 251,000 165,000 207,000
Other Permanent Differences 36,000 142,000 191,000
------------ ------------ -----------
$ 2,074,000 $ 2,401,000 $ 3,230,000
============ ============ ===========
Effective Income Tax Rate 39.3% 39.0% 38.8%
============ ============ ===========
Significant components of the Company's deferred tax assets and
liabilities are as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(000s omitted)
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Deferred Tax Assets and Other:
Net operating loss carry forwards and other carry forwards $ 22,000 $ 19,000
Suspended passive activity losses 34,000 38,000
Tax basis of assets in excess of Fresh Start estimated fair values 11,000 39,000
-------------- -------------
67,000 96,000
-------------- -------------
Less: valuation allowance (31,000) (24,000)
-------------- -------------
$ 36,000 $ 72,000
============== =============
Deferred Tax Liabilities:
Negative capital accounts $ 33,000 $ 41,000
Tax basis of liabilities in excess of related Fresh Start
estimated fair values 3,000 3,000
Tax basis of assets less than related Fresh Start estimated fair values 0 28,000
-------------- -------------
$ 36,000 $ 72,000
============== =============
</TABLE>
F-27
<PAGE>
32
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 8: INCOME TAXES (cont'd)
The valuation reserve against deferred tax assets has been reduced
by amounts equivalent to the portions of the tax provisions which
are not payable in cash. Corresponding increases have been made to
Additional Paid-in Capital.
As a result of the uncertainties relating to the ultimate
utilization of favorable tax attributes described below, the Company
has provided a valuation allowance for the remaining excess of the
net deferred tax assets as of December 31, 1997 and 1996.
In addition to regular corporate income tax, corporations are
subject to an alternative minimum tax liability to the extent
alternative minimum tax exceeds regular tax. The Company will record
an alternative minimum tax liability in the year that events and
transactions create an alternative minimum tax which is probable of
being paid and can be reasonably estimated by the Company. As of
December 31, 1997, the Company has estimated that it has net
operating loss ("NOL") carry forwards for tax purposes of
approximately $64.9 million which if not utilized, expire in the
years 2001 through 2013. In the event that current or future 5%
shareholders (as defined by the Internal Revenue Code) acquire or
dispose of shares, over a defined time period, representing in the
aggregate 50% or more of the Company's outstanding shares, a
limitation on the use of NOL carry forwards will occur. The Company
has also estimated that it has approximately $101.3 million in
suspended passive activity losses ("PALs") which may be available to
offset future passive and active income. In December 1997 the
Company's Board of Directors accelerated the scheduled termination
date of transfer restrictions with respect to the sale of the
Company's stock. This provision was originally included in the
Company's Restated Articles of Incorporation (which, in turn, were
included within the Plan of Reorganization) to prevent the potential
for an ownership change that would otherwise result in a limitation
in the Company's ability to utilize net operating and passive loss
carryforwards. As contemplated under the Restated Articles of
Incorporation, the Board determined that the transfer restriction
was no longer necessary. The Company's determination of its NOLs,
PALs, and other tax attributes, as well as its ability to utilize
them to reduce taxable income is subject to uncertainties. Although
the Company believes that its determinations concerning its tax
attributes are supportable under applicable tax laws, there can be
no assurance that taxing authorities, upon examination will not
argue to the contrary.
F-28
<PAGE>
33
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: NONRECURRING COSTS
In 1997, the Company incurred Nonrecurring Costs totaling
approximately $827,000. Approximately $400,000 of the charge was due
to costs related to the elimination of overlapping functions between
Lexford Properties and the Company's previous management services
operations. In the second half of 1997 the Company recorded a charge
of approximately $427,000 primarily related to costs incurred for
the Form S-11 filing for the proposed spinoff of the Company's
Rental Properties. The Company has withdrawn this filing as it has
determined to maintain its ownership interests in the Rental
Properties and seek to qualify as a REIT under the Internal Revenue
Code (SEE NOTE 14). At December 31, 1997, the Company had deferred
REIT organization costs of approximately $808,000. These costs are
included in Prepaids and Other on the Consolidated Balance Sheet.
In 1995, the Company implemented a corporate restructuring plan and
initiated further restructuring in 1996. The Company recorded a
charge of approximately $243,000 and $1.5 million in 1996 and 1995,
respectively, related to the costs of the restructuring, principally
severance and separation costs. Approximately 26 employees were
released as a result of the restructurings in 1995 and 1996. In 1996
the Company paid $1.7 million of costs related to the 1995 and 1996
restructuring.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Office and Operating Leases
The Company leases corporate office space under an operating lease
which expired in October, 1997 and was extended on a month to month
basis beginning November 1, 1997. The Company has an option for five
additional terms of three years each. The Company is responsible for
the payment of insurance, real estate taxes and operating expenses
of the leased facility (SEE NOTE 12). The Company entered into an
operating lease for its executive offices which expires December,
2004. Lexford Properties leases office space in four cities to
support its third party management operations. Annual rental
requirements are approximately $463,000 in 1998, $282,000 in 1999,
$109,000 in 2000, $102,000 in 2001, $108,000 in 2002 and $235,000
thereafter. The Company also leases various equipment and software,
typically over five years, and management offices under operating
leases which generally have remaining terms of less than one year.
The equipment and software rental requirements are approximately
$322,000 in 1998, $231,000 in 1999, $13,200 in 2000 and $12,000 in
2001. Rent expense for the years ended December 31, 1997, 1996, and
1995, was approximately $1,122,000, $749,000, and $512,000,
respectively.
Mortgage Notes
In December 1997, the Company entered into a mortgage purchase
agreement with a financial institution wherein the lender agreed to
purchase outstanding mortgage notes with a balance of $4.8 million
on certain Unconsolidated Partnerships. As part of the agreement,
the financial institution has a put option whereby the Company has
agreed to purchase the mortgage notes at a discounted amount of $3.6
million.
F-29
<PAGE>
34
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 10: COMMITMENTS AND CONTINGENCIES (cont'd)
Litigation
The Company is involved in various legal actions arising out of the
normal course of its business. Management of the Company, based upon
knowledge of facts and the advice of counsel, believes potential
exposure to loss from legal actions should not result in a material
adverse effect on the Company's consolidated financial position.
NOTE 11: RETIREMENT PLAN
The Company maintains the Cardinal Realty Services, Inc. Savings
Plan (the "Savings Plan") under section 401(k) of the Internal
Revenue Code (the "Code"), to which participants may contribute a
percentage of their base pay and overtime earnings up to limits
established by the Code. The Savings Plan was amended and restated,
effective July 1, 1993, to (i) provide for discretionary matching
contributions by the Company, (ii) provide for immediate vesting in
all Company contributions and (iii) allow loans to participants.
Effective December 31, 1995 the Savings Plan was amended to exclude
highly compensated employees. Effective July 1, 1996, the Savings
Plan was amended to include employees at the Properties as
participants, increase the Company match and to allow highly
compensated employees to participate in the Plan. The Company
contribution amounts to 1% of wages for every 2% of wages
contributed by a participant up to a maximum of the lesser of 3% of
wages or $2,000 per year. In 1997, 1996, and 1995, the Company's
cash contributions amounted to approximately $126,400, $134,000, and
$92,000, respectively. The Company's cash contributions are then
invested in Company stock held by the Savings Plan Trustee.
NOTE 12: RELATED PARTY TRANSACTIONS
The Company is the sole beneficial equity owner of all Rental
Properties and is a general partner in the Unconsolidated
Partnerships. The Company also serves as the management company for
substantially all of the Properties and provides various ancillary
services, including a Preferred Resource purchasing program to the
Properties and renter's insurance to residents. The Company's fee
based revenue, and interest income are derived primarily from
Properties affiliated with the Company. Approximately $1.9 million
and $4.1 million of the Company's accounts receivable are due from
the Unconsolidated Partnerships as of December 31, 1997, and 1996,
respectively.
The Company advanced, net of amounts repaid, to Unconsolidated
Partnerships approximately $992,000, $2.6 million, and $8.6 million
in 1997, 1996 and 1995, respectively. The majority of the advances
relate to operating needs and advances to facilitate the refinancing
of the mortgages on the Properties as described in Note 6. Effective
October 1, 1995, in conjunction with the favorable terms the Company
achieved on its credit facility, the interest rate on these advances
was revised to prime plus one percent from principally prime plus
six percent. The interest rate on advances may be adjusted in the
future based on prevailing market rates.
F-30
<PAGE>
35
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 12: RELATED PARTY TRANSACTIONS (cont'd)
An outside director of the Company is a partner in the law firm
which serves as outside general counsel to the Company. Legal fees
paid related to services provided to the Company by this law firm
were approximately $981,000 in 1997, $286,000 in 1996 and $255,000
in 1995. The Company had accrued expenses of approximately $176,000
and $105,000 to this law firm at December 31, 1997 and 1996,
respectively. In addition, legal fees paid related to debt
restructuring and refinancing services provided by this law firm to
the Rental Properties and Unconsolidated Partnerships were
approximately $99,000 in 1997, $523,000 in 1996, and $739,400 in
1995.
Another outside director of the Company has an ownership interest in
the lessor of the office facility that houses the Company's
operations (SEE NOTE 10).
F-31
<PAGE>
36
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 13: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Revenues
1997 $ 16,830,272 $ 17,524,626 $ 18,231,947 $ 17,780,646
1996 $ 14,689,011 $ 14,711,256 $ 15,709,041 $ 20,191,682
Income/(loss) before Extraordinary Item
1997 $ 1,276,038 $ 1,655,497 $ 1,840,975 $ (1,386,398)
1996 $ 1,091,350 $ 757,284 $ 887,034 $ 2,634,562
Extraordinary Item, net of Income Taxes
1997 $ 0 $ (180,534) $ 0 $ 0
1996 $ 0 $ 0 $ 0 $ (1,614,356)
Net Income/(Loss)
1997 $ 1,276,038 $ 1,474,963 $ 1,840,975 $ (1,386,398)
1996 $ 1,091,350 $ 757,284 $ 887,034 $ 1,020,206
Earnings per share:<F1>
Basic
Income/(Loss) before Extraordinary Item
1997 $ 0.16 $ 0.21 $ 0.23 $ (0.16)
1996 $ 0.15 $ 0.10 $ 0.12 $ 0.34
Extraordinary Item
1997 $ 0.00 $ (0.02) $ 0.00 $ 0.00
1996 $ 0.00 $ 0.00 $ 0.00 $ (0.21)
Net Income/(Loss)
1997 $ 0.16 $ 0.19 $ 0.23 $ (0.16)
1996 $ 0.15 $ 0.10 $ 0.12 $ 0.13
Diluted
Income/(Loss) before Extraordinary Item
1997 $ 0.16 $ 0.20 $ 0.22 $ (0.16)
1996 $ 0.14 $ 0.10 $ 0.11 $ 0.32
Extraordinary Item
1997 $ 0.00 $ (0.02) $ 0.00 $ 0.00
1996 $ 0.00 $ 0.00 $ 0.00 $ (0.20)
Net Income/(Loss)
1997 $ 0.16 $ 0.18 $ 0.22 $ (0.16)
1996 $ 0.14 $ 0.10 $ 0.11 $ 0.13
<FN>
<F1> The 1996 and the first three quarters of 1997 Earnings per share
amounts have been restated to comply with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Also see Note 14 -
Subsequent Events regarding two for one stock exchange.
</FN>
</TABLE>
F-32
<PAGE>
37
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 14: SUBSEQUENT EVENTS
In December 1997, the Company announced that it would seek to
qualify and elect to be taxed as a REIT in 1998. In connection with
this decision, the Company established a new entity known as Lexford
Residential Trust (the "Trust") and in January 1998 caused the Trust
to file a Form S-4 Registration Statement with the Securities and
Exchange Commission relating to the proposed merger of the Company
with and into the Trust. The Trust expects to be taxed as a REIT. On
March 3, 1998, the shareholders of the Company approved the merger
of the Company with and into the Trust. The terms of the merger
transaction provide that each share of the Company's common stock be
canceled and converted to two common shares of beneficial interest
in the Trust. The merger became effective on March 18, 1998.
Shareholders of the Company who did not vote in favor of the merger
were entitled to exercise dissenter's rights through March 13, 1998.
As of March 18, 1998 the Company had not received notice of the
exercise of any such dissenter's rights. All share and earnings per
common share amounts disclosed in the Consolidated Financial
Statements and the notes thereto have been restated giving
retroactive effect to the two for one stock exchange.
In connection with the Company's decision to elect REIT status, the
Company initiated a plan ("the Consolidation Plan"), the purpose of
which was to minimize third party interests in the entities owning
the Unconsolidated Partnerships. As of March 3, 1998, the Company
has acquired the entire third party ownership interests in 287
Unconsolidated Partnerships (the "Consolidating Properties"). The
Company has made cash payments to former partners of the 287
Unconsolidated Partnerships totaling $21.3 million. The Company
intends to pursue the acquisition of the third party interests in
all or a substantial portion of the remaining Unconsolidated
Partnerships. The Consolidation Plan will significantly change the
financial statements of the Company. The Investments in and Advances
to Unconsolidated Partnerships of $57.1 million at December 31,
1997, and the related interest income derived from such investments
and Fee Based Income earned from managing the properties will be
almost entirely eliminated as the formerly Unconsolidated
Partnerships are consolidated in the financial statements of the
Company. In addition, upon qualification and maintaining REIT
status, the Company will no longer record a provision for income
taxes.
On March 13, 1998, the Company negotiated a settlement with the
prior shareholders of Lexford Properties whereby 300,000 of the
900,000 shares subject to forfeiture were released in exchange for
the forfeiture of the remaining 600,000 shares (see Note 1 "Lexford
Properties Acquisition"). The agreement was a result of the
Company's decision to elect REIT status which would impact the third
party management business and the ability of Lexford Properties to
achieve the profitability criteria necessary for the release of the
shares subject to forfeiture. The release of the 300,000 shares will
result in a $3.0 million charge in the first quarter of 1998.
F-33
<PAGE>
38
SCHEDULE II
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc., formerly Cardinal Realty Services, Inc.)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
-------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Balance at Beginning of Period $ 3,691,117 $ 3,414,943 $ 2,276,074
Add: Charged to Costs and Expenses:
Recovery of Allowances 0 (300,000) 0
Allowances associated with Loan Fees 0 0 291,164
Other Allowances 389,361 803,421 847,705
Less: Account Charge Offs (533,256) (227,247) 0
---------------- ------------------ -----------------
Balance at End of Period $ 3,547,222 $ 3,691,117 $ 3,414,943
================ ================== =================
</TABLE>
F-34
<PAGE>
39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SCHEDULE III
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc. formerly Cardinal Realty Services, Inc.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN B | COLUMN C | COLUMN D
- --------------------------------------------------------------------------------------------------------------------------
DESCRIPTION - | | | COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) | ENCUMBRANCES | INITIAL COST TO THE COMPANY | SUBSEQUENT TO ACQUISITION
- --------------------------------------------------------------------------------------------------------------------------
| | |
| AT | |
| AT STATED | BUILDINGS |
| CONTRACTUAL CARRYING | & | CARRYING
PROPERTY NAME ST | VALUE VALUE | LAND IMPROVEMENTS | IMPROVEMENTS COSTS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GLENVIEW AL 1,709,168 1,709,168 178,221 1,784,904 11,948 0
BEL AIRE II FL 1,184,188 435,852 81,451 287,059 7,149 0
BLUEBERRY HILL FL 761,259 761,259 63,610 362,610 38,063 0
CALIFORNIA GARDENS FL 1,160,100 582,868 96,067 521,414 11,725 0
CANTERBURY CROSSING FL 1,422,021 676,003 78,303 385,838 9,360 0
CENTRE LAKE I, II & III FL 4,889,630 4,889,630 1,210,779 3,116,732 68,104 0
FOREST GLEN FL 1,118,325 1,118,325 229,086 994,552 29,840 0
GARDEN TERRACE I FL 612,875 612,875 89,123 801,137 98,214 0
HERON POINTE FL 1,637,264 1,637,264 367,599 1,440,838 62,162 0
HIDDEN ACRES FL 1,674,287 1,674,287 388,349 1,136,083 30,846 0
HILLSIDE TRACE FL 1,088,000 1,088,000 197,277 833,232 5,764 0
HOLLY SANDS II FL 1,054,940 1,054,940 231,970 943,482 78,939 0
JEFFERSON WAY FL 1,045,792 1,045,792 116,366 1,062,590 28,688 0
JUPITER COVE I FL 1,360,455 1,133,250 219,698 805,001 9,439 0
JUPITER COVE III FL 1,434,204 1,434,204 285,929 1,026,413 8,443 0
MARK LANDING I FL 1,329,188 1,329,188 250,827 1,481,543 58,239 0
MIGUEL PLACE FL 1,493,801 1,493,801 237,234 1,125,414 14,504 0
OAK GARDENS FL 2,707,634 1,857,319 582,419 1,758,597 11,050 0
OAKWOOD VILLAGE FL 748,356 314,278 103,045 566,398 26,493 0
PELICAN POINTE I FL 1,337,084 1,337,084 221,311 1,204,527 33,502 0
PELICAN POINTE II FL 1,023,399 1,023,399 158,390 1,190,595 36,446 0
PINE BARRENS FL 1,538,535 1,538,535 302,399 1,405,048 76,590 0
RIVERS END II FL 1,161,409 1,161,409 160,894 936,779 20,100 0
SKY PINES II FL 909,906 909,906 266,498 676,283 76,635 0
SUNSET WAY I FL 1,665,024 1,665,024 621,326 1,353,585 27,225 0
SUNSET WAY II FL 2,694,057 2,131,279 649,409 1,678,049 24,364 0
THYMEWOOD II FL 1,692,441 836,509 429,480 731,592 16,512 0
WHISPERING PINES II FL 627,822 627,822 71,433 505,435 8,800 0
WINDWOOD I FL 599,612 599,612 24,569 457,382 52,283 0
COLONY WOODS II GA 1,581,032 1,581,032 273,901 1,556,452 4,509 0
GLEN ARM MANOR GA 1,200,000 1,200,000 148,679 1,274,345 68,736 0
GLENWOOD VILLAGE GA 1,518,815 887,795 156,445 1,000,148 8,820 0
HATCHERWAY GA 965,525 965,525 111,336 1,102,856 29,093 0
INDIAN LAKE I & II GA 4,557,695 4,557,695 898,265 5,262,660 33,694 0
KINGS COLONY GA 2,098,525 1,506,804 237,393 1,723,165 17,690 0
LAKESHORE I GA 1,256,570 1,256,570 45,846 995,214 36,755 0
LAUREL GLEN GA 1,730,108 1,730,108 265,974 1,627,699 50,551 0
MARSHLANDING II GA 972,993 925,655 28,851 918,445 14,918 0
MILL RUN GA 1,274,864 1,274,864 187,772 1,260,209 70,545 0
</TABLE>
F-35
<PAGE>
40
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SCHEDULE III
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc. formerly Cardinal Realty Services, Inc.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN B | COLUMN C | COLUMN D
- ----------------------------------------------------------------------------------------------------------------------------
DESCRIPTION - | | | COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) | ENCUMBRANCES | INITIAL COST TO THE COMPANY | SUBSEQUENT TO ACQUISITION
- ----------------------------------------------------------------------------------------------------------------------------
| | |
| AT | |
| AT STATED | BUILDINGS |
| CONTRACTUAL CARRYING | & | CARRYING
PROPERTY NAME ST | VALUE VALUE | LAND IMPROVEMENTS | IMPROVEMENTS COSTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RAMBLEWOOD II GA 1,870,245 1,870,245 264,381 1,906,078 12,359 0
STEWART WAY I GA 1,387,052 1,387,052 260,869 1,614,962 66,645 0
STEWART WAY II GA 1,244,267 1,244,267 215,612 1,468,190 41,638 0
VALLEYBROOK GA 1,568,241 1,568,241 129,440 1,353,762 38,062 0
WILLCREST WOODS GA 1,060,687 1,060,687 245,513 1,189,165 69,577 0
BRADFORD PLACE IL 1,173,564 883,185 215,924 719,156 9,994 0
BRUNSWICK APTS IL 1,432,000 1,432,000 53,500 1,644,920 16,323 0
HUNTER GLEN IL 1,022,337 1,022,337 256,720 1,461,719 8,529 0
CADIA COURT II IN 1,862,018 1,862,018 398,032 1,668,862 19,968 0
APPLEGATE APTS II IN 1,256,575 1,256,575 163,470 1,815,278 20,993 0
ARAGON WOODS IN 1,136,613 1,136,613 298,431 1,248,762 12,454 0
CAMBRIDGE COMMONS III IN 0 0 1,087 1,306,118 23,322 0
CHERRY GLEN I IN 1,369,733 1,369,733 203,862 1,465,002 15,084 0
CHERRY GLENN II IN 1,115,664 1,115,664 4,343 1,731,393 17,319 0
DOGWOOD GLEN I IN 1,779,466 1,779,466 248,246 1,427,201 36,170 0
ELMTREE PARK I IN 1,200,137 1,200,137 208,426 1,308,102 9,396 0
ELMTREE PARK II IN 1,040,873 1,040,873 45,751 1,107,766 9,531 0
MARABOU MILLS II IN 1,009,103 1,009,103 84,391 1,190,609 10,654 0
MARABOU MILLS III IN 1,196,481 1,196,481 75,122 1,099,183 30,972 0
MARIBOU MILLS IN 1,451,240 1,451,240 179,704 1,570,450 17,585 0
MEADOWOOD II IN 744,494 744,494 61,771 1,193,299 18,315 0
RIDGEWOOD IN 1,207,481 1,207,481 100,300 1,320,200 8,200 0
RIDGEWOOD II & III IN 1,364,345 1,364,345 100,795 1,564,956 11,831 0
ROSEWOOD COMMONS II IN 1,280,756 1,280,756 121,194 1,172,776 26,240 0
SHERBROOK IN 1,202,138 1,202,138 141,991 1,254,354 32,218 0
SPICEWOOD APT IN 1,029,011 1,029,011 90,619 1,025,442 28,571 0
WILLOWOOD II IN 1,148,500 1,148,500 149,671 1,310,162 64,383 0
CEDARGATE II KY 1,160,000 1,160,000 123,475 966,198 26,454 0
CEDARWOOD II KY 1,012,738 1,012,738 173,648 913,048 31,399 0
CEDARWOOD III KY 877,391 877,391 122,917 966,624 31,238 0
HAYFIELD PARK KY 1,603,515 1,603,515 341,799 1,680,717 52,787 0
SPRINGWOOD KY 827,693 827,693 85,723 844,029 34,466 0
CHERRY TREE APT MD 2,154,213 2,154,213 623,153 2,711,201 44,484 0
FORSYTHIA COURT II MD 2,385,060 1,786,419 283,697 1,597,543 14,337 0
MERRIFIELD MD 2,102,577 2,102,577 210,294 2,271,824 23,169 0
GARDEN COURT MI 2,173,656 2,173,656 127,573 2,247,404 18,534 0
HEATHMOORE I MI 1,590,427 1,590,427 128,605 1,329,672 25,865 0
LAUREL BAY MI 903,500 903,500 164,159 1,160,480 8,953 0
NEWBERRY II MI 1,295,979 733,305 91,315 715,532 5,843 0
</TABLE>
F-36
<PAGE>
41
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SCHEDULE III
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc. formerly Cardinal Realty Services, Inc.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN B | COLUMN C | COLUMN D
- ----------------------------------------------------------------------------------------------------------------------------
DESCRIPTION - | | | COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) | ENCUMBRANCES | INITIAL COST TO THE COMPANY | SUBSEQUENT TO ACQUISITION
- ----------------------------------------------------------------------------------------------------------------------------
| | |
| AT | |
| AT STATED | BUILDINGS |
| CONTRACTUAL CARRYING | & | CARRYING
PROPERTY NAME ST | VALUE VALUE | LAND IMPROVEMENTS | IMPROVEMENTS COSTS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AMBERWOOD OH 902,458 902,458 171,878 1,003,228 10,388 0
AMESBURY I OH 1,248,882 1,248,882 136,179 1,133,012 25,711 0
AMESBURY II OH 1,314,616 1,314,616 168,000 1,621,000 29,660 0
ANNHURST II OH 1,106,590 1,182,406 123,397 1,006,847 43,349 0
ANNHURST III OH 935,760 935,760 70,246 1,003,822 50,596 0
APPLERIDGE I OH 1,053,897 1,053,897 214,233 912,594 32,571 0
ASHFORD HILLS OH 1,400,000 1,400,000 359,522 1,260,948 50,205 0
CLEARWATER APTS OH 1,053,902 1,053,902 132,478 1,045,131 33,881 0
DARTMOUTH PLACE II OH 878,578 878,578 114,393 1,135,027 18,752 0
FOXHAVEN OH 1,871,766 1,871,766 403,075 1,657,128 25,040 0
HARVEST GROVE I OH 1,375,970 1,375,970 225,001 1,276,072 4,741 0
HARVEST GROVE II OH 1,110,103 1,110,103 251,000 1,201,600 16,167 0
LINDENDALE APTS OH 1,422,218 1,422,218 188,724 1,717,434 27,436 0
MEADOWOOD OH 472,439 472,439 50,520 573,536 9,593 0
MONTROSE SQUARE OH 1,778,276 1,778,276 568,914 2,184,937 25,587 0
PICKERINGTON MEADOWS OH 1,177,725 1,177,725 150,000 1,200,000 12,719 0
RED DEER II OH 1,234,575 1,234,575 235,173 1,474,820 10,825 0
RIVER GLEN I OH 1,069,821 1,069,821 146,287 1,287,027 10,341 0
RIVER GLEN II OH 1,175,707 1,175,707 178,568 1,230,268 3,935 0
RIVERVIEW ESTATES OH 1,374,578 1,374,578 74,073 1,609,026 60,626 0
SUFFOLK GROVE II OH 1,082,115 1,082,115 154,263 1,248,211 14,648 0
THE WILLOWS I OH 589,511 589,511 157,611 761,576 28,428 0
THE WILLOWS III OH 877,710 877,710 44,602 871,216 11,338 0
WILLOWOOD II OH 944,544 944,544 35,657 622,170 9,183 0
WINTHROP COURT II OH 754,613 754,613 145,906 825,115 17,310 0
SHERBROOK PA 1,361,339 1,361,339 355,188 1,492,285 21,350 0
WOODLANDS II PA 1,168,417 1,168,417 118,447 1,346,599 20,173 0
RAVENWOOD SC 1,672,542 1,672,542 169,601 1,507,589 7,532 0
SPRINGBROOK SC 1,730,569 1,730,569 120,467 1,762,353 51,993 0
WILLOW LAKE SC 2,084,584 2,084,584 188,704 1,738,232 8,820 0
CEDARHILL TN 1,476,915 1,476,915 235,269 1,331,238 43,030 0
WALKER PLACE TX 1,183,000 1,183,000 269,890 1,196,059 0 0
BRUNSWICK II WV 1,324,332 1,324,332 104,000 1,696,000 18,094 0
---------------------------------------------------------- -------------------------------
TOTALS $150,284,725 $142,636,874 $23,124,313 $143,768,544 $3,064,622 $0
========================================================== ===============================
</TABLE>
F-37
<PAGE>
42
SCHEDULE III
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc. formerly Cardinal Realty Services, Inc.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN E | COLUMN F | COLUMN G |COLUMN H | COLUMN I
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | |
| | | | |
| GROSS AMOUNT AT WHICH CARRIED AT | | | |
DESCRIPTION - | CLOSE OF PERIOD, DECEMBER 31, 1997 | | | |
(ALL GARDEN APARTMENTS) | NOTES (1) AND (2) | | | | LIFE ON
- -------------------------------|----------------------------------------| | DATE | | WHICH
| | BUILDINGS & | | ACCUMULATED | OF | DATE | DEPRECIATION
PROPERTY NAME ST | LAND | IMPROVEMENTS | TOTAL | DEPRECIATION | CONSTRUCTION| ACQUIRED| IS COMPUTED
- -------------------------------|--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLENVIEW AL 178,221 1,608,261 1,786,482 105,648 8/1/86 N/A 31
BEL AIRE II FL 81,451 402,530 483,981 27,238 1/1/86 N/A 30
BLUEBERRY HILL FL 63,610 400,114 463,724 25,320 12/1/86 N/A 31
CALIFORNIA GARDENS FL 96,067 407,896 503,963 26,405 7/1/87 N/A 32
CANTERBURY CROSSING FL 78,303 555,560 633,863 40,298 12/1/83 N/A 28
CENTRE LAKE I, II & III FL 1,210,779 3,171,034 4,381,813 212,759 6/1/86 N/A 30
FOREST GLEN FL 229,086 932,862 1,161,948 63,594 1/1/86 N/A 30
GARDEN TERRACE I FL 89,123 898,117 987,240 72,068 9/1/81 N/A 26
HERON POINTE FL 367,599 1,459,693 1,827,292 99,632 1/1/86 N/A 30
HIDDEN ACRES FL 388,349 467,556 855,905 31,473 1/1/87 N/A 31
HILLSIDE TRACE FL 197,277 837,712 1,034,989 53,029 9/1/87 N/A 32
HOLLY SANDS II FL 231,970 1,001,290 1,233,260 73,551 6/1/86 N/A 30
JEFFERSON WAY FL 116,366 1,069,855 1,186,221 67,887 8/1/87 N/A 32
JUPITER COVE I FL 219,698 887,389 1,107,087 56,580 9/1/87 N/A 32
JUPITER COVE III FL 285,929 1,033,274 1,319,203 65,626 9/1/87 N/A 32
MARK LANDING I FL 250,827 1,537,499 1,788,326 107,681 11/1/87 N/A 32
MIGUEL PLACE FL 237,234 1,098,108 1,335,342 69,936 10/1/87 N/A 32
OAK GARDENS FL 582,419 1,260,153 1,842,572 79,905 1/1/88 N/A 32
OAKWOOD VILLAGE FL 103,045 236,593 339,638 16,522 1/1/86 N/A 30
PELICAN POINTE I FL 221,311 1,236,173 1,457,484 78,872 11/1/87 N/A 32
PELICAN POINTE II FL 158,390 1,148,174 1,306,564 73,232 11/1/87 N/A 32
PINE BARRENS FL 302,399 1,479,473 1,781,872 101,261 6/1/86 N/A 30
RIVERS END II FL 160,894 928,416 1,089,310 62,320 1/1/86 N/A 30
SKY PINES II FL 266,498 751,876 1,018,374 58,412 6/1/86 N/A 30
SUNSET WAY I FL 621,326 1,378,724 2,000,050 88,703 8/1/87 N/A 32
SUNSET WAY II FL 649,409 1,499,675 2,149,084 93,991 4/27/88 N/A 32
THYMEWOOD II FL 429,480 379,444 808,924 26,709 1/1/86 N/A 30
WHISPERING PINES II FL 71,433 513,456 584,889 34,589 3/31/86 N/A 30
WINDWOOD I FL 24,569 508,960 533,529 32,352 5/1/88 N/A 32
COLONY WOODS II GA 273,901 1,506,624 1,780,525 93,704 3/28/88 N/A 32
GLEN ARM MANOR GA 148,679 1,207,004 1,355,683 93,390 1/1/86 N/A 30
GLENWOOD VILLAGE GA 156,445 665,292 821,737 43,496 12/1/86 N/A 31
HATCHERWAY GA 111,336 1,099,966 1,211,302 76,588 1/1/86 N/A 30
INDIAN LAKE I & II GA 898,265 4,907,355 5,805,620 312,759 8/11/87 N/A 32
KINGS COLONY GA 237,393 1,244,186 1,481,579 78,687 11/15/87 N/A 32
LAKESHORE I GA 45,846 930,784 976,630 62,944 6/20/86 N/A 31
LAUREL GLEN GA 265,974 1,675,742 1,941,716 111,052 4/4/86 N/A 30
MARSHLANDING II GA 28,851 894,596 923,447 58,396 12/31/86 N/A 31
MILL RUN GA 187,772 1,328,812 1,516,584 93,353 4/14/86 N/A 30
</TABLE>
F-38
<PAGE>
43
<TABLE>
<CAPTION>
SCHEDULE III
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc. formerly Cardinal Realty Services, Inc.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN E | COLUMN F | COLUMN G | COLUMN H | COLUMN I
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | |
| | | | |
| GROSS AMOUNT AT WHICH CARRIED AT | | | |
DESCRIPTION - | CLOSE OF PERIOD, DECEMBER 31, 1997 | | | |
(ALL GARDEN APARTMENTS) | NOTES (1) AND (2) | | | | LIFE ON
- --------------------------------|----------------------------------------| | DATE | | WHICH
| | BUILDINGS & | | ACCUMULATED | OF | DATE | DEPRECIATION
PROPERTY NAME ST | LAND | IMPROVEMENTS | TOTAL | DEPRECIATION | CONSTRUCTION| ACQUIRED| IS COMPUTED
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RAMBLEWOOD II GA 264,381 1,775,754 2,040,135 115,118 10/1/86 N/A 31
STEWART WAY I GA 260,869 1,667,283 1,928,152 123,098 1/1/86 N/A 30
STEWART WAY II GA 215,612 1,507,566 1,723,178 103,151 12/1/86 N/A 31
VALLEYBROOK GA 129,440 1,389,738 1,519,178 94,215 10/15/86 N/A 31
WILLCREST WOODS GA 245,513 1,225,269 1,470,782 90,474 12/31/86 N/A 31
BRADFORD PLACE IL 215,924 625,791 841,715 41,522 7/23/86 N/A 31
BRUNSWICK APTS IL 53,500 1,623,865 1,677,365 108,240 4/1/86 N/A 30
HUNTER GLEN IL 256,720 1,322,878 1,579,598 85,599 3/1/87 N/A 31
ACADIA COURT II IN 398,032 1,620,669 2,018,701 107,109 6/6/86 N/A 30
APPLEGATE APTS II IN 163,470 1,833,474 1,996,944 119,714 6/1/87 N/A 31
ARAGON WOODS IN 298,431 1,183,847 1,482,278 76,700 12/26/86 N/A 31
CAMBRIDGE COMMONS III IN 1,087 1,195,015 1,196,102 73,622 1/29/88 N/A 32
CHERRY GLEN I IN 203,862 1,465,277 1,669,139 96,609 7/10/86 N/A 31
CHERRY GLENN II IN 4,343 1,698,391 1,702,734 109,846 4/1/87 N/A 31
DOGWOOD GLEN I IN 248,246 1,320,813 1,569,059 85,730 7/18/86 N/A 31
ELMTREE PARK I IN 208,426 1,181,214 1,389,640 77,970 6/8/86 N/A 30
ELMTREE PARK II IN 45,751 1,115,030 1,160,781 71,553 5/1/87 N/A 31
MARABOU MILLS II IN 84,391 1,153,343 1,237,734 71,073 N/A 10/29/93 33
MARABOU MILLS III IN 75,122 1,128,403 1,203,525 71,606 12/1/87 N/A 32
MARIBOU MILLS IN 179,704 1,585,615 1,765,319 108,653 6/23/86 N/A 31
MEADOWOOD II IN 61,771 1,058,489 1,120,260 71,408 5/30/86 N/A 30
RIDGEWOOD IN 100,300 1,328,399 1,428,699 63,215 N/A 8/1/96 30
RIDGEWOOD II & III IN 100,795 1,427,169 1,527,964 96,160 3/1/86 N/A 30
ROSEWOOD COMMONS II IN 121,194 1,197,210 1,318,404 77,135 6/1/87 N/A 31
SHERBROOK IN 141,991 1,233,871 1,375,862 81,970 6/16/86 N/A 31
SPICEWOOD APT IN 90,619 1,009,511 1,100,130 68,058 3/16/86 N/A 30
WILLOWOOD II IN 149,671 1,264,887 1,414,558 80,911 6/1/87 N/A 31
CEDARGATE II KY 123,475 893,838 1,017,313 59,175 6/1/86 N/A 30
CEDARWOOD II KY 173,648 913,492 1,087,140 61,848 1/1/86 N/A 30
CEDARWOOD III KY 122,917 996,373 1,119,290 70,068 5/20/86 N/A 30
HAYFIELD PARK KY 341,799 1,558,181 1,899,980 103,526 7/17/86 N/A 31
SPRINGWOOD KY 85,723 877,194 962,917 60,728 1/1/86 N/A 30
CHERRY TREE APT MD 623,153 2,470,168 3,093,321 161,679 9/1/86 N/A 31
FORSYTHIA COURT II MD 283,697 1,484,064 1,767,761 94,891 6/1/87 N/A 31
MERRIFIELD MD 210,294 2,219,004 2,429,298 139,664 1/11/88 N/A 32
GARDEN COURT MI 127,573 2,177,868 2,305,441 137,211 4/22/88 N/A 32
HEATHMOORE I MI 128,605 1,216,286 1,344,891 80,094 7/31/86 N/A 31
LAUREL BAY MI 164,159 1,079,514 1,243,673 76,263 10/1/89 N/A 34
NEWBERRY II MI 91,315 631,930 723,245 41,777 12/26/86 N/A 31
</TABLE>
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<PAGE>
44
<TABLE>
<CAPTION>
SCHEDULE III
LEXFORD, INC. AND SUBSIDIARIES
(Lexford, Inc. formerly Cardinal Realty Services, Inc.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN E | COLUMN F | COLUMN G |COLUMN H | COLUMN I
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | |
| | | | |
| GROSS AMOUNT AT WHICH CARRIED AT | | | |
DESCRIPTION - | CLOSE OF PERIOD, DECEMBER 31, 1997 | | | |
(ALL GARDEN APARTMENTS) | NOTES (1) AND (2) | | | | LIFE ON
- -------------------------------|----------------------------------------| | DATE | | WHICH
| | BUILDINGS & | | ACCUMULATED | OF | DATE | DEPRECIATION
PROPERTY NAME ST | LAND | IMPROVEMENTS | TOTAL | DEPRECIATION | CONSTRUCTION| ACQUIRED| IS COMPUTED
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMBERWOOD OH 171,878 1,012,070 1,183,948 64,544 10/1/87 N/A 32
AMESBURY I OH 136,179 1,043,969 1,180,148 72,912 2/17/86 N/A 30
AMESBURY II OH 168,000 1,648,162 1,816,162 112,361 N/A 09/26/95 30
ANNHURST II OH 123,397 1,171,504 1,294,901 75,772 7/1/86 N/A 31
ANNHURST III OH 70,246 1,028,853 1,099,099 62,381 5/5/88 N/A 32
APPLERIDGE I OH 214,233 742,825 957,058 52,819 1/1/87 N/A 28
ASHFORD HILLS OH 359,522 975,907 1,335,429 65,009 6/23/86 N/A 31
CLEARWATER APTS OH 132,478 986,621 1,119,099 68,625 11/1/86 N/A 31
DARTMOUTH PLACE II OH 114,393 1,097,803 1,212,196 73,083 7/18/86 N/A 31
FOXHAVEN OH 403,075 1,588,159 1,991,234 106,636 8/18/86 N/A 31
HARVEST GROVE I OH 225,001 1,162,235 1,387,236 76,172 9/8/86 N/A 31
HARVEST GROVE II OH 251,000 1,215,915 1,466,915 81,044 N/A 09/26/95 30
LINDENDALE APTS OH 188,724 1,660,305 1,849,029 107,245 3/1/87 N/A 31
MEADOWOOD OH 50,520 582,245 632,765 39,060 1/1/86 N/A 30
MONTROSE SQUARE OH 568,914 2,185,903 2,754,817 146,705 1/1/87 N/A 30
PICKERINGTON MEADOWS OH 150,000 1,210,870 1,360,870 79,996 N/A 03/29/95 30
RED DEER II OH 235,173 1,391,719 1,626,892 89,220 8/1/87 N/A 32
RIVER GLEN I OH 146,287 1,255,066 1,401,353 81,434 4/1/87 N/A 31
RIVER GLEN II OH 178,568 1,200,194 1,378,762 75,784 11/1/87 N/A 32
RIVERVIEW ESTATES OH 74,073 1,667,173 1,741,246 122,226 1/1/87 N/A 28
SUFFOLK GROVE II OH 154,263 1,203,575 1,357,838 77,257 6/1/87 N/A 31
THE WILLOWS I OH 157,611 768,235 925,846 59,083 1/1/87 N/A 28
THE WILLOWS III OH 44,602 845,236 889,838 55,820 7/1/87 N/A 32
WILLOWOOD II OH 35,657 605,790 641,447 39,875 8/1/86 N/A 31
WINTHROP COURT II OH 145,906 840,546 986,452 56,194 2/25/86 N/A 30
SHERBROOK PA 355,188 1,448,955 1,804,143 94,750 12/20/86 N/A 31
WOODLANDS II PA 118,447 1,302,332 1,420,779 84,609 3/1/87 N/A 31
RAVENWOOD SC 169,601 1,512,798 1,682,399 96,793 5/7/87 N/A 31
SPRINGBROOK SC 120,467 1,744,503 1,864,970 123,541 6/13/86 N/A 30
WILLOW LAKE SC 188,704 1,763,237 1,951,941 114,007 12/12/86 N/A 31
CEDARHILL TN 235,269 1,268,996 1,504,265 82,286 5/30/86 N/A 30
WALKER PLACE TX 269,890 1,194,215 1,464,105 74,399 1/25/88 N/A 32
BRUNSWICK II WV 104,000 1,712,076 1,816,076 112,799 N/A 09/26/95 30
-------------------------------------------------------
TOTALS $23,124,313 $138,244,903 $161,369,216 $9,151,786
=======================================================
</TABLE>
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<PAGE>
45
<TABLE>
<CAPTION>
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO SCHEDULE III
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Note (1) Schedule III Reconciliation: 1997 1996 1995
------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Balance as of beginning of year $ 161,569,924 $ 164,334,055 $ 166,430,698 (4)
Additions during the year:
Acquisitions of Property 0 1,420,501 6,391,600
Costs Capitalized 2,355,122 702,056 0
Deductions during the year:
Disposals through foreclosure 0 (4,886,688) (3,380,382)
Disposals through sales (2,555,830) 0 0
Other (4) 0 0 (937,482)
Application of Income from the Effective
Date through December 31, 1995 upon full
consolidation from "Held for Sale"
classification 0 0 (4,170,379)
------------------- ------------------ -----------------
Balance at close of year: 161,369,216 161,569,924 164,334,055
------------------- ------------------ -----------------
Other:
Furniture and Fixtures 0 0 3,368,617
Application of Income from the Effective
Date through December 31, 1995 upon full
consolidation from "Held for Sale"
classification 0 0 (3,368,617)
------------------- ------------------ -----------------
Balance, Rental Properties $ 161,369,216 $ 161,569,924 $ 164,334,055
December 31, 1997, 1996, 1995, respectively =================== ================== =================
<FN>
Note (2) Tax basis of assets:
The tax basis for federal income tax purposes in Rental Properties
was approximately $106,963,000 at December 31, 1997.
Note (3) Depreciation:
No depreciation has been provided for the period September 11,
1992 (Effective Date) to December 31, 1995 as the assets were held
for sale (SEE NOTES 1 AND 2 TO CONSOLIDATED FINANCIAL STATEMENTS).
Note (4) Correction of interest recorded in prior years; such interest
was capitalized during the period the Rental Properties were
classified as Held for Sale and therefore has no impact on equity.
</FN>
</TABLE>
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