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SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PERSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13951
------------------------
LEXFORD RESIDENTIAL TRUST
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 31-4427382
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
41 SOUTH HIGH STREET, SUITE 2410
COLUMBUS, OHIO 43215
(Address of Principal Executive Offices including Zip Code)
(614) 242-3850
(Registrant's Telephone Number, including Area Code)
-----------------------------
Indicate by check X whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of July 30, 1998 there were 9,499,675 common shares of beneficial interest
issued and outstanding.
Exhibit Index on page 27
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<TABLE>
LEXFORD RESIDENTIAL TRUST
INDEX
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1998
(Unaudited) and December 31, 1997 (Audited) 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 (Unaudited) 6 - 7
Notes to Consolidated Financial Statements 8 - 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17 - 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27 - 28
Signatures 28
</TABLE>
2
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<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 (UNAUDITED) AND
DECEMBER 31, 1997 (AUDITED)
<CAPTION>
June 30, December 31,
1998 1997
------------------------------
<S> <C> <C>
ASSETS
Rental Properties (Note 2):
Land ........................................................................ $ 59,926,288 $ 23,124,313
Buildings, Improvements and Fixtures ........................................ 536,282,499 138,244,903
------------ ------------
596,208,787 161,369,216
Accumulated Depreciation .................................................... (18,013,114) (9,151,786)
------------ ------------
578,195,673 152,217,430
Investments in and Advances to Unconsolidated Partnerships, net of an allowance
of $1.6 and $2.6 million at June 30, 1998 and December 31,1997, Respectively
(Note 1) ................................................................... 12,589,958 57,111,374
Cash (Note 1) .................................................................. 145,924 2,568,890
Accounts Receivable, Affiliates (net of an allowance of $428,534 and $941,521 at
June 30, 1998 and December 31, 1997, Respectively), Residents and Other
(Note 4) ................................................................... 2,712,477 4,898,993
Furniture, Fixtures and Other, Net ............................................. 2,023,079 1,719,521
Funds Held in Escrow (Note 1) .................................................. 24,496,562 11,887,936
Intangible Assets (Note 1) ..................................................... 6,645,839 9,200,531
Prepaids and Other (Note 1) .................................................... 6,915,023 1,992,921
------------ ------------
$633,724,535 $241,597,596
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and Revolving/Term Debt
Non Recourse Mortgages (Note 3) ............................................. $501,479,672 $142,636,874
Revolving/Term Debt ......................................................... 27,910,418 7,361,682
------------ ------------
529,390,090 149,998,556
------------ ------------
Accounts Payable ............................................................... 522,613 1,287,753
Accrued Interest, Real Estate and Other Taxes .................................. 12,505,998 3,719,625
Other Accrued Expenses ......................................................... 7,917,861 8,241,526
Other Liabilities .............................................................. 8,208,720 3,503,640
Deferred Compensation (Note 1) ................................................. 10,697,149 0
------------ ------------
Total Liabilities ........................................................... 569,242,431 166,751,100
------------ ------------
Shareholders' Equity (Note 1):
Preferred Shares, $.01 par value, 5,000,000 Shares Authorized, Unissued .... 0 0
Common Shares, $.01 par value, 50,000,000 Shares Authorized, 9,374,131
and 8,493,648 Shares Issued and Outstanding, at June 30, 1998 and
December 31,1997, Respectively .......................................... 93,741 84,936
Additional Paid-in Capital ..................................................... 63,968,559 54,137,777
Retained Earnings .............................................................. 14,803,746 20,623,783
Less Cost of Treasury Shares (Note 1) .......................................... (14,383,942) 0
------------ ------------
64,482,104 74,846,496
------------ ------------
$633,724,535 $241,597,596
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental and Other Property Revenues ............ $37,094,293 $10,441,946 $62,788,092 $20,628,978
Fee Based ..................................... 829,367 4,039,502 3,161,036 8,082,757
Income from Unconsolidated Partnerships ....... 462,975 2,543,987 1,635,614 5,146,242
----------- ----------- ----------- -----------
38,386,635 17,025,435 67,584,742 33,857,977
Expenses:
Property Operating and Maintenance ............ 11,806,757 3,603,660 20,112,555 7,001,311
Real Estate Taxes and Insurance ............... 3,012,712 1,000,068 5,097,774 1,983,285
Property Management ........................... 2,838,186 3,903,743 6,761,523 7,958,222
Administration ................................ 1,535,758 1,322,969 3,050,179 2,364,687
Performance Equity Plan (Note 1) .............. 829,500 -- 829,500 --
Non-recurring Costs (Note 1) .................. -- -- 1,808,181 250,000
Interest-Non Recourse Mortgages ............... 11,221,870 3,489,441 19,109,261 6,936,527
Interest-Revolving/Term Debt .................. 419,074 137,395 580,470 307,324
Depreciation and Amortization ................. 5,815,158 1,475,372 10,005,249 2,940,442
Loss on Sale of Third Party Management Business
(Note 1) ...................................... -- -- 6,300,000 --
----------- ----------- ----------- -----------
37,479,015 14,932,648 73,654,692 29,741,798
----------- ----------- ----------- -----------
Income/(Loss) Before Gain on Disposal of Assets and
Income Taxes ...................................... 907,620 2,092,787 (6,069,950) 4,116,179
Provision for Income Taxes (Note 1):
Credited to Additional Paid-in Capital ........ -- (958,200) -- (1,674,000)
Current ....................................... -- (100,000) -- (200,000)
Gain on Disposal of Assets - Net .................. 160,546 620,910 249,913 689,356
----------- ----------- ----------- -----------
Income/(Loss) Before Extraordinary Item ........... 1,068,166 1,655,497 (5,820,037) 2,931,535
Extraordinary Loss, Net of Income
Tax Benefit of $115,000 (Note 3) .............. -- (180,534) -- (180,534)
----------- ----------- ----------- -----------
Net Income/(Loss) ................................. $ 1,068,166 $ 1,474,963 $(5,820,037) $ 2,751,001
=========== =========== =========== ===========
Basic Earnings Per Share:
Net Income/(Loss) .............................. $ .12 $ .19 $ (.66) $ .35
=========== =========== =========== ===========
Diluted Earnings Per Share:
Net Income/(Loss) ............................. $ .11 $ .18 $ (.66) $ .34
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS
ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Common Shares
------------------- Less Cost of
Additional Retained Treasury
Shares Amount Paid-in Capital Earnings Shares Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 8,493,648 $84,936 $54,137,777 $20,623,783 $ 0 $74,846,496
Adjust for unvested shares
held in the Rabbi Trust
(Note 1) 311,110 3,111 4,513,082 (4,516,193) 0
Deferred Compensation
liability for vested
shares held in the Rabbi
Trust (Note 1) 107,600 1,076 1,487,760 (9,867,749) (8,378,913)
Contingent shares issued
in connection with Lexford
Properties, Inc.
acquisition released in
exchange for forfeiture of
600,000 unvested shares
(Note 1) 300,000 3,000 2,997,000 3,000,000
Exercise of options under
non-qualified stock option
plan 158,237 1,582 763,284 764,866
Trustee Restricted Stock
Plan shares (Note 1) 3,536 36 69,656 69,692
Net Loss for the period (5,820,037) (5,820,037)
--------- ------- ----------- ----------- ------------ -----------
Balance, June 30, 1998 9,374,131 $93,741 $63,968,559 $14,803,746 $(14,383,942) $64,482,104
========= ======= =========== =========== ============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<CAPTION>
Six Months Ended June 30,
1998 1997
-----------------------------
<S> <C> <C>
Cash Flows provided by/(used in) Operating activities:
Net Income/(Loss) .................................................................. $ (5,820,037) $ 2,751,001
Adjustments to reconcile Net Income/(Loss) to Net Cash
provided by Operating activities:
Depreciation ................................................................... 9,167,307 2,557,326
Amortization ................................................................... 837,942 383,116
Loss on Sale of Third Party Management Business ................................ 6,300,000 --
Provision for Losses on Accounts Receivable .................................... 1,086,756 68,082
Loss on Debt Restructuring ..................................................... -- 295,534
Income from Disposal of Assets ................................................. (249,914) (689,356)
Provision for Income Taxes Credited to Additional Paid-In Capital .............. -- 1,559,000
Share Compensation Credited to Additional Paid-In Capital and Common Shares .... 1,558,426 748,766
Changes in Operating Assets and Liabilities:
Investments in and Advances to Unconsolidated Partnerships .................. 541,260 1,008,242
Accounts Receivable and Other Assets ........................................ (305,135) 3,666,393
Accounts Payable and Other Liabilities ...................................... 200,231 (3,059,888)
------------ -----------
Net Cash provided by Operating activities ............................................. 13,316,836 9,288,216
------------ -----------
Cash Flows provided by/(used in) Investing activities:
Proceeds from Sale of Assets ..................................................... 277,626 726,237
Capital Expenditures ............................................................. (609,050) (263,532)
Repayment from Unconsolidated Partnerships ....................................... 29,209 48,330
Investments in Unconsolidated Partnerships and Other ............................. (3,411,612) (1,212,881)
Purchase of 324 Unconsolidated Partnerships, Net of Cash Acquired ................ (25,506,117) --
Capital Expenditures - Real Estate ............................................... (3,858,640) (373,273)
------------ -----------
Net Cash (used in) Investing activities ............................................... (33,078,584) (1,075,119)
------------ -----------
Cash Flows provided by/(used in) Financing activities:
Proceeds from the exercise of Stock Options ...................................... 764,866 17,541
Proceeds from Revolving/Term Debt ................................................ 21,235,882 --
Principal Payments on Revolving/Term Debt and Other .............................. (687,146) (7,294,888)
Proceeds from Mortgage Debt ...................................................... -- 2,560,000
Payments on Mortgages - principal amortization ................................... (3,610,085) (1,090,584)
Payments on Mortgages - lump sum ................................................. (364,735) (2,642,734)
------------ -----------
Net Cash provided by/(used in) Financing activities ................................... 17,338,782 (8,450,665)
------------ -----------
(Decrease) in Cash .................................................................... (2,422,966) (237,568)
Cash at Beginning of Year ............................................................. 2,568,890 3,593,121
------------ -----------
Cash at End of Period ................................................................. $ 145,924 $ 3,355,553
============ ===========
Supplemental Disclosure of Cash Flow Information
Cash Payments for Interest ....................................................... $ 19,385,175 $ 7,248,318
============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (con't)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first half of 1998, the Company acquired the entire ownership
interest in 324 Unconsolidated Partnerships owning 326 apartment communities.
Such acquisitions resulted in the following increases (decreases) to the
Company's balance sheet (SEE NOTE 2):
(In thousands)
--------------
Non-Cash Effects:
- -----------------
Investments in and Advances to Unconsolidated Partnerships .... $(81,237)
Land and Building ............................................. $ 30,981
Accounts Receivable and Other Assets .......................... $ 9,409
Mortgages ..................................................... $362,610
Accounts Payable and Other Liabilities ........................ $ 14,939
Cash Effects:
- -------------
Cash Paid to Former Partner(s) ................................ $(33,902)
Net Cash Acquired ............................................. 8,396
--------
$ 25,506
========
On March 13, 1998, the Company negotiated a settlement with the former
shareholders of Lexford Properties, Inc. whereby 300,000 out of an aggregate of
900,000 common shares of beneficial interest subject to forfeiture, per the
terms of the merger agreement dated August 1, 1996, were released to such former
shareholders in exchange for the forfeiture of the remaining 600,000 shares (SEE
NOTE 1).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
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LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
In December 1997, Lexford, Inc. announced that it would seek to qualify
and elect to be taxed as a real estate investment trust for Federal income tax
purposes ("REIT") in 1998. In connection with this decision, Lexford, Inc.
established a new entity known as Lexford Residential Trust (the "Company"). On
March 3, 1998, the shareholders of Lexford, Inc. approved the merger of Lexford,
Inc. with and into the Company. The terms of the merger transaction provided
that each share of Lexford, Inc.'s issued and outstanding common stock be
canceled and converted to two common shares of beneficial interest in the
Company. The merger transaction was consummated on March 18, 1998 and the
Company has therefore acquired all of the assets and assumed all of the
liabilities of the former Lexford, Inc. The consolidated financial statements
include the accounts of Lexford Residential Trust, formerly known as Lexford,
Inc. and Cardinal Realty Services, Inc., and its wholly owned subsidiaries and
partnerships (collectively the "Company"). The Company, for consolidated
financial statement purposes, includes limited partnerships and other legal
entities which own multifamily apartment communities (the "Rental Properties")
in which the Company, in turn, owns 100% equity interest. The Company also holds
equity ownership or significant economic interests in multifamily apartment
communities in its capacity as general partner or property manager,
respectively, in various limited partnerships (the "Unconsolidated
Partnerships"). The Rental Properties and the Unconsolidated Partnerships are
collectively referred to as the "Properties." The accounts of the Unconsolidated
Partnerships are not included within the Company's consolidated financial
statements but are accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated in this
consolidation. The accompanying consolidated financial statements, except for
the Consolidated Balance Sheet as of December 31, 1997, are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for a complete financial statement presentation. The consolidated
financial statements, the notes hereto and the capitalized terms included herein
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
The interim consolidated financial statements have been prepared in
accordance with the Company's customary accounting practices. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
Business Overview
- -----------------
The Company is a fully integrated REIT which owns, manages and
opportunistically acquires apartment communities. The Company is the seventh
largest multifamily REIT in terms of equity ownership of units, with a strong
focus in the value-conscious segment of the apartment industry. The Company's
Properties generally consist of relatively smaller apartment communities,
averaging approximately 90 units per site. As of June 30, 1998, the Company has
whole ownership interest in 437 Rental Properties located on 339 sites
comprising 28,929 residential units, a partial equity interest in 65
Unconsolidated Partnerships located on 49 sites comprising 4,481 residential
units and a significant economic interest as property manager in 14 apartment
communities located on 14 sites comprising 2,995 residential units. The combined
516 Properties are located at 402 sites throughout the midwestern and
southeastern United States. Certain of the Rental Properties were formerly
Unconsolidated Partnerships owning Properties constructed on contiguous sites.
Following consolidation of ownership of these Rental Properties, the Company
operated these properties as an integrated apartment community on a single site.
8
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LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (con't)
The Company's primary mission is to become the leading multifamily REIT
operating in the value-conscious segment. The Company defines value-conscious
renters as those who prefer clean, attractive living accommodations without
unnecessary amenities at rental rates below the median rent in the relevant
housing market. The Company seeks to serve this segment by maintaining
competitively priced rental structures, as represented by its typical monthly
rent that currently ranges from $350 to $550 per apartment unit.
Third Party Management Business
- -------------------------------
In the first quarter of 1998 the Company was also engaged in providing
management services to third party owners of multifamily apartment communities
(the "Third Party Management Business"). Because of Internal Revenue Code
limitations on the nature and amount of non-qualified REIT income, the Company
contributed the majority of its assets related to the Third Party Management
Business to a newly formed corporation in exchange for all of the preferred
stock of such corporation on February 20, 1998. Effective as of April 1, 1998,
the Company sold all its preferred equity interest in the Third Party Management
Business. The Company has retained a significant number of the executive
officers and other personnel dedicated to the Company's property management
activities and its proprietary interest in property management training programs
and systems and management agreements for 14 apartment communities in which the
Company currently does not own an equity interest. (SEE "SALE OF THIRD PARTY
MANAGEMENT BUSINESS").
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 secured by certain assets owned by the Company
exceeded the estimated fair value of the respective Rental Property, the Company
reduced the contractual amount of the related non-recourse mortgage debt by the
amount of the deficiency (the "Mortgage Deficiency"). The contractual mortgage
balance net of any applicable Mortgage Deficiency, is referred to as the
"Carrying Value" of the mortgage (SEE NOTE 3).
Cash, Funds Held in Escrow and Other Assets
- -------------------------------------------
In the second quarter of 1998, with the completion of the consolidation
of ownership of the Rental Properties, the Company revised its cash management
system to ensure that the majority of operating cash, not otherwise required by
mortgage loan covenants to be segregated, is applied to the Company's credit
facility with draws on the credit facility as funds are needed. This change
resulted in a significant decline in the amount of operating cash reflected on
the Company's balance sheet.
Funds Held in Escrow at June 30, 1998 includes funds of $22.1 million
held in escrow for the benefit of Rental Properties for improvements and
deferred maintenance, real estate taxes, insurance and resident security
deposits.
Intangible Assets at June 30, 1998 is primarily comprised of goodwill
related to the executive officers and other personnel, training programs and
property management systems retained from the Third
9
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LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (con't)
Party Management Business and management contracts on a portfolio of properties,
net of amortization of approximately $273,000 (SEE "SALE OF THIRD PARTY
MANAGEMENT BUSINESS"). In addition, Intangible Assets includes deferred
financing costs of $2.4 million at June 30, 1998. The deferred financing costs
relate to mortgage refinancings on the Rental Properties and are amortized over
the terms of the respective loans.
Prepaids and Other assets at June 30, 1998 includes $3.1 million of
deferred offering costs and a $1.8 million note receivable related to the sale
of the third party management business. In addition, Prepaids and Other assets
consists of $1.0 million of prepaid rent, insurance and real estate taxes,
approximately $298,800 of utility and other deposits and approximately $654,000
of other prepaid expenses.
Investments in and Advances to Unconsolidated Partnerships
- ----------------------------------------------------------
Investments in and Advances to Unconsolidated Partnerships represent
the Company's general partners' interest in and advances to Unconsolidated
Partnerships. 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. The contractual amounts of the
receivables are significantly more than the recorded carrying values.
Prior to November 1, 1997, the Company accounted for its investments by
the cost method. Effective November 1, 1997, based on Lexford, Inc.'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 of the Unconsolidated Partnerships, amounted to approximately $41,100 for
the first half of 1998, and is combined with interest earned on receivables from
Unconsolidated Partnerships and classified as Income from Unconsolidated
Partnerships in the Consolidated Statements of Income.
In the first quarter of 1998, the Company invested in a joint venture
with a developer for the construction of an apartment community. The investment
of $3.4 million is included in Investments in and Advances to Unconsolidated
Partnerships at June 30, 1998.
Reclassifications
- -----------------
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
Provision for Income Taxes
- --------------------------
The Company intends to elect to be taxed as a REIT under sections 856
through 860 of the Internal Revenue Code, commencing with its taxable year
beginning January 1, 1998. As a REIT, the Company generally will not be subject
to Federal Income Tax on income it distributes to shareholders as long as it
distributes at least 95% of its REIT taxable income and satisfies a number of
organizational ownership and operational requirements. In addition, primarily
due to its organization as a Maryland real estate investment trust, the Company
believes it will not be subject to state income taxes in jurisdictions where the
Properties are located. Therefore, the Consolidated Statements of Income for the
three and six months ended June 30, 1998 do not include a provision for Federal
or state income taxes.
10
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LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (con't)
Sale of Third Party Management Business
- ---------------------------------------
Due to the non-qualified REIT income generated by the Third Party
Management Business, the Company classified this business as Held for Sale in
the first quarter of 1998 and closed the sale of the business effective as of
April 1, 1998. The Company, however, retained management agreements for 14
apartment communities, certain of Lexford Properties, Inc.'s former executive
officers, training programs and property management systems to facilitate
improved management of the Company's Properties. As a result of the decision to
sell and in order to facilitate such sale of the Third Party Management
Business, the Company has taken the following actions:
The original merger agreement for the acquisition of Lexford
Properties, Inc. (the former owner of the Third Party Management
Business) included a provision that approximately $9.0 million, or
900,000 shares (valued at the time of acquisition), of the purchase
price was subject to forfeiture in whole or in part in the event the
Third Party Management Business did not achieve certain profitability
criteria by December 31, 1999. On March 13, 1998, the Company
negotiated a settlement with the prior shareholders of Lexford
Properties, Inc. whereby 300,000 of the 900,000 shares subject to
forfeiture were released in exchange for the forfeiture of the
remaining 600,000 shares. The release of the 300,000 shares resulted in
a $3.0 million charge in the first quarter of 1998.
The Company adjusted the carrying value of goodwill associated with the
original acquisition of the Third Party Management Business by writing
off $2.0 million of goodwill. Due to the reclassification of the Third
Party Management Business as Held for Sale, the Company recorded a $1.3
million reserve for sale/disposal costs associated with this sale. The
above charges totaling $6.3 million have been classified as Loss on
Sale of Third Party Management Business.
Lexford Properties, Inc. formed a subsidiary, Lexford Property
Management, Inc. ("LPM") and contributed all of its interests in its
management contracts for multifamily apartment communities owned
entirely by third parties (other than its management contracts acquired
in December 1997 on a portfolio of 14 apartment communities) to LPM in
exchange for all of LPM's issued and outstanding preferred stock.
Effective as of April 1, 1998, the Company sold its entire preferred
stock interest in LPM to a company formed to acquire the Third Party Management
Business by FSC Realty LLC, a company affiliated with Stanley R. Fimberg, a
consultant to, and Trustee of, the Company at the time of the sale, Ralph V.
Williams, a consultant to the Company at the time of the sale and Bruce
Woodward, an executive officer of Lexford Properties, Inc. at the time of the
sale. As a result of the sale, each of Messrs. Fimberg, Williams and Woodward
severed their respective consulting and employment relationships with the
Company. Mr. Fimberg remains a Trustee of the Company. Each of Messrs. Fimberg,
Williams and Woodward were also former beneficial equity owners of Lexford
Properties, Inc. prior to the Company's original acquisition of the Third Party
Management Business in August 1996. The Company received a promissory note in
the principal amount of $1.8 million payable over a ten year period which bears
interest at 6% per annum until April 1, 2000 and 11% per annum thereafter, in
exchange for all of the outstanding preferred stock of LPM. Mr. Fimberg did not
participate in the Company's decision to sell the Third Party Management
Business. Management believes that the terms for the sale of the Third Party
Management Business are representative of terms which would have been available
from an unrelated purchaser.
11
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LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (con't)
Non-recurring Costs
- -------------------
Non-recurring Costs were approximately $1.8 million for the six months
ended June 30, 1998. Approximately $1.6 million of the charge related to the
retirement plan ("Trustee Retirement Plan") for four Trustees who retired April
15, 1998. Each retiring Trustee received a package consisting of the right to
receive a cash payment of $225,000 (the "Retirement Payment"), vesting of all
non-vested common share awards and the opportunity to continue participation in
the Company's Executive Deferred Compensation Plan and the Executive Deferred
Compensation Rabbi Trust (the "Rabbi Trust") for up to five years. The retiring
Trustees were also afforded the opportunity to defer receipt of all or any
portion of the Retirement Payment and direct that the deferred portion be
contributed to the Rabbi Trust and invested in the Company's common shares for
their benefit. In connection with their participation in the Trustee Retirement
Plan, two of the retiring Trustees elected to defer receipt of a total of
$400,000 of Retirement Payments in such manner. The majority of the remaining
$200,000 of Non-recurring Costs relates to severance costs associated with
terminated employees.
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
and have been issued. 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. In the second quarter of 1998, the Company
accrued $829,500 related to the potential vesting of the remaining shares
(212,000 shares) under the Plan, 44,000 of which have already vested in
connection with the Trustee Retirement Plan.
Rabbi Trust
- -----------
The Company established the Rabbi Trust in 1996. The Rabbi Trust was
established to permit executive officers and trustees to defer taxes on awards
of Company shares. The Rabbi Trust is currently restricted to holding Company
shares or cash equivalents. In March 1998, the Emerging Issues Task Force of the
Financial Accounting Standards Board ("EITF") reached a tentative conclusion on
Issue No. 97-14, Accounting for Deferred Compensation Arrangements. The EITF
concluded that the deferred compensation liability and the securities issued to
fund deferred compensation must be consolidated by the Company and carried on
the Company's balance sheet. Further, the Company's common shares held in the
Rabbi Trust should be accounted for as treasury shares by the Company. The
Company has applied EITF No. 97-14 on a prospective basis commencing in the
first quarter of 1998. At June 30, 1998, 734,866 vested shares held in the
Company's Rabbi Trust are included in weighted average shares outstanding for
earnings per share purposes and 296,775 non-vested shares held in the Rabbi
Trust are reflected in Treasury Shares and excluded from weighted average shares
outstanding for earnings per share purposes.
12
<PAGE> 13
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (con't)
Earnings Per Share
- ------------------
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 shares and stock
option dilutive potential.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted Earnings Per Share:
Net Income/(Loss) $1,068,166 $1,474,963 $(5,820,037) $2,751,001
========== ========== =========== ==========
Denominator:
Denominator for Basic Earnings Per Share-
Weighted Average Shares 9,065,277 7,947,758 8,819,458 7,944,648
---------- ---------- ----------- ----------
Effect of Dilutive Securities:
Stock options (1) 166,196 198,916 -- 198,916
Time Vesting Restricted Share Awards 35,068 68,334 49,568 67,276
---------- ---------- ----------- ----------
Dilutive Potential Common Shares 201,264 267,250 49,568 266,192
---------- ---------- ----------- ----------
Denominator for Diluted Earnings Per Share-
Adjusted Weighted Average Shares 9,266,541 8,215,008 8,869,026 8,210,840
========== ========== =========== ==========
Basic Earnings Per Share:
Net Income/(Loss) $ 0.12 $ 0.19 $ (.66) $ .35
========== ========== =========== ==========
Diluted Earnings Per Share:
Net Income/(Loss) $ .11 $ .18 $ (.66) $ .34
========== ========== =========== ==========
</TABLE>
(1) Stock Options for 166,196 shares were excluded from diluted earnings per
share for the six months ended June 30, 1998 because including the shares
would be anti-dilutive as a result of the net loss the Company recognized
for the first half of the year.
In August 1996, the Company issued 1.4 million shares in connection
with the acquisition of Lexford Properties, Inc., 900,000 shares of which were
subject to forfeiture in whole or in part. The 900,000 contingent shares were
excluded from the weighted average shares outstanding. On March 13, 1998, the
Company negotiated a settlement whereby 300,000 of the contingent shares were
released in exchange for the forfeiture and cancellation of the remaining
600,000 shares. The 300,000 shares released are included in the weighted average
shares outstanding in 1998 (SEE "SALE OF THIRD PARTY MANAGEMENT BUSINESS").
NOTE 2 PROPERTY ACQUISITIONS
In conjunction with its determination to elect REIT status, the Company
initiated a consolidation plan, the purpose of which was to minimize third party
equity interests in the Unconsolidated Partnerships owning apartment communities
(the "Consolidation Plan"). In the first quarter of 1998, the Company had
acquired the entire equity ownership interest in 287 former Unconsolidated
Partnerships. The acquisition of the 287 former Unconsolidated Partnerships was
effective as of January 31, 1998.
13
<PAGE> 14
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 PROPERTY ACQUISITIONS (con't)
Effective as of April 1, 1998, the Company acquired the entire
ownership interest in an additional 37 Unconsolidated Partnerships that owned 39
Properties, which were accounted for under the equity method in the first
quarter of 1998. The Company has made cash payments to the former partners of
the 324 former Unconsolidated Partnerships totaling $33.9 million. The acquired
former Unconsolidated Partnerships are now classified as Rental Properties.
The acquisition of the 324 former Unconsolidated Partnerships was
recorded as a purchase. The purchase price of $443.8 million was comprised of
$33.9 million to purchase former partners' equity interests, $47.3 million of
carrying value of investments in and advances to the 324 former Unconsolidated
Partnerships and the assumption of $362.6 million of non-recourse mortgage debt
on the acquired Properties (SEE NOTE 5).
NOTE 3 MORTGAGE DEBT
As of the Effective Date, the mortgages on certain Rental Properties
were restated to estimated fair value (the "Carrying Value") if the Fresh Start
value of the respective Rental Property was less than the outstanding principal
amount of its mortgage. The difference between the Carrying Value of each such
mortgage and the full unpaid principal amount thereof is characterized as a
"Mortgage Deficiency" for Fresh Start purposes. Although the value of the Rental
Properties may have increased since the Effective Date, the Carrying Values of
the mortgages and the Rental Properties have not been adjusted. Interest expense
is recorded based on the Carrying Value of the mortgage using the effective
interest rate method. Mortgages which have been originated or assumed following
the Effective Date are recorded as liabilities on the Consolidated Balance
Sheets in their full principal amount. Typically, each Rental Property is
secured by a separate mortgage loan. The mortgage loans on a portfolio of 26
Rental Properties contain cross collateral and cross default provisions;
however, all of the mortgage loans secured by the Rental Properties are
non-recourse to the Company.
The outstanding non-recourse mortgage debt on the Rental Properties,
including the mortgage debt assumed in relation to the acquisition of the 324
former Unconsolidated Partnerships at June 30, 1998 and December 31, 1997 is as
follows:
June 30, 1998 December 31, 1997
-----------------------------------
Contractual Mortgage Payable $508,919,925 $150,284,725
Mortgage Deficiency
(7,440,253) (7,647,851)
------------ ------------
$501,479,672 $142,636,874
============ ============
Approximately $187.2 million of the contractual mortgage debt is
prepayable at June 30, 1998. The Company is contemplating financing alternatives
to fund prepayment of the mortgage debt. Any prepayment of mortgage debt at the
contractual value will result in an extraordinary charge equal to the amount of
Mortgage Deficiency associated with such debt.
In the second quarter of 1997 an extraordinary non-cash loss of
approximately $180,000, net of tax benefits, resulted from the mortgage debt
refinancings of the Rental Properties.
14
<PAGE> 15
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages all but one of the Unconsolidated Partnerships. The
Company also provides various ancillary services, including renter's insurance
to residents. The Company earned fee based revenues from the Unconsolidated
Partnerships of approximately $515,000 and $3.1 million for the three months
ended June 30, 1998 and 1997, respectively and $2.3 million and $6.1 million for
the six months ended June 30, 1998 and 1997, respectively. The Company also
earned a majority of its interest income on its receivables (including second
mortgages) from the Unconsolidated Partnerships. Approximately $450,000 and $1.9
million of the Accounts Receivable were due from the Unconsolidated Partnerships
as of June 30, 1998 and December 31, 1997, respectively. The decline in the
accounts receivable is due primarily to the acquisition of the 324 former
Unconsolidated Partnerships. Fee Based Revenues and Accounts Receivable related
to the Rental Properties are eliminated in consolidation.
The Company received principal repayment of advances from
Unconsolidated Partnerships of approximately $29,000 in the first six months of
1998 as compared to approximately $48,000 in the first six months of 1997. These
advance repayments were credited to Investments in and Advances to
Unconsolidated Partnerships (SEE NOTE 1 -- "INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED PARTNERSHIPS").
15
<PAGE> 16
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME
STATEMENTS
The unaudited pro forma condensed consolidated income statements for
the three and six months ended June 30, 1998 and 1997 assume that all 324 former
Unconsolidated Partnerships acquired in 1998 were purchased as of January 1,
1998, and 1997, respectively. The unaudited pro forma condensed consolidated
income statements do not purport to present what the Company's results of
operations would actually have been had such events in fact occurred on the date
or at the beginning of the periods indicated above or to project the Company's
results of operations for any future date or period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Pro Forma Condensed Consolidated Income Statements 1998 1997 1998 1997
- -------------------------------------------------- -----------------------------------------------
Unaudited Unaudited Unaudited Unaudited
-----------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Rental and Other Property Revenues $37,094 $35,984 $73,697 $71,105
Fee Based and Income from Unconsolidated Partnerships 1,292 2,605 3,689 5,169
------- ------- ------- -------
38,386 38,589 77,386 76,274
------- ------- ------- -------
EXPENSES:
Property Operating and Maintenance 11,807 11,906 23,393 23,192
Real Estate Taxes and Insurance 3,013 3,317 5,978 6,575
Property Management 2,838 3,882 6,761 7,936
Administration 1,536 1,323 3,050 2,362
Non-recurring Costs/Performance Equity Plan 829 -- 2,637 250
Interest 11,641 12,033 23,334 24,061
Depreciation and Amortization 5,815 4,905 11,759 9,800
Loss on Sale of Third Party Management Business -- -- 6,300 --
------- ------- ------- -------
37,479 37,366 83,212 74,176
------- ------- ------- -------
Income/(Loss) before Gain on Disposal of Assets,
Income Taxes and Extraordinary Items 907 1,223 (5,826) 2,098
Provision for Income Taxes -- (718) -- (1,085)
Extraordinary Loss -- (181) -- (181)
Gain on Disposal of Assets 161 621 250 689
------- ------- ------- -------
Net Income/(Loss) $ 1,068 $ 945 $(5,576) $ 1,521
======= ------- ------- -------
Basic Earnings/(Loss) Per Share $ .12 $ 0.12 $ (.63) $ .19
======= ======= ======= =======
Diluted Earnings/(Loss) Per Share $ .11 $ 0.11 $ (.63) $ .18
======= ======= ======= =======
</TABLE>
NOTE 6 SUBSEQUENT EVENT
On July 10, 1998, the Company declared its first quarterly dividend of
$0.4325 per share for the quarter ending September 30, 1998, payable on October
15, 1998 to shareholders of record on September 30, 1998. This dividend was
declared by the Board of Trustees pursuant to its previously announced initial
dividend policy of an annualized dividend rate of $1.73 per share.
16
<PAGE> 17
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
INTRODUCTION
The following discussion explains material changes in the Company's
results of operations, comparing the three and six months ended June 30, 1998
and 1997, and significant developments affecting the Company's financial
condition since the end of 1997. As a result of the Company's consolidation of
324 former Unconsolidated Partnerships during the first half of 1998, the
operating results of such Unconsolidated Partnerships are included in the
Company's financial statements for the quarter ended June 30, 1998. Therefore,
the Company's results for the first six months of 1998 will not be comparable to
the same period in 1997. The following discussion should be read in conjunction
with the historical financial statements of the Company.
RESULTS OF OPERATIONS
RENTAL AND OTHER PROPERTY REVENUES are derived from the Rental
Properties which own and operate apartment communities. Rental and Other
Property Revenues increased approximately $26.7 million, or 255%, for the three
months ended June 30, 1998, and $42.2 million, or 204% for the six months ended
June 30, 1998, as compared to the same periods in 1997. The majority of the
increase, $26.6 million for the three month period and $41.9 million for the six
month period, is related to the acquisition of the 324 former Unconsolidated
Partnerships in 1998. On a comparable unit basis (111 Rental Properties in
operation for both periods), the average monthly rent collected per occupied
unit during the six month period increased from $428 in 1997 to $435 in 1998.
FEE BASED REVENUES are comprised of management services and
investment management revenues generated from services provided to
Unconsolidated Partnerships, third party owners and residents at the Properties.
Management services revenues principally relate to property management and
accounting services provided to the Unconsolidated Partnerships and property
management services provided to third party property owners (SEE NOTE 1 OF NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS). The Company also provides ancillary
services to the Unconsolidated Partnerships, including a "Preferred Resource"
discount buying program and laundry services. The Company enters into group
buying, volume discount contracts with major vendors and receives a discount
from vendors for every purchase made through the Preferred Resource program, as
well as a rebate from residents' use of laundry equipment. Investment management
revenues consist of partnership administration fees as well as, in 1997, fees
generated from loan refinancing and restructuring.
The following are the major components of management services revenues
and investment management fee-based revenues for the three and six months ended
June 30, 1998 as compared to the same periods in 1997 (certain amounts
previously reported have been reclassified herein between management services
and Preferred Resource for all periods presented):
17
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) (In thousands)
1998 1997 1998 1997
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Management Services:
Property Management Services:
Unconsolidated Partnerships $549 $2,323 $1,651 $4,547
Third Party -- 951 861 1,993
Preferred Resources Revenues 231 430 457 870
---- ------ ------ ------
Total Management Services Revenues 780 3,704 2,969 7,410
---- ------ ------ ------
Investment Management:
Partnership Administration & Other Fees 49 279 192 567
Loan Refinancing and Restructuring Fees -- 57 -- 106
---- ------ ------ ------
Total Investment Management Fee Revenues 49 336 192 673
---- ------ ------ ------
Total Fee Based Revenues $829 $4,040 $3,161 $8,083
==== ====== ====== ======
</TABLE>
FEE BASED REVENUES decreased approximately $3.2 million, or 80%, for
the three months ended June 30, 1998, and $4.9 million, or 61%, for the six
months ended June 30, 1998 as compared to the same periods in 1997. The decrease
for the three month period was due to the elimination of fee based revenues
related to the acquisition of the 324 former Unconsolidated Partnerships in 1998
and approximately $951,000 and $1.0 million for the three and six month periods,
respectively, primarily due to the sale of the third party management business
effective April 1, 1998. Preferred Resource revenues decreased approximately
$199,000 for the three months ended June 30, 1998, and $413,000 for the six
months ended June 30, 1998 as compared to the same periods in 1997. The decrease
was due to the classification of vendor rebates on purchases made by the 324
former Unconsolidated Partnerships as an offset to maintenance expense instead
of revenues from services provided to Unconsolidated Partnerships.
INCOME FROM UNCONSOLIDATED PARTNERSHIPS decreased approximately $2.1
million, or 81.8%, for the three months ended June 30, 1998, and $3.5 million,
or 68.2%, for the six months ended June 30, 1998, as compared to the same
periods in 1997. This income is primarily derived from the interest collected or
accrued on the recorded value of Investments in and Advances to Unconsolidated
Partnerships (SEE NOTE 1 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS). The
decrease in Income from Unconsolidated Partnerships was due to the acquisition
of the 324 former Unconsolidated Partnerships in 1998.
PROPERTY OPERATING AND MAINTENANCE Expense increased approximately $8.2
million, or 227%, for the three months ended June 30, 1998, and $13.1 million,
or 187%, for the six months ended June 30, 1998, as compared to the same periods
in 1997. The majority of the increase is related to the acquisition of the 324
former Unconsolidated Partnerships in 1998. On a comparable unit basis, Property
Operating and Maintenance expense from the 111 Rental Properties in operation
for both periods decreased approximately $95,000 or 2.9%, for the three months
ended June 30, 1998 and increased approximately $168,000 or 2.8%, for the six
months ended June 30, 1998 as compared to the same periods in 1997. The increase
for the six month period was due to a write-down of approximately $400,000 in
insurance claim receivables in the first quarter of 1998.
REAL ESTATE TAXES AND INSURANCE expense increased approximately $2.0
million, or 201%, for the three months ended June 30, 1998, and $3.1 million, or
157%, for the six months ended June 30, 1998, as compared to the same periods in
1997. The increase was due to the acquisition of the 324 former Unconsolidated
Partnerships in 1998. Real Estate Taxes and Insurance expense from the 111
Rental Properties in operation for both periods decreased approximately $6,900,
or 1.0%, for the three months
18
<PAGE> 19
ended June 30, 1998 and approximately $111,000, or 5.6% for the six months ended
June 30, 1998, as compared to the same periods in 1997. The decrease related to
reduced insurance premiums upon the renewal of insurance policies.
PROPERTY MANAGEMENT expense decreased approximately $1.1 million, or
27.3%, for the three months ended June 30, 1998, and $1.2 million or 15.0%, for
the six months ended June 30, 1998, as compared to the same periods in 1997.
Property Management expense decreased due to the sale of the third party
management business effective April 1, 1998 (SEE NOTE 1 OF NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS). The Company records Property Management
expense for all Properties under management, including all Unconsolidated
Partnerships and Rental Properties.
ADMINISTRATION EXPENSES increased approximately $213,000, or 16.1% for
the three months ended June 30, 1998, and approximately $685,000, or 29%, for
the six months ended June 30, 1998 as compared to the same periods in 1997. The
increase in administration expenses was primarily due to compensation and
relocation costs in relation to hiring of the Company's Senior Vice President,
General Counsel and Secretary and the creation of an acquisition department.
NON-RECURRING COSTS were approximately $1.8 million for the six months
ended June 30, 1998. Approximately $1.6 million of the charge related to the
retirement plan for four Trustees who retired April 15, 1998. Each retiring
Trustee received a package consisting of the right to receive a cash payment of
$225,000 (the "Retirement Payment"), vesting of all non-vested common share
awards and the opportunity to continue participation in the Company's Deferred
Compensation Plan and Rabbi Trust for up to five years. The retiring Trustees
were also afforded the opportunity to defer receipt of all or any portion of the
Retirement Payment and direct that the deferred portion be contributed to the
Rabbi Trust and invested in the Company's common shares for their benefit. In
connection with their participation in the Trustee Retirement Plan, two of the
retiring Trustees elected to defer receipt of a total of $400,000 of Retirement
Payments in such manner. The majority of the remaining $200,000 of Non-recurring
Costs relates to severance costs associated with terminated employees.
PERFORMANCE EQUITY PLAN EXPENSE represents the non-cash charge recorded
based upon the potential vesting of the remaining shares available under the
1997 Performance Equity Plan which was approved by the Company's shareholders at
the 1997 annual meeting. (SEE NOTE 1 OF NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS).
INTEREST EXPENSE for mortgages on the Rental Properties increased
approximately $7.7 million for the three months ended June 30, 1998, and
approximately $12.2 million for the six months ended June 30, 1998, as compared
to the same periods in 1997. The majority of the increase was due to the
acquisition of the 324 former Unconsolidated Partnerships in 1998. On a
comparable unit basis, Interest Expense from the 111 Rental Properties in
operation for both periods remained relatively constant. Interest Expense on the
Company's revolving and term credit line increased approximately $282,000 for
the three months ended June 30, 1998 and approximately $273,000 for the six
months ended June 30, 1998 as compared to the same periods in 1997. This
increase was due primarily to the increase in the principal amount outstanding
related to the funding of the acquisition of the 324 former Unconsolidated
Partnerships.
DEPRECIATION AND AMORTIZATION EXPENSE increased approximately $4.3
million for the three months ended June 30, 1998, and $7.1 million for the six
months ended June 30, 1998 as compared to the same periods in 1997. The increase
is due to a non-recurring $300,000 amortization adjustment to the value of a
land lease and approximately $3.9 million and $6.2 million for the three and six
months ended June 30, 1998, respectively, related to depreciation on the 324
former Unconsolidated Partnerships acquired in 1998.
19
<PAGE> 20
LOSS ON SALE OF THIRD PARTY MANAGEMENT BUSINESS was $6.3 million for
the six months ended June 30, 1998. Due to the non-qualifying REIT income
generated by the Third Party Management Business, the Company classified this
business as Held for Sale in the first quarter of 1998 and closed the sale of
the business effective as of April 1, 1998. The Company, however, retained
management agreements for 14 apartment communities acquired in December 1997, a
majority of Lexford Properties, Inc.'s former executive officers, training
programs and property management systems to facilitate improved management of
the Company's Properties. As a result of the decision to sell and in order to
facilitate such sale of the Third Party Management Business, the Company has
taken the following actions:
The original merger agreement for the acquisition of Lexford
Properties, Inc. (the former owner of the Third Party Management
Business) included a provision that approximately $9.0 million, or
900,000 shares (valued at the time of acquisition), of the purchase
price was subject to forfeiture in whole or in part in the event the
Third Party Management Business did not achieve certain profitability
criteria by December 31, 1999. On March 13, 1998, the Company
negotiated a settlement with the prior shareholders of Lexford
Properties, Inc. whereby 300,000 of the 900,000 shares subject to
forfeiture were released in exchange for the forfeiture of the
remaining 600,000 shares. The release of the 300,000 shares resulted in
a $3.0 million charge in the first quarter of 1998.
The Company adjusted the carrying value of goodwill associated with the
original acquisition of the Third Party Management Business by writing
off $2.0 million of goodwill. Due to the reclassification of the Third
Party Management Business as Held for Sale, the Company recorded a $1.3
million reserve for sale/disposal costs associated with this sale.
Lexford Properties, Inc. formed a subsidiary, Lexford Property
Management, Inc. ("LPM"), and contributed all of its interests in its
management contracts for multifamily apartment communities owned
entirely by third parties (other than its management contracts on a
portfolio of 14 properties acquired in December 1997) to LPM in
exchange for all of LPM's issued and outstanding preferred stock.
Effective as of April 1, 1998, the Company sold its entire preferred
stock interest in LPM to a company formed to acquire the Third Party Management
Business by FSC Realty, LLC, a company affiliated with Stanley R. Fimberg, a
consultant to, and Trustee of, the Company at the time of the sale, Ralph V.
Williams, a consultant to the Company at the time of the sale and Bruce
Woodward, an executive officer of Lexford Properties, Inc. at the time of the
sale. As a result of the sale, each of Messrs. Fimberg, Williams and Woodward
severed their respective consulting and employment relationships with the
Company. Mr. Fimberg remains a Trustee of the Company. Each of Messrs. Fimberg,
Williams and Woodward were also former beneficial equity owners of Lexford
Properties, Inc. prior to the Company's original acquisition of the Third Party
Management Business in August 1996. The Company received a promissory note in
the principal amount of $1.8 million payable over a ten year period which bears
interest at 6% per annum until April 1, 2000 and 11% per annum thereafter, in
exchange for all of the outstanding preferred stock of LPM. Mr. Fimberg did not
participate in the Company's decision to sell the Third Party Management
Business. Management believes that the terms for the sale of the Third Party
Management Business are representative of terms which would have been available
from an unrelated purchaser.
Income from Disposal of Assets decreased approximately $460,000 for the
three months ended June 30, 1998, and approximately $439,000 for the six months
ended June 30, 1998, as compared to the same periods in 1997. This income is
derived from the net disposition proceeds in excess of the aggregate
20
<PAGE> 21
recorded value of these assets. Income from Disposal of Assets is not a
recurring, long term source of revenue.
Earnings before Interest, Taxes, Depreciation and Amortization
EBITDA is computed as net income before disposal of properties and
minority interests plus interest expense, taxes and depreciation and
amortization. Recurring EBITDA is computed as EBITDA, as adjusted for
non-recurring items. Adjusted EBITDA is computed as Recurring EBITDA plus
principal payments of receivables from Unconsolidated Partnerships less interest
on Rental Property mortgage debt. Management believes that, in addition to cash
flows and net income, Recurring EBITDA is a useful financial performance measure
for assessing the operating performance of an equity REIT because, together with
net income and cash flows, Recurring EBITDA provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures and to make distributions to
shareholders. To evaluate Recurring EBITDA and the trends it depicts, the
components of Recurring EBITDA, such as rental and other revenues, operating and
maintenance expenses, real estate taxes and general and administrative expenses,
should be considered. Excluded from Recurring EBITDA are financing costs such as
interest expense as well as depreciation and amortization, each of which can
significantly affect a REIT's results of operations and liquidity and should be
considered in evaluating a REIT's operating performance. Further, Recurring
EBITDA does not represent net income or cash flows provided by (used in)
operating, financing and investing activities as defined by Generally Accepted
Accounting Principles ("GAAP") and does not necessarily indicate that cash flows
will be sufficient to fund cash needs. It should not be considered as an
alternative to net income as an indicator of the Company's operating performance
or to cash flows as a measure of liquidity.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) (In thousands)
1998 1997 1998 1997
--------------------------- ---------------------
<S> <C> <C> <C> <C>
EBITDA $ 18,364 $ 7,195 $ 23,625 $14,301
-------- ------- -------- -------
Loss on Sale of Third Party
Management Business -- 6,300 --
Loan Fees (56) -- (105)
Reserve of Non-Operating Property Receivables -- 400 --
Non-recurring Costs -- -- 1,808 250
-------- ------- -------- -------
Recurring EBITDA 18,364 7,139 32,133 14,446
-------- ------- -------- -------
Interest on Mortgage Loans to Rental Properties (11,222) (3,489) (19,109) (6,936)
Principal Payments from Unconsolidated
Partnerships 83 0 295 --
-------- ------- -------- -------
Adjusted EBITDA $ 7,225 $ 3,650 $ 13,319 $ 7,510
======== ======= ======== =======
</TABLE>
Adjusted EBITDA increased approximately $3.5 million, or 97.9%, for the
three months ended June 30, 1998, and $5.8 million, or 77.4%, for the six months
ended June 30, 1998, as compared to the same periods in 1997. The increase in
Adjusted EBITDA was primarily related to the acquisition of the 324 former
Unconsolidated Partnerships.
21
<PAGE> 22
Funds from Operations
Funds from Operations ("Funds from Operations" or "FFO") is calculated
in accordance with the White Paper on FFO approved by the Board of Governors of
the National Association of Real Estate Investment Trusts ("NAREIT") in March
1995 (net income (loss) in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and after similar adjustments for unconsolidated partnerships and joint
ventures), further adjusted by the Company to eliminate expenses attributable to
certain non-cash share awards and compensation, operations from sold properties
and certain non-recurring expenditures. In addition to cash flows and net
income, management considers FFO to be an additional measure of the performance
of an equity REIT because, together with net income and cash flows, FFO provides
investors with an additional basis to evaluate the ability of an entity to fund
acquisitions and other capital expenditures and to make distributions to
shareholders. However, FFO does not measure whether cash flow is sufficient to
fund all of an entity's cash needs including principal amortization, capital
improvements and distributions to shareholders. FFO does not actually represent
the cash made available to investors during any particular period. FFO also does
not represent cash flows provided by (used in) operating, investing or financing
activities as determined in accordance with GAAP. FFO should not be considered
as an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. Further, FFO as
disclosed by other REITs may not be comparable to the Company's calculation of
FFO.
<TABLE>
<CAPTION>
Funds from Operations
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) (In thousands)
1998 1997 1998 1997
------------------ -------------------
<S> <C> <C> <C> <C>
Net Income / (Loss) $1,068 $1,475 $(5,820) $2,751
------ ------ ------- ------
Real Estate Depreciation 5,388 1,151 8,861 2,301
Income from Asset Disposals (161) (621) (250) (689)
Non-Cash Stock Compensation 1,225 598 1,736 749
Non-Recurring Items -- -- 1,808 250
Loss on Sale of Third Party Management
Business -- -- 6,300 --
Reserve for Non-Operating Receivables -- -- 400 --
Amortization associated with Land Lease and
Goodwill -- 52 388 129
Capitalization of Replacement Items Recorded in -- --
the Third Quarter of 1997 296 500
Provision for Income Taxes -- 1,058 -- 1,874
------ ------ ------- ------
$7,520 $4,009 $13,423 $7,865
====== ====== ======= ======
</TABLE>
FFO increased approximately $3.5 million, or 87.6% for the three
months ended June 30, 1998 and $5.6 million, or 70.7% for the six months ended
June 30, 1998, as compared to the same periods in 1997. The increase in FFO was
principally due to the acquisition of the 324 former Unconsolidated Partnerships
in 1998 and therefore will not be comparable to prior periods in many respects.
22
<PAGE> 23
Same Store Property Operating Results
The following table summarizes the unaudited combined operating
results, excluding management and other fees charged by the Company, of the
Properties the Company owns or has ownership interest in, for the three and six
months ended June 30, 1998 and 1997 (SEE ITEM 2 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"--RENTAL AND OTHER
PROPERTY REVENUES):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------------------------------------------
<S> <C> <C> <C> <C>
Statistical information
- -----------------------
Properties 501 501 501 501
Units 32,973 32,973 32,973 32,973
Average Economic Occupancy 92.5% 91.3% 92.0% 91.1%
Average Physical Occupancy 93.8% 92.1% 93.5% 92.0%
Average Rent Collected / Unit / Month $ 436 $ 430 $ 434 $ 428
Financial Information (In thousands)
- ---------------------
Revenues
Rental Income $40,466 $39,165 $80,335 $77,896
Other Property Income 1,936 1,726 3,908 2,970
------- ------- ------- -------
Total Revenues 42,402 40,891 84,243 80,866
------- ------- ------- -------
Expenses
Property Operating Maintenance 11,730 11,039 24,455 23,824
Real Estate Taxes and Insurance 3,645 3,828 7,180 7,647
Major Maintenance (1) 676 1,254 1,401 1,950
Other 146 154 709 345
------- ------- ------- -------
Total Expenses 16,197 16,275 33,745 33,766
------- ------- ------- -------
Net Operating Income 26,205 24,616 50,498 47,100
Interest - Mortgage Debt 12,948 12,844 25,117 25,630
------- ------- ------- -------
Income after certain expenses $13,257 $11,772 $25,381 $21,470
======= ======= ======= =======
Capital Expenditures (1) $ 2,707 $ 2,644 $ 5,032 $ 4,378
======= ======= ======= =======
</TABLE>
(1) The June 30, 1997 Major Maintenance and Capital Expenditures line items have
been adjusted as if the capitalization policy that was revised in the third
quarter of 1997 to include capitalization of certain replacement items (formerly
expensed) had been in effect during the first and second quarters of 1997.
23
<PAGE> 24
Same Store Property Operating Results - By Region
The Company operates its portfolio as four distinct regions. The
Northeast region is comprised of northern and central Ohio, Pennsylvania, and
West Virginia; the Central region is comprised of southern Ohio, Indiana,
Kentucky and Michigan; the Mid-Atlantic region is primarily Georgia; and the
Southeast region is primarily Florida. The Company has two properties comprised
of 180 units that are not managed by the Company and are not included in the
regional information.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C> <C>
Northeast Region
Units 8,821
=====
Average Economic Occupancy 93.4% 92.6% 92.7% 91.7%
Average Physical Occupancy 94.2% 93.1% 93.5% 92.2%
Average Rent collected/Unit/Month $ 443 $ 436 $ 442 $ 435
Central Region
Units 9,268
=====
Average Economic Occupancy 93.5% 92.4% 92.9% 91.8%
Average Physical Occupancy 94.4% 92.4% 94.1% 92.3%
Average Rent collected/Unit/Month $ 421 $ 417 $ 415 $ 412
Mid-Atlantic Region
Units 4,935
=====
Average Economic Occupancy 89.8% 90.4% 90.2% 90.6%
Average Physical Occupancy 92.6% 90.8% 92.5% 91.3%
Average Rent collected/Unit/Month $ 465 $ 465 $ 467 $ 463
Southeast Region
Units 9,769
=====
Average Economic Occupancy 92.0% 89.5% 91.5% 90.1%
Average Physical Occupancy 93.3% 91.4% 93.3% 92.0%
Average Rent collected/Unit/Month $ 434 $ 421 $ 431 $ 420
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
- ---------
The following discussion regarding liquidity and capital resources
should be read in conjunction with the Company's Consolidated Balance Sheets as
of June 30, 1998 and December 31, 1997 and the Consolidated Statements of Cash
Flows for the six months ended June 30, 1998 and 1997.
The Company anticipates that cash flow from its operations and
borrowings available under the Company's credit facility should be adequate to
meet the foreseeable capital and liquidity requirements of the Company.
The principal sources of liquidity for the Company are cash flow from
its operations and borrowing available under the Company's credit facility. The
Company's Net Cash Provided by Operating Activities increased approximately $4.0
million for the six months ended June 30, 1998, as
24
<PAGE> 25
compared to the same period in 1997. The increase was due primarily to the
acquisition of 324 former Unconsolidated Partnerships in 1998.
The other factors impacting the Company's cash flow in 1998 as compared
to the same period in 1997 are discussed in "Results of Operations."
REIT Election
- -------------
After careful consideration and consultation with its legal, tax and
financial advisers, the Company announced on December 19, 1997 that it would
seek to elect to be taxed as a REIT. To help facilitate REIT qualification and
to position itself to meet the expectations which management believes the
capital markets apply to REITs, the Company engaged in the following
transactions (collectively referred to as the "REIT Conversion"): (i) the merger
of the Company's predecessor, Lexford, Inc., with and into the Company (SEE NOTE
1 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS), and (ii) the sale of the
Third Party Management Business. The REIT Conversion was structured so as to
allow the Company to carry on the pre-existing business of owning and managing
multifamily residential apartment communities but at the same time to take
advantage of favorable Federal income tax consequences available to REITs. In
addition, the Company believes the market valuations and access to capital
markets are more favorable to REITs as compared to the traditional "C"
corporation real estate operating companies. The Company believes its REIT
status will enhance its ability to pursue its growth strategy.
Credit Facility
- ---------------
On September 30, 1997 the Company entered into an Amended and Restated
Loan and Security Agreement with the Provident Bank. The amended revolving
credit facility ("Facility"), is for $35 million and represents an increase to
and replacement of all former revolving credit facilities with The Provident
Bank (the "Bank"). In the first quarter of 1998, the Company reached an
agreement with the Bank to increase the Facility by $5.0 million to $40.0
million. The scheduled term of the Facility expires March 30, 2000, although the
Company may elect from time to time to convert all or any portion of the
principal amount outstanding under the Facility into a five year term loan.
Revolving loans outstanding under the Facility bear interest at a variable
interest rate equal to the Bank's prime rate of interest, currently 8.5%, minus
1%. As of June 30, 1998 the outstanding balance under the Facility was $23.8
million. The increase was due to the costs to acquire the 324 former
Unconsolidated Partnerships. The Company's former $7.0 million revolving line of
credit for acquisitions and Property debt restructuring (the "Acquisition Line")
was converted into a term loan which matures in March 2001 and has a 7.25% fixed
interest rate with monthly installments of principal and interest of $139,435.
As of June 30, 1998, the unpaid principal balance outstanding under the
Acquisition Line was approximately $4.0 million.
Shelf Registration
- ------------------
On May 21, 1998, the Company announced that it had postponed the
securities offering it had planned due to the current market conditions for REIT
securities. The Company had planned a public offering of 11 million common
shares of beneficial interest. On June 2, 1998, the Company filed a shelf
registration statement with the SEC for the potential offering of up to 12.65
million common shares of beneficial interest. The Company will continue to
consider an offering under this shelf registration depending upon market
conditions and capital requirements. The costs associated with the proposed
offering have been deferred pending potential share issuance under the shelf
registration.
The Company had obtained a commitment letter from Bank Boston, NA for a $150.0
million credit facility that was contingent upon the Company raising new equity
capital of at least $240.0 million. Due
25
<PAGE> 26
to the withdrawal of the proposed offering of 11,000,000 shares, this facility
is not available to the Company.
Capital Expenditures
- --------------------
The Company's non-real estate capital expenditures for the six months
ended June 30, 1998 amounted to approximately $609,000 funded from cash flow and
borrowings under the Company's credit facility. The Company anticipates that its
capital needs in the future can be satisfied out of cash flow from operations or
the Company's credit facility.
The Company's capital expenditures for the six months ended June 30,
1998 amounted to approximately $3.9 million for the Rental Properties. In
addition, approximately $603,000 of Major Maintenance and Replacement costs were
expensed in the first half of 1998. These expenditures were funded from cash
flow and maintenance escrow funds. The Company has identified 224 Properties
(approximately 15,000 units) for which it believes disciplined capital spending
will yield substantial rent and occupancy increases and attractive return on
investment. Subject to available financing, the Company plans to invest
approximately $19.0 million over the next five years on such Properties in
excess of its targeted annual capital and major maintenance spending of $400 per
unit.
Year 2000
- ---------
The Company, has initiated communications with its significant vendors
and service suppliers to determine the extent to which interface systems are
vulnerable to such third parties' failure to remediate their own year 2000
issues. The Company's total Year 2000 project cost and estimates to complete do
not include the estimated costs and time associated with the impact of third
party Year 2000 issues. There can be no guarantee that the systems of the other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems.
Lexford anticipates completing any Year 2000 projects no later than
June 1999, which is prior to any anticipated impact on its operating systems.
The total cost of the Year 2000 project is estimated to be immaterial to the
Company. This assumption is based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of third party software modifications and other factors. There can
be no assurance that these estimates will be achieved and actual results could
differ materially from those anticipated.
Quarterly Dividend
- ------------------
On July 10, 1998, the Company declared its first quarterly dividend of
$0.4325 per share for the quarter ending September 30, 1998, payable on October
15, 1998 to shareholders of record on September 30, 1998. This dividend is equal
to an annualized dividend rate of $1.73 per share. The Company has instituted a
policy of paying a quarterly dividend approximately 15 days after the close of
each quarter. The Company's distribution policy is subject to modification by
the Company's Board of Trustees.
26
<PAGE> 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
This Form 10-Q contains certain forward-looking statements regarding
prospects for (i) proposed mortgage loan repayments and capital improvements to
Rental Properties, contingent, in all cases, upon available financing, (ii)
possible improvements in net operating income from the Properties, (iii) the
Company's quarterly dividends and its distribution policy, and (iv) the
Company's foreseeable capital and liquidity requirements and sources. The
forward-looking statements represent management's good faith evaluations based,
among other things, upon existing market, financial and economic conditions, as
well as the continuing availability and satisfaction of conditions precedent to
proposed financing arrangements and the physical condition of the Rental
Properties. There can be no assurance that the forward-looking statements will
prove to be correct. Any differences in actual results or developments may be
material.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL PAGE
NO.
<S> <C> <C>
10.1 Non-employee Trustee Retirement Program Filed as an Exhibit to this Form 10-Q
10.2 Agreement of Severance and Mutual Release dated July Filed as an Exhibit to this Form 10-Q
1, 1998 between Patrick M. Holder and Lexford
Residential Trust
11.1 Statement re: computation of Per Share Earnings See Note 1 of Notes to Consolidated Financial
Statements
27 Financial Data Schedule Filed as an Exhibit to this Form 10-Q
</TABLE>
27
<PAGE> 28
(b) Reports on Form 8-K
(1) Report of Trustee Retirement Program filed April 1,
1998.
(2) Report of Acquisition of 39 Rental Properties
previously owned by 37 Unconsolidated Partnerships
filed April 20, 1998 together with Rule 3-14 Audited
Combined Financial Statements for the total 326
Rental Properties referred to in the Form 8-Ks filed
on February 17, 1998, March 2, 1998 and April 20,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEXFORD RESIDENTIAL TRUST
(Registrant)
Dated: August 12, 1998 By: /s/ John B. Bartling
----------------------------------------------------
John B. Bartling
President and Chief Executive Officer
Dated: August 12, 1998 By: /s/ Mark D. Thompson
----------------------------------------------------
Mark D. Thompson
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Dated: August 12, 1998 By: /s/ Ronald P. Koegler
----------------------------------------------------
Ronald P. Koegler
Senior Vice President and Controller
28
<PAGE> 1
Exhibit 10.1
LEXFORD RESIDENTIAL TRUST
Non-Employee Trustee Retirement Program
o Overview. The Lexford Residential Trust Non-Employee Trustee Retirement
Program (the "Program") provides each eligible trustee with an opportunity
to obtain a retirement package in connection with his voluntary resignation
from the Board of Trustees ("Board").
o Eligibility. Each non-employee trustee, other than the Chairman and
Stanley R. Fimberg, is eligible to participate in the Program subject to
the election requirements described below. However, no more than five
trustees will be permitted to participate.
o Election Requirements. To participate in the Program, an eligible trustee
must submit a written election to resign from the Board prior to the
earlier of: (a) April 15, 1998; and (b) the date as of which the maximum
number of trustees have elected to participate. Participation is completely
voluntary.
o Program Benefits.
- Trustee Fees. Each trustee participating in the Program will be
entitled to the full amount of the trustee annual retainer payment
on account of the second calendar quarter of 1998 (being
$3,750.00) as well as the $1,000.00 meeting fee for the Board of
Trustees meeting to be held on April 16, 1998 immediately
following completion of the Program; provided, that the retiring
Trustee attends such meeting. All such fees will, in turn, be
applied in accordance with the retiring trustee's outstanding
election to participate in the Non-Employee Trustee Restricted
Stock Plan.
- Cash Payment. Each trustee participating in the Program will
receive a cash payment of $225,000 ("Cash Payment") as soon as
practicable following his resignation. This payment recognizes
that: (a) the trustee faces significant income tax liability with
respect to awards under Lexford Residential Trust's equity
compensation agreements; and (b) the "lock up" requirements
imposed by the underwriters will limit the trustee's ability to
liquidate shares to cover this tax liability. In addition, each
trustee participating in the Program may elect to cause Lexford
Residential Trust (the "Company") to apply all or any part of the
Cash Payment towards the purchase of the Company's common shares
of beneficial interest ("Shares") which purchased Shares will be
contributed to the Company's Executive Deferred Compensation Rabbi
Trust ("Rabbi Trust") for the benefit of such trustee. The
participating trustee's receipt of such purchased shares will be
<PAGE> 2
deferred in accordance with the trustee's election as provided for
under "Rabbi Trust Participation" below.
- Performance Equity Plan. Each trustee participating in the
Program will become fully vested in his nonvested awards (11,000
Shares) under the 1997 Performance Equity Plan ("Performance
Equity Plan").
- Stock Options. Each trustee participating in the Program will
become fully vested in his nonvested stock options (the options to
purchase 4,000 Shares awarded in 1997).
- Rabbi Trust Participation. Each trustee participating in the
Program will be given the opportunity to elect to continue the
deferral in the Rabbi Trust of receipt (and taxation) of Shares
issued for his benefit under the Performance Equity Plan as well
as any Shares purchased for his account with the proceeds of the
Cash Payment for a period not to exceed five years.
- Vesting of Shares previously purchased through Non-Employee
Trustee Restricted Stock Plan. Notwithstanding the three year
vesting requirement for Shares purchased pursuant to the terms of
the Non-Employee Trustee Restricted Stock Plan, each trustee
participating in the Program will become entitled to full and
immediate vesting of all Shares issued to such trustee pursuant to
his previous election made under the Non-Employee Trustee
Restricted Stock Plan.
- Administration. The Program will be administered and interpreted
in accordance with rules established by the Special Independent
Committee of the Board of Trustees (Messrs. Bartling, Holder and
Fimberg) appointed March 26, 1998 to promulgate the Program.
<PAGE> 1
Exhibit 10.2
AGREEMENT OF SEVERANCE AND MUTUAL RELEASE
-----------------------------------------
This Agreement of Severance and Mutual Release ("Agreement") is made
this 1st day of July, 1998 between Patrick M. Holder ("Holder") and Lexford
Residential Trust, a Maryland real estate investment trust (together with its
predecessor by merger, Lexford, Inc., formerly known as Cardinal Realty
Services, Inc., "Lexford Trust").
WITNESSETH:
-----------
WHEREAS, Holder and Lexford each desire to amicably agree to the terms
of Holder's resignation and retirement, respectively, from all positions
including, without limitation, as an employee, officer, director or trustee with
Lexford Trust or any of its subsidiaries, affiliates or partnerships
(collectively with Lexford Trust, "Lexford").
NOW, THEREFORE, in consideration of the covenants and agreements set
forth in this Agreement, and other good and valuable consideration exchanged by
the parties hereto, the sufficiency of which to support each and every covenant
herein is expressly acknowledged by the parties hereto, the parties agree as
follows:
1. Resignation.
- -- ------------
Holder, simultaneous with the execution and delivery hereof, has
tendered his notice of retirement, effective July 1, 1998, as a Trustee of
Lexford Trust, as well as his resignation, also effective July 1, 1998, as
President and Chief Operating Officer and member of the Board of Directors of
Lexford Trust's wholly owned subsidiary, Lexford Properties, Inc. ("LPI"), in
which status he has heretofore served pursuant to that certain Employment
Agreement between Holder and LPI dated August 1, 1996 (the "Employment
Agreement"), which notice of retirement and resignation Lexford and LPI have
accepted. To the extent not covered by the aforementioned notice or resignation,
this Agreement shall serve as Holder's resignation from all positions with
Lexford. Accordingly, the term of the Employment Agreement is hereby deemed
terminated and the terms and provisions thereof, solely except those contained
in Paragraph 8 which will remain in full force and effect according to their
terms, are of no further force and effect.
2. Final Compensation.
- -- -------------------
Lexford will pay to Holder, as severance compensation and in full
consideration of Holder's release and covenants contained herein, the aggregate
sum of Four Hundred Twenty-five Thousand Dollars ($425,000), payable in full
seven (7) days following the execution and delivery hereof. Holder acknowledges
that such payment to be made to him in accordance with this Paragraph 2 will be
made net of applicable employee payroll withholding and other employee taxes.
Holder acknowledges and agrees that the payment to be made to him pursuant to
this Paragraph 2 will be made in full satisfaction of any and all obligations
and liabilities which Lexford, LPI or any of their respective affiliates owes,
or may owe, to Holder in respect of the Employment Agreement or any other
agreements,
<PAGE> 2
documents, instruments or arrangements (whether written or verbal) existing
between Holder and any of them. Such obligations satisfied hereby include, by
way of example and not by way of limitation: (a) Lexford's prior obligations
under the Employment Agreement to furnish Holder with any health and dental
insurance, life insurance, disability insurance, retirement or other employee
benefits of any kind, nature or description, it being understood and agreed that
upon the execution and delivery of this Agreement all such obligations shall
cease immediately and be of no further force and effect; provided, however, that
nothing herein shall impact statutory obligations imposed by the Comprehensive
Omnibus Budget Reconciliation Act; (b) Lexford Trust's obligations to Holder
under that certain Registration Rights Agreement dated August 1, 1996, by and
among Lexford Trust and the former shareholders of LPI, including Holder (the
"Registration Rights Agreement"); and (c) the obligations of Lexford Trust and
LPI (as successor by merger to Rexflor Acquisition Corporation), if any,
remaining under that certain Merger Agreement dated August 1, 1996, by and among
Lexford Trust, Rexflor Acquisition Corporation, LPI and LPI's former
shareholders, including Holder (the "Merger Agreement").
3. Standstill and Irrevocable Proxy.
- -- ---------------------------------
Lexford and Holder acknowledge and agree that, as of the date of this
Agreement, Holder is the record and beneficial owner of 200,000 common shares of
beneficial interest, par value $.01 per share, of Lexford (the "Common Shares").
In consideration of the payment made by Lexford to Holder hereunder and other
good and valuable consideration provided for herein, Holder agrees that, without
Lexford's prior written consent, he will not, during the period beginning on the
date hereof and continuing through and including June 30, 1999 (the "Standstill
Period"), (i) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of , directly or
indirectly, any Common Shares or any securities, convertible into, exercisable
or exchangeable for Common Shares, or (ii) enter into any swap or any other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Shares, whether any such transaction
described in Clause (i) or (ii) above is to be settled by delivery of Common
Shares or such other securities in cash or otherwise. In addition, Holder,
simultaneous with the execution and delivery hereof, has executed and delivered
to Lexford Trust his irrevocable proxy in the form of Exhibit "A" attached
hereto and incorporated herein by reference. Holder covenants that he will not
take any action designed to directly or indirectly defeat the intent of his
irrevocable proxy, it being understood and agreed that so long as said proxy
remains in effect, Holder will not exercise voting power over any Common Shares
of Lexford Trust within the meaning of Rule 13d-3, promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended.
Holder acknowledges and agrees that upon termination of the Standstill Period,
Holder will no longer be an affiliate of Lexford Trust and, therefore, he will
be free to sell his Common Shares at that time, should he so choose, pursuant to
provisions of Securities Act Rule 144. Accordingly, Holder will no longer
require or benefit from the provisions of the Registration Rights Agreement as
to which he and Lexford have granted a full mutual release herein.
2
<PAGE> 3
4. Return of Equipment.
- -- --------------------
Holder may keep the laptop computer he used during his employment with
Lexford; however, he must return all other equipment owned by Lexford,
including, but not limited to, dictation equipment and will remove all personal
effects from the office space he has occupied at Lexford's offices in Irving,
Texas.
5. Release by Employee.
- -- --------------------
(a) Holder, for himself and his dependents, successors, assigns, heirs,
representatives, attorneys, executors and administrators (and his and their
legal representatives of every kind), hereby completely and irrevocably
discharges and releases Lexford and LPI, their respective officers, trustees,
directors, employees, agents, shareholders, affiliates, subsidiaries, related
entities, successors and assigns from any and all claims, demands, actions,
causes of action and/or liability whatsoever involving any matter arising out of
or in any way related, directly or indirectly, to (i) Holder's employment with
LPI, including any positions with subsidiary or affiliate entities, compensation
therefor, or the termination thereof, including, but not limited to, any claim
for employment discrimination in violation of Title VII of the Civil Rights Act
of 1964, 42 U.S.C. Section 2000e, et seq., the Age Discrimination in Employment
Act, 29 U.S.C. Section 621, et seq., the Americans with Disabilities Act, 42
U.S.C. Section 12101, et seq., Ohio Revised Code Section 4112, Ohio Revised Code
Section 4101 and any other federal, state or municipal fair employment practice
or discrimination laws, statutes or ordinances, (ii) the Merger Agreement; (iii)
the Registration Rights Agreement; and (iv) any and all other matters, rights,
claims, actions, suits, liens, debts, dues, damages or demands of every kind,
whether or not referred to in this Agreement, arising, occurring, accruing or in
existence on, or prior to, the date hereof. Holder agrees that he will not seek
reinstatement or reemployment with Lexford or any affiliate thereof at any time
in the future.
(b) Holder further agrees and acknowledges that he (i) has been advised
by Lexford to consult with legal counsel prior to executing this Agreement and
the release provided for in this Section 5; (ii) has had an opportunity to
consult with and has been advised by legal counsel of his choice; (iii) fully
understands the terms of this Agreement; and (iv) enters into this Agreement
freely and voluntarily and intending to be bound.
6. Release by Lexford.
- -- -------------------
Except as provided in the immediately succeeding sentence Lexford
Trust, on behalf of itself and its affiliated, related and subsidiary entities,
successors and assigns (herein the "Corporate Releasors"), hereby completely and
irrevocably releases and forever discharges Holder, his successors, assigns,
heirs, representatives, attorneys, executors and administrators from any and all
claims, demands, damages, actions and/or causes of action of any kind and every
description, which the Corporate Releasors now have or may have had for, upon,
or by reasons of any cause whatsoever, against Holder. This release shall not,
however, apply to the obligations of Holder, arising under or evidenced by this
Agreement or under Paragraph 8 of the Employment Agreement.
3
<PAGE> 4
7. Continued Availability and Cooperation.
- -- ---------------------------------------
(a) Holder shall cooperate fully with Lexford and with Lexford's
counsel in connection with any future actual or threatened litigation or
administrative proceeding involving Lexford, its affiliated, related or
subsidiary entities, its officers, directors, shareholders, employees, agents
and representatives, and its successors or assigns that relates to events,
occurrences or conduct occurring (or claimed to have occurred) during the period
of Holder's employment by LPI (or any of its predecessors-in-interest).
(b) Holder shall be reimbursed by Lexford for reasonable travel,
lodging, telephone and similar expenses incurred in connection with any such
cooperation required under Section 7(a) above, which Lexford shall reasonably
endeavor to schedule at times not conflicting with the reasonable requirements
of any third party with whom Holder has a business relationship that provides
remuneration to Holder. Holder shall not unreasonably withhold his availability
for such cooperation.
8. Successors and Binding Agreement.
- -- ---------------------------------
(a) This Agreement shall be binding upon and inure to the benefit of
Lexford and any successor of or to Lexford, including, without limitation, any
persons acquiring directly or indirectly all or substantially all of the
business and/or assets of Lexford whether by purchase, merger, consolidation,
reorganization or otherwise be assignable or delegable by Lexford.
(b) This Agreement shall inure to the benefit of and be enforceable by
Holder, his personal or legal representatives, executors, administrators,
successors, heirs, distributees and/or legatees.
(c) This Agreement is personal in nature and none of the parties hereto
shall, without the consent of the other parties, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 8(a) and 8(b) of this Agreement.
(d) This Agreement is intended to be for the exclusive benefit of the
parties hereto, and except as provided in Section 8(a) of this Agreement, no
third party shall have any rights hereunder.
9. Confidentiality and Statements to Third Parties.
- -- ------------------------------------------------
(a) Except as otherwise required by law and except to the extent, and
only to the extent, that Lexford has, publicly or disclosed, or will publicly
disclose the terms of this Agreement due to its status as a reporting company
under the Securities Exchange Act of 1934 and Holder's prior affiliate status,
Holder will not disclose the terms of this Agreement to anyone other than
members of his immediate family, his accountants, or his legal advisors, as
necessary, and Holder will require that they and their agents take all
reasonable steps to maintain the confidentiality hereof, except as otherwise
required by law, and Lexford will further disclose the terms of this Agreement
only to those persons (including employees of Lexford) with a genuine business
interest in learning such information.
4
<PAGE> 5
(b) Neither Holder nor Lexford shall, directly or indirectly, make or
cause to be made any statements to any third parties criticizing or disparaging
the other or commenting adversely on the character or business reputation of the
other, but this provision shall not limit the ability or responsibility of
either party to respond to the best of its knowledge to administrative or
regulatory inquiries or to testify to the best of its knowledge in legal
proceedings.
(c) Holder agrees not to disclose, divuige, discuss, copy or otherwise
use or suffer to be used in any manner, in competition with, or contrary to the
interests of, Lexford or any of Lexford's subsidiaries, affiliates or related
entities, customer lists, product research, pricing information, Lexford's trade
secrets or any other information that would provide Lexford's competitors with
information about Lexford's methods, goals, or customers, it being acknowledged
by Holder that all such information regarding Lexford's business and Lexford's
subsidiaries, affiliates and related entities compiled or obtained by, or
furnished to, Holder while Holder was employed by or associated with Lexford is
confidential information and Lexford's exclusive property.
10. Notices.
- --- --------
For all purposes of this Agreement, all communications provided for
herein shall be in writing and shall be deemed to have been duly given when
delivered, addressed (a) to Lexford (to the attention of its General Counsel) at
its principal executive offices located at The Huntington Center, 41 South High
Street, Suite 2410, Columbus, Ohio 43215, and (b) to Holder at his principal
residence, or to such other address as either party may have furnished to the
other in writing and in accordance herewith. Notices of change of address shall
be effective only upon receipt.
11. Governing Law.
- --- --------------
The validity, interpretation, construction and performance of this
Agreement (and every other issue arising hereunder) shall be governed by the
laws of the State of Ohio, without giving effect to the principles of conflict
of laws of such state.
12. Miscellaneous.
- --- --------------
Lexford and Holder hereby acknowledge and understand that:
(a) Each has been afforded the opportunity to review and consider the
terms of this Agreement for a period of forty-five (45) days;
(b) Each has had the opportunity to receive counsel regarding their
respective rights, obligations and liabilities;
(c) Nothing in this Agreement is or shall be construed as an admission
by Lexford of any breach of any agreement or any intentional or unintentional
wrongdoing of any nature;
(d) Neither Holder nor Lexford have made any representations concerning
the terms or effects of this Agreement other than those contained in this
Agreement and this Agreement may not be modified or terminated orally;
(e) The terms of this Agreement are not effective or enforceable until
seven (7) days after its execution, during which period Holder may revoke this
Agreement;
5
<PAGE> 6
(f) The benefits provided Holder herein are in excess of the benefits
as to which he would otherwise be entitled;
(g) The death or disability of Holder following the execution of this
Agreement shall not affect or revoke this Agreement or any of the obligations of
the parties hereto. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Holder and Lexford. No waiver by either party hereto at any time of
any breach by the other party hereto or compliance with any condition or
provision of this Agreement to be performed by such other party shall deemed a
waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
expressed or implied, with respect to the subject matter hereof have been made
by any of the parties that are not set forth expressly in this Agreement and
every one of them (if, in fact, there have been any) is hereby terminated
without liability or any other legal effect whatsoever; and
(h) Except as provided for in this Agreement, all compensation and
other payments due Holder as a result of his employment with Lexford have been
paid in full and Holder is not entitled to any additional salary, bonus or other
payments whatsoever.
13. Entire Agreement.
- --- -----------------
This Agreement (together with the other documents and supporting
information delivered simultaneously herewith) shall constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
shall supercede all prior verbal or written agreements, covenants,
communications, understandings, commitments, representations or warranties,
whether oral or written, by any party hereto or any of its representatives
pertaining to such subject matter.
14. Validity.
- --- ---------
The validity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement which shall nevertheless remain in full force and effect.
15. Counterparts.
- --- -------------
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same Agreement.
16. Captions and Sections Headings.
- --- -------------------------------
Captions and section headings used herein are for convenience and are
not part of this Agreement and shall not be used in construing it.
17. Further Assurances.
- --- -------------------
Each party hereto shall execute such additional documents and do such
additional things, as may reasonably be requested by the other party to
effectuate the purposes and provisions of the Agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, the undersigned parties have hereunto executed this
Severance Agreement and Mutual Release as of the day and date first above
written.
WITNESSES: LEXFORD RESIDENTIAL TRUST
/s/ Lynn M. Donaghy By: /s/ John B. Bartling
- --------------------------- ---------------------------
/s/ Christine Gallion Its: President
- --------------------------- ---------------------------
/s/ Thomas Huth /s/ Patrick M. Holder
- --------------------------- ---------------------------
Patrick M. Holder
/s/ Trisha Rhodes
- ---------------------------
The undersigned, Sandra J. Holder is Holder's spouse, who has executed
this Agreement to evidence her consent to the terms of this Agreement and the
irrevocable proxy in the form attached hereto as Exhibit "A", each as executed
and delivered by Holder, to the full extent of her interest in and to the
foregoing or any legal rights affected thereby under the laws of the State of
Texas or otherwise.
WITNESSES:
/s/ Thomas Huth /s/ Sandra J. Holder
- --------------------------- ---------------------------
Sandra J. Holder
/s/ Trisha Rhodes
- ---------------------------
7
<PAGE> 8
STATE OF Ohio )
) SS:
COUNTY OF Franklin )
BEFORE ME, a Notary Public in and for said County and State, personally
appeared John Bartling , known to me to be the President of Lexford Residential
Trust; he did acknowledge that he executed the foregoing Agreement of said
Maryland real estate investment trust and that the same was his free act and
deed and the free act and deed of said Maryland real estate investment trust.
/s/ Bradley A. Van Auken
---------------------------
Notary Public
STATE OF Texas )
) SS:
COUNTY OF Dallas )
BEFORE ME, a Notary Public in and for said County and State, personally
appeared Patrick M. Holder, and he did acknowledge that he executed the
foregoing Agreement and that the same was his free act and deed.
/s/ Barbara L. Lewis
---------------------------
Notary Public
STATE OF Texas )
) SS:
COUNTY OF Dallas )
BEFORE ME, a Notary Public in and for said County and State, personally
appeared Sandra J. Holder, and she did acknowledge that she executed the
foregoing Agreement and that the same was her free act and deed.
/s/ Barbara L. Lewis
---------------------------
Notary Public
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 146
<SECURITIES> 0
<RECEIVABLES> 3,141
<ALLOWANCES> 429
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 596,209
<DEPRECIATION> 18,013
<TOTAL-ASSETS> 633,725
<CURRENT-LIABILITIES> 0
<BONDS> 529,390
0
0
<COMMON> 94
<OTHER-SE> 64,388
<TOTAL-LIABILITY-AND-EQUITY> 633,725
<SALES> 0
<TOTAL-REVENUES> 67,585
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 53,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,690
<INCOME-PRETAX> (5,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,820)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
<FN>
THE REGISTRANT HAS A NON-CLASSIFIED BALANCE SHEET
</FN>
</TABLE>
